The Overnight Report: Toothless

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            [6] => ((TLS))
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            [8] => IFN
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This story features MACQUARIE GROUP LIMITED, and other companies.
For more info SHARE ANALYSIS: MQG
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

Four Fails

It was notable yesterday that the ASX200 traded no lower in the session than it did after the half hour opening rotation. Thereafter it spent the rest of the day grafting some of the loss back. Wall Street may have provided a negative lead but realistically a de-rating of the US tech sector is worlds away from the local market.

The opening sell-off was merely technical, one assumes, given 6300 is proving a brick wall. The index closed smack on that level on Friday and yesterday’s open was a one-way ticket south on rapid transit. It is the fourth time in July the index has reached 6300 or close to it and failed. It is thus an easy call for short-term traders to take profits.

Our own IT sector did duly fall -0.8% under Nasdaq influence to be the second worst performing sector on the day. The worst was healthcare, down -0.9%, with high-flyer CSL down -0.9%. Similarly over in financials high-flyer Macquarie Group ((MQG)) lost -0.8%. These have been stand-out upside momentum trades of late.

Financials only lost -0.4%, helped by a 4.5% gain for beaten down AMP ((AMP)). It is a rare day AMP tops the ASX200 leaders’ board, post-RC.

Materials lost -0.7% despite a solid rise in the iron ore price overnight, but weakness was not about the big miners. Sandfire Resources ((SFR)) topped the losers’ board with an -8.9% fall, on disappointing FY19 guidance, while Independence Group ((IGO)) lost -6.7% after revealing a decline in grades at its flagship mine. Orocobre ((ORE)) and Syrah Resources ((SYR)) wrapped up third and fourth, but they are among the most volatile stocks on the market.

Other sectors suffered smaller losses but bucking the trend were telcos, following the announcement the Telstra ((TLS)) board has had half of all senior management taken out and shot. Commentators ask is this really the right time to implement such a shake-up, but given Telstra closed up 1.8% in the session, against the tide, the market clearly believes things couldn’t get any worse.

The Wall Street tech wreck continued last night but this morning the local futures are only down -2 points, confirming that yesterday was really only a technical trade.

Incentive to break up through 6300 will only come via the upcoming earnings season. Or not.

Just a Flesh Wound

The US earnings season has now reached the half-way mark, in terms of number of S&P500 companies reporting. So far some 83% have beaten on June quarter earnings, with the earnings growth run-rate up around 22% year on year.

One might expect this to be the recipe for Wall Street rising ever higher but it’s all about valuations being justified. When it comes to Big Tech, and particularly FANG & Co, clearly this has not been the case.

Netflix had fallen -11% the week before after its earnings report, Facebook fell -20% earlier last week and Twitter fell -20% on Friday. Big Tech stalwart Intel fell -8.5% on Friday. Wall Street shrugged at Netflix and tried to justify Facebook but by the time Twitter and Intel hit the wire, it was all a bit too much.

Thus a mini tech wreck is underway. After falling sharply on Friday, the Nasdaq was down another -1.4% last night when all of the Dow, S&P and Russell small cap were down -0.6%. Twitter fell another -8%.

I have more than once pointed out in this report the limitations of the Dow as an indicator, given the distortions of a share price-weighted average. The truest US stock market benchmark is the S&P500, but even cap-weighted indices have their issues.

Index-tracking funds are obliged to maintain their portfolio weightings in line with market cap weightings, hence if the likes of the FANGs rise to ever new heights, their cap-weightings increase, meaning index-trackers are forced to buy, meaning cap-weightings increase, meaning…

Then throw in a preponderance of ETFs which have become that much more popular in the last couple of years. ETFs on the S&P must also honour weightings, and tech had grown to around 30% of the benchmark. EFTs on the Nasdaq are even more distorted, and there are plenty of other variations such as ETFs on growth stocks, EFTs on tech stocks, or even ETFs on just the FANGs themselves.

All of these players have been jumping over each other to reweight, hence tech had become a “crowded trade”. The day of reckoning will always come when overcrowding is apparent. And then it all works in reverse – a lot of people have to leave the burning building through the one small fire exit.

While Facebook may have lost the greatest amount of value in US history, no one is panicking. An overcrowded trade which has led to elevated valuations is coming back to earth, a bit. No big deal – healthy stuff, blah, blah, blah.

It’s not the year 2000.

And if you are an index-tracker or ETF sponsor, you only shrug in such situations. You’re not making a call on the market, you’re merely offering an investment vehicle to be selected at an investor’s discretion.

The question now being asked, nonetheless, is has “growth” now had its day? Should we all go back to trading “value” again?

The counter to that argument is: How many people do you see on a train actually looking out the window?

Commodities

Posturing in currency markets ahead of this week’s policy meetings for all of the BoJ, Fed and BoE saw the US dollar index down -0.3%. The move has done little for commodity prices.

Barring any exogenous influences, such as strikes or supply disruptions, base metal prices are in a holding pattern awaiting an outcome on global trade.

Oil markets are more topsy-turvy, with each day bringing new rumours about production increases, supply drawdowns or geopolitical tensions, but a wider holding pattern is also evident. WTI is back over US$70/bbl after rising 2% last night without any specific explanation.

Despite the greenback fall, the Aussie is steady at US$0.7405.

Today

The SPI Overnight closed down -2 points.

The Bank of Japan meets today and there is much anticipation of a tightening of policy. Mind you, we’ve been here before.

China releases July manufacturing and services PMIs today.

The eurozone reports June quarter GDP tonight

The US will see a June reading for PCE inflation.

In Australia we have numbers for building approvals and private sector credit.

On the local stock front, Alacer Gold ((AQG)), Infigen Energy ((IFN)), Origin Energy ((ORG)) and Regis Resources ((RRL)) provide production reports, Credit Corp ((CCP)) and Freelancer ((FLN)) publish earnings reports, and the Australian Agricultural Company ((AAC)) holds its AGM.

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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