Overnight: Not Good Enough

By Greg Peel

Before the Fed

There was reason not to do much yesterday on the local bourse given arguably one of most important Fed decisions of recent times being due last night. That said, while closing down only -9 points the ASX200 did manage to be down over -30 at lunchtime.

It was a mixed bag of sector moves yesterday. The no-brainer was energy, down -2.7% on the -7% fall in the oil price and the standout mover on the day, with utilities (-1.2%) also impacted.

Healthcare (-1.4%) was next worst as Mayne Pharma ((MYX)) continues to be thumped (-8.0%) while IT (-1.1%) was predictable and telcos (-0.8%) reflected Telstra ((TLS)) executives admitting they don’t really know what 5G will be used for.

Otherwise moves were smaller. The banks (+0.4%) provided some offset despite no less than 88% of shareholders attending National Bank’s AGM voting against executive remuneration. Told yers. APRA came to the rescue, removing the 30% limit on interest-only loans and suggesting most banks have brought mortgage books to a point the 10% growth cap can also be removed. The limits have “served their purpose,” said APRA.

The limits have triggered a possible housing collapse so we better about face, might be what the regulator really meant to say.

Materials (+0.3) also held up with investors increasing moving into gold – the top three ASX200 gainers yesterday were all gold miners – while Metcash ((MTS)) snuck in at number five and staples (+0.3%) to close in the green.

Bega Cheese ((BGA)) was the train crash of the day, falling -12.3% on lower milk prices.

Then it was just a matter of waiting for the Fed.

After the Fed

The Dow was up 380 points at 2pm when the Fed statement was released. It confirmed a 25 basis point hike to 2.5%. Ten minutes later the Dow was down -64.

Then came the press conference. Right off the bat, Fed chair Jerome Powell said the FOMC no longer saw three rate hikes in 2019, but rather two. At 2.30pm the Dow was up 150. But as the Q&A played out, sentiment turned. At 3pm the Dow was down -500.

I have noted often enough that the “smart money” stays out of the market in the two hours following a Fed statement release, waiting until the next day to respond as seen fit. You can see why. Computers move very fast, and get very easily confused.

We can take from the intraday moves that Wall Street was taking a bet in the lead up to the release that perhaps the Fed would decide not to hike, was disappointed when it did, was buoyed by the news of two hikes instead of three, but found Powell to be just not dovish enough as he answered questions from the press.

There is no plan to change the path of the balance sheet run-off (QT). The committee looks at financial markets, but does not see recent volatility as a reason to change course. The Fed watches trade developments, but believes tariffs do more to harm sentiment rather than the actual economy. In short, the market wanted Powell to say “we’ve got your back”, but he didn’t.

One can argue till the cows come home as to whether he was right or wrong not to do so. What we do know is the Dow and S&P, despite paring some of the losses towards the death, are both now down for the year. The Nasdaq was already down for the year.

Trump will be fuming.

The US ten-year yield fell -5 basis points to 2.78%. What does that tell us? That bonds look safer than stocks right now in a period of slowing global growth in which the US surely cannot remain immune. Stock markets get jittery when bond prices rise (yields fall), creating a negative feedback loop.

The US dollar fell on the 2-not-3 news but came all the way back again to be down only -0.1%.

Despite this small move, the Aussie has been slammed, down -1.2% overnight.

So now what? That was the last Big Event for the year, ahead of the Christmas break (for us). Next year will kick off with another Brexit vote. What fun.

We should also note that as of next year, every Fed meeting will be “live” and each will be followed by a press conference, not just the quarterly meetings. That implies eight chances to change rates, but arguably ups volatility potential as we have to go through this will they-won’t they business twice as many times.

What fun.

Let’s see what Wall Street does tonight.

Commodities

The LME always closed just as the Fed statement is released. Although there’s no reason to believe metals prices will do any more than bang around a bit as they have been doing lately. For them the focus is on trade.

Gold came off on a bit of a sell-the-fact, I’d suggest.

We have to take the sharp rebound in the WTI crude price, unmatched by the Brent price, in the context of it being expiry day for WTI but not Brent.

The Aussie…not sure about that one…down -1% to US$0.7101.

Today

The SPI Overnight closed down -28 points or -0.5%.

The Banks of Japan and England will both hold policy meetings today/night.

New Zealand releases its September quarter GDP result today. Better late than never.

Locally we’ll see November job numbers.

And locally today brings the closest we get to an equivalent of US “quadruple witching”. All of SPI futures and options, index options and stock options expire today. Could be volatile. And if we consider that tomorrow is the day everyone either buggers off early or goes to lunch with no intention of coming back, today could be the day to square up ahead of Christmas.

Monday is an abbreviated session. Half a dozen skeletons will be relieved when the bell goes at 2.10pm. Wall Street will close at 1pm on Monday night. And by the way, tomorrow night is quadruple witching.

Why am I telling you this now? Because this is my last Overnight Report for 2018.

FNArena’s regular service will cease after today. Things will ramp up again from January 7 and full service will be resumed from January 14. I’m off on my annual break. The Overnight Report will return on January 21.

Merry Christmas and Happy New Year to all.

The Australian share market over the past thirty days…