Overnight: Turnaround Tuesday

By Greg Peel

Trump Card

If the SPI futures were down -273 points yesterday morning because Wall Street fell over -7% on Monday night, this seemed to be a case of double-counting given the ASX200 fell over -7% on Monday. We got there first, and aside from a growing case-count, nothing new had happened. All agreed the 24 hours to yesterday morning was a matter of stretching the rubber band too far.

So it was the ASX200 fell -222 points in the first ten minutes of trade yesterday and by 10.30 was almost back to square. These movements were so swift actual humans may have had no chance to buy the dip unless they had orders already in place before the bell.

There followed an hour and a half of “now what?” before President Trump held a press conference at which he pledged a fiscal stimulus rescue package. No details at that point, but a pledge nonetheless. This appeared to be the green light the Australian market was waiting for, and then it was on for young and old.

In the afternoon the index rallied 401 points or 7.3% from the morning low. Mind you, that still leaves us down -4.7% from Friday’s close.

The Morrison government has also promised a fiscal stimulus package but to date that has been ignored, with any details still pending.

Given the sell-off to yesterday had featured a clear skew among sectors, with cyclicals the hardest hit and defensives not as significantly, yesterday saw that pattern reverse on the way back up.

Outside of energy, which was smashed on Monday due to the oil price plunge, the banks and IT had been the worst performers on Monday so they led the market back yesterday with 4.7% gains each. Materials was not far behind on 4.0%. Energy managed a 3.4% rebound from what was clearly an oversold position.

Healthcare and discretionary bounced over 3% each and then we drop down to the defensives. Telcos managed 1.6%, staples 1.5%, industrials (airports & toll roads) 1.0% and utilities actually fell -0.6%, having been the most popular safe haven on the way down.

The top performing individual stocks on the day varied in sector. Viva Energy Group ((VEA)) waved the flag for energy with a 13.8% gain, while positions two through five saw a spread of 12.6% to 12.2% gains, suggesting a lot more double-digit moves down the list of also-rans.

oOh!media ((OML)) remains a victim on the downside (-5.2%), while the rest of the top five losers were largely defensives that had provided shelter earlier.

Is it over? Still can’t say. The correction continues to play to script. Sharp snap-back rallies are a common feature before a bottom is in place, although Monday did smack of ultimate capitulation. One thing we do know is that a bottom can only be called in retrospect, and requires more than one session of evidence.

The problem remains that all the stimulus in the world, monetary and fiscal, can be thrown at the economy but it won’t stop the virus. One saving grace, to at least some extent, is the Aussie has fallen -1.5% to under US65c as the greenback has rebounded along with US bond yields.

Bonding Session

The Dow opened up 900 points last on Trump’s stimulus package news, but also on the over-stretched rubber band theme. But there are always the slow movers who hadn’t sold fast enough and look for any rebound to make their belated move. By late morning, the US indices were back to square.

However, with that out of the way, the rebound could resume. Driving that rebound, aside from stimulus and rubber bands, were two other significant rebounds.

The WTI crude price jumped 12%. There was no specific reason, other than a fall of -10% on Friday and -25% on Monday into too-far territory. Energy stocks rebounded in concert.

One US shale company, Occidental Petroleum, announced it had slashed its dividend and its capex plans and duly rallied 15%. It’s not every day a slashed dividend will spark a 15% rally, but as one of the most highly leveraged of the shale plays, Occidental had fallen -50% on Monday night. What Wall Street fears most is a run of highly indebted shale companies going under, leading to a credit crunch. Occidental is doing its best not to go under.

The US ten-year bond yield bounced back 25 basis points to 0.75%. Bear in mind the yield hit 0.32% intraday on Monday, so it has effectively doubled. Aside, again, from that rubber band, fiscal stimulus takes the pressure off the Fed to have to do all the heavy lifting through monetary stimulus, thus reducing the need for another “shock & awe” rate cut.

Not that another rate cut next week is now off the table, and actual details of the stimulus package are not only yet to be confirmed, but have to pass through Congress. Early news is Trump is pushing to cut the payroll tax, which is paid by both employer and employee, to zero to the end of the year, and, preferably, permanently.

The Democrats may agree to an emergency cut in the short term but given payroll tax is the primary source of funds for social security, Medicare and Medicaid, it is doubtful they’d back a permanent cut.

There may yet be a battle, as the case-count grows.

No one is yet prepared to call a bottom on Wall Street, given all agree the virus is simply too much of an unknown factor. Indeed, given the slow pace of test kits becoming available in the US, the fear is the US case-count is actually much higher than presently reported.

Will the US have to go down the same path as Italy? That’s why this is not over yet.

Commodities

Metals, too, have rebounded to some extent but the standouts are the oil prices, and gold. It was inevitable that were US bond yields to bounce, the bullion safe haven would suffer.

Also standing out is a full 1.5% bounce for the US dollar index on the bond rebound, matched by the Aussie with a -1.5% fall to US$0.6487.

Today

The SPI Overnight closed up 34 points or 0.6%. This time we’re not double-counting. But if we do close in the green today it will mark the first time since the sell-off began we see two consecutive up-days.

Westpac’s consumer confidence survey will make for interesting reading today. We’ll also see housing finance numbers.

The US CPI data for February are due tonight, but will fall into disarray this month due to the oil price plunge.

The Australian share market over the past thirty days…