Overnight: No Vacancy

By Greg Peel

Be Very Afraid

The local futures had suggested up 6 points yesterday morning but instead the ASX200 shot up 15 points from the bell, with resources sectors leading the way. That gain meant the index was right at 6200 resistance. The first attempt to push through failed, as did the second, and then around forty minutes into the session the barrier was breached and the index quickly ran up another 10 points.

All smoke and mirrors of course – technical trading and computer models – hence 11am marked the high of the day and the index came all the way back down again.

For that we can largely thank the banks.

The RC interim report is due tomorrow and while the market has always known this day would come, this week has seen fear grip the sector. When the RC commenced, few believed any more would be revealed than was already known at that point. But right from day one, and as each day passed, the horror stories just kept on coming.

To that end, clearly the market is afraid of what the interim report might signal with regard punitive and regulatory fallout. After a brief respite on hard-to-ignore yields, the banks are again a no-go zone until the market can be confident the worst is finally out there.

And this is just the interim report.

Financials fell -0.6% yesterday to be one of only two sectors to close in the red. Healthcare was the other. A tug of war is now apparent in CSL, which has become the new morning coin toss stock, taking the reins from Telstra, and yesterday CSL had a down-day. We also saw a -9.8% plunge for Australian Pharmaceuticals ((API)) after Credit Suisse warned the market it was kidding itself having driven the stock up 20% in a challenging environment for pharma.

Credit Suisse downgraded to Underperform. Morgan Stanley – the only other FNArena database broker to cover the stock — is on Underweight.

Every other sector closed in the green, to varying extent, which ex-banks and CSL looked fairly “risk on” despite the threat of the last night’s Fed meeting.

IT (+1.7%) was the best performing sector with Afterpay Touch ((APT)) leading the ASX200 winners with a 6.5% gain after Smiles Inclusive ((SIL)) became the first dental chain to introduce Afterpay’s service, at its 52 clinics across the nation.

Having failed again to crack 6200 (which is a re-run of June), it looks like today will not be the day either. The futures are down -17 points.

What’s in a word?

The Fed raised its funds rate last night by 25 basis points to 2.00-2.25%, as expected. Thereafter, confusion reigned.

Stock indices went down, then up, then down. Bond yields went down, then up, then down. It is not unusual to see such immediate volatility, given computers and even humans look for a couple of key words and react spontaneously before actually reading the statement, but this time there was a clear source of confusion.

For the first time over a decade, the statement did not describe the Fed’s policy setting as “accommodative”. That word mysteriously disappeared. What does this mean? Does it mean the central bank no longer sees any need to support the US economy?

In his press conference speech, Fed Chair Jay Powell suggested the US economy was “in a good moment” – low unemployment, low inflation, strong growth. He all but confirmed there would be another rate hike in December, and that at this stage three more in 2019 was the plan. When asked about the infamous missing word at the Q&A session, Powell implied one shouldn’t read too much into it.

He suggested it should be taken to mean the economy is performing as expected. Given the FOMC expects above trend economic growth to continue into 2019, this will be tagged with gradual but suitable rate hikes until reaching what is currently assumed to be a “neutral” rate – neither easy nor tight – of around 3.00%. At that point the Fed will rest on its laurels, expecting economic growth from there to ease back towards the historical trend rate of 2%.

But unlike his predecessors, this Fed chair is candid in his acknowledgement that forecasts are pie in the sky, particularly the further out one goes in time. It could all change tomorrow. There were as yet no signs the trade war was having a noticeable impact on the US economy, and inflation, but the FOMC is watching closely. There are as yet no signs Trump’s tax cuts and fiscal stimulus is threatening an inflation explosion, but the FOMC is watching closely.

When one sums it all up – statement, speech, Q&A – absolutely nothing has changed with regard Fed policy, other than the omission of one word.

Commentators were thus left scratching their heads as to why the Dow was up over a hundred points before the statement release, and down over a hundred by the close. The US ten-year yield rose from 3.07% to 3.10% and then fell back to 3.05%. The yield curve, having shown slight signs of widening this week, flattened once more.

This was bad news for the US banks, which closed weak on the day yet again. Banks want high yields and a steep curve. Bond-proxy stocks, such as real estate and utilities, want lower rates, yet they performed even worse than the banks.

Which just goes to underscore the confusion.

As I have persistently pointed out over the years, experience suggests the “smart money” stays right out of the market in the two hours following a Fed statement, knowing that initial responses are always made by computers and other headless chooks. To gauge the true response to Fed policy, one needs to wait for the day after.

Commodities

The US dollar also shot up and down following the statement release, and was last up 0.1%. Trading on the LME was just coming to a close at the time of the release, so tonight may be more telling. In the meantime, the recent trend of recovery (ex-lead) continued.

Gold dropped a bit, but has been stuck in the mud for some time.

The oils have gone into limbo.

The Aussie is also up 0.1%, at US$0.7257.

Today

The SPI Overnight closed down -17 points or -0.3%.

The RBNZ held a policy meeting this morning.

The US June quarter GDP result will again be revised tonight.

It’s quarterly stock options expiry day on the ASX today, and today also brings the traditional round of mostly bond-proxy stocks that all for some reason decide to go ex together on the last Thursday of October (or April in the other season). There is a long, long list of mostly small, but collectively not insignificant ex-divs today.

Rudi will travel to Sydney CBD’s Surry Hills to make his weekly appearance on Sky News Business (soon: Your Money) from midday till 2pm.

The Australian share market over the past thirty days…