Overnight: Tech Under Scrutiny

By Greg Peel

When Worlds Collide

At 11.30 yesterday morning it was revealed the Australia economy grew by 0.9% in the June quarter rather than 0.7% as forecast. Annual growth rose to 3.4% compared to 3.1% in the March quarter, when 2.9% was expected. The numbers exceeded both economist and RBA forecasts.

The “beat” was driven by a 1.0% gain in public sector spending, 1.7% for housing construction and 5.1% for mining investment. Mining investment, it appears, is back. Mining exports were indeed muted as had been expected, on lower commodity prices, which was one reason economist forecasts were for a weaker result than seen in March.

Private consumption rose a solid 0.7% but for consumers it was all about dipping further into savings, with wage growth only 0.1%. The lack of wage inflation means the RBA will not be moved by this GDP result.

The big disappointment is non-mining investment, which fell -1.7%. Non-mining was supposed to be the saviour as mining “boom” investment of past years wound down. But no, we are still an economy that survives simply on selling rocks to China. Housing construction will reduce in the September quarter and continue to do so beyond. Consumers will eventually stop spending if wage growth cannot offset dwindling savings.

So what looked great was not really. The local stock market rose on the release, for about five minutes. But it was not a deeper assessment that changed traders’ minds. The market was heading to hell in a hand cart and nothing was going to stop it.

Despite that one little 11.30 blip, the ASX200 plunged from the open and tracked an asymptotic path to close at its lows – slowing the pace in the afternoon but still falling. The futures had suggested down -18, most likely driven by carnage in metals prices in London overnight, as well as weakness in iron ore and gold, and indeed the materials sector was the worst performer on the day with a -2.0% fall.

We may argue that the fine imposed on Westpac ((WBC)), while insignificant in dollar terms, is merely the puff of wind down the tunnel of RC fallout before the train actually arrives, and hence financials fell another -0.9% yesterday. But in reality, everything was carted. No sector was spared. Sell Australia.

Australia is not an emerging market, but it is an emerging market proxy. Witness the Aussie’s move yesterday – a similar brief blip up on the GDP release and then straight back down again. It would appear that despite general weakness in commodity prices (ex-oil) throughout the course of this year’s trade war (that supposedly isn’t one yet), yesterday saw a bit of a straw and camel situation.

And the ramifications spread. Once the momentum picked up, it was a case of simply getting out of the way. Earnings result season? Kiss that goodbye. IT and healthcare were among the sectors seeing panicked profit-taking yesterday.

These sudden one-day clean-outs are not rare, and have punctuated the ASX200’s rise to new highs this year. But with nothing happening on Wall Street last night that would much impact on Australia, and metals prices stabilising, the futures are showing down another -25 points this morning.

Social Responsibility

Facebook and Twitter made voluntary testimonies to a Congressional committee last night on Capitol Hill. Google declined the offer. While nothing said in the session was earth shattering, Wall Street was spooked.

Since the Cambridge Analytica scandal that rocked Facebook earlier this year, Wall Street has been assuming the day would come when the government stepped in to scrutinise the social media phenomenon — the growth of which has been unabated and at a speed well beyond  that of regulatory control. That day has now arrived, although the process will undoubtedly be a long one. At the heart of the issue is interference in elections, and the mid-terms are around the corner.

Despite knowing this day would come, the assumption of regulation some time down the track that would impact on earnings ensured no one was spared in the tech sector last night. Everything was sold, including the likes trillionaires Apple and Amazon along with Microsoft and others which are not social media companies specifically (certainly not Amazon, but Trump hates Amazon for other reasons). It was a good excuse to take profits.

Meanwhile, trade talks with Canada are progressing “well” according to the president but then that’s what he says every time. Talks with China are supposedly progressing “well” as well. It was enough to keep the “big board” at bay, with the Dow – wherein some of most tariff-exposed multinationals reside — wobbling around but closing as good as flat.

It is imperative for Trump that he makes some sort of breakthrough before the mid-terms, lest swinging voters decide the man is all bluff on trade. Mexico appears on board, but commentators are not holding out a lot of hope that an agreement with Canada can be reached before November, and pretty much no hope with regard China, despite the next US$200bn tranche deadline looming ever closer.

Meanwhile, the US trade deficit rose -10% in July to its highest level in five months. Trump’s goal is not only to run a net trade surplus, but to run a surplus against every individual trading partner – a feat that is almost a contradiction in terms. Never mind that trade deficits are typically indicative of a strong economy – more inputs are needed from around the globe to support a booming economy, and the booming economy provides the wherewithal for greater consumption of imported goods. The US economy is currently strong – the trade deficit supports that notion.

The question is as to whether when it comes to the crunch, will Trump stuff it all up?

Commodities

Tropical Storm Gordon has swept past the oil refineries of Mississippi and is tracking toward those in Alabama. So far refineries have merely switched off as a safety precaution and then switched back on again pretty swiftly. But it is a reminder that US hurricane season has begun.

If refineries shut down, crude supply backs up, and the crude price falls. WTI fell a percent last night. If the hurricane forces the shutdown of Gulf oil rigs then there is a level of demand/supply balance. Gordon didn’t, but these days all marginal US crude production comes from among the cacti, deep inland, in the form of shale oil, so refinery knock-outs are more likely to lead to lower crude prices, as well as higher prices at the pump, which reduces demand.

Temporarily. Once refineries are switched back on the crude price always recovers. It just depends on the extent of the damage.

The US dollar index fell back -0.3% last night and there was no new news on trade, hence metals prices stabilised.

The Aussie is 0.2% higher at US$0.7193.

Today

The SPI Overnight closed down -25 points this morning. No sign of a bounce.

Bear in mind futures prices are not impacted by stock dividends, so -25 is not reflecting the fact BHP ((BHP)) goes ex this morning, along with ASX ((ASX)), Healthscope ((HSO)), nib Holdings ((NHF)) and a very long list of others.

Sigma Healthcare ((SIG)) reports earnings today.

Australia’s trade numbers for July are out today.

US private sector jobs numbers are out tonight.

Rudi will travel to Surry Hills and appear on Sky News Business, midday-2pm.

The Australian share market over the past thirty days…