The Overnight Report: China Trade In Reverse

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Local price action yesterday saw the enthusiasm for everything commodities-related evaporate rapidly as no additional stimulus measures were announced in China.

That disappointment travelled around the world overnight and is likely to still impact on the local market at opening today.

But everything that was temporarily out’ of fashion is back in favour and the ASX200 is projected to still open slightly higher.

With BHP Group ((BHP)) shares expected to open -1% lower, this implies banks, healthcare, technology and industrials are likely to fare better at opening.

World Overnight
SPI Overnight	8236.00	+ 15.00	0.18%
S&P ASX 200	8176.90	– 28.50	– 0.35%
S&P500	5751.13	+ 55.19	0.97%
Nasdaq Comp	18182.92	+ 259.01	1.45%
DJIA	42080.37	+ 126.13	0.30%
S&P500 VIX	21.42	– 1.22	– 5.39%
US 10-year yield	4.03	+ 0.01	0.17%
USD Index	102.49	– 0.03	– 0.03%
FTSE100	8190.61	– 113.01	– 1.36%
DAX30	19066.47	– 37.63	– 0.20%

By Chris Weston, Head of Research, Pepperstone

Good morning.

We’ve been treated to some truly grown-up-sized moves in Chinese/HK equity markets, with the elastic band snapping hard, driven by market players failing to hear the level of explicit detail and urgency on fiscal to meet lofty expectations.

The impact of -10% declines in the HK50 and H-shares, and the sharp pullback from initial opening highs in the CSI300 were as aggressive as you will see in a large-cap equity index outside of the NKY225 move seen on 5 August, and the volumes playing through the exchanges were incredible.

The Chinese authorities are unlikely to be bullied by the markets into detailing firmer stimulus plans, notably because the timing of the initial set of announcements was designed to pump up markets into the Golden Week holiday, and the 75th anniversary of the People’s Republic.

That said, if they are credible on plans to drive demand, which I’d argue they are, then they must keep the peddle down to alter households and businesses mindsets and drive a positive expectancy on capex, and investment opportunities in equity, property, and infrastructure.

 Unless the authorities can shift the mindset to one where households and businesses truly believe that investment offer greater opportunity than increasing savings or paying down debt, then the recent raft of measures will fail to get the sort of economic traction that is needed.

 With a decent washout of extended long positions in China/HK cash equity markets and modest selling in the CHH (offshore Chinese yuan), we look to Hang Seng futures and see a whippy ride through US trade but currently sit unchanged from the cash exchange close.

Subsequently, our opening calls for Chinese/HK cash equities look ominously calm at this point.

The market will look to find a fair value for these markets, and this may mean more volatility and two-way price action –  while I have no doubt there will be pockets of traders trying to pick a low point in the sell-off, I would wait until we see the buying kick in with good volume, noting intraday rallies could easily be used as exit liquidity.

The lack of real substance from the NDRCs fiscal plans have seen big selling in crude, with Brent crude -4.1%, where we have seen a sizeable 643k contracts traded, and the second largest number of options contracts traded ever.

The geopolitical news flow remains fluid, but the falls in crude speak to a perception of Chinese demand, over any positive feel that Iranian supply has a reduced chance of being impacted.

Gold has also found sellers, with price closing -0.9% and below the recent consolidation lows of US$2624/oz.

While we’ve seen modestly lower US Treasury yields, and a flat USD, with geopolitical concerns still very much in the mix, many of the fundamentalists will say the selloff seen in yellow is perhaps a little unjustified.

This just reinforces the notion that gold does what it wants on any given day, and what is claimed to have caused the move in gold on one day, may have absolutely no influence on another.

While we see a solid shake-out of Chinese equity, US equity has found love with a solid intraday trend seen in the S&P500 and NAS100.

One could argue that an element of capital recently put to work in Chinese/HK equity may have switched back to US markets, and notably, as we head into US Q3 earnings, while it is also worth flagging that Trump’s odds of becoming president have lifted, increasing the possibility of increased tariffs.

Either way, US equity has worked well, and the bulls will be enthused by the hold of range lows in S&P500 futures of 5724.

The S&P500 energy and materials sectors closed lower, which won’t surprise given the part unwind of the China fiscal dream, but the switch into big tech/AI, comms services and discretionary plays looks real and may have some near-term legs.

Certainly, Nvidia has regained some real form and is showing leadership once again, and while volumes were not overly significant, there is good underlying upside momentum here.

3m Nvidia calls traded on the day, relative to 1.51m, so this would have played a part as dealers hedged exposures by buying the shares to manage their exposures as price through into or through the various strikes.

 Turning to Asia and all eyes remain on the reaction seen in the China/HK equity, as well as commodity markets iron ore futures, crude, and copper.

Our calls for the ASX200 look constructive at this stage, although we could see materials having a tough open, with BHP Group ((BHP)) shares likely to open around -1% weaker.

Banks should therefore put in the points, with consumer names and tech plays working. Japan will start us off on a positive note, with a 1% gain eyed for the NKY225.

 The known event risk today falls on the RBNZ meeting, where NZ swaps imply a- 50bp cut at close to 90% – subsequently, should a -50bp cut play out then the reaction in the NZD should be limited and the move will likely come in the tone of the RBNZ statement and the appetite to cut by another -50bp in the November meeting.

Should we see a -25bp cut emerge then one would expect a sharp initial rally in the NZD, although that may reverse quickly if the statement reads dovish.

Elsewhere, we get FOMC minutes and several Fed and ECB speakers.

On the calendar today:

-RBNZ cash rate decision

-Westpac Consumer Confidence Australia

-US Sept FOMC minutes

-REA Group ((REA)) AGM

FNArena’s four-weekly calendar: https://fnarena.com/index.php/financial-news/calendar/

Corporate news in Australia:

-DroneShield ((DRO)) received a $13.5m repeat order from a US government customer for its counterdrone systems, to be delivered this quarter

-Clarity Pharmaceuticals ((CU6)) partnered with SpectronRx to produce its prostate cancer diagnostic product for phase III trials, ensuring broad US distribution

Spot Metals,Minerals & Energy Futures
Gold (oz)	2640.70	– 22.20	– 0.83%
Silver (oz)	30.89	– 1.08	– 3.38%
Copper (lb)	4.48	– 0.08	– 1.72%
Aluminium (lb)	1.16	– 0.04	– 3.19%
Nickel (lb)	7.99	– 0.10	– 1.24%
Zinc (lb)	1.39	– 0.04	– 3.13%
West Texas Crude	73.89	– 3.47	– 4.49%
Brent Crude	77.47	– 3.63	– 4.48%
Iron Ore (t)	112.39	+ 3.55	3.26%

The Australian share market over the past thirty days

Index	08 Oct 2024	Week To Date	Month To Date (Oct)	Quarter To Date (Oct-Dec)	Year To Date (2024)
S&P ASX 200 (ex-div)	8176.90	0.33%	-1.12%	-1.12%	7.72%

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
COH	Cochlear	Upgrade to Neutral from Sell	Citi
LTM	Arcadium Lithium	Downgrade to Hold from Buy	Bell Potter
MFG	Magellan Financial	Upgrade to Neutral from Underperform	Macquarie
SGR	Star Entertainment	Downgrade to Reduce from Hold	Morgans
SHV	Select Harvests	Upgrade to Accumulate from Hold	Ord Minnett

For more detail go to FNArena’s Australian Broker Call Report, which is updated each morning, Mon-Fri.

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available on the FNArena website.  Click here. (Subscribers can access prices on the website.)

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