Overnight: Interest Widens

By Greg Peel

More of the Same

It took a late rally to push the ASX200 up to a 23 point gain on the session yesterday. Otherwise trading was again dominated by shifting around in sectors, and yesterday looked particularly like the local market was mimicking Wall Street.

Materials (+1.7%) and banks (+0.9%) were the biggest winners, as has been notable on Wall Street this week. Materials gained an extra boost from a broker upgrade for BHP Group ((BHP)) and approval granted for New Hole Corp’s ((NHC)) New Acland coal mine. That stock rallied 8.5% to top the winners’ board.

The banks have been rallying on a rebound in global bond yields, having been beaten down here not just by yields but of course also by RC-fallout.

A -1.4% drop in consumer staples and a 0.8% gain for consumer discretionary smacks of selling in defensives and buying in cyclicals. Industrials (-0.4%) should by rights be performing well if we really are mimicking Wall Street but the big bond proxies Transurban ((TCL)) and Sydney Airport ((SYD)) continue to be exited and three big names in the sector went ex-dividend yesterday.

Further evidence of bond-proxy selling was provided by a further -5.7% drop for Charter Hall Group ((CHC)).

IT (-1.4%) is the odd one out, being a growth sector, as part of Wall Street’s rotation has been one of selling growth (tech) and buying value (anything beaten down) and that has impacted on the Nasdaq, and hence our own sector.

Healthcare (-0.7%) tends to the defensive but also the often overbought when the mega-caps in the sector are in play. In smaller names, Pro Medicus ((PME)) has had a tough week and fell another -8.3% yesterday, being a growth story in the sector.

So there’s been a lot of paddling under the surface of late while not going anywhere in a hurry while this rotation theme plays out. It was still evident again on Wall Street last night, but last night interest began to broaden.

Not Just More of the Same

Monday and Tuesday nights on Wall Street were all about trading out of defensive stocks (and bonds, and gold) and into cyclicals, selling out of growth (tech) and into value (basically those same cyclicals), and selling out of big (FANG) and into small. The Russell small cap index has jumped 4.7% in three sessions, including last night, but is still -10% from its all-time high.

Last night saw the Dow regain 27,000 and the S&P500 3000 for the first time since July. The S&P is only one good session away from its all-time high (3025).

The market opened with the same rotation trade again immediately apparent. If you need any proof, oil prices fell -3% last night yet the US energy sector still closed in the green, having been one of the worst performing sectors of 2019.

The banks have been the other, until bond yields turned this week. Banks were again stronger last night but not with quite the same urgency. Indeed, while some of the defensive big staples that had been the best performers continued to be sold off last night – Coke, McDonalds, Proctor & Gamble and so forth – the sell-off in big tech growth stocks swung around in the afternoon.

The Nasdaq closed up 1%.

This suggests that while the rotation theme was still evident it is beginning to settle down and a wider interest in the stock market in general is building. Mind you, whenever FANG dips there are always buyers lined up at lower levels, and in Apple’s case, Apple (endless buyback).

Other than Trump calling the FOMC “boneheads” in a tweet last night, elsewhere the news was positive.

Beijing surprised by providing a slight concession on the trade front. A small subset of items will be excluded from the original list of goods included in the last round of retaliatory tariffs. The list is diverse – cancer drugs, lubricants, pesticides and shrimp meal for example – and does not include what Trump would like to see, such as soybeans and other agri-products.

Beijing went even further and said that the exemption list will be extended in coming weeks, and even went as far as to promise a refund on now-excluded items of tariffs paid to date (since September 1).

Where is this taking us?

It can only be promising, one presumes, and part of the impetus for Wall Street to start shifting to a wider buying stance last night.

The White House is also reported to be considering easing sanctions on Iran ahead of the meeting Trump wants to have with the Iranian president. That’s why the oil price tanked, but this is also positive news because (a) it suggests easing geopolitical tensions and (b) while lower oil prices are not good for oil companies, they’re good for everyone else.

Interesting that such consideration should be made on 9/11.

In US economic news, the PPI rose 0.1% in August when 0.0% was expected. A “beat” if you like, but still tepid. The annual core wholesale inflation rate increased to 1.8% from 1.7% but again, nothing there to stop the Fed cutting next week.

We now have some promising signs on trade and geopolitical issues and the Fed is still set to cut next week, while the ECB is expected to cut tonight.

What could possibly go wrong?

Commodities

This may have been the question asked by gold traders last night as the gold price stopped plunging in the risk-on trade and jumped back US$11/oz, despite the greenback rising 0.3%. Bond yields also stabilised after their two-day surge, which probably helped.

Adding to weakness in oil prices, beyond easing tensions, was the usual US weekly crude inventory lottery which went the wrong way.

The greenback appeared to impact base metals but not iron ore.

Having jumped up a cent or so, the Aussie is now back to playing rabbit in the headlights at US$0.6860.

Today

The SPI Overnight closed up 26 points or 0.4%.

US CPI data are out tonight but all focus will be on the ECB meeting.

Synlait Milk ((SM1)) reports earnings today and Whitehaven Coal hosts an investor day.

There’s a long list of ex-divs today, which includes Breville Group ((BRG)), Flight Centre ((FLT)), IOOF Holdings ((IFL)), and nickel exposures Independence Group ((IGO)), Western Areas ((WSA)) and South32 ((S32)).

The Australian share market over the past thirty days…