The Overnight Report: Trump Slump Deepens

This story features CORONADO GLOBAL RESOURCES INC, and other companies. For more info SHARE ANALYSIS: CRN

By Chris Weston, Head of Research, Pepperstone

Good morning.

US equity futures traded heavy through Asia, but the moves were measured and calm.

That changed through EU trade with the selling accelerating, and volumes kicking up as the S&P500 cash equity market opened and with correlations rising on a cross-asset basis, market players once again went about cutting and hedging risk and playing defence. 

Risk aversion is the play here, and for the most part, we saw a classic day of de-grossing portfolio risk, shorting lower-quality assets and seeking protection through Treasuries, and (options) volatility.

A late session rally in US equity futures was a small win for the remaining bulls but given the extent of the one-way flow through US equity cash trade, the turn was hardly convincing and may just offer the sellers exit liquidity.

Some will also point to the fact that 30% of S&P500 stocks closed higher, so there were some pockets of life in the equity market, and it wasn’t an all-out blanket liquidation of equity but this may be a case of trying too hard to find the positives in a troubled market.

Whether we’re closer to a point where much of the forced selling is reaching an endpoint is a debate on the floors, but aside from the unconvincing’ 1% late session bounce, the intraday tape of NAS100 or S&P500 futures certainly doesn’t offer the sort of conviction to really believe we’re nearing a capitulation point. 

What is the Circuit Breaker?

Many will start to opine market on a likely circuit breaker that swings sentiment -this is typically reviewed from a response from the Fed– however, unless the Fed adopt a far more forward-looking approach, US economics are not in a place which offers a more radical response from the Fed.

Trump is certainly not giving any indications he is going to cave to market moves. So, while we can’t rule out strong intraday rallies in risk, with uncertainty increasing, questions left firmly unanswered and the technicals looking wholly bearish, it seems the probabilities for the direction of travel in risk remains skewed. 

It’s in this dynamic where the technicals and price action should matter to all.

We’re trading the collective flows in the market, and the aggregation of all beliefs -many of which are turning increasingly emotional and even irrational– and standing in the way of this flow of capital and attempting to time a turn without the price action giving you that confidence just increases the risk of ruin. 

The safety of US Treasuries has been a comfort for many, with the Treasury curve moving lower (in yield) almost in parallel.

The 10bp decline in the 2yr Treasury speaks to an increased anticipation that the Fed will need to come to the party sooner and more intently.

With US swaps now pricing -80bp of implied rate cuts by December, terminal Fed pricing has added an additional -12bp of cuts to trade at 3.44%.

Inflation expectations have pulled -4bp lower, and high yield credit CDX +14bp. 

Crude trades -1.6% and continues to eye multi-year support levels at US$65/bbl, and while some will see the reduction in the crude price as a positive (for the consumer), the message we’re hearing from the energy markets is certainly not a positive one.

Clearly, the market is struggling to reconcile the notion of OPEC-plus increasing supply in April and slower US economic activity. 

Gold and the USD Fail to Perform Despite the Higher Volatility 

Gold has failed to play defence in the portfolio and trades -0.7%, and we see broad selling flows through US trade, with spot gold pulled from US$2910 to US$2880/oz.

G10 FX moves have been relatively contained, with the USD finding modest buyers vs the CAD, AUD and GBP.

As we know, historically the USD outperforms when we get a solid rise in volatility, but when the US economy and US equity market are the central point of concern this is now limiting the attractiveness of the USD.

Turning to Asia, the ASX200 should outperform Asia, as is typically the way given its characteristics as a more value-oriented equity index, but even so, SPI futures trade -70p and we see the cash index unwinding below 7900.

The risk of another session where utilities and the ultra-safe end of town are in vogue is high.  

Traders will navigate the US NFIB small business optimism survey (21:00 AEDT), which presumably gets a greater focus given the unfolding economic concerns and a strong reduction in sentiment would presumably add fuel to this fire.

On the calendar today:

-NZ 4Q manufacturing volume

-AU Feb NAB business survey

-AU Westpac consumer confidence (March)

-JP 4Q GDP

-US Feb NFIB

-US Jan JOLTS

-CORONADO GLOBAL RESOURCES INC ((CRN)) ex-div 0.55c (100%)

-CUE ENERGY RESOURCES LIMITED ((CUE)) ex-div 1c

-DUSK GROUP LIMITED ((DSK)) ex-div 5c (100%)

-ECHELON RESOURCES LIMITED ((ECH)) ex-div 1.28c

-HELLOWORLD TRAVEL LIMITED ((HLO)) ex-div 8c (100%)

-IVE GROUP LIMITED ((IGL)) ex-div 9.50c (100%)

-NEWS CORPORATION ((NWS)) ex-div 11.20c

-PREDICTIVE DISCOVERY LIMITED ((PDI)) earnings report

-QUALITAS LIMITED ((QAL)) ex-div 2.5c (100%)

-QANTAS AIRWAYS LIMITED ((QAN)) ex-div 16.50c (100%)

-QANTAS AIRWAYS LIMITED ((QAN)) ex-div 9.90c (100%)

-SILVER MINES LIMITED ((SVL)) AGM

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

Corporate news in Australia

-Ron Finemore Transport has acquired a 9% stake in rival Lindsay Australia ((LAU)), sparking industry speculation

The Australian share market over the past thirty days

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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