MID MORNING MARKETS 29-11-18

The ASX 200 is up 44 points in mid morning trade after an extraordinary night. Cons Disc ↓ but Materials and banks all good. Powell saves the day, Brexit costs firmed up and CAPEX the key. PMV AGM BAL investor update and and BIN ACCC review. AGM#ausbiz

m1m2m3TODAY

  • Economic data – HIA New Home Sales, Private Capital Expenditure. Last: -2.5%, Est 1.0% although range is wide -0.5-3.0%
  • Ex-dividend – ALS (ALQ) 11.0c, Aurora Dividend Income Trust (AOD) 0.3c, Gryphon Capital Income Trust (GCI) 0.9c, Gazal Corporation (GZL) 10.0c, Technology One (TNE) 8.2c
  • Japanese data – Retail Sales
  • AGMs Bank of Queensland (BOQ), Premier Investments (PMV)
  • Belamy’s (BAL) Investor Day

TONIGHT

  • US economic data – Personal Income, Personal Spending, PCE Prices, Pending Home Sales

FED RATE EXPECTATIONS

The market is pricing in just a 9.3% chance of the Fed Funds rate being at or above 3.00% in December 19 (1 hike in Dec 18 and 3 next year). The Fed dot plot shows the MEDIAN expectation at 3.125%. Markets will get a hike “shock” or the Fed will need to downgrade growth expectations. Neither scenario is positive for markets.

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BREXIT

2 reports out last night

1. Bank of England report on Brexit – A disorderly Brexit could be worse than the GFC. All scenarios are worse for the UK economy.

Under the BoE worst case scenario, the “disorderly” scenario, unemployment rises to 7.5%, house prices fall 30%, and the economy shrinks by around 8% over the course of a year. (That compares with the 6.25% contraction experienced during the crisis.). The UK would also lose existing trade arrangements with non-EU countries through membership of the EU and the UK border infrastructure is also assumed to be unable to cope smoothly with customs requirements.

In the slightly better “disruptive” scenario, unemployment would rise to just below 6%. Tariffs and other barriers to trade between the UK and EU are introduced suddenly. No new trade deals are implemented within the five-year period, but the UK replicates deals acquired by virtue of EU membership,

2. British government assessment – The government also out its assessment. It says the UK economy could be up to 3.9% smaller after 15 years (assuming zero net migration) compared to -9.3%  impact of a no-deal Brexit.

If migration rules remained unchanged, national output would be 2.1% smaller in just over 15 years’ time than if Britain remained in the bloc but if there was no deal, it would be 7.7% smaller.

Automotive and chemicals face potentially biggest no-deal hit as they represent 20% of output.

BoE Governor  Carney said last week that the impact of leaving the bloc without a transition could be akin to the 1970s oil crisis for the world’s fifth-biggest economy. He also warned investors not to count on a cut to borrowing costs in the event of an economic shock, saying it could push up inflation sharply and damage growth.

Criticism from Brexit supporters say May’s deal hurts Britain’s economy over the long term by making it harder to strike trade deals with faster-growing countries and regions beyond Europe, and it is not clear that lawmakers will be swayed by the latest forecasts.

Parliamentary votes on December 11.

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COMPANY NEWS

  • Bingo (BIN) – The ACC has identified a number of issues with NIN’s proposed acquisition of Dial-a-Dump. BIN says “We strongly disagree with the preliminary competition concerns raised in the ACCC’s SOI. We remain firmly of the view that the acquisition would not have the effect of substantially lessening competition in the Greater Sydney market. We provided the ACCC with an extensive data set, supported by a number of industry-leading experts, demonstrating this.” BINGO will continue to work with the ACCC in the lead-up to their final decision on 21 February 2019.
  • Bellamy’s (BAL) – AGM. No positive news about SAMR registration but overall tone seems very positive re business.

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OVERNIGHT

m10m11

SPI FUTURES +40

US EQUITIES – S&P 500 +62 (+2.30%), Dow +618 (+2.50%), NASDAQ +209 (+2.95%)

Main themes

  • Fed Chairman Jay Powell said that rates are just below the neutral range, allaying fears of rapid tightening in US rates.
  • US-Trade concerns eased slightly following Larry Kudlow’s comments that discussions had resumed at all levels. Trump and Chinese President Xi Jinping are having dinner on Saturday at the G20.

EUROPEAN MARKETS – Mixed. STOXX500 +0.00%, UK FTSE -0.18%, German DAX -0.09%, French CAC +0.00%.

CURRENCIES

  • The USD fell 0.5% to 96.84.
  • The Aussie dollar rallied to US73.06c.

BONDS – 2-yr: -3 bps to 2.80%, 5-yr: -2 bps to 2.87%, 10-yr: -1 bp to 3.05%, 30-yr: +1 bp to 3.33%

COMMODITIES

  • WTI crude futures were down US$1.27 or 2.5% at US$50.29 (the lowest close since October 2017), following another increase in US inventories (3.6mb). Market sentiment is also dominated by the G20 meeting on November 30-December 1, followed by the OPEC meeting on December 6. Saudi Arabia said it will not cut output alone.
  • Iron Ore – IRESS reports iron ore flat at US$63.50 a tonne. The CommSec site says China Import (Fines 62% Fe) was up US$1.05 at US$65.80 dry ton. (CFR Tianjin port)
  • LME metals – Cu +0.40%, Ni +0.84%, Al -0.10%

ECONOMIC DATA, NEWS & POLITICS

  • US economic data – Q3 GDP Second Estimate 3.5% (consensus 3.6%; prior 3.5%), Q3 GDP Deflator Second Estimate 1.7% (consensus 1.4%; prior 1.7%), October Advance International Trade in Goods -$77.25bn (prior -$76.00 billion), October Advance Retail Inventories 0.9% (prior 0.1%), and October Advance Wholesale Inventories 0.7% (prior 0.3%); New Home Sales 544K (consensus 575K; prior 597K); Weekly MBA Mortgage Index 5.5% (prior -0.1%)
  • Fed Speak – Powells comments referred to the fed funds rate being just below neutral. “Just below” is very different to “a long way from”, which is what Powell said on 3 October…which coincides exactly with the start of the US market correction. Our peak was in late August after results.
  • Interest rate outlook – It’s worth noting that the market is now pricing in an 8.8% probability of 4 hikes by the end of next year (ie a fed funds rate of 300 or more from the current 2-2.25%. It was 11.6% yesterday The median Fed projection at the September meeting was 3.125%

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