The Overnight Report: Hard Exit

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This story features COMMONWEALTH BANK OF AUSTRALIA, and other companies.
For more info SHARE ANALYSIS: CBA
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

Out of Puff

The ASX200 shot out of the blocks yesterday to make another assault through the 6100 mark and managed to be up 27 points at 6111 at 10.45am, with that level hit again at midday. But the momentum was not there.

The afternoon featured a steady slide back to only a small gain, marking two sessions in a row in which early exuberance gave way to afternoon indifference.

There were a couple of reasons to square up yesterday, first being the impending federal budget. Budgets are not typically index movers, rather specific sectors or sub-sectors can be hit on regulatory changes while market-wide impacts are minimal. And these days anything critical is always known beforehand. But, there’s always a risk.

The other was Trump’s pending announcement on the Iran nuclear deal. It was assumed the announcement would be one of withdrawal but with markets having already priced in this outcome, the risk was one of a potentially “soft” renegotiation. We note energy was the biggest loser yesterday with a -1.2% drop.

On the flipside, if there is one sector arguably most at risk every first Tuesday night in May, it’s healthcare – a sector reliant to a great extent on government policy. But it rose 0.8% yesterday.

So did the banks, which are playing their own game at the moment.

Indeed, healthcare and the banks, and to a lesser extent IT, balanced out losses in all other sectors yesterday. Outside of budgets and geopolitics, the local market has run pretty hard from 5750 in early April to 6100 now with barely a stumble, picking up momentum up until the past couple of sessions to form a “parabolic” curve on the chart. Such moves always require a pullback, consolidation, regrouping, before they can start again.

With Wall Street flat overnight, the market can use today’s session to assess the budget and its impact. Infrastructure is obviously a winner, consumer discretionary will enjoy July 2019 when most Australians get a hand-out…there will be many sector-specific ramifications that analysts will scrutinise over this week but no major market impact.

The Aussie, on the other hand, is down -0.8% at US$0.7452 when the US dollar index is only up 0.4% and there have been no major moves in commodity prices. Looks like the forex traders are doubting the surplus call.

What Now?

Wall Street did not move much ahead of Trump’s announcement, and then the Dow promptly fell -150 points. Given Monday night saw the Dow give up around -150 points when Trump announced he would make the announcement, we can say that pulling out of the Iran deal is worth -300 points.

Except that the Dow then rallied all the way back to square by the close.

It’s a straightforward argument to suggest sanctions on Iran equals loss of oil exports equals higher oil price equals cost inflation for all companies, with oil companies the only winners. But the oil price also fell immediately after the Trump announcement.

That’s no great surprise – the oil market has been building in an Iran risk premium for some time, hence “sell the fact” was always on the cards.

In the wider scheme of things, lost Iranian oil exports can easily be made up by OPEC easing up on its production cuts, if it so chooses. And in the meantime, the US is pumping out shale oil at record levels. The risk of a spike in the oil price is not as great as might otherwise be assumed.

Outside of oil prices, the risk is simply one of further heightening in geopolitical tensions in the region if Iran is upset, which it is, and tensions between the US and its allies. The UK and Germany have already declared they will not pull out of the deal, and Iran has said it intends to maintain its commitments to those parties.

There was a possibility that Trump, in typical fashion, would talk tough first and then announce some sort of “soft” exit, but no, the US is out, right now, end of story. And there will be ramifications for anyone who goes against the US which, for now, implies the UK and Germany, and we know France will stick with its European partners.

So what does it all mean? That was the question Wall Street was asking last night, with two hours of trading to think about it. Despite heightened geopolitical tension, gold did not move, being capped by the stronger greenback. The US ten-year bond yield rose only a couple of points but is still stuck below 3%.

There was no “risk off” trade.

But this story has a way to run.

Commodities

Not a great deal of movement across the commodities spectrum, acknowledging that the rising US dollar is providing a strengthening headwind to prices.

Oil is off its highs but not meaningfully so.

Today

The SPI Overnight closed up 5 points.

Today will see the budget sliced and diced, analysed, assessed and discussed ad nauseum. It will take a while to crunch all the numbers, but there appear to be no shocks.

Westpac will release its monthly consumer confidence survey today.

CSR ((CSR)) and Incitec Pivot ((IPL)) will release earnings results and Janus Henderson ((JHG)) will provide its quarterly numbers.

Commonwealth Bank ((CBA)) will provide a quarterly update, as will Goodman Group ((GMG)).

WorleyParsons ((WOR)) will host an investor day.

The Australian share market over the past thirty days…

For more detail go to FNArena's Australian Broker Call.

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