Overnight: Rebound

By Greg Peel

Thanks Scoop

An QECD report published yesterday suggested the possibility of a significant correction in the Australian housing market which could lead to financial institution insolvency.

OMG, sell the banks.

Never mind that “House prices have fallen, although only gradually, since late last year,” the OECD noted.” The current trajectory would suggest a soft landing, but some risk of a hard landing remains”. The OECD actually thinks a “direct hit” from mortgage defaults is unlikely, but a subsequent dive in consumer confidence as a result of declining wealth would hurt the overall economy.

OMG, sell discretionary. Sell staples. Sell everything! If the sky falls, someone might get hurt!

At least two major brokers have been offering similar warnings over past months, and talk of a housing correction has been all over the media for weeks now. Why the OECD’s report should suddenly send the Australian stock market into a spiral is anyone’s guess. Perhaps if we throw in a -500 point drop in the Dow on Friday and some weak Chinese trade data over the weekend, yesterday was just a day of capitulation.

Financials fell -3.1%. You don’t see that very often. Consumer discretionary fell -2.3% and staples, which last week were playing a defensive role, fell -2.6%. Healthcare was slammed -3.7%. Telcos fell -1.9%.

After spending most of last week defending 5650 support, the ASX200 dropped straight through that level from the open and the rush was on. Technical selling only served to exacerbate. Although after the initial plunge, it was a fairly orderly drift down to the close.

The “outperformers” on the day, funnily enough, were materials (-0.6%) and energy (-0.8%), which were the only sectors not to fall -2% or more. So China didn’t have much to do with it.

From a technical perspective, it’s next stop 5400, or another -150 points lower. But Wall Street staged a big comeback overnight, and our futures have closed up 20 points this morning.

Lazarus

Theresa May last night postponed the Brexit vote that was due tonight in the UK parliament because she knows it would have failed. She will now head back to Brussels to see if she can again find another compromise. The sticking point remains Northern Ireland. The pound plunged. Chaos reigns.

The Dow was down another -500 points in morning trade. But when Europe closed, the selling stopped.

A legal battle has been going on in China between Apple and Qualcomm over a patent dispute. A Chinese provincial court has ordered Apple to stop selling older model iPhones. Last night Apple issued a statement saying all iPhones remain available to customers in China, and pointed to new operating systems mean newer iPhones are not in dispute. Apple also accused Qualcomm of being “desperate”.

Apple shares, which have been on the slide for the last two months, bounced. Then everything bounced.

Also helping to turn around sentiment was the ever growing feeling the Fed actually might not hike this month. The odds of a December hike were 90% after the last Fed meeting, but only 70% last night. This is much lower than the odds ahead of each of the three rate hikes this year.

Others remain convinced the Fed will indeed hike because (a) if not it would like they’re bowing to Trump and are not thus independent and (b) it might send an overly negative signal to the market regarding the Fed’s view of the US economy. Yet given all that’s going on in the global economy – Brexit, Italy, trade wars, Huawei arrest, you name it – justification for not hiking is not hard to define.

Either way, the Dow railed all the way back to close slightly positive. The S&P gained 0.3% and the Nasdaq 0.7%, which largely represents the spread of Apple influence in each index.

The rebound came despite oil prices taking another tumble. The rebound in oil on Friday following announced OPEC-Russia production cuts proved fleeting as the market returned its focus to runaway US production meeting falling demand as the global economy slows, amidst the risk of a prolonged trade war and everything else.

While China’s November import/export numbers were weak, within the data China’s trade balance with the US came out as a much bigger surplus than expected. This would have Trump seething, while the Chinese have called in US ambassadors to explain this Huawei arrest. Can we still have any confidence of a cosy deal within the ninety day timeframe?

What is confusing market watchers is the fact the VIX volatility index on the S&P500 remains at a low 22. Given all that’s been going on lately, and wild index swings, it should by rights be at 42. The fact that it’s not suggests investors just aren’t that worried.

It is only after they have become sufficiently worried that a bottom can be put in place, history suggests. Wall Street has still not seen its capitulation trade. On that basis many believe a bottom is yet to be seen before any talk of Santa.

From the perspective of downunder, where Christmas means a summer break, thoughts of “stop the world, I want to get off” must be rising.

Commodities

The US dollar index has jumped 0.7% on the pound’s plunge. Not helpful for commodity prices, before we even get to fundamental issues.

Not even gold could hang in there last night.

The Aussie is nonetheless steady at US$0.7185. Seems it’s fallen far enough in the last few days.

Today

The SPI Overnight closed up 20 points or 0.4%.

There will not be a vote on Brexit tonight.

The US PPI will be released.

Just to rub salt into the wound, locally we’ll see a September quarter house price index today, along with NAB’s business confidence survey.

James Hardie ((JHX)) goes ex.

The Australian share market over the past thirty days…