The Overnight Report: Take A Breath

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

By Greg Peel

Lack of Resources

In an all too familiar pattern, the ASX200 was thumped down over -40 points yesterday morning by computers during the opening rotation in what seemed an overly harsh sell-off given Wall Street strength. Only the day before, the index had rallied on the back of Wall Street.

But the humans stepped in and once again we saw an immediate rebound, taking the index back to be down only -16 points at midday. Thereafter, we saw an afternoon drift.

I suggested yesterday morning the three factors that could induce weakness for the market were a lower oil price, a lower iron ore price and a more than one percent pop for the Aussie dollar, unrelated to the greenback. Sure enough, energy closed down -1.2% and materials -1.0%.

For the resource sectors it was a double-whammy effect, given lower commodity prices should come with a dampener of a lower Aussie, not a solid jump. Healthcare is highly leveraged to the currency and it fell -0.9%.

And speaking of double-whammies, the utilities sector dropped -2.0% on recovering US rates as well as the lower oil price, given AGL Energy ((AGL)) operates both upstream and down.

This week’s strong retail sales result was quickly forgotten as consumer discretionary fell -0.9%. But the selling was not market-wide. Consumer staples played defensive and telcos didn’t fall for once, ditto the banks which rose 0.1% as investors wonder whether they can actually fall any further.

As Jack Palance once famously said, Royal Commission ain’t over yet.

From a technical perspective, the index seems reluctant to fall too far below 6000 but it is also struggling to hold its head above that level. With the banks heading south all month it was left to the resources sectors to drive the ASX200 back to the previous high, but now that the froth has come off commodity prices, and the banks are unlikely to come racing back, that milestone seems ever further away.

Unfortunately our own tech sector is just not big enough to provide the clout, despite trying hard yesterday with a 1.4% gain.

This morning we see WTI back up a percent but talk of oil pushing all the way up to US$80/bbl has subsided as it becomes apparent that US$70/bbl is sufficient to incentivise marginal high-cost shale production in the US and have OPEC/Russia talking a wind back of production cuts.

Iron ore is indirectly beholden to global trade wars, but it has also bounced back.

Too Strong?

Wall Street is now beginning to worry that the US economy might be a little bit too strong right now in comparison to the rest of the world. With March quarter GDP coming in a 2.3% growth, estimates, via run-rate calculations, that the June quarter would see close to 4% were initially scoffed at, but are now looking quite possible.

On the back of the “unbelievably good” May jobs report, last night’s US job openings data (JOLTS) showed a record 6.7m job openings in April, for an available pool of currently unemployed of 6.4m. It’s the second month in a row openings have exceeded availability, and that has never happened in 18 years of the data.

The US services sector PMI rose to 58.6 in May from 56.8, following on from last Friday’s manufacturing PMI result of 58.7, up from 58.3. Meanwhile, the eurozone composite PMI (manufacturing plus services) hit a one and a half year low in May at 54.1, while China’s PMIs are struggling in the low fifties.

After a solid couple of sessions, Wall Street took a breather last night but that didn’t stop the tech-driven Nasdaq hitting another new all-time high, along with the Russell small cap index, which has hit several new highs in recent days.

The US dollar index dipped slightly but in terms of trend, the concern is greenback strength may become a thorn in the side of the US economy. Everyone was happier last year when global growth was synchronised, and that no longer seems to be the case.

A rising oil price is another concern, but as suggested above, maybe there is a line in the sand.

Apple watchers will note the company’s market cap snuck up to the US$950bn mark last night. Not long now.

All hail Trump’s tax cuts. But in a dose of reality, last night the people in charge of US social security (pension) payments warned that this year they will have to dip into reserves to make up the difference. This is akin to a retiree reliant on an income stream having to dip into capital to pay the electricity bill.

US social security is invested only in government bonds issued specifically for the purpose, and not in the stock market, and this has been the case since social security was introduced in the Depression. With Trump’s budget deficit ever rising, the years ahead look bleak for the have-nots.

Commodities

Back to all too familiar – the latest round of strikes by workers at Escondida copper mines and subsequent wage negotiations have sent the copper price to a six-week high, as other base metals are dragged along in the wake.

Iron ore prices may have been higher earlier in the year but they don’t seem to want to head below US$60/t.

The Aussie has come off a bit, down -0.3% to US$0.7617.

Today

The SPI Overnight closed up 10 points, likely reflecting oil and iron ore prices and the Aussie heading back in the other direction last night. That would take us back above 6000 once more.

Australia’s March quarter GDP result is out today. We’re looking for 0.8%/2.7%.

Adelaide Brighton ((ABC)) hosts an investor day.

The Australian share market over the past thirty days…

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