Overnight: Much Ado

By Greg Peel

Guidance Abandoned

Let’s get one thing straight. What the RBA announced yesterday is not QE, as the mass media would have you believe. Admittedly, the concept of QE has morphed and stretched and evolved since Ben Bernanke began the experiment in 2009, but at its base level QE involves buying a set value of government bonds in the primary (new issue) market over a period of time using money that’s been conjured up.

Recently the Fed has announced US$700bn in government bond and mortgage-backed security purchases and the ECB yesterday announced E750bn in purchases of both public and private sector bonds. The RBA put no figure on its bond purchases.

The reason is it may not have to buy any at all.

The RBA had long ago declared 0.25% to be as low as the cash rate could go before anything less is pointless, and that’s when non-conventional tools would need to be used. The RBA is also not a great fan of QE, but would use it if things were really that desperate. What the RBA announced yesterday, as had been anticipated by economists drawing upon prior RBA commentary, is called “yield curve control”, as has been practiced by the Bank of Japan for a long time.

The RBA has now set a cash rate target of 0.25%, and a three-year bond rate target of 0.25%. This covers the overnight cash market as well as where the greater concentration of Australian debt sits on the curve. While the central bank will put money into and pull money out of the overnight market to ensure the target level is maintained, often it need do nothing as the market will adjust on its own.

The same, thus, is true at the three-year point on the curve. Economists agree the market may test the RBA’s resolve to maintain this level, and right now the demand for credit is greater than the supply, but in theory the RBA may also need at some point to take money out again. Importantly, the central bank will only purchase bonds in the secondary market, meaning existing bonds. It will not be buying bonds issued by the Treasury for the purpose.

Not QE.

The RBA has also set up a term funding facility for the banking system, by which banks can borrow up to 3% of their existing debt amount or more if they are specifically lending to businesses, particularly SMEs. This facility does have a number: “at least $90bn”.

The package should have brought some comfort to a spiralling stock market, but alas we live in a global world. The ASX200 opened up 150 points yesterday but after twenty minutes it was all over and the index then followed a bumpy but consistent path to close on its low.

The ASX200 followed the US stock futures as usual, which began to be sold again as the ECB announced its E750bn QE package, but it was also the day corporate Australia threw its hands in the air.

One by one, companies announced the withdrawal of earnings guidance. Those offering the grimmest outlook were anything consumer discretionary, from retail to travel, in the latter case further impacted by Australia’s now full-blown border closure. Retail includes relative REITs and developers, while bricks & mortar is a no-go zone. Kathmandu ((KMD)) down -27%, Super Retail ((SUL)) down -35%, Myer ((MYR)) down -44%. Lovisa ((LOV)) down -44%.

The travel companies were also trashed once more: Flight Centre ((FLT)) and Helloworld ((HLO)) each down -33%, while Webjet ((WEB)) is now in a trading halt as it attempts to raise capital.

The market yesterday was largely bifurcated along defensive versus cyclical lines, with utilities (+4.1%) a clear outlier on the RBA move, staples (+0.5%) the only other positive despite a trip to the supermarket now being an exercise in futility, and telcos (-0.8%) and healthcare (-0.3%) seeing only minor falls.

Most other sectors fell -2.5-3%, other than energy (-7.8%) and financials (-5.9%), the latter on the RBA move, not that it wasn’t expected.

The Aussie dollar is down -0.8% this morning at US$0.5741, but only after bouncing back from US$0.5520 just ahead of the RBA not announcing QE. At that point it was down -3.5% for the second session running.

A wild day on Wall Street ended in a small gain last night. Our futures are up 119 points this morning. Yesterday the ASX200 broke down through, and closed below, the prior intraday low. Not a good sign. But we’ll see what transpires today.

Oh and by the way Australia’s unemployment rate fell to 5.1% from 5.3% in February. Print out the report and frame it.

Consolidation?

The ECB stimulus package spooked Wall Street last night, beginning in the overnight futures, and sending the Dow down -700 points from the open. Also disturbing was news the Fed had stepped in to backstop the municipal bond market, on top of everything else, which is typically the safest of safe haven credit markets and deadly boring.

The US auto industry closes down tonight, impacting a million workers, and more when one extends to the wider industry. The NYSE closes its doors to humans tonight. Yes, the computers have finally won.

The reality is these days floor-trading volumes are completely swamped by electronic trading, and the Nasdaq has only ever been electronic.

Pretty soon the Dow was up 500 points, before chopping around madly through the afternoon to a small, 188 point gain.

Helping the rebound was a snap-back rally for oil prices, with WTI leaping 12% to mark its biggest ever one-day increase. I wouldn’t read much into it. There was no actual trigger, just a typical bounce from an oversold level the night before.

It was nevertheless notable last night when the dust cleared that this rally, if you call it that, is the first of the odd few rallies we’ve seen amidst the freefall that was not led by defensive sectors. Quite the opposite in fact. Energy, big tech and even consumer discretionary were the leading sectors.

It smacks of “sell now and asks questions later”. Analysts have been sorting through to identify those companies which will not suffer as much as their share prices suggest, and which have balance sheet support and ongoing cash flows. Others, such as department stores, are not expected to survive.

Airlines will survive, but not before the government helps get them through the crisis. It was the government that shut the border. Boeing expects a handout, but this is not going down well in the US given the company was in all sorts of trouble of its own making beforehand and thus why should taxpayers bail it out?

Also being exposed are those companies which have spent the last three years buying back their shares rather than doing something useful with their cash, and more so those who exploited ultra-low interest rates to borrow money to fund buybacks. Those companies are now the ones in balance sheet stress.

Last night is the sort of action one might expect in the consolidation phase following a major correction. But while it may be a canary, it’s no fat lady. Consolidation can go on for weeks or months.

Commodities

The biggest problems now for commodity markets, and for emerging markets, is the surging US dollar. It’s up another 1.7%, on a lesser of the evils basis when one weighs up all the dire global economic forecasts.

That’s why the gold price continues to fall, because it’s the USD gold price. In Aussie it’s a whole different story, as evidenced by ongoing buying of Australian gold miners.

Today

The SPI Overnight, now trading the June contract bellwether, closed up 119 points or 2.5%. It is unclear whether yesterday’s weakness for the ASX200 included any impact from the futures rollover.

The S&P/ASX index rebalance for the March quarter is scheduled to be announced today, but I can’t see how they can identify moving targets. There is a lot of Heisenberg Uncertainty Theory going on in market caps right now.

Premier Investments ((PMV)) delivers its earnings result, while Sydney Airport ((SYD)) is due to update its traffic numbers, if it has any.

The Australian share market over the past thirty days…