Overnight: Volatility Returns

By Greg Peel

All in Vain?

The ASX200 was off to a flying start yesterday, buoyed by Wall Street strength on news a US-China trade deal is set to be signed in a mere two weeks’ time. Well, hopefully anyway. The index step-jumped from the open and was up almost 50 points by late morning.

The afternoon featured a gradual fade to a more modest close. Volumes were unspectacular but the index did manage to chalk up another milestone in passing 6200.

Alas, the futures are suggesting we go down -43 points today.

Yesterday’s rally was driven mostly by materials, healthcare and the consumer sectors.

Not only are the big miners beneficiaries of an end to the trade war, the iron ore price was up sharply overnight. Fortescue Metals ((FMG)) led the charge with a 6.9% gain. The materials sector netted out to a 0.7% gain after gold miners were hit on a bottling of the gold price.

CSL ((CSL)) appears to be back in vogue since its earnings result last month so healthcare stood out with +1.0%.

Metcash ((MTS)) provided an upbeat update yesterday, helping consumer staples to a 1.2% gain. In discretionary, Bellamy’s ((BAL)) again topped the ASX200 leaders’ board yesterday in rising another 12%, seemingly hell bent in closing the gap to its formula peers.

And it’s been every day now for at least a week that Bingo Industries ((BIN)) has appeared among the top five, rising another 8.9% yesterday in its comeback with some help from the positive ACCC ruling on the company’s Dial-a-Dump acquisition.

Bingo is now about half way back from whence it fell.

The top five losers’ board was yesterday dominated by gold miners.

In economic news, building approvals surprised by rising 2.5% in January having fallen sharply in December and November. It’s a seasonally adjusted number nevertheless, and approvals are well down on a year ago. Apartment approvals are down -51% year on year.

Late-to-the-party construction continues but when that reaches completion, the approval trend suggests the residential construction industry is set to fall into a black hole.

December quarter numbers for corporate profits, inventories and wages all disappointed yesterday. ANZ’s economists now fear tomorrow’s GDP growth result may be negative quarter on quarter.

Little point in pulling yesterday’s action apart any further as today will be rather different than yesterday.

Doubts Creep In

On Friday night the S&P500 closed above psychological resistance at 2800 for the first time since October. Was this the long awaited breakout?

Last night Wall Street took off to a flyer, sending the Dow up 130 points from the open. The S&P500 reached 2815, which is a point of technical resistance.

It was then that delayed December data for construction spending were released, showing a -0.6% fall when a 0.3% gain was forecast. Let us not forget the US economy is supposed to be the last man standing in the global growth story. It was enough to bring in the sellers.

Which in turn set off the technical algos, given it was a turnaround at technical resistance. And that in turn brought in the momentum algos, and before anyone knew it the Dow was down -440 by lunchtime.

Afternoon buying brought that back to -200 before more selling emerged at the death.

It’s been a while since we’ve seen such volatility on Wall Street – volatility that was commonplace last year. US indices have recently been drifting along just underneath technical triggers, waiting for the green light to begin another leg higher. That leg would be determined by the outcome of the trade talks.

Or will it? There are a couple of problems.

The first is that many on Wall Street are no longer asking the question of whether a positive trade deal is priced into the market, they’re already convinced that’s the case. With corporate earnings forecasts for the March quarter still being downgraded, the market PE is rising into expensive territory as the indices sit still.

The second is that the chances of a trade deal to end all trade wars being signed in a couple of weeks don’t look that solid. For starters, despite Washington’s exuberance on Friday night with regard an imminent signing, there has been no news at all out of Beijing. No corroboration.

The Chinese stock market had another strong session yesterday but that’s because MSCI has substantially increased the China weighting in its emerging markets index.

Furthermore, President Xi is coming to the US — to Trump’s Miami hideaway no less – for the signing. It’s one thing to walk away from a deal on neutral territory, al la Trump in Vietnam with regard North Korea, but you can’t walk out on a guest you’ve invited to your own table. This smacks of the possibility of concessions being made, just to get something achieved.

As the Americans say, Trump does not want to go “oh for two” on his critical foreign policy agenda when already presidential nominees are coming out of the woodwork for 2020.

The adults in the room in Washington have qualified the upcoming signing as simply a stepping stone on the path towards a comprehensive and beneficial (to the US) agreement between the two nations – a path that could take as long as a decade to travel.

So put it all together and Wall Street is staring at the possibility of either major disappointment or major excitement that leads to a sell-off nonetheless.

Commodities

Signs that Chinese demand for nickel for stainless steel production remains solid suggest 2019 might prove a fourth year of global deficit for the market. Meanwhile, a drop in the copper price has been put down to profit-taking.

Would the last investor out of gold please turn out the lights.

WTI crude bounced back a bit from Friday night’s fall.

The Aussie is down -0.4% at US$0.7088, driven by yesterday’s December quarter data.

Today

The SPI Overnight closed down -43 points or -0.7%.

The December quarter current account figures are due today, including the terms of trade. Could they save the day?

The RBA meets today. For the first time in a very long time the resultant statement might be interesting.

Services PMIs are due across the globe today. We have US durable goods orders for January on the calendar but I think we can dismiss that one.

Today’s round of ex-dividends includes Medibank Private ((MPL)), Nine Entertainment ((NEC)) and Oil Search ((OSH)).

The Australian share market over the past thirty days…