The Overnight Report: Downdraft

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By Greg Peel

The Dow closed down -122 points or -0.6% while the S&P lost -0.6% to 2280 and the Nasdaq fell -0.8%.

Sell-Off

The local market was looking pretty positive on Friday, having reclaimed the 5700 mark in the ASX200 following the pullback from the peak. Chartists were calling a return to 5800. Yesterday morning, the index was slapped on the open and kept falling, before recovering slightly in the afternoon.

So what happened?

The stand-out sector fall on the day was info tech, which lost -3.4%. But that was an individual story. Once high-flyer and more lately highly volatile software stock Aconex ((ACX)) issued a big Confession Session profit warning and investors decided it was simply time to walk away. Aconex fell -45%.

Earlier this year Aconex became the most shorted stock on the ASX.

Beyond info tech, all other sectors fell relatively evenly, suggesting it was a sell-the-market session rather than anything industry or stock specific. If sellers were anticipating a negative reaction on Wall Street last night to Donald Trump’s immigration bans, declared over the weekend, then it was the right call.

From the weak opening, selling begat selling. Momentum traders would have helped push the index to down -60 points at midday. It was the second last day of the month, ahead of the new month which brings corporate earnings season. Perhaps a good time to square up and lock in some profits.

Excuse to Sell?

Trump’s election sparked a Wall Street rally because there were elements to his campaign pledges that the financial markets liked – tax reform, deregulation, infrastructure spending – all economically stimulatory and in tune with the capitalist ethos. There were also elements not all of Wall Street agreed with, but were prepared to overlook on the assumption they would be watered down.

We saw a glimpse of this a couple of weeks ago, when Wall Street pulled back from reaching the Dow 20k mark as Trump first set about dismantling free trade agreements and started talking tough on border taxes and import tariffs. This is not in tune with Wall Street’s capitalist, free market ethos. And when would we get to tax reform?

Wall Street kicked again when Trump signed orders to expedite the Keystone XL and Dakota Access oil pipelines, which had been stuck in environmental limbo under Obama. This was progress. This was infrastructure spending. This is something Big Oil has been pushing for for a long time. Oh yes, and a wall would be built as well – not in everyone’s view a positive thing, but think of the cement sales!

The Dow hit 20k, and the other major indices all marked new all-time highs. The talk was of how quickly the Dow might reach 21k, but also that there would likely need to be some consolidation beforehand. A VIX at 10.5 is unsettling.

Over the weekend Trump signed executive orders restricting immigration from seven Muslim countries. While such an order might be cheered in the rust belts and on the prairies, it does not sit well with Wall Street – a “street” where many an immigrant has made his or her fortune. Nor does it sit well with Silicon Valley.

It is suggested Silicon Valley boasts the highest proportion of immigrant workers than anywhere else in the US. Not fruit pickers – rather a collection of some of the smartest minds from around the globe. Without immigrants, said Apple CEO Tim Cook in response to Trump’s order, there would be no Apple.

Whether or not a 90-day restriction of immigration from seven selected mostly-Muslim countries is going to send Silicon Valley crashing is debatable. It’s the wider implications of a Trump White House that had the US tech sector up in arms last night, and sent the share prices of FANG and company tumbling.

Energy stocks also suffered a weak session last night, but not because of Trump. Concern over the rapid pace of US rig count growth in the wake of OPEC production cuts met a research paper published last night suggesting only 75% compliance with the agreed cuts. Having been weaker on Friday night, oil prices fell again last night.

But is the Trump immigration policy the real reason Wall Street posted its biggest loss since the election last night? Commentators suggest it was more a case of triggering a pullback that was waiting to happen since the Dow hit 20k. Aside from tech and energy, all sectors were lower last night in a relatively even move, as was the case for the ASX200 yesterday. It’s hard to find someone who doesn’t see some consolidation as positive.

The VIX jumped 15% to 12.1. Ironically, President Trump was on camera in the morning taking credit for the Wall Street rally to now – something US presidents never do. Aside from wishing to keep politics at arm’s length from the markets, what does the president say when the market falls? Perhaps this claim alone was enough of a counter-trigger.

Wall Street did see a recovery in the final hour of trade. At its low, the Dow was down -223 points.

Commodities

West Texas crude is down -US48c at US$52.64/bbl.

Base metals were back to their more volatile ways last night, with trading thin in the absence of China. Aluminium and copper fell -1%, zinc rose 1.5% and lead and nickel rose over 2%.

Iron ore was nevertheless unchanged again at US$82.40/t. Price moves during the Lunar New Year break are rare.

The US dollar index fell -0.2% to 100.38, which allowed gold to rise US$4.80 to US$1195.50/oz.

The Aussie is currently a rabbit in the headlights at US$0.7548.

Today

The SPI Overnight closed down -5 points. This suggest the market believes yesterday’s action on the ASX was pre-emptive of Wall Street last night.

The Bank of Japan will hold a policy meeting today.

In Australia we’ll see private sector credit, housing affordability and the monthly NAB business confidence survey.

There is a raft of production reports due out today, including those of Fortescue Metals ((FMG)) and Iluka Resources ((ILU)).

CYBG ((CYB)) will provide a quarterly update while earnings reports are due from Credit Corp ((CCP)), Energy Resources of Australia ((ERA)) and Navitas ((NVT)).

The earnings season is upon us.
 

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