Overnight: And The Winner Is…

By Greg Peel

Ominous Fade

After a stumbling start, the ASX200 shot up like a rocket yesterday morning, peaking at 44 points up around 2pm despite the futures having suggested up 5. The market had two “positive” elements to draw upon which may have spurred on the momentum trade into further blue sky, being China’s PMI and local retail sales.

China’s manufacturing PMI rose back into expansion at 50.2 in November, up from 49.3 in October. Local retailers cheered Black Friday sales, with Amazon Oz declaring its best day ever since inception downunder and local pretender Kogan ((KGN)) announcing an 80% increase on last year.

Two problems here. One is that while the Chinese number would at any other time, in isolation, be a clear positive, in the context of trade negotiations it is not. One might assume Beijing would be more prepared to concede ground were the PMI to still be contracting, but this result suggests China can weather the storm. In case anyone suspects manipulation, Caixin’s independent PMI ticked up to 51.8 from 51.7.

With regard Black Friday, what retailers may be missing as they rush to embrace further Americanisation is that Americans do as much Christmas shopping as they can during the Thanksgiving sales, not in December like we do. The risk is the same pattern develops in Australia, such that a strong Black Friday/Cyber Monday, whatever, simply sucks forward shopping otherwise planned for this month.

We also had data showing house prices in Sydney and Melbourne are on track to reach new records by March. Good news? We’ll see how the RBA feels about it today.

And if all of the above drove yesterday’s early rally, it meant cherry-picking the day’s data. We also learned that building approvals fell -8.1% in October. This did follow September’s surprise 7.3% gain, but aside from reflecting the lumpiness of apartment block approvals, year on year approvals are down -23.6% compared to economist forecasts of -18%, in the wake of the housing downturn.

While the housing downturn may be over, a swing back to new construction carries a big lag.

Corporate profits fell -0.8% in the September quarter, having risen 4.8% in the June quarter. While mining came off the boil a bit on commodity price pullbacks, it was the financial sector (-28% qoq) that really let the team down. Can’t think why.

The good news is that adjusting for inventory build-up, profits were not that bad. But that inventory still has to be shifted.

And as it turned out, what looked like a damn-the-torpedos push to 6900 for the sake of it was hit by a torpedo in the afternoon, in the shape of a rapid fade to only a 16 point gain.

The banks (+0.4%) found some brave buyers once more, the blood bank is hell bent on reaching $300, hence healthcare rose 0.8%, and materials (+0.2%) defied a lower iron ore price, probably focusing on the Chinese PMI. Not so for energy (-0.5%). But when the dust settled, it was all about defensives yet again. Utilities (+1.1%) won the day, while staples (+0.3%) overran discretionary (-0.2%).

So much for Black Friday.

Were the early buyers on the money? Or was profit-taking the right call?

Our futures are down -90 points this morning. July déjà vu.

Weakest Link

China’s manufacturing PMI may have snuck back into expansion but the eurozone’s has not, marking a tenth month of contraction in November. However the eurozone PMI did rise to 46.9 from 45.9, so things might be looking up.

The Dow futures had been signalling a solid start to Wall Street last night on the strength of Black Friday sales, up until the morning’s data releases.

The US manufacturing PMI fell to 48.1 from 48.3 when economists had forecast a rise to 49.2. So the score was China 50.2 – US 48.1, with Europe winning Most Improved. Beijing will not sign a phase one deal without tariff rollbacks. Will Washington buckle?

The icing on the PMI cake was a -0.8% fall in US construction spending in October, following a -0.3% decline in September, when economists had expected a 0.4% rebound.

Oh, and Trump has decided to reinstate tariffs on steel and aluminium imports from Brazil and Argentina, accusing those governments of “presiding over a massive devaluation of their currencies, which is not good for our farmers”. Never mind why those currencies have fallen out of bed. What Trump is most upset about is that China has been buying all its soybeans in South America to avoid US tariffs.

And the US Commerce Secretary noted last night the president is prepared to” levy more duties” on China if a trade deal is not signed. December 15 approaches.

The Dow fell -250 points from the open, and an afternoon attempt at a comeback ultimately failed.

Industrials were unsurprisingly the hardest hit, while the FANGs saw a rush to lock in profits. Wall Street is hopeful the strength of the US consumer can more than offset the impact of the trade war, noting the December tariffs are all on consumer goods.

Santa has the sleigh on care & maintenance until the outlook becomes clearer.

Commodities

Iron ore liked the Chinese PMI. Base metals didn’t like the US PMI.

The oils recovered from Friday night’s plunge after the Saudis reinforced their commitment to a production cut extension, but not by much.

Forex traders had to weigh up weak Australian data and weak US data against stronger Chinese data, and the fact they always play the short side, in sending the Aussie up 0.7% to US$0.6822.

Today

The SPI Overnight closed down -90 points or -1.3%.

September quarter numbers for the local current account and terms of trade are due today.

Today’s RBA meeting should be a cracker.

Santos ((STO)) hosts an investor day.

The Australian share market over the past thirty days…