The Overnight Report: More Sellers Than Buyers

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Looks like defensives are in vogue today when the local market opens, but all else might see sellers outnumber buyers.

By Chris Weston, Head of Research, Pepperstone

Good morning.

It’s all become quite lively in markets, with portfolio de-risking, liquidations and hedging activity resulting in a 3.7 standard deviation sell-off in the S&P500 and NAS100. Volumes have ramped up, with S&P500 cash volumes 14% above the 30-day average, and some 2.05m S&P500 futures contracts traded on the day (vs the 15-day average of 1.6m).

Traders have played outright defence, as the saturated and well-owned tech position continues to be unwound, with levels of equity and index volatility rising sharply as funds increase portfolio protection – the lift in implied and realised volatility has compounded the sell-off and the rotation into ultra-defensive areas of the equity market.

One could argue that given the moves and flows we saw last week the platform was already set, and investors were already questioning their position in big tech – throw in clear disappointment in Alphabet’s Q3 CAPEX guidance, and outright poor numbers from Tesla (with no real guidance to inspire), and we can see the effect in MAG7, semis and the AI-related plays.

We can also add an ongoing unease around China’s growth trajectory, very poor PMIs in Europe and a bearish opinion piece from ex-NY Fed member Bill Dudley, and investors and traders de-risked and de-grossed portfolios – with an outright closing of long position into cash or rotating into the ultra-safe/low volatility beneficiaries – utilities, and healthcare.  

We also can’t dismiss the technical developments, where we’ve seen the NAS100 futures break the 50-day MA, which many use as a trend filter. While momentum and trend-following systematic funds (CTAs’) have seen both the S&P500 and NAS100 futures breach key price trigger levels that dictate that they reduce the length in positioning.

Options flow would have also exacerbated the selling in equity, where we’ve seen a sizeable ramp-up in S&P500 1-month put buying, with traders/funds looking to hedge downside risks. The VIX index now trades at 18.04%, which indicates daily moves in the S&P500 of -/+1.1%.

The inspiration for the bulls is that IBM sits +4% after hours after reporting upbeat earnings numbers, and with S&P500 futures still holding above the 50-day MA, this level will need to hold, or increasing volatility could beget even higher volatility.

We’ve seen good demand for US 2yr Treasuries, with yields settling at 4.43% -6bp, and with the selling seen in long-dated Treasuries (US 10yr Treasury settled at 4.28% +3bp), the result has been a sizeable bull steeping of the US Treasury curve.

Gold initially rallied to US$2432 on haven buying, but as the US 2yr Treasury yield fell gold was pulled lower in sympathy and gold now holds below US$2400 Our flows in gold have been above average and I would imagine they will remain so, especially if we see a downside break of US$2388 and into the 50-day MA (US$2360).

Given the moves seen on the US equity dance floor, our calls for the Asia equity open are shaping up for a somewhat dark and sinister feel. The ASX200 eyes an unwind -1% lower, and like we saw in the S&P500 sectors, it’s the companies with ultra-predictable and stable cashflows which will find the love today, where utilities and staples should outperform, and materials, banks and tech will find sellers.

China is eyed to open lower, but its times like these when the Chinese equity markets will do the opposite of DM markets and find a bid from seemingly nowhere so while we see modest selling on open, it wouldn’t surprise at all if the tape turns early in the session and the buyers step in hard.

On the calendar today:

-NAB business confidence
-Fortescue ((FMG)) Quarterly update
-Karoon Energy ((KAR)) Quarterly update
-Macquarie Group ((MGQ)) AGM
-Northern Star ((NST)) Quarterly update
-Sandfire Resources ((SFR)) Quarterly update
-Eurozone IFO Business climate July
-US 2Q GDP
-US Core PCE Q2
-US Jobless claims
-US New home sales
-US Personal consumption Q2

Corporate news in Australia:

-Prior to today’s AGM, Macquarie Group has confirmed Q1 profits are in line with forecasts
-Ampol ((ALD)) guides to falling sales for the six months to June 30
-The FDA has accepted Telix Pharmaceuticals’ ((TLX)) NDA for a prostate cancer imaging kit
-Platinum Capital ((PMC)) to merge with the Platinum International Fund to reduce the share price discount following a strategic review
-Fonterra ((FSF)) has appointed JPMorgan, Cameron Partners, and Jarden to advise on selling its Australian assets
-Antipodes Partners to acquire Maple-Brown Abbott, increasing its assets under management to $18.6bn
-The Australian reports Southern Cross Media ((SXL)) may sell its TV unit to Network Ten
-Arafura Rare Earths ((ARU)) has entered a trading halt on the ASX for a capital raise announcement
-Bellevue Gold ((BGL)) is set to raise up to $200m to reduce debt

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.

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.)

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