The Overnight Report: Skies Darkening

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By Greg Peel

The Dow closed down 105 points or 0.6% while the S&P fell 0.7% to 2111 and the Nasdaq lost 0.7%.

Fluctuating Fortunes

On a day when most of the market was meant to be otherwise distracted, it was a very up-and-down session on the local bourse yesterday.

The ASX200 plunged around 45 points on the open to near the 5270 mark, suggesting Monday’s rally was indeed all about window dressing after a torrid month. We then saw a very choppy morning.

At midday the index was again down near 5270 when the Chinese PMI data came out. These were good enough for a 20 point recovery. Then the RBA statement came out and suddenly we were back at 5270 again. A sharp rally in the last half hour ensured a return to 5290.

Beijing’s official manufacturing PMI for October came in at 51.2, up from 50.3 in September, to mark its highest level in two years. Caixin’s independent measure usually shows some variation but it, too, came in at 51.2, up from 50.1. Beijing’s official service sector PMI saw a gain to 54.0 from 53.7.

All is heading in the right direction in China, it would seem.

Few expected the RBA to cut the cash rate yesterday afternoon and indeed the rate remains on hold at 1.50%. But the language of Philip Lowe’s statement had the market believing that there isn’t going to be another rate cut at all. Some excerpts:

“The Bank's forecasts for output growth and inflation are little changed from those of three months ago. Over the next year, the economy is forecast to grow at close to its potential rate, before gradually strengthening. Inflation is expected to pick up gradually over the next two years.”

“The rate of increase in housing prices is also lower than it was a year ago, although prices in some markets have been rising briskly over the past few months. Considerable supply of apartments is scheduled to come on stream over the next couple of years, particularly in the eastern capital cities.”

Add a “strengthening” economy to “briskly” rising house prices and apartment oversupply, and a very good argument could be made that the RBA should start hiking, now.

No surprise therefore that the Aussie rose as high as US$0.7680 in evening trade.

It is a surprise the only sector to finish in the green yesterday, just, was utilities. The telcos were worst hit, down 1.8%, and a 0.5% drop for the banks provided the bulk of the index downside. Otherwise, selling was again rather evenly spread amongst sectors.

It looks like we’re in for another weak session today, with the futures suggesting a 36 point drop. The only bright spot might be the response to a ten dollar rally in gold.

Why would gold rally?

Be Very Afraid

One poll now has Donald Trump a point ahead of Hillary Clinton. The response was wholesale selling of the US dollar, stocks and bonds.

The Dow did manage a late recovery to be down only a hundred points, having been down two hundred points earlier in the afternoon. The US ten-year bond yield jumped to 1.87% before falling back to 1.82%. The US dollar index has fallen 0.6% to 97.77, which is why gold is up US$10.00 at US$1288.10/oz.

Other polls still have Clinton in the lead, but the margin continues to reduce. Whichever way you look at it, Trump has the momentum heading into the last week. Can we take any comfort in the fact “stay” had the momentum in Brexit polling right up to the vote?

Wall Street is certainly not feeling comfortable. Never mind that the US manufacturing PMI showed an encouraging gain to 51.9 from 51.5.

The Fed will release a policy statement tonight. Strength in the PMI is yet another reason to assume the Fed will hike in December, but there is little expectation of a hike tonight given the election will be held next Tuesday night. And we get another jobs report on Friday night.

One reality we might now assume is that if Trump does win the election – and right now you’d have to say it appears to be a coin toss – the correction many have long been waiting for on Wall Street could arrive in a hurry.

Commodities

West Texas crude is US7c lower at US$46.77/bbl.

Copper jumped a percent on the LME last night, while the other metals trod water.

Iron ore rose US60c to US$64.40/t.

Despite the US dollar index falling sharply after the Aussie had already rallied on the RBA statement, the Aussie is now only up 0.5% at US$0.7650.

Today

The SPI Overnight closed down 36 points or 0.7%.

Building approval numbers are out today locally.

The US sees the ADP private sector job number as well as the Fed statement tonight.

CSR ((CSR)) will post its earnings result today.

Rudi will appear on Sky Business today, instead of his usual appearance on Thursday; 12.30-2.30pm.
 

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