Overnight: Waiting Game

By Greg Peel

Fighting Back

RBA governor Philip Lowe spoke at a lunch yesterday and said he doesn’t understand how investors can call for rate cuts and buy the stock market at the same time, calling it a “strange world”.

Clearly Dr Lowe has never met TINA.

When you get nothing for your money in cash and very little in fixed income, indeed nothing in real terms, and the property market has boomed and busted, then there is no alternative but to put your money in stocks. Particularly yield stocks.

And given lower discount rates boost equity valuations, rate cuts are a good thing and bad news becomes good news.

Yep, it might be strange, but welcome to the post-GFC world Phil.

The ASX200 dropped over -30 points to late morning yesterday, likely spurred on by a rally on Wall Street that failed in the afternoon, and by US-Iran tensions which once upon a time could have had stock markets plunging. Perhaps the fact Trump called off his military strike and settled for cyber warfare and further sanctions is a relief rather than a concern.

Either way, TINA then stepped in and the index rallied steadily to close on its high, marking a turnaround of over 40 points.

Telcos (+0.7%), and one in particular, led the comeback while the banks (+0.3%), healthcare (+0.2%) and the miners (+0.2%) offered support. On the downside, consumer staples (-0.7%) countered after Metcash ((MTS)) posted a miss on earnings, leading to a -9.8% drop.

All other sectors were relatively quiet, finishing flattish.

Among other individual stock moves, mining contractor Ausdrill ((ASL)) shot up 10.5% after being awarded a five-year contract in Botswana.

Star of the day, outside the index, was furniture retailer Adairs ((ADH)), which bounced a solid 18.4% having fallen -30% on Friday. Brokers were confused by a sudden lack of sales growth at the company (See: Adairs Confounds Analysts), but agreed the share price response was overdone.

As we count off the days to the G20, with nothing much on the local economic data front to ponder, it’s difficult to see the market going much one way or the other. Swing factors are of course Iran, and the OPEC meeting tonight.

And Twitter.

Not Fighting Back

Australia went down then up yesterday and last night Wall Street went up then down, again. It was a similar pattern to that seen on Friday night only this time the range was tighter, with the Dow giving up an early gain of 87 points.

The worst sector performance was posted by energy, which has been enjoying higher oil prices. Were there to be a conflict with Iran, or if, one way or the other, Iran closed the Strait of Hormuz, oil prices would quickly be in triple digits. But this uncertainty is clearly leading investors to steer clear.

The Dow and S&P may have closed flat, and the Nasdaq slightly lower, but commentators were quick to point out big falls in the Dow Transports (-1.5%) and Russell small cap index (-1.3%).

Century-old “Dow Theory” has it that a falling Dow Transports average is a precursor to falling Dow Industrial average, but then that harks back to a time when the equivalent of the internet were the railroads. Transport is nevertheless still a valid bellwether of global economic activity, so a falling Transports average remains a sign of weakness.

Another sign of weakness last night was a -10 point fall in the Dallas Fed activity index when -1 was forecast. Dallas joins Philadelphia and New York (Empire State) in posting much weaker than expected activity indices this month.

As for the Russell, it appears investors are at this time preferring to stick to the big names rather than the riskier small names, and preference remains for lumbering defensives. We note also that small caps rallied strongly when the trade war broke out, being mostly domestic-centred and thus immune to tariffs.

Wall Street still thinks it’s going to get a deal.

On that note, Monday has already set the pattern for the week which, as suggested above, will likely be quiet ahead of the G20 barring any other distractions.

Commodities

If ever there were a momentum trade to jump on right now it’s gold. It’s a pity gold doesn’t pay a dividend. But it is a store of wealth in uncertain times. Gold has not only woken up, it’s on pills.

Not much going on elsewhere.

The US dollar index is down, again, by -0.2% to below 96. The Aussie is up, again, by 0.5% at US$0.6962, rather spoiling the USD gold rally.

Today

The SPI Overnight closed down -16 points or 0.2%. Will we fight back again today?

OPEC meeting tonight.

US consumer confidence will be in the frame.

Collins Foods ((CKF)) posts its earnings result.

The Australian share market over the past thirty days…