The Overnight Report: Stunning Reversal

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            [3] => ((QAN))
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This story features BANK OF QUEENSLAND LIMITED, and other companies.
For more info SHARE ANALYSIS: BOQ
The company is included in ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

Not Much Point

I shall be brief this morning regarding the local market, given the reversal on Wall Street has our futures up 110 points this morning.

Yesterday’s second consecutive flat close was once again about the banks versus the rest.

Having risen 1.9% on Wednesday, the banks gained another 1.4% yesterday. While the banks were helped on Wednesday by a fall in bond yields, that move was all about the upbeat outlook for the sector's Net Interest Margin (NIM) as suggested by Bank of Queensland ((BOQ)).

Yesterday the Aussie ten-year yield moved back up 5 points to the line-in-the-sand 4.00%. This meant real estate, which was the only other positive sector on Wednesday, fell -1.9% yesterday to be the worst sector performer.

The banks kicked on regardless.

Consumer discretionary was the only other sector to close in the green yesterday, up less than 0.1%. Healthcare fell -1.0%.

nib Holdings ((NHF)) fell -12.0%, on a discounted capital raising required to fund the health insurer’s entry in the NDIS as a Plan Manager. Medibank Private ((MPL)) is in a trading halt following a cyber attack.

Industrials closed a tick lower despite Qantas ((QAN)) taking off by 8.7%, after announcing it expected to swing to a profit in the first half for the first time since post-pandemic, and lifted a wage freeze on its employees.

Energy (-0.9%) and materials (-0.6%) offered the biggest counter to bank gains while staples (-0.7%) continue to be sold off after being the go-to sector in the most market recent falls.

Today will see a different mood.

Wow

US headline inflation rose 0.4% in September when 0.3% was forecast, to an annual rate of 8.2%, down from 8.3% in August. While the slightest dip was in itself a little disappointing, it was the core CPI that sent Wall Street into another freefall.

It rose 0.6% when 0.4% was forecast, taking the annual rate up to 6.6% from 6.3%.

US bonds yields rocketed higher and the Dow fell -550 points. But then a funny thing happened – Wall Street bounced hard.

There are two main reasons cited for the turnaround, other than an oversold market and a belief all the bad news had been priced in.

Firstly, the S&P500 fell on to an intraday 3502. At 3517, the index had reversed a full -50% of the rally from the covid low of March 2020 – a significant technical level.

But perhaps more influential was a sudden 1.9% surge in the pound against the dollar, and a subsequent drop in UK yields.

Speculation is the UK government is going to rethink its much-maligned budget, and drop all planned tax cuts as it has those for the rich. There is also speculation that despite having given UK pension funds a Friday deadline, the Bank of England will need to extend the Friday cut-off of its bond purchase program due to ongoing volatility and subsequent systemic risk.

Whether or not either will come about, Wall Street wasn’t going to wait to find out. After turning around sharply, short-covering, momentum and FOMO kicked in. The Dow was up almost 1000 heading into the last hour.

The massive swing came even as the US ten-year yield rose 5 points to 3.95% and the two-year 15 points to 4.32%, although they were much higher initially after the CPI report, dropping back on the UK speculation.

So, will this one stick? Bear market rallies to date have been, well, just that.

There is not a lot of faith a bottom can now be declared. History is nevertheless on side. There have been only four days in the past decades when the S&P500 has reversed from a -2% fall to a +2% gain – most recently in 2008, which saw two. In all four cases, the S&P500 was higher one week and one month later.

Otherwise, observers assume the short-covering, momentum trading and general exuberance will be exhausted before too long, and we’ll be back to FOMO on the downside.

Wall Street was pricing in almost a 100% chance of a 75 point Fed rate hike next month before the CPI report. Suffice to say that’s now baked in, and once again we’re seeing some forecasts of 100 points.

There are two competing opinions in the market as to what the Fed will do from here. One is stop fannying about with these ongoing 75 hikes – just go big and get it over with. The other, more prevalent, is for God's sake stop and let the economic impact catch up, before something seriously breaks.

JPMorgan, Wells Fargo, Citi and Bank of America report earnings tonight, unofficially kicking off the September quarter result season. Results will need to be good throughout the season, or not as bad as feared, if this rally has to have any legs at all.

Commodities

We recall that the aluminium price had shot up on speculation the LME would ban Russian metals trade, and the fell back again after the LME implied it was unlikely. Last night the US banned Russian aluminium imports.

Oil prices rose last night after US weekly inventory data showed a drop in diesel and heating oil supplies heading into winter.

The US dollar index fell -0.7% on the pound’s surge, but the Aussie has recovered only 0.4% to US$0.6296.

Today

The SPI Overnight closed up 110 points or 1.7%.

China will report September inflation and trade numbers today.

The US will see retail sales and consumer sentiment.

Harvey Norman ((HVN)) goes ex.

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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