The Overnight Report: The Last Bastion

This story features DOMAIN HOLDINGS AUSTRALIA LIMITED, and other companies. For more info SHARE ANALYSIS: DHG

World Overnight
SPI Overnight	7025.00	+ 58.00	0.83%
S&P ASX 200	7024.30	– 109.60	– 1.54%
S&P500	3821.62	+ 3.96	0.10%
Nasdaq Comp	10547.11	+ 1.08	0.01%
DJIA	32849.74	+ 92.20	0.28%
S&P500 VIX	21.38	– 1.04	– 4.64%
US 10-year yield	3.68	+ 0.10	2.88%
USD Index	104.00	– 0.69	– 0.66%
FTSE100	7370.62	+ 9.31	0.13%
DAX30	13884.66	– 58.21	– 0.42%

By Greg Peel

Tora Tora Tora

It seemed out of place that the futures should suggest a 27 point gain yesterday morning following another soggy night on Wall Street, and sure enough the ASX200 was down around -30 points by 11am, ahead of the release of the RBA minutes of its December meeting.

And they were the day’s surprise number one.

The board considered a pause in rate hikes. But at the same time, they also considered a 50 point hike. A 50 point hike was on the table because “High inflation damages the economy and makes life more difficult for people”. A pause could also be justified because “There had already been a significant cumulative increase in interest rates and the full effects of this adjustment would take time to occur”.

So they split the difference, and we got 25. There will be a pause anyway in January, as there is no meeting.

The market was not quite sure how to absorb this information. Thus through to 2pm, the index remained relatively flat. But then the Bank of Japan shocked the world.

Surprise number two.

The BoJ kept its cash rate at -0.1%, but said it would allow the ten-year yield to drift up as high as 0.50%, from a previous limit of 0.25%. And yet it would significantly increase bond purchases (QE).

Makes sense? Japan is renowned for its subtlety, and that includes the central bank, but in terms of market response, you’d think Mt Fuji had just erupted.

The Nikkei crashed -2.5% as the yen rallied close to 4% to the US dollar. The Aussie ten-year yield jumped 20 points to 3.72% and the ASX200 dropped -50 points in a heartbeat. It seems the Land of the Never Rising Inflation (not for thirty years anyway) has a problem with inflation.

Japan’s measure of inflation, which is unique as it excludes fresh food, and only fresh food, has hit an annual rate of 3.6%, it was revealed in late November. Oh the humanity.

The last bastion has fallen.

Bearing in mind Japan remains one of our largest trading partners, and the “yen carry trade” has been set in stone for three decades (you’ll have to look that one up yourselves), the extraordinary BoJ move rattled the local market, and has subsequently rattled the world.

Yet while every sector closed in the red on the stock market yesterday, some moves were a lot more severe than others.

A 20 point jump in the ten-year? Technology fell -4.4%, consumer discretionary -3.5% and real estate -3.8%. However, in the latter two cases, there were other factors at play.

Domain Holdings ((DHG)) issued a profit warning and fell -9.1%, taking REA Group ((REA)) down -7.7% in sympathy. City Chic Collective ((CCX)) issued another profit warning and fell another -31.4%. City Chic is not in the index, but the reverberations are clear. The retailer once much loved by analysts is now down a plus-sized -84% since July.

Materials (-1.9%) and energy (-1.4%) finally bottled, but the banks were unsure (-0.2%), given higher rates lead to higher margins as long as we can make our payments.

I could rattle off a few more sector moves but it would be pointless. Wall Street finally found support last night and hence our futures are up 58 points this morning.

The market is thin, and will get even thinner through to Friday. School’s out for summer, Alice tells me, and some brokerage houses have already put up the shutters.

Technically Speaking

With the US ten-year yield up 10 points to 3.68% last night on the BoJ move, Wall Street had every reason to take yet another leg down. But it didn’t.

While the S&P500 has wandered either side of a 3800-3900 range these past couple of months (including up to 4000), 3800 is seen as solid technical support. Last night the index fell to 3975 from the open, and there it found buyers.

We note that every day prior since last week’s Fed meeting, Wall Street has closed lower but always with some late buying. Talk is of the market becoming oversold.

The BoJ equally shocked the US market last night, but as one commentator put it, there’s only one central bank Wall Street cares about.

And then there’s the seasonal factor. Strictly speaking, the famed “Santa Rally” occurs over just the one week – from Christmas to New Year. Wall Street hardly shot the lights out last night, but it was a start.

Maybe.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz)	1818.20	+ 31.90	1.79%
Silver (oz)	24.15	+ 1.25	5.46%
Copper (lb)	3.78	+ 0.02	0.57%
Aluminium (lb)	1.17	+ 0.00	0.21%
Lead (lb)	0.98	+ 0.00	0.37%
Nickel (lb)	12.84	+ 0.58	4.77%
Zinc (lb)	1.38	– 0.02	– 1.37%
West Texas Crude	76.09	+ 0.77	1.02%
Brent Crude	79.84	– 0.29	– 0.36%
Iron Ore (t)	109.86	+ 0.30	0.27%

While the BoJ move had little impact on most commodity prices (ignore nickel), it did spark a rush of safe haven buying in precious metals.

The US dollar index is down -0.7%. The Aussie, which is not in the US dollar index, is down -0.4% at US$0.6674. That’s a rare double-plus for Aussie dollar gold.

Today

The SPI Overnight closed up 58 points or 0.8%.

The US will see numbers for consumer confidence and home sales tonight.

From an economic and corporate perspective (unless there are any more pre-Christmas profit warnings), Australia has shut down.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
AZJ	Aurizon Holdings	Downgrade to Hold from Add	Morgans
BOQ	Bank of Queensland	Downgrade to Neutral from Buy	Citi
CXO	Core Lithium	Upgrade to Outperform from Neutral	Macquarie
IGO	IGO	Upgrade to Buy from Neutral	Citi
PLS	Pilbara Minerals	Upgrade to Add from Hold	Morgans
VVA	Viva Leisure	Upgrade to Buy from Neutral	Citi

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

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available on the FNArena website.  Click here. (Subscribers can access prices on the website.)

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author's and not by association FNArena's – see disclaimer on the website)

All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts on the website and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided. www.fnarena.com

FNArena is proud about its track record and past achievements: Ten Years On

Click to view our Glossary of Financial Terms