Overnight: Love Is Blue

By Greg Peel

And they’re off!

So much for a quiet waiting game before the election, and so much for the futures suggesting a non-committal 5 points up yesterday morning despite a big bounce on Wall Street. The ASX200 shot up 70 points in the first half hour and then everyone jumped on – organic and inorganic.

The RBA’s policy statement provided an extra kicker at 2.30, providing for a high of up 139, but some late profit-taking pared that back at the close. In its determination to bring down the Aussie, the RBA has announced a package of monetary policy measures that surpassed most expectations.

The rate cut to 0.10% was no surprise, the announced QE package of $100bn (buying 5-10 year federal/state bonds) was on forecast, but wait, there’s more.

The Term Funding Facility (borrowing rate for banks) was also cut to 0.1% from 0.25% and the three-year yield target was also cut to 0.10% from 0.25%. The latter is not so much of a shock but the fact the RBA is prepared to purchase three-years in whatever quantity is required raised some eyebrows. That’s on top of $100bn in QE, so basically the RBA’s support is open-ended.

Mario Draghi, Jerome Powell and now Philip Lowe. Whatever it takes.

With a package like that, you’d think the Aussie would have plunged. Nup, it’s up almost a cent at US$0.7145. If whatever it takes doesn’t do it, what does? We can put part of the gain down to a -0.6% drop in the US dollar index, but the rest is no doubt the perennial issue of forex traders always being short.

The package did not boost dividend-paying stocks by as much as the overall market, because that happened on Monday. Utilities (+1.0%), telcos (+0.9%) and staples (+0.5%) all had positive sessions but were left behind by the rest.

Energy is the new IT sector in volatility terms. Oil & gas stocks were already due a bounce on higher oil prices overnight but talk of OPEC-Plus perhaps further cutting production in January, when not so long ago they were ready to lift restrictions, helped the sector leap 5.3%.

We then come all the way down to a 2.7% gain for industrials, which mimicked the Dow’s big overnight gain, 2.6% for consumer discretionary, on more money in punters’ pockets, and 2.4% for materials, on the lower Aussie the RBA policy’s will result in.

Bummer.

Even the banks managed 1.2%, despite a 0.1% rate painting NIMs into a corner. The offset is the TFF rate also falling to 0.1%, meaning the banks do not need to rely on deposits or expensive offshore funding.

Webjet ((WEB)) posted the best individual index gain with 8.6%, but then it is the most shorted stock on the ASX by a margin. Fund manager Pendal Group ((PDL)) took the silver with 7.7%, ahead of its full-year earnings result today. Credit Corp ((CCP)) took the bronze for obvious reasons but shared it with Oil Search ((OSH)), also up 7.5%, which is madness for a company of that size.

Index losers were thin on the ground aside from Sandfire Resources ((SFR)), which fell -7.0% on rumours copper may be the next export Beijing’s going to throw out of the pram.

Bearing in mind the great majority of yesterday’s rally was posted before the RBA release, we can conclude Wall Street’s overnight rally had a lot to do with it. Wall Street traded on Monday night as if Biden had it in the bag, and perhaps even a Blue Wave, and we seemed to like that idea too.

And Wall Street was at it again last night.

Now the fun begins

The Dow was up almost 700 points late morning, before bouncing around in the afternoon but still closing up 554.

The best outcome for Wall Street is not necessarily a victory for either candidate, but for an uncontested, clear result. On Monday night Wall Street appeared to be pricing in a clear Biden victory, but by last night it appeared a Senate win was on the cards as well.

The clear indicator of this was the fact only one S&P500 sector closed in the red last night, being energy (-0.8%). The next worst result was that of communication services (+1.4%), while industrials again stole the show with +2.9%.

Biden plans to pump money into renewables at Big Oil’s expense, and a big stimulus package, sailing through Congress, is music to the ears of struggling industrial “value” stocks and other cyclicals.

Of course, they have to be right, and 2016 proved one should never count one’s chickens. As I write, west coast polls are only now beginning to close, so there’s a long night ahead for America and little chance of a clear result before tomorrow due to the number of postal votes.

The US total case-count has now hit 9.3 million with the death toll at 231,566, around 20% of the global total. Some of the states suffering out of control spread are the so-called battleground states such as Michigan and Wisconsin.

Polls suggest for Americans the most important election issue is the economy, then the virus. But considering the two are inexorably linked (US unemployment was at 3.5% last year), covid really is the standout issue.

But don’t worry, it will go away; it’s already going away.

Commodities

A -0.5% fall for the dollar index and a further tick up in the US ten-year rate to 0.88% are also risk-on indicators, echoing the stock market. The lower dollar supports base metal prices and, despite the bond rate, gold.

Iron ore, on the other hand, never pays attention to currency.

The oils kicked on a bit further on OPEC production cut hopes while the Aussie, as noted, is up 1.4% at US$0.7145.

Today

Shades of yesterday: the S&P500 closed up 1.8% and the SPI Overnight closed up 4 points.

With the Cup out of the way, things go back to normal on the economic data and stock market front today.

We’ll see September retail sales, but they were already pre-released last month. We’ll see the October services PMI, as will everyone else.

Pendal Group reports earnings, as noted, Woolworths ((WOW)) reports September quarter sales and Domino’s Pizza ((DMP)) holds its AGM.

Bank of Queensland ((BOQ)) goes ex.

The Australian share market over the past thirty days…