Overnight: Problems

By Greg Peel

Quiet Day

No, that’s not a joke. Yesterday the ASX200 opened down close enough to -100 points and stayed there. There was no chance to sell on the way down, so there was not a lot of action. It was simply a market-wide step-down.

The index closed -1.5% lower and so did most sectors. IT was the biggest loser on -2.4%, but that’s business as usual. Financials (-1.9%) stood out in posting the second biggest drop.

Bank selling was compounded by National Bank’s ((NAB)) move to increase provisions for costs related to customer remediation and software capitalisation by $1.18bn. The $832m set aside for remediation in the second half doubles the original pool. If one bank makes such a move, what does it imply for the others?

For some time analysts have noted which banks have moved swiftly to make meaningful provisions and which have dragged the chain. But when the bank sector “outperforms” to the downside on any given day, it’s always going to be a bloodbath in terms of index points.

And we’re not looking too flash for today’s session either. Yesterday we lost -100 points. This morning the futures are suggesting -120.

Among individual stocks, Mayne Pharma ((MYX)) shot up 18.9% after announcing it had signed a 20-year agreement with a US company to commercialise a new oral contraceptive. I didn’t know you could get pregnant from oral.

Investment platform Hub24 ((HUB)) was the index biggest loser in a very long list for the session, falling -7.1%. Yesterday Macquarie reaffirmed its Underperform ratings on Hub24 and on peer Netwealth ((NWL)) in light of the RBA rate cut and hints of more to come. At 0.75%, platform customers are paying to hold cash positions with their platform given fees exceed interest paid. How long will they do that for?

Not much more to say. We’ll now be looking out for the mid-August bottom of 6405.

Running Scared

The US private sector jobs report showed 135,000 new jobs being created in September, short of 152,000 expectations. While this was indeed a “miss”, more worryingly the August result of 195,000 was revised down to 157,000.

This was not what a market still shell-shocked from Tuesday night’s weak manufacturing PMI number wanted to see. The Dow fell -600 points to lunchtime.

But it was not just the weak data sparking another big sell-off. Last night the WTO approved the imposition US tariffs on EU exports in retaliation for longstanding government subsidies for Airbus, rival to Boeing. Aircraft parts will see a 10% tariff, while a list of other goods, yet to be confirmed, will be hit with 25%.

Delta Airlines, for one, fell -4.7% given it flies Airbus planes. Boeing still managed a -2% fall in the general rush.

So if things weren’t bad enough on the Eastern Front, now the situation is set to escalate on the Western Front. The good news is the new tariffs are set to come into effect on October 18 but EU and US officials will meet on October 14. So there may be some hope yet.

US and Chinese officials meet on October 10. So there may be some hope yet.

Wall Street did manage to recover from its lows by the close, but only slightly in the scheme of things. One man said the Dow was falling because of the Democrats’ pursuit of impeachment. Everyone else knows it’s the trade war.

Weak US data and the trade war are not separate issues. US manufacturing is contracting because of tariffs. Jobs growth is slowing because of tariffs. China’s economy is slowing because of tariffs and pundits suggest the greatest impact is being felt not by the US and China, but by Europe. Even before it gets its own tariffs.

There is little disagreement China needs to be brought to heel. But there is also little disagreement that if the trade war goes on much longer, then recession is inevitable – globally and in the US.

This is not what Trump wants running into an election. But he blames the Fed. The odds of another Fed rate cut at the end of this month are firming, and if it comes to pass Trump will see his attacks on the central bank as vindicated, but he will no doubt fume if it’s only another -25 points.

What would another rate cut achieve? Rates are already extremely accommodative for businesses or households to borrow. The US housing market is showing positive signs on lower mortgage rates but US businesses are simply not spending. They are not investing in capex amidst trade uncertainty. If they’re not investing they’re not borrowing. If they’re not borrowing then what difference will another -25bp make?

The Fed meets on October 31, after Chinese trade talks, EU trade talks and potential new tariff introductions. But the past two sessions have confirmed Wall Street is no longer in “bad news is good news” mode. Otherwise weak data would have led to a rally. Bad news is now simply bad news. It could be that if the Fed does cut, Wall Street falls in response.

There is slight irony in the fact the US two-year yield fell -7 basis points last night to 1.48% and the tens fell -5 basis points to 1.64% which means the 2-10 curve is moving away from inversion and thus, theoretically, from a recession signal. That’s what cash rate cuts are supposed to achieve, and that’s why St Louis Fed president James Bullard “dissented” at the last FOMC meeting in wanting a -50 point cut straight up.

His fellow members will be a little red-faced if they have to make that a reality within a mere six weeks.

Commodities

Ups and downs in base metals but things are expected to be volatile when China is out of the market and volumes are thin.

That’s also why iron ore is “unch”.

Oil price falls were exacerbated by the usual weekly US crude inventory lottery.

Gold is back.

The Aussie is steady at US$0.6706.

Today

The SPI Overnight closed down -120 points or -1.8%.

Suddenly tonight’s US services PMI release has become very critical, along with tomorrow night’s non-farm payrolls.

Locally we see August trade numbers.

Wesfarmers ((WES)) hosts an investor presentation today.

ARB Corp ((ARB)) and Sims Metal Management ((SGM)) go ex.

The Australian share market over the past thirty days…