The Overnight Report: Bonds Crash Through

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            [6] => ((SIG))
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This story features NATIONAL AUSTRALIA BANK LIMITED, and other companies.
For more info SHARE ANALYSIS: NAB
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

Three Strikes

I suggested on Monday morning that if a third attempt to close above the previous post-GFC closing high failed then the likely outcome would be a pullback and consolidation. Traders typically afford a market three chances at support/resistance levels before deciding it’s not going to happen for now.

The ASX200 traded over 6135 on both Thursday and Friday but closed below, and on Monday closed right on 6135, suggesting the market was poised. If the index fell from the open yesterday, the odds were the sellers would move in.

At least one computer was hell bent on triggering a breakout, given the index hit 6146 at 10.04am when only a few stocks had opened, but then National Bank ((NAB)) went ex and half an hour later the index troughed at 6124. The troops reassembled, and after another hour there we were again, right on 6135.

Then out came the Chinese data for April.

Chinese industrial production rose 7.0% year on year in April, up from 6.0% in March and beating 6.3% expectations. That was the good news. The bad news was retail sales rose only 9.4%, down from 10.1% when 10.0% was expected and, more importantly from a “where do Australia’s commodities end up?” perspective, fixed asset investment fell to 7.0% year to date from 7.4% in March to mark the lowest level since 1999.

Australia’s resource sectors have been running hard of late so the Chinese data were likely a sufficient trigger for investors to take some profits. In a totally unrelated matter, Telstra ((TLS)) plunged another -5.6% yesterday after falling much the same on Monday.

Monday brought the profit warning from management, yesterday brought the analyst response. Consensus has it that Telstra will not be able to maintain its dividend at the current level for as long as previously assumed unless, as Citi put it, “drastic action” is taken.

Investors ran for the exits.

Telstra’s woes spilled over to its peers and hence the telcos sector fell by -5.1% yesterday. On Monday the sector fell over -4%, against the tide of sector gains elsewhere. Yesterday telcos simply led the pack down. Only info tech managed a gain.

Yesterday Link Administration ((LNK)) provided a quantification of what it expects to lose as a result of changes in this month’s federal budget with regard superannuation rules. With uncertainty removed, Link shares bounced 5.3% to take the IT sector up 1.2%.

Beyond that, materials fell -0.8%, energy -0.9% and industrials -1.0% to provide the other big moves on the day, notwithstanding a -1.8% for the smaller utilities sector. The banks joined in with a -0.4% drop. Selling continued into the afternoon to ensure a close at the day’s low.

Wall Street’s winning streak broke last night but the -37 point fall yesterday for the ASX200 was in no way anticipatory, despite the SPI futures only being down -7 point this morning.

The good news is the Aussie’s down half a cent overnight but the bad news for the miners today is US gold has dropped twenty dollars.

US bond yields have broken to the upside which will likely instil some fear downunder that despite the RBA’s persistent suggestions to the contrary, upside pressure will come to bear on Australian rates on the differential.

Inflation, Again

US retail sales rose 0.3% in April as economists expected but what caught the market’s eye was a 0.8% jump in sales at what we call petrol stations. That jump is about higher prices and not increased demand, thus represents headline inflation.

Why this is a surprise when the WTI price has recently run up over US$70/bbl is unclear, but US bond markets became edgy.

The Empire State activity index is not a data point I spend much time on as it tends to bounce around a lot month on month. But last night’s reading for May, for manufacturing activity in the New York State region, showed a jump to 20.1 from 15.8 in April (zero is neutral).

What caught the market’s attention was the biggest single jump in years in a sub-segment of that index, being input prices. On that note, bond markets cracked.

The previous high for the US ten-year yield was 3.03%, set back in 2013. In February the yield hit 3.02% before retreating back under 3%. Last night saw a leap to 3.09% without a blink, before settling at 3.08%, up 9 basis points.

Wall Street had assumed 3.03% would hold it, if for no other reason bond yields begin to look attractive against stock dividend yields above that level. But 3.03% was left in the dust and US stock markets responded accordingly.

It was not, however, panic stations. The Dow was down as much as -270 points before recovering to a close of down -193. Given the retail sales and Empire State numbers were released before the bell, the major indices step-jumped down from the open before tracking largely sideways for the rest of the session. Volume was to the light side.

The argument is that if US bonds are rising and inflation is ticking up then this is reflective of a stronger economy. But rising fuel costs, even if not acknowledged in the core inflation measures the Fed assesses, are simply a tax on industry and the consumer, undermining the tax breaks that took Wall Street to its highs early this year.

News also came through in the afternoon that North Korea had pulled out of its meeting with South Korea tomorrow because the US and South Korea are conducting military exercises, as they do every year at this time. The announcement stunned the Pentagon and confused everyone else. Will Kim pull out of the Trump meeting?

Wall Street didn’t move on the news.

Commodities

After having plateaued for a week, the US dollar index was back in business last night with a 0.6% jump, following bond yields.

Gold has subsequently taken a bath.

Moves in other commodities were inconsequential.

The Aussie is down -0.7% at US$0.7471.

Today

The SPI Overnight closed down -7 points.

Speaking of inflation, Australia’s March quarter wage price index is released today.

Japan will release its GDP result and it could be a minus.

Myer ((MYR)) will announce today whether it made any sales in the quarter while Boral ((BLD)) will host an investor day and Coca-Cola Amatil ((CCL)) and Sigma Healthcare ((SIG)) hold AGMs.

The Australian share market over the past thirty days…

For more detail go to FNArena's Australian Broker Call Report, which is updated each morning, Mon-Fri.

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