Overnight: Optimism Builds

By Greg Peel

More Bank Blues

It was highly anticipated Westpac ((WBC)) would have to cut its elevated dividend in order to shore up the bank’s capital position ahead of possible further remediation provisions and as yet unknown RBNZ capital requirements, but it was not highly anticipated the bank would actually raise new capital.

The news killed off an initial 44 point rally for the ASX200 yesterday, in line with new highs on Wall Street, and by late morning the index was up only 14 points. Then the September retail sales number was released.

Sales grew 0.2% in the month when 0.4% was forecast. Sales thus grew 0.5% for the whole quarter – the slowest pace since 2018. But making the result even worse was a big jump in food prices impacting on this dollar value figure. Volume of sales has dropped to -0.2% on an annual basis – the first negative reading since the 1991 recession.

And on that news, the index rallied to be up 36 points, before sliding all the way to almost flat with less than an hour to trade. May we assume bad news started off as good news but then turned bad? It’s the sort of data that might otherwise have the stock market rallying on hopes of another RBA rate cut, except that clearly RBA rate cuts are not having any effect.

The weak numbers most impacted on retail heavyweight JB Hi-Fi ((JBH)), which fell -2.2% to be the third worst index performer on the day. Second spot went to national Bank ((NAB)), which will be the last of the big banks to report full-year earnings, on Thursday. It fell -2.5%. The banks had already been de-rated after ANZ Bank ((ANZ)) cut its franking last week, but investors continue to run scared.

Westpac is in a trading halt. Hence its impact is yet to be felt.

A further -0.8% fall for the financials sector was offset by the resource sectors on better iron ore and oil prices. Materials jumped 2.1% and energy 0.7%. Within materials, the short-covering scramble continues for lithium miners Pilbara Resources ((PLS)), which added another 10.1% and Galaxy Resources ((GXY)), up 9.7%.

Winner on the day was NRW Holdings ((NWH)), which rose 13.3% after being confirmed bidder for peer BGC Contracting’s mining and construction business. CSR ((CSR)) also starred with a 9.5% gain after the Murdoch press suggested the stock could be a takeover target.

Today the RBA hands down its policy decision at 2.30pm, half an hour before that other thing. What is a central bank to do? Two rates cuts and nothing to show for it other than a reignited housing bubble (possibly) and a currency refusing to give up.

And let’s not forget tax cuts. They’ve been a dud as well. The pressure is growing.

But this morning, with Westpac yet to come back on the boards, the futures are up 45 points. Oil prices are mildly higher but the iron ore price has dipped again. Wall Street made new highs, modestly, in all three major indices on more trade optimism. Is that the driver?

And Now the Dow

US Commerce Secretary Wilbur Ross said last night that he was optimistic about phase one of a trade deal being finalised this month. He also said the US may “not need” to put tariffs on European cars, following Trump’s request for the Commerce Department to investigate whether foreign automakers threatened US national security.

Clearly Americans tremble in their boots every time a VW goes past.

With US-China in the frame, there has been little talk of the potential 25% tariff on European cars and parts earmarked for November 14. The hope now is these tariffs do not go ahead, and more importantly the December tariffs on consumer goods imports from China do not go ahead, even though they have not been mentioned as up for debate in “phase one”.

Optimism is building, again, and last night the Dow joined the S&P500 and Nasdaq in marking a new all-time high. The Dow managed the milestone despite a -2.7% fall for McDonalds after the CEO was fired for an office dalliance. He has been credited with turning the fortunes of the burger joint around.

Friday night’s jobs number also buoyed confidence that the US economy was not heading down any recession path. Earnings results remain net positive. On the prior two occasions the S&P hit new all-time highs this year, neither managed to provide a kick-on of 3% before a pullback. While this is no magic number, it is considered the point of “break up” into blue sky, and typically a door to new buyers.

There’s still a little way to go.

US bond yields also jumped on the bandwagon last night, with the ten-year up 6 basis points to 1.79% and the two-ten spread up over 19 basis points to its highest level since its brief inversion.

Hope springs eternal.

Commodities

Such hope was evident for aluminium, copper and zinc but not iron ore. Nickel has already rallied substantially.

The retail sales result has the Aussie off -0.5% at US$0.6884 but the greenback rallied 0.3% as well.

Today

The SPI Overnight closed up 45 points or 0.5%.

The RBA meets today.

It’s services sector PMI day across the globe.

Amcor ((AMC)) holds its AGM.

Victoria is closed for the day.

The Australian share market over the past thirty days…