Overnight: Fear Abates

By Greg Peel

Step Down

Following two days of solid falls on Wall Street, the ASX200 adjusted down -1.4% yesterday. While the index fell by as much as -126 points early in the session, it soon pulled back to be down around the -100 mark and there it remained for the rest of the day.

The adjustment was thus rather orderly. This was not a market-wide sell-off. On the contrary, sector moves clearly reflected the anticipated impact of the coronavirus on China’s economy and its consumers.

Energy (-2.9%) posted the biggest fall, having seemingly been slow to move last Friday. Materials (-2.3%) were also hard hit as iron ore and base metal miners were jettisoned, net of gold miners being sought after. Three of the top five ASX200 winners on the day were gold miners.

If the resource sector moves reflected loss of Chinese production and airline travel, consumer discretionary (-2.5%) reflected loss of Chinese consumption. Travel agent Webjet ((WEB)) posted the worst performance on the day, down -13.9%, while the casinos were also clear targets along with anyone else reliant on Chinese discretionary spending.

There was then a big gap in movement terms to fourth placed IT (-1.5%). The banks fell -1.3% as bond yields tumbled globally, with the Australian ten-year falling to 0.96%.

By contrast, healthcare rose 0.4% to post the only sector gain on the day. Utilities closed flat on a combination of having no real exposure to a virus and as a defensive. Similarly consumer staples only fell -0.6%.

News this morning is that Australian scientists have successfully recreated the coronavirus in a lab, providing hope for the development of a vaccine. Meanwhile it is being noted that the mortality rate of the virus is not nearly as high as that of SARS or MERS or the hyper-deadly ebola, being, to date, about 2%.

Market commentators expect the impact to be short-lived. The Chinese economy will take a hit, but Beijing will be sure to counter. To that end, US futures had already begun to rebound late in our session yesterday and sure enough Wall Street has bounced quite solidly overnight.

Our futures are up 38 points this morning.

It should also be noted that many an analyst was calling the local market overvalued above 7000, heading into the coronavirus impact.

In other news, NAB’s business conditions index fell to 2.7 in December from 4.3 in November, while confidence fell to -1.9 from zero. It would be easy to point the finger at the bushfires, but NAB’s compilers have pointed out the survey was mostly conducted before the bushfire crisis hit its zenith. We recall New Year’s Eve was basically the peak.

Don’t Panic

Commentators suggest the sell-off on Wall Street triggered by the coronavirus, which began quietly last week before picking up pace on Monday night, was a sell-off Wall Street needed anyway. It, too, had become overvalued at constant new all-time highs.

Note that the S&P500 could have fallen a full -10% before reaching the current 200-day moving average.

Commentary focused last night on the aforementioned low mortality rate of the coronavirus, at 2-3% compared to 10% for SARS, and the fact deaths to date have been contained to the elderly or those with a pre-existing condition. Beijing has also moved far more swiftly to respond to the outbreak than it did in 2003, when it initially attempted to keep SARS quiet.

Traders hoping for a more extensive pullback would thus have been disappointed last night as Wall Street rebounded, albeit no one is yet calling an end to the crisis nor an end to the pullback, whether the virus is the driver or not.

Meanwhile, corporate earnings reports continue to roll in. Results are currently beating forecasts by a net 5%, which is the best performance since the March quarter 2019. However, earnings revisions suggest work still needs to be done to justify current prices.

While there were some strong results last night, notable was a -5.7% drop for 3M (Dow) on a December quarter earnings miss, despite the company being the world’s largest supplier of face masks.

Apple reported after the bell, and having rallied back 2.8% during the session after falling -3% on Monday night, is trading flat post result.

In US economic news, durable goods orders rose 2.5% in December but take out military equipment and orders fell -2.5%, having fallen a revised -3.1% in November. If the US economic is strengthening, it’s not doing so at the top-dollar end of the market. It’s all about the consumer.

The Conference Board’s monthly consumer confidence index has risen to 131.6 from 128.2 in December.

Wall Street is now looking ahead to tonight’s Fed policy statement. No change to the funds rate is expected but the market is now more focused on the Fed balance sheet given the pick-up in “repo” operations, or QE by any other name.

Commodities

The stand-out on the table above is iron ore, but the big drop reflects a market that was closed for four sessions over the lunar new year holiday. Such a move was anticipated, and arguably already priced into Australian mining stocks.

As the US stock market rebounded last night, so too did other markets reverse. The US ten-year bond yield bounced back 4 basis points to 1.64% and gold took a tumble.

A little bit of stability is apparent in base metals, while oil prices have bounced mildly.

The Aussie is steady at US$0.6758.

Today

The SPI Overnight closed up 38 points or 0.6%.

China will remain closed through to Sunday by government decree but many Chinese firms, from tech companies to car manufacturers, have extended that closure for another week or even to the end of February.

Australia’s December quarter CPI numbers are due today.

The Fed wraps up its policy meeting tonight.

Evolution Mining ((EVN)), OZ Minerals ((OZL)) and Regis Resources ((RRL)) publish quarterly production reports today.

The Australian share market over the past thirty days…