The Overnight Report: Sell-Off

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By Greg Peel

The Dow closed down 210 points or 1.2% while the S&P fell 0.9% to 2075 and the Nasdaq dropped 1.2%.

Rock’n’Roll

It was a wild old session on the local bourse yesterday as a clear determination to buy was interrupted by the Bank of Japan’s determination not to do anything.

The trend in recent times has been for the BoJ to move on monetary policy when no one is expecting a move and to stay put when the world is convinced a move is afoot. The yen has been nothing but strong ever since the BoJ moved its cash rate into the negative in January so the expectation was that the central bank would have do something at its meeting yesterday – head further into the negative or at least pump QE purchases up further.

But the decision was to wait for longer to give negative rates more time to play out. On that note, the Nikkei index plunged 3.6% and the yen soared once more. Locally, the ASX200 was sitting at a peak of up 52 points at 1pm when the BoJ decision hit the wires, and six minutes later was only up 11 points.

But by 2.30pm the index was back up 47 points before closing up 37. The BoJ caused no more than a computer-driven blip, it would seem.

When the dust settled, the theme of the day appeared to be a continuation of Wednesday’s trade when the shock CPI result had the market assuming an RBA rate cut is nigh, maybe even as soon as next Tuesday. The sectors that led the rally were consumer discretionary (1.2%) and staples (1.8%), energy (1.8%), materials (2.8%) and industrials (0.8%).

The consumer sectors benefit from lower rates putting more money in punters’ pockets, the resource sectors have been enjoying the commodity price bounce but have found earnings tempered by the strong Aussie, and many an industrial earns its revenues offshore. No other sector much moved. We might have expected the banks to be sold given they are hampered by lower rates, but a 0.1% gain suggests no one wants to do anything too rash ahead of next week’s earnings results.

The Aussie fell 2% on Wednesday’s CPI result and was heading further south yesterday when the yen took off. The US dollar index is down 0.7% this morning and the Aussie is up 0.4% at US$0.7626 – still about a cent down from where it was pre-CPI.

Technical Trigger

The past few quiet but strong sessions on Wall Street have not had traders convinced, with many looking forward to a pullback to provide a more attractive entry point. The first key support level on the S&P500 before last night was 2087, followed by 2075. The US indices had wobbled around all session up to 2pm, balancing out the BoJ, some M&A announcements and earnings reports, including that of Facebook (up 7%). Then billionaire investor Carl Icahn told CNBC he had sold out of Apple.

Down went Apple shares, and so too the Dow. Icahn went on to imply that indeed he didn’t much like the US stock market at all right now. Down went everything. The S&P breached 2087 and a hole opened up.

The S&P stopped falling at 2075.

The session had begun on Wall Street with the release of the first estimate of US March quarter GDP growth, which came in at a paltry 0.5%, below 0.7% expectation. That makes three March quarters in a row the US economy has stalled. In 2014 and 2015 it was all about being snowed in for most of the quarter. While 2016 also featured one record-breaking “Snowzilla” event, weather was not really a factor this time.

Which makes expectations for this year’s June quarter interesting. In the past two years, everyone assumed, correctly, that the June quarter would see a rebound purely on the weather factor. There is no weather factor this time. Yet some analysts are suggesting that the BoJ’s decision not to cut further means the Fed has a clearer path to a June rate hike.

If there is to be a rebound this year, it will come down to the US dollar. The strong dollar hit multinational earnings hard in the March quarter but it has now fallen back substantially, much to the BoJ’s chagrin.

Commodities

West Texas crude is up another US55c to US$45.88/bbl and Brent is up US69c to US$47.89/bbl.

Between the BoJ and the GDP, the US dollar index is down 0.7% at 93.74. This is enough to support both oil prices and base metal prices, with aluminium, lead, nickel and zinc all up a percent or so, although copper stayed put.

Iron ore is down US$1.10 at US$60.00/t.

The US dollar drop provided a boost to gold, which is up US$20.60 at US$1266.40/oz.

Today

The SPI Overnight closed down 8 points.

I suggested yesterday the 52 point SPI Overnight move looked “ambitious”, but was proven wrong when the index peaked out up 57 points. This morning, one might think a 200 point drop in the Dow would elicit a bit more caution than an 8 point drop in the SPI. It would appear that the local index simply wants to go up.

Australia’s March quarter PPI numbers are out today, proving colour to the shock CPI result. We’ll also see monthly private sector credit.

The Nikkei will have a breather today given Japan is closed. The eurozone will release its first estimate of March quarter GDP tonight. The US will see personal income & spending data, including the Fed’s preferred PCE inflation measure.

Beijing will release China’s April PMIs on Sunday.

On the local stock front, today will see production reports from Origin Energy ((ORG)) and AWE ((AWE)) while Genworth Mortgage Insurance ((GMA)) will provide a quarterly update.
 

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