The Overnight Report: Build Back Burned

This story features MAGELLAN FINANCIAL GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: MFG

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

World Overnight
SPI Overnight	7201.00	+ 6.00	0.08%
S&P ASX 200	7292.20	– 11.80	– 0.16%
S&P500	4568.02	– 52.62	– 1.14%
Nasdaq Comp	14980.94	– 188.74	– 1.24%
DJIA	34932.16	– 433.28	– 1.23%
S&P500 VIX	22.87	+ 1.30	6.03%
US 10-year yield	1.42	+ 0.02	1.21%
USD Index	96.55	– 0.02	– 0.02%
FTSE100	7198.03	– 71.89	– 0.99%
DAX30	15239.67	– 292.02	– 1.88%

By Greg Peel

Holding Fast

Wall Street had fallen on Friday night over a rising omicron threat meeting Fed tightening and the ASX200 duly fell -30 points from the open yesterday as the futures had suggested. But there began a choppy recovery to a close of only down -11.

This was in contrast to markets in the rest of Asia.

There were two pieces of news through during the session. One was that for the first time in 20 months, Chinese banks lowered their borrowing costs, as Beijing continues its swing from restrictions to stimulus.

The other was that the Republican plant in the Democrat senate, Joe Manchin, has for now killed off Biden’s US$2trn social infrastructure bill, known as Build Back Better. More on that below, but suffice to say this is the primary reason for the -400 point drop in the Dow.

It was also the reason for all of the Japanese, Korean and Hong Kong stock markets to fall -2% yesterday. In Hong Kong, and in Shanghai (-1%), the news appeared to override any benefit from lower lending rates. Oil prices in Asia started tanking.

Which is why our energy sector stood out yesterday with a -3.4% plunge, and indeed WTI crude is down near to -4% overnight.

But other than a small fall for industrials (-0.2%), and a -0.8% fall in financials which was not about the banks, although they were a little lower, but about a -33% fall for Magellan Financial Group ((MFG)) after the fund manager lost a significant mandate, all other sectors closed in the green.

It was a combined effort of smaller moves, led out by healthcare (+0.8%) which appears now to have sorted itself out in the wake of CSL’s ((CSL)) big raising.

What’s more, with the S&P500 down -1.1% overnight, our futures are up 6 points this morning.

Perhaps Australia is back in favour on a relative covid basis, as it was until delta hit and we didn’t have any vaccines. But we have our own case-counts on the rise, amid the contradiction of the People’s Democratic Republic of Western Australia locked off while the most populous state thumbs its nose at omicron.

My God, the ABC and BBC cricket commentary teams have been forced into isolation.

The National Cabinet meeting today will be interesting.

More interesting will be whether our market can keep its head again when all about it are losing theirs.

Fiscal Falter

The daily US case-count is now running at 130,000 and it appears omicron has now overtaken delta as the dominant strain. On Friday night Wall Street tumbled on the fear of omicron slowing the US economy just as the Fed begins to tighten policy. Yet by the same token, omicron has the capacity to extend the supply shortages and delays that have driven runaway inflation.

It’s rather a rock and a hard place, particularly if you then add in the impact on demand (a cruise liner pulled into Miami on the weekend with 48 positive cases). This would perhaps curb inflation to an extent, but also slow the economy.

One big hope for US economic growth in 2022 is Biden’s US$2trn infrastructure package, which on the balance of the tax increases on corporations and the wealthy required to pay for it, is seen as net stimulatory. While the package focuses a lot on welfare – child care, health, the elderly – it also focuses on fighting climate change, including investment in renewables and incentives for EV purchases.

But the recalcitrant senator from West Virginia – one of America’s poorest states – turned around on Sunday night and said he just can’t pass it. Whether or not elements of what is a ten-year spending plan can be individually passed, for now it appears Build Back Better is dead.

Goldman Sachs has subsequently halved its prior US economic growth forecast for 2022.

The hardest hit sectors in the S&P500 last night were industrials, materials, energy and the banks, reflecting the loss of the stimulus.

Consumer discretionary was another victim, more so reflecting omicron.

Only staples and utilities managed to just scrape into the green but the other defensive group – Big Tech – did not play the part it has done so all year. The FAAMGs were all sold down again.

Indeed the uniformity of falls across the major indices indicates this was not yet another rotation session, but a “Sell Everything”.

There was a little positivity in the indices recovering some of the losses at the death (the Dow was down -600 in the morning), but heading into Christmas, Wall Street is facing an uncertainty-driven and volatile run to year-end.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz)	1791.80	– 6.90	– 0.38%
Silver (oz)	22.27	– 0.08	– 0.36%
Copper (lb)	4.28	– 0.02	– 0.48%
Aluminium (lb)	1.19	– 0.02	– 1.92%
Lead (lb)	1.05	– 0.01	– 0.71%
Nickel (lb)	8.86	– 0.12	– 1.29%
Zinc (lb)	1.54	– 0.01	– 0.43%
West Texas Crude	68.23	– 2.63	– 3.71%
Brent Crude	71.87	– 1.65	– 2.24%
Iron Ore (t)	123.20	+ 4.95	4.19%

While US policy has global impact, and omicron is a global phenomenon, it’s very much a China story when it comes to iron ore.

Hence while metals and oils fell as expected last night, the renewed ramp-up of Chinese steel production following Beijing’s about-face on policy, combined with 2021’s precipitous plunge from record highs, has iron ore bouncing back.

The Aussie is down -0.2% at US$0.7111.

Today

The SPI Overnight closed up 6 points.

The minutes of the December RBA meeting are out today.

Metcash ((MTS)) goes ex.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
CTD	Corporate Travel Management	Upgrade to Outperform from Neutral	Macquarie
JBH	JB Hi-Fi	Upgrade to Buy from Hold	Ord Minnett
PDN	Paladin Energy	Outperform	Macquarie
WES	Wesfarmers	Upgrade to Accumulate from Hold	Ord Minnett

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

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