The Overnight Report: Downgrade Trigger

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This story features AGL ENERGY LIMITED.
For more info SHARE ANALYSIS: AGL
The company is included in ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

Sell-Off I

The futures were already showing -39 points ahead of yesterday’s open for the ASX on weaker commodity prices overnight, as traders despair Beijing’s minimal stimulus measures. But the ASX200 fell over -60 points on the open.

By late morning the index had managed to claw its way to above 7400 before news from abroad had Asian markets tanking and ours following. After a solid run-up to above 7450, and relief over the RBA pause, it was a case of lock in profits before the opportunity is lost.

Selling was marketwide and no sector was spared. The best performer was technology (-0.5%) and the worst utilities (-2.2%), exacerbated by an unrelated -4.8% fall for AGL Energy ((AGL)), downgraded by Macquarie.

Materials ultimately fell -1.2% but the real damage was done in the banks -1.8%.

Yesterday ratings agency Fitch downgraded the US to AA+ from AAA. Fitch was the last of the three major agencies to drop its US rating, with the others having done so in 2011. Standard & Poor’s has AA+ and Moody’s has Aaa.

Australia’s S&P rating is AAA and the big banks score AA. But yesterday was excuse enough to sell them.

The Aussie ten-year yield rose 5 points yesterday to 4.02% which puts it largely in line with the US. The Aussie dollar has dropped -1.2% to this morning, with commodity prices all down again.

The fall in the financials sector was pipped only by utilities and real estate (-2.0%).

The S&P500 has fallen -1.4% overnight on the news and our futures are down another -58 points this morning which, having smashed through 7400 yesterday, would take us to below 7300.

The question is do we need to double-count the Fitch news, or is this the beginning of a more pronounced pullback in an otherwise upward trend? Australian investors tend to sell first and ask questions later.

Much will depend on just how far Wall Street falls from here, with commentators shrugging off Fitch’s downgrade as inconsequential.

Sell-Off II

"In Fitch's view, there has been a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters, notwithstanding the June bipartisan agreement to suspend the debt limit until January 2025."

Janet Yellen said she "strongly" disagreed with Fitch's decision. "Treasury securities remain the world's preeminent safe and liquid asset, and… the American economy is fundamentally strong".

Former US Treasury Secretary Larry Summers said Fitch's decision is "bizarre and inept," particularly as the US economy "looks stronger than expected".

Mohamed El-Erian, much respected chief economic adviser at Allianz and formerly Pimco (now owned by Allianz), summed up a general feeling in suggesting "This announcement is more likely to be dismissed than have a lasting disruptive impact on the US economy and markets".

JPMorgan CEO Jamie Dimon suggested the move doesn’t really change anything. Consensus is it is the market that prices US debt, not the ratings agencies.

Still, investors have been looking for an excuse to sell following the steady and persistent rally out of the March SVB crisis. Valuations have become overwrought.

To add fuel to the fire last night, the ADP private sector jobs number for July came in at a much higher than expected 324,000 additions, with wages up 6.2% year on year.

Wall Street had been cheering strong economic data over past months, as it plays into the “soft landing” theme, but now, with the ten-year yield back above 4%, the concern is the Fed may not be able to pause soon as hoped. If the economy is strong, it only refuels inflation.

The S&P500 fell -1.4% — the first -1% drop since May. Underperformance by the Nasdaq to the Dow indicates the biggest impact was in the biggest tech names – the ones that have soared all year to dizzying multiples.

Aside from consensus shrugging off Fitch, the general feeling is that any pullback can only be healthy, and will not upset the up-trend. There are plenty of investors who have missed the rally this year and have been waiting, waiting for a pullback to finally get on board.

This suggests that while Wall Street may yet fall further, it won’t be able to fall too far.

Commodities

Beijing is apparently keen to pick up the pace of implementing the raft of policy measures announced in recent days and turning its attention to promises to help economic recovery.

Fat lot of good that’s done. “Sell everything” extended to commodities last night.

The AAA-rated Aussie is down -1.2% at US$0.6540 while the AA+-rated US dollar is up 0.4%, which rather supports the shrug response.

Today

The SPI Overnight closed down -58 points or -0.8%. Will we double-up today? The resource sectors will be a drag.

Australia’s June trade numbers are out today.

The world reports July services PMIs.

The Bank of England meets tonight.

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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