The Overnight Report: War And Peace

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This story features COMPUTERSHARE LIMITED, and other companies.
For more info SHARE ANALYSIS: CPU
The company is included in ASX50, ASX100, ASX200, ASX300, ALL-ORDS and ALL-TECH

By Greg Peel

Same Argument Applies

On Tuesday the ASX200 did not fall in lock-step with Wall Street, as is so often the case, as investors came to the conclusion there was little correlation with the drivers of US stock market weakness and the Australian stock market. Aside from any other comparisons, one sector stands out as an obvious difference.

Tech is 25% of the S&P500 and 2% of the ASX200. US tech stocks are largely believed to have been wildly overvalued heading into 2018 and while the same may be said of some newer and smaller tech listings in Australia, for local sector heavyweights such as Computershare ((CPU)), Carsales ((CAR)) and REA Group ((REA)) that is not the case.

Big Tech has been leading Wall Street up and down these past couple of weeks of trade war fears, both in terms of percentage move and market cap clout. No need for the Australian index to follow suit.

It was thus heartening to see the ASX200 not blindly follow Wall Street on Tuesday but by the same argument, there was little reason for the local index to join in with Wall Street’s rebound on Tuesday night. So on Tuesday we were down a bit, and yesterday we were up a bit.

Sector moves yesterday were relatively benign and in either direction. Two moves nevertheless stand out, being those of consumer staples (+0.5%) and consumer discretionary (-0.6%).

Discretionary weakness seemed odd on a day the February retail sales numbers were released and showed a 0.6% gain when 0.3% was forecast. Department stores showed rare improvement, but remain the biggest laggard year on year. Perhaps shoppers decided to buy in February before it’s too late.

But we note that the worst performer on the ASX200 yesterday was Retail Food Group ((RFG)), down -10% on the same old theme, followed by second worst performer G8 Education ((GEM)), down -4% on news the former chair has been charged with multiple offences relating to the takeover of Affinity Education.

On the flipside, staples Bellamy’s ((BAL)) and a2 Milk ((A2M)) were the ASX200’s best performers, up 7% and 5% respectively, following a2’s scoffing over the entry of Nestle into the Chinese market, claiming a2’s superior product could hold its ground against all comers.

There were other single-stock stories around on the day as well, but suffice to say the local market had no real incentive to head in either direction yesterday.

We’ll see what happens today.

Whiplash

Last week Donald Trump confirmed his intention to place US$50bn worth of tariffs on Chinese exports, with intellectual property theft the basis of the targeted products. On Tuesday night the list of those targeted products was released, numbering some 1300. They included everything from high-end industries such as medicine, aviation, semiconductors, machinery and chemicals to consumer goods such as dish washers, snow ploughs and motorcycles.

Last night, before the open on Wall Street, China retaliated with a new list of products that will attract a 25% tariff, on top of the 120-odd announced earlier in the week. That list included pork, wine, fruit and a long list of commodities. The new list adds another 106 products, including cars, planes and, hitting right at the heart of Trump Land, soybeans.

Note that China already imposes a 25% tariff on US cars. Yet exports of US cars to China have surged in the past three years. The new tariff will be 50%.

When this news hit, the Dow futures showed down -700 before the opening bell last night. When the NYSE opened the Dow fell over -500 points but there hit an important technical level and bounced. Having bounced, US indices rode momentum back to square, and ultimately to a 230 point gain for the Dow.

While commentators declared the bounce to be simply technical, driven solely by algorithms, credit was also given to Trump’s troops being sent out to calm the nerves. Secretary of Commerce Wilbur Ross and newly appointed economic advisor Larry Kudlow individually assured the market that while it all looks bad on the surface, underneath there are negotiations in train.

Importantly, Trump’s tariffs will not come into force until May, allowing relevant US industries time to make their objections known. That deadline can also be extended. Similarly, Chinese tariffs will not come into force immediately, and indeed no timeframe has been announced.

It is now relatively well understood that Trump’s “negotiation” tactic, in business, in politics and probably in life, is to fire off the heavy artillery first to force the enemy into parlaying, ultimately achieving what appears to be a compromise but is really what was desired in the first place. This would not be lost on the Chinese, who have retaliated in kind but are on record as saying they do not want a trade war and are prepared to talk.

So what we have seen this week, manifested in excessive Wall Street volatility, is much the same as we saw late last month – big plunge on trade war fear, big rebound on negotiation assurance. How many times Wall Street has to do this before simply waiting to let the talking run its course is anyone’s guess, given it’s the computers largely running the show. Commentators note there is little evidence of institutional and retail volume in the market at present.

By the time Trump’s initial deadline looms, Wall Street will have all but completed the March quarter result season. If these whiplash sessions can subside, perhaps earnings might be able to take centre stage.

And monetary policy. Last night’s ADP report showed 241,000 private sector jobs added in March when 185,000 were expected.

Commodities

After running up for a couple of sessions, copper and nickel both suffered pullbacks last night. Aluminium had been weak but also turned around.

Elsewhere commodity price moves were relatively inconsequential.

The Aussie is nevertheless up 0.4% at US$0.7715.

Today

The SPI Overnight closed up 24 points or 0.4%.

China is closed today.

Australia’s February trade balance is due.

There are a number of stocks going ex-div today, including ARB Corp ((ARB)), Harvey Norman ((HVN)), Nufarm ((NUF)) and Sigma Healthcare ((SIG)).

Scentre Group ((SCG)) holds its AGM.

Rudi will be traveling to News Ltd's headquarters in Sydney's Surry Hills to appear on Sky News Business from noon till 2pm.

The Australian share market over the past thirty days…

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