The Overnight Report: Geopolitics

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

By Greg Peel

Sea of Red

It’s not often we see the ASX200 down -42 points when the Dow was up 300 but the local market has not been paying that much day to day attention to Wall Street in recent weeks, instead marching to its own tune. It is not simple to pinpoint one particular reason why the Australian market tanked yesterday. There were arguably several triggers.

Firstly, would the last investor to exit Telstra ((TLS)) please turn out the lights? News that the 3G/4G outage on the weekend was a software issue did nothing to prevent yet another -2.1% plunge yesterday, taking the telcos sector down -2.0%.

For materials, a beat on quarterly earnings and subsequent 4.0% jump for James Hardie, topping the ASX200 leaders’ board on the day, could not stand up to the rush out of the big miners as what had been a drift-back in the iron ore price became more of a plunge. Materials fell -0.8%.

Exacerbating the issue for resources stocks was the overnight 1% jump for the Aussie. The currency had sold down initially in April when global trade war fears first emerged and went on with it as the US dollar rallied. Traders clearly set themselves for further falls, hence the bounce on the news of the US-China trade truce.

The stronger Aussie is not helpful for any exporter or offshore operator, and particularly so in healthcare. After a fresh re-rating post guidance upgrade, CSL ((CSL)) fell back -1% yesterday and healthcare fell -0.9%.

Yesterday saw another session of the Royal Commission. It’s almost a given that the financials would fall -0.7%.

On any other day one might expect these individual stories to feature a mix of good and bad, but yesterday every sector closed in the red. The selling was market-wide.

What we did not see, thankfully, was an accelerating fall to the close. Rather, the index opened lower and then went on with it, bottoming out down -55 points at 2pm before making a slight comeback. Given that we saw momentum traders driving the index swiftly up from 5800 to over 6100 earlier in the month, it’s a fair bet those traders were heading in the other direction yesterday morning.

Not closing on the low of the day is a positive. The 6000 level should provide support. We note the Dow has given back -180 points last night but the local futures are only down -4 points this morning.

Iron ore is lower again, but only marginally so, and the Aussie is steady.

Hold Your Horses

When asked last night if he was happy the way the US-China trade talks were going the president replied “Not really…we still have a long way to go”. On the weekend the Treasury Secretary seemed far more optimistic in announcing the trade war was “on hold”, pending a mere sorting out of the details.

On Monday night the Dow outperformed the other major indices to the upside, led by the likes of Boeing and Caterpillar, and last night it outperformed to the downside, led by the likes of Boeing and Caterpillar.

The trade situation is at best uncertain. Then we can add in the North Korea situation. Last night the president also suggested the planned June 12 meeting with Kim-Jong-un may not go ahead, or may be postponed.

Just when things were looking up, geopolitically, they’re looking down again. The White House has also extended the conditions under which Iran can avoid a reimposition of stricter sanctions to include, on top of no further uranium enrichment, a withdrawal of all support for militant groups in the Middle East.

Tehran’s response was that’s not going to happen.

It appears the rally that took the Dow back to the 25,000 mark is, psychologically, enough for now. More clarity is needed on various issues to provide the next catalyst.

Commodities

There was some mention last night of OPEC easing off on its production cuts to counter exports lost from Iran and Venezuela, if that is to be the case. The WTI price did ease off a bit, but not as much as one might expect if this proves to be true.

The reality is the production cuts to date have achieved exactly what OPEC wanted, so why blow it now? The threat was always increased US shale production in response, but even with the right price incentive, US shale is struggling with funding issues and increasing costs when it comes to marginal production increases.

If the US is going to include a withdrawal of support for militant groups as a requirement for Iran to avoid sanctions, we can be pretty sure sanctions will be imposed. Meanwhile, Venezuela is imploding.

Iron ore fell again last night, but not by as much as it did Monday night.

The Aussie is steady at US$0.7576.

Today

The SPI Overnight closed down -4 points.

The minutes of the last Fed meeting are out tonight. Wall Street has already priced in a June rate hike. Uncertainty still remains as to whether there’ll be subsequently one or two more in 2018.

In Australia we’ll see numbers for March quarter construction work done, and the RBA governor will make a speech.

Woodside Petroleum ((WPL)) hosts an investor day today, Blackmores ((BKL)) hosts an analysts’ meeting and Boart Longyear ((BLY)) holds its AGM.

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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