The Overnight Report: It’s Time We Talked

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World Overnight
SPI Overnight (Jun)	7394.00	+ 6.00	0.08%
S&P ASX 200	7386.20	+ 6.70	0.09%
S&P500	4223.70	– 22.89	– 0.54%
Nasdaq Comp	14039.68	– 33.17	– 0.24%
DJIA	34033.67	– 265.66	– 0.77%
S&P500 VIX	18.15	+ 1.13	6.64%
US 10-year yield	1.57	+ 0.07	4.67%
USD Index	91.39	+ 0.86	0.95%
FTSE100	7184.95	+ 12.47	0.17%
DAX30	15710.57	– 18.95	– 0.12%

By Greg Peel

Material Losses

After Tuesday’s strong blue chip-led rally for the ASX200, the futures showed down -12 yesterday morning which was unsurprising, but it was not to be. From the open, the index made another assault on the 7400 level.

At midday the index was up 25 points and just a tad over 7400 but then in came the sellers, with some no doubt deciding the impending Fed meeting was sufficient reason to take profits.

In the wash-up, the final score was materials versus the rest. Big falls in copper, nickel and gold had materials down -1.6%, which translated into a -6.7% drop for copper miner OZ Minerals ((OZL)) and -1.7% for copper miner BHP Group ((BHP)), along with -4.8% for Nickel Mines (NIC)) and -1.3% for Newcrest Mining ((NCM)), to name a few.

Technology followed down the Nasdaq (-0.4%) and industrials were flat, leaving every other sector to provide the balance.

The banks rose 0.8%, energy 1.5% and healthcare 0.5% to provide most of the counter.

On the subject of commodities, China’s Assets Supervision and Administration Commission has ordered state enterprises to control risks and limit their exposure to overseas commodities markets. Companies have been asked to report their futures positions for review.

I don’t think it’s the overseas commodity markets Beijing has to worry about.

And on the subject of inflation, being the current hot topic, the Australian Fair Work Commission yesterday announced a 2.5% rise in the minimum wage, which has been met with angry backlash from business bodies. Pandemic-hit industries will be granted a delay but elsewhere it's a “kick us when we’re down” issue.

Not to mention the impact on wage inflation. The trade-off will be the cost to businesses against the surge in consumer spending that extra $18.80 per week will bring.

Among individual stock moves yesterday, it was quite the mix of companies on both sides of the ledger. Individual falls were clearly more substantial than gains, with Pro Medicus ((PME)) topping the charts with a mere 3.2%.

On the downside we see Austal ((ASB)) taking another dive (-5.7%) following cuts in earnings forecasts from brokers post the company’s profit warning, albeit three of four covering FNArena database brokers retain Buy ratings.

This morning’s Fed statement and press conference has led to a dip on Wall Street but most notably, a surge in the US dollar and a big wash-out for gold. The gold price has dropped from US$1900/oz to near US$1800/oz this week.

Bitcoin has rallied from US$35,000 to US$38,500. Just saying.

Despite gold’s crunch and some weakness on Wall Street, our futures are up 6 points this morning.

Mixed Messages

“You can think of this meeting that we had as the ‘talking about talking about’ meeting, if you’d like,” said the Fed chair at last night’s press conference. “I now suggest that we retire that term, which has served its purpose.”

When the Fed statement was released prior to the conference, Wall Street immediately homed in on the infamous “dot plot”, which indicates the individual rate expectations of the 18 FOMC members. What leapt out was seven members expecting the first rate hike in 2022 (up from four previously), when to date Jerome Powell has targeted 2024.

The Dow fell -380 points. The US ten-year bond yield shot up 7 basis points.

The Fed also lifted its 2021 inflation forecast to 3.0% from a prior 2.2%, but did suggest this would drop sharply in 2022. In other words, it will be transitory.

The panic nevertheless began to subside when Powell began answering questions at the press conference. He warned against reading too much into the dot-plot, saying the projections need to be taken with a “big grain of salt.” In turn, the market curtailed its losses.

In short, Powell threw a dovish bucket of water over what had appeared to be a more hawkish statement. The only real change is that yes, the Fed will now begin to discuss the timing of tapering, but will provide plenty of warning before that happens.

And it won’t be happening soon. As for rate hikes – don’t even think about it.

What Powell has not achieved, however, is any end to the battle between the transitories and the structurals. The debate will continue to rage on.

Perhaps the most noteworthy market response, other than the US dollar surging 1%, was that the 7bps jump in the ten-year to 1.57% resulted in “outperformance” in the Nasdaq (-0.2%) vis a vis the Dow (-0.8%). One would expect that to be the other way around.

While the impact of higher rates would be felt on the second and lower tier growth stocks, the big guns of Amazon and Apple, for example, are too big, too established and too defensive in their earnings as to not much care. Both those stocks closed higher on the day.

It is nonetheless a truth universally acknowledged that the smart money stays well out of the one and a half hours of trading post Fed release, which is traditionally highly volatile. The best gauge of the response to a Fed statement comes on the following day.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz)	1811.90	– 46.80	– 2.52%
Silver (oz)	26.95	– 0.71	– 2.57%
Copper (lb)	4.31	– 0.03	– 0.58%
Aluminium (lb)	1.12	– 0.01	– 0.61%
Lead (lb)	0.99	+ 0.01	0.59%
Nickel (lb)	7.98	– 0.01	– 0.08%
Zinc (lb)	1.36	+ 0.00	0.07%
West Texas Crude	72.15	+ 0.03	0.04%
Brent Crude	73.87	– 0.41	– 0.55%
Iron Ore (t)	213.65	– 8.70	– 3.91%

Note that the LME closes ahead of the Fed release. So tonight will be more telling.

And Singapore iron ore trading closes well before. Last night’s drop would reflect Beijing’s growing interference.

Gold I think we’ve covered.

The oils slept through proceedings.

One saving grace – the Aussie is down -1% at US$0.7615.

Today

The SPI Overnight closed up 6 points.

Fed response notwithstanding, we could be in for some local volatility today. We’ll see the May jobs numbers, the RBA governor will speak, and June quarter ASX futures and options will expire.

Mind you, the recent solid rally may well have left the concentration of options positions well below the money.

New Zealand will release its March quarter GDP result today, for those who can remember back that far.

Challenger ((CGF)) will hold an investor day and Coles ((COL)) a strategy day.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
ALX	Atlas Arteria	Downgrade to Hold from Add	Morgans
COL	Coles	Upgrade to Outperform from Neutral	Macquarie
DMP	Domino's Pizza Enterprises	Downgrade to Hold from Add	Morgans
DOW	Downer EDI	Downgrade to Lighten from Hold	Ord Minnett
IGO	IGO	Downgrade to Underweight from Equal-weight	Morgan Stanley
ILU	Iluka Resources	Upgrade to Outperform from Neutral	Macquarie
REG	Regis Healthcare	Upgrade to Add from Hold	Morgans
SEK	Seek	Upgrade to Outperform from Neutral	Macquarie
SGM	Sims	Upgrade to Buy from Hold	Ord Minnett
SOM	Somnomed	Downgrade to Hold from Add	Morgans
SUN	Suncorp	Downgrade to Neutral from Outperform	Credit Suisse
WHC	Whitehaven Coal	Downgrade to Neutral from Buy	Citi
WOW	Woolworths	Downgrade to Neutral from Outperform	Macquarie

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

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available on the FNArena website.  Click here. (Subscribers can access prices on the website.)

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