Overnight: Release The Doves

The Fed did not hike last night, and won’t, apparently, this year. Dow down -141.

By Greg Peel

Adrift

Well it looks like SPI futures traders have thrown in the towel. On Monday morning they said up 35 points and the ASX200 rose 18. On Tuesday they said up 20 and the index fell -6, and yesterday they said up 10 and the index fell -19. This morning they’re saying down -4. Big rally today?

The fact is the way the index has tracked this week it is clear no one has any clue as to where to go next. No session has produced a big move yet every session has experienced sharp intraday reversals. We’re waiting for news on trade, we’re waiting for an outcome on Brexit, and yesterday we were no doubt hesitant ahead of last night’s Fed statement.

But there was a lot going on among individual stocks.

The big news of the day was a Brazilian court ruling allowing Vale to restart its Brucutu mine, one of the largest in country, situated some 150km from Laranjeiras where the disaster occurred. The day before, Vale recommenced shipping iron ore from a Brazilian port. Iron ore futures headed south on the news yesterday and this morning spot ore is down -3.3%.

The big Australian miners suffered falls yesterday as a result, but add in Cyclone Veronica, currently threatening Fortescue Metal’s ((FMG)) two major ports at Port Hedland and Karratha, and the high-flying pure-play fell -6.7%. Presumably, disruption to Fortescue’s shipments will act as an iron ore price counterbalance, at least in the short term.

But at -6.7%, Fortescue could only manage a fifth spot on the ASX200 top five losers’ board yesterday.

The co-founder of Platinum Asset Management ((PTM)) and his wife will offload 60m of their shares, or around 10%, in an institutional offer. Those shares fell -11.1% yesterday.

Coal miner New Hope Corp ((NHC)), which had a bad session the day before on its earnings results, highlighted thermal coal deliveries being delayed at Chinese ports and suffered another -14.1% drop.

One might have assumed the drought story was well enough known and Nufarm ((NUF)) had been keeping the market up to date but the stock fell -23.9% yesterday on the company’s earnings result. Guidance was a miss, but news from Bayer that a lawsuit against Round Up (glyphosate) was progressing in the US also added to the woes.

Yet still Nufarm wasn’t the biggest train wreck of the day. That accolade was reserved for car leasing company EclipX Group ((ECX)), which posted a trading update that would largely determine whether rival McMillan Shakespeare ((MMS)) would proceed with a proposed merger or not. Suffice to say, when McMillan ran screaming from the room, EclipX shares fell -56%.

McMillan Shakespeare shares rose 3.6%, which actually got the stock onto the ASX200 winners’ board.

It doesn’t get much better outside of the index. Synlait Milk ((SM1) reported a -10% drop in profit and fell -14%. OFX Group ((OFX)) complained of low currency market volatility and lost -7%.

But at least an update from Corporate Travel Management ((CTD)) led to a gain (4.4%) and a spot on the leaders’ board. There is quite the disparity in the magnitude of share price reactions to positive news and negative news. The market is skittish.

The materials sector (-1.4%) provided the bulk of the index loss yesterday while the banks drifted lower and coin came up tales for Telstra.

Is Good? Is Bad?

I’m beginning to get the impression the trade talks have reached the point at which China is saying “We’ll fix IP if you lift tariffs” and the US is saying “We’ll lift tariffs if you fix IP”.

Even then, as Trump revealed last night, the US has no intention of lifting tariffs until it is abundantly clear China is sticking to a deal, and that could be a “substantial period of time,” according to the president.

If I we’re hanging out for a breakthrough, I wouldn’t be holding my breath.

The comment from Trump was worth a -200 point fall in the Dow by mid-session last night, despite the pending Fed statement release. The release brought US indices back to square.

At the last quarterly meeting in December, at which the fourth hike of 2018 was announced, the FOMC “dot plot” projections suggested two more rate hikes in 2019. The Fed has since “pivoted”, and shifted to a position of “patience”, and as of the March quarterly meeting those dot plots now suggest no rate hikes in 2019, and only one in 2020.

Indeed Chairman Powell was quite clear in his assertion there would be no rate hike this year. That, of course, is music to Wall Street’s ears. Traders were hoping for dovish, and got more than what they bargained for.

And then the Dow fell to be down -140.

Is it good news? The Fed also pulled back its 2019 GDP forecast to 2.1% growth from 2.3% and its inflation (PCE) expectation to 1.8% from 1.9%. Why is the Fed on hold? Because the world, and now as it would appear, the US, is slowing.

Notwithstanding Wall Street has been rallying up to the expectation of “good” news from the Fed since Christmas Eve, some 20% in fact, and was still rallying for the most part in the lead up to this Fed meeting.

Thus for “no rate hikes” to provide another big kicker for the market is a bit of a stretch.

Perhaps when US stocks rallied back on the statement someone pointed to the US bond market. The US ten-year yield plunged -8 basis points to 2.53%, taking out what had been rock-solid support at 2.55%. Yields fell across the curve and from overnight cash out to almost ten years the curve is now flat. Consider that the ten-year is at 2.55% and the Fed funds rate at 2.25-2.50%.

The biggest losers in this scenario are the US banks, who early this year were salivating at the prospect of the ten-year (supposedly) heading towards 4%, and what that would do for their margins.

The US dollar index also tanked -0.5%, sending the euro flying, even though the ECB cash rate is zero and Mario Draghi is trying hard to win the “dovishness” contest.

We shall see what transpires tonight, as typically Wall Street’s real reaction to the Fed is evident in the following session, after the immediate dust has settled.

Commodities

As the table above suggests, a weak greenback is good for commodity prices.

Except in the case of iron ore.

The RBA will be banging its head against a brick wall with the Aussie jumping another 0.4% on the greenback to US$0.7116, but if this keeps up there might be scope to cut.

Today

The SPI Overnight closed down -4 points. Take that as you will.

New Zealand releases its December quarter GDP result today.

Japan is closed.

The Bank of England will meet tonight in what surely is a superfluous process at this point. The EU has told May she can have her Brexit extension only if the UK parliament votes in deal number three. Given deals one and two were trashed in the Commons, what hope?

March 29 approacheth.

Just as immigration becomes a hot election topic downunder, today we’ll see December quarter population numbers. We’ll also see February jobs numbers.

Sigma Healthcare ((SIG)) reports earnings today.

Flight Centre ((FLT)) is among those stocks going ex.

Today is a quarterly expiry for SPI futures and options and index options. Strap in.

The Australian share market over the past thirty days…

For more detail go to FNArena’s Australian Broker Call Report, which is updated each morning, Mon-Fri.