Overnight: Wipeout

By Greg Peel

Thanks anyway Phil

The ASX200 rallied through the morning yesterday to be up 26 points around 12.30, possibly in anticipation of a rate cut about to come. Or maybe not. The index then fall back to flat by the critical 2.30 release time.

Before yesterday, the market showed an 80% chance of a cut, and sure enough the RBA delivered. Was it the other 20% of doubters who then bought the index up 54 points on the announcement? Or was it the “promise” of more cuts to come.

“It is reasonable to expect that an extended period of low interest rates will be required in Australia to reach full employment and achieve the inflation target. The Board will continue to monitor developments, including in the labour market, and is prepared to ease monetary policy further if needed to support sustainable growth in the economy, full employment and the achievement of the inflation target over time.”

Philip Lowe later backed up that statement in a speech last night, in which he implied further cuts are inevitable and took the opportunity to give the government another swift kick up the Khyber.

Good luck with that one. Josh has blamed the rest of the world. And the drought. Not the Australian economy.

Alas, it has all come to nought as said rest of the world spoilt the party last night, with US manufacturing data surprising to the downside and Wall Street responding in fright. Our futures are down -75 points this morning. Thanks for playing.

For the record, most sectors were up an even 1% yesterday. Energy (-0.4) missed out due to a fall in the oil price, while materials (+0.5%) underperformed due to a drop in the gold price.

Financials (+0.3%) also underperformed, given lower rates are good for borrowers but not for bank margins, and on that note we’ve seen ANZ Bank ((ANZ)) pass on only -15 basis points into SVR loans and Commonwealth Bank ((CBA)) only -13.

Healthcare (+2.1%) outperformed, probably on the RBA-related plunge in the Aussie and the fact the sector has underperformed recently.

At the individual stock level, the only standout was once again Nufarm ((NUF)), which continues to play Lazarus after selling its LatAm business and it jumped another 15.2% yesterday as brokers gushed and upgraded, and likely more short positions were covered.

The RBA is trying to stop the government sending us into recession but last night it was the world’s most resilient economy throwing the R-word around once more.

Manufactured Fear

Wall Street kicked off the scariest month of the year on a positive note last night, sending the Dow up a hundred points in the first half hour. Then the ISM manufacturing PMI for September was released.

It showed a drop to 47.8, down from 49.1 in August, which had been the first fall into contraction in years. While this is quite a sharp move for this series, what really set Wall Street off was the fact economists had forecast a creep back into expansion at 50.2. It is the worst reading since 2009.

By mid-afternoon the Dow was down -350 points. A rally from that point proved short-lived, and Wall Street closed pretty much on its lows.

Does the Manufacturing PMI mean the US is heading into recession? That is the question being asked.

For starters, manufacturing represents 15% of the US economy and non-manufacturing (services) 85%. There have been cases before of a “manufacturing recession” not leading to an overall economic recession.

But what drives the US economy is the US consumer, so the question is as to whether a manufacturing recession will lead to lay-offs that will increase unemployment and thus impact on consumer spending, whether directly or just on the basis of sentiment.

Why has the US manufacturing sector collapsed? Well obviously Jerome Powell is to blame. The Fed’s inaction has led to a too-strong US dollar and that’s what’s hurting the sector.

Said one person last night.

Everyone else knows it’s the trade war. So the fact that trade talks will resume in a bit over a week could mean that weak PMI data could prove to be just a temporary issue, or things could get a lot, lot worse. The White House will have been smugly smiling over China’s recent contraction in manufacturing, but China’s September PMI rose to 49.8 from 49.5 and the US has fallen to 47.8 from 49.1.

Who’s winning now?

There were suggestions Wall Street’s response was a bit heavy-handed, particularly given trade upside risk, and technical influences were blamed given the S&P500 broke its 50-day moving average. For the technically-minded, the S&P broke out of its August range in early September at 2940, and that’s exactly where it closed last night.

And of course the weak PMI number has improved the odds of a Fed rate hike at the end of this month.

In other markets, the US ten-year bond yield fell -3 basis points to 1.64% and gold clawed back some of its Monday night losses but these were not substantial flight-to-safety moves. What was most notable in the US stock market was that every S&P sector closed in the red. There was no further rotation into defensives. It was just a sell everything day.

Commodities

Doctor Copper bore the brunt of weak manufacturing data last night.

Brent crude is more directly impacted by the resumption of Saudi production.

The Aussie is down -0.7% thanks to the RBA, and despite the greenback being down -0.3%.

Today

The SPI Overnight closed down -75 points or -1.1%

US jobs data will now be more closely watched, with regard the Fed and the R-word. Tonight sees private sector numbers for September, ahead of Friday’s non-farm payrolls.

The Australian share market over the past thirty days…