Overnight: Familiar Territory

By Greg Peel

Not so extraordinarily unlikely

It could have been worse. With the futures suggesting down -78 points yesterday morning, again following down Wall Street, the opening ten minutes saw a fall of -50 points. But by 11am that had been pared back to -26. Had sanity finally prevailed?

After all, Wall Street had seen a sharp recovery from steep lows in afternoon trade. But no, by lunchtime the index was down -60 points. Still, investors did manage to pare that back to -38 by the close.

If we ignore a 2.3% bounce for the Ausdaq, which was driven by tech buying against the tide on Wall Street, we could look at other sector moves and provide a purely domestic overview of yesterday’s sentiment. Weakness was exclusively driven by Australia’s two biggest industries – banks and resources.

Materials fell -2.0% on a now plunging iron ore price, with no offset being offered this time by gold. Energy fell -1.9% on a drop in oil prices. While one could argue the banks (-1.4%) fell in line with Wall Street, because they always do, Guy Debelle also had something to add.

The deputy RBA governor spoke yesterday and for economists it was not about what he said, but rather what he didn’t say. Philip Lowe has spoken more than once about negative interest rates not being ruled out, but always with the qualification of being “extraordinarily unlikely”.

Yesterday Debelle reiterated the RBA’s list of potential policy responses, including pumping up the term lending facility further, pure quantitative easing (buying government bonds), a “micro cut” to the cash rate (the market is already expecting a drop from the current 0.25% to 0.10%), or if necessary, a cut into the negative.

He did not say the latter was “extraordinarily unlikely”. Or even “unlikely”, for that matter.

The slow and painful death of Europe’s banks, which have never recovered from the GFC, is testament to what negative rates mean for bank earnings potential.

It was left to the defensives of healthcare (+1.1%) and staples (+0.8%) to provide some balance against banks and resources yesterday. Yet in many ways it was a day of good news.

South Australia is reopening its border with NSW. Even the Wicked Witch of the North is showing some largesse in expanding the NSW-Queensland border bubble. No doubt she feels safe given 70% of Queenslanders support a totally discompassionate approach to border management. She should be a shoe-in next month.

NSW recorded its first day of zero community transmission yesterday in its second wave. The Victorian trend is heading towards easing of restrictions. As the rest of world struggles with second waves (or ongoing first waves), Australia is once again looking good.

Yet on the ASX200 losers’ board yesterday, travel agents Webjet ((WEB)) and Corporate Travel Management ((CTD)) took gold and silver with falls of -6.0% and -5.8%. State borders might reopen, but it could be years before the international border follows.

The good news is Wall Street was back to its old self last night, rising healthily on tech’s coattails. And with some thanks to an ongoing bounce for the US dollar, and the dovish tones of a deputy RBA governor, the Aussie has plummeted over two sessions from eyeing off US74c to be under US72c this morning.

This should provide support for the resource sectors, but unfortunately iron ore and gold are down again. The futures are up 36.

A Plaintive Cry

The S&P500 hit the -10% correction level on Monday night before rallying back hard, albeit still closing in the red. All indices opened to the upside last night but soon the Dow was down -160 points. Nonetheless, again a rally ensued, again led by Big Tech. Amazon, for one, closed up 5.7%.

Just like old times.

Wall Street was heartened that having plunged on Monday night, UK and European markets were steady last night, despite Boris calling last drinks for the second time. No change, however, to the case-count trajectory.

Which was reason enough that when Fed chair Jerome Powell and Treasury Secretary Steve Mnuchin testified to Congress last night they said, in not so many words, of you don’t get your bloody act together on stimulus then the economy is going to hell in a hand basket.

It seemed to work for Wall Street, if not for the president. He’s pushing ahead with his Supreme Court nomination, to ensure he will be victorious if he contests the election result, thus forcing Congress to have two issues to argue over in the short time it has before mandatory recess.

And one presumes the president was fuming last night when the FDA, in not so many words, said it would not be browbeaten by political influence and would need to see two months of testing of any vaccine candidate beyond the second dose that leading contenders require.

That blows any hope of a vaccine being approved before the election. The only candidate far enough along in the process to be a possibility is Moderna’s, with others not close enough to come in pre-election anyway. Moderna shares fell on the news, but by less than -1%.

Wall Street had never priced in a vaccine before the election anyway.

So has Wall Street seen the bottom now, having bounced off a -10% S&P correction? Unlikely given ongoing uncertainty. Uncertainty over the case-count and the possibility of a second lockdown, over whether a vaccine can be found in reasonable time, over whether a second fiscal package can be agreed upon before all current support expires, over the election result…

As Jack Palance once said: Day ain’t over yet.

Commodities

Base metals and oil steadied last night after Monday night’s falls, but not so iron ore, which has crashed through what might have been support at US$120/t.

The sharp rebound is ongoing in the US dollar, up another 0.5%, sending gold down to test US$1900/oz.

A combination of greenback relativity and RBA rhetoric has the Aussie down another -0.8% at US$0.7171.

Today

The SPI Overnight closed up 36 points or 0.6%.

The RBNZ holds a policy meeting today.

Flash estimates of September manufacturing PMIs are due across the globe.

The ABS will publish preliminary August retail sales numbers today.

Kathmandu ((KMD)) and Nufarm ((NUF)) report earnings.

The Australian share market over the past thirty days…