The Overnight Report: Back From The Dead

This story features FLIGHT CENTRE TRAVEL GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: FLT

The company is included in ASX200, ASX300 and ALL-ORDS

World Overnight
SPI Overnight	7210.00	+ 33.00	0.46%
S&P ASX 200	7206.50	– 41.90	– 0.58%
S&P500	4363.55	+ 17.83	0.41%
Nasdaq Comp	14501.91	+ 68.08	0.47%
DJIA	34416.99	+ 102.32	0.30%
S&P500 VIX	21.00	– 0.30	– 1.41%
US 10-year yield	1.52	– 0.01	– 0.33%
USD Index	94.22	+ 0.22	0.23%
FTSE100	6995.87	– 81.23	– 1.15%
DAX30	14973.33	– 221.16	– 1.46%

By Greg Peel

Alarming Rate

After a solid rebound on Wall Street overnight, and the futures suggesting up 36 points, the ASX200 duly opened up 31 points yesterday in the first ten minutes, but that was the end of that.

Clearly no one informed the computers at the open the RBNZ had just raised its cash rate to 0.50% from 0.25%, and signalled further hikes would be needed to keep a lid on inflation. In response, the Aussie ten-year yield shot up 8 basis points to 1.59%.

The RBNZ’s move implies pressure on RBA policy.

Higher rates should be positive for banks, except that yesterday APRA announced an increase to the mortgage serviceability “buffer” rate to 3.0% from 2.5%. This implies that to be approved for a mortgage at 2%, borrowers must satisfy the bank they can service that mortgage at 5.0%.

The RBNZ had signalled the rate rise at its prior meeting, having taken on a more hawkish tone. Economists have been expecting such from APRA for months, and notably the regulator did not also move on debt-to-income limits as was assumed, although it doesn’t mean it won’t in the near future.

The banks were the biggest drag on the index by day’s end because of their market cap, falling -0.9%. The biggest percentage drop was recorded by consumer discretionary (-1.3%). While consumer spending capacity is very much linked to mortgage obligation, the sector was led lower by falls in Flight Centre ((FLT)) and Webjet ((WEB)), down -6.6% and -6.2%.

These heavily shorted stocks had taken off on the announced pull-forward of the international border reopening, but yesterday seemed to be a delayed reaction to Tuesday’s announcement from Morrison that inbound tourists will not be allowed in until next year, allowing preference to stranded Aussies, foreign students and skilled migrants.

Later in the day, the Dow futures were sliding over -100 points which suggested, given this volatile week, another big fall on Wall Street was in the offing. Which ultimately it was. See below.

Energy was yet again the best performing sector, up 0.6%, but that will all change today. Having fallen sharply on Tuesday on the Nasdsaq’s fall, technology also squeaked higher (+0.5%) on the Nasdaq’s bounce. All other sectors closed in the red.

Things went sour for a2 Milk ((A2M)) yesterday, and its share price went south by -7.7%. Shareholders have begun a class action against the board, claiming it has been deceptive in its disclosures as evidenced by rolling earnings downgrades.

The top five winners’ board was a mixed bag, led out by ever rising Whitehaven Coal ((WHC)) on ever rising thermal coal prices. Also ever rising in the energy space have been oil and natgas, both of which finally saw profit-taking last night.

On a mid-session bounce on Wall Street, our futures are up 33 points this morning.

Dancing on the ceiling

From the close of the ASX the Dow futures kept falling, and the Dow was down -460 points early in last night’s session.

There was no obvious trigger for this particular fall, other than in the October pattern to date, the series of down-up-down-up sessions was due another down. Oil and natgas prices did finally roll over, but the energy sector is only 2% of the S&P500 and high energy costs are a drag on every other sector.

The pullback was triggered by Putin announcing Russia would boost supply of gas to Europe to ease the shortage issue ahead of the northern winter.

But just when things were looking grim, the Republican Senate leader proposed a debt ceiling extension out to December.

We recall that the last time the US government shut down due to Republicans blocking a debt ceiling increase was in 2011 under the Obama Administration. The world’s largest economy subsequently lost its AAA credit rating, US bonds were sold down and the stock market fell a net -17%.

This sufficiently rattled the Good Old Boys, and their investment portfolios, to lead to a compromise. Which is why Wall Street has no doubt an agreement will ultimately be reached this time around at the last minute.

The extension to December is no more than your common or garden “kicking the can down the road”, as it does not signal a back-down by the Republicans – just more time for everyone to fret.

The US is the only country in the world to have a debt ceiling, and every time it needs to be, it has been raised. Hence there is a push to scrap it altogether, and end this constant farce.

The debt ceiling news was nevertheless enough to spin Wall Street around, and send it rocketing back. The rebound was also aided by a September private sector jobs increase of 568,000 when 425,000 was forecast, ending the run of disappointing labour market data.

It will still come down to Friday’s non-farm payrolls nonetheless, but economists have been suggesting for a while that the end of covid-related unemployment bonuses last month would trigger a rush back into the workforce.

Low-paid American workers can no longer earn more by lying on the couch.

So there was much relief on Wall Street last night but two disquieting factors stand out. Firstly, last night’s bounce was not driven by cyclicals or growth but by consumer staples, property and utilities – defensives all.

Secondly, the S&P500 closed on its high last night which happened to be, give or take a couple of points, the same high as Tuesday, and of last Friday, and of last Thursday (intraday), and roughly where the S&P pulled up in the September sell-off.

Unless something can drive a break to the upside, the trend remains down.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz)	1764.10	+ 4.10	0.23%
Silver (oz)	22.66	+ 0.07	0.31%
Copper (lb)	4.11	– 0.03	– 0.65%
Aluminium (lb)	1.30	– 0.01	– 0.95%
Lead (lb)	0.99	+ 0.00	0.02%
Nickel (lb)	8.22	+ 0.07	0.88%
Zinc (lb)	1.36	– 0.01	– 0.43%
West Texas Crude	77.05	– 2.10	– 2.65%
Brent Crude	80.81	– 1.94	– 2.34%
Iron Ore (t)	117.80	0.00	0.00%

Outside of the oils, nothing untoward.

China will be back from holiday tomorrow to get the iron ore price moving again.

The Aussie is down -0.2% at US$0.7276 as the greenback continues to creep higher.

Today

The SPI Overnight closed up 33 points or 0.5%.

ARB Corp ((ARB)) goes ex today.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
AGL	AGL Energy	Upgrade to Equal-weight from Underweight	Morgan Stanley
		Upgrade to Neutral from Sell	UBS
BBN	Baby Bunting	Upgrade to Add from Hold	Morgans
BXB	Brambles	Upgrade to Buy from Neutral	UBS
PME	Pro Medicus	Upgrade to Hold from Reduce	Morgans

For more detail go to FNArena's Australian Broker Call Report, which is updated each morning, Mon-Fri.

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