The Overnight Report: Holding Firm

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By Greg Peel

The Dow closed up 47 points or 0.3% while the S&P rose 0.1% to 1884 as the Nasdaq fell 0.6%.

Technical

The interesting point to note about yesterday’s 3.8% rout on Bridge Street is that it did not represent a selling stampede. When the bell rang at 10am, there were simply no buyers to be found. Half an hour later, following the opening rotation, the buyers were found 150 points lower.

And that’s where everything stopped, all the way to 3pm. Late selling then took the index down another 50 points. It seems strange to say, but it was actually a very in-volatile day. Calm, almost.

If we subtract the very weird 71 point rally posted on Monday, against the tide of the rest of the world, then the ASX200 was realistically down 124 points yesterday. The open took us immediately down through the solid 5000 support level to stop at 4966, where we still were at 3pm. But staring the market in the face was the previous intraday low of the correction at 4928, hit back in August. Technically, markets like to retest previous lows on a second leg of a correction before it can be said a bottom is in place.

And so we tested it, closing at 4918. Technicians have been suggesting a breach of 5000 would see 4800 as the next support level. But since we are set for a rebound, most likely, today, given Wall Street is up, commodity prices are mostly up (except iron ore), and the SPI Overnight closed up 43 points, it might be that we have now “passed” the test.

Or we could still go lower. It’s not like sentiment has suddenly improved overnight. And Wall Street is yet to retest its own correction low, at 1867 in the S&P500. That’s still 17 points, or 0.9%, away.

Taking out the previous low is actually a source relief for the market from a technical perspective.

It is also interesting to note the Aussie did not go with the stock market yesterday. It’s steady at US$0.6987.

The brunt of yesterday’s fall was taken by energy, down 6.7%, and materials, down 5.0%. These are the “China fear” sectors. The related fear is one of debt held by the big miners and gas players. Talk of global mining giant Glencore (down 30% on Monday night) potentially going to the wall does not help sentiment for the likes of BHP and Rio, who both carry debt on their balance sheets. But not to any extent of bankruptcy fear.

The banks dropped 3.6%, in line with the index. But then the banks are the clearest proxy for the index on a cap-weighted basis. The other fall of note was telcos, down 4.5%. Here we might suggest that while Telstra is also a mega-cap in Australian index terms, that strange session on Monday failed to take account of the fact the M&A going on among the juniors in the sector is actually creating a fourth viable competitor to Telstra, Optus and TPG Telecom in the broadband stakes. Vocus-Amcom-M2 will be a powerful force, increasing competition in that market place, and for Telstra in particular.

Why did we sell-off yesterday? Is it directly “China fear”, which is hardly a new fashion trend, or because of the technical action on Wall Street on Monday night which saw “Death Crosses” across the indices? If Wall Street’s gonna go, local traders thought yesterday, we’d better get the hell out now.

While one session is not enough to call the chicken entrails wrong on this one, it is nevertheless noteworthy that last night Wall Street put in a quiet and largely dull session, meandering to a vague gain. Hardly what one might expect as a result of staring technical Hades in the face. The Nasdaq closed down another 0.6%, but that was all about the ongoing biotech clear-out, which commentators are suggesting has now likely run its course.

Breather

The US biotech sell-off has now taken PEs in the sector down from lofty, bubble highs to multiples more in line with the current market average.

That’s good news, and Wall Street was also greeted with good news last night in the form of the Conference Board monthly consumer confidence survey. It unexpectedly rose to 103.0 from 101.1 in August, to mark the second highest level since the GFC bottom (January saw the highest). And while I hate to bring it up this far out (anyone spotted tinsel yet?), such a reading is positive heading into “the holidays” as Americans like to call them.

In further news, it seems the US housing recovery is hanging in there. The Case-Shiller house 20-city house price index for July showed a 4.7% year on year gain, up from 4.5% in June.

Tonight brings the ADP private sector jobs report, a precursor to Friday’s non-farm payrolls report, which is a pre-cursor to a Fed rate rise. Despite the New York Fed president’s suggestion on Monday night that October is a possibility, the market is only ascribing a 10% chance. December is the firm favourite at this point.

Before we get to US jobs on Friday, we have to get through Chinese PMI day tomorrow. The official and Caixin readings for China’s September manufacturing and service sector PMIs will all be released.

And today locally, and tonight in the US, is the end of the quarter. “Window dressing” seems a bit hollow after a 200 point drop the day before, but the indications are positive going into today’s session. As October begins, so will both Bridge Street and Wall Street be poised – ready for the data that will likely determine whether we are reaching a bottom or whether there is another serious leg down yet to come.

Commodities

Base metal prices consolidated last night ahead of this raft of important data. Tin dipped slightly, but every other metal posted a small rally ranging from a slight tick-up for lead to a 1.7% gain for zinc.

Iron ore fell US$1.30 to US$54.70/t. With Glencore shares having rebounded 17% in London overnight, helping BHP Billiton ((BHP)) up 1.6% in London and Rio Tinto ((RIO)) up 1.8%, one presumes this drop in the iron ore price will not force the big miners lower again today after yesterday’s efforts.

West Texas crude rose US83c to US$44.84/bbl and Brent rose US64c to US$48.00/bbl.

Gold slipped another US$4.90 to US$1127.70/oz, possibly presuming that last night’s unexpectedly positive read on US consumer confidence only plays into the rate rise camp.

The US dollar index is steady at 95.92.

Today

As noted, the SPI Overnight closed up 43 points or 0.9%.

Australian building approval numbers are out today. Japan will release industrial production and retail sales data.

Tonight sees a flash reading on eurozone September CPI, which will be closely watched by Mario Draghi. As noted, the US private sector jobs report is due.

And it is the end of the quarter. Thank God that’s over, one might say. Except that tomorrow, it’s October.
 

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