Overnight: Once More With Feeling

By Greg Peel

Just a Flesh Wound

The Australian market set about putting in a more definitive rebound yesterday following a modest turnaround on Wall Street, climbing steadily through the morning to be up 40 points after lunch. Confidence was aided by the PBoC dumping a second round of stimulus (US$71bn) into the Chinese financial system following Monday’s big injection.

Beijing has taken on the Draghi mantra – “whatever it takes”.

But the wheels fell off somewhat on the dot of 2.30pm when the RBA’s policy statement was released. No one had expected a rate cut, despite March and April firming in the odds, and indeed the cash rate was left unchanged at 0.75%. But everyone was adamant the central bank would lower its economic growth forecast in light of the bushfires and coronavirus.

Nup.

“The central scenario is for the Australian economy to grow by around 2¾ per cent this year and 3 per cent next year, which would be a step up from the growth rates over the past two years.”

This is unchanged from November, before the bushfire crisis escalated. There was one minor caveat:

“In the short term, the bushfires and the coronavirus outbreak will temporarily weigh on domestic growth.”

But those calling a rate cut as soon as March may have to rethink:

“With interest rates having already been reduced to a very low level and recognising the long and variable lags in the transmission of monetary policy, the Board decided to hold the cash rate steady at this meeting.”

If the “black swans” of bushfires and coronavirus aren’t enough to prompt the RBA into emergency mode, then “long and variable lags” suggest there is no urgency to support the economy any further than it has been until there is more evidence of whether easing to date is having an impact.

The ASX200 plunged on the statement to turn a 40 point gain into a 13 points gain, before a slight recovery to the close.

Disappointment on the rate front is likely why utilities (-0.5%) fell on the day, in contrast to consumer staples (+1.2%) which, alongside healthcare (+0.6%), has become the go-to defensive amidst the turmoil. Energy (-1.1%) was understandably again the worst performer as oil prices continue to tank.

Materials (0.3%) held up fairly well despite another big drop in the iron ore price but the sector has its own inbuilt hedge in the form of gold stocks, which are typically going the other way.

The iron ore price has rebounded since, but gold is off over twenty dollars.

Amongst individual index stocks, Blackmores ((BKL)) waved the flag for Chinese stimulus in rising 7.6% while Harvey Norman ((HVN)) surprised with a 5.9% gain, possibly on short-covering driven by a tick up in the weekly consumer confidence survey (plus a number of stockbrokers are turning less negative on anticipation of housing market improvement).

On the downside, P’nyang disappointment continued for Oil Search ((OSH)), which fell another -2.5%, while a profit warning from ARB Corp ((ARB)), specifically related to a surge in the Thai baht, had that stock down -2.4%. ARB’s auto parts are mostly manufactured in Thailand.

The market looks set to shake off RBA disappointment today and have another go at a recovery. With Wall Street surging our futures are up 43 points this morning, although 0.6% is a bit light against the S&P500’s 1.5%.

It’s Electrifying

The coronavirus is clearly top of the news but all anyone can talk about on Wall Street is Tesla. The stock added another 20% last night, to make two 20% gains in a row and a doubling of the share price in 2020. The rally was initially sparked by a strong earnings result, but since then it’s become an out of control feedback loop.

The batteries will have to go flat at some point but for now momo and FOMO for Tesla has pushed the Nasdaq back to a new all-time high. Virus be damned.

The hype around Tesla has infected the wider market as US earnings results continue to suggest a net 5% beat on expectations. Heavyweight Apple gained 3.3% last night after announcing it would resume full production in China on February 10, virus or not.

WHO has declared coronavirus not to be a “pandemic”, but rather a stable virus as viruses go, despite 20,000 cases and a death toll racing towards 500.

The Senate is expected to clear the president of impeachment during our session today before he delivers the annual State of the Union address. Meanwhile, a technical stuff up at the Iowa caucuses means that as I write, no one yet knows who won. Any stumbling in the Democrat nomination process is an incremental win for Wall Street.

Add in the second round of Chinese stimulus and what was a tentative and unconvincing rebound on Monday night became a fully blown recovery last night. The Dow closed off its highs of up over 500 points, but 400 ain’t bad on the upside.

Commodities

Copper has been the hardest hit metal and is now seeing some benefits of Beijing’s stimulus.

Iron ore has bounced back well.

Another whiplash session for gold. The US ten-year yield bounced back 8 points to 1.60%.

OPEC is meeting to discuss production, as WTI slips into the forties, and is expected to announce further cuts.

The lack of a GDP downgrade from the RBA has sent the Aussie surging back 0.7% to US$0.6738.

Today

The SPI Overnight closed up 43 points or 0.6%.

The RBA governor has some explaining to do at the Press Club today.

It’s service sector PMI day across the globe while the US sees numbers for trade and private sector jobs.

Earnings reports are due today from the Centuria Industrial ((CIP)) and Metropolitan ((CMA)) REITs along with Genworth Mortgage Insurance ((GMA)).

The Australian share market over the past thirty days…