Overnight: Policy On The Run

By Greg Peel

Release the Doves

“At our meeting in two weeks’ time, we will consider the case for lower interest rates.”

And with that, Philip Lowe spun the ASX200 from a -30 point loss at 10.45am yesterday into a 24 point gain by the close. But once again, it was all about the banks.

Indeed, the banks (+1.17%) and telcos (+0.8%) were the only two sectors to close in the green yesterday.

In the space of two sessions, the outlook is far less grim for the banks than it was on Friday. Negative gearing will not be scrapped and thus there won’t be a further collapse in house prices and increase in defaults on that basis, if that were to have been the result, and a rate cut, now assumed a given, will provide not only relief for borrowers on variable rates but also the chance for the banks to reprice their mortgage books once more.

And to add the cherry on top, yesterday APRA flagged a reduction in its “minimum interest rate serviceability buffer” from 7%. This is the rate at which banks must determine that a borrower can still make mortgage payments, and 7% does seem a little far-fetched when current mortgage rates are that much lower and will now go lower still.

We may never see 7% again in our lifetimes. My first mortgage was 13%. Gee those were the days.

Elsewhere in the market it seems rate relief joy was absent. Consumer discretionary fell -0.5% and staples -1.4% which seems at odds with a “more money in the pocket” theme, unless one considers the reason for the RBA feeling the need to cut, that being, in not so many words, the economy needs help.

Utilities (-1.0%) also seemed at odds when lower rates make bond-proxy stocks more attractive, although AGL Energy ((AGL)) fell -0.9%.

The big loser on the day was IT (-3.5%). Typically when the Nasdaq has a bad day so does our IT sector, despite a lack of correlation (the Nasdaq was led down on Monday night by chip-makers, which are a tad thin on the ground downunder), but yesterday we had a poor earnings result from TechnologyOne ((TNE)) that was worth -13.5%, and a disappointing update from sector gorilla Computershare ((CPU)) which was worth -8.5%.

On the flipside, a very positive update from Lynas Corp ((LYC)), outlining future growth prospects in its rare earth operation, was worth a 14% rally and a speeding ticket from the ASX, who wanted more clarification.

The materials sector nonetheless closed slightly lower (-0.1%). Given all bar two sectors closed lower, one might assume everything else is being to raise funds for the great bank revival.

With Wall Street bouncing back last night, our futures are up 13 this morning.

Reprieve

It was the chip stocks that led Wall Street down on Monday and night and the chip stocks that led Wall Street back up last night. Suppliers to Huawei have been granted a 90-day exemption from the overall ban to provide time to make other arrangements.

Meanwhile the CEO of Huawei has fired back against the ban in suggesting the US government is underestimating how powerful his company will be in 5G in a few years.

I think that’s the problem mate.

Yet Wall Street has taken the reprieve as a sign trade tensions may be easing slightly, which seems a bit of a stretch, but right now traders are simply following every positive or negative tweet with buying or selling. If there is a pattern, it’s that dip-buying remains popular, but one feels a thousand point down-day for the Dow is but one ill-considered presidential rant away.

Underlying the dip-buying mentality is Fed policy. Last night the Chicago Fed president gave a speech in which he discussed the need for the Fed to plan for the next recession, when it may once again be faced with a need to drop rates towards zero to stimulate the economy. There is no suggestion the US is about to go into recession – that remains unlikely in the near term – but Wall Street is heartened in knowing, once again, that the market has a “put option” of Fed support.

There are nevertheless a few US department store chains feeling a bit recessionary this morning. JC Penney and Kohl’s reported earnings last night and fell -7% and -12% respectively. While there was a finger pointed at the weather in February, weak guidance did not support the excuse.

Weak retail earnings are not otherwise proving to be a sector-wide phenomenon, raising the issue of just who is, and who isn’t, adjusting successfully to an Amazon world.

And to a tariff world. If the White House ahead with its plans to put a 25% tariff on everything else that comes from China and is yet to be tariffed, it will include footwear. This has led 200 US footwear companies, including the likes of Nike, to write a combined letter to the president warning that tariffs on shoes would be “catastrophic” for the US consumer.

We await the next tweet.

Commodities

A bit “nothing to see here” today. From a global perspective commodities are in a bit of a flux at present with so many balls in the air – trade, Brazilian iron ore constraints and threats of a war with Iran.

The RBA’s rate cut tip-off was good for a -0.4% fall for the Aussie to US$0.6883.

Today

The SPI Overnight closed up 13 points.

The minutes of the last Fed meeting will be released tonight.

Locally we’ll see March quarter numbers for construction work done, feeding into next month’s GDP result.

Fortescue Metals ((FMG)) goes ex today.

The Australian share market over the past thirty days…