Overnight: Losing The Faith

By Greg Peel

Do your own thing

The ASX200 shot up 40-odd points from the open yesterday and crept higher as the morning unfolded. With the S&P500 flat, and the Nasdaq lower, we can only assume the excitement was all domestic. While not quite baaack, Victoria is on its way.

China released its September quarter GDP result mid-session and my lord it was a miss. The number came in at 4.9% (year on year) when Chinese economists had forecast 5.2%. They’re now off to re-education camps.

The performance was hampered by a reluctance of Chinese consumers to return to spending post-lockdowns, as evidenced by retail sales contracting -7.2% in the year to September from a year ago. However, the tide could be turning, with month of September retail sales up 3.3% year on year compared to down -0.3% in August, and when 1.8% was forecast.

Month of September industrial production rose 6.9% compared to 5.8% forecasts and 5.6% in August. Fixed asset investment swung to 0.8% growth year to date from -0.3% in August, as was forecast. Infrastructure spending is starting to make its mark.

The Australian market did not much respond, ultimately holding morning gains to the close.

All sectors closed in the green bar property (-0.3%), which by rights should be a Victoria reopening beneficiary (even though retail is not reopening till next week) but it’s a whole new paradigm out there now in retail land.

Healthcare (1.6%) was the best performer, after having been one of the worst on Friday, as similarly turning around were materials (0.8%) and energy (0.7%).

But the banks were the main driver (1.0%), as investors continue to look from a perspective of fewer defaults implied by re-openings while dismissing next month’s assumed rate cut. The banks are unlikely to much move the dial on mortgage and other rates, if at all. They can’t drop deposit rates any further.

Consumer discretionary was a bit left behind (0.1%) but was dragged down by an -8.2% standout fall for Crown Resorts ((CWN)), as AUSTRAC becomes interested.

To the upside, Cimic Group ((CIM)) won with an 8.2% gain after selling half of its Thiess global mining service business, thus bolstering its balance sheet.

After playing puppy dog to Wall Street in September, the local market has finally begun to do its own thing and recognise that we don’t have a horrendously rising case count, we do have bipartisan stimulus and we don’t have an election looming that might add uncertainty. Having underperformed Wall Street since the virus bottom in March, we are now outperforming.

With the S&P500 down -1.6% overnight, and the Nasdaq down for the fifth straight session – a feat last achieved over a year ago – our futures are down only -17 points this morning (according to the ASX website).

Pre-election Yips

The White House has upped the ante, again. It’s now lifted its stimulus bid to US$1.9trn from US$1.8trn, which was lifted from US$1.6trn, which was lifted…you know the story. Anyone would think there was an election coming.

Even if the Democrats and White House can meet in the middle at, say, US$2trn, the quantum of stimulus is one factor but the allocation of stimulus remains a more significant stumbling block. And even if they can agree on both quantum and allocation, it still has to be passed by the Senate. And it won’t be.

I really don’t quite understand why Wall Street might still be optimistic about a package being passed before an election a mere 15 days away. Earlier this month it appeared investors had accepted the reality of no package pre-election, but a big package sometime thereafter, but last night’s trade suggests they are still putting their faith in a pre-election deal being reached.

The Dow had opened up a hundred points but then began to drift steadily lower. When news came through the new bid from the White House was not accepted, mid-afternoon, stock indices tanked. All S&P500 sectors closed in the red in a very uniform spread.

Perhaps the real trigger was a tweet from an aide to Nancy Pelosi that there was technically only 48 hours left for a deal to be reached for it to passed ahead of November 3.

Perhaps after retesting highs again post the September swoon, Wall Street simply needs to pull back amidst so much uncertainty: ever rising case count; no immediate vaccine (and a long wait until general distribution anyway); and an election that still has to be run and won.

The real risk is Biden wins but the Republicans hold the Senate. That would result in a stalemate of dangerous proportions.

The September quarter result season is also a factor, with this week seeing the big ramp-up. So far, earnings “beats” have largely been met with selling. What happens when misses appear?

The US housing market sentiment index hit a record 85 this month. That’s extreme optimism on a 50-neutral measure – a measure rarely seen above the sixties. Yet home builder stocks were sold off last night nevertheless, along with everything else.

The VIX volatility index is pushing higher once more, and fair enough too.

Commodities

Some positive response to China’s industrial production result but not much beyond nickel and zinc, and a weaker greenback was supportive anyway.

The oils did start the day stronger, but turned around with Wall Street.

With the dollar index down -0.3% the Aussie should be higher, but it’s also down -0.3%. Having already baked in a rate cut to 0.10% next month, economists are now discussing just what level of QE (buying five to ten year government bonds) will also be announced.

Today

The SPI Overnight closed down -17 points.

Speaking of the RBA, the minutes of the October meeting are out today.

AGMs will be held today by Bapcor ((BAP)), Cochlear ((COH)), Origin Energy ((ORG)) and Stockland ((SGP)), among others.

BHP Group ((BHP)) and Oil Search ((OSH)) report production numbers.

CSL ((CSL)) holds its annual R&D day.

Sydney Airport ((SYD)) reveals monthly traffic stats.

Why?

The Australian share market over the past thirty days…