Overnight: Trade Relief Rolls On

By Greg Peel

Don’t bank on it

It was reasonable to assume that the release of the RC interim report would lead to a relief rally for Australian banks, and that news on the banking front would now go quiet from here until to the scheduled February release of the the ultimate report. But so far, nothing could be further from the truth.

The banks did indeed enjoy a brief moment in the sun on Friday but immediately thereafter calls came to extend the commission, and thus on Monday the banks gave it all back again. Then yesterday we learned that the commissioner was close to releasing bank “confessions” requested at the beginning of proceedings, and, separately, the ACCC is to launch an enquiry into foreign exchange gouging.

The accusation is the banks have been ripping off small customers changing money for overseas holidays or international transfers and the like through unfair currency spreads.

Hence the financials sector was whipped into submission yet again yesterday, falling another -1.1%. The ASX200 had managed to open up 8 points but it immediately tanked to be down -54 by lunchtime, wherefrom it drifted to a slight improvement by the close.

The coin came up tails on CSL ((CSL)) yesterday and its -2.0% fall led healthcare down -1.7%.

The chairman of recently high-flying Aristocrat Leisure ((ALL)) announced yesterday he is stepping down and that stock fell -2.8%, helping consumer discretionary down -1.8%. In market cap terms, Aristocrat is just outside the ASX top 20.

Adding to discretionary woes was this comment from the RBA governor in his statement released yesterday: “One continuing source of uncertainty is the outlook for household consumption. Growth in household income remains low and debt levels are high“.

But aside from some notable moves in the big caps – the banks, including Macquarie Group ((MQG)), which has been an immune high flyer through the RC, CSL and Aristocrat, everything was sold yesterday. Everything except energy, but it managed only a mere 0.1% gain despite a 3% jump in oil prices.

Materials was another outperformer in falling only -0.2%. The lithium miners shone yesterday – Orocobre ((ORE)) up 11.4% and Galaxy Resources ((GXY)) up 7.2% — but these stocks are (a) highly volatile and (b) very heavily shorted.

It was another “risk off” session. As the new quarter unfolds Australia’s market is notably diverging from a US market that is enjoying progress on trade deals that should also be comforting news for the Australian economy.

The Aussie is down half a percent.

Rotation

Just as the Australian market has become very domestic-focused recently, so too have US markets. A one point fall in the S&P500 last night suggests nothing much was going on, until we note the Dow was up 0.5% to a new all-time high while the Nasdaq fell -0.5% and the Russell small cap index fell -1.0%.

It was a straight re-run of Monday night’s trade. The new “NAFTA” deal (it looks like everyone’s going to stick with the old name, given USMCA doesn’t really roll off the tongue), while in itself a relief for specifically impacted industries, is a harbinger of ongoing trade settlements with the EU and China.

Or so Wall Street seems to believe. Not everyone though.

Since the original trade war fear sell-off in March this year the theme for 2018 has been sell the big industrials most exposed to trade, buy the high-growth tech names which, despite not being immune to tariffs, are simply high-growth anyway, and buy domestic-facing small caps which don’t trade internationally.

The Dow gives us all the big industrials, the Nasdaq all the big tech names, and the Russell all the small caps. With NAFTA signalling the beginning of the end of the trade war, it’s time to reverse that trade. Wall Street can afford to be confident in its rose-tinted outlook, given the US economy, as the Fed chair reiterated in a speech last night, is in just such a perfect position.

Not so the rest of the world.

The European markets have been sliding into the mire. A member of Italy’s ruling party last night startled markets by suggesting the country would be better off outside the euro, prompting the Italian prime minister to step in and reaffirm commitment to the common currency. But Italy is on a collision course with the EU over a planned blow-out to its budget deficit.

We may recall that the European crisis that emerged post-GFC, of which Greece became the main focus of attention, began because it was revealed EU members had failed to pay any attention to the budget deficit caps (percentage of GDP) placed on eurozone members, and that the EU had either failed to monitor such (extensive) breaches or simply had a laissez faire attitude.

Here we are again, but this time populist governments are not sneaking around behind the EU’s back but rather thumbing their noses directly at Brussels.

How will it all end? Boris probably has a theory.

Commodities

Gold investors appear to have a theory as well. Despite a 0.2% rise in the US dollar index, gold jumped fourteen dollars last night.

While individual base metals are under the influence of different fundamental factors at present, China’s absence this week would explain some of the volatility.

The Aussie is down -0.5% at US$0.7184. The CSL coin might come up heads today.

Today

The SPI Overnight closed up 9 points.

It’s services PMI day across the globe today/night.

In Australia we’ll see building approvals numbers.

The US will see private sector jobs numbers.

Today’s ex-div list is unsubstantial.

What new evil will be revealed in the banking sector today, I wonder. One point to note is that an extension to the banking RC is not up to parliament, only the commissioner can make that call, and he hasn’t.

The Australian share market over the past thirty days…