The Overnight Report: And We’re Back

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

By Greg Peel

The Dow closed up 144 points or 0.7% while the S&P gained 0.8% to 2453 as the Nasdaq jumped 1.4%.

Whole Fright

Well we got our answer – Woolworths ((WOW)) fell -3.5% yesterday to mark the third worst ASX200 stock performance on the session. The leviathan that is Amazon has now shifted its shadow across the consumer staple space as well as discretionary, following its (proposed) acquisition of Whole Foods in the US.

Metcash ((MTS)) and Wesfarmers ((WES)) also copped selling yesterday, ensuring the staples sector bucked the index trend with a -1.0% plunge. But it seems the news only served to remind investors of the risk Amazon poses in discretionary retail. Despite having already had bad months, the likes of Harvey Norman ((HVN)), JB Hi-Fi ((JBH)) and Super Retail ((SUL)) all featured on the worst performers table yesterday.

The flipside in the sector was strong performances by media companies, specifically Southern Cross ((SXL)) and Seven West ((SWM)), as the government looks set to succeed in relaxing cross ownership laws. And the milk vendors continue to soar, with Bellamy’s ((BAL)) having led the charge earlier but investors now piling back into a2 Milk ((A2M)) as well given the company can’t keep up with Chinese demand.

Let’s hope China doesn’t move the goal posts yet again.

Consumer discretionary closed a net 0.1% higher yesterday leaving the only other sector to close in the red as energy (-0.2%), on oil price weakness. Otherwise, it was strength across the board. Utilities (+1.5%) are having another moment in the sun despite the Fed rate hike, but experience suggests this mood can change in a flash. Around half of yesterday’s 31 point gain for the ASX200 was provided by the banks (+1.0%).

For a sector that’s meant to plod along on subtle fluctuations in net interest margins, the banks have been extraordinarily volatile of late. The market just cannot seem to agree on a valuation. Things may be interesting today nevertheless.

The Senate has passed the bank levy bill, unamended. This implies the Big Five’s attempts to include a sunset clause and extend the levy to foreign banks fell on deaf ears. So we’re stuck with it now. What future politician would risk electoral ire by removing the levy, surplus or not? Let us not forget the UK equivalent has been raised nine times since introduction.

Moody’s has downgraded the credit ratings of all Australian banks, including the Big Four, largely on housing debt risk. While the downgrade follows a similar move by S&P last month, S&P did not include the Big Four. Will we see selling in the sector today? Well, Wall Street has had a strong session overnight, in which financials featured. We do have a habit of following US banks.

From a technical perspective, it was interesting to see the index shot up from the bell to 5800 yesterday, immediately copped selling, battled it out in the early afternoon and then shot up again at the close, to finish at 5805. It’s a tenuous level, but then Wall Street just might make the difference today.

All is Forgiven?

The Nasdaq soared 1.4% last night as the world piled back into Big Tech. It is not known who rang the bell to mark the end of the reversal. We do know that there was a minor rally about a week ago that interrupted further selling, so we can’t yet call the sell-off over, but last night’s move looked more definitive.

No one has been the least bit concerned about the sell-off experienced by FANG & Co, given stretched valuations. And given all of Wall Street was excited about the possibility of being able to buy in at more realistic levels, a rebound was only a matter of time.

What we nevertheless saw as the sell-off played out was a rotation into other sectors such as financials and materials which had sagged in recent months as the White House failed to achieve anything other than notoriety. The Dow has hence since outperformed. What we didn’t see last night was a reversal of that theme on the back of the tech reversal. The same sectors were still being bought.

Hence the Dow hit a new all-time high last night, as did the S&P500. The Nasdaq has a bit more to claw back.

Energy was not a participant in the rally, with the WTI price falling another -1.3% to sit ominously close to the previous low of US$43.70/bbl. The impact of OPEC-Russia’s production cut extension has now faded, replaced by the reality the exempted OPEC members Libya and Nigeria are pumping as hard as they can, the US rig count continues to climb despite prices below US$50/bbl, and US inventories continue to build against the seasonal trend.

Summer officially starts in the US this week (unlike Australia, the US sensibly follows the solar calendar), and next week’s Fourth of July holiday ushers in the summer vacation period in which Americans are expected to drive down oil inventories by driving cars. We shall see.

Commodities

Gold is down another -US$9.80 at US$1243.60/oz. The move follows a 0.4% gain for the US dollar index to 97.52, likely a response to New York Fed president William Dudley’s endorsement last night of Janet Yellen’s policy stance.

Yesterday China’s securities regulator said it will encourage wealth managers to invest in commodity futures in order to promote China’s own immature commodity derivatives markets and increase the level of commodities in Chinese assets under management. One presumes that if wealth managers aren’t “encouraged” they may never be seen again.

Whaddya know, all base metal prices were higher in London last night by around 1%.

Iron ore rose US80c to US$54.70/t.

West Texas crude is down -US59c at US$44.10/bbl.

The Aussie is -0.2% lower at US$0.7599.

Today

The SPI Overnight closed up 8 points.

Which suggests we might be able to move up safely from 5800, but then there are a lot of moving parts to consider – metals up, gold down, oil down, banks downgraded, Wall Street hitting new highs…

The minutes of the June RBA meeting are due out today.

Rudi will connect with Sky Business via Skype today around 11.15am today to discuss broker calls.

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