The Monday Report

Array
(
    [0] => Array
        (
            [0] => ((LNK))
            [1] => ((ECX))
            [2] => ((LYC))
            [3] => ((CSL))
            [4] => ((SUN))
            [5] => ((WOR))
        )

    [1] => Array
        (
            [0] => LNK
            [1] => ECX
            [2] => LYC
            [3] => CSL
            [4] => SUN
            [5] => WOR
        )

)

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

Square Up

The interesting thing about Friday’s trade on the ASX was that the market learned about weak Chinese data during the session, and about Trump’s threat to place a 5% tariff on all goods imported from Mexico which was a pretty sure bet to be not well-received on Wall Street that night (Dow futures were down -200). Yet the ASX200 closed flat.

The session started as one might expect, with the index falling -30 points from the open following a weak lead form Wall Street. But it quickly bottomed and headed back up again, stumbling on the China data, but recovering, and only drifting off slightly in the afternoon.

The close of the futures on Saturday morning looked more appropriate, but down -24 points, or -0.4%, is a far cry from Wall Street's -1.4% tumble on Friday night.

We might conclude that bad news in China is actually good news because it implies greater stimulus is coming, and that US-Mexico trade does not really have much to do with Australia.

And we only conclude that the last day of the month prompted squaring up/window dressing.

China’s manufacturing PMI slipped into contraction territory at 49.4 in May, down from 50.1 in April and worse than 49.9 forecasts. The services PMI remained steady at 54.3 but that was also below expectation.

Energy (-1.4%) was the worst performer in market cap terms on a big fall in the oil price, and oil suffered an even larger fall on Friday night.

IT (-3.4%) was the worst performer in percentage terms following a -23% fall for Link Administration ((LNK)), related to Brexit concerns aired in a market update containing an FY19 profit warning.

On the upside, EclipX Group ((ECX)) jumped 29.5% on its earnings report, remembering the stock lost half its value in one session earlier this year.

Lynas Corp ((LYC)) got yet another kick (+11.3%) as the Malaysian government indicated it might change its mind about radioactive waste stemming from Lynas’s processing plant, just as Lynas plans to move half of its processing back home, and funnily enough just as China hints at banning rare earth exports.

Otherwise, the banks were mildly weaker (-0.2%), telcos were again positive (+0.2%), a particularly bad flu season across the globe had CSL ((CSL)) leading healthcare up 0.9%, and iron ore supply issues (Brazil) mean weak Chinese data are a secondary concern for the miners (+0.8%).

Today brings the new month and ultimately EOFY – a month in which, if they haven’t already done so, investors ditch underperforming positions for the tax losses and small businesses spend up big to cut their own tax bills. The ASX200 has well outperformed Wall Street during May – closing higher when the S&P closed down -6.5% — thanks to the election, APRA/RBA and the iron ore price. How long will domestic issues counter the deteriorating global macro story?

Border Wars

Donald Trump began by imposing tariffs to address what he perceived as global trade imbalances but is now threatening to use tariffs more bluntly as a general political weapon. Hot on the heels of dropping tariffs on steel and aluminium for Canada and Mexico, in order to expedite Nafta 2.0 ratification, Trump has given Mexico ten days to do something about the flood of illegal immigrants into the US or he will apply a 5% tariff on everything coming out of Mexico, which will increase by 5% increments every month up to 25%.

Which basically means help build The Wall.

There is no denying illegal immigration has become a crisis – some hundred thousand are flooding into the US every week – but most of them aren’t Mexicans and tariffs on Mexican exports actually have a greater impact on US companies than Mexican companies.

Oil is an exception – Mexico is America’s third largest oil supplier – but a lot of the cross-border traffic comes from US and other international companies that have moved manufacturing plants into Mexico to exploit cheap labour. Auto is a major case in point.

We recall that the problems with China all began when US companies moved manufacturing to China back in the noughties for exactly the same reason.

If The Wall does ultimately get built, it will have been funded by the US consumer.

Just to rub in the salt, reports suggest Beijing is gearing up to take major retaliatory measures against the US specifically in response to the Huawei ban. Look out rare earth metals.

And Wall Street did not find any comfort in the Chinese PMI numbers. On the wider global growth story, watching your enemy suffer is cold comfort.

The response to the tariff news across all markets was significant. WTI crude fell -5.5%. The US ten-year bond yield fell -9 basis points to 2.14%, leading the US dollar index down -0.4% and in turn leading gold back up over US$1300/oz.

The bond market is even more emphatically telling the Fed it’s time to cut. On that subject, the core PCE measure of US inflation, preferred by the Fed, ticked up slightly in April but at 1.6% is still a long way off the 2% target.

The VIX volatility index jumped 8% on Friday night but at 18.7 is still below the supposed threshold into fear at 20. The suggestion here is that investors have already been loading up on stock market hedges as the trade story plays out and are now well-covered.

Now it's over to Mexico.

Commodities

So it’s a big move down for oil and a big move up for gold, which will provide for some counter in local trading today, but iron ore has slipped back into double digits.

Base metals just continue to drift lower.

The Aussie is not helping, up 0.3% on the greenback move at US$0.6932.

The SPI Overnight closed down -24 points or -0.4%.

The Week Ahead

Drum roll please…the RBA meets tomorrow.

Philip Lowe will also speak thereafter and this week’s local data releases include job ads and house prices today, retail sales tomorrow, the trade balance on Thursday and private sector credit on Friday.

Manufacturing PMIs are due across the globe today and services on Wednesday.

Australia will also see March quarter data for company profits and inventories today and the current account and terms of trade tomorrow ahead of Wednesday’s GDP result.

The ECB holds a policy meeting on Thursday. The German ten-year yield has fallen further into the negative.

Fed chair Jerome Powell will speak on Tuesday night ahead of the Fed’s Beige Book release on Wednesday. The US also sees numbers for factory orders tomorrow and trade on Thursday, along with private sector jobs on Wednesday and non-farm payrolls on Friday.

The local corporate calendar is now beginning to thin out as we run up to books close. Suncorp ((SUN)) and WorleyParsons ((WOR)) both hold investor days on Wednesday.

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.

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available on the FNArena website.  Click here. (Subscribers can access prices on the website.)

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author's and not by association FNArena's – see disclaimer on the website)

All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts on the website and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided. www.fnarena.com

FNArena is proud about its track record and past achievements: Ten Years On

Click to view our Glossary of Financial Terms