The Overnight Report: Earnings Rule

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

By Greg Peel

More Bruising

The futures suggested up 27 points for the ASX200 yesterday which implied a level beyond 6300, but for the second session in a row the index hit 6300 on the open and found a concrete ceiling. An hour later, as it became clear incentive was waning, the sellers struck.

On Monday the sellers took the index back to flat but yesterday they went on with it, flipping the futures’ up 27 optimism into a down -27 point result.

Every sector closed in the red bar two, being the resources sectors. Thanks to a slight rebound in base metal prices, materials rose 0.5% against the tide, while energy stood still.

The biggest contributor to closing weakness were financials, which dropped -1.0% to end the recent recovery rally for the banks. Telcos had also found some long lost friends of late but they fell -1.1%.

Healthcare is solidly correlated to the Aussie (conversely), and a stronger currency tends to spark some profit-taking in CSL ((CSL)) and co. Healthcare fell -0.5%. Utilities (-1.4%) saw the biggest drop as the energy regulator proposed electricity distribution rates unfavourable to the suppliers.

While the ASX200 has rallied 200 points in a month it’s been a choppy affair, featuring several about-faces, the triggers for which have not been all that clear. As late as Friday the index rocketed over 50 points and took everyone by surprise, and two sessions later we have an almost -50 point fall from the intraday high. What changed in the meantime?

Nothing obvious. Trump has now threatened to escalate the trade war further, touting tariffs on an additional US$200bn or more of Chinese imports on top of the US$35bn which came into effect on Friday. This is not new news. Trump has always suggested he would do so if China retaliated, which they did.

Such a move would represent a sizeable escalation in the trade war, presumably intended to finally bring Beijing to the negotiating table. The US imports US$500bn worth of Chinese goods a year, the Chinese import US$150bn of US goods. The implication is America’s bazooka will beat China’s pop-gun if that’s where this leads.

Talk of new tariffs has the Aussie down this morning, by -0.3% to US$0.7441. The ever optimistic futures are up 16 points, but that might change after 9.30am.

Meanwhile, Wall Street has decided it’s sick of trade war talk and wants to focus on something else.

Bring it on

As a curtain raiser to the main event, Pepsico released June quarter earnings last night. The result was much better than expected and the stock rose 4.8%.

Pepsi managed to reignite demand for consumer staples stocks. Staples were market leaders initially as the S&P500 tried to rally off the bottom of its five-month range, but ultimately gave way to growth stocks (FANG) and small caps, as the trade war flared. Last night saw a return to favour.

Indeed, while last night’s session looked very similar to Monday night’s – Dow outperforming, Nasdaq and Russell taking a backseat, the sector break-down was completely different.

On Monday night the US banks led the charge higher, while defensives proved the laggards. Last night staples, utilities and real estate drove the S&P upward, while financials was the only sector to finish in the red.

Note that all of JP Morgan, Wells Fargo and Citigroup report on Friday.

The Nasdaq closed flat against the Dow’s 0.6% gain, and while having hit its umpteenth new intraday high from the opening bell, the Russell small cap dropped -0.5%.

Wall Street as a whole may be enjoying a winning streak but each session brings a new leader, and as the S&P500 approaches the 2800 level, being the top of the range since March, investors are rotating into safety.

In the March quarter, S&P500 earnings rose a net 26%. The forecast for the June quarter is another 20%. Yet while earnings helped Wall Street drag itself off trade-fear lows in April, the highs seen in January – to a lot of extent driven by earnings expectations – remained distant. Instead, PE ratios compressed, implying strong earnings were met with more hesitant sentiment.

So what might happen this quarter? If the S&P does manage 20% or better, will that be enough to spark a break-out, or is sentiment still fragile? There are many suggesting that to ignore the escalating trade war, as the last few sessions on Wall Street imply, is to do so at one’s peril.

And presently, Trump is in Brussels to console the Belgians, but also to talk tough at NATO. Who knows what might transpire. Then he’s on to the UK to talk to the prime minister, whoever that might be when he gets there.

Commodities

After a brief pause on Monday night, base metal prices resumed their steady slide last night thanks to trade and a stronger greenback.

Elsewhere, commodity price moves were less notable, other than we may acknowledge the Brent-WTI has begun to widen once more.

Today

The SPI Overnight closed up 16 points or 0.3%.

Locally, we’ll see housing finance numbers today along with the Westpac consumer confidence survey.

The June PPI is out in the US.

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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