Overnight: More Bond Jitters

Just when Wall Street thought the US ten-year yield had stabilised, another plunge last night put the frighteners on before an afternoon recovery. Dow down -32.

Support Holds

Wall Street managed a relief rally on Tuesday night when it appeared the bond yield plunge had run its course, our futures showed a tentative up 10 points yesterday morning, but then the ASX200 immediately dropped from the open to be down -34 points by midday.

What went wrong?

For one, Chinese data showed a -14% plunge in the profits of industrial companies over January-February, marking the largest decline since 2011.

There was possibly some consternation ahead of the banks once again facing a grilling in Canberra, as this always sends shivers, but we could also look across The Dutch to the RBNZ’s decision to keep its cash rate on hold but move to an “easing bias”.

Another nail in the global growth coffin, albeit not from a major contributor to global growth. It took a while for the Australian market to wake up to the notion of global slowing, as evidenced by the euphoric rally we had a couple of weeks ago when the RBA shifted away from its tightening bias. That rally may have been domestic-focused, but it wasn’t long before the world stage offered up a more grim picture and the ASX200 started taking that into account.

There is a line in the sand with regard bond yields. At first, the prospect of interest rate cuts, and thus lower yields, is encouraging from a stimulus basis, until one steps back to consider why rates have had to be cut. That’s exactly the line Wall Street is dealing with right now.

The good news about the RBNZ’s easing bias is that it sent the Kiwi dollar south, and the Aussie was caught in the downdraught. The Aussie was falling when the ASX200 dipped just below support at 6100, and both that benefit and the technical trade appeared to spark the rebound back to slightly positive on the day.

That, and the fact banks turned around when no shock news emanated from Canberra.

Thus we saw the banks (+0.3%) helping to prop up the market by the close, aided by telcos (+0.3%), which have stoically proven a defensive play through the week and materials (+0.3%), with Fortescue Metals ((FMG)) in particular boosted by evidence the price discount gap to low grade iron ore has all but closed.

On the flipside, the energy sector (-0.1%) failed to capitalise on a 2% jump in the oil price overnight, possibly because energy policy is very much in the frame in the run-up to the election and uncertainty thus reigns. An ABC expose on the household solar industry the other night probably hasn’t helped either, and the utilities sector (-1.3%) posted the biggest fall yesterday when it should be supported by lower yields, because AGL Energy ((AGL)) dropped.

Healthcare (-0.8%) is in loser mode at present given the majors in the sector are highly leveraged to the global growth story. The lower Aussie should have helped, but didn’t.

In individual stocks, the standout was yet again EclipX Group ((ECX)), but this time in the other direction. The stock jumped 22.8% as the company reiterated its intention to sell its Graysonline and Right2Drive businesses, and suspend its dividend, in order to fix its balance sheet. EclipX is not overly shorted so the rally represented genuine bargain hunting after a -70% plunge.

I’ve pointed out over the past few sessions that the futures market has not been a great predictor of the day’s actions. Seems they’ve thrown in the towel. The SPI is “unch” this morning.

How Low Can You Go?

On Tuesday night Wall Street had breathed a sigh of relief as it appeared the US ten-year yield had found a bottom, following a bout of panic bond-buying many suggested was overdone. Last night Wall Street opened in the same frame of mind, sending the Dow up 100 points as the yield held firm at 2.42%.

But when a German ten-year bond auction pushed that rate further into the negative, the US yield dropped through the critical 2.40% level and the rush was on again. At midday it hit 2.35% and the Dow was down -230. The S&P crashed through support at 2800 to 2787.

And then as is so often the case, Europe closed and Wall Street rallied the troops. The ten-year yield climbed back to 2.38% and the S&P snuck back over 2800. The Dow closed mildly negative, but was supported by ongoing bargain hunting in Boeing. The S&P remains poised.

And that’s the story on Wall Street at present – follow the bonds. Nothing much else seems to matter, at least until we start seeing March quarter earnings reports next month. Or if there is some breakthrough news on trade.

Across The Pond, the latest twist in the Brexit saga has Theresa May finally saying she will indeed resign, but only if her deal does get through the UK parliament. Que? We recall that the Commons has wrested control of the decision from the prime minister, and that the prime minister’s last deal is still included among the options that may be supported.

So there we were all thinking May might step down because her deals keep being rejected, but if parliament votes to actually accept her deal, well then it sends a certain message.

Commodities

A steady greenback and lower LME inventories supported some relief for base metal prices last night. There is also still uncertainty whether Norlisk’s Alunorte aluminium smelter will receive approval to restart.

Looks like the gold bugs have lost some conviction.

Oil prices fell on the usual weekly US crude inventory lottery.

The Aussie is down -0.5% at US$0.7085.

Today

The SPI Overnight closed unchanged.

A revision of the US March quarter GDP result is due tonight.

It’s stock options expiry day on the ASX for the March quarter, although this event is not as dramatic as last week’s SPI/index derivative expiry can be.

Today is nevertheless yield payers pay-day. For some reason a large cohort of REITs and other investment funds choose the last Thursday of March to go ex-distribution together.

The Australian share market over the past thirty days…