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Australian shares are poised to open sharply lower, following a tech-paced sell-off that has washed through global markets, triggered by Apple. ASX futures were down 65 points at about 8.40am AEDT. The Australian dollar slid below the US72¢ mark.
Not helping sentiment, oil turned from positive to negative in afternoon trading in New York with Brent dropping sharply in post-settlement trade, leaving it down 1.4 per cent by 4.59pm in New York. US oil did the same, ending the session down 2.2 per cent. The Saudis are looking at potentially paring output next year, a move that President Donald Trump sought to deter in a tweet.
The Dow shed 602 points or 2.3 per cent, with Goldman Sachs down 7.5 per cent as the bank’s troubles surrounding billions of dollars of deals for Malaysian state fund 1MDB escalate, Bloomberg reported. Twenty six of the Dow’s 30 components were lower. Apple shed 5 per cent and Boeing tumbled 3.5 per cent.
“At the moment it seems the path of least resistance is down,” said Peter Jankovskis, co-chief investment officer at OakBrook Investments LLC in Lisle, Illinois.
With the overnight drop, Apple has entered a correction this month. The company’s shares closed at $US222.22 on November 1; overnight, they dropped to $US194.17 — a 12.6 per cent drubbing in the wake of Apple flagging a disappointing outlook for holiday sales and reports that an increasing number of its key iPhone parts suppliers have been told to cut shipments or are tipping lower revenues.
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Volatility surged. The VIX leapt 17 per cent to more than 20.
Trump blames Democrats for stock rout: President Donald Trump blamed the downturn in the stock market on the prospect of Democrats aggressively wielding their newfound oversight power.
Apple extended its retreat amid concerns about demand for iPhones, with some badysts questioning whether demand for the phones has peaked, linked in part the company’s decision to stop detailing how many iPhones it sells.
However, the overnight drop was triggered by the main supplier for Apple’s Face ID technology, Lumentum Holdings, which slashed revenue and profit forecasts, citing reduced orders from a major customer. Lumentum’s shares dropped 33 per cent.
There’s a chance the sell-off could extend itself.
In a new blog post, BlackRock portfolio manager Russ Koesterich said his badysis of current stock valuations showed that shares were still pricier than two years ago and that last week’s post-midterm rally reflected “a short term exhaustion of selling, rather than bargain hunting”.
Mr Koesterich said it’s difficult, especially when talking about US equities, to say they “got so cheap buyers simply could not help themselves”.
“The argument that stocks were more attractively priced in the fall of 2016 is supported by the fact that bond yields were also much lower. Right before the 2016 post-election rally, the U.S. 10 year Treasury was yielding approximately 1.80% and German Bund yields had just recently crossed back above 0%. In other words, not only were stocks modestly cheaper on an absolute basis, they were much cheaper once you adjusted for interest rates.”
Mr Koesterich also said some perspective is necessary.
“Certain segments of the market are trading below their long-term average, and even at the index level stocks are less egregiously priced than was the case in late January. However, not being egregiously priced is not the same as being cheap. With US rates up nearly 150 basis points (bps, or 1.50% points) from the fall of 2016 and the Fed still tightening, it will be harder for multiples to expand from here.
“I can think of two scenarios: rising growth expectations, such as we saw with the stock market rally in late 2016, or modest growth coupled with easier financial conditions, i.e. something closer to the rally during the first half of 2017. In the first instance, expect value and probably financials to lead. The second scenario would arguably be characterized by a return of king tech. In the absence of either, expect more volatility.”
In a review of the outlook for local shares, Wealth Within’s Dale Gillham said he continued to be optimistic though cautious. “It is still too early to confirm if the correction we had to have is now over although I believe the market will continue to rise over the coming months to between 6200 to 6400 points by Christmas.”
Mr Gillham said he thinks “there is plenty of room for the market to rise up to the previous all time high of 6873 points and surpbad it, which I believe will occur in the first quarter of 2019”.
However Mr Gillham said he’d be wary of buying into AMP despite its recent drop. “From a technical perspective, it is exceedingly rare for a stock to fall below 90 per cent of its all-time high price which AMP now has.
“While AMP has caught my attention, now is not the time to jump in with the expectation of gaining a bargain, even though the stock has risen in the past two weeks by around 10 per cent, as buying it right now would be high risk.
“Looking back to 2003, we can see that AMP fell to a low of $US2.73, which was a decline of around 90 per cent from its all-time high of $US30.05. Following this, the stock rose by around 300 per cent and so while investor sentiment is not currently on their side, it should not be ignored as the stock could move nicely when it turns to rise given that I am expecting AMP to find support at around the $US3 mark and trade up.”
Today’s Agenda
Local data: NAB October business conditions and confidence reports
Overseas data: German CPI October, ZEW November expectations; Euro zone ZEW November expectations; UK jobless claims change October, ILO unemployment rate September, Average weekly earnings September; US NFIB small business optimism October
Market Highlights
SPI futures down 65 points or 1.1% to 5866 at 8.40am AEDT
AUD -0.7% to 71.72 US cents
On Wall St: Dow -2.3% S&P 500 -2% Nasdaq -2.8%
In New York, BHP flat Rio -0.7% Atlbadian -3.1%
In Europe: Stoxx 50 -1.1% FTSE -0.7% CAC -0.9% DAX -1.8%
Spot gold -0.8% to $US1200.47 an ounce at 4.59pm New York
Brent crude -1.4% to $US69.21 a barrel at 4.49pm New York
US oil -2% to $US58.99 an ounce at 4.49pm New York
Iron ore -1.5% to $US76.05 a tonne
Dalian iron ore n/a
LME aluminium -0.6% to $US1942.50 a tonne
LME copper -0.1% to $US6048 a tonne
US bond market closed overnight for Veterans’ Day holiday
2-year yield: US 2.92% Australia 2.05%
5-year yield: US 3.04% Australia 2.26%
10-year yield: US 3.18% Australia 2.70% Germany 0.40%
US-Australia 10-year yield gap as of 9.03am AEDT: 48 basis points
From Today’s Financial Review
Woolworths expected to return $1.7b: Woolworths is expected to return $1.7 billion from the sale of its fuel business through an off-market share buy-back to minimise earnings dilution and maximise franking credits.
McKibbin queries RBA’s inaction on rates: Economists, led by former Reserve Bank board member Warwick McKibbin, have queried the central bank’s strategy of extending its stretch of record low official interest rates.
Chanticleer: Housing regulation’s soft underbelly: It seems extraordinary that one of the most critical sectors of the economy, which finances about $400 billion in new loans each year, is being called out in such a blatant way as being inadequately supervised.
United States
With Monday’s losses, all three major Wall St indexes erased the gains from their brief rally after the US congressional elections on November 6.
“The concerns are all about global economic growth, specifically demands for the products of companies like Apple,” said Kate Warne, investment strategist at Edward Jones in St. Louis. “Investors are becoming more concerned about faster-growing companies and whether they will continue to grow at that pace.”
Among the S&P 500’s 11 major sectors, technology and financial stocks weighed most heavily. The S&P 500 technology sector index fell 3.5 per cent, and the financial sector index fell 2.0 per cent.
Energy stocks also accelerated their decline toward the end of the session as oil prices fell.
Wall St equity traders to cash in: Equity traders on Wall Street are expected to take home the biggest bonuses this year as a surge in volatility boosted client activity, but 2019 may not be as rosy.
LPL’s earnings season review: “With 90% of S&P 500 Index companies having reported, S&P 500 Index earnings growth is tracking to an impressive 27.9% year-over-year increase, the highest growth rate since the fourth quarter of 2010 and 6 percentage points above expectations as of quarter end.
“Beat rates of 77% and 60% for earnings and revenue are impressive, as is the amount of earnings upside. However, we are most impressed with the amount of revenue upside-tougher to generate-that has been generated over the past two weeks. Revenue growth is tracking to an 8.5% year-over-year increase, compared to 7.7% just two weeks ago.”
SocGen’s Albert Edwards view on US business investment: “… despite extremely high levels of corporate optimism on the back of Trumps fiscal reforms, business investment (including inventories) has not been a key driver of the stronger economy, as it contributed less than 1pp to the 3% GDP yoy growth.”
Europe
European shares were lower on Monday led by a sell-off in technology stocks after earnings and M&A news from German heavyweights Infineon and SAP, and tobacco was hit by new signs of US regulators tightening the screws on menthol cigarettes.
The pan-European STOXX 600 benchmark index fell 1 per cent, reversing earlier gains.
The swift slide into the red, ending a tentative recovery from Friday’s losses, highlights the fragility of market sentiment amid lingering worries about Italy’s budget crisis, a Brexit deal and expectations for a US interest rate hike.
News that Banca Carige has around €400 million to plug a hole in its capital base also underscored concerns about the health of the banking sector in the 3rd largest euro zone economy.
Trading in the lender’s shares were suspended pending an announcement. Just before the market close, Carige approved measures totalling €400 million, including the issue of a subordinated bond which is convertible into shares.
The main Italian stocks index fell 1 per cent, ahead of Tuesday’s EU deadline for Rome to present a revised version of the budget.
Chipmaker Infineon and SAP sank to the bottom of the DAX, down 7.8 per cent and 5.6 per cent respectively. M&A was the driver behind SAP after the software company announced its acquisition of consumer sentiment tracker Qualtrics International for $US8 billion, a price considered expensive by traders and badysts.
Tobacco shares were rocked by a Wall Street Journal report that the US Food and Drug Administration plans to pursue a ban on menthol cigarettes.
British American Tobacco, which traders said has the greatest exposure to menthol cigarettes, fell as much as 11 per cent to its lowest since February 2014 in early deals, while Imperial Brands shares fell 2.2 per cent.
Menthol, which accounts for 36 per cent of the US market, accounts for about a quarter of BAT’s total EBIT and 11 per cent of Imperial’s tobacco EBIT, according to Barclays’ badysts.
Asia
We could work with China, says PM: Australia would be willing to co-fund regional infrastructure projects with China if it helped with stability, Scott Morrison said.
North Korean missile capacity intact: More than a dozen hidden military bases have been identified in North Korea, indicating that the nation is far from dismantling its weapons facilities, according to a new report.
Stocks in Hong Kong moved up marginally on Monday, but were left out from the policy-inspired rally seen in the technology sector in the mainland market, as investors in the city appeared cautious ahead of key earnings announcements and global events. The main Hang Seng index and the Hang Seng China Enterprises index each ended 0.1 per cent firmer.
Tencent Holdings, which is due to report its third quarter earnings on Wednesday, was the second worst performer in the Hang Seng and worst among H-shares on Monday, dropping 3.1 per cent. The company’s shares were battered last Friday after a brokerage cut its target price.
In Tokyo, the Nikkei share average gained 0.1 per cent to 22,269.88 after trading lower in early deals. The benchmark index fell to as low as 22,046.29, but traders said that futures buying supported the market.
“Investors are buying on the dip today, while futures buying seemed to have kicked in when the index neared the 22,000 level,” said Norihiro Fujito, chief investment strategist at Mitsubishi UFJ Morgan Stanley Securities.
Analysts said that a modestly softer yen also supported sentiment.
Currencies
US dollar climbs to 16-month peak: The US dollar reached a 16-month high against a basket of currencies as investors built bets on a Federal Reserve interest rate increase next month.
Capital Economics on the outlook for sterling: “Sterling extended its recent loses against the dollar today, despite a bounce after reports that Michel Barnier said that a breakthrough on Brexit was close. While we expect the currency to remain under pressure in the near term, we still think it is more likely than not that sterling will rally next year.
“In what has become a common theme in the past few months, the latest pull back in sterling appears to reflect fading optimism of a Brexit breakthrough. Theresa May reportedly cancelled plans for an emergency Cabinet meeting to approve a deal on Monday amid continued disagreement from MPs on the Irish backstop. There are further reports that a number of ministers are prepared to join Jo Johnson in resigning.”
“Provided that the UK and EU agree on a deal and politicians vote in favour of a deal in Parliament, we expect sterling to rally to $US1.45/£ by the end of next year. In our view, this is still just about the most likely scenario.
“If, however, the UK Parliament rejects the deal agreed between the two sides and the UK heads towards a chaotic exit from the EU, sterling may fall sharply in the short term. But there are reasons to expect that the fall would not be too large. For one, there is already a large net-short position on sterling against the dollar. And sterling has already fallen a long way – it is 9% below its level on the eve of the EU referendum.”
Commodities
Nickel fell to an 11-month low on Monday on worries about stainless steel, while other base metals were pressured by uncertainty about the global economy.Aluminium touched the weakest since August last year as speculators piled on more bearish positions.
“The macro pressures continue to weigh on the downside, such as China’s growth situation, Europe’s political uncertainty and also the dollar’s pretty strong,” said Geordie Wilkes, head of research at Sucden Financial in London. “People are now looking to the G20 for some sort of clarification, but I’m cautious about the negotiations on the (China-U.S.) trade war.”
Three-month nickel on the London Metal Exchange shed 0.7 per cent to close at $US11,375 a tonne, its lowest since December 15 last year.
Shanghai rebar steel prices tumbled nearly 4 percent to the lowest since late July, pressured by worries over slowing demand in top consumer China over the seasonally weak winter period.
That weighed on zinc, mainly used in galvanised steel, with the LME price ending 1 per cent weaker at $US2497.50 a tonne.
LME on-warrant aluminium stocks , those not earmarked for delivery, rose 5550 tonnes to 745,750, data showed on Monday. They have climbed 22 per cent over the past month.
Aluminium slipped 0.6 per cent to finish at $US1942.50 a tonne, the lowest since August 7 last year.
LME copper dipped 0.1 per cent to close at $US6048 a tonne.
Australian Sharemarket
Australian shares rallied from an opening loss to close the session higher on Monday, advancing to a three week high and wiping Friday’s losses.
The S&P/ASX 200 Index closed the session 19.5 points, or 0.3 per cent, higher at 5941.3, rallying from a 37 point loss inside the opening hour of trading.
The energy sector led the market gains on Monday as oil prices ended a record run of losses after Saudi Arabia’s Energy Minister Khalid Al-Falih told reporters on Sunday in Abu Dhabi, the Kingdom would reduce crude sales in December.
“My sense is the move has emboldened buyers of what’s been a beaten down sector recently,” said McKenna Macro founder Greg McKenna. “It’s fair to say the result on the local market has been measured – correctly in my view. But if oil can bounce, if we do hear more from OPEC in the weeks ahead, these stocks and the overall energy index should find a bid.”
Street Talk
Asahi shows rising interest in rival’s local portfolio
Heavyweights to step up the water torture on Blue Sky fund
OFX Group considers large cash deal of its own
with Reuters, Bloomberg, AAP
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