Overnight: Mixed Messages

By Greg Peel

Wings Clipped

The ASX200 jumped from the open yesterday and was up almost 50 points at 11am. Then it appeared to hit its head on the ceiling, rather hard.

Whether one big seller triggered the slide or traders just decided the rally was a bit over-exuberant at that point is unclear, but the index spent the rest of the day gradually sliding back to close up only 16.

Interestingly, REITs (+1.1%), utilities (+0.7%) and telcos (+0.6%) were the best performing sectors on the day, in contrast to earlier in the week when defensives were out of fashion on rising bond yields. In the former case, a UBS upgrade to Buy for sector heavyweight Goodman Group ((GMG)) had that stock up 2.2%.

IT was down -0.5% despite a rally overnight for the Nasdaq, with volatile Nanosonics ((NAN)) the worst performer on -5.2%, but otherwise there was no specific sign of a switch into defensives being matched with a switch out of cyclicals. Energy fell -1.2% on the oil price but materials rose 0.5%, consumer discretionary 0.3% and the banks 0.3%.

Industrials and healthcare sat it out.

Early optimism was attributable to a little glimmer of hope in the trade war as China pulled some of the items off its last tariff list, and last night there were more feel-good developments, possibly. The futures are up 22 this morning, matching the S&P500, so we may recover some of yesterday’s sharp reversal.

Trading Confusion

“Now it’s high time I think for the fiscal policy to take charge. In view of the weakening economic outlook and the continued prominence of downside risks, governments with fiscal space should act in an effective and timely manner.”

Over to you Germany. These words from outgoing ECB president Mario Draghi last night accompanied an announced -10 basis point eurozone cash rate cut, to -0.5%, and the recommencement of QE bond buying at the rate of E20bn per month. The size of the monetary stimulus package would have disappointed some, but clearly Draghi is cementing the point that there’s not much more monetary policy can achieve in life below zero.

Leading EU economy Germany has since the GFC forced austerity policies upon the weaker members – reining in fiscal spending – but last month the German government indicated it was ready to go the other way and provide a fiscal boost. Nothing has yet happened, so Draghi’s valedictory act was to put a rocket up them.

Across the Pond, the US core inflation rate jumped 0.3% in August when 0.2% was expected, taking the annual rate to 2.4%. This was enough to spur a rally in bond yields once more, with the US ten-year yield rising another 6 basis points to 1.79%.

US stock markets have been following bond yields around of late but confusion dominated trading early in last night’s session due to conflicting messages on the trade front.

A Bloomberg report suggested the Trump administration had discussed offering China a limited interim trade deal that would delay or even roll back some of the tariffs in exchange for commitments on intellectual property and agricultural purchases.

Wall Street rallied.

When asked if this were true, the White House responded “absolutely not”.

Wall Street fell.

Yet after the close on Wednesday night Trump did tweet the planned tariff increase on US$250bn worth of goods to 30% from 25% set for October 1 would now shift to October 15. Meetings between the top-line delegates are slated for early October, so Trump offered this as a “gesture of goodwill”.

The WSJ carried a story suggesting China wants to separate matters of trade and national security in order to make some progress on the trade side – presumably removing crippling tariffs – while continuing negotiations on national security. Given Trump is using tariffs as his weapon in national security issues (IP, foreign ownership), this seems unlikely.

The wash-up of all of this is that both sides are looking to concessions to break the deadlock. In a sign of desperation, China is prepared to drop its tariff on imports of US pork, as the country suffers from swine fever. White House sources have suggested that Trump could go into next year’s election with US$250bn of tariffs still in place and not upset his voters, which implies a big reduction in the list of goods in the interim.

There is apparently a chance the round of tariffs on mostly consumer goods, delayed from September 1 to December 15, will be scrapped.

After rallying early then falling, Wall Street rallied again towards all-time highs before fading fast in the last hour. The Dow had been up over 180 points. Rotation trading seen earlier in the week subsided. Investors were back in buying growth stocks and big caps while the cyclical and small caps that were popular on Monday-Tuesday sat still.

While there is obvious little clarity on trade, and few expect an actual “deal” anytime soon, frustration appears to be breeding a desire to move forward on both sides.

Mid-level talks commence this month before the big guns get together in October. Meanwhile, the Fed is still expected to cut next week, by -25 points, despite the “hot” CPI number. The ECB has provided little choice.

Commodities

Copper caught the market’s attention last night. A rising copper price is seen as a sign of belief that the global economy may be stabilising.

Who said the iron ore rally was over?

Another weak night for the oils with no new news on Iran sanctions.

The Aussie has largely ignored a -0.3% drop in the US dollar, ticking up slightly to US$0.6865.

Today

The SPI Overnight closed up 22 points or 0.3%.

US retail sales will be the prime focus tonight.

Locally, S&P/ASX will announce its quarterly index component reviews, to come into effect in a week.

Seven West Group ((SVW)) is the bigger stock in a smaller list of ex-divs today.

Don’t look at the calendar.

The Australian share market over the past thirty days…