The Overnight Report: The Krakens Wake

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            [1] => ((LYC))
            [2] => ((SBM))
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This story features LYNAS RARE EARTHS LIMITED, and other companies.
For more info SHARE ANALYSIS: LYC
The company is included in ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

As You Were

The ASX200 bounced from the open to recover a good chunk of what was lost on Monday, supporting the assumption Monday’s session saw a big sell order hit the market and everyone simply stood aside. Once recovered, the index traded sideways for the rest of the day.

Monday’s selling was clearly index based, with only energy avoiding the action due to heightened geopolitical risk (Iran/US). Energy stood still again yesterday as the other sectors made their way back.

The recovery was nevertheless not as even as the sell-off. Materials led the way thanks to China – more on that in a moment – rising 1.3%. Healthcare was back in familiar buying mode as the Aussie fell back, and the consumer sectors recovered their ground.

Financials, industrials and utilities did not recover all their lost ground while IT was relatively flat and telcos dead flat.

I suggested yesterday Afterpay Touch ((APT)) would be finding it hard to breathe in the thin air reached post trading update and sure enough, the stock pulled back -4.1% yesterday to top the ASX200 losers’ board.

Lynas Corp ((LYC)) marked its third consecutive session in the top five winners, yesterday topping the list with a full 11.2% gain in the wake of broker upgrades, which have followed the company’s own rare earth price forecast upgrades.

Rare earths were the hot commodity about five years ago on the “new world” story of electric motors and wind turbines, among other uses, until the bubble burst. Investor attention, which is always short-span, has since moved on to another new world theme of EVs and batteries, targeting the likes of lithium, nickel, cobalt and graphite. But the rare earth story remains the same.

Materials had been the weakest link on the local market this month on the escalating trade war, but has been thrown a life line in the form of Chinese stimulus.

The PBoC has made a record injection into the Chinese banking system. Yesterday the Chinese stock market, which has been sliding away on trade war fears, bounced 1.5%. Chinese bond yields, which have been held down by investors seeking safe haven, bounced substantially, and the renminbi slid once more.

Beijing can argue that stimulus was required given Chinese growth is appearing to slow, but one cannot dismiss the notion that it’s all about retaliation against the US. China cannot beat America on a tit-for-tat tariff war, but it can fight the battle by other means.

The Chinese stimulus has sparked some big bounces in base metal prices in London overnight, justifying the solid session yesterday for the Australian materials sector.

Focus on Earnings

The US earnings season scoreboard so far is showing 22% S&P500 companies reporting with 91% beating earnings forecasts and 75% beating on revenue.

In the long recovery from the GFC and right up until around 2017 the typical US earnings season featured 60-70% odd of earnings beats but no revenue growth. Earnings came down to cost-cutting and the support of ultra-low interest rates, while revenue growth remained stuck in recession.

Things had begun to improve before Trump took the helm and thanks to tax cuts and strengthening economic growth, numbers like those above are resulting.

Last night saw solid moves up for Google, which reported in Monday night’s aftermarket, and Dow components Verizon, United Technologies and 3M. The Dow subsequently became the index outperformer on the day.

A funny thing happened on the Nasdaq last night. It was up a full 1.1% mid-session, another all-time high of course, and then sold off to close flat.

The explanation may lie in a -1.1% fall for the Russell small cap index. Trade war immune small caps and strong growth Big Tech have been the darlings of the rally back since February. Last night some dusty old Dow stalwarts took centre stage, and so profits were taken on the prior winners.

Wall Street continues to focus on earnings and while trade war nervousness lingers, traders are trying to pretend everything will be fine in the end. That’s the way Donald Trump sees it, telling American farmers last night to be patient, all will be well, as the government announced billions in aid to agricultural producers hit by Chinese tariffs.

Speaking of tariffs, I noted yesterday Whirlpool was a big winner from Trump’s first batch of tariffs earlier in the year, which included washing machines, only to be swamped by Trump’s next, big round of tariffs, which included steel. The stock fell -8% in the aftermarket on Monday night.

Last night it closed down -14.5%.

Commodities

Aluminium had its bounce on Monday night on news Rusal sanctions may soon be lifted, so it stood aside last night as the other base metals enjoyed relief from announced Chinese stimulus.

Copper’s solid bounce was also aided by strike action in Chile, which is pretty much a biennial event, or thereabouts.

The bounce came with little support from the US dollar, which was only slightly weaker.

But it did impact on the Aussie, which has shot back up 0.6% to US$0.7423.

Today

The SPI Overnight closed up 16 points or 0.3%.

It’s CPI day in Australia today. Look for 2.3% annual headline inflation.

St Barbara ((SBM)) will release its production report.

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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