Overnight: Arrested Development

By Greg Peel

Fighting Hard

News spread yesterday of the arrest in Canada of Meng Wanzhou, CFO of Huawei and daughter of the founder, for breaches of sanctions against Iran. She is to be extradited to the US.

Clearly such a development risks bringing the ninety day trading truce between China and the US to a screaming halt, and last night Beijing demanded Meng’s release. But there are a lot of questions being asked. More on that below.

The ASX200 opened down -20-odd points from the open yesterday, found some brief support, but was down almost -50 points by lunchtime. Complicating matters was a sharp move in the S&P futures in electronic CME trading yesterday in Asian time.

In one trade the contract plunged -1.9%, triggering the circuit breakers. The CME stepped in, suspecting a “fat finger” error (trade entered with a wrong “big figure” price, taking out buy orders all the way down). The contract then reopened to be down -0.8%.

Error or not, it could have been a good trade, given Wall Street did indeed plunge from the open. But that was not yet known in yesterday’s local trade.

Yet amidst the confusion of arrests and futures mayhem, the ASX200 clawed its way back to the close for the second day running. When it looked for all the world like the index would this time close below the technically critical 5650 level, it didn’t.

The clawback also came despite some not so hot local data.

Retail sales rose 0.3% in October, as expected, and as they had done in September except that yesterday the September number was revised down to only 0.1%.

Australia’s trade surplus fell in October to $2.6bn, below $3bn forecasts. While exports grew 1% in the month, supported by strong coal prices and solid tourism, imports rose 3%, reflecting elevated business and public infrastructure development.

Having been one of the better performers during Wednesday’s sell-off, the materials sector turned worst performer yesterday in falling -1.0%. IT (-0.6%) was hit again, as were the banks (-0.6%).

Elsewhere, defensives were again in vogue – utilities up 1.1%, telcos 0.2% and staples 0.4% — but industrials (+0.2%) also managed a positive session. Note that Asaleo Care ((AHY)) jumped 45% on the divestment of its Australian consumer tissue operations but this stock is no longer in the ASX200.

While the market is shifting into a more defensive mode at a time Santa is meant to be revving up reflects macro concern but also confusion. No more was that confusion evident than on Wall Street last night.

Conspiracy?

The story so far…

Trump and Xi had dinner on Saturday night in Argentina. Trump thereafter declared a truce had been reached, there would be a ninety day hiatus, and China was ready to buy lots of American soybeans and other stuff and eventually take its auto tariffs down to zero. Wall Street rallied sharply on Monday night.

Twenty-four hours later, Beijing had confirmed none of the above. Not even the ninety days. Wall Street plunged on Tuesday night. Finally, on Wednesday, Beijing confirmed a deal had been agreed to, and confirmed the ninety days, but was vague on any other detail. Wall Street was closed.

Last night the Dow fell from the open to be down almost -800 once more, on the assumption the deal would likely now be off due to this Huawei arrest. Beijing has demanded Meng be released immediately. But wait…

Meng was arrested on Saturday. President Trudeau knew about it. Trump national security advisor John Bolton knew about it. Only on Wednesday night was the world informed. Did Trump know about it on Saturday night at dinner? Did Xi?

Bolton has said the arrest was made by law enforcement agencies without political interference. As to whether Trump knew about it, Bolton didn’t know. But the conspiracy theory that began to grow on Wall Street during last night’s session was that both Trump and Xi knew about it.

If the arrest was made on Saturday, why did China wait until Thursday to say anything? For that matter, why did Beijing wait until Wednesday to make any comment on a deal supposedly struck four days earlier? Is it because, as an “olive branch”, Xi accepted the arrest, allowing a deal, or at least the truce, to progress? Last night’s release demand would just be a face-saving diplomatic response.

Seems far-fetched, but the Dow closed down only -192. I say “only” because that’s a rally back from -784.

And if that wasn’t enough to have traders shaking their heads, for the first time in thirty years, the OPEC meeting did not bring an agreement on production quotas. No press conference followed last night’s meeting in Vienna. This had the WTI price plunging back towards US$50/bbl once more, until it was announced a decision has been suspended until OPEC can bring Russia into the huddle tonight.

Russia has already indicated it would be amenable to production cuts. WTI bounced back, but still closed down -2.5%.

The US ten-year bond yield fell another -5 basis points to 2.87% last night. Having “double-topped” at 3.24 before the October swoon, the yield is now right back where it had spent the bulk of 2018. It traded as low as 2.82% last night before recovering, which just happens to have been the prior low between the two tops.

Decembers are not meant to be like this.

Stay tuned, it seems anything could happen tonight. And we have a US jobs number due.

Commodities

The LME closed before Wall Street bounced last night. We can call uniform base metal and iron ore price falls Huawei-related.

The US dollar is -0.3% weaker, gold looks a bit like a stunned mullet, and the Aussie is down another -0.5% on more “weak” local data. And, one presumes, trade fear.

The oils are poised for tonight’s outcome in Vienna. Expectations are for a cut of -500,000-1,000,000bpd. Not cut will put oil well into the forties.

Today

The SPI Overnight closed down all of three points.

US jobs numbers tonight.

China will release inflation and trade numbers over the weekend.

Origin Energy ((ORG)) hosts an investor day today.

The Australian share market over the past thirty days…