Overnight: And We’re Back

By Greg Peel

Ignore

The fact that the ASX200 traded as high as 6196 in the opening two minutes yesterday, and twenty minutes later had fallen back -30 points, told us immediately it was SPI and index option expiry day for the September quarter.

This reality was further underscored by a very choppy session, which appeared to be a fight between the 6200 and 6150 strike prices. Gamma was king on the day, for those of you who understand such things, and ultimately it appeared the “risk on” trade of the previous two sessions had evaporated.

But I’d take it with a grain of salt. And the futures are up 22 this morning.

The sellers were the winners as options positions were squared, and possibly futures arbitrage positions unwound, in a reversal of this week’s strength. All bar two sectors closed in the red, in a relatively uniform fashion.

Healthcare bucked the trend (+1.38%) for the simple reason it had not participated in the risk-on trade previously due to the rising Aussie. Materials also bucked the trend (+1.1%) because stronger commodity prices could not be ignored and Rio Tinto ((RIO)) announced a huge share buyback.

But WTI shot up over US$70/bbl on Wednesday night, yet energy closed down -1.0% in line with the pack. This reinforces the assumption fundamentals were not at play yesterday.

Consumer staples fell -1.5% to be one of the worst performing sectors, albeit in line with the general trend. The suggestion is sellers moved in on the supermarkets after Woolworths ((WOW)) announced it would add a drought levy to its discount milk price as a humanitarian gesture to provide drought relief to those poor, poor farmers they continue to mercilessly screw with their discount milk campaign. Ever imaginative, Coles ((WES)) announced its own levy five minutes later.

Bold-faced hypocrisy.

Sticking with individual stock news, all of the ASX200 top five winners yesterday were miners or mining-related, including Seven Group ((SVW)) in fifth, distributor of Tonka toys.

In a mixed bag of losers, the standouts were companies reporting earnings on the day – Brickworks ((BKW)), down -5.4%, Brickworks’ cross-shareholding associate WH Soul Pattinson ((SOL)), down -6.3%, and Solly Lew’s Premier Investments ((PMV)), down -2.3%.

One could also make the argument telcos and utilities fell victim to rising US bond yields, but realistically I believe we can just write yesterday off, and get back to business today.

Conquering Australia Day

Last night the Dow reached a new all-time high, passing the previous ATH set on January 26.

Back in January exuberance was swiftly derailed when US annual wage growth printed at a surprise 2.9% and the US ten-year bond yield shot over 3%. Wall Street feared four rate hikes from the Fed in 2018, when already nervous about three.

Back to today, the latest print on wages growth came in at 2.9%. The ten-year closed last night at 3.08%. The Fed will hike for a third time, next week, and probably again in December.

From the previous ATH, Wall Street corrected by over -10% though February. This time, under the same circumstances, the Dow has hit a new ATH. As did the S&P500 last night, albeit the broad index briefly reclaimed its January high in August.

In between, an attempt by Wall Street to rally back from the February low was derailed in March when the president announced tariffs on steel and aluminium. Princep shot Ferdinand. Hitler invaded Poland.

In the choppy graft back from the March low, the focus has all been on the trade war. There’s also been a drag from fears of regulation on social media but when it comes to the Dow and S&P, more so than the Nasdaq, trade has been the focus.

Fighting back against trade fears have been the realities of two quarters of 20% plus earnings growth, with guidance suggesting it will be three quarters, and ever strengthening US economic data. The combination of those two provides the reason Wall Street no longer fears three or even four rate hikes. If the economy suggests it should be so, knock yourself out.

That initial shock read of 2.9% wages growth quickly gave way to lower numbers in subsequent months, initially quelling fear, but soon morphing into concern the US consumer would struggle as wage growth remained benign and interest rates rose. But wages growth is back – and this time that’s a good thing. Consumer confidence has recently been tracking historical highs.

But what about the trade war? It has only escalated since the initial tariffs were announced. Yes, but all along Wall Street has hung onto a belief America would win and a resolution would be met. The fact this last tit-for-tat exchange with China featured 10% tariffs, instead of 25% as assumed, was evidence enough for a rose-tinted view that this back-down signalled the beginning of the end.

The jury is still out on that one. But all along, due to multinational industrials’ exposure to tariff wars, the Dow has underperformed. The Nasdaq long ago regained its ATH, and more, thanks to Apple and Amazon.

Those two stocks stood still last night (despite Amazon launching an Alexa-operated microwave, woohoo!). The Dow has been the outperformer all week since the latest tranche of tariffs, on both sides, were confirmed.

Commentators are buoyed by the fact the recovery of the Dow, while the Nasdaq has been struggling a bit lately, suggests this time Wall Street is not purely technology-led, as it was back in January. This time we see rotation into other sectors of the market, resulting in a new high. Breadth is a positive sign.

Commodities

The US dollar index fell -0.7% last night. If “risk on” is back, that safe haven is no longer required.

It should have been a great session for commodity prices on that basis but base metals have already expressed their own trade war relief this week and iron ore is in a holding pattern.

The oils went the other way, but had surged all week. Trump’s thumb was again to blame, as the president sent one of his typically eloquent messages, this time to OPEC ahead of its upcoming production meeting: “Get prices down now!”

OPEC would be happy with US$80/bbl.

The Aussie is the unfortunate victim, given here we look at things upside down. It’s up another 0.4% at US$0.7292.

Today

The SPI Overnight closed up 22 points or 0.4%.

Japan, the eurozone and US will flash estimates of September manufacturing PMIs today/night.

Navitas ((NVT)) hosts an investor day today.

Atlas Arteria ((ALX)) goes ex.

The Australian share market over the past thirty days…