The Overnight Report: Back To Business

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This story features SIGMA HEALTHCARE LIMITED, and other companies.
For more info SHARE ANALYSIS: SIG
The company is included in ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

Regional Slide

Late selling on Friday saw the ASX200 close down -20 points on end of year book squaring. The futures suggested we should have recovered that loss yesterday morning, but while the index did open higher, the buying was tentative.

Late morning did see the ASX200 up 26 to recover Friday’s losses but at that point it was as if someone rang a bell, and pointed to Asian markets.

In a week in which Trump’s tariffs begin to come into effect, the Chinese stock market is sliding away and Japan is also slipping. The Shanghai index is now down -22% this year, having fallen another -2.5% yesterday, while the Nikkei is down -5% since early June, falling -2.2% yesterday.

Caixin’s independent manufacturing PMI for China came out yesterday, showing a fall to 51.0 from 51.1 – just hanging on to expansion territory. Japan’s PMI rose to 53.0 from 52.8 but what worried investors was a greater than expected decline in export orders, indicating the trade war is now beginning to bite.

From midday yesterday the ASX200 fell in a straight line to the closing bell, turning a 26 point gain into a -16 point loss. The resources sectors were among the biggest losers despite oil and iron ore prices being higher overnight and base metal prices doing little. Energy fell -0.8% and materials -0.5%.

The banks (-0.3%) are back in selling mode as the RC rumbles on.

Consumer discretionary (-0.9%) was the worst performer, featuring an -8.8% plunge for Automotive Holdings Group ((AHG)) after the cancellation of the sale of its cold logistics business.

Train wreck of the day was Sigma Healthcare ((SIG)), plunging -40% after losing its contract to supply Chemist Warehouse. The healthcare sector nonetheless was one of the best performers on the day, along with industrials, in rising 0.3%. The buyers were back looking for a lower entry point into CSL ((CSL)) following Friday’s round of end of year profit-taking.  

It is a commonly held belief that Trump’s global trade war will ultimately result in peace talks, and that the US will win. Trump will provide concessions, but will get the outcome he wanted. China has more to lose, with the US being China’s biggest export market. This is reflected in an S&P500 that has traded in a flat range since March while the Chinese market has tanked.

But to date, there have been no breakthroughs, no concessions. China has held its ground and having waited this long for Trump to come to his senses, Canada and the EU have had no choice but to retaliate, and Mexico is also set to do so assuming the new president is thus inclined.

The Australian stock market saw a very strong rally in June as it became somewhat of a go-to trade when the rest of the world was playing war games, but for how long is Australia immune, exemptions from Trump’s tariffs notwithstanding, if China and Japan suffer as a result?

We note, nevertheless, that all commodity prices are weaker this morning and Wall Street managed only a slight gain, yet the futures are up 23 points.

Still Hopeful

It remains a mystery as to why White House minders are yet to confiscate the president’s mobile phone. Trump was at it again over the weekend and last night, with two tweets in particular causing ructions.

One was a declaration that imposing tariffs on global auto imports will prove the biggest weapon yet in his goal to extract concessions from trading partners. The share prices of German automakers have been sliding for weeks in fear of a touted 25% tariff on imported, Mercs, BMWs, Audis, VWs, and Porsches. Wall Street is nervous.

Another tweet had Trump reporting that he had spoken to the King of Saudi Arabia, pointed out that oil prices are too high (the US summer driving season officially begins this week), and suggesting that the Saudis pump an additional 2m barrels per day. The King, apparently, “agreed”.

This sent the White House into a scramble, pointing out the King had not “agreed” to anything, rather he simply acknowledged the Saudis did have that much excess capacity at their disposal.

Greater fear was reflected in the Brent crude price last night, which fell -2.3%, while WTI, for which supply is tight due to domestic infrastructure bottlenecks, fell only modestly.

It was enough to send the US energy sector down from the open nevertheless, while general trade war fears had Wall Street back in selling mode to open the second half of the year.  The Dow was down -193 points from the bell.

But that was the low of the day. A steady rally back into positive territory ensued. Leading the way, once again, were Big Tech and small caps. Both the Nasdaq and the Russell rallied 0.7% against the S&P’s 0.3%.

Research notes that year on year, 120% of the S&P500’s rally is due to a mere ten stocks, all of which are either in the tech sector or considered “tech” as such. This implies a lot of weakness in other sectors.

Can the tech growth story keep carrying Wall Street? That is the question du jour. The other question is: what happens if it stops?

Either way, Wall Street’s rally back last night suggests hope still reigns with regard the trade war on the belief ultimately there will be peace, probably in America’s favour. But it's taking time, and the casualty count is now beginning to mount.

Commodities

The big drop in the US dollar on Friday night looked very much like a quarter-end anomaly, as the greenback was back in rally mode last night. That strength, and trade war fears, continue to weigh on metals prices.

Gold was back in selling mode.

Ditto the Aussie which, after its brief bounce on Friday night, is back down where it had been, falling -0.9% to US$7337.

Today

The SPI Overnight closed up 23 points or 0.3%. The futures have been hard to read lately.

Following on from yesterday’s weak Australian house price data, building approval numbers are out today.

The RBA meets today to discuss house prices, trade wars, the currency and other matters.

Rudi will be ready to connect with Sky Business via Skype at around 11am to discuss share market and broker calls.

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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