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The Overnight Report: Higher For Longer

Daily Market Reports | Sep 21 2023

This story features NEW HOPE CORPORATION LIMITED, and other companies. For more info SHARE ANALYSIS: NHC

World Overnight
SPI Overnight 7151.00 – 20.00 – 0.28%
S&P ASX 200 7163.30 – 33.30 – 0.46%
S&P500 4402.20 – 41.75 – 0.94%
Nasdaq Comp 13469.13 – 209.06 – 1.53%
DJIA 34440.88 – 76.85 – 0.22%
S&P500 VIX 15.14 + 1.03 7.30%
US 10-year yield 4.35 – 0.02 – 0.37%
USD Index 105.35 + 0.20 0.19%
FTSE100 7731.65 + 71.45 0.93%
DAX30 15781.59 + 117.11 0.75%

By Greg Peel

Commodity Crunch

Amidst concern ahead of last night’s Fed decision, it were the resource sectors that led the ASX200 ever lower yesterday.

Oil prices have tipped over, slightly, which comes as no surprise after rallying 30% from the June lows and stalling above US$90/bbl. The lack of surprise in what is an overdue pullback had the energy sector down -1.8% yesterday.

Coal didn’t help either. New Hope Corp ((NHC)) lost -2.4% a day after its result after Citi cut to Sell, joining two other Sells amongst daily-monitored brokers.

Having enjoyed a brief boost on China’s August data-dump last week, metal/mineral prices are also now trending lower again. Materials fell -1.2%.

Given the banks sat it out for once, it was resources that made the difference, with some help from healthcare (-0.5%).

Despite the RBA indicating it is on hold for the foreseeable future, Aussie bonds continue their sell-off. Yields rose another 5-6 points yesterday and the two-year is dangerously close to 4%.

This hit real estate (-0.8%), utilities (-0.6%) and technology (-1.2%) but not the banks this time.

The consumer sectors are remaining surprisingly resilient, up yesterday by small amounts. KMD Brands ((KMD)), formerly known as Kathmandu before it diversified into surfwear, fell -4.6% on its result, largely due to a slow start to FY24 trading. KMD is not in the index nevertheless.

In July, the index hit a low of 7000 before shooting up to 7400. In the ups and downs that have followed, the index had held 7100 on two occasions. With the futures down again this morning, post-Fed, and seasonal weakness an overhanging cloud, 7100 has come into view once more.

The test will be to hold it.

Proceed Carefully

The Fed left its cash rate on hold at 5.25-5.50% last night, as expected. For those hoping Powell would signal that’s all folks, he suggested there’s a good chance of one more hike in one of the two remaining meetings this year.

The issue, however, is not so much inflation. Yes, energy prices are forcing headline inflation back up, and yes, sticky services inflation continues to prop up core rates but the current problem, more so, is a stubbornly strong US economy, with a stubbornly tight labour market.

Until the economy slows and unemployment rises, inflation cannot fall to the 2% target. The FOMC does not see that happening for at least two years.

The dot plots revealed increased GDP forecasts over the ensuing period, lower unemployment forecasts than previously, and only two rate cuts in 2024 rather than four, as was projected in the March plots. That’s what Wall Street was afraid of.

That is why Powell wants to “proceed carefully”. The trick is to force a slower economy and higher unemployment but not a deep recession. That is, a soft landing. But despite 525 points of hikes to date, it’s not yet happening in a meaningful sense. The Fed is cognisant of the lag effect, but does not see enough reason not to hike again and hold for longer if necessary.

Those in the recession next year camp, who also believe the first rate cut will come as early as the first half, simply do not agree with the dot plots. One factor to recall is that the Fed is continuing to implement QT – selling bonds – which in effect implies another 200 or more basis points of tightening on top of the cash rate.

The impact will soon be felt, the recessionist camp insists.

While Wall Street may have been looking for signs the Fed might be ready to cut rates next year, it’s a case of be careful what you wish for. A rate cut would imply the need to support a slowing economy and put a lid on rising unemployment – a scenario which implies lower corporate earnings.

Which implies lower stock valuations.

On the basis of proceeding carefully, aligned with the chance of one more hike, the market is now assigning a greater chance of a December hike than November.

FedEx is seen as a reliable bellwether for the state of the US economy. It reported earnings this morning in the aftermarket and is up 5.4%.

With every Fed decision, the smart money avoids the wild swings that can occur in the last couple of hours on Wall Street, such that the true response comes in the following session. So we’ll see.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz) 1929.80 – 1.10 – 0.06%
Silver (oz) 23.22 + 0.04 0.17%
Copper (lb) 3.75 + 0.00 0.01%
Aluminium (lb) 1.00 + 0.01 0.94%
Nickel (lb) 8.80 + 0.03 0.35%
Zinc (lb) 1.12 + 0.00 0.24%
West Texas Crude 90.28 – 0.92 – 1.01%
Brent Crude 93.18 – 1.40 – 1.48%
Iron Ore (t) 121.83 – 0.33 – 0.27%

Mostly green for once, but nothing to write home about.

Red for the oils nonetheless, but with the Saudis and Russia determined to prop up prices, any pullback may not be extensive.

The Aussie is down slightly at US$0.6447.

Today

The SPI Overnight closed down -20 points or -0.3%. Given the S&P fell -0.9%, that’s a somewhat encouraging outcome.

It would suggest given falls all week Fed fear had been largely priced in already, and may reflect what I noted above regarding coming close to 7100 support.

Today is derivative expiry day on the ASX, which may lead to some volatility if there is a cluster of option positions around 7100 or 7150.

New Zealand reports June quarter GDP today.

The Bank of England meets tonight.

The Australian share market over the past thirty days…

Index 20 Sep 2023 Week To Date Month To Date (Sep) Quarter To Date (Jul-Sep) Year To Date (2023)
S&P ASX 200 (ex-div) 7163.30 -1.59% -1.94% -0.56% 1.77%
BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
NHC New Hope Downgrade to Sell from Neutral Citi
PNR Pantoro Downgrade to Hold from Buy Bell Potter

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)

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