The Overnight Report: Trillion Dollar Toast

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            [1] => ((BHP))
            [2] => ((IGO))
            [3] => ((WSA))
            [4] => ((RMD))
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            [0] => RIO
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            [4] => RMD
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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

I Go to Rio

It was fair bet the local market would open lower yesterday and it did, but only just. Big falls across the commodity price complex provided a bit of a no brainer but the ASX200 did not really tumble until Asian markets opened around noon.

Commodity prices had all fallen overnight after confirmation the White House intends to raise its tariff level on the new US$200bn tranche of Chinese goods to 25% from 10%, clearly hoping this escalation will be what finally breaks Beijing.

Coincidentally, Rio Tinto ((RIO)) posted its earnings result after the bell on Wednesday and revealed a miss on earnings. Rio closed down -4.9%.

Rio had been well priced leading into its result release so the suggestion is the stock was primed for a fall on any disappointment. Analysts have nevertheless shrugged off the miss, instead pointing to the beat on Rio’s dividend and the promise of more to come. Rio is swimming in cash from both operations and divestments.

But on a day when the materials sector led the index down with a standout -2.2% drop, it’s hard to determine just what the individual reaction to Rio’s result really was. BHP ((BHP)) fell -3.3%, albeit also reflecting a strike in Chile. Atop the ASX200 losers’ board were nickel miners Independence Group ((IGO)) and Western Areas ((WSA)) which both lost over -5%.

The next worst sector performer was energy, down -0.7%. So earnings and strikes aside, it was a bad session for resources.

It might have been a better session on any other day when a $1.8bn surplus for the month of June is reported, much higher than expected. The surge from May’s $0.75bn was down to exports, with some help from lower fuel costs ensuring a drop in imports to create a surplus double whammy. Exports rose 2.6% and imports fell -0.7%.

The acceleration in selling yesterday after a slow start likely came down to the Asian markets’ response to the new news from the trade war front. Japan fell -1% and China -2%.

Movements in other sectors, beyond resources, were modest. We might note that it was materials that saved the day on Wednesday, rising 0.7% to offset bank losses, so there was room to fall.

This morning we that Wall Street has once again shrugged off the war. Base metal prices are mostly lower again but not substantially, iron ore is steady, oil is up, and the Aussie has dropped half a percent. The futures are 21 points higher.

When the dust settles, perhaps investors will look more closely at the candy jar on offer from Rio.

What Trade War?

The Dow opened down over -200 points last night, driven by the usual industrial names impacted most significantly by a trade war. But the open was the low of the day, and by the close the Dow was almost back to square.

Wall Street continues to hang onto the notion that a trade war will not eventuate. While a lift to 25% from 10% for a tranche of US$200bn that is a lift from the US$35bn currently in place provides reason to be fearful, it might also provide reason to believe China will simply have to capitulate, even if it pretends to come out the winner. Many believe this will be the case.

Such a stoic view provided Wall Street with the opportunity therefore to simply toast the biggest company in the world, which last night became the first in history to reach a trillion dollars in value. Apple shares rose 3% on the day, kicking on from Wednesday night’s post-result gains, and thus popped the corks.

For Tesla, it was a case of sticking the knife into the doubters. Views on Tesla are polarised across the market – some seeing it a visionary company of the future while others see a lot of smoke and mirrors, and a car company that has no right to be valued so much higher than the likes of GM or Ford. Not to mention offering a product that will likely be eclipsed by the Germans in due course.

Tesla reported earnings on Wednesday night after the bell that were solid, but the market held off barging into the stock ahead of the conference call with Elon Musk. Last quarter Musk upset analysts by basically being rude. This time he began by apologising profusely for his behaviour last time, citing lack of sleep.

The result? Tesla shares jumped 14% last night. Tesla is the most shorted stock on Wall Street.

Apple and Tesla both buoyed sentiment last night in the tech sector, shaking off poor earnings results last month from the likes of Facebook, Twitter and Netflix. But in Apple’s case it’s all a bit euphoric – a remarkable milestone but still just a number like any other nonetheless. The Nasdaq was the big outperformer on the day.

The Bank of England last night lifted its cash rate 25 basis points to 0.75% s expected, suggesting the first quarter UK economic slowdown would prove temporary and pre-empting a solid second quarter. The pound slumped. This seems the wrong way round, but the BoE also threw in the caveat of, in not so many words, “unless Brexit stuffs everything up”.

The pound’s plunge meant the US dollar index jumped 0.5%.

Commodities

Oil prices had traded lower earlier in the session, alongside stocks, as the trade war took centre stage, but like stocks rebounded and posted their first gains in three sessions. The reason? The usual crude inventory surprise.

Other than zinc, base metal price weakness continued but not the the extent of Wednesday night, and despite the strong greenback.

The same cannot be said for gold, which was hit by the dollar train.

The Aussie has matched the greenback’s rise in falling 0.5% to US$0.7364.

Today

The SPI Overnight closed up 21 points or 0.3%.

It’s service sector PMI day today/night across the globe.

In Australia we will also see retail sales numbers.

US non-farm payrolls are due tonight alongside trade numbers.

ResMed ((RMD)) reports earnings.

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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