The Overnight Report: Deliberation

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By Greg Peel

The Dow closed up 27 points or 0.2% while the S&P gained 0.2% to 2081 and the Nasdaq fell 0.2%.

House of Cards

Much has been made in the popular press of the OECD’s downgrade of its forecast GDP growth rate for Australia in 2016 to 2.6% from a previous 3.0%, reflecting slower Chinese growth. The reality is that organisations such as the OECD, IMF and World Bank tend to run a good six months behind the curve. Last week the RBA tightened its own forecast for FY16 to 2.25% from an earlier forecast band of 2.0-3.0%, and tightened its FY17 band to 2.75-3.75% from an earlier 2.5-4.0%.

Give it another six months and the OECD might catch up. Local economists are constantly reviewing their forecasts so the bottom line is yesterday’s OECD numbers would have had little impact on the market.

Critical to Australia’s GDP growth, ahead of the impact of the lower Aussie dollar finally flowing through to benefit non-mining sectors of the economy, is the housing construction boom. It alone has kept Australia out of recession over the past two years as mining investment and commodity prices have collapsed. Therefore yesterday’s housing finance numbers were something the market did pay close attention too.

The value of housing loans fell by 1.6% in September, to a lower annual rate of 12.4% growth. Owner occupier loans rose by 3.0% to be up 23.1% but the critical segment of investor loans fell by a whopping 8.5% to turn negative annually at minus 2.1%.

The party is over.

It is easy to point to tighter regulatory controls on investment lending, implemented by APRA, encouraged by the RBA and responded to by the banks with mortgage repricing, as the reason behind the peak in Australia’s investment housing boom. But realistically the tide was already turning, given property prices have been running away but rents have not been keeping pace. Mortgage repricing was just the straw that broke the camel.

Negative gearing might be the Holy Grail in Australia but it’s called “negative” because it simply means losing money. As the gap from rental yield to debt servicing obligation widens, the capital value increase required on the property to recover that negative cash flow becomes unrealistic. Either rents must rise (can you see the Chinese coming in and renting everything in Sydney?) or debt costs must fall (currently at historic lows, banks now in tightening cycle) or the investment is not economically viable at the price.

It is telling that the worst performing sector on the local market yesterday (outside a 2% fall for tiny info tech) was consumer discretionary, down 0.9%. The banks also came in for punishment, down 0.6%. The ASX200 did manage to stage a solid comeback on late buying, having been down 72 points mid-afternoon to close down only 20, but most of that buying was seen in the beaten-down resource, telco and consumer staples sectors. Consumer discretionary has very close links to Australia’s housing market.

It was a bumpy ride for the index yesterday, punctuated by the midday release of China’s October CPI. It fell to 1.3% annual from 1.6% in September, which had fallen from 2.0% in August. That’s bad news, but good news if bad news implies expectations of more concerted stimulus measures from Beijing. Bridge Street struggled to make up its mind over the implications, evidenced in index rocking and rolling through the afternoon but at least one big buy order late in the day reflected a mind made up.

The actual good news is Australian businesses otherwise believe conditions are very positive at present, thanks to low interest rates and a lower currency. NAB’s October business survey showed the conditions index steady at plus 9 – well above the long-run average of plus 1 and the best reading since the GFC. Confidence fell from the long-run average of plus 5 seen in September to plus 2.

Interestingly, the survey was conducted in the final week of October when substantial profit warnings were being issued by the likes of Dick Smith and Woolies, and the banks were posting disappointing earnings results and guidance. Home sales data was also released showing the first drop in however long. No wonder confidence was dented.

Yesterday’s late rally, which took us from an onerous looking 5050 back to a 5100 close, may indicate a willingness from buyers to pick up stocks above the 5000 level, but we’ve seen this movie before. Further weakness, and a drop through 5000, can take us down fast.

Whole lotta not much

There was not a lot going on on Wall Street last night beyond a few micro-specific issues. Traders are still trying to figure out if a December Fed rate hike is good or bad.

Lacking anything much else to focus on, traders were glued to the gripping saga that was McDonalds’ investor day. How is the all-day breakfast going? OMG, they’re going to change the recipe for the Egg McMuffin. (How does one fiddle an egg, and a muffin?) And they’re not going to spin off McDonalds’ property portfolio into a REIT, a la Woolies and Bunnings for example, downunder. Mickey D’s stock price went up and down all day with each new revelation.

Just goes to show what a lacklustre session it was. The other news was that Apple component suppliers were experiencing a slowing in demand. Apple shares thus kept a lid on the indices, despite this hardly being a surprise given aficionados always barrel in on Day One to buy new iThings, and sales always slow thereafter.

Tonight is promising to be even more lacklustre on The Street, given the Veterans Day quasi-holiday has US banks and the bond market closed and stock and commodity markets open.

Commodities

A technical breach was blamed for a sudden 2% price fall for zinc on the LME last night, while otherwise base metal movements were mixed and small. Copper fell half a percent and tin rose a percent.

Iron ore was unchanged at US$47.70/t.

The oils are both up US28c, to US$44.22/bbl for West Texas and to US$47.51/bbl for Brent.

The US dollar index is up 0.3% at 99.26 so gold is US$2.90 lower at US$1087.80/oz.

The Aussie is down 0.4% at US$0.7023, reflecting those weak housing loan numbers.

Today  

The SPI Overnight closed up 3 points.

Westpac’s local consumer confidence survey is out today but around midday we will see Chinese industrial production, retail sales and fixed asset production numbers for October, which will likely determine the direction of afternoon trade.

As noted, it’s a quasi-holiday in the US tonight.

On the local stock front, there are quite a few AGMs booked in for today while DuluxGroup ((DLX)) will report full-year earnings and Westpac ((WBC)) goes ex.
 

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