The Overnight Report: US Gloom Descends

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By Greg Peel

The Dow closed down 157 points or 0.9% (to below 17,000) while the S&P lost 0.5% to 1994 and the Nasdaq fell 0.3%.

Beijing phone home

Australia’s energy sector has become particularly fickle of late, flying around on the slightest moves in overnight energy prices. The rally in WTI crude back to almost US$50/bbl last week had the big oil names on the fly as bargain hunters piled in, but this week hopes of a break to the upside for oil prices have evaporated.

Crude oil prices were weaker on Tuesday night so yesterday those big oil names were hammered, sending the energy sector down 3.3%. But this move proved to be very much a standout among the sectors.

The ASX200 fell around 40 points from the open yesterday and despite a couple of blips, was still around that level when Beijing released China’s September inflation data.

China’s headline CPI fell to an annual rate of 1.6% in the month, down from 2.0% in August. The PPI was down 5.9%, unchanged from the August annual rate, to mark the 43^rd consecutive negative number and maintain a six-year low.

Of course in this upside-down economic world, this is good news. It is now assumed Beijing will be jolted into acting, and acting swiftly, with further monetary policy stimulus, most likely in the form of interest rate and/or reserve ratio requirement (RRR) cuts.

To that end, the ASX200 recovered through the afternoon to be down only 5 points at the close. Energy remained hammered, but materials fell only 0.4%, while consumer discretionary (+0.9%) and healthcare (+0.8%) provided a balance.

The banks were also very much in the spotlight following Westpac’s ((WBC)) announced capital raising and increase in floating mortgage rates. Westpac shares remained in a trading halt, thus were not factored into yesterday’s 0.2% gain for the financial sector. The points to note about Westpac’s announcements are firstly that the bank is the last of the Big Four to raise new capital, thus there is no further sector implication to consider, and secondly that Westpac’s rate hike will probably prompt its peers into following suit.

RBA?

Analysts were surprised when Westpac didn’t join in the capital raising rush last quarter when ANZ Bank and Commonwealth Bank announced in quick succession, with National Bank having raised previously. Perhaps the volatility at the time, which saw bank shares carted, encouraged the board to delay.

The potentially good news for the wider Australian economy is that in lifting mortgage rates, and assuming all will follow, the banks have relieved the RBA, to some extent, of the need to carefully balance monetary policy for the wider economy against the rampant Sydney-Melbourne housing boom. Across the board 20 basis point mortgage rate hikes leaves the door a lot more open for the central bank to deliver a 25 basis point cash rate cut, perhaps on its oft favoured date of Cup Day.

The housing boom is already showing signs of having topped out, particularly in the apartment segment, following stricter APRA regulations and supply rising ahead of population growth. Mortgage rate increase will go further towards taking the heat out.

Possibly hindering a decision by the RBA to rush into another rate cut, despite the drag of lower commodity prices, is the fact the Aussie has finally come down to a more realistic level, and the impact of that is yet to really be seen in the Australian economy. However, the news coming out of the US last night may offer the RBA sufficient grounds to take the cash rate down to a new historic low.

Retail Rout

US retails sales rose just 0.1% in September, it was revealed last night, following a flat August result. While meeting expectations, the number nevertheless remains disappointing. Take out the balance of strong auto sales and lower fuel prices, and sales were actually flat.

The fall in gasoline prices over the month saw the US PPI fall 0.5%, again in line with expectations. The core PPI, ex food & energy, fell 0.3%.

Just as Wall Street was absorbing these rather dour data, America’s biggest bricks & mortar retailer and employer, Wal-Mart, issued a profit warning which suggested earnings would be flat for the next three years. The company’s decision earlier in the year to raise wages for its enormous employee pool is the issue, along with impacts from the stronger US dollar.

Wal-Mart shares were subsequently slammed 10%, which is why the fall in the Dow last night was much greater than that of the S&P500. However, the Wal-Mart news sparked selling across all US bricks & mortar names, most likely because of selling in the leading related exchange traded fund.

If the above wasn’t enough to ensure a soggy session on Wall Street last night, later in the day the Fed Beige Book was released. The anecdotal assessment noted apparent slowing in three of the twelve Fed districts, with the remaining nine posting only “modest” or “moderate” growth. The report specifically pointed to the impact of the stronger US dollar as being behind this weaker assessment.

All up, last night’s economic news suggests the US economy is not going to grow as strongly in 2015 as had been hoped earlier in the year, particularly after the strong June quarter rebound from the weather-bound March quarter. The US economy is consumer-led, and consumers are not coming to the party.

Fed rate rise in 2015? Forget it. At least, that’s what most commentators are now suggesting, while the Fed itself is appearing to be more and more fractured in its views, frustrating Wall Street and adding to uncertainty. This would explain why last night’s bad news was indeed taken as bad news, when otherwise further confirmation of a 2015 rate rise being off the table could be seen as bullish for the stock market.

The US bond market certainly doesn’t expect a rate rise. Last night the ten-year yield fell 7 basis points to 1.98%. And that US dollar that has been causing all the trouble took a beating last night, with the dollar index falling 0.8% to 93.97.

Commodities

The weaker greenback and heightened expectations of further Chinese stimulus were enough to spark some buying of base metals last night. Tin lead the charge with a 2.6% gain while copper and lead rose 1%, with the others posting smaller gains.

Iron ore nevertheless fell US60c to US$54.30/t.

The oils were almost unchanged last night, which we haven’t seen for a while, no doubt balancing underlying weakness against the impact of the lower US dollar. West Texas is at US46.63/bbl and Brent is at US$49.15/bbl.

The big winner on the night was gold which, on the dollar crunch, rose US$19.00 to US$1187.00/oz.

The loser, we might say in a reverse sense, was the Aussie, which having fallen sharply after the release of the weak Chinese trade data earlier this week has jumped 0.7% to US$7303.

If the US dollar is now set to lose its rate rise expectation premium and force the Aussie higher, the chances of a November RBA cut improve.

Today

On the balance of everything, the SPI Overnight closed down only one point.

It’s jobs day in Australia today, while tonight the US CPI will provide further fuel for the Fed speculation fire.

It’s a busy day on the local stock front today featuring several AGMs, including that of CSL ((CSL)), along with a raft of resource sector production reports. Fortescue Metals ((FMG)), Iluka Resources ((ILU)) and Woodside Petroleum ((WPL)) provide the highlights.

Rudi will make his weekly appearance on Sky Business. Tune in midday-1pm for Lunch Money.
 

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