Overnight: Second Test Collapse

By Greg Peel

Shame Really

It was a volatile day on the ASX yesterday but actually quite a positive one, if we exclude the impact of a -4% fall in the oil price overnight.

That fall had our energy sector unsurprisingly down -2.1%, as well as materials down -1.0%, as BHP ((BHP)) is also a major oil producer, and utilities down -0.2%, as therein lies AGL Energy ((AGL)). Take out AGL, which is also under pressure from government policy-on-the-run, and utilities would have closed in the green alongside the banks, healthcare, industrials and telcos.

If we look at the ASX200 loser’s board, we find three of the top five posted falls for reasons unrelated to market sentiment. Bank of Queensland ((BOQ)) fell -5.5% because it went ex-div, WorleyParsons ((WOR)) came back on the boards down -6.5% following a highly dilutive capital raise, and Super Retail ((SUL)) fell -10.9% after the CEO announced his retirement.

On the upside, the top three spots were taken by two gold miners and a contractor thereto.

The important point – yesterday – was that a lunchtime drop towards the 5800 support level was swiftly arrested by the buyers. Unfortunately that will all mean naught today.

The futures are down -1.6% this morning, which is not a bad result if accurate with the S&P500 down -2.8%, but it does mean a crash through 5800 and that would open up 5650 as the next support level.

The best I can say is, strap in.

Technical Trashing

As the busiest week of the US earnings season rolls on, once again average results are solid. The problem is, sentiment on Wall at present is such that if you miss on both or just one of the top and bottom lines, or on some other individually key metric important to your performance, you will be trashed. Meet expectations and you will be sold. Slightly beat expectations and you’ll probably still be sold. Only if you astonish, will you find a buyer.

Overriding all of the above is the most critical element of all – outlook, and/or actual guidance. If that suggests a weaker fourth quarter and/or implies a weaker 2019, you will be trashed. The common theme this season has been exactly that. Rising input costs, a slowing China (tariffs), a slowing Europe (tariffs), a rising US dollar (repatriation) are all contributing to, in many cases, a need to increase prices to customers. That suggests potentially lower margins, which suggests potentially lower earnings in 2019.

Last night saw evidence of such sentiment. Stocks that beat on some metrics but not on all, and/or posted weaker outlooks, included Texas Instruments, down -4.5%, Freeport McMoRan, down -6.6%, UPS, down -4.1%, and AT&T (Dow), down -6.5%. Only Boeing (Dow), up +2.7%, made the “astonishment” grade.

Wall Street is beginning to wonder whether the ~10% forecast for S&P earnings growth in 2019, down from 20%-plus in 2018 as the tax cuts roll over, is misguided. If so it means a lower E in PE multiples, which then need to be adjusted down by reducing P. That is, selling shares.

The scarier implication of having to raise prices is this will lead to higher inflation. And higher inflation will mean the Fed has no choice but to continue raising rates, even if the US economy begins to be dragged back into the global pack.

The upshot? Wall Street opened up last night for about five minutes, with the strong result from Boeing providing some hope, and then proceeded to tumble once more. The two levels to watch were the low marked earlier in the month on the initial swoon, and the lower low marked on Tuesday night from which Wall Street completely recovered.

First one fell, then the other. On Tuesday night commentators noted that the breach of the initial low did not, as one might have assumed, spark risk management algorithms into action, which is why Wall Street was able to rally back again. Maybe the algos had a day at the beach on Tuesday. Last night, when Tuesday’s low was hit, the floor opened up.

That occurred around 3pm when the Dow was not quite down -400 and showing signs it might rally to the close. The market-on-close orders were biased to the buy-side. Once the breach occurred, the buyers vanished. The Dow lost another -200 as the market-on-close orders quickly swung to the sell-side.

Both the Dow and S&P are now negative for 2018. More ominously, the stars of 2018 are now both negative as well, being the Nasdaq and Russell small cap. In the latter case, by quite a bit. The Nasdaq has now suffered its worst losing streak since 2011.

To date there has been an element of flight to safety through this sell-off, but not markedly so. Last night the US dollar jumped 0.5%, gold rose a couple of dollars despite dollar strength, and the US ten-year yield fell -4 basis points to 3.12% despite this week’s Treasury auctions being met with limited interest.

But…and this is a big “but”…commentators suggest last night’s session cannot be called the final capitulation trade that signals the end is nigh. Last night’s volumes were only average. You’d need double that to suggest capitulation. The VIX jumped 22% last night but only to 25. It would need to be 30-40 to suggest ultimate panic.

Wall Street closed on its lows. That’s not good. Any silver lining? Well, reporting after the bell last night were Dow names Microsoft, Ford and Visa, and there’ll all stronger in the aftermarket. Ditto Tesla, up 12%.

It ain’t over till it’s over.

Commodities

I think we can safely say moves in commodity prices last night had nothing to do with moves in stock markets.

The Aussie is down -0.4% at US$0.7061.

Today

The SPI Overnight closed down -94 points or -1.6%, which compared to Wall Street looks underdone.

As expected, the EU rejected Italy’s new expansionary budget last night. The Italian government said prior it has no intention of changing it. Italexit? The ECB meets tonight.

After a very weak read on new home sales last night, the US has durable goods to ponder tonight, as well as pending home sales.

Locally, today is the busiest this week in the AGM/quarterly report calendar. AGM highlights include those of Blackmores ((BKL)), JB Hi-Fi ((JBH)), South32 ((S32)) and Whitehaven Coal ((WHC)). Quarterly report highlights include those of Fortescue Metals ((FMG)), IOOF ((IFL)) and Qantas ((QAN)). There are also a few investor days being hosted today, including that of Tabcorp ((TAH)).

Please refer to the FNArena Calendar for the full list.

The Australian share market over the past thirty days…