The Overnight Report: Pause For Clarification

This story features AURIZON HOLDINGS LIMITED, and other companies. For more info SHARE ANALYSIS: AZJ

The company is included in ASX100, ASX200, ASX300 and ALL-ORDS

World Overnight
SPI Overnight (Jun)	6136.00	– 16.00	– 0.26%
S&P ASX 200	6197.60	– 12.80	– 0.21%
S&P500	2723.06	+ 5.99	0.22%
Nasdaq Comp	7561.63	+ 29.62	0.39%
DJIA	24283.11	+ 30.31	0.12%
S&P500 VIX	15.92	– 1.41	– 8.14%
US 10-year yield	2.88	+ 0.01	0.17%
USD Index	94.67	+ 0.37	0.39%
FTSE100	7537.92	+ 28.08	0.37%
DAX30	12234.34	– 35.99	– 0.29%

By Greg Peel

Resilient

The ASX200 posted a strong performance yesterday, fighting against the tide of global market weakness as Trump ramped up the trade war. We were down, but not by much.

The resources sectors are the first to lose on any talk of trade war escalation and hence energy was down -0.6% and materials -0.9% as commodity prices continue their pullback. Copper has now broken down through its 200-day moving average.

IT (-0.9%) also saw weakness, or more so profit-taking, given it is the one sector we can truly tie to Trump’s supposed intentions to restrict foreign investment in US technology, the details of which remain completely opaque.

Otherwise, there’s not a lot of correlation with our market, as I suggested yesterday. Consumer discretionary is another potential loser and it was down -0.7%, but rather than wholesale sell-off we simply saw rotation into defensives and more domestic-focused sectors, being consumer staples, banks, telcos and utilities.

Again we must note that as we approach year-end, a lot of argie-bargie is likely among sectors as investors square off their books.

Overnight we saw Wall Street stall, rather than go on with it, while metals prices were only mildly weaker and oil has shot up another 3.5%.

The Aussie is also weaker again, but the futures are showing down -16 points this morning, suggesting a session lacking specific direction. We’ll need to get through this week before we know just where the market wants to go.

Live Hogs

It is understood US Treasury Secretary Steve Mnuchin and chief trade advisor Peter Navarro are far from great pals, clashing on policy, and that explains why Mnuchin said on Monday night that there would be restrictions on US technology investment from all countries while Navarro first said there are no plans for restrictions, and then said they would only be on China.

Wall Street has no idea what the real answer is, which is likely why US markets largely paused last night.

To date Wall Street has run with the idea that Trump is all bluster and bravado up front before conceding ground to reach concessions that were his specific intention in the first place. Hence every trade fear sell-off has been met with a recovery. But as time ticks away, reality is beginning to bite.

Last night Harley Davidson announced it would move part of its production to Europe in response to the EU’s imposition of a hefty tariff on US motorcycle imports, which itself is a retaliation against tariffs imposed on EU imports in the US. The auto industry across the globe is in turmoil, including in the US and particularly in Germany, as no one can be sure where this is all leading.

Trump unsurprisingly spat the dummy at Harley Davidson, via Twitter, threatening to tax any repatriated profits from Europe like they’ve never been taxed before.

Helpful stuff.

Trade concerns have begun to trickle down to the US consumer, as last night’s weaker read on monthly consumer confidence suggests. Meanwhile, the US is not suffering the Australian malaise of a cooling housing market, with house prices now up 6.4% for the year.

Mind you, prices post-GFC never went nuts in the US as they did here, and Australian first home buyers would weep at comparable US house prices.

The Dow had also broken down through its 200-day moving average on Monday night, but it has done so twice already in 2018 and each time bounced back. Last night it held. The average could have looked better if General Electric’s 7% jump was included, but last night was the first of the Dow being ex-GE, after 110 years years of continuous inclusion.

GE’s replacement, Walgreen, fell on the session.

Also weak were US banks, which have now posted twelve consecutive down-days as a sector, which apparently has never been seen before. Trade uncertainty is keeping a lid on US bond yields, which by now were meant to be on their way to 4%.

Energy was the lead sector in the S&P last night as the White House declared that all crude imports from Iran must cease by November. The WTI price shot up 3.5% to break through US$70/bbl once more.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz)	1258.60	– 6.50	– 0.51%
Silver (oz)	16.27	– 0.02	– 0.12%
Copper (lb)	3.04	– 0.02	– 0.68%
Aluminium (lb)	0.97	+ 0.00	0.09%
Lead (lb)	1.09	– 0.00	– 0.09%
Nickel (lb)	6.61	– 0.05	– 0.75%
Zinc (lb)	1.31	– 0.01	– 0.65%
West Texas Crude (Aug)	70.68	+ 2.49	3.65%
Brent Crude (Aug)	76.65	+ 1.72	2.30%
Iron Ore (t)	64.65	+ 0.05	0.08%

The oil price jump looks like a bit of an overreaction, commentators suggest, given Saudi Arabia alone should have the capacity to fill the gap left by lost Iranian exports. And OPEC has agreed to lift production levels to do so.

But others point to the demand side, which continues to grow, to the point the oil glut of two years ago, which saw tankers floating off ports with nowhere to go, is now fully absorbed.

Demand growth, and the fact some OPEC members have noted they don’t have the spare capacity to increase production anyway, sets a target for WTI of US$75-85/bbl, according to the oil bulls.

The US dollar rebounded last night and gold just can’t seem to find any friends either way. The Aussie has nevertheless matched the greenback’s rise with a -0.3% fall to US$0.7390.

Today

The SPI Overnight closed down -16 points or -0.3%.

The US trade balance for May is due out tonight, and trade numbers are now more in focus than ever before. Durable goods numbers are due too, and they have always been in focus.

Locally, Aurizon ((AZJ)) hosts an investor day and CSR ((CSR)) holds its AGM.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
BAL	BELLAMY'S AUSTRALIA	Downgrade to Hold from Add	Morgans
CCP	CREDIT CORP	Upgrade to Add from Hold	Morgans
		Upgrade to Accumulate from Hold	Ord Minnett
		Downgrade to Hold from Add	Morgans
DMP	DOMINO'S PIZZA	Downgrade to Hold from Add	Morgans
EPW	ERM POWER	Upgrade to Neutral from Underperform	Macquarie
FBU	FLETCHER BUILDING	Downgrade to Equal-weight from Overweight	Morgan Stanley
LLC	LEND LEASE CORP	Upgrade to Hold from Lighten	Ord Minnett
MHJ	MICHAEL HILL	Downgrade to Neutral from Buy	Citi
MTS	METCASH	Downgrade to Sell from Neutral	Citi
NST	NORTHERN STAR	Upgrade to Buy from Sell	UBS
RHC	RAMSAY HEALTH CARE	Upgrade to Buy from Hold	Deutsche Bank
SYD	SYDNEY AIRPORT	Downgrade to Neutral from Buy	UBS

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

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