Overnight: Going Defensive

By Greg Peel

Two Steps Forward

The ASX200 again shot out of the blocks yesterday as it had done on Wednesday, up over 30 points in the first half hour. A peak of up 45 points was reached at lunch time before once again the afternoon brought a rollover.

On Wednesday a peak of up 55 reversed to a gradual decline to half that gain, and yesterday’s peak was followed by an accelerating decline to the close to again halve gains.

Yesterday’s net rally was supported to some extent by energy stocks not falling much further (-0.1%) despite a big drop in the oil price. If investors were assuming the oil price couldn’t fall much further they were right – oil has bounced 2.8% overnight.

It was left to materials to post the worst performance (-1.0%) as the iron ore price slid during the session. Otherwise, all other sectors closed in the green.

The focus was clearly on yield payers, which aside from being defensive are more attractive on falling global cash rates. Utilities gained 2.4% and REITs 2.2%, the latter helping financials up 0.6% with bank yields also remaining tempting.

After being held back by Vocus Group on Wednesday, telcos rose 0.7% yesterday on a similar theme.

The only real exception to prove the rule was seen in the consumer sectors, where discretionary jumped 1.3% to staples’ 0.2%. Defence would suggest the other way around, albeit two strong up-days for staples likely reflects RBA rate cut excitement.

After two days of two-steps-forward, one-step back rallies, the ASX200 has only regained around a quarter of what it lost from the post-election peak. With Wall Street rallying on the latest trade news overnight, and oil rebounding for the same reason, our futures are up 28 points this morning.

Despite central bank support, it remains a case of a world that will live and die on each successive tweet. Otherwise, the slowing global growth story, including in Australia, is the backdrop.

Welcome Delay

The ECB held a policy meeting last night and decided to extend the period for which rates will be held at low levels to mid-2020 from a prior end-2019. There was no cut to the current cash rate of -0.4%.

Mario Draghi also provided an update on the ECB’s targeted longer term refinancing operations (TLTRO) –  cheap lending to European banks, i.e. to you and me – but the terms are not as generous, the market decided, than the previous round of such stimulus.

So while an extension of lower rates could be seen as “dovish”, no cash rate cut and disappointment on TLTROs meant markets deemed the outcome to be less dovish than hoped. The euro shot up 0.5% and sent the US dollar index down -0.4%.

US stock indices opened slightly lower last night and were struggling to find much upside traction when news broke that the White House will likely delay the Mexican tariff decision beyond the previous Monday deadline. This was enough to provide a return to upside impetus.

The tariffs may be delayed, and may not even go into effect, and if they do, they may not last that long. That’s what the White House is saying as negotiations are underway with Mexico to address the immigration problem.

So we have a delay because a deal might be pending. Have we seen this movie before? Tariff increases on Chinese imports were delayed from last year all the way through to May because a deal was always “close”. And that didn’t turn out so well.

Either way, Wall Street was happy to take the news as a positive, and happy that having fallen -22% from its peak in April, the WTI crude price finally rebounded on the trade news (Mexico being a big exporter of oil to the US), if oil wasn’t already due for a bounce.

Outside of energy stocks and stocks specifically exposed to trade with Mexico such as automakers and railroads, the best performing sectors were once again the defensives – utilities and REITs – as they were on Wednesday night.

Wall Street has so far posted its best week in 2019 and it’s all about the Fed. The Fed has indicated it stands ready to cut its cash rate if it has to, and has acknowledged that the major determinant is now trade. But how can the Fed respond when one day a deal with China is close, and the next day all bets are off? For over a year aluminium and steel imports from Canada and Mexico carried a tariff, and then out of the blue those tariffs are dropped. And the next day Mexico is again threatened with tariffs – this time on everything – and now they may not happen.

If fiscal policy is a shooting gallery, how can one set monetary policy? Wall Street might be disappointed if the Fed does not leap in and act as swiftly as hoped.

A lot supposedly rides on the G20 meeting at the end of the month, but is one brief chat between Trump and Xi suddenly going to resolve the trade dispute, particularly now the Chinese have dug in?

It may be the best week for Wall Street this year but the switch to defensives is indicative of caution that this bounce, as have so many before it, may prove fleeting, tweets notwithstanding.

Commodities

With the exception of lead, which has rebounded solidly this week, the failure of base metal prices to do any more than quietly trend down suggests there’s not a lot of faith evident on the LME.

Iron ore has now slipped below US$99/t.

Outside of oil, which is Mexico-related, there was no support provided from a drop in the US dollar, although gold continues to creep higher.

The Aussie has only gained 0.1% to US$0.6976 on the dollar’s -0.4% fall.

Today

The SPI Overnight closed up 28 points or 0.4%.

Locally today we’ll see private sector credit numbers for April – a month that is now rather distant given all that’s happened in between.

In the US it’s jobs night.

The Australian share market over the past thirty days…