Overnight: Reality Bites

By Greg Peel

Enjoy it while it lasts

Australia’s current account – the sum of all money going into and out of the country via imports, exports, interest payments and dividends – hit a surplus in the June quarter for the first time since 1975. Woohoo! But like 1975, the achievement can probably met with dismissal.

If the government talks this up, it would be celebrating tragedy in Brazil. For it’s all about the iron ore price. That price has come off substantially in August, so the current quarter will probably have us back in deficit.

Closer to the ground, retail sales fell -0.1% in July, having risen 0.4% in June, and missing expectations of +0.2%. The biggest falls were in discretionary segments, suggesting the consumer is battening down the hatches. It should be noted, nonetheless, that Morrison’s tax cuts will have had little chance to have an impact by July.

The weak result feeds into a broader watch-list of factors now on the RBA’s radar. The board left rates on hold yesterday but the statement noted:

It is reasonable to expect that an extended period of low interest rates will be required in Australia to make progress in reducing unemployment and achieve more assured progress towards the inflation target. The Board will continue to monitor developments, including in the labour market, and ease monetary policy further if needed to support sustainable growth in the economy and the achievement of the inflation target over time. (My emphasis)

Previously the RBA was “closely” watching the labour market, implying this was the do or die data point. Now its watch-list merely “includes” the labour market. There remains little to suggest we won’t see another rate cut in October.

As for yesterday’s “action” on the stock market, it’s a case of nothing to see here. With no lead from Wall Street, meaning no tweets as well, the ASX200 meandered around doing not much all day before closing down -6.

Industrials, healthcare and IT closed modestly in the green and all else modestly in the red. The worst performer was telcos, which lost -0.6% as selling continued in Telstra ((TLS)) post NBN update.

Emphasising the tone of the day was an ASX200 losers’ board which included stocks that simply went ex-div.

It was a little different on the winner’s board, with short-covering in Speedcast International ((SDA)) again evident in a second session of buying, sending that stock up another 20.8%. Sounds impressive, but it is from under $1 per share.

Western Areas ((WSA)) kicked another 7.4% as more players woke up to the pending nickel supply deficit.

What the local market hasn’t done in the past two sessions is pay much attention to the new round of tit-for-tat tariffs that came into effect on Sunday. They didn’t go unnoticed on Wall Street last night.

The Proof of the Pudding

Wall Street knew full well the tariffs were coming, but opened lower anyway to start the new month – September being historically weak.

Not helping the Dow from the open was a WSJ article suggesting the Boeing 737 Max is unlikely to be approved for return until after Christmas, meaning it won’t be available for the busy holiday season. Boeing shares closed down -2.7% to provide a decent chunk of Dow points loss, being the highest price share in the average.

The Dow fell to be down -400 points when the US manufacturing PMI for August was released. The index fell to 49.1 from 51.2 in July. Forecasters did not foresee contraction — for the first time in three years.

No prizes for guessing why US manufacturing is going backwards. On that note, Trump tweeted last night, initially, “We are doing very well in our negotiations with China”. He followed this up with, referencing the 2020 election. “And then, think what happens to China when I win. Deal would get MUCH TOUGHER! In the meantime, China’s Supply Chain will crumble and businesses, jobs and money will be gone!”

That didn’t help either.

Wall Street was led down, as has become the standard response to trade issues, by the big industrials, chipmakers and so on. Apple waves even more of a flag for the trade war losers as of Sunday, given the company’s “wearables” are now subject to a 15% tariff.

US bond yields fell again. The thirty-year fell to under 2%, the ten-year fell -4 basis points to 1.46% and the two-year managed to land one point above, so no inversion.

Stock indices clawed back some ground towards the close nevertheless, and we note the Boeing factor in a -1.1% fall for the Dow compared to -0.7% for the S&P.

We should also note a couple of factors less negative observers are hanging their hats on.

Firstly, US corporate bond yields – not just investment grade but right down the ladder to junk – are not blowing out. This implies investors are not running scared of recession, yet. It also underscores the notion that low US Treasury yield are not the harbinger of recession, merely a reflection of even lower yields elsewhere.

Secondly, the VIX volatility index remains below 20. This implies investors are not rushing to buy protection for their portfolios. This possibly reflects an assumption the trade war might drag on but likely can’t get much worse (under duress from corporate CEOs, Trump withdrew an initial response to retaliatory tariffs to double his tranche up to 30%) and could possibly, out of the blue, get much better.

We might also note BofA Merrill Lynch’s contrarian indicator has just flashed a Buy signal.

Commodities

For commodity prices, see: trade war.

Not precious metals of course. Gold is up again but look at the momentum silver has now picked up. Couldn’t give the stuff away for years.

The Aussie is up 0.6% at US$0.6754 on the current account news.

Today

The SPI Overnight closed down -39 points or -0.6%, basically matching the S&P500.

The current account surplus may well be swiftly forgotten today when the June quarter GDP result is released. No doubt you’ve heard about it on the news.

It’s services sector PMI day across the globe today, except in the US (tomorrow).

The Fed Beige Book is out tonight, as is the US July trade balance.

Incitec Pivot ((IPL)) hosts an investor day today.

There’s a sizeable list of stocks going ex.

The Australian share market over the past thirty days…