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The Overnight Report: The Only Way Is Down

By Greg PeelMarket OverviewDec 06, 2022 10:58
au.investing.com/analysis/the-overnight-report-the-only-way-is-down-200538558
The Overnight Report: The Only Way Is Down
By Greg Peel   |  Dec 06, 2022 10:58
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Mixed Feelings

A 24 point gain for the ASX200 seemed about right yesterday following Friday’s fall. The index was up 50 points at lunchtime, wiping out Friday’s losses, but faded through the afternoon.

A bit of a spurt from midday was possibly linked to the release of September quarter data, which showed company profits were quite weak but inventories and wage growth were strong. Profits were weak largely as some commodity prices came off their highs.

The upshot is economists have ticked up their forecasts for Wednesday’s GDP result. A strong economy (mind you, all those months ago) is not what the RBA wants to see, but as long as we only get 25 today as expected, and inflation continues to behave itself, then a strong economy eases fears of a recession next year.

If ever we were to have one.

But, enough about yesterday, as there have been some interesting developments in the meantime.

How to not lose face while losing face

Coronavirus is weakening and management protocols could be downgraded, an (unnamed) health expert on China’s state media has claimed. Well hasn’t that come at just the right time.

More than 95% of China’s cases are now asymptomatic and mild, and the fatality rate is very low, said Dr X. Under such circumstances, adhering to Class A management protocols is not in line with science.

Only a week or so ago, the Eternal Grand Poobah himself had said lockdown policy was science-based.

Hence covid could be downgraded from a Class A disease (eg the plague) to Class B (eg AIDS) or possibly even Class C (the flu).

Oh what blessed relief! What exquisite coincidence!

A BBC reporter in Beijing noted last night there has not been a significant drop in infections, yet public transport now no longer requires a PCR test result, bars and restaurants are slowly re-opening, and in some cases people are being allowed to isolate at home after catching covid instead of going into centralised quarantine facilities.

So when you examine what is happening here right now, said Stephen McDonell, the trajectory seems clear – the government appears to have quietly dumped zero-covid as a goal.

The end of zero-covid should provide a big boost for the global economy – being a major swing factor in 2023 forecasts – and for Australia, as demand for commodities should now in theory fire up again.

But…

At Your Service

…Wall Street didn’t see it that way.

Last Thursday, Wall Street was in two minds. The PCE inflation reading had come in lower than expected, and that was great news with regard Fed policy. But the US manufacturing PMI showed a drop into contraction in November, and that was bad news with regard the possibility of recession.

Put the two together and bond yields plunged, but the stock market split the difference.

The US services industry had been going gangbusters in 2022 when consumer focus switched from the purchase of “stuff” in 2020-21 to enjoying life again post lockdowns. But the rate of expansion eased over September and October as rate hikes and recession fears made their mark. Economists assumed further easing in November, forecasting 53.5, down from 54.4.

So when it came in at 56.5, Wall Street plunged. Forget China.

It’s rather a case of damned if you do and damned if you don’t. Last week Wall Street saw a contracting manufacturing sector as bad news, as it implied a pending recession. Last night Wall Street saw an expanding services sector as bad news, as it implied greater Fed tenacity. US bond yields plunged on last week’s PMI and last night the ten-year jumped back 10 points to 3.60%.

Under what scenario would Wall Street actually be happy?

I’d wager that last night’s fall was always going to happen – it just needed an excuse. The S&P500 had once again shot up like an aerobatic plane and right at the top of the downtrend line, the engine stalled. If the S&P could not punch through this level, the only way was down.

China was not enough for a punch. The services PMI was just what was needed to ensure the November rally was again of the bear market variety, just as most had been warning. The S&P closed last night below the psychological support level of 4000.

Commodities

China was enough, however, to spark up base metals.

Not oil though, given the weekend’s decision by OPEC-Plus not to cut production.

Gold also lost what it had gained on civil unrest in China, and as the US dollar jumped 0.8% on the services PMI.

The Aussie is down -1.4% at US$0.6690.

Today

The SPI Overnight closed down -47 points or -0.6%.

The last piece of Australia’s GDP puzzle is out today in the form of the current account, which includes the terms of trade.

The RBA meets today and will hike by 25 points.

Bank Of Queensland Ltd. (ASX:BOQ) holds its AGM.

"The Overnight Report: The Only Way Is Down" was originally published on FNArena.com and was republished with permission.

The Overnight Report: The Only Way Is Down
 

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The Overnight Report: The Only Way Is Down

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