The Monday Report – 16 September 2024

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World Overnight
SPI Overnight	8116.00	+ 16.00	0.20%
S&P ASX 200	8099.90	+ 24.20	0.30%
S&P500	5626.02	+ 30.26	0.54%
Nasdaq Comp	17683.98	+ 114.30	0.65%
DJIA	41393.78	+ 297.01	0.72%
S&P500 VIX	16.56	– 0.51	– 2.99%
US 10-year yield	3.65	– 0.03	– 0.82%
USD Index	101.11	– 0.13	– 0.13%
FTSE100	8273.09	+ 32.12	0.39%
DAX30	18699.40	+ 181.01	0.98%

By Chris Weston, Head of Research, Pepperstone

Good morning.

Coming off the back of the worst weekly performance for US equity of 2024, US large-cap equity markets last week navigated the US CPI report and the Trump vs Harris presidential debate with ease In fact, we saw one of the most impressive turnarounds for years, with big tech finding form and shorts capitulating (the Goldman Sachs high short interest basket closed +7.4% w/w), and the S&P500 and NAS100 ultimately had the best weekly performance since November 2023.

US cyclical equity may have underperformed the more defensive sectors, but it didn’t hold the respective indices back and after five straight days of upside momentum in US large-cap indices, the bulls now eye key resistance levels, with some solid wood to chop to get to the all-time highs. If the buyers see the right outcome from the key event risk due this week, the upside levels to watch remain 20,025 in NAS100 futures, and 5669 in S&P500 futures if the bulls can push through these levels, then the chase higher could be on.

Should we see better selling flows, I see risk in S&P500 futures defined below the 100-day MA (5433) and then below 5394, where a breakdown would suggest short positions, on the higher timeframes, getting increased traction.

US Small caps (the Russell 2k cash) lagged for most of the week, but caught a solid bid on Friday, closing up 2.5%, and we’ll see if the momentum can build as we roll towards US retail sales and the all-important FOMC meeting.

In the US Treasury market, the US 2yr fell -6bp on the week to 3.58%, with US swaps closing out the week implying -34bp of cuts for this week’s FOMC meeting, and -110bp of implied cuts by December.

The breakout in spot Gold (XAUUSD) has been well traded by clients, with US$2600/oz now not far off. Gold futures in fact breached US$2600 on Friday without too much resistance, although the accumulation did drop off markedly on the break, so conviction from the buyers did fall as we broke the big figure. On the week we saw a sizeable US$654m of inflows into the GLD ETF and US$282m into the GDX ETF (Gold miners ETF), which was the highest level of inflows into the GDX since November 2023 – so ETF buying was a bullish factor that needs to be accounted for.

Adding to that flow, is talk that money managers have been better buyers of gold as a portfolio hedge, and they, in turn, have been the beneficiaries of what is a momentum trade, with gold futures driven higher by systematic momentum and trend buyers.

US retail sales (Wed 13:30 UK / 22:30 AEST) Could weak retail numbers affect the Fed’s thinking? It seems unlikely, and as such the volatility from this otherwise important data point may result in limited volatility. However, it could still validate those running short USD positions into the FOMC meeting.

The September FOMC meeting (Wednesday 7 pm UK / Thursday 4 am AEST) After such lengthy and intense speculation the rubber finally meets the road, and the Fed will set the market straight on their collective thinking. There are just too many variables to make a clear-cut playbook over this event risk, and it is not as easy as thinking that the USD rallies/risk falls if we get just’ a -25bp cut or conversely that the USD sells off/risk rallies if we get a -50bp cut.

We need to also consider the Fed’s new economic projections and the new set of dots’. The tone of Chair Powell’s press conference (30 minutes after the statement drops) will also be a huge factor, and whether there is the appetite for a series of big cuts if the labour market further deteriorates.

UK CPI (Wed 7 am UK / 16:00 AEST) UK swaps price a -25bp cut this week from the BoE at 22%, so with a high barrier for a cut, the CPI numbers may only result in small changes in swaps pricing and by extension the GBP. To get the GBP really moving, naturally, the outcome of CPI would need to be a significant deviation from the consensus.

BoE meeting (Thursday 12:00 UK / 21:00 AEST) The strong belief is that the BoE maintains the bank rate unchanged at 5%. 

BoJ Meeting (Friday Asia afternoon) Despite the rally in the JPY, the BoJ meeting will likely be a non-event for markets. Governor Ueda’s press conference later in the session will be more closely followed for signs the review process the BoJ has undergone since the July hike is progressing and for any clues of an appetite to hike again this year. Prior to the BoJ policy statement, we see Japan’s national CPI print (09:30 AEST), and again while unlikely to cause any major volatility in the JPY, it could impact the pricing for a hike in December.

China data and policy rates We watch to see if there is a negative reaction to the weaker-than-expected China data dump (released on Saturday) in the AUD on the FX open, as we will in copper and iron ore futures, and in the China equity indices. The trend in the CN50 index is firmly lower and unless we hear something new and substantial on a fiscal level or that state-owned banks are asked to step in and support the equity market – then rallies will be sold and the trend is lower for a reason.

We also see the PBoC making a call this week on the Medium-Lending Facility and the 1 & 5-year Prime rate, although given how cheap it already is to access credit or to refinance, I’m not sure reducing the cost of capital is the answer the market is looking for. With Chinese households and businesses increasingly looking to reduce debt, there just isn’t the appetite to invest and spend, and that needs to change.

Also on the docket, and data that could move specific markets Aussie jobs (Thursday 11:30 AEST), Norges bank meeting (Thursday 18:00 AEST on hold), SARB meeting (Thursday, -25bp cut expected) and Canada CPI (Wed 22:30 AEST).

On the calendar today:

-China Public Holiday

-US August retail sales

-Cochlear ((COH)) ex-div 210c (80%)

-Duratec ((DUR)) ex-div 2.5c (100%)

-Incitec Pivot ((IPL)) investor briefing

-Maas Group ((MGH)) ex-div 3.50c (100%)

FNArena’s four-weekly calendar: https://fnarena.com/index.php/financial-news/calendar/

Corporate news in Australia:

-Auckland Airport ((AIA)) signed an $NZ800m contract with Hawkins, a Downer Group ((DOW)) subsidiary, to manage the construction of a new domestic jet terminal building

-Canberra Data Centres (CDC) is reportedly set to launch a blockbuster capital raise after receiving approval for all required preparations

-Amaero International ((3DA)) to announce a $25m equity raise after securing a key client

-The Biden-Harris administration has called on Congress to pass legislation that would reduce duty-free thresholds for imports into the US and curb alleged abuse by Chinese online retailers. Some analysts fear it could ensnare platforms like Cettire ((CTT)) if implemented to the fullest extent

Spot Metals,Minerals & Energy Futures
Gold (oz)	2606.20	+ 19.20	0.74%
Silver (oz)	31.07	+ 0.86	2.85%
Copper (lb)	4.22	+ 0.01	0.25%
Aluminium (lb)	1.11	+ 0.03	2.65%
Nickel (lb)	7.17	– 0.04	– 0.51%
Zinc (lb)	1.31	+ 0.02	1.40%
West Texas Crude	67.75	– 1.44	– 2.08%
Brent Crude	71.61	+ 0.89	1.26%
Iron Ore (t)	92.26	– 0.80	– 0.86%

Stephen Auth, Chief Investment Officer for Equities at Federated Hermes

An inside joke at Federated Hermes is that “whenever Auth heads to the beach, something bad happens to mess up his vacation.” I am happy to report I had a delightful holiday, and better still, our thesis is playing out well. So, we are sticking with our call for a broadening out of the market and remaining cautiously overweight on stocks as US election uncertainty rises.

We are closely watching five big things; the yen carry trade is slowly unwinding, the un-inversion of the yield curve toward more normal levels continues, relative earnings growth advantage of large cap growth stocks continues to shrink, labour market data continue to soften, and the election outcome is reaching peak uncertainty – especially for markets.

Against this backdrop, valuations surprisingly reflect more the experience of the past three years, not the future. For example, growth stocks trade at 27x forward 2025 earnings, while value stocks at only 16x, even while the growth gap between the two is likely to reverse next year due to these five big things. While the election uncertainty could cause volatility in the weeks ahead, we expect by year-end that small caps and Value stocks will continue to move “rockily” higher.

The Australian share market over the past thirty days

Index	13 Sep 2024	Week To Date	Month To Date (Sep)	Quarter To Date (Jul-Sep)	Year To Date (2024)
S&P ASX 200 (ex-div)	8099.90	1.08%	0.10%	4.28%	6.71%

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
ARB	ARB Corp	Upgrade to Overweight from Equal-weight	Morgan Stanley
BHP	BHP Group	Upgrade to Outperform from Neutral	Macquarie
DRE	Dreadnought Resources	Downgrade to Hold from Speculative Buy	Bell Potter
PIQ	Proteomics International Laboratories	Downgrade to Reduce from Speculative Buy	Morgans
RIO	Rio Tinto	Upgrade to Outperform from Neutral	Macquarie

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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