The Overnight Report: Bond Street

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World Overnight
SPI Overnight (Jun)	7256.00	+ 11.00	0.15%
S&P ASX 200	7326.90	+ 65.10	0.90%
S&P500	4358.13	+ 14.59	0.34%
Nasdaq Comp	14665.06	+ 1.42	0.01%
DJIA	34681.79	+ 104.42	0.30%
S&P500 VIX	16.20	– 0.24	– 1.46%
US 10-year yield	1.32	– 0.05	– 3.58%
USD Index	92.71	+ 0.16	0.17%
FTSE100	7151.02	+ 50.14	0.71%
DAX30	15692.71	+ 181.33	1.17%

By Greg Peel

Jailhouse Rock

One might have expected the news that Sydney’s lockdown would be extended for a week, flagged ahead of yesterday’s 11am update, and the threat of some council areas going into even stricter lockdown, would be a negative for the stock market. But no.

The ASX200 opened higher yesterday and at the 11am confirmation just kept on going. There was a bit of a wobble in the afternoon but the index bounced off 7300 and kicked to the close. This despite a weak session on Wall Street.

The most notable asset price move yesterday was that of the ten-year bond yield, which fell -10 basis points to 1.36%, a day after the RBA announced tapering. The US equivalent had also dropped overnight, and did so again last night, rather confounding commentators.

In Australia’s case, was the RBA’s announced pace of tapering not as steep as feared? Unlikely, as economists were more surprised in the other direction.

Is it a sign of what I had discussed before year-end, being the need for 60:40 balanced funds to rebalance after a 24% FY21 gain in equities? Well no, because then bond buying would have been met with stock selling.

Is it a sudden easing of inflation fears? Unlikely, as the drivers of (possibly) transitory inflation remain firmly in place. We have to wait until the end of this month for Australia’s June quarter CPI result.

Or is it simply a case of demand for yield from abroad? Foreign sovereigns and large pension funds simply have to find low-risk yield somewhere – anywhere – and Australia and the US are seen as safe bets. Indeed, Australia has a higher credit rating (AAA) than the US (AA).

On Wall Street, the latter explanation is being seen as the most plausible. But whatever the case, it was a good day for Australian stocks, and in particular the growth stocks found in the technology sector (+2.8%). Technology was sold down on Tuesday on the RBA tapering news, as were all yield-paying sectors.

Yesterday the complete opposite was true. Aside from the swift rebound in technology, staples shot back up 1.8%, telcos 1.6% and the banks 0.8%, even though lower long-end yields are a drag on interest margins.

I noted yesterday the Aussie had initially jumped up to US76c on the RBA statement but was back down a full cent overnight. Healthcare fell on the Aussie’s gain on Tuesday but bounced right back 1.7% yesterday.

Even property managed a 0.9% gain despite the impact of lockdowns on retail REITs. The notable exceptions were utilities (flat), which suffered from oil price falls, and industrials (flat), which were perhaps the one indicator of the impact of an extended lockdown.

The energy sector was the only real loser, down -1.9% on said oil prices.

Among individual stocks, Challenger ((CGF)) won the day with an 8.8% gain on news Apollo Global Management had taken a 15% stake.

Wall Street rebounded somewhat last night from Tuesday night’s losses and having been down -11 points ahead of yesterday’s open, this morning our futures are up 11 points.

Minutes to Midnight

The biggest policy problem for the RBA is the balance between needing to keep rates low in order not to upset the economic rebound and the side effect of inducing runaway house prices as a result. The RBA’s QE program is centred only on government bond purchases. Analysts expect APRA to move soon to tighten lending standards to cool the housing market.

The US is also experiencing a house price surge, for the same low-rate reason. But the Fed’s QE program includes both government bond and mortgage-backed security purchases. Hence the Fed has the capacity to cool the US housing market by backing off on buying MBSs while maintaining bond purchase levels.

And that’s what some FOMC board members want to do, sooner rather than later, according to the minutes of last month’s Fed meeting.

We recall that the meeting late last month resulted in some confusion, with around half of FOMC members predicting, via their “dot plots”, rate hikes would be needed possibly as early as next year, while Jay Powell, at his press conference, as good as laughed that prospect off.

The minutes confirmed division within the FOMC of those believing the time is nigh to begin tapering, and those wanting to remain patient – to wait for the actual data to finally provide the green light.

While this hawkish leaning should by rights suggest higher US bond yields, the ten-year yield has done nothing but slide back from its highs over 1.7% in recent months and having fallen -7 basis points on Tuesday night fell another -5 basis points last night, to 1.32%.

As noted above, foreign buying is assumed as the driver, US inflation risk be damned.

In another unusual move, the Nasdaq closed only a tick higher last night (new high of course) while the Dow and S&P posted 0.3% gains. It seems the market is no longer jumping at the shadows of bond price movements when it comes to the growth/value rotation. The S&P’s rebound was also good enough for another new high.

It was nonetheless a choppy session, one in which any sense of direction or of exactly which sectors to buy was not evident. The only definitive sector move was that of energy, which again had a bad night as oil prices continued to fall.

Economic data aside, we’re getting very close to the US reporting season, which will determine whether forecasts of extraordinary earnings growth are accurate. Wall Street will be responding from the lofty position of ever new highs.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz)	1803.40	+ 6.90	0.38%
Silver (oz)	26.10	– 0.02	– 0.08%
Copper (lb)	4.31	+ 0.07	1.75%
Aluminium (lb)	1.14	+ 0.01	1.14%
Lead (lb)	1.05	+ 0.00	0.41%
Nickel (lb)	8.32	+ 0.14	1.66%
Zinc (lb)	1.34	+ 0.02	1.25%
West Texas Crude	72.20	– 1.17	– 1.59%
Brent Crude	73.42	– 1.49	– 1.99%
Iron Ore (t)	222.85	+ 0.85	0.38%

Beijing’s cunning plan to curb rising metals prices by selling from strategic reserves did not quite go the way Xi may have expected yesterday. The government auctioned off 20t of copper, 30t of zinc and 50t of aluminium and was knocked over in the rush.

Back to the drawing board.

Iron ore appears to have settled down for now, rising only incrementally, while lower bond yields have gold back over the US$1800/oz mark.

The Aussie is a tad lower at US$0.7586.

Today

The SPI Overnight closed up 11 points.

The RBA governor will speak today.

Netwealth ((NWL)) provides a quarterly update.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
AMA	Ama Group	Downgrade to Neutral from Buy	UBS
ASX	ASX	Downgrade to Sell from Neutral	Citi
BLD	Boral	Downgrade to Neutral from Outperform	Macquarie
BSL	Bluescope Steel	Upgrade to Overweight from Equal-weight	Morgan Stanley
CRN	Coronado Global Resources	Upgrade to Add from Hold	Morgans
CVN	Carnarvon Petroleum	Upgrade to Buy from Hold	Ord Minnett
IPL	Incitec Pivot	Upgrade to Outperform from Neutral	Credit Suisse
NEC	Nine Entertainment	Downgrade to Neutral from Outperform	Macquarie
OSH	Oil Search	Upgrade to Add from Hold	Morgans
SVW	Seven Group	Upgrade to Buy from Accumulate	Ord Minnett
SYD	Sydney Airport	Upgrade to Neutral from Underperform	Credit Suisse
		Downgrade to Hold from Add	Morgans
TAH	Tabcorp	Upgrade to Add from Hold	Morgans
WOW	Woolworths Group	Downgrade to Equal-weight from Overweight	Morgan Stanley

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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