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The Overnight Report: The Fourth Quarter

Daily Market Reports | Oct 04 2016

By Greg Peel

The Dow closed down 53 points or 0.3% while the S&P lost 0.3% to 2161 and the Nasdaq fell 0.2%.

As You Were

The ASX200 recovered the losses posted on Friday in the opening half hour yesterday and in low volume trade, did little more for the rest of the session. With half the country enjoying a public holiday it was always going to be a quiet day.

Friday’s 0.7% fall for the index was led by a 1% fall in the financials sector due to fears over Deutsch Bank’s survival. Deutsche shares rebounded 15% on Friday night following a rumour the US Department of Justice was prepared to reassess the US$14bn fine it was imposing on Deutsche. Yesterday saw the Australian financial sector rebound 1.2%.

Friday was also the end of the September quarter and such sessions can always be marred by misrepresentative volatility. As yesterday was also a long weekend in NSW and other states, Friday was a good day to square positions. With the new quarter up and running yesterday, most of went down on Friday came back up again.

Improvement in China’s manufacturing and service sector PMIs also provided support to commodity prices and as such, the local resources sectors put in strong performances.

There was also some positive news on Australia’s manufacturing sector, albeit the local PMI is so wild as to be questionable. It rose to 49.8 in September form 47.6 in August – still in contraction but only just.

And Japan enjoyed a turnaround in its manufacturing sector, with the PMI rising back into expansion at 50.4 from 49.5 in August.

Remember Brexit?

Given the Brexit drama back in July proved to be somewhat of a 2016 version of Y2K, global markets have since become complacent and all but forgotten that reality is yet to bite. The UK economy has in the interim proven more than resilient and outside of unrelated bank issues, Europe has not seen any notable effects yet either.

The UK’s September manufacturing PMI rose to 55.4 from 53.4 and the eurozone PMI rose to 52.6 from 51.7.

But last night the British prime minister announced the government intended to pull the Brexit trigger by March, and that the process would then begin for a “hard” Brexit to be achieved by 2019. “Hard” does not mean difficult, but rather a complete and inexorable separation from the EU with no lingering ties.

The announcement prompted a fresh tumble in the pound.

It also caused some angst on Wall Street. But as the US enters the fourth quarter, there is much to consider.

Firstly, the fourth quarter is traditionally positive for stocks and most are expecting tradition to be maintained this time around. First we have to get through October of course, and October is traditionally the month of scary plunges. In 2016, there is concern Deutsche Bank could be the trigger this time.

Irrespective of whether or not the US DoJ reduces Deutsche’s fine, the bank remains in possible need of assistance. The ECB is obliged to provide liquidity back up but liquidity is not the issue for Deutsche, it is capital. On that front, German politicians have been railing against the concept of any government support. Deutsche is not out of the woods just yet.

Then there’s the Fed. The market now expects the Fed to hike in December so if that proves the case, there should be little surprise. We do have a lot of data to flow beforehand nonetheless, so Wall Street will remain on edge. The US manufacturing PMI showed a relieving rebound to 51.5 from August’s surprise plunge into contraction at 49.4. But there is still an element of the market recoiling at positive data.

Then there’s earnings. September earnings reports will begin to flow from next week and once again the market expects a net contraction across S&P500 companies.

And there’s OPEC. Will November bring confirmed production cuts as are now suggested, or not?

Put it all together and while the fourth quarter is expected to once again be positive for US stocks, it’s hard to find a particular reason why it would be. One thing is now pretty certain – the low volatility trade is being replaced by the high volatility trade. With the Fed expected to move in December, investors are switching out of plodding dividend payers and into higher risk cyclicals, particularly technology stocks. Financials are also being favoured given they benefit from rising rates, but then the banking sector clearly has its own threats to deal with at present.

With much to consider, the Dow was down a hundred points early in last night’s session, before grafting back half that loss.


The oil price continues its graft higher, with West Texas crude rising US65c to US$48.68/bbl.

Base metals continue to suffer from a return to volatility. Last night saw aluminium up 0.5% and zinc 1%, while copper fell 1%, lead 1.5% and nickel 2.5%.

Iron ore fell US10c to US$55.10/t. There is likely to be little to no movement in the iron ore price for the rest of the week with China closed for Golden Week.

The US dollar index is 0.3% higher on the drop in the pound and gold is down US$2.90 to US$1313.00/oz.

The Aussie is slightly higher at US$0.7675.


The SPI Overnight closed down 22 points or 0.4%, suggesting the to-ing and fro-ing is set to continue as half the country returns from its long weekend.

ANZ will release its local job ads series for September today and building approval numbers are also due. The RBA will meet this afternoon and in Philip Lowe’s first statement he will explain why rates remain on hold.

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