The Overnight Report: Slow Going

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By Greg Peel

The Dow closed down 23 points or 0.1% while the S&P was flat at 2089 and the Nasdaq lost 0.4%.

Down, Down

Yesterday’s session on Bridge Street started with a good deal of promise. The Dow had closed up 200 points and oil prices had surged. Iron ore had fallen below US$50/t, which was not good news, but an oil price rebound suggested some balance between the resource sectors. The futures were suggesting a 40 point rally for the ASX200.

But we closed down 68 points. Indeed, the index only managed to rise around 20 points on the open before the selling began and throughout the session, built upon itself.

The issue was a micro-specific one, namely domestic earnings. The main culprit on the day was Woolies, which delivered a September quarter trading report full of smiles and upbeat banter, and a shocking profit guidance downgrade. Oh how the mighty have fallen. Woolies is still one of Australia’ biggest companies, hence its 10% fall alone had a sizeable impact on the index.

There was no back-slapping going on over at Coles, nonetheless. The market saw the issue not just as an individual problem but a problem for Australia’s under-attack supermarket duopoly. Wesfarmers shares fell 4% and the consumer staples index finished the day down 5.4%.

From the wider retail perspective, the Woolies’ profit warning came only a day after electronics retailer Dick Smith similarly issued a substantial profit warning, which on Thursday had wiped over 30% off Dick’s share price. There is not a lot of pre-Christmas excitement in retail land at the moment.

Then there were the banks. National Bank’s slightly disappointing profit result released on Wednesday had prompted a 2% fall, as investors mulled over the offset of the bank’s life insurance sale. Yesterday ANZ Bank came out with a result that was also slightly disappointing, and its shares fell 2%. Having looked more closely at NAB, investors yesterday sold the bank down another 4%. A delay in the carving off of NAB’s UK business is also disappointing.

The financials index fell 1.0% yesterday, adding to ASX200 weakness. Materials fell 1.5% as one might expect following another big drop in the iron ore price, but energy also fell, by 1.3%, despite a 6% jump in the West Texas crude price overnight.

Then there were the new home sales data. HIA’s numbers showed a 4% drop in new home sales in September, following a 2.3% rise in August. Is this the peak brokers have recently been lining up to warn about? The booming housing market has, to date, been about the only sector of the economy offering a growth offset to the impact of tumbling mining investment and commodity prices.

It was a bit of a mood-shift day, following on from the earlier excitement of global central bank stimulus and the break-up through the top of the previous trading range. Once the selling had begun it just carried on through to the close.

Except in Blackmores. The snake oil pedlar hit $200 briefly yesterday before dumbfounded profit-takers moved in.

Moderately Prosperous

The Chinese economy needs to grow at an average 6.53% over the next five years for the country to remain “moderately prosperous”, the Chinese prime minister declared last night ahead of the wrap-up of the Plenary Session. This suggests Beijing will lower its growth forecast in 2016 from 2015’s 7.0% target, which likely will be missed if the September quarter’s 6.9% year on year result is any guide.

And given the number in question runs to a second decimal point, we might conclude someone has actually crunched some numbers this time – some forward estimates as we would call them – rather than starting with a desired result and working backwards.

The prime minister also threw cold water on any suggestion of a big step-up in monetary policy stimulus, suggesting a move to some form of QE would only flood the economy with too much money. This implies that if we are to see anymore stimulus coming out of China other than incremental interest rate and RRR fiddling and a further move towards a floating currency, it would have come from the fiscal side.

On the subject of QE, the Bank of Japan holds a policy meeting today at which the impact of more ECB QE, Chinese rate cuts and, on the other hand, a possible Fed rate hike in December on Japan’s position in the global export economy will be discussed.

Destocking

The jury is still out on whether Wednesday night’s Fed statement assures a December rate hike or not. Certainly the Fed’s language is suddenly more specific, but I’m yet to see anyone on US business television suggest other than there definitely won’t be a rate hike in December.

Yet it seems the gold market, and the overbought US bond market, are not going to wait to find out. Last night gold fell another US$11.70 to US$1144.60/oz despite the US dollar index pulling back 0.4% to 97.24 after Wednesday night’s jump. The US ten-year yield rose 8 basis points to 2.17% following Wednesday night’s 6bps gain. And yet, last night’s first estimate of US September quarter GDP disappointed.

Having grown at an annual pace of 3.9% in the June quarter, the US economy grew at only 1.5% in the September quarter on first estimates. The main issue was a lack of inventory restocking, which suggests businesses lack confidence in sales growth.

But drilling down showed some positive aspects. Consumer spending rose 3.2%, suggesting cheaper fuel prices are finally starting to have an impact. Business investment in equipment rose 5.3% to more than offset a 4.0% drop plant investment, such as in oil rigs. Home construction spending rose 6.1%. All of these positives were offset by weak inventories.

And we must remember that this first estimate is merely an extrapolation across three months of the numbers crunched so far for the first month of the quarter. That’s why subsequent revisions of the GDP result can often be quite substantial.

One interesting number among the GDP data was the personal consumption expenditure (PCE) measure of inflation for the quarter. It came in at 1.2%, and we recall that (a) the Fed wants to see inflation rising to the 2% target if it is going to raise in December and (b), the Fed prefers the PCE measure over the CPI measure as a guide.

US pending home sales fell 2.3% in September to mark the second monthly drop in a row. This result surprised Wall Street given other home sale data have been positive of late.

All up, one might have expected these weak data releases to prompt selling on Wall Street, particularly after Wednesday night’s 200 point Dow surge. Indeed, the Dow was down almost a hundred points mid-morning, but the afternoon saw the buyers fighting back. Perhaps they see weak data as reason why the Fed will not raise in December.

Commodities

Last night provided the first opportunity for the LME to respond to Wednesday night’s Fed statement, and as might be expected the result was negative. If the Fed starts raising this means a stronger greenback, so all base metals fell 1-2%.

Iron ore fell another US50c to US$49.00/t. I think that’s now twelve days of falls in a row.

The oils came back a tad after Wednesday night’s rally. West Texas is down US17c to US$45.78/bbl and Brent is down US43c to US$48.60/bbl.

The Aussie is 0.3% lower at US$0.7076.

Today

The SPI Overnight closed down 14 points or 0.3%.

Australia’s September quarter PPI is out today, following on from Wednesday’s CPI number which fuelled much Cup Day rate cut expectation.

The BoJ will meet today as noted, and will have September inflation data to contemplate.

The US will see personal income & spending and consumer sentiment data tonight.

On the local stock front, another round of AGMs will wrap up the busiest AGM week of the year while there remains a final handful of quarterly production reports to get through. Macquarie Group ((MQG)) will report interim earnings.

Beijing will release its October manufacturing and services PMIs on Sunday.

And Summer time ends in the US on Sunday morning, so from Tuesday morning the NYSE will close at 8am Sydney time and the SPI Overnight session will also close at 8am.

I could say Happy Halloween but I don’t go in for that Seppo commercial crap. I shall be hiding inside tomorrow night with the lights off as usual when the greedy little sugar freaks come around.

Rudi will appear on Sky Business' Your Money, Your Call – Equities versus Bonds, tonight, 7-8pm.
 

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