The Overnight Report: Election Trumps Fed

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By Greg Peel

The Dow closed down 77 points or 0.4% while the S&P fell 0.6% to 2097 as the Nasdaq dropped 0.9%.

Say it isn’t so

The ASX200 plunged 60 points from the open yesterday. The market is not in a positive mood, buyers are in hiding, and the last thing investors want to hear is that Donald Trump may be in the ascendancy. The world fears the thought of Trump with the launch codes. America’s trading partners, of which Australia is one, fear a return to a protectionist regime.

Buyers did come out of hiding late morning, staging a small recovery up to midday. But they stood aside again as another wave of selling hit, waiting until the index was down over 80 points before moving back in once more.

The second wave may have been inspired by the release of yesterday’s building approval numbers for September. On face value, a fall of 8.7% does not look encouraging for an economy reliant on housing construction to lead the transition from mining investment. But digging down, there are some positive signs.

Apartment block approvals fell 17.5%. It is generally agreed we are at risk of apartment oversupply in the major capitals. Yet while approvals have now peaked and are falling, down 4.4% year on year, the time it takes to complete an apartment block ensures construction will remain an economic driver for some time yet.

Non-residential approvals have near doubled year on year to September. Over the past few years that housing has been the economy’s primary driver, commercial construction has been missing in action. Just as investment in infrastructure is quietly taking the baton from investment in the resource sectors, commercial construction (office, retail, hotels) can help offset the inevitable decline of housing.

Not that anyone was much in the mood to dig down into the detail of the building approval numbers yesterday. The oft heard expression at present is “sell first, think about it later”. This is the approach being taken globally to Donald Trump’s rise in the polls.

Selling was once again relatively sector-wide yesterday, with a couple of exceptions. Firstly, the rally in gold, also Trump-related, meant gold miners dominated the ASX top ten gainers yesterday, and countered the fall in materials. Secondly, for the second day running, utilities managed a small gain against the tide.

It would appear investors have decide that the long, hard fall in bond proxy stocks have taken yields to levels that sufficiently compensate for rising global interest rates.

The biggest individual gainer on the day was CSR ((CSR)), following a better than expected earnings result.

Bring on December

The FOMC last night voted 8 to 2 not to hike, yet. No one was surprised. The computers went a bit nuts for a few minutes as usual, but Wall Street was a little more positive, while still in negative territory, following the afternoon statement release.

“The committee judges that the case for an increase in the federal funds rate has continued to strengthen but decided, for the time being, to wait for some further evidence of further progress toward its objectives.”

In other words, we’ll hike next meeting. December is a quarterly meeting, meaning the FOMC members will update their forecasts – the infamous “dot plots” — and Janet Yellen will hold a press conference. It was Ben Bernanke who introduced the quarterly press conference in order to improve Fed transparency. The result is Wall Street now assumes any policy changes will only occur at these meetings, not at interim meetings.

And not before a presidential election, although the Fed will always deny this influences their decision. And never before has the Fed been faced with the likes of The Donald.

Trump continues to dominate the mood. While a further fall in the oil price helped Wall Street lower last night, the session was choppy and not as dramatic as Tuesday night. What does seem clear as that while selling is yet to accelerate, there is not a lot of interest in buying right now. Last night the Dow closed below 18,000 and the S&P500 below 2100 for the first time since Brexit.

What is a Trump victory worth? Five hundred down in the Dow? One thousand down in the Dow? Such questions are now being pondered.

Also being pondered is if there were a big Trump-driven sell-off in markets, would the Fed hold off in December, regardless of the economic data?

If Wall Street is not yet completely panicking, investors are continuing to move into gold as a safety hedge. The US dollar index is down another 0.4% at 97.42 this morning and gold has jumped another US$9.50 to US$1297.60/oz.

The more direct measure of Trump fear at present is nevertheless the Mexican peso. Having gradually clawed back ground after Clinton was considered victor after each of the three debates (except by Fox News), the peso has tumbled once more.

Commodities

The weekly US crude inventory lottery this week showed a record jump in stockpiles. To put it in perspective, a 14m barrel build when a 2m barrel build was forecast. Analysts had been waiting for an increase following a couple of weeks of surprise drawdowns, but they did not see this coming.

Even more surprisingly, the sudden jump was not about more US shale oil rigs firing up again on better oil prices, but on a big jump in imports. Go figure. It is probably also surprising West Texas crude fell only US$1.27 to US$45.50/bbl, particularly given hopes of an OPEC agreement are now waning.

Lead took the spotlight on the LME last night in jumping 2%. Zinc fell 1.5%.

Iron ore was unchanged at US$64.40/t.

The fall in the greenback may otherwise have ensured a rise in the Aussie, but the Aussie dropped yesterday following the weak building approval numbers. It’s steady over 24 hours at US$0.7656.

Today

The SPI Overnight closed down 16 points or 0.3%.

It’s service sector PMI day across the globe today and in Australia we’ll also see trade data. Japan is closed today and the Bank of England will hold a policy meeting tonight.

After a couple of quiet days, the local AGM season gets back into full swing today. We’ll also see a quarterly update from REA Group ((REA)), earnings results from BT Investment Management ((BTT)) and Xero ((XRO)) and the biggie, ANZ Bank’s ((ANZ)) full-year.

Rudi will be interviewed by Peter Switzer on Sky Business tonight, between 7-8pm.
 

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