The Overnight Report: Hawkish Surprise

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This story features CSL LIMITED, and other companies.
For more info SHARE ANALYSIS: CSL
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

The Dow closed up 46 points or 0.2% while the S&P lost -0.1% to 2437 as the Nasdaq fell -0.4%.

And Again

If Tuesday’s big rally in the local market surprised many, yesterday’s kick-on had many in the market offering ideas about what was actually happening. Was last week’s sell-off unfounded? Did bank yields become just too attractive? Is it superannuation money flowing in ahead of June 30? Is it a combination?

Or I might add, are high frequency momentum-based algorithms simply adding to volatility, both down and up?

Whatever the case, the buying has not been uniform across sectors. On Tuesday the banks stood out. Yesterday they were back with another 1.2% gain. On Tuesday healthcare was popular. Yesterday it led the charge with a 2.5% gain. CSL ((CSL)) was again highly sought.

Consumer discretionary rose 1.2% yesterday, but we can highlight strong schadenfreude moves from Seven West ((SWM)) and Nine Entertainment ((NEC)) due to demise of rival Ten Network ((TEN)). Although for Ten, the move by Lachie and Co to trigger administration is clearly a ploy to pick up cheap shares as soon as parliament passes more relaxed media ownership laws, possibly in the next few days.

The rebound has not been simply Large Cap based, given the resources sectors have not really joined in and Telstra ((TLS)) continues to go backwards. The risk of the banks having to cut their dividends has diminished in recent months while the risk of Telstra eventually cutting is still a matter for debate.

It was another interesting day in the lithium space yesterday. I suggested selling in Galaxy Resources ((GXY)) on Tuesday likely represented a switch into Mineral Resources ((MIN)) but yesterday MinRes slipped back a tad, while Galaxy got carted by another -8.6% and second worst ASX200 performer on the day was Orocobre ((ORE)) with a -2.9% fall. A reassessment of risk in the space? Orocobre’s fall was likely dampened by short positions of over 20%.

Yesterday also saw a May data dump from China.

Industrial production rose 6.5% year on year, as it had in April, beating expectations of 6.4%. Retail sales rose 10.7%, as they had in April, missing a 10.8% forecast. Fixed asset investment rose 8.6% year to date, short of April’s 8.9% and missing an 8.8% forecast.

Conclusion: Chugging along, nothing to see here.

More concerning on the Australian front was the -1.8% fall in consumer confidence, sending Westpac’s index to below the 100 mark and thus suggesting pessimism. Confidence is now tracking -5% below the long run average and has been below for seven straight months.

Consumers, it appears, were worried about all the talk of a possible negative March GDP result (it wasn’t) while struggling with rising utility and other costs when wage growth is absent and household debt is crippling. Business confidence, on the other hand, continues to be buoyant. Profits are not flowing through to wages.

The ASX200 sailed through 5800 yesterday and it seemed that perhaps we’d all be talking about the magic 6000 number again. But the futures have closed down -32 points this morning. Oil is off almost -3% and copper is weaker, but other base metals are stronger and so is iron ore. So the suggestion here is perhaps the ~150 point gain of the past two sessions was just a little excitable.

Staying the Course

As expected, the Fed raised its cash rate by 25bps last night to a 1.00-1.25% range. What was not expected was a lack of any change in Fed rhetoric, in essence supporting the expectation of one more rate hike this year. Janet Yellen also reiterated that the plan is to start reducing the size of the Fed balance sheet before year end.

Wall Street had expected Yellen to be a little more dovish, given recent data flow has been to the soft side and talk of a 3% GDP growth rate has given way to 2% being more likely. Even the morning’s data releases were weak – headline CPI fell -0.1% in May to a 1.9% annual rate, down from 2.7% only four months ago. Retail sales fell -0.3% — the biggest monthly drop since January 2016.

In both cases lower oil prices played a part, but the Fed’s preferred PCE measure of inflation remains stubbornly well under 2% and yet the Fed continues to expect that target to be reached over the next couple of years given a tight labour market.

It appears the Fed is less data dependent than it was and simply determined now to start normalising monetary policy lest it be caught behind the curve. Uncertainty reigns, but the FOMC still has to keep in mind the economic boost that would follow Trump’s fiscal policy changes, if they come to pass.

Higher rates are good for banks, so a “hawkish” tone (by virtue of not being dovish as expected) meant financials were again highly sought after on Wall Street last night. And after a brief blip, the selling in Big Tech names recommenced.

There are two elements here. What do you sell to fund your bank purchases? The stocks that have run the hardest. And while banks stand to benefit from higher rates, Big Tech multinationals see lower US dollar earnings if the interest rate differential to the rest of the world continues to widen.

Mind you, the US dollar index is down -0.1% post-Fed and the ten-year bond yield is down -7 basis points to 2.14%. Once again the bond market is seeing things a little differently to the equity market, although yields are beholden to offshore differentials. And US bond rates fell on the weak CPI and retail sales numbers.

So it was, after the dust had settled from the usual up/down scramble that ensues as each Fed statement is released, that the Dow hit a new high as the Nasdaq started to slide again and the S&P split the difference.

Commodities

The US dollar index is down -0.1% at 96.93 but no change of heart from the Fed meant gold fell -US$6.00 to US$1260.10/oz.

Another round of weekly US inventory numbers, and West Texas crude is down -US$1.27 or -2.8% at US$44.68/bbl.

Copper fell -1% in London but nickel and zinc were both up 1.5%.

Iron ore rose US50c to US$53.50/t.

The Aussie continues to astound, up another 0.7% at US$0.7590.

Today

The SPI Overnight closed down -32 points or -0.6%.

Today sees the local monthly jobs lottery.

Note that today is the June quarter expiry for the SPI and ASX index options, which must have been hurting market-makers these past two sessions. We could see more volatility with the 5800 level an important one. We likely have already seen an impact this week.

The Bank of England will hold a policy meeting tonight.

Stockland ((SGP)) will host an investor day today.

Rudi will travel to Macquarie Park to appear on Sky Business from noon till 2pm and then do it all again for an interview by Marty Switzer at around 7.30pm tonight.
 

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