The Overnight Report: That Sinking Feeling

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By Greg Peel

The Dow closed down 28 points or 0.2% while the S&P lost 0.4% to 2088 as the Nasdaq fell 0.9%.

Consolidation

5200 appears to be the next level of support for the ASX200. The index opened at this level yesterday morning, down almost 30 points, before rebounding swiftly. We then meandered along the flatline for the rest of the session before closing at 5225.

The futures are down 25 points this morning, so it looks like 5200 will be tested once more.

At that point the index is down 7% from the 5600 high at the beginning of August, reached in the post-Brexit rebound. The overreaching theme in that period has been expectations for a US interest rate rise sounding the end to the “search for yield” frenzy that saw many a bond proxy stock become overvalued. Also overvalued were many of the former market darlings among more defensive industries and a lot of new world growth stocks.

So we have consolidated. Where to next will be determined initially by the result of next week’s presidential election.

Behind the scenes the Australian economy is doing okay, despite the most dysfunctional government since…well… the previous one.

Australia’s trade deficit was predicted to narrow in September thanks to the surge in coal prices, but at $1.2bn the deficit was much narrower than the $1.7bn forecast, down from $1.9bn in August. Exports rose 1.6% and imports fell 0.8%.

Among commodity exports, coal rose 12.1% and metals 13.7% while agricultural exports chimed in with a 5.0% gain. Exports of services rose 0.5%, which was largely driven by inbound tourism which was largely driven by the Chinese.

Coal prices have continued to rise and given the lag between delivery contract prices and spot prices, export prices are still playing catch-up. Hence October is expected to show another solid improvement in the trade balance, perhaps even a surplus.

It’s all good news for the federal budget bottom line, and no doubt a welcome relief for Scott Morrison when everything else appears to be in a mess. As long as Mr Morrison doesn’t start taking the credit.

Losing Streak

Wall Street has now extended its run of losses to eight consecutive days – the longest losing streak in five years. It hasn’t been overly dramatic, rather representing an underlying nervousness.

Yesterday I posed the question as to what Wall Street would do if Trump wins. Of course we should also consider what might happen if Clinton wins, which is still the expected result but with less conviction than previously.

We can in fact break it down into three scenarios: Trump wins; Clinton wins but the Republicans retain the House; Clinton wins and the Democrats take over the House.

Wall Street does not want Clinton to win, but would rather Clinton wins than Trump. The best result is a Clinton victory and a Republican House – that way the Democrats will not be able to pass any damaging social reform-style legislation nor sign the Trans-Pacific trade partnership (although Clinton’s not keen on the TPP anyway) and Congress will remain in the same stalemate it has been in throughout Obama’s second term.

The less the parliamentarians can do to move the goal posts the better off the free market will be.

It would be a disaster, Wall Street believes, were the Democrats to take both the White House and the House of Reps. Indeed, it might be said Wall Street would prefer a Trump victory over this scenario.

So next week we’ll either see a big sell-off on two possible scenarios (albeit the Democrats taking the House would require a significant landslide) or, presumably, a solid rebound on the one scenario that at this stage appears the most likely, while far from confirmed.

Meanwhile, oil fell again last night, but there was a raft of positive data releases including the services PMI, factory orders and September quarter productivity that again pointed to a US economy moving steadily along, and again pointed to the Fed raising next month.

Despite the positive data, last night saw Wall Street attempt to rally from the open but gradually fade away to a slightly weaker close.

Commodities

The US dollar index has slipped another 0.3% to 97.12, but a jump in the pound last night helped as the Bank of England hinted that the next policy move might actually have to be a rate rise if inflation begins to take hold.

We’ve also learned this morning the UK High Court has ruled that the government needs parliamentary approval to trigger Brexit. This could be interesting. Brexit was a popular vote, but what was the burough count? Presumably members could justify ignoring the “will of the people” and vote against Brexit if their own borough voted to stay.

Having broken technical support, West Texas crude is down another US85c at US$44.65/bbl.

Zinc rose 2% on the LME last night, and copper and nickel around 1%. Lead fell 1%.

Iron ore rose US10c to US$64.50/t.

Gold’s rise continued, up another US$5.20 to US$1302.80/oz.

The Aussie is up 0.3% at US$0.7682.

Today

The SPI Overnight closed down 25 points or 0.5%.

Retail sales numbers are due locally today and the RBA will release its quarterly Statement on Monetary Policy.

Tonight in the US sees the second last jobs report before the December Fed meeting.

On the local stock front, Orica ((ORI)) will release its earnings result today and National Bank ((NAB)) will go ex-dividend.

Note that summer time ends in the US on the weekend so as of Tuesday morning, the NYSE will close at 8am Sydney time.

Rudi will connect with Sky Business through Skype to discuss broker calls on air, probably around 11.05am.
 

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