Overnight: Almost There

By Greg Peel

Pause for Thought

Wall Street was down modestly overnight and the futures suggested a relatively weak opening for the ASX200 yesterday morning. But by late morning, the index was up 20 points.

We could attribute this to a number of factors—any one of it being derivatives expiry day, the second last day of trade before there’s no one around anymore, thus time to window-dress for quarter end, thin volumes anyway as offices start to empty, or even anticipation of another weak jobs number, which would cement a February rate cut from the RBA.

Well, the last one certainly didn’t eventuate. Having lost -24,800 jobs in October, leading economists to ink in a February rate cut, the Australian economy added 39,900 jobs in November – the biggest monthly gain in more than a year.

Back to square one.

Christmas came early for Josh and Scott. It should be noted, nonetheless, that 35,700 of those jobs are only part-time, which is a bit of a kissing-your-sister result, and the annual rate of employment growth was unmoved at 2.0%, and the ABS acknowledged minor disruption to data collection last month due to the bushfires. But the unemployment rate did fall back to 5.2% from 5.3% and in Canberra, that’s all that matters.

But what really matters is an acknowledgement by economists that they probably should have only pencilled in a February rate cut, not inked it in. ANZ’s economists, for one, described the data as “a significant challenge” to their rate cut expectations.

On the ASX, it was ultimately worth a -38 point turnaround. But throw in expiry battles and lower than average volume and it’s not that obvious how the market feels. Given the ASX200 hit a new high when the prior month’s RBA minutes as good as confirmed another rate cut, a -16 point drop overall is hardly a panic response. Could it be that the possibility of not going into recession is actually not such a bad thing?

And why were the only two sectors to close in the green on the day utilities and industrials – the latter being driven by the utilities within industrials (roads, airport) – which are the pin-up defensives? There’s something a bit wrong with this picture. But then telcos dropped -0.5% while staples closed flat. Healthcare dropped -1.1%, probably because the Aussie rallied 0.5% in response the the jobs numbers.

The banks fell another -0.4% despite not one regulatory authority announcing another lawsuit on the day. Energy fell -0.9% despite a rise in the oil price.

The futures are down -28 points this morning, despite a rally on Wall Street. Delayed reaction? Or misleading given we just shifted to the new March expiry bellwether? Indeed, I think we can put a lot of the confusion down to expiry day yesterday and the time of the year. Don’t read too much into it – wait for January.

In individual stock news, communication infrastructure company Service Stream ((SSM)) topped the index leaders’ board with an 11.1% gain after winning a big contract with Sydney Water.

Outside of the index, troubled Village Roadshow ((VRL)) – a company from a bygone era – received a takeover bid from private equity and jumped 21.6%. Maybe because when it’s this damned hot, fools go to the beach and smart people go to the (air-conditioned) movies.

We can pretty much call the year done and dusted by lunchtime today. So realistically anything could happen.

Pens at the ready

US Treasury Secretary Steven Mnuchin said last night the trade deal will be signed in early January. It’s “just going through what I would consider to be a technical legal scrub.”

The Chinese Ministry of Commerce confirmed it remains in contact as the deal is drafted, but declined to confirm China will be buying an additional $32bn worth of US agri-products on top of the $24bn peak in 2017.

We might recall that back in October, a trade deal “just needed to be inked” but never was.

But Wall Street was prepared to give the White House the benefit of the doubt, and hence last night once more saw triple all-time highs. Focus may have been on trade, but a lot of attention is now being paid to the US yield curve, again. This time for positive reasons.

Having dipped into a slight negative earlier in the year, sparking frantic recession debate, the spread on US two-year to ten-year bonds has been climbing quietly recently and is now above 30 basis points. And while the popular press was all over Trump’s impeachment last night, Wall Street was all over the Riksbank.

Last night Sweden’s central bank – the world’s first ever central bank – hiked its cash rate 25 basis points to 0.0%. It was a close run thing — at one point someone lost the Allen key – but Wall Street took it as an early Christmas gift. Remember “synchronised global growth”?

Commodities

Base metal traders have up to now been reluctant to get too excited about the trade deal, and with good reason having been many times bitten and thus shy, but last night it seemed a bit of optimism finally crept in.

Even iron ore perked up.

But the Aussie has perked right up, by 0.5% to US$0.6887, which is the RBA’s yang to the yin of a good jobs result.

Today

The SPI Overnight closed down -22 points or -0.3%. Square up, because it will be tumbleweeds after lunchtime.

The US will see one more revision of September quarter GDP tonight, along with PCE inflation and the last consumer sentiment survey before Christmas.

The changes to the ASX20 to 200 indices announced last week come into effect today.

Incitec Pivot ((IPL)) holds its AGM today and Sydney Airport ((SYD)) releases monthly traffic stats.

Please note that the Overnight Report will continue until Tuesday but FNArena will only be providing an abridged service for those two days before closing for the summer break. Full service will resume on January 13.

The Australian share market over the past thirty days…