The Overnight Report: Stop The World

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World Overnight
SPI Overnight	6894.00	– 26.00	– 0.38%
S&P ASX 200	6961.60	– 177.90	– 2.49%
S&P500	4349.93	– 6.52	– 0.15%
Nasdaq Comp	13542.12	+ 2.82	0.02%
DJIA	34168.09	– 129.64	– 0.38%
S&P500 VIX	31.96	+ 0.80	2.57%
US 10-year yield	1.85	+ 0.07	3.65%
USD Index	96.46	+ 0.57	0.59%
FTSE100	7469.78	+ 98.32	1.33%
DAX30	15459.39	+ 335.52	2.22%

By Greg Peel

Careful what you wish for

I could say Happy New Year, but…

The interesting thing about Wall Street’s current action is that the market spent all the last half of 2021 pricing in Fed rate hikes as early as 2022, and more than one, defying Jay Powell’s longstanding insistence there would be no hike before 2024, and now that the Fed has woken up and fallen into line, Wall Street throws a tantrum.

History does not simply suggest but confirms that when Wall Street posts a significant gain in a calendar year – such as the 25% the S&P500 put on in 2021 – there is always a correction early in the new year.

While the Fed may have been spooked by a visit from the Ghost of Christmas Future it is fair to say no one saw omicron coming, at least not its impact, and this is what has helped the Fed to realise supply shortages and subsequent inflation are not going away in a hurry. The Fed has been surprised by the quantum and extent of inflation, while also being surprised by the strength of the US economy, reflected in both GDP growth and low unemployment.

Then there’s the small matter of Russia.

The ASX200 only gained 13% in 2021, ex-dividends, which in isolation is a cracking year but well below the S&P500’s performance given that was mostly driven by the tech giants. Yet the ASX200 is, as of Tuesday’s close, down -8% from the January 4 peak which largely matches the S&P.

Sneeze-cold, you know the drill.

We can however point to an Australian ten-year yield closing at 1.94% on Tuesday compared to the US equivalent of a 1.71% close on Monday night. The first RBA meeting of 2022 is next Tuesday. The market is on edge.

Zooming in to this week, the ASX200 held up relatively well on Monday in the face of another weak session on Wall Street. On Monday night, the Dow dropped -1100 points before closing up 100. The signals were there for a local rebound, but our futures were showing down -92.

Clearly a big Sell Australia order was going to hit the market. And it did. Nothing was spared. Defensive sectors held up a little better but that was about all. Then came the higher than expected CPI numbers and it was all over bar the shouting.

Subsequently, the Dow dropped -800 points on Tuesday night, as the Johnny-come-lately sellers saw their chance, rebounded to be up 200, and then closed slightly down.

These two extraordinary rebound sessions laid a platform, it seemed, for a bottom to be called in this correction. The only hurdle was nevertheless the Fed meeting. The Dow opened higher before the meeting (the Nasdaq more so), was up 500 on the statement release, and then plunged during the press conference to close down -129.

Our futures have closed down -26 this morning.

The Fed Meeting

The Fed statement did not confirm the first rate hike as early as the next meeting in March, as Wall Street was expecting. This was seen as “dovish”, hence the Dow rallied to be up 500. But during the press conference, again Powell did not confirm a March hike but implied it was probably likely.

What spooked Wall Street was what Powell would not, when asked, rule out.

He would not rule out a double-hike, ie 50 basis points. He would not rule out a rate hike at every meeting this year. He also offered that quantitative tightening would be discussed after the first hike was implemented.

For the record, quantitative easing is when the central bank buys a fixed amount of new bonds each month, while also replacing bonds already on the balance sheet as they mature. Tapering is when that quantum of monthly bond buying is gradually reduced down to zero.

A neutral point is reached when the central bank is no longer buying new bonds, but still replacing maturing bonds, maintaining the size of the balance sheet. Quantitative tightening is when maturing bonds are no longer replaced, and the balance sheet “runs down”.

Powell’s press conference proved to be a lot more “hawkish” than Wall Street expected. The session began with traders assuming Powell would merely confirm what was already expected, and priced into the market, which would provide the potential for a bottoming out from the correction. But no, the volatility is set to continue.

At the micro level, analysts did not expect US corporate earnings growth to match the extraordinary numbers of 2021, or the latter quarters of 2020, but still expected another solid result season. That has not been forthcoming.

Moreover, the current atmosphere means even “beats” are being slammed if they are not big enough. Never mind misses.

The US result season is only just getting into full swing.

The Australian result season begins next week, though we'll have a few early birds this week already.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz)	1818.40	– 22.00	– 1.20%
Silver (oz)	23.51	– 0.40	– 1.67%
Copper (lb)	4.51	+ 0.11	2.48%
Aluminium (lb)	1.40	+ 0.02	1.18%
Lead (lb)	1.07	+ 0.00	0.07%
Nickel (lb)	10.58	+ 0.26	2.53%
Zinc (lb)	1.66	+ 0.01	0.65%
West Texas Crude	86.70	+ 3.01	3.60%
Brent Crude	89.34	+ 2.65	3.06%
Iron Ore (t)	138.10	+ 4.40	3.29%

Note that the prices above all reflect two-day moves.

Note also that the LME closes just as the Fed statement is being released, so base metal price moves do not yet reflect what happened thereafter.

The most notable moves thereafter, outside stocks, were a 0.6% jump for the US dollar index and a 7 basis point jump in the US ten-year yield to 1.85%. The former is a drag on real commodities and both are a drag on the gold price.

The oils however do reflect up to date action.

The Aussie has matched the greenback with a -0.5% fall to US$0.7115.

Today

Nothing notable on the Australian economic calendar today. New Zealand reports December quarter CPI and China December industrial profits.

Just to add fuel to the fire, the US will tonight see a first estimate of December quarter GDP, along with December quarter PCE inflation and month of December durable goods orders.

On the stock market, Ansarada Group ((AND)) reports earnings today while Evolution Mining ((EVN)) and OZ Minerals ((OZL)) release December quarter production reports.

Atlas Arteria ((ALX)) and Insignia Financial ((IFL)) – the artist formerly known as the International Order of Oddfellows (IOOF) – provide quarterly updates.

Janus Henderson ((JHG)) holds its AGM.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
29M	29metals	Downgrade to Neutral from Outperform	Credit Suisse
ABP	Abacus Property	Upgrade to Buy from Neutral	Citi
ADH	Adairs	Downgrade to Hold from Accumulate	Ord Minnett
CHC	Charter Hall	Downgrade to Equal-weight from Overweight	Morgan Stanley
COH	Cochlear	Upgrade to Outperform from Neutral	Credit Suisse
DXI	Dexus Industria REIT	Upgrade to Outperform from Neutral	Macquarie
DXS	Dexus	Upgrade to Neutral from Sell	Citi
LLC	Lendlease Group	Upgrade to Outperform from Neutral	Macquarie
PME	Pro Medicus	Upgrade to Add from Hold	Morgans
REA	REA Group	Downgrade to Neutral from Outperform	Macquarie
RMD	ResMed	Upgrade to Buy from Hold	Ord Minnett
RRL	Regis Resources	Downgrade to Hold from Add	Morgans

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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