The Overnight Report: Mid-Cycle Adjustment

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            [3] => ((TLS))
            [4] => ((CYB))
            [5] => ((GMA))
            [6] => ((RIO))
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This story features TELSTRA GROUP LIMITED, and other companies.
For more info SHARE ANALYSIS: TLS
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

Back to Business

Now that the ASX200 has walked on the moon, we can all get back to business. Sure, hitting the old high was loads of fun, but yesterday Adelaide Brighton issued a profit warning at five minutes to midnight in earnings season terms and it fell -18%.

The hangover begins. We hit the high from the open on Tuesday and duly fell back, fell -32 points yesterday and the futures are down another -29 this morning. The question now is where is the “reality line”? How far do we need to fall to return to the fundamentals?

Earnings season will likely provide the answer.

Adelaide Brighton ((ABC)) cited a weak construction market, increased competition and rising input costs as reason to slash its profit guidance. All building materials stocks fell in sympathy, with Boral ((BLD)) down -8.0% and CSR ((CSR)) -6.3%. The materials sector nonetheless held up relatively well at -0.3%, with a stronger gold price providing assistance.

That will change today.

Otherwise, energy was the only true gainer on the day (+0.7%) on the oil price while staples and telcos held fast. The market enjoyed Telstra ((TLS)) telling the NBN to drop its prices or we’re out of here, have you heard of 5G?

The banks (-0.8%) made the biggest dint in the index yesterday while utilities (-1.1%) and discretionary (-1.0%) were the hardest hit.

One might argue the market fell because of fading trade deal hopes, or on China’s July manufacturing PMI indicating ongoing contraction (49.7, albeit up from 49.4 in June), but the market was primed to fall anyway.

Other notable stock moves include that of CYBG ((CYB)), which reported on Tuesday but fell -13% yesterday as brokers lined up to warn of challenges ahead, Boris being one of them.

Genworth Mortgage Insurance ((GMA)), not in the index, reported yesterday and jumped 15% after announcing a special.

We can now stop wondering what the Fed might do for a few weeks and likely assume the RBA won’t go three in a row, particularly after yesterday’s CPI numbers, and forget about trade because nothing’s happening there, so it’s on to earnings.

Rio Tinto ((RIO)) today.

After headline inflation terrified the RBA in the March quarter by rising a full 0.0%, the June quarter saw a 0.6% gain, ahead of 0.5% expectation. A lot of that was petrol, but the core rate rose by 0.4% to be up 1.6% year on year – still a long way to go to 2%, but at least not going backwards.

Waste of Time

“Think of it as a mid-cycle adjustment,” said Jay Powell in his press conference last night, after cutting the Fed cash rate by -25 points, “it’s not the start of a long easing cycle”.

On that, the Dow fell -478 points.

But then Powell started to “walk it back”, as they say, attempting to alleviate fears this was simply a “one and done”. There might be more, dunno yet. Biggest problems are the impact of the trade war and weakness in global manufacturing.

Which suggests the Fed is not even “data-dependent”, it’s “headline dependent”.

The press conference left a lot of commentators angry that Powell did not really speak to the US economy at all nor provide clarity on where the Fed sees things heading. Many believe Fed press conferences should be scrapped, as they only lead to confusion and volatility. Bernanke started it with quarterly conferences, but that was in “emergency” times and the market needed calming. Powell has added a conference to every Fed meeting.

I’d go one further and ban all Fedspeak, either after or in between meetings.

But on the matter of lack of clarity, one has to sympathise with Powell. He has Trump as a president.

Either way, Wall Street was primed for a fall. Not only does a trade deal resolution remain priced in, Wall Street was also pricing in several rate cuts. It was unlikely anything could spark US stock markets into running still higher, while plenty of downside awaited.

It should be noted that closing levels in all three major indices were net of Apple, which had reported in the aftermarket on Tuesday night and jumped 4%, before settling back to be up 2% last night.

As is typical post Fed meetings, the computers ran amok and volatility reigned. From down -478 the Dow bounced to be down only -200, before late selling ensured a -333 close. The “smart money” will have been watching from the sidelines and will make its move tonight.

In the meantime, the US trade delegation headed home from Beijing offering no more than a shrug.

The private sector jobs report showed 156,000 additions, smack on expectation.

Goldman Sachs has noted that for the first time since the GFC, corporate share buybacks have exceeded free cash flow. That’s how you push a stock market to new highs.

Commodities

Note, as always, the LME closes before the Fed chair speaks. Last night’s base metal moves will thus not have taken in a 0.5% jump in the US dollar.

Gold traders certainly took it in.

China’s PMI has been blamed for iron ore’s fall.

The jump in the greenback sent the Aussie down another -0.4% to US$0.6845.

Today

The SPI Overnight closed down -29 points or -0.4%.

The rest of the world reports manufacturing PMIs today. Locally we’ll also see July house prices and June quarter import/export prices.

The Bank of England meets tonight to hand out the life jackets.

Rio Tinto 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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