The Overnight Report: Yield To Japan

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This story features WESTPAC BANKING CORPORATION, and other companies.
For more info SHARE ANALYSIS: WBC
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

Hero One Day…

The ASX200 was slammed from the open yesterday, plunging -0.9% up to midday and failing to get off the mat in the afternoon. It was a bit of a knock-out punch that wiped out all of the gains achieved last Thursday and Friday.

Why, exactly, is anyone’s guess. But then Thursday’s and Friday’s sessions were also a little curious – Friday in particular suggesting market-wide buying.

Yesterday was about as clear an example of market-wide selling as you can get. All sectors, bar one, fell in close unison around the -1% mark.

Energy was the only sector not to fall -1%, but probably would have if not for the Iranian and US leaders exchanging annihilation threats. Energy closed flat, suggesting buyers on oil price rise speculation managed to offset the -1% whoever was selling would have otherwise achieved.

We saw this earlier last week too – what looked like one big market order. Thin volume exacerbated the fall, likely reflecting confused investors simply standing aside.

There was otherwise some negative news about, but not that would send the entire index south.

Westpac’s ((WBC)) BT Financial Group announced a significant restructure to platform fees and a subsequent earnings downgrade, blowing the sector apart on the assumption all must follow. It was bad news for the big names such as AMP ((AMP)), down -2% and IOOF ((IFL)), down -5%, but worst for the high-flying platform disruptors Netwealth ((NWL)), down -11%, Praemium ((PPS)), down -9% and HUB24 ((HUB)), down -6.5%.

The RC strikes again.

Nufarm ((NUF)) issued a profit warning due to the severity of the drought downunder and fell -11%, taking Elders ((ELD)) down -5.6% in sympathy.

BHP ((BHP)) announced it would defend a shareholder class action over the Samarco dam disaster. It fell -1.4%.

On the flipside, Lynas Corp ((LYC)) had another strong session after upgraded rare earth price forecasts and Afterpay Touch ((APT)) will soon be needing oxygen to breathe.

Everything under the surface yesterday was overwhelmed by a big selling spree.

The futures are up 17 points this morning.

Interesting Timing?

Iran was Trump’s target last night but on Friday night the president was busy complaining about “currency manipulation” and its impact on the US dollar, specifically singling out China and the EU. Japan was not mentioned, and nor does Japan much come up in debate about global trade wars, but it is both a “currency manipulator” and potential trade war victim.

Interesting, then, that Reuters would report last night the Bank of Japan will discuss the possibility of backing off its highly accommodative monetary policy when it meets at the end of the month.

The BoJ has since 2016 maintained a negative cash rate and has purchased bonds (QE) right along the yield curve to keep the Japanese ten-year rate at zero, all with a target of 2% inflation that continues to prove allusive. Another tactic is required, it would seem, which coincidentally would very much please The Donald.

The news from Japan had bond yields popping all over the globe, including in Germany, and the US ten-yield jumped 7 basis points to 2.97%.

The result in the US stock market was as one would expect. Banks were the leaders on the day as the US yield curve steepened a little more and the bond-proxy sectors and cash flow-driven consumer staples fell to offset. Industrials and materials were also weaker, but that’s more closely related to trade.

News from the weekend’s G20 summit was that the US and EU had made little progress. Not sure what Larry Kudlow was on about last week.

Speaking of trade, there was much anticipation last night ahead of Whirlpool’s after-the-bell earnings release. One of the very first tariffs Trump imposed was on imported washing machines, and Whirlpool shares leapt as a result. But then along came tariffs on aluminium and steel.

Whirlpool posted a miss on earnings and downgraded guidance. Its shares fell -8% in the aftermarket.

There was also much anticipation ahead of Google’s result, also aftermarket, given the FANGs have been the high flyers all year and Netflix disappointed last week, suffering a -14% plunge.

Google (Alphabet) posted a slight beat on revenue and a big beat on earnings and its shares were up by as much as 5% thereafter.

Facebook reports on Wednesday night and Amazon on Thursday night.

Earnings results continue to be net positive, but any upside for indices is being offset by generally negative macro influences, most specifically trade. As a result, the S&P500 broke 2800 ten days ago – suggesting a breakout of the near five month range – and last night closed at 2806, having not managed to go anywhere in the meantime.

Commodities

It was several years ago amidst Middle East tensions that there was first concern Iran would close the Strait of Hormuz – through which around a third of all global oil exports pass – and the oil price would hit US$200/bbl. After the “you blow us up we blow you up back” exchange between the Iranian and US leaders on the weekend, this possibility is again being touted.

Iran didn’t close the Strait back then and wisdom suggests they won’t do it now, given the US Navy is parked within spitting distance. Indeed, oil prices initially popped from the open last night but settled back, and ultimately closed lower.

Amidst all discussions of sanctions and increased OPEC/Russia production, perhaps the most telling influence on oil at present is the issue of US bottlenecks. Permian Basin shale oil can be extracted for as low a cost as US$22/bbl, but without sufficient pipeline infrastructure, it has nowhere to go in a hurry.

“Debottleneck” the Permian, and what will be the price of oil?

The White House last night spoke of potentially lifting sanctions on Rusal, hence aluminium is up 2.5%. Otherwise, metal price moves were limited as the US dollar bounced back a little, although gold’s day in the sun proved short-lived.

The Aussie is back down -0.5% at US$0.7382.

Today

The SPI Overnight closed up 17 points or 0.3%.

Flash PMIs are due today/night from Japan, the eurozone and US.

Iluka Resources ((ILU)) releases its quarterly report and Atlas Arteria ((ALX)) reports traffic numbers.

Rudi is poised to connect with Sky News Business via Skype to talk share markets and broker calls at around 10.30am this morning, instead of the usual 11am.

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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