Markets down most in more than a month

A big sell off today for Aussie stocks with sellers out early and sustained throughout the day with very little respite to speak of – the market eventually closing on its lows. Banks came under pressure on a broker downgrade of the sector while the iron ore names felt the heat of a weaker iron ore price – although Fortescue (FMG) and Rio Tinto (RIO) did well to pick themselves up and rally from the morning lows as iron ore ticked higher in Asia. At a sector level, all finished in the red with recent strength in the property, utilities and healthcare names giving way today.

US Futures fell during our timezone, however it was Asian markets that felt the brunt with Hong Kong and China off around ~2% apiece while Japan was down by ~0.60% .

Overall, the ASX 200 fell -79 points today or -1.17% to 6672. Dow Futures are trading down -70 points / -0.25%.

ASX 200 Chart

ASX 200 Chart

CATCHING OUR EYE;

Yield stocks feel the heat: One obvious theme from the sector performances today was that the traditional yield names felt the brunt – Property & Utilities, sectors that generally perform relatively well in a weak market. Not today, and while we don’t like re-hashing content, revisiting what we wrote on the weekend around interest rates, and the market getting ahead of itself is relevant today.

Over recent months MM has been confident the RBA would cut interest rates to at least 1% with our main indicator being the 3-year bond yield was trading noticeably under the official RBA rate. However, over the last week the 1% mark has felt like a magnet to both rates, while a few days clearly doesn’t make a summer, we feel the “easy money” for the rate cut lovers is behind us. Markets are still expecting one more 0.25% cut in 2019, with potentially another in 2020, but this may become 1 or 2 cuts too far with potential disappointment for investors already ravenous for “cheap money”. Logic says to me the RBA will want to see the impact of these 2 quick rate cuts before considering going again.

Australian 3-year bond yields v RBA Cash Rate Chart

Morgan Stanley turn negative: MS have moved from equal weight to underweight global equities, saying the ability of central bank policy easing to offset weaker economic data, poorer readings on the economic cycle, and disbelief that a trade truce between the US and China at the Group of 20 meeting will lead to a lasting positive outcome. We see a market too sanguine about what lower bond yields may be suggesting – a worsening growth outlook.

We also had news that Deutsche Bank was cutting its Australian equities business as part of a global cost-cutting plan. About 50 jobs are being cut largely from research, sales and trading roles.

Broker moves;

• Adelaide Brighton Cut to Underweight at JPMorgan; PT A$3.90
• SRG Global Ltd Cut to Hold at Argonaut Securities; PT A$0.52
• Austal Downgraded to Sell at Argonaut Securities; PT A$2.75
• Austin Engineering Cut to Hold at Argonaut Securities; PT A$0.21
• G8 Education Downgraded to Hold at Moelis & Company; PT A$3.38
• Auckland Airport Cut to Underperform at Forsyth Barr; PT NZ$7.90
• Magellan Financial Downgraded to Sell at UBS; PT A$42
• CBA Downgraded to Neutral at Credit Suisse; PT A$79

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