Overnight: Global Slowdown

The Fed Beige Book sees only slight growth in most districts while the US trade deficit with China hits a new record. Dow down -133.

World Overnight
SPI Overnight (Mar) 6251.00 + 4.00 0.06%
S&P ASX 200 6245.60 + 46.30 0.75%
S&P500 2771.45 – 18.20 – 0.65%
Nasdaq Comp 7505.92 – 70.44 – 0.93%
DJIA 25673.46 – 133.17 – 0.52%
S&P500 VIX 15.74 + 1.00 6.78%
US 10-year yield 2.69 – 0.03 – 1.10%
USD Index 96.86 + 0.03 0.03%
FTSE100 7196.00 + 12.57 0.17%
DAX30 11587.63 – 33.11 – 0.28%

By Greg Peel

Bad News Is Good News

Looks like we’ve caught the disease downunder.

For years after the GFC, Wall Street yearned for more policy easing from the Fed – more QE – such that every time weak economic data were released, Wall Street would cheer. The Fed would have to act, traders assumed. Bad news was good news.

Yesterday the Australian market was doing not much up until the release of the December quarter GDP numbers at 11am. Then whooshka. Up flew the ASX200.

Australia’s economy grew by 0.2% in the quarter to a 2.3% annual rate, down from 0.3% and 2.7% in September. In the first half of 2018 GDP grew by 3.8% and in the second half it grew by 0.9%. No prizes for guessing the main issue.

Housing construction fell -3.4% in the December quarter while household consumption rose by only 0.4% nationally and a standout 0.1% in NSW.

Exports were weaker in the quarter, largely due to lower agricultural exports from drought-ridden regions. Mining investment was weak as construction at the big LNG projects (gas is counted as mining) nears completion. Providing the positive balance was non-mining investment, which is at least encouraging, and public spending (infrastructure projects).

It was a weak result by anyone’s measure. Josh was stuck for words. Bill was choosing a new suit in which to meet the Governor General. The ABC noted GDP growth failed to match population growth in the third and fourth quarters, thus implying a “per capita recession”.

And the stock market loved it!

Why? Let’s just note AMP’s Shane Oliver is tipping two RBA rate cuts later in the year, to 1.0%. That sums it up. The Aussie fell -0.9% and is nearing the sixties once more.

Banks (+0.7%) like rate cuts as they leave room for mortgage repricing. The materials (+1.1%) and energy (+0.9%) sectors love a lower Aussie. The consumer sectors (+0.5% each) like when there’s more money in pockets. But let’s face it, everyone loves low rates.

Let’s hope we can have a fully blown recession!

If you think the world’s gone mad, it gets even more bizarre. Myer ((MYR)) posted increased earnings yesterday and rallied 11%. Mind you, total sales were still down -2.8%.

Myer is no longer in the ASX200. Among those members, smaller miners dominated the leaders’ board yesterday, given many carry short positions. On the flipside, the losers’ board was mostly ex-divs.

Wall Street is soft again overnight. Yet out futures are holding fast this morning. Do we see new highs in sight?

Paint it Beige

I can’t remember the last time the Fed Beige Book did not describe growth in most of the twelve Fed regions as “modest to moderate”. It’s been years. Last night’s Beige Book suggested growth in ten of the twelve regions over January-February was “slight to moderate”, and “flat” in St Louis and Pennsylvania.

Admittedly, half of the regions cited the government shutdown as impacting on activity. Meanwhile, Fed chair Jerome Powell told a bunch of economists last night the US economy is “about as good as it gets: very low unemployment, sustainable growth and inflation just about at our 2% goal.” Yet the cash rate is “right at neutral”, so no need to hike.

If the Fed has the monetary side of things under control, the fiscal side is dominated by Trump’s trade tariffs, intended to reduce America’s trade deficit with the rest of the world.

Last night’s delayed December trade data showed the trade deficit has blown out to a ten-year high, rising 19% in the month. That’s the biggest monthly increase, and biggest deficit, since 2008.

The deficit with China is 12% higher in December 2018 than December 2017 and is at a record. Tariffs began being imposed in early 2018. Deficits with Mexico and Europe also hit records.

The White House continues to suggest it is the Chinese economy hurting most in the tit-for-tat trade war.

The deficits reflect an increase in US spending on imports. The capacity to increase spending has been put down to Trump’s tax cuts.

Can’t win.

Wall Street went back to being soggy again last night, but not downright weak. Still those hopes are being placed on a favourable trade outcome. Meanwhile, forecasts for S&P500 earnings growth for the March quarter are down to a net 4% from 10% prior.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz) 1286.50 – 1.20 – 0.09%
Silver (oz) 15.05 – 0.06 – 0.40%
Copper (lb) 2.94 – 0.03 – 0.87%
Aluminium (lb) 0.84 – 0.01 – 1.03%
Lead (lb) 0.95 – 0.00 – 0.40%
Nickel (lb) 6.13 + 0.01 0.09%
Zinc (lb) 1.27 + 0.01 0.62%
West Texas Crude 56.17 – 0.45 – 0.79%
Brent Crude 65.85 – 0.08 – 0.12%
Iron Ore (t) futures 85.60 – 2.40 – 2.73%

Base metals seem to be stringing together mixed up and down days at present, and ditto iron ore.

The usual US inventory data release had the oils a bit weaker.

Gold has come to a screaming halt.

The US dollar is steady, but the Aussie is down -0.9% at US$0.7027.

Today

The SPI Overnight closed up 2 points.

Locally today we’ll see numbers for trade and retail sales.

The ECB holds a policy meeting tonight.

Note that three of the biggest Candy Men go ex today – all of BHP Billiton ((BHP)), Rio Tinto ((RIO)) and South32 ((S32)). The materials sector opening will look like a war zone.

Throw in ASX ((ASX)), QBE Insurance ((QBE)) and Treasury Wine Estates ((TWE)) and today’s list is comprehensive, and that’s only a handful of the names on today’s list.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
ANZ ANZ BANKING GROUP Downgrade to Neutral from Buy Citi
CHC CHARTER HALL Upgrade to Accumulate from Hold Ord Minnett
CIM CIMIC GROUP Downgrade to Neutral from Outperform Macquarie
COH COCHLEAR Upgrade to Buy from Neutral Citi
FMG FORTESCUE Upgrade to Buy from Hold Ord Minnett
NUF NUFARM Upgrade to Buy from Hold Deutsche Bank
RIO RIO TINTO Downgrade to Neutral from Buy UBS
SCP SHOPPING CENTRES AUS Upgrade to Neutral from Underperform Credit Suisse
SIL SMILES INCLUSIVE Downgrade to Hold from Add Morgans
SXY SENEX ENERGY Downgrade to Lighten from Hold Ord Minnett
TAH TABCORP HOLDINGS Downgrade to Lighten from Hold Ord Minnett
VCX VICINITY CENTRES Downgrade to Neutral from Outperform Credit Suisse
VRL VILLAGE ROADSHOW Upgrade to Outperform from Neutral Macquarie

About Greg Peel

Greg Peel joined Macquarie Bank in 1986 and acquired trading experience in equities, currency, fixed income and commodities derivatives, ultimately being appointed director of equity derivatives trading. He later published In With The Smart Money (a plain English guide to the mysterious world of financial markets and derivatives) and acted as a consultant to boutique investment funds. In 2004 Greg joined FNArena as a contributing writer. He is now a director and principal of the company. Greg compliments the journalistic background of the FNArena team with lengthy experience as a financial markets proprietary trader.

View more articles by Greg Peel →