The Overnight Report: Let’s Talk

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This story features COMMONWEALTH BANK OF AUSTRALIA, and other companies.
For more info SHARE ANALYSIS: CBA
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

[We're having some tech problems with data this morning – our apologies]

By Greg Peel

Revolving Doors

Wall Street was sold down heavily last Thursday night on trade war fears and again on Friday as those fears met added concerns of a blow-out in the US deficit, as massive spending meets tax cuts. The ASX200 fell over -100 points on Friday and yesterday morning the futures suggested another -50 point drop, implying a breach of 5800 support.

The index duly fell close to -50 points from the open yesterday but immediately recovered some ground, before stumbling through the session and ultimately closing on a less ominous -30 points down at 5790. When it comes to big support levels like 5800, technically we’re allowed a little margin either way.

It would all depend on what happened on Wall Street last night. As it was, the Dow posted its third biggest points gain in history.

That turnaround began in the Dow futures overnight session – our day session – following a report over the weekend in the Wall Street Journal that while all the bluster of trade war talk might be going on front of stage, behind the scenes the Americans and Chinese are actually holding genuine discussions. More on that below.

Most sectors on the local markets closed weaker yesterday, with energy holding its ground on the stronger oil price and IT also closing flat. The biggest drag on the index were the financials, which posted the biggest down-move (-0.8%) and were thus by far the biggest influence on the index.

While the local banks have been falling in concert with the US banks since this trade and deficit-related slide began, the Royal Commission and its ramifications are only serving to exacerbate bank weakness. Yesterday three senior Commonwealth Bank ((CBA)) executives were shown the door, ahead of the new CEO taking the reins next month.

The CEO of AMP ((AMP)) also announced yesterday he would retire at the end of the year.

There is not necessarily any connection between these movements and the Royal Commission – it’s typical of a new CEO to lop a few heads straight up to show he means business and the AMP boss may have been planning his retirement for some time — but in the current context disgruntled investors are not splitting hairs.

We’ve since learned that Labor is prepared to water down its policy to scrap franking cash-backs, exempting pensioners and other welfare recipients. But that initial policy announcement, and the Coalition’s 29^th Newspoll loss, are other reasons the banks can’t find any love at present.

Maybe that will change today.

The jump in the gold price on Friday night allowed for the materials sector to only fall -0.4% yesterday despite a big drop in the iron ore price. This morning we see mixed commodity prices, but no doubt a bout of trade relief.

Parlay

Stock markets in London and Europe were weak again last night on the news of extensive EU expulsion of Russian diplomats, as the fallout from the ex-spy poisoning continues. The US, too, is joining in but that wasn’t front of mind for Wall Street last night.

The Dow shot up from the open last night but began to stumble as European markets closed. It is typical for European traders to carry their mood into the afternoon when the US session begins, but when Europe shuts down for the day, Wall Street then does its own thing.

That thing proved to be a session in which the Dow posted its biggest one day percentage gain since 2015 and its third biggest points gain in history.

Last week, as Trump was railing against China and announcing US$60bn in tariffs on goods deemed to be representative of intellectual property theft, the US treasury secretary and US trade boss wrote a letter to the Chinese setting out specific requests, including a reduction in Chinese tariffs on US autos, more Chinese purchases of US semi-conductors and greater access to Chinese financial markets for US companies.

In short, the Chinese are open to discussions.

It appears now, maybe, that Trump’s seemingly clumsy initial approach to tariffs was indeed a “shock them into submission” tactic. From a supposed tariff on anyone’s steel and aluminium exports a couple of weeks ago, now most of the world is exempted. From a threat of US$60bn in tariffs on other Chinese goods (which, incidentally, is not a lot in the scheme of things), we may now have a more conciliatory outcome.

The news was certainly sufficient to invoke a big sigh of relief on Wall Street.

Throw in the fact many a commentator was suggesting the trade-related sell-off was overdone, and that any dip in US stocks is a good buying opportunity, and the scene was set last night for a solid rebound. Volumes were nevertheless to the low side, suggesting a lack of sellers more than an army of buyers, but this was also much the case on the way down, when buyers simply stood aside.

The hardest hit sectors last week were the banks, tech stocks and big industrials. The leaders of last night’s rally were the banks, the tech stock and the big industrials. In tech’s case, it was the ANG stocks leading the way, albeit Facebook did manage to turn positive right at the death.

Now we can all get some sleep.

Trade talks will no doubt take time to play out from here but in the meantime, attention will turn to this week’s US inflation data. Also in focus is a record US$300bn of US Treasuries being auctioned this week. Last night’s two-year note auction was met with a modest response, sending yields higher across the curve.

Commodities

The US dollar finally managed to recover some ground against the yen last night but was still weaker against other currencies, hence the dollar index is down another -0.5%. While this may have helped gold and some base metals, along with trade relief, copper still fell -1% and iron ore is down another dollar.

Oil saw some profit-taking after a solid run.

The Aussie did not rise last week as the greenback fell given we would be impacted by a trade war as well, but last night the currency bounced 0.6% to US$0.7747.

Today

The SPI Overnight closed up 33 points or 0.6%. That would take the index comfortably back above 5800.

Today’s list of ex-dividend stocks includes Iluka Resources ((ILU)), Japara Healthcare ((JHC)), Link Administration ((LNK)), Northern Star Resources ((NST)), SG Fleet ((SGF)) and Webjet ((WEB)).

The Australian share market over the past thirty days…

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