Overnight: Trade Deal Drifting Away

By Greg Peel

Miracle Rally

Blimey. Didn’t quite expect such a reaction. In the run-up to the election – remember, that one Bill Shorten was supposed to win – we did not see any major selling in the banks that might suggest negative gearing/franking credit policies would sound the death knell. The banks traded lower, yes, but not by much ex of ex-dividends and mostly due to increased remediation provision announcements.

But yesterday the financials sector shot up 5.9%. If we break it down, we can say that the rest-of-market response to the Morrison victory was a 23 point gain. The big four banks represented the other 87 points. And the 23 points includes two big insurers surging on election relief.

It would be easy to point the finger at the franking credit refund issue, given the banks pay high fully-franked yields and are held in most portfolios, but if that were the main driver, why didn’t any other high fully-franked yield stocks respond? For example, Telstra ((TLS)) fell -0.6%.

So it has to be negative gearing. Now that that’s here to stay (who would ever touch it again?), the banks won’t be falling into a bottomless pit of wiped out investor mortgage demand.

A bit overdone? Well the Big Four were all around 2% shorted going into the election, and this morning the futures are down -41 points with only a modest fall on Wall Street. Might be a clue there.

The other drivers in financials were nib Holdings ((NHF)), up 15.8% and Medibank Private ((MPL)), up 11.5%, given Bill’s plan to cap health insurance premiums is now dust as well.

In the wider picture for yield stocks, the suggestion now is Morrison’s tax cuts may be enough to keep the RBA on the sidelines when all about were expecting a rate cut. Perhaps why we saw utilities down -0.4%.

The consumer sectors were solid nonetheless, given tax cut benefits.

Materials (-0.3%) likely funded the bank buying, and maybe some of the big industrials as well (-1.0%).

So it was all a bit of a mad scramble, and today looks like being a dust-settler. Soon we can return to worrying about the actual economy, the trade war, rising geopolitics tensions and other usual stuff.

Chips are down

The story of last night on Wall Street is clearly evident in the fact the Dow was only down -0.3% when the Nasdaq fell -1.5%.

Apple is in both indices but more influential in the cap-weighted Nasdaq, so its -3% fall on ongoing trade war fears is part of the story. But it was the chip-makers that really copped the brunt. Aside from being suppliers to Apple they are also major suppliers to Huawei. They can no longer sell to Huawei, and a tariff iPhone coming back to the US after having been assembled in China implies reduced demand.

Chip-makers also led the most recent run-up to new highs, back a couple of weeks ago when we all thought a trade deal was about to be signed.

The chances of that happening anytime soon appear to have rapidly diminished. Beijing has dug in. There are no scheduled talks ahead, the Huawei ban clearly hasn’t helped, and China just cancelled a big order of US pork, despite being in the midst of a swine flu scare domestically.

Beijing will not budge until the US makes concessions, analysts suggest. Somehow it’s hard to see Trump making concessions. Analysts also point out that despite Trump’s insistence the US will always be the winner in a trade war, it is the US consumer who will fund that war.

So Wall Street continues to exit those stocks most impacted by the trade war, particularly as it must now be assumed the White House will move to apply tariffs to everything else left. They include the Likes of Apple and the chip-makers, but also the big industrials and other China-exposed businesses.

Meanwhile, life goes on in the rest of the market, and traders continue to see falls on the open as an opportunity to buy. Last night the Dow was down -200 before closing down -81. While not quite a “flight to safety”, bond-proxy sectors such as utilities continue to outperform.

Commodities

Last night authorities granted major Brazilian aluminium producer Alunorte permission to return to full production. The smelter had been operating at 50% capacity since March last year.

Brazilian issues are also the source of iron ore’s return to over US$100/t, although last night saw play stop as iron ore acknowledged the crowd and kissed its badge.

Speaking of winning wars, Trump has declared that if Tehran wants to fight, it will be the “official end” of Iran. Another helpful comment. Enough for Iran to turn to China for assistance.

WTI continues to tick up.

The Aussie dollar’s response to the election was already booked in early yesterday morning, so it’s up only slightly since then at US$0.6908.

Today

The SPI Overnight closed down -41 or -0.6%, which actually matches the S&P500.

The minutes of the May RBA meeting are out today and the governor will have a chance to voice his thoughts on election result implications when he speaks today.

The Fed chair is also talking tonight.

ALS ltd ((ALQ)), James Hardie ((JHX)), OFX Group ((OFX)) and TechnologyOne ((TNE)) all report earnings today.

The Australian share market over the past thirty days…