The Overnight Report: More Weakness

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SPI futures are indicating another weak opening lays ahead for Aussie equities today.

By Chris Weston, Head of Research, Pepperstone

-Our Asia equity index opening calls are looking heavy
-Winners and losers from US trade
-Commodity moves – Look to Nat Gas and Cocoa for the movement

The countdown is on, with the market going into full risk management mode. Market participants have undertaken a full assessment as to the skew in risk, expected volatility and the subsequent review of their position sizing over US CPI and the FOMC meeting, and a six-hour period that could set up a whippy ride across markets.

It’s these periods, over marquee news, where liquidity often becomes be a factor that drives exaggerated price moves and various flow dynamics impact and makes price action hard to explain.

It makes for exciting watching, but to others who have positions in the market or want to enter one, this backdrop offers little edge, and many choose to stand aside – they look for the facts to emerge and to get set once the dust settles and the collective in the market reveals how it really feels.

In the lead up though, our opening calls for Asia equity look heavy once again, with the ASX200 and HK50 likely opening 0.6% lower, while the NKY225 should fare somewhat worse with an unwind 0.9% lower.

There aren’t a whole lot of reasons to jump in and support the opening weakness either, so we could easily see further selling on open, although we did see a reasonable sell-off in the ASX200 yesterday, so one could argue much of the pre-positioning has played out and investors feel comfortable with their how portfolios are set into US CPI/FOMC.

European equities have offered no inspiration for Asia either, although the political considerations which have impacted EU peripheral spreads, and seen EU equity markets lower on the day, are not Asia’s issue – semantics does count though and does spill over into other jurisdictions.

US large-cap equity markets have closed higher (S&P500 +0.3%, NAS100 0.7%), and while there was a migration to higher-quality names, the move in the respective indices was driven largely by Apple (+7.3%), which traded 40.76m shares – double the 15-day average.

Communication services worked well too, with gains in Google and Meta also supporting the tape.

Staying on the winners Oracle sits +9% in the post-market session after hitting the market with earnings, as well as corporate activity aligned with Google/Open AI deals. 

The notable loser comes from US financials. Tesla has also broken down and trades through the 50-day MA, which has been acting as a floor since mid-May.

Strong demand in the US 10-year Treasury auction has resulted in a 6bp rally in USTs, with yields lower across the board – it’s somewhat surprising to see such demand ahead of the key event risk, but fixed income funds have piled in, and this has taken down yields.

The USD hasn’t reacted too intently to the move lower in US bond yields and looks well supported going into the key event risk. 

Commodity markets have been calm, with crude +0.2%, gold +0.3% and copper -1.1%. The action though has been seen in Nat Gas which has rallied 7% and broken to new run highs – the trend and momentum accounts adding length to positioning and this could easily test the YTD highs.

We also see good movement in cocoa (+7%), and this also looks like it could kick further higher. 

So, onto CPI/FOMC, with that six-hour period between the US CPI dropping and Jay Powell speaking in his presser potentially offering some fireworks.

I like to use US core CPI m/m as my simple playbook guide, with 0.3% m/m expected, so any number that rounds to 0.2% m/m could offer relief in risk markets and bring out USD sellers, while a number that rounds to 0.4% could see US 2yr yields rise and with it the USD comes in hot.

Where we get real venom in markets is an absolute print above 0.4% or below 0.2% – this would be a surprise and add some spice to price action.

The Fed meeting could go either way, but the statement should be largely unchanged.

On the calendar today:

-In Australia: overseas arrivals and departures data

-Superloop ((SLC)) and Unibail Rodamco Westfield ((URW)) host investor meetings

-ALS Ltd ((ALQ)) shares trade ex dividend

-Chinese inflation data

-In the US , the Consumer Price Index (CPI) is released, plus the Federal Reserve Open Market Committee (FOMC) hands down its interest rate decision

Corporate news in Australia:

– The independent review into SkyCity Adelaide ((SKC)) has recommenced following the Federal Court’s approval of the $67m fine

-AGL Energy ((AGL)) will invest in UK-based OVO Energy’s Kaluza smart energy platform and deploy its technology in Australia

-Speculation has it QBE Insurance ((QBE)) intends to acquire Beazley Insurance

-Sayonara CSR ((CSR)) as Saint-Gobain has received approval from Australia’s Foreign Investment Review Board for its $4.3bn takeover

-Owners of datacentres operator AirTrunk have reportedly received non-binding indicative offers from the Canada Pension Plan Investment Board, Blackstone, and an IFM Investors and DigitalBridge partnership ((MQG)) ((GDG))

-Bapcor ((BAP))) suitor Bain Capital has reportedly approached former Bapcor CEO Darryl Abotomey

The Australian share market over the past thirty days…

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

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