The Overnight Report: Just A Flesh Wound

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This story features BUBS AUSTRALIA LIMITED, and other companies.
For more info SHARE ANALYSIS: BUB

By Greg Peel

Trumped

It was all looking rosy on Saturday morning when the SPI futures closed for the week, up 30 points on the strong US jobs number and subsequent positive response from Wall Street. But it was on Sunday when President Trump tweeted that the long-planned step-jump in tariffs on Chinese imports to 25% from 10% would happen this Friday, as talks were moving too slowly.

For markets it was a case of sell first and ask questions later. Before the ASX opened, the Dow futures were down over -400 points. No surprise then that what had meant to be a 30 point rally became a -52 point loss for the ASX200. At 11.30 the index was down -87.

The Dow did indeed fall over -400 points from the open last night – almost -500. But then it came back. Our futures are thus up 25 points this morning. Clearly the assumption is Trump’s tweet did not signal trade negotiations had failed, and the war will now begin.

Yesterday saw all China-facing stocks cop the brunt of the selling, although no one was spared bar utilities (+0.2%). The consumer sectors and IT were the hardest hit, the former a major exporter of the likes of wine, fish and infant formula to China, the latter simply high-flying growth stocks that are always first to be jettisoned in times of trouble.

(Note Bubs Australia ((BUB)) went the other way, but that’s another story.)

The miners and energy stocks were all sold as might be expected, albeit not substantially. Fortescue Metals ((FMG)) only fell -2% which, given recent volatility, is a quiet day.

Industrials were hit, with international construction company Cimic ((CIM)) topping the ASX200 losers’ board with a -7% fall. Telcos and healthcare suffered lesser falls.

The banks fell -0.6% without any direct exposure to a trade war, but Westpac’s ((WBC)) earnings result was not well-received.

Fuelling the plunge yesterday was the response in the Chinese stock market. It fell -5.5%.

But it’s all a bit academic this morning, given Wall Street’s comeback overnight.

Buy the Dip

Last week it appeared the trade talks were very near a conclusion. Clearly they weren’t.

The deadline for the step-up in tariffs was originally set last year. It was this that brought China to the negotiating table, which was no doubt Trump’s tactic all along. The deadline was extended and extended as talks progressed, ultimately to be left open-ended as a resolution seemed to be drawing nearer. It was always assumed by observers that Beijing would play a long game, chipping away at Washington in order to be seen to score a “victory”. In the final stretch, Trump has obviously lost patience. Back to The Art of the Deal. Reinstate the threat.

The question now is: will it work? The assumption is Beijing will not just bow down and capitulate before Friday, as this would look weak. But for most the assumption is a deal will ultimately be reached, if not this month.

A lot rides on this week’s Chinese trade delegation to Washington. That has not been cancelled, as was first feared. If that delegation includes vice premier Liu He, the “closer”, then the signs are good. If not, the signs are not so good.

The Dow opened down -470 points last night, and that was the bottom. Wall Street spent all session climbing its way back. A lot has been made of the old “cash on the sidelines” which has still not been deployed despite indices hitting new highs. This cash has been waiting for a pullback that up until last night had never come.

So if you think Trump’s threat is simply a hurry-along, it was an opportunity to finally get in at lower levels.

Matching the stock market’s initial plunge and recovery where the US dollar, which shot up first and then fell back, and the US ten-year bond yield, which fell from 2.53% to 2.47% before recovering to 2.50%.

Interestingly, oil prices closed higher on the day. Typically trade war fears send oil lower. But with Beijing not responding by cancelling its planned trip to Washington this week, escalating Middle East tensions won over, bringing in buyers.

It will now all come down to what happens at the negotiating table this week. Will China cave? Will Trump extend the deadline again, or hold firm?

It could be a rocky week from here.

Commodities

The LME was mercifully closed last night, leaving iron ore to provide the response.

The US dollar rose and fell back again, hence gold is little changed.

The Aussie traded down to US$0.6965 before recovering to US$0.6986, down -0.1% over 24 hours.

Today

The SPI Overnight closed up 25 points or 0.4%.

Just when you thought trade was the topic du jour, the RBA meets today. With cut/no cut at 50/50 with the punters, we could see a sharp move in either direction for the ASX200 at 2.30pm, ceteris paribus. But all is clouded by last night’s Wall Street comeback.

We also have retail sales and trade numbers today.

The Australian share market over the past thirty days…

For more detail go to FNArena's Australian Broker Call Report, which is updated each morning, Mon-Fri.

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