Overnight: When The Levee Breaks

By Greg Peel

Carnage I

The signs were there late last week. The ASX200 peaked intraday on Thursday on earnings season exuberance before fading in the afternoon. Friday brought some nervous selling. The weekend confirmed the news virus outbreaks had begun in Korea, Italy and Iran. The index fell -100 points from the open yesterday.

There it found a level, at least until late morning before more selling emerged. The ASX200 didn’t quite close on its lows, but not far off it.

It should nevertheless be noted that the close of 6978 still exceeds the close on February 3 – the last time there was a sharp virus-related sell-off — of 6911. Since Friday we’ve simply wiped out earnings season gains. That should in itself be heartening, but for the fact our futures are down -167 points this morning. We fell -2.3% yesterday and the S&P500 has dropped -3.4% overnight. It’s not clear why we should fall another full -2% today, but panic can do that.

There’s still a long way to go to the 6680 level, which is where the ASX200 began 2020. The 200-day moving average is closer to 6700. The implication here is we can have a more substantial sell-off and not upset the trend.

For clearly the virus has been a trigger for stock prices to come back to earth not just as a result of the economic implications, but from overblown PE multiples. Take CSL ((CSL)) for example. It fell -3.3% yesterday despite being a manufacturer of flu (a coronavirus) vaccines. It had simply run too far, and yesterday was a day to “Sell everything!”

Except the gold miners. They all stood out on the upside yesterday. Elsewhere upside was rather elusive. It was not a good day to report a positive earnings result and it was a very bad day to report a negative one.

Sector-wise, energy fell furthest (-4.0%) as the market rightly anticipated an overnight -4% fall in oil prices. IT dropped -3.9% as high-PE growth stocks are always among the first to be jettisoned.

Consumer discretionary (-3.6%) is highly exposed to virus impact as are many industrials (-3.1%), including supposed defensive Sydney Airport ((SYD)). Materials split the balance between gold miners and all other miners in falling -1.6%.

Healthcare’s -3.0% drop stood out among the more defensive and less exposed sectors. Consumer staples fell “only” -2.2%, the banks -1.7%, utilities -1.8% and telcos -1.4%. One would have to assume an RBA rate cut is inching ever closer, even if we only look at last month’s job numbers, and that would be good for yield stocks. But they were sold anyway.

Among yesterday’s reporting companies, Reliance Worldwide ((RWC)) was the day’s train wreck, down -26.5% despite expecting only minimal virus impact. G8 Education ((GEM)) fell -5.2%, noting a childcare impact from the virus and the bushfires. BlueScope Steel ((BSL)) has businesses in China. It fell -7.9%.

Insurer nib Holdings ((NHF)) has no connection but fell -7.1%, so too oOh!media ((OML)) which fell -3.1%.

Today it will be just a matter of where does this stop? There’s another decent chunk of earnings results due but there’s also quite a sizable list of ex-dividends to boot, which will handicap the index from the start.

Carnage II

The story was the same on Wall Street. The market was ripe for a pullback from overstretched valuations, and the “black swan” that is the virus was the trigger. A case in point is Apple, which despite Chinese exposure had continued to stumble higher and higher before last night, when it fell -4.8%, impacting on all three major indices.

Wall Street is now bracing for a -10% correction for the first time since December 2018. It will come down to what point investors decide stocks are the only investment option. The good news is the virus has peaked in China, as confirmed by WHO. The bad news is it’s now popped up elsewhere. The ultimate impact on the global economy is as yet unknown.

The outbreak in Italy is centred in Lombardy, in which lies Italy’s financial hub of Milan. The region itself is responsible for some 30% of Italy’s GDP. Many towns in the area are on lock-down.

Adding to the problem last night was another caucus victory for Bernie Sanders – the man who is intent on wiping out US private healthcare companies. While few believe a Congress of any make-up would approve such a policy, and most believe Sanders is no match for Trump, insurers were nevertheless sold off hard last night along with obvious virus-impacted sectors.

Having fallen over -1000 points by mid-session, the Dow did find some buying and recovered to be down “only” just over -800. But just when it looked like it might be safe to go back in the water, late selling ensured a final drop of -1031. Not quite the low of the day but not far off it.

Around Europe, the story was the same. London down -3%, France and Germany -4% and Italy -5%.

Commodities

No real surprises in the table above.

Gold’s ongoing rally was supported last night by a full -10 point drop in the US ten-year bond yield to 1.37% — its lowest level in history.

The plunge in oil prices may just steel OPEC’s resolve when production cuts are discussed next month.

One surprise, perhaps, is the Aussie. It seems to have found a floor at US66c as it is little changed overnight.

Today

The SPI Overnight closed down -167 points or -2.4%.

Still plenty of earnings reports due today. Check out the FNArena Calendar (https://www.fnarena.com/index.php/financial-news/calendar/) for those and today’s list of ex-divs.

For a full list of earnings results due today please refer to the FNArena Corporate Results Monitor (https://www.fnarena.com/index.php/reporting_season/).

The Australian share market over the past thirty days…