The Overnight Report: Late Mail

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

By Greg Peel

Resourceful

The local market appears to be unsure of its direction this week, with three days of sharp index-wide moves doing little more than to confuse. Monday saw surprise across-the board selling, Tuesday saw a mirror reversal of most of that loss, and yesterday it was back to index-wide selling again, but for the resources sectors.

Energy (+0.4%) and materials (+1.0%) provided the counter yesterday to selling in all other sectors, including big moves in big caps. Healthcare and consumer staples both fell -1.5%, telcos fell -1.0% and the banks -0.6%. Other sectors fared better but were still lower, so we can’t call a rotation out of defensives other than into resources.

If not for resources we would have been back to Monday’s low. But it is notable that this sharp spike in volatility comes amidst thin volumes for the week, exacerbating the moves. We are perhaps simply seeing some argie-bargie ahead of results season with many opting to move to the sidelines ahead of kick-off.

Results season does not really get going until after next week, but for a handful of early reporters including Rio Tinto ((RIO)).

The currency also seems very much a factor and here we have also seen a spike in day to day volatility, without much result in the wider picture. The Aussie’s been buzzing around the US74c mark for a month.

What we do know from yesterday is the RBA is definitely not going to be raising rates this year, probably not next year, and possibly never again in our lifetimes.

Yesterday’s June quarter CPI data showed an increase in annual headline inflation to 2.1% from the March quarter’s 1.9% when 2.3% was expected. Core inflation remained flat at 1.9% as expected, implying inflation is yet to reach the RBA’s 2-3% target zone.

Half of the increase in the headline was down to petrol/diesel prices, not included in the core rate. Weakness was seen in discretionary retail thanks to ongoing price competition. Weakness was also seen in utility prices following their steep rise, as energy providers start to respond to public anger. Rental inflation was at its lowest since 1994.

It is of little wonder economists keep pushing out their timelines for the long awaited rate rise from the historical low. The US is hiking, the EU is moving slowly in the same direction and even Japan is now talking normalisation. The RBA is stuck put, and we were the economy that didn’t go into recession post GFC.

Breakthrough?

The EU is going to buy a lot more soybeans from the US, and has agreed to buy LNG, once sufficient US export infrastructure is built, as a hedge against reliance on Russian gas.

The US and EU will “work together towards zero tariffs, zero non-tariff barriers and zero subsidies on non-auto industrial goods”. There is an agreement to avoid tariffs on European automakers also in being nutted out, and the two will work together to reform the WTO, with a specific emphasis on intellectual property (See: China).

This was the news from a joint press conference between Donald Trump and European Commission president Jean-Claude Junker, announced around 15 minutes before the close of Wall Street last night. At that point the Dow was dead flat, before closing up 170 points.

Up to that point it was another earnings-focused session on Wall Street. Well may Trump and Junker discuss auto tariffs, given General Motors last night reported and subsequently fell -4.6%, while Fiat Chrysler did the same and fell -15.5%. Ford reported after the bell and is down -3.9%.

The problem? Lowered guidance due to steel and aluminium tariffs.

But is this all about to change? Are we going to be forced to admit that Trump’ tactics, seemingly mad at first, are working? Surely this agreement with the EU represents significant progress.

Now it’s over to China.

The bottom line is that despite the late “pop” in US stocks last night, particularly industrials, as well might we expect, Wall Street hasn’t really been sold down as the trade war continued to escalate. It sold down on the initial announcement earlier this year of steel and aluminium tariffs, but that was before investors began to assume it was all just a ploy. Despite increasing tit-for-tat between the US and China, the question has still been “Is there going to be a trade war?”

Maybe not, if last night is anything to go by. This week has seen US earnings season largely split into a lot of winners but some clear losers, the latter blaming tariffs. Alcoa, Whirlpool and now the car makers have all suffered this fate. Is this soon to change?

The Trump administration was forced only the night before to announce billions in support for US farmers, such as those of soybeans, to counter tariff impact. Is this now going to be necessary?

These and other questions will no doubt now be asked, and it is likely Wall Street will just have to hang in there and see.

Meanwhile, back in earnings land, Facebook is being thumped as I write, down -20% following a “miss” in its earnings report. A very slight miss, just quietly, and the actual earnings number was a beat. Many have suggested the FANGs have been recently “priced for perfection”, and this appears to be the case. Nothing other than major upside surprise would have prevented Facebook being sold.

Commodities

Trading on the LME had long closed for the session before the Trump-Junker press conference. Watch this space tonight.

Iron ore is also pre-conference.

The US dollar goes up on trade war fears and the Aussie goes down. So right now the dollar index is down -0.4% and the Aussie is up 0.4% at US$0.7450.

Gold has found some relief thanks to the greenback.

Today

The SPI Overnight closed up 8 points.

The ECB will hold a policy meeting tonight.

The UK will release its June quarter GDP result.

On the local stock front, Beach Energy ((BPT)), Fortescue Metals ((FMG)), Newcrest Mining ((NCM)) and OceanaGold ((OGC)) all deliver production reports and IOOF ((IFL)) reports quarterly funds flows.

Macquarie Group ((MQG)) holds its AGM.

And Rudi will appear on Sky News Business at noon, for two hours long.

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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