Overnight: Deal Or No Deal?

By Greg Peel

And on the Third Day…

“We’ve seen several of these sharp sell-offs en route to new all-time highs, and typically they last two days before Trump or someone else at the White House spouts some positive spin on trade and all is forgiven.”

The SPI futures are up 56 points this morning. That’s about all you need to know. Yes, last night brought some positive spin out of the White House. More on that below.

Yesterday was your classic Day Two of the sell-off, sparked initially by trade fears. Day Twos are when investors who were on the golf course, oblivious, on Day One kick into action, or managed account platforms that attempt to order-match on Day One finally execute balances.

It was another Sell Australia day, with all sectors closing in the red by around -1.5-2%, with the exceptions being consumer staples (-2.2%) and healthcare (-0.7%) as the outliers at either end, despite both being clear market leaders in the recent run-up to new all-time highs.

We might posit that investors were wasting no time picking up some CSL ((CSL)) given the chance, given that stock only closed down -0.2%, and in the case of staples, the GDP result probably didn’t help.

Australia’s GDP grew 0.4% in the September quarter, missing forecasts of 0.5%. Year on year growth actually improved to 1.7% from 1.6% in the June quarter, so all is not lost. ANZ Bank economists describe this as perhaps the “gentlest of turning points”, but of greatest concern is a -0.3% fall in private sector demand.

Housing construction fell -1.7% in the quarter – no great surprise there – but business investment fell -2.0%. Consumer spending rose a mere 0.1% despite ScoMo’s tax cuts boosting household incomes by 2.5% in the quarter, and 5.1% year on year. The household savings rate jumped to a two-year high 4.8%.

Businesses are not investing, and households are not spending, despite round one of tax cuts and no less than three rate cuts this year. What is a central banker to do? The stock market gets excited every time another rate cut appears imminent, but there appears no evidence to suggest it should. The RBA has indicated it is prepared to cut twice more before it’s on to QE. A February rate cut is now all but in the bag, but that probably won’t be the end of it.

Unless a trade deal brings joy and happiness to all this Christmas.

The only individual stock worth mentioning from yesterday’s rout is out-of-home advertising company, oOh!media ((OML)), which revealed on Tuesday that weakness suffered in the June quarter had suddenly evaporated, and now everything is chugging along nicely. The stock jumped 24%. Four of four covering brokers in the FNArena database had, and still have, a Buy on the stock.

Otherwise, the futures are up 56 points this morning, and that’s about all you need to know.

Deck the Halls

Usually when Wall Street wobbles on trade fears the president tweets that a deal is “close” and everything turns around again. No qualification is provided, but for some reason he is constantly believed.

At least last night brought a turnaround not from a tweet but from a possibly more efficacious Bloomberg News report, citing those old “sources familiar” in the White House, that Beijing and Washington will complete a phase one trade deal before the December 15 deadline for that final tariff tranche.

Again, no actual qualification was provided as to why a deal is suddenly imminent, but Wall Street took it to mean the December tariffs won’t go ahead, which is great news, although a fade to only a 150 point rally for the Dow, after spending all session up over 200, implies caution persists.

And why wouldn’t it? On Tuesday night Wall Street was selling on Trump’s suggestion he wasn’t bovvered if negotiations dragged on past next year’s election.

The early rebound for the stock indices came despite weak economic releases.

The US added a mere 67,000 private sector jobs in November when 156,000 were forecast. The ADP does not closely correlate with non-farm payrolls, but forecasts of 190,000 for NFPs are now being rethought.

The US service sector PMI fell to 53.9 from 54.7 in November. A year ago that index hit a 13-year high 60.8.

While Wall Street still considers the manufacturing PMI the true bellwether of economic health, manufacturing is around 25% of US GDP to services’ 75%. To date the great hope, with regard Trump’s tariffs, is the detrimental impact will remain contained within the smaller manufacturing sector, and not spill over into the wider economy, being services.

Hence last night’s number is a bit worrisome.

But it’s okay – a trade deal will be signed in the next ten days.

The other positive news last night, depending from which perspective one views it, is that the Iraqi oil minister suggests OPEC members are keen to extend production cuts both in time and quantum, as they will agree at tonight’s meeting in Vienna. The suggestion is another -400,000 barrel per day cut on top of the current -1.2mbpd for another six months, if not twelve.

Add in a weekly US crude inventory lottery that came up well short, and WTI jumped 4%. Just in time for the Australian holiday driving season.

We might also note that while the US stock market was a little wary, the US ten-year yield jumped 7 basis points last night after falling -11 points on Tuesday night, flipping the US bank sector from leading loser to leading winner over two sessions.

Commodities

Happy days are here again.

Except for nickel.

And aluminium.

And gold.

The Aussie fell initially on the GDP miss but has since succumbed to greenback weakness and is up 0.1% at US$0.6852.

Today

The SPI Overnight closed up 56 points or 0.9%. The two-day crunch was worth -250, so it’s back on those stairs.

Just when you thought Australian economic data couldn’t get any worse, October retail sales numbers are out today. Hopefully the October trade numbers will provide some relief.

The US will also see trade data, along with factory orders.

Metcash ((MTS)) reports earnings today while Caltex Australia ((CTX)) holds an investor day.

Nufarm ((NUF)) holds its AGM while Bellamy’s Australia ((BAL)) shareholders vote on the Chinese invasion.

Pendal Group ((PDL)) goes ex-div.

The Australian share market over the past thirty days…

For more detail go to FNArena’s Australian Broker Call Report, which is updated each morning, Mon-Fri.