The Overnight Report: As You Were

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By Greg Peel

Fightback

The ASX200 plunged through the 6000 level from the opening bell yesterday, dropping -50 points in the opening rotation. But when that concluded at 10.30am, the index bounced straight back to halve that loss by midday. Once again, computers vs humans.

It may well be that investors who did not sell on Monday, despite all that set Wall Street off on Monday night being known already, had seen no reason to. When the Australian market tumbled yesterday they saw a buying opportunity, and after last night they have been vindicated.

As I had suggested yesterday morning, the local banks blindly followed down the US banks, following a big fall in US rates, to be the biggest contributor yesterday with a -1.4% loss.

It was a text book risk-off session in which defensives came to the fore. Utilities led the resistance with a 1.6% gain and healthcare rose 0.7%, with consumer staples steady. Telcos (-0.7%) used to be in that group but now those companies are more consumer discretionary than utility.

Materials (-0.3%) did no more than wobble while energy was flat despite another tick down in the oil price. Watch this space today.

There were no individual stock stories that really stood out yesterday.

Wall Street has bounced back, so it’s all a bit academic. The local futures showed down -45 before yesterday’s open and are showing up 40 this morning. US bond yields have bounced, the oil price has shot back up and the Aussie has jumped a percent.

All of which largely suggests a reversal of all of the above.

La Dolce Vita

It was the computers running amok on Tuesday night night on Wall Street from the open, playing blindly to the “negative” theme of the Italian story. Buyers stood aside, as is prudent to do so in such situations, and sellers sold into a vacuum. The Dow was quickly down -500 points.

It was the bond market that grabbed the attention, given a -16 point fall in the US ten-year yield, but commentators put this down to a crowded trade of short US bonds and long European bonds, given ECB support, Italy included. It was snap reversal.

The US ten-year yield bounced back 7bp last night to 2.84% — not a full recovery but representative of a more measured assessment of risk. The Italian bond fell back -10bp.

For many it’s a case of we’ve seen this movie before, in the matter of Greece 2011-12. Greece was and is a minnow in eurozone GDP terms compared with Italy, but the political story is the same.

Greece wanted out of the euro and most of the world said yes please, just so life on global markets could go back to normal. Germany resisted and Greece was bailed out. In 2015 the Greeks rebelled against the resultant EU austerity package and elected a new prime minister who ran on a Grexit platform. He won, took office, and five minutes later announced Greece was staying.

Someone quietly pointed out what would become of his country, ex-EU. Alex Tsipras remains prime minister to this day.

The upcoming Italian election is being touted as a proxy referendum on the EU. But even if an anti-EU government does manage to be formed, the process of actually leaving would be so complex as last most of an eternity (just look at Brexit, and the UK is not even in the eurozone), if that ever were to actually be the case, to the point any new prime minister may well have a similar Tsipras epiphany.

Whatever transpires, Italy is there, and will be there for some time. Wall Street can just get on with it. The banks all bounced back last night in tune with bond yields, and having all closed in the red on Tuesday night, every S&P500 sector closed in the green last night.

Unrelated to Italy, OPEC/Russia announced last night that it would keep its current production cut quotas in place until at least the end of the year, to assess what happens with regard Iran, Venezuela and subsequent global supply constraints. As a result the WTI price bounced 3.5%, and energy was the strongest sector on the day.

In other news, the US added 178,000 private sector jobs in May, when 198,000 was forecast. The March quarter GDP result was revised down to 2.2% growth from 2.3%, when unchanged was forecast.

Slightly disappointing, but not enough to dispute the belief the US economy is tracking along nicely. Indeed, Wall Street would be more concerned if it was too nicely.

To that point, irrespective of the Italian story forcing a readjustment of long-end US bonds, it has also seen the odds of a fourth rate hike in December drop from over 40% to under 20%, according to the polls.

The one more specific concern with regard Italy is that if the ECB had to respond with easier policy as a result, it has no firepower left. Rather, the tightening phase that was soon to begin will likely now be pushed out in time, perhaps leading the Fed to not be so quick to move as has been feared.

Commodities

Oil’s bounce back was aided by a reprieve from the US dollar, which has fallen back -0.8% on its index on a reversal of the euro.

The same is true for metal prices, but only nickel and zinc are on the move at present. Both were up last night after both being up on Tuesday night.

Alas, the Aussie has also bounced back, up 0.9% to US$0.7575.

Today

The SPI Overnight closed up 40 points or 0.7%.

Local March quarter private sector capex and capex intentions data are out today, in the lead up to next week’s GDP result. April private sector credit is also due.

China releases May manufacturing and services PMIs.

The US releases personal income & spending numbers, including PCE inflation.

Westfield ((WFD)) will pack its bags and leave the ASX today. Unfortunately the malls are staying.

Rudi will travel to Sydney's Surry Hills and appear on Sky News Business from noon till 2pm.

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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