Overnight: Uncertain Times

By Greg Peel

Back On

The ASX200 exploded out the blocks yesterday, as the futures had suggested, and pushed on to be up 53 points late morning. There were echoes of last Friday’s trade, when the index put on 30-plus points ahead of a critical US jobs report. This time it was ahead of a critical Fed testimony.

We recall that the index then crashed on Monday, when the news was bad (more jobs than expected). Last night the news was good (Fed rate cut coming), so our futures are up 5 this morning, deciding yesterday was enough.

Local traders also decided enough was enough at lunch time, as the ASX200 gradually gave back half its gains through the afternoon. One wonders how much of the strength in the market presently is due to offshore interest, with the Aussie at 69, the cash rate at 1.0% and dividend yields of 5% or better available, when the US cash rate is at 2.25% (lower bound), about to become 2.0%, and the average dividend yield on the S&P500 is around 2%.

The consumer sectors were the biggest winners yesterday.

In staples, an upgrade to Buy from UBS for a2 Milk ((A2M)) had that stock leading the index, up 8.0%. The sector rose 1.9%. Citi reviewed the situation for discretionary stocks and decided the rate cuts, tax cuts and a stabilising housing market have set the most promising scene for retail in years. The broker upgraded several stocks in the space, albeit most from Underperform to Neutral. The sector rose 1.2%.

Citi would presumably not have been thrilled, thus, when the Westpac consumer confidence survey was released.

This confidence index has fallen this month by -4.1%, to a two-year low 96.5 from 100.7, and hence into pessimism from optimism, despite, as Westpac economists noted, all of the above that Citi is excited about. Digging down, pessimism appears to be related to concerns over the direction of the Australian economy.

While stock market traders laud rate cuts as good news, consumers see them for what they are.

The bond proxies were back in favour again yesterday, helping industrials up 1.0% and utilities up 0.7%. IT blindly followed the Nasdaq as usual, up 1.8%. (The Nasdaq hit another new high last night.)

The banks sat it out, while materials were the only sector to go backwards (-0.5%). Base metal prices were indeed all lower overnight, but iron ore surged 4% and the big miners were again sold yesterday. It would appear recent volatility in the iron ore price has investors a little wary.

The ASX200 is still over 70 points away from last Friday’s new high, and a fairly muted response on Wall Street overnight does not suggest anything explosive today. But it seems our market is happy to explode spontaneously whenever it is so inclined.

Phew

Friday night’s strong jobs number led to investors questioning the assumed certainty of a Fed rate cut this month, but last night it was uncertainty that underscored that certainty. Fed Chair Jay Powell all but confirmed to the House there will be a rate cut.

Gone are assumptions of low inflation being “transitory”, as was the case late last year. Gone is any notion of being “patient”, as was the case earlier this year. Now the buzzword is “uncertainty”, as was oft-repeated in Powell’s testimony. Very oft in fact.

The major sources of uncertainty are slowing global growth and the trade war. While the latter feeds into the former, it also feeds into a stalling in US business investment and a decline in manufacturing output. The trade war was meant to be over in March, and despite a truce being declared at the G20, peace seems just as far away as ever. Hence the uncertainty.

While some still believe July will bring a full -50 point cut, the money is on -25 points to correct the mistake made in December, with the chance of another -25 in September to provide actual easing.

In response to Powell’s testimony, the S&P hit 3000 for the first time. It hit 2000 for the first time in 2014. But that was an intraday high, before a close of 2993. The Nasdaq did hit a new all-time high. But all up the response was relatively muted, as expectations had already been baked in.

Most notably, the US two-year yield plunged -8 basis points while the ten-year sat still at 2.06%. The yield curve has thus steepened, suggesting the rate cut (or cuts) will stave off recession. The US dollar index dropped -0.4%, and commodity prices took off. Gold jumped twenty bucks.

Oil prices leapt 3.5%, but were further bolstered by news of a cyclone forming in the Gulf. It seems the Oldsmobiles are in early this year.

The energy sector thus helped drive the Dow and S&P, while the tech sector is enjoying renewed faith, as evidenced by the Nasdaq.

Fed speculation will be heightened again tonight when the US CPI numbers are released. Thereafter, the focus will swing solidly to earnings season. That begins in earnest late next week with the big banks, but a few gun-jumpers have already begun to post.

Levi Strauss reported last night and its shares fell -12%.

Commodities

Fed rate cut nigh, greenback down, commodity prices up.

Except iron ore, which marches to its own drummer.

Aussie up 0.5% to US$0.6961 matching the dollar’s fall.

Today

The SPI Overnight closed up 5 points.

Australia will see housing finance numbers today for May ahead of tonight’s June CPI report in the US.

Whitehaven Coal ((WHC)) kicks off the formal quarterly production report season today, albeit we’ve already seen a couple of pre-releases.

The Australian share market over the past thirty days…