The Overnight Report: Bombshell

This story features COLLINS FOODS LIMITED, and other companies. For more info SHARE ANALYSIS: CKF

The company is included in ASX300 and ALL-ORDS

By Greg Peel

Fun while it lasted

With help from Wall Street, yesterday the ASX200 made good on the rebound it didn’t quite achieve on Monday, at least up to lunchtime when the index was up over 90 points. Once again the sellers moved in, and when the bell rang the index was up only 50 points.

On the market-on-close match-up, another -34 points were wiped off. Those sellers weren’t to know what would transpire, but it wasn’t a bad move considering the futures are down -35 points this morning.

At the official close it was a mixed bag sector-wise. Defensives held the fort, with telcos up 1.8%, property 0.9% and staples 0.8%, although utilities fell -1.2% to be the worst performer.

The banks closed flat, with the Aussie ten-year yield down another -5 points to 1.68%. Materials managed to gain 0.3% on a partial rebound in metal prices but energy did not move on a slight rebound for oil.

Second worst sector performer was discretionary, which makes sense if lockdowns are once again upon us.

The key to everything will be finding out whether the current vaccines are or are not still effective against omicron. Yes says no lockdown, no is another matter.

Collins Foods ((CKF)) topped the index leaders after reporting earnings and jumping 12.6%. KFC does well in a lockdown.

Credit Corp ((CCP)) rose 8.6% on its acquisition of Radio Rentals from Thorn Group ((TGA)).

Other big movers on the day included Orocobre ((ORE)), up 7.9%, Uniti Group ((UWL)) 7.8% and Omni Bridgeway ((OBL)) 6.6%.

The losers’ board saw smaller moves, with gold miners appearing once again. St Barbara ((SBM)) was the worst of them, down -4.3%, while second worst stock on the day was Cochlear ((COH)) down -3.9% presumably on fears of a re-shutting down of elective surgery.

No point in diving deeper — Jay Powell has provided another twist in the omicron tale.

Stagflation?

A couple of months ago, talk of stagflation was scoffed at by economists who pointed out that while inflation was rising as the economy was slowing from its rapid pace, the stagflation tag of the 1970s referred to double-digit inflation in a deep recession.

The one caveat, to a degree, would be if the Fed were forced to raise rates to fight persistent inflation, into a slowing economy.

Last night Jay Powell dropped a bombshell at a Congressional committee hearing. With regard “transitory” inflation, he suggested: “It’s probably a good time to retire that word and explain more clearly what we mean.”

On that note he said it would be appropriate, given the present economic backdrop, to consider speeding up the tapering process.

Wall Street’s response was a resounding why now? Had he made this capitulation months ago when the economy was strong, delta was easing and inflation was rising, Wall Street would have applauded. If he’d done so last Thursday Wall Street would still have hardly blinked. But when the world faces a whole new round of covid uncertainty, Powell decides to put on the economic brakes.

The decision will be made in the next Fed meeting in a couple of weeks.

To rub in the salt, Janet Yellen warned the government will run out of money by December 15, or earlier, unless the debt ceiling is lifted.

But before all of this happened, the CEO of Moderna set markets back on edge by predicting that current vaccines would be less effective against omicron.

The Fed is caught between a rock and a hard place. Before omicron it was clear that inflation will not go away in a hurry due to ongoing supply problems that began in the 2020 virus waves and subsequent lockdowns and were exacerbated by delta. Now omicron threatens lockdowns once more, particularly in the global supply hub of Asia, where China, in particular, is maintaining a zero-covid policy and locking down at the first sign of trouble.

If new vaccines are needed, that will take time, and inflation will only persist, or get worse, in the interim. The global economy will not only slow if lockdowns spread, but likely recede once again, at least in the short term. Stagnant economy, high inflation.

The Fed now risks being as much a part of the problem as the solution. To be fair, faster tapering does not immediately imply rate hikes, but surely brings forward the timing, just as Wall Street has being trying to tell the FOMC for the past months.

Wall Street will also send a message to the Fed if stock markets once again tank, in which case monetary tightening might have to be completely reconsidered.

Shades of December 2018, when too many rate hikes sent Wall Street tumbling, forcing the Fed into a policy “pivot”.

I don’t envy his job.

One interesting element of Wall Street’s otherwise unsurprising second crunch last night was a matter of safe havens. Gold fell -US$10/oz and Apple rose 2.5%. Had Apple have gone the other way, falls on all three major indices would have been much, much worse.

Government bonds are also a safe haven, at the long end. Hence the US ten-year yield fell -9 points to 1.44% last night despite the threat of policy tightening, which was otherwise reflected on rising short-end yields. The yield curve is flattening fast. Inversion comes before recession.

Commodities

More wobbles for base metal prices, while iron ore had closed ahead of Wall Street.

Another down-leg for the oils, ahead of tomorrow night’s OPEC meeting.

The Aussie is steady at US$0.7129.

Today

The SPI Overnight closed down -35 points or -0.5%.

Australia’s lockdown impacted September quarter GDP is out today, and is rapidly becoming old news.

It’s the first of the new month, so locally we’ll see house prices and across the globe it's manufacturing PMI day.

China reported a slight rebound in its November PMI yesterday, up to 50.1 from 49.2, or we might say, barely alive.

Tonight brings private sector jobs numbers in the US, and the Fed Beige Book.

Aristocrat Leisure ((ALL)), Incitec Pivot ((IPL)) and United Malt Group ((UMG)) all go ex today.

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.

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