Overnight: Technical Problems

By Greg Peel

Buy it Back

Okay hands up: With the Dow down -500 and the SPI futures down -32 who among you said yesterday morning the ASX200 would be up by over 50 points? Anyone? Anyone? Bueller?

I did note yesterday morning that the -1% fall for the ASX200 on Friday and the -2% fall for the S&P500 on Friday were both responses to the same factor, being weak Chinese data. Thus for the ASX200 to go again would be double-dipping, but for the fact the S&P fell twice as far.

It was thus no great shock our index did not fall from the open yesterday but simply hung in there, all the way to late morning, as if it was waiting for something to provide fresh direction. Things started to warm up a little bit towards midday as traders began to talk up the possibility of Chinese stimulus in the face of a sinking economy.

It was at 1.10pm, nonetheless, that the index took off. BHP Group ((BHP)) announced it had completed its $7.3bn buyback at a -14% discount to market and announced a $1.02 special dividend. The market saw, and decided it was good. BHP jumped 3.5%.

Materials led the day’s gains with a 2.7% rally but BHP managed to spark a market-wide rally that saw every sector bar one close in the green, and every one of those, bar one, by more than 1%.

The banks (-0.1%) were the stick in the mud, given news the RBNZ is looking to lift its tier one capital requirement, currently 8.5% (Australia 10.5%) potentially to a whopping 16%. All four majors would thus be required to raise yet more capital, not just the obvious one.

Energy rose only 0.4% because the oil price went the other way.

Perhaps BHP’s announcement underscored the reality that despite weak global sentiment, Australian companies have for the most part very strong balance sheets. In the case of BHP, a balance sheet without options other than to hand money back to shareholders. For others, balance sheets are being used to fund a range of acquisitions, mostly in the US. We’ve seen a run of those lately.

And then we had MYEFO reminding us just what a standout economy Australia’s is, and that of course we’ll be back in surplus by FY20. How many prior governments have promised a surplus, and where are they now?

But alas…

I wish I had a dollar for every time I’ve said “But alas” this year. Wall Street has plunged again overnight, the Dow’s down -500 and the S&P now needs only one more percent to hit the February low. The oil price has tanked almost -4% and the SPI futures are down -85.

Was yesterday just a dream?

Pre-Set Target

On Friday night the S&P500 closed smack on 2600 – a level that had provided support and the springboard for interim rallies all though October and November. Wall Street has become divided between those believing 2600 would hold and Santa would arrive, and those believing the S&P must retest the February low of 2530 before any recovery could begin.

Last night the S&P opened lower. Buyers stepped in and took the index back to 2600, but it failed. Troops were re-marshalled and another assault was made. Again it failed. So that was it. In piled the sellers.

It was thereafter a straight line plunge to the close, driven by technical selling backed up by momentum players jumping on. Computers would have been the main force. With sentiment as it is, buyers stood aside.

There was no particular trigger for another session of weakness following on from Friday. The slowing global growth story dominates as Wall Street awaits any concrete evidence of an easing of trade tensions. Brexit remains a worry. May has called the vote in parliament for mid-January but what will change between now and then?

There is now talk Donald Trump may sack Jerome Powell, if the Fed raises this week. No one’s really quite sure the president can, but such a move would not be positive for the US financial system. Chaos would reign.

The morning saw some weak numbers for US housing market sentiment and the Empire State activity index, but a prime focus was a report from one research house suggesting last week’s US crude inventory data will be a bit of a shock, in terms of the extent of inventory build. WTI thus fell -3.8%.

For WTI, US$50/bbl was seen as the equivalent of 2600 for the S&P. WTI is now at US$49.30/bbl.

One disturbing element of last night’s trade is that the sectors that have been holding up of late – defensive utilities and REITs – were actually the worst performing sectors on the day in each falling over -3%. Energy only fell -1.9% by comparison.

It’s beginning to look a lot like capitulation. The VIX jumped 17% last night, but at 25 it’s still not the sort of number we might expect when fear overrides all. Can we see an “orderly” retest of the February low?

Wall Street now awaits the Fed, and a speech from Xi Jinping on the topic of economic reform, which may or may not provide hints regarding the progress of trade negotiations.

Commodities

With the US dollar dipping -0.3%, base metal prices were mixed in London and iron ore held up.

Gold was able to rally back to a level more representative of a safe haven trade.

Enough said about oil.

The Aussie is up only a tad at US$0.7175.

Today

The SPI Overnight closed down -85 points or -1.5%.

The RBA minutes are out today. Will they seem more dovish?

Centuria Metropolitan REIT ((CMA)) holds its AGM.

The Australian share market over the past thirty days…