The Overnight Report: A Little Wobbly

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

By Greg Peel

All the Way?

More momo/fomo on display again yesterday in the local market as a positive lead from Wall Street was further boosted by comments from the RBA governor.

“It is highly unlikely that we will be contemplating higher interest rates until we are confident that inflation will return to around the midpoint of the target range.”

Mastermind subject: stating the bleeding obvious.

“On current projections, it will be some time before inflation is comfortably back within the target range.”

Yes, but do we get another cut in August?

“It remains to be seen if future growth in demand will be sufficient to put pressure on the economy’s supply capacity and lift inflation in reasonable timeframe”.

Probably not. It is well understood central bank rate cuts take a good six months or more to make their impact on the economy, even if the stock market prices in their impact immediately. We’ve had two cuts in two months – likely because the board thought one of cut of -50 points might be a bit alarming – but now it looks like the RBA will hold off a bit to see what transpires.

But another rate cut is still expected, if not August then at least by year’s end, and yet another earlier next year. Where does one put one’s money? TINA.

Materials was the only sector not to surge higher once more on the ASX yesterday, indeed mirroring the general market with a -1.5% fall. The iron ore price fell overnight on news Vale may be able to restart some of its production, sending the biggies lower. Fortescue ((FMG)) doubled-down with a disappointing production report, and fell -5.5%.

Rio Tinto ((RIO)) made the top five losers with a -4.2% gain in an otherwise positive market, while Iluka Resources ((ILU)) again took the gold with a -7.0% fall, kicking on from Wednesday.

But the rest of the market went the other way. Healthcare (+1.7%), industrials (+1.6%), staples (+1.4%) and financials (+1.1%) led the charge. Telcos (+0.8%) and discretionary (+1.0%) provided back-up. The momentum trade continued to feed on itself, seeming targeting a new all-time high come what may, and “fear of missing out” chased behind.

Can we get there?

Not today. The all-time closing high is still a bit over 30 points away for the ASX200 and this morning our futures are down -34 following a weaker session on Wall Street, largely driven by disappointing earnings reports.

And out futures have fallen sharply despite Google jumping 9% in the US aftermarket post-report, which is a mega-move for a mega-cap.

Draghi Vacillates

I rattled off a few US stocks in yesterday’s report that had posted earnings after the bell on Wednesday night. This is how they ended the session last night:

Tesla down -13%, Ford (Dow) down -7.5%, PayPal down -5% and Facebook down -2%. We can throw in, from reports early in last night session, Dow Inc (not of Jones fame, but of former DuPont fame, and in the Dow Jones just to make things confusing) down -3.8% and 3M (Dow), which was slaughtered after an earlier profit warning, down -0.7%, failing to regain any ground.

And Boeing (Dow) fell another -3.7%.

The gloss suddenly came off US earnings season last night, prompting a bit of profit-taking across all sectors. While it was cyclicals mostly being sold off, with defensives back in favour, all S&P sectors closed in the red.

Amazon reported after the bell last night and is barely lower as I write, but as noted, Google (Alphabet) is up an extraordinary 9%. So there might be a slightly different mood tonight.

But as much as it was about earnings last night on Wall Street, it was also about the Fed.

US durable goods orders rose by 2.0% in June when 0.7% was expected. Even without the lumpy cars/planes segment, orders rose 1.2%.

Every time there’s a strong US data release, Wall Street takes a sharp breath. But it seems lately that for every positive data point there is an equally weak one to match it. Such as Wednesday night’s PMI showing zero growth in manufacturing.

But more importantly, Mario Draghi left the ECB cash rate on hold last night. The ECB intends to leave rates at “present or lower levels” at least through the first half of 2020. While “no cut” was largely expected, with September shorter in the odds, there was still an element of disappointment on Wall Street. For one, Draghi was vague. There was no talk of timeframe, or of any QE plans.

This plays into the Fed’s decision next week, for if the Fed does cut, the reason behind the cut will be more about slowing global growth and subsequent central bank easing outside the US than a need to cut for the sake of the US economy in isolation. If the ECB hasn’t cut, does the Fed hold off?

Most likely not, but with Wall Street hitting all-time highs yet again this week, there are some nervous punters out there.

Commodities

Traders blamed further evidence of European factory output slowing as reason for nickel’s plunge last night, but if that were the case, all metal prices would be lower. Nickel has just run too hard, too fast.

You can’t keep a good iron ore price down. Even if Vale restarts some production, Chinese steelmakers are running low on inventory, reports suggest.

Gold traders seemed disappointed in Draghi.

Looks like no one turned up to trade oil last night.

The Aussie is down -0.4% to US$0.6951 thanks to Dr Lowe. Must be getting close to the usual short-covering bounce.

Today

The SPI Overnight closed down -34 points or -0.5%.

Tonight brings the release of the first estimate of US June quarter GDP. It will be the last major economic indicator before the Fed meeting next week.

GUD Holdings ((GUD)) and ResMed ((RMD)) will today remind us that the August earnings season begins with a few support acts.

The Australian share market over the past thirty days…

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