The Overnight Report: Yielding To Italy

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This story features TECHNOLOGY ONE LIMITED.
For more info SHARE ANALYSIS: TNE
The company is included in ASX100, ASX200, ASX300, ALL-ORDS and ALL-TECH

By Greg Peel

Not Paying Attention

Either Australian investors were oblivious to what is unfolding in Italy or were not quite sure what to make of it, deciding yesterday that with no leads from offshore, it’s best to do nothing. The ASX200 closed up 9 points yesterday after a lacklustre session and the futures are down -45 this morning when nothing has changed in Europe in the last 24 hours.

Other than Wall Street was open.

Australian banks tend to follow US banks outside of specifically domestic issues (eg Royal Commissions) so it will be interesting to see today whether those buyers deciding our beaten down banks are now offering value, pushing the sector up 0.5% yesterday, remain as committed today.

Healthcare was also back in favour yesterday, rising 0.8%, while another slight fall in the iron ore price did not deter those who thought the big miners have taken enough of a hit recently, given materials rose 0.2%.

Ditto energy, which despite another fall in the oil price closed flat.

It was left to the telcos (-1.7%) to provide the balance, with one big telco resuming its plunge on dividend concerns, while IT chimed in with a -1.0% drop.

The Aussie dollar is down -0.5% this morning which does provide some buffer against other macro impacts, supporting the materials and healthcare sectors for example, but the big drop in US rates will have ramifications for certain insurers and others for which rising US rates provide a tailwind.

What does Italy have to do with us? Well, remember Greece.

Yields Plunge

Germany, France and EU officials in Brussels all breathed a sigh of relief on the weekend when the latest attempt at an Italian government was dismissed. Both parties within the coalition that was able to form a government were anti-EU, sparking fears of another Brexit, but a more catastrophic one given Italy is in the eurozone.

The dismissal of the government by an unelected Italian president on the basis of his executive call vis a vis EU membership could only serve, one assumes, to throw fuel on the fire of the anti-EU movement not just in Italy, but across all of Europe. Hence, when Italy goes back to the polls to try again, will support for the populist parties become even more of a groundswell than before?

The irony is that one of the populist parties in the former coalition is far left, and the other is far right. As one wag put it, it’s as if Bernie Sanders and Donald Trump got together to form a government. Not only did no one think it was even possible for the two parties to co-ally, they both dismissed the notion pre-election. That is, until it was clear no other disparate coalition could form a government.

So was born the chalk and cheese collation, with the one common platform being a desire to exit the EU. The anti-EU movement in Italy may be bolstered as a result of the president’s actions, will there be a counter backlash against each individual party for deigning to side with the enemy?

These were the questions being asked last night as financial markets took a typical respond now and ask questions later approach. Investors poured into the safe haven of US bonds, sending the US ten-year yield crashing -16 basis points to 2.77%.

The euro plunged, sending the US dollar up 0.5%. The US financial sector has been the primary driver of Wall Street’s most recent rally, on the back of the ten-year rising above 3%. US banks led the indices down last night, with the big names falling by as much as -6%.

While there was some respite for the bond-proxy sectors of utilities and REITs, all S&P500 sectors closed in the red.

One saving grace is that German bonds, too, saw a rush of buyers. The Italian ten-year blew out 43 basis points to 3.10% but the German equivalent fell -10 basis points to 0.25%. Back when the EU was seemingly dangerously close to imploding several years ago in the wake of the GFC, when the PIIGS were bankrupt and Grexit loomed large, all of Europe became a no-go zone for investors.

This time the European economy is in much better shape, albeit still under heavy ECB support.

An unelected technocrat has been appointed as caretaker prime minister in Italy. He will not contest the next election, which is presumed to occur in August but may occur sooner if there is a no confidence vote against him.

Italy has had 65 governments in 70 years. Makes Rudd-Gillard-Rudd-Abbott-Turnbull look like a model of democracy.

Another saving grace, to some extent, is that Wall Street did not close on its lows. The Dow was down over -500 points late in the afternoon.

Commodities

US data services and media are showing oil prices down overnight. I was initially confused until I realised they are catching up on two sessions rather than one. Oil prices are a little higher this morning.

Nothing untoward going on in metal prices despite the surging greenback, with iron ore unchanged.

One might have expected a rush into gold as the other safe haven but the greenback has put paid to that.

The Aussie is down -0.5% at US$0.7505.

Today

The SPI Overnight closed down -45 points or -0.8%.

Local building approvals data are out today.

Tonight the US will see the first revision of the March quarter GDP result – the forecast is for no change – along with private sector jobs numbers and the Fed Beige Book.

TechnologyOne ((TNE)) will host an investor day and OZ Minerals ((OZL)) a strategy day. Not sure what the difference is.

The Australian share market over the past thirty days…

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