Overnight: Fiscal Firepower

By Greg Peel

Step-Jump I

It was actually a quiet day on the local market yesterday. The ASX200 was up 60 points in the first eight minutes and that was it. One might as well have gone home.

Buying was largely market-wide, as risk-off turned to risk-back-on following news of global stimulus and trade talks at least continuing. Over the weekend the German finance minister confirmed Friday night’s news reports in suggesting US$55bn of fiscal stimulus could be implemented if needed, while China moved to reform interest rates to lower borrowing costs for companies.

There was nevertheless some variation among sectors, largely due to earnings results.

Materials (-0.4%) missed out as the gloss comes off the iron ore players, in the wake of a -20% off price pullback, gold stocks saw selling and BlueScope Steel ((BSL)) was caught up in Trump’s trade tactics, falling -8.4% to be the worst ASX200 performer on the day.

In contrast, energy (+2.2%) was the second best of sectors as oil prices stabilised and Beach Energy ((BPT)) jumped 10.8% on its result.

Pipping Beach Energy were Lendlease ((LLC)), which rose 10.9% after confirming it will ditch its engineering division, and another lease company, Smartgroup Corp ((SIQ)), which leapt 21.7% on its result and broker upgrades.

On the downside, outdoor advertising is now on the nose as oOh!media ((OML)) fell another -7.8%, while nib Holdings ((NHF)) despaired of tough times in health insurance and fell -6.3%.

Sector winner on the day was unsurprisingly IT, which rebounded 3.2% after playing whipping boy through the sell-off. All other sectors saw relatively equal gains of over 1% except telcos (+0.6%) and utilities (-0.2%) which would have seen risk-on switching.

News from Germany and China as well as some further talk on trade has seen Wall Street post another strong session overnight, adding another 1%. The Dow futures were already on the move yesterday afternoon hence a mere 12 point gain for our futures this morning suggests yesterday already accounted for most of the good news.

How good is fiscal stimulus!

Step-Jump II

It was the same picture on Wall Street last night. The Dow opened up around 250 points higher and that was pretty much that.

Aside from news from Germany and China regarding stimulus, Wall Street was further heartened by comments from senior economic advisor Larry Kudlow on the weekend that he expects the US economy to be strong in the second half, driven by the buoyant consumer, and that the White House was looking at a possible payroll tax cut to support middle and lower income earners.

Such a cut was touted ahead of last year’s midterms but vanished once the elections were over.

Last night, the Department of Commerce announced a 90-day extension to exemptions to the ban on doing business with Huawei, while adding another 46 Huawei subsidiaries that supposedly will be sanctioned in November. That news lit a fire under the chip stocks.

And finally, Apple CEO Tim Cook had a little word in the president’s ear.

All along Trump has insisted China is hurting because “China is paying the tariffs” despite everyone else knowing this to be rubbish. Aside from the logical observation of that’s not how tariffs work, the evidence is clear the pain is being felt on both sides, and particularly by US farmers and manufacturers. The next round of tariffs would shift the cost to the US consumer – the US economy’s growth engine.

Cook pointed out that the new tariffs would force up the price of Apple iPhones but not the price of Samsung Galaxies from Korea. Trump said, “I’ll think about it”.

We could sum up all of the above by noting the US ten-year bond yield jumped 6 points to 1.60% last night from what most considered an overbought position, a least in the short term, and further widened the gap away from inversion. Currently bond yields and stock indices are in lockstep.

Tonight is a big night for earnings reports from US retailers. Retailers typically crowd the back end of reporting seasons and if the US consumer is truly supporting the economy and warding off recession fears, the evidence will need to be there in retailer earnings.

Commodities

In a tale of two benchmarks, global stimulus is good for oil prices and the subsequent “risk-on” response is bad for the gold price.

Stimulus is also good for copper, which is not currently subject to the same supply uncertainty as other metals.

The Aussie is down a little at US$0.6768 on the greenback’s gain

Today

The SPI Overnight closed up 12 points.

The minutes of the August RBA meeting are out today.

Today is the first truly big day of the local results season, ahead of the Wednesday-Thursday crescendo. BHP Group ((BHP)) leads the charge, along with Oil Search ((OSH)), Seek ((SEK)), Sonic Healthcare ((SHL)) and Seven West Media ((SWM)), among many others.

The Australian share market over the past thirty days…