Overnight: Relief All Round

By Greg Peel

Public Service

The computers had the ASX200 down -70 points from the opening bell yesterday, in line with Wall Street’s fall, albeit a series of ex-dividends were also a factor in the initial setting. The humans then bought the index back 20 points ahead of the GDP release at 11.30am.

Australia’s economy grew by 0.5% in the June quarter and 1.4% year on year – the slowest growth rate since 2009. Last June quarter the GDP was growing 3.3% year on year. The numbers were in line with expectation, but there were fears they could have been worse.

While 1.4% in itself is a disappointment, the stark reality is 1.3% of that 1.4% was provided by government spending, mostly in disability services, health and aged care. Private sector demand grew 0%, and is down -0.4% year on year.

Housing construction was a significant factor, falling -4.4% in the quarter, while business investment fell -0.4%. An increase of 0.4% in consumer spending is considered poor.

All that, and elevated iron ore prices. We note also that while spending in health, aged care and disability might be honourable, it does little for economic productivity. A month ago the RBA had forecast 1.7% GDP growth. The board will be sharpening the knife as we speak.

The stock market shrugged, for half an hour anyway, before then starting to tilt downwards again. It probably required a bit of time to actually dig through the numbers and decide they were even worse than face value suggested. But just when it looked like the lows might be in sight once more, a white knight rode over the hill.

Carrie Lam has withdrawn the proposed extradition bill that triggered the whole Hong Kong uprising. Given Carrie Lam comes with strings attached, the implication is Beijing, despite amassing police long the mainland border, has backed down. The Hang Seng rallied 3.9%.

If Beijing can back down on Hong Kong protests, is there anything else it might back down on?

The ASX00 closed down only -20 points on the day.

Healthcare was the worst performing sector (-1.4%) as it was apparently a day to sell CSL ((CSL)). Telcos fell another -1.0% as Telstra ((TLS)) continued its slide. Utilities fell -0.9%, which might suggest a bit of “risk-on”.

Materials posted the best performance with a gain of only 0.2%, and despite CSR ((CSR)) topping the loser’s board on the day (-6.5%) after Ord Minnett downgraded the stock to Lighten. Six FNArena database brokers cover CSR and only Macquarie has a Buy rating on the stock against five Sells (or equivalent).

The consumer sectors sat out the session while all others saw modest falls. There was nothing else remarkable among individual share price moves.

With Wall Street recovering all of what it lost yesterday, our futures are up 19 points. It seems a bit weak against the S&P500’s 1.1% rally, but that rally is as much about Hong Kong as anything else, which we had already factored in.

Hope Springs Eternal

The UK parliament last night voted for a Brexit delay rather than no deal, delivering Johnson another defeat. That decision has to be ratified by the Lords, but Johnson has called for a snap election. That requires a 2/3 majority of parliament, and Corbyn has said he will vote for an election only after the Lords ratified the no-deal vote.

Given Johnson was overwhelmingly elected head of the Tory party, and thus PM, on his well-understood Brexit policy, it would seem incongruous the Tories would vote for an election, but then they no longer have a majority, so anything could happen. One thing we do know is the Brexit issue will go on, and on, and…

This news came late in Wall Street’s session and while no no-deal is seen as a positive for the global economy, US stock markets had already rallied, recovering Tuesday night’s losses.

The impetus from the open was Carrie Lam’s (or call it Beijing’s) capitulation, news that the PBoC intends to cut its RRR, and the Fed Beige Book’s findings.

A scrapping of the proposed extradition bill is only one of five demands made by the protesters, but it’s a big step. Another is Lam’s resignation, which clearly Beijing won’t allow despite her being keen to do so in private (wouldn’t you?) while staunchly determined not to go in public.

China’s state media reported last night that the Chinese central bank intends to lower the bank reserve ratio requirement, which frees up more funds to be lent into the economy. There are also expectations further fiscal stimulus will be announced next month when current China celebrates its 70^th anniversary.

Josh wouldn’t know a fiscal stimulus package if it landed on his head. Governments are not re-elected in recessions mate.

While the Fed Beige Book – an anecdotal assessment of the state of the economy across the twelve Fed regions – last night reconfirmed its near-perennial “modest” growth assessment, what caught Wall Street’s eye is that outside of manufacturing and agriculture, which are well known to have been crushed by Trump, other sectors in the US economy are doing just fine.

A majority of business owners “remain optimistic about the near-term outlook,” the report noted.

So put it all together and the fall on Tuesday night was completely reversed last night.

Commodities

In short, commodity markets all liked the overnight developments.

Oil prices were helped by expectations of another weekly US crude inventory drawdown.

We might have expected the gold price to have come off on geopolitical relief, but it met a US dollar dropping -0.5% instead.

Hence while the weakest GDP growth since the GFC might otherwise have impacted on the Aussie, it’s up 0.6% at US$0.6794.

Today

The SPI Overnight closed up 19 points or 0.3%.

Today is the biggest day on the ex-dividend calendar in terms of number of stocks. And there are some biggies in there, including BHP Group ((BHP)) and Ramsay Health Care ((RHC)). So again we’ll start the day with a handicap.

Myer ((MYR)) and Sigma Healthcare ((SIG)) post earnings results today. Collins Foods ((CKF)) holds its AGM.

Locally we’ll see trade numbers for July.

The US private sector jobs report for August is out tonight.

The Australian share market over the past thirty days…