Overnight: And We’re Back

Central Bank Put I

While the Fed statement was welcomed on Wall Street on Wednesday night, the hint of a rate cut to come was widely expected, hence US stock indices rose only modestly. It was a different story last night, but yesterday morning the ASX200 also rose only modestly from the open.

It was not the Fed, but the RBA which sparked the index into action once more, rising steadily to the close.

While Governor Lowe said nothing new in his speech yesterday morning, he did leave observers feeling even more certain of more rate cuts to come than they had otherwise been. It’s all about the spare capacity in the labour market – unemployment, underemployment and benign wages growth – and the governor admitted that the one rate cut delivered last week was not alone going to solve the problem. More would be needed.

Commonwealth Bank’s economists, for one, immediately issued a new forecast of two more rate cuts in 2019 to take us to 0.75%. One wonders why, if the RBA is admitting one cut alone won’t cut it, it didn’t just go -50 points in one hit.

The governor also emphasised the point that monetary policy is not a panacea, and not the only option. Fiscal support is required, he told Scott and Josh.

The biggest movers on the day to the upside were banks and bond proxies. Financials rose 0.8% and utilities 1.9%, while the toll road/airport duo helped push industrials up 1.3%. REITs would have done better if GPT Group ((GPT)) had not announced a big capital raise, forcing fund managers to keep their powder dry.

Either way it was all about yield. The high-yielding miners missed out though, firstly because there was some talk of Vale being ready to bring some iron ore production back on line and secondly because Rio Tinto ((RIO)) downgraded its iron ore production guidance due to some operational challenges in the Pilbara.

Both resource sectors sat out the rally. Energy fell -0.2% to be the only sector in the red on the day, after Caltex Australia ((CTX)) issued another profit warning. It fell -13.3% and took peer Viva Energy ((VEA)) down -8.0% with it.

A 0.1% gain for materials belied the fact four of the top five ASX200 winners on the day were gold miners, rising up to 10%, and boy, they’ll be having fun today.

Central Bank Put II

As I have been highlighting for many years in this Report, the smart money on Wall Street never joins in with the last two hours of often hysterical volatility that follows a Fed statement release, rather preferring to go home and have a good think about it. They thought about it, and then sent the Dow up 250 points from the opening bell.

The US ten-year bond yield fell to as low as 1.999%. The US dollar index tanked -0.6%.

But there things topped out, and the Dow gave back -200 of those points. This is likely a sign there are at least a few people who believe all the good news must surely by now be baked in. Around noon, Reuters reported that a US trade delegation may head to Osaka as early as Tuesday, ahead of Friday’s G20 meeting, having hooked back up again with its Chinese counterparts by phone beforehand.

The two teams have not spoken since early May, when Trump lifted tariffs to 25% from 10%.

That was enough to spin Wall Street back around, and the Dow returned from whence it came. The S&P500 hit a new all-time high of 2954. The Dow remains 75 points short.

So we’re back. The S&P hit its previous high in early May when all and sundry assumed a trade deal was about to be signed, and prior to that in September when the Fed was still very hawkish and so the wheels fell off.

The Fed problem’s been solved, but Wall Street is once again pricing in a trade resolution. Ambitious?

Just to add to the flavour of last night’s trade, Iran shot down a US drone. Trump tweeted that Iran had just made a “very big mistake” and “you’ll soon find out”. Speaking later at a press conference, Trump tempered his words to suggest it may have been an error on the part of some trigger-happy general, not an order from Tehran.

Whatever the case, WTI crude surged 5%.

Commodities

The surge in oil prices reflected escalated Middle East tensions but was ably supported by the big -0.6% fall in the greenback.

Both factors were also behind gold shooting up US$28/oz.

Base metals were not quite as euphoric, remembering that this was the first chance to react to the Fed, but it’s been quite a while since copper jumped 2%.

If Vale is set to bring some iron ore production back on line, no one told them in Singapore.

The Aussie is up 0.6% to US$0.6921, matching the greenback’s fall.

Today

The new September contract for the SPI Overnight closed down -4 points, which is probably more of a reflection of the rollover to the new quarter than a direction call.

Australia, Japan, the eurozone and US will all see flash estimates of June manufacturing PMI today/night.

The quarterly changes to the ASX indices go into effect today.

DuluxGroup ((DLX)) goes ex.

The Australian share market over the past thirty days…