The Overnight Report: Baring The Fangs

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

By Greg Peel

Front Running

The two Wall Street sessions either side of Anzac Day saw the Dow down -400 before rallying back 100. On a net basis, the Australian market would likely have been set for weakness yesterday were it not for the after-the-bell earnings result release from Facebook, the US Big Tech stock du jour.

Facebook posted a stronger than expected result and having been beaten down -20% from its high on the data breach issue, was always primed for a rebound. The stock jumped 7% in the aftermarket and Australian traders (rightly) predicted last night would see a general tech rebound on Wall Street.

The result was almost a market-wide post-Anzac buying spree. Consumer staples, energy, industrials and utilities all rose 1% or more. Healthcare jumped 2% thanks to a takeover bid for Healthscope ((HSO)), which had that stock up 15% on the session. As of last week, Healthscope was 13% shorted.

Even telcos managed a 0.4% gain and consumer discretionary booked 0.3%. And yet, the ASX200 closed down -10 points.

Materials fell -0.2% on lower commodity prices, but it was a -1.8% fall for the banks which wiped out all other gains.

Yesterday UBS downgraded Westpac ((WBC)) to Sell and slashed its price target by -15%. While the potential fallout from the RC is an issue, UBS’ main gripe is with perceived deteriorating quality in the bank’s mortgage book. On the assumption Westpac is not alone, the market sold down all of the banks.

And Bank of Queensland ((BOQ)) went ex-div, just to add to apparent weakness.

The ASX200 is sitting just above 5900, hoping to make another push towards the post GFC high of 6120. We won’t mention how far away the pre-GFC high remains. The Big Four represent around 25% of the ASX200, and the financials sector as a whole around 35%.

Beyond that we get into commodities as Australia’s main stock market driver. Commodity prices are trading at highs, not lows, in terms of recent ranges and there appears no way the banks have the catalyst to recover from the RC fallout, given the dampeners that will now be applied to lending and loan growth, such that new highs for the index can be contemplated.

Without the banks, the index cannot move forward. It is up to other sectors to provide the strength, and for investors to stop focusing on “the index” as their benchmark. Arguably, this has been the case for some time.

But…the futures are up 44 points this morning. Why? Because Amazon just reported after the bell on Wall Street and it shares are up 7% in the aftermarket.

Dow stocks Microsoft and Intel have also posted after-the-bell results, and they are up 2% and 5% respectively.

All is Forgiven

Amazon’s share price was already up 3% in the day-session, as all Big Tech rode on the coattails of the rebound in Facebook. It took weeks for Facebook’s share price to fall -20% on the data breach scandal, and expectations of stricter regulations, and one day to jump 10% following a result analysts have called “a sigh of relief”.

Big Tech had already seen weakness in 2018 as investors feared stock prices had run just too far, too fast. The Cambridge Analytica affair only added fuel to that fire. But amidst the true FANG – Facebook, Amazon, Netflix, Google – Facebook and Google rely on advertising while Amazon and Netflix run subscription-based models. Facebook and Google were hardest hit by the data breach episode while the other two suffered lesser falls.

One cannot argue with actual earnings. Heading into the result season, forecasts were for 18% earnings growth for the S&P500. With just over a third of companies reporting to date, the run-rate is at 23%. Forecasts for June and September quarter earnings have also been revised up.

There’s still two-thirds to go, and the season has a long tail, but the bottom line is that since JP Morgan kicked off the season earlier this month, Wall Street is little changed.

One concern is the possibility of “peak earnings”, as we’ve discussed this week, although to date only Caterpillar has actually raised this possibility. The likes of Amazon have blown it away.

Chip-making heavyweight Advanced Micro Devices jumped 14% last night following its earnings result. These are not small companies.

A very real concern is rising input prices, in the form of steel, aluminium, oil and other commodities. It is quite possible earnings for companies beholden to input price volatility will indeed see peak earnings if rising costs cannot be passed onto customers.

Then there’s rates. The US ten-year slipped back under 3% last night. For the record, the average dividend yield on the S&P500 at present (ahead of any dividend increase or buyback announcements yet to come) is 1.9%. If you’re looking for the security of yield, as opposed to the risk of capital gains, why would you not invest for ten years at a “risk free” 3% rather than try your luck on a possibly overvalued stock market?

Notwithstanding, last night Mario Draghi noted, at his post ECB meeting press conference, that the European economy is still chugging along nicely but the data are not quite as promising as it was earlier. In other words, no change to QE, and thus little chance of further gains in European bond yields.

On the arbitrage, this translates back to a cap on US long yields.

But consider this: last night’s US weekly initial jobless claims number showed a drop of -24,000 to 209,000. That’s the lowest level since records began being kept in 1969. To put that into Australian terms, it means the fewest number of Americans signed up to the dole for the first time last week as has ever been recorded, and that’s irrespective of population growth in the past 50 years.

It’s the sort of number that Fed would look at and say “we’d better get a wriggle on with these rate hikes”. If that is the case, the risk is the US yield curve will invert. Can we still call an inverted curve a harbinger of recession into today’s “globalised” world?

The jury is out. There is concern among investors. But let’s face it, how can you have the lowest number of new unemployed on record and being talking of an imminent recession?

Commodities

Nothing of great note in commodity price moves last night. Aluminium has bounced back a bit.

Gold continues to drift lower as the greenback continues to rise. ECB dovishness last night helped the US dollar index up another 0.3%.

The Aussie is subsequently lower once more, but only by -0.1% to US$0.7555.

Today

The SPI Overnight closed up 44 points. Yesterday it closed up 41 and the ASX200 fell -10 but 41 followed a -34 point fall on Wednesday morning so that meant up 7. The banks then spoiled the party.

This 44 point jump is clear air, and all about Amazon one assumes.

The Bank of Japan will hold a policy meeting today and tonight sees the first estimates of March quarter GDP for both the UK and US.

Locally we’ll see the March quarter PPI numbers.

ResMed ((RMD)) has announced its quarterly earnings result this morning and Sandfire Resources ((SFR)) will publish its production report today.

Rudi will connect with Sky News Business via Skype at around 11am, one presumes.

The Australian share market over the past thirty days…

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