The Overnight Report: Breather

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This story features BENDIGO & ADELAIDE BANK LIMITED, and other companies.
For more info SHARE ANALYSIS: BEN
The company is included in ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

The Dow closed down -22 points or -0.1% while the S&P lost -0.1% and the Nasdaq fell -0.2%.

Banks in a Spin

The most interesting aspect of yesterday’s -33 point fall for the ASX200 is the fact the consumer discretionary, consumer staples, healthcare, industrials, telcos and utilities sectors all closed flat. Materials and energy traded off a -0.3% fall and a 0.2% gain. Info tech rose 0.7%, but it’s a low cap-weight sector. That just left the banks, down -1.5%.

The other interesting aspect is the banks rose 1.0% on Friday. So what changed?

Bendigo & Adelaide Bank ((BEN)) announced it was altering the accounting method for its Homesafe product – a deal which allows homeowners to sell a proportion of their home to the bank on a deferred basis, thus receiving cash up front. Bendelaide had previously been booking periodic revaluations of the property proportion as earnings, and now won’t, which represents an -8% immediate earnings adjustment.

Bendelaide shares fell -4%, but there seems little reason why this individual factor should weigh on the Big Four. All we can really discern is that on Friday, there were buyers of large cap stocks across the board, which includes the banks, and yesterday there were sellers of the banks alone.

It was looking ugly at late in the afternoon with the index down -50 points, but some late buying pared the losses. One thing we do know is the weakness was in no way tied to the attack in London. Markets no longer move on terrorism.

The reason the energy sector managed a gain was news Saudi Arabia and the Gulf states had severed ties with neighbour Qatar, alleging collusion with Iran and terrorists. The oil price initially popped on this news until it was realised there was no real reason oil supply would be impacted. The oil price did not fall back again until last night.

Within materials, investors might have hoped for more from gold stocks following the jump in the gold price but that jump was matched by an even bigger percentage move up in the Aussie, meaning a lower AUD gold price.

Train crash of the day was Retail Food Group ((RPG)), which owns chains such as Sizzler and Crust. Again, accounting methodology was at play, driving the stock down -11%. We might note the stock is one of the more heavily shorted in the market, to the tune of 9.3% last week.

It seems the short term direction of the Australian market, notwithstanding any big moves in commodity prices, will be determined by just where bank valuations settle once all this to-ing and fro-ing calms down.

Pause and Reflect

Former FBI director James Comey will provide his public testimony this week. We recall that last month Wall Street suffered its biggest one-day fall of the year when the whole Comey-Trump-Russia story came to a head and cries of “impeachment” were heard. The markets have since shrugged off the story, but only because no new news has flowed in the meantime. On Friday night Wall Street hit a new all-time high triple.

From that point Wall Street will now be nervously following the testimony. The UK election will also be in focus, and if terror attacks no longer upset a world weary market, the string of UK attacks in the lead-up to the election do provide some cause for concern. The ECB will hold a policy meeting on the same day, and the Fed next week. The isolation of Qatar further fuels the ever simmering Middle East fire.

There is thus cause for Wall Street to take a breather, as it did last night. Market moves were minimal and volumes were low.

Economic data releases in the session had the US services PMI for May falling -0.6, but at 56.9 that sector is still ripping along. Factory orders nevertheless fell -0.2% to mark the first fall in five months. Yet in the very near term, US data does not much seem to matter.

The market has a June Fed rate hike at 96% probability. The Fed has been sticking to an assumption of three rate hikes this year, and June would make two. Thus in the medium term, data does matter. The market has September at only a 25% chance for a hike and December as 50-50. A lot can happen before then.

Commodities

The US dollar index managed a 0.1% rebound last night to 96.81. This did not help commodity prices.

All base metals closed lower in London, with copper down -0.5% and aluminium and zinc each down -1.5%.

After looking like it might be in for a more sustained bounce, iron ore fell -US60c to US$55.70/t.

Gold bucked the trend, hanging in there at US$1279.30/oz.

West Texas crude, having sparked up in electronic trading yesterday on the Qatar news, is down -US33c over 24 hours at US$47.39/bbl.

The Aussie is on a tear, following up Friday’s big move up with another 0.7% jump to US$0.7486. It seems the Battler is being swept up in the cross-rates.

Today

The SPI Overnight closed down -4 points.

The RBA will meet today but little change in tone is expected from a governor who seems a lot more upbeat about the Australian economy than most.

Perhaps today’s March quarter current account numbers, including the terms of trade, will support Lowe’s view. Or not.

Rudi will step on stage and present his views and findings from around midday on invitation of the Australian Investors Association (AIA) in Melbourne today.
 

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