The Overnight Report: Rate Rise Nerves

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This story features ANZ GROUP HOLDINGS LIMITED, and other companies.
For more info SHARE ANALYSIS: ANZ
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

The Dow closed down -112 points or -0.5% while the S&P lost -0.5% to 2557 and the Nasdaq fell -0.5%.

More Work To Do

The ASX200 took the lead from the futures yesterday morning and opened over 20 to the upside, likely reflecting an apparently strong session on Wall Street, and a turnaround from US weakness the session prior. But that’s as far as we got, with the index pulling back in the morning to better reflect that the broad market on Wall Street, as aside form the Dow 30, had not posted such a strong gain.

Then along came the September CPI result.

Economists were looking for a 0.8% rise in headline inflation in the quarter, driven to a great extent by surging gas and electricity prices. It was already known that prices at the pump had come down and vegetable prices had fallen quite a bit in the period. There was thus surprise when the result came in at 0.6%, for a 1.8% annual rate.

While utility prices did indeed rise, they did not rise by quite as much as expected. Consumer retail prices were the main drag on the downside, which is no great surprise given on the one hand we have a subdued consumer, loaded with household debt, and on the other we have a competitive marketplace, disrupted by everyone from Amazon to Aldi.

Core inflation rose 0.4% to also be sitting at 1.8% annual and is thus stuck below the RBA’s 2-3% target zone. There will be no rate rise in the foreseeable future.

The clearest response to the weak CPI came from the Aussie dollar, which has tanked over -1% in 24 hours to US$0.7697 this morning, despite the US dollar index being down -0.2%. The stock market also quickly tumbled as traders reflected on the serially weak consumer.

Consumer staples ended the session down -1.4% and discretionary down -0.4%. But realistically yesterday was just another lookalike session to both Monday and Tuesday this week – some of the sector moves are significant but really the market is treading water, consolidating around the 5900 mark with no real clue as to what to do next.

Yesterday, for example, it was the turn of telcos to drop (-1.2%) while stronger commodity prices had materials (+1.0%) and energy (+1.3%) balancing to the upside. The banks had a day off ahead of ANZ Bank’s ((ANZ)) full-year result today.

If the consolidation phase is to end with a renewed push to 6000, it won’t happen today. This time Wall Street’s weak lead is market-wide and not a Dow distortion. Commodity prices were a little weaker overnight and the futures are down -11 points this morning.

Profit-Taking

Very late in Tuesday night’s session on Wall Street it was revealed a straw poll of senior Republicans, conducted by The Donald himself, put academic and noted hawk John Taylor in the lead for Fed chair. The market had little time to respond.

It had time to respond early in last night’s session, and that response was to sell. Adding fuel to the fire was last night’s release of September new durable goods orders data.

Orders rose 2.2% when economists had forecast 0.7%. Lumpy aircraft and military orders are very difficult to forecast, but take those out and orders still rose 0.7%. Most notably, core capital goods orders, seen as a proxy for business investment, rose by 1.3% for the third month in a row. The numbers were seen, overall, as very strong.

Which is of course a good thing, but put together strong data and a hawk in the Fed chair and Wall Street is worried that the pace of Fed rate rises will be faster than hoped. All year Janet Yellen has been at pains to insist that the pace of both rate rises and Fed balance sheet unwinding will be gradual. A new chair may have a different view. Easy policy has taken Wall Street to record highs, take that away and what is left?

Earnings, that’s what’s left. And to date the number of stocks beating on both earnings and revenues has been impressive. But last night’s numbers were not so flash.

Fast food chain Chipotle missed on earnings and was punished -14%. Chip-maker Advanced Micro Devices actually beat on earnings but disappointed with guidance, so it fell -15%. These two results are clear evidence that when a market is at all-time highs, any miss on expectations will result in a mass exodus.

The most talked about result of the day was that of Boeing (Dow). It posted an earnings beat and guidance upgrade, and fell -3%. Given Boeing has risen more than 50% year to date, a bit of profit-taking as a “sell the fact” is hardly a shock. But Boeing’s rally puts it in the category of “momentum trade”.

Most of the momentum trades this year have come from the Big Tech space, but the banks have also had a good run recently. Momentum traders are not looking for value or growth, they simply jump on bandwagons and ride them until it’s time to get off. The risk of a faster than expected pace of Fed tightening might just suggest a good time to alight.

The Dow was down -190 points at midday before recovering almost half of that by the close. If momentum traders do get off, there is still a pool of passive buyers, it would seem, at lower levels. That is why Wall Street has posted its longest ever run without even a -3% pullback. How long can this go on?

This is the biggest week in the US earnings calendar, after which there is a very long tail. There’s still a-ways to go, and the trend in results has been positive. But to justify further upside, results will need to be very positive, a la Caterpillar and 3M the night before, rather than just a common or garden “beat”.

Coming back to monetary policy, the ECB holds a meeting tonight. Mario Draghi will probably hold fire, coming up with another excuse to not yet begin QE tapering, but then again he may surprise. Typically Draghi saves his big calls for the December meeting, but strength in the European economy is hard to deny.

The Bank of England holds a meeting next month. Last night’s UK September GDP result beat forecasts with a 0.4% gain, for 1.5% annual growth. This is enough to reinforce expectations Mark Carney will lift the BoE cash rate to 0.5% from 0.25% — the first move up since the GFC.

The world is getting tighter.

Commodities

Aluminium rose over 1% in London but copper fell -0.5% and nickel fell -1%.

Iron ore fell -US60c to US$61.10/t.

West Texas crude is down -US26c to US$52.50/bbl.

Gold is relatively flat at US$1277.10/oz with the US dollar index down -0.2% at 93.72.

The Aussie, as noted, is down -1.1% at US$0.7697.

Today

The SPI Overnight closed down -11 points or -0.2%.

Locally today we see the September quarter import/export price index.

All eyes will be on the ECB tonight.

Before that, all eyes will be on ANZ Bank’s result today.

There could be some curly ones asked at Crown’s ((CWN)) AGM today. Also holding AGMs today are Blackmores ((BKL)), Challenger ((CGF)), GUD Holdings ((GUD)), JB HiFi ((JBH)) and Star Entertainment ((SGR)).

Newcrest Mining ((NCM)) posts production numbers.

Rudi will travel to Macquarie Park for one last appearance in the old Sky Business studios. From next week onwards a flashy brand new decor inside News Ltd's headquarters in Surry Hills will surround hosts and guests. It's all they can talk about at Macquarie Park this week. Rudi will appear from 1-2pm.

****

The Australian share market over the past thirty days…

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