The Overnight Report: Gold Capitulates

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By Greg Peel

The Dow closed down 85 points or 0.5% while the S&P lost 0.5% to 2050 and the Nasdaq fell 0.2%.

Resilient

The ASX200 moved sharply lower from the open yesterday, down 30 points at its nadir, before grafting steadily back to a flat close. The open did seem somewhat of an overreaction to a mildly weak session on Wall Street.

With much of the country on school holidays, volumes are currently on the light side. Aside from some strength in the resource sectors, much of yesterday’s ultimate action centred on individual stock stories.

Wealth Manager Henderson Group ((HGG)) enjoyed a 12% pop after announcing a merger while mining service company Bradken ((BKN)) leapt 31% on a takeover bid. A strike by Border Force had yield darling Sydney Airport ((SYD)) dropping 2%, ensuring utilities was the worst performing sector on the day.

There was a little bit of a retreat in the index late afternoon following the RBA’s decision to leave its cash rate on hold. No one expected any different but there are always some dreamers. Those hoping Philip Lowe might prove to be a little more dovish than Glenn Stevens would have been disappointed in a statement that pretty much came off Stevens’ Roneo machine. The 1% fall for the utilities sector no doubt reflected this disappointment.

Lowe did give a nod to the flood of new apartments set to hit the eastern cities and to that end we note that building approvals were down by a less than expected 1.8% in August. Apartment approvals were down 3.6%. But net approvals are still up 10% year on year and apartment approvals are up 26%.

Taper Talk

Do you remember that before we spent endless, tedious months debating whether or not the Fed would hike for a second time, we spent endless, tedious months debating whether the Fed would taper QE, when and by how much? Well now we can relive those hazy, crazy days all over again with the ECB.

Having spent years telling us he would do “whatever it takes” to prop up the eurozone economy, it appears Mario Draghi has now begun to wonder whether he’s not part of the problem rather than part of the solution. With Deutsche Bank being only the most prominent of European banks in trouble – Italian banks being race leaders – it is clear keeping rates in the negative will only be a burden on banks and not a boost.

To that end, the ECB suggested last night it may begin to taper its extensive bond buying program (QE) a month earlier than the current March timetable.

Last night also had Richmond Fed president Jeffrey Lacker warning that in order to stay ahead of a sudden spike in inflation, the Fed needs to raise sooner rather than later.

Lacker is not an FOMC member but despite not hiking last month, Fedspeak remains very much to the hawkish side, suggesting a December rate hike may already be booked. In the wake of the BoJ not cutting further into the negative, the Fed seemingly anxious to hike and now ECB taper talk, it would seem major central banks have begun to question whether extraordinary and unprecedented policy measures are really the right way to go.

Which, by implication, means the wrong way to go is gold. Having tenuously held above US$1305/oz support recently, last night a break of that level sent gold into a tailspin. The greenback rose, the euro rose, and caught in the crossfire was the pound, as markets continue to contemplate Brexit implications. Gold has plunged US$44.00 to US$1269.00/oz.

Cleary the impact was felt in the US materials sector last night, and the dividend paying sectors were also hit once more on the threat of tighter global policy. The US ten-year bond yield jumped 6 basis points to 1.68%. But rate rises are good for a financials sector struggling with fresh Lehman talk. So in the wash-up it was a mixed bag for Wall Street last night.

The S&P500 closed right on 2150 support.

Commodities

Oil prices managed to hold up in the face of the stronger greenback, as traders consider the potential impact of Hurricane Matthew on Gulf production. West Texas crude is down US5c at US$48.63/bbl.

Base metals were all weaker nonetheless. Aluminium and copper fell 0.5%, lead and zinc 1% and nickel 2.5%.

Iron ore fell US10c to US$55.00/t.

The US dollar index is up 0.4% at 96.12 but Philip Lowe will be happy to see the Aussie down 0.7% at US$0.7625.

Today

The SPI Overnight closed down 31 points or 0.6%. Prepare for carnage in the overbought gold sector today.

Local August retail sales numbers are due today along with the service sector PMI, and services PMIs are due across the globe tonight as well. Tonight also sees the release of the US private sector jobs report for September.

BHP Billiton ((BHP)) will hold an investor briefing today.
 

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