Overnight: When Bad News Is Great News

By Greg Peel

Well blow me down

The only surprising thing about yesterday’s RBA rate cut – to 1.25% in case you hadn’t heard – was that the ASX200 rallied from down -5 points to up 11 on the news, as if confirmation was blessed relief. And given expectations run from one more to as many as three more cuts, this comment in the governor’s statement might have provided cause to go the other way:

“The Board will continue to monitor developments in the labour market closely and adjust monetary policy to support sustainable growth in the economy and the achievement of the inflation target over time.”

In other words, no hint that another one is coming. However, Philip Lowe gave a speech after the market had closed in which he said:

“The Board has not yet made a decision, but it is not unreasonable to expect a lower cash rate. Our latest set of forecasts were prepared on the assumption that the cash rate would follow the path implied by market pricing, which was for the cash rate to be around 1 per cent by the end of the year.”

…but:

“There are, of course, a range of other possible scenarios and much will depend on how the evidence evolves, especially on the labour market.”

For it is the labour market that has the RBA worried, not the housing market, which the board noted was looking like bottoming out soon. Anaemic wage growth and rising underemployment, keeping a lid on inflation, were the primary driver of the cut, along with downside risks to global growth.

Add it all up and those who believed there would be more than one rate cut coming after this one still hold that view today.

The (modest) rally for the ASX200 was not a uniform affair. Surprisingly the consumer sectors both closed lower, despite what a rate cut implies. However a -0.3% for staples was largely due to big falls for infant formula producers on news Beijing intends to reduce China’s reliance on imports and become more self-sufficient in the dairy space. A2 Milk ((A2M)) fell -8.6%.

The banks rose by a tepid 0.3%. The rate cut is both good (mortgage stress relief, housing market support) and bad (lower margins) for the banks, so the benefits are not cut and dried. The debate about whether or not the majors would pass the cut on in full has already been settled – Commonwealth Bank ((CBA)) and National Bank ((NAB)) yes, Westpac ((WBC)) and ANZ Bank ((ANZ)) no. So two have taken the lower margins, offset by lower offshore funding costs, and two have gone for margin support through repricing, despite stiff competition for mortgages.

Energy fell -0.6% on a lower oil price and materials rose 0.7% despite a lower iron ore price, possibly because the big iron ore miners are among the best dividend payers in the market. On the same theme we saw telcos up 1.0% and utilities 0.6%.

IT fell -2.4% because the Nasdaq tanked overnight, despite there being zero connection with US tech companies being trashed on antitrust concerns. Bravura Solutions ((BVS)) did nevertheless fall -11.3% after a profit upgrade from takeover target GBST Holdings ((GBT)).

We can now argue all we like about more RBA rate cuts ahead but globally the more important issue is whether or not the Fed will follow suit. Wall Street has bounced hard on that notion, and our futures are up 53 points this morning.

Dead Cat?

From yesterday’s Overnight Report:

“The question now is… as to whether the six-week run of losses on Wall Street must soon come to an end, and whether the bond market has now become short-term overbought.

“But what has to change? Well clearly some positive news on trade would be good, but it’s hard to see where that’s going to come from. Realistically it’s up to the Fed.”

Yesterday China’s Commerce Ministry suggested “differences and frictions” in trade relations should be resolved through talks. This is a far more conciliatory comment than we have heard coming out of China to date, particularly when retaliations have been expected.

Tick box one.

The Fed is monitoring the economic outlook in the face of escalating trade tensions and other factors, Jerome Powell said in a speech during the day, and would “act as appropriate” to sustain the economic expansion.

Tick box two.

In a re-run of Philip Lowe dropping a big hint and then delivering, the Fed is now anticipated to follow up such remarks with a rate cut soon. Australia’s rate cut was not lost on Wall Street either.

So was the US stock market oversold and bond market overbought? Yesiree Bob. The US ten-year yield bounced back 4 basis points to 2.12%, despite a rate cut hint, and the S&P500 flew back through its 200-day moving average and up to the critical 2800 level in one fell swoop.

At least one investment bank called the rally a mere “short squeeze” and pointed to low volume in suggesting there was nothing convincing about it. Perhaps one point to note is that on Monday night you couldn’t give away shares in the FANGs given antitrust concerns and yet last night the Nasdaq screamed back 2.7%, with Apple leading the charge, despite the reason for Monday night’s sell-off having not changed one iota.

The S&P stopped at the 2800 level, which for about a year has provided both support and resistance, whichever way the market was heading, with significant break ups/downs on the odd breach. It is the pivot point.

So which way do we go this time? If the Fed’s now providing the put option, with trade front of mind, the whole world again hangs on the next tweet.

Commodities

Any easing in trade tensions and a chance of a Fed rate cut are both supportive for commodity prices. Base metals and oils saw hesitant bounces, as did iron ore.

Gold is now sitting still after having shot back through US$1300/oz.

It’s not every day you see the Aussie rally on a rate cut, but the market had already priced the cut in and the greenback is lower yet again. The Aussie is up 0.2% at US$0.6991, which is no doubt frustrating for the RBA.

Today

The SPI Overnight closed up 53 points or 0.8%.

It’s GDP day downunder today. Look for 0.4% growth in the quarter to lower the annual growth rate to 1.7% from 2.3%, according to forecasts.

It’s service sector PMI day across the globe and the US will see private sector jobs and the Fed Beige Book tonight.

WorleyParsons ((WOR)) hosts an investor day today and James Hardie ((JHX)) goes ex-div.

The Australian share market over the past thirty days…