The Monday Report (On Tuesday) – 09 June 2020

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

By Greg Peel

Friday

On Thursday night Wall Street had appeared to ring the bell, for now, when the Nasdaq 100 hit a new intraday high and triggered profit-taking. So it was the ASX200, which on Thursday had rung its own bell of sorts by breaching 6000 but not managing to close above that level, fell through Friday morning to be down around -30 points.

But you can’t keep an excited market down.

It was a choppy affair, but perhaps the most exciting news on the day came from Qantas ((QAN)). The airline had raised hopes, and relevant stock prices, on Thursday when it announced a lift to 15% capacity from lockdown 5%, suggesting July might see further capacity increases if the demand was there.

Was it swamped with bookings? On Friday Qantas announced it had the ability to increase to 40% in July. Qantas shares rallied another 3.1%, but Sydney Airport ((SYD)) was the big winner, jumping 6.2%.

It was otherwise a mish-mash of a session, and afternoon buying again took the index above 6000 only to close just below it once more. One would assume 6000 was clearly looking like a near term top, until Wall Street opened on Friday night.

The consumer discretionary sector actually closed down -0.8% on the day despite the excitement, reflected in Kogan ((KGN)), which is not in the index, jumping 8.6% to a new all-time high. Nine Entertainment ((NEC)) rose 5.4% as the crowds are set to return to the footy this weekend.

Staples ticked up 0.2%. This belied selling in defensives, with telcos down -1.1% and utilities down -1.3%, and just to underscore a one day up, one day down theme, healthcare fell -2.8% having risen 2.7% on Thursday. There appears to be a Whack-a-Mole attitude to CSL ((CSL)) at the moment.

Funds drawn out of defensives went into the banks (+1.9%) and energy (+1.1%). Bank of Queensland ((BOQ)) jumped 8.9%, while short-covering in lithium miners offset losses in iron ore and gold stocks.

It’s all academic, given what happened on Wall Street. Our futures were up 101 points on Saturday morning.

Note that the ASX200 put in a five-day winning streak last week and gained 4.2%, having gained 4.7% the week before.

Friday Night

In April, 20.7 million jobs were lost in the US and no one was shocked. In May, 2.5 million jobs were recovered. Everyone was shocked.

Economists had forecast May would see a further loss of 7.3m jobs, following April’s record 20.7m, and the unemployment rate would rise to 19% from April’s 14.7%. Instead the unemployment rate fell to 13.3% on the record 2.5m jobs recovered. The US stats bureau did nevertheless point out that many households have been filling out their forms incorrectly.

Which probably provides a clue as to why the enormous discrepancy between forecast and result, aside from the US economy reopening faster than anyone had previously predicted. If you were “furloughed” during the lockdown, but paid by the government, are you unemployed or employed?

The Bureau said 2.7m people who had “temporarily” lost their jobs returned to work in May, suggesting furloughed workers were indeed counted as unemployed. We must also consider the fact that on these official numbers, 18.2m Americans remain out of work.

As is the case in Australia, the fear is many furloughed workers will be laid off once government support expires, if companies respond to lost earnings by paring back their costs, perhaps shutting physical stores and ramping up online platforms. Hence economists are warning not to read too much into the May numbers.

Tell that to Wall Street. The Dow closed up 827 points, the Nasdaq 100 closed at a new all-time high, and the Nasdaq Composite (“Nasdaq”) hit a new intraday high before slipping back at the death. The Nasdaq nevertheless underperformed in rising only 2.1% to the S&P500’s 2.6% and the Dow’s 3.2%.

The S&P rose 4.9% in the week and the Dow rose 6.8%.

The Dow’s move reflects the disproportionate weighting to Boeing, which jumped 40% over the week. Boeing has now become the poster child for the reopening theme, aided and abetted by big gains for airline stocks and even cruise lines.

The energy sector led the charge on Friday night, up 7.5%, with oil up 6% — all part of the transport theme. The banks took second followed by industrials and REITs.

One gets the feeling the S&P500, too, will soon be back at all-time highs. Yet despite the re-openings, many warn that unemployment will remain elevated for quite some time, and we are yet to see the true impact on corporate earnings, which might be a bit of a reality check.

Meanwhile, with the NSW Supreme Court having attempted to ban this weekend’s protest in Sydney due to virus concerns, the dreaded second wave is also front of mind in the US as protests continue around the country.

Commodities I

Big moves up in metal and oil prices post Friday night’s jobs news. Iron ore shot back up over US$100/t.

The US ten-year yield jumped another 8 basis points to 0.90%, and the US dollar index ticked up 0.2%, sending gold down -US$29/oz.

The Aussie hit US70c on Friday before slipping back to US$0.6972, up 0.4% from Friday morning.

Monday Night

More of the same.

What was interesting however is that on Friday night, equities rallied, bond yields rallied, oil rallied, while gold tumbled and the VIX volatility index pulled back – all “risk on” trades. Last night, equities again rallied but every other one of those assets went the other way.

The US ten-year bond yield fell back -2 basis points to 0.88%, oil fell -3.5%, gold recovered over US$14/oz and the VIX ticked up again. But the Dow gained another 461 points.

What’s wrong with this picture?

On Friday all indices step-jumped at the open, following the pre-open release of the jobs numbers. If you weren’t already on, you missed out. Last night the indices step-jumped again, but from that base gradually rose higher before spiking at the close. This smacks of FOMO desperation.

The S&P500 last night closed up 0.05% for the year. The Nasdaq closed at a new all-time high, up 10.5% for the year. The S&P is now only -4.5% below its all-time high, and the Dow -6.7%.

The theme on Monday night was the same as it has been since the rally morphed from the “oversold” phase to the reopening of the economy phase. In the first leg, Big Tech led the charge while the hardest hit sectors wallowed. In this second phase, Big Tech remains supported but those hardest hit sectors – the so-called “value” trade – have outperformed.

The familiar picture last night was Dow up 1.7%, S&P 1.2% and Nasdaq 1.1%. For the Dow it’s been all about Boeing – on the way down and now on the way back up. Boeing is up 50% from its lows, despite having not seen any new plane orders for two months.

Last night New York City finally began a phase one reopening, having been the virus epicentre to date.

Arizona, Arkansas, California, Florida, North Carolina, Texas, Utah and other states are reporting increased numbers of infections since they reopened their economies.

The Fed is about to launch its Main Street lending program, probably this week, having set up lending programs across just about all of the rest of the economy. The program targets companies of 500-15,000 employees that are big enough to be economically significant but not big enough to issue their own corporate bonds.

This week’s scheduled Fed policy meeting may have passed without much of a whimper, given the central bank has been nothing but fully open about its policy programs, but there is now a renewed interest in the wake of those jobs numbers. Is it possible the Fed might begin to consider withdrawing some stimulus?

Unlikely at this stage.

The US National Bureau of Economic Research last night declared a recession officially began in February, based on its own running model rather than waiting for the actual quarterly result.

Thanks Scoop.

Commodities

OPEC-Plus agreed on the weekend to extend the -10m barrels a day production cut, which was put in place as oil prices were tumbling in March, to the end of July. There had been a subsequent agreement, around the time the WTI price went negative, to cut a further -1.2mbpd.

However, Reuters reports Gulf OPEC members have no intention of maintaining that extra cut. Meanwhile, Mexico (non-OPEC)  is refusing to adhere to production cuts and Libya (OPEC) is about to restart its largest oil field. The bounce-back in oil prices to close to US$40bbl for WTI suggests marginal US shale producers could begin ramping back up as well.

Hence oil prices fell -3.5% last night.

Metal prices have held up again while as noted, gold has recovered somewhat. Iron ore has again surged, to a new post-virus high.

The Aussie is up 0.6% at US$0.7015.

The SPI Overnight closed up a net 142 points, or 2.4%, over two sessions. The ASX website was down for maintenance over the weekend, but last night produced 41 of those 142 points, hence Friday night added 101.

The Week Ahead

Locally we’ll see the NAB business confidence survey out today and Westpac consumer confidence tomorrow. It is important to note NAB’s is a May survey and Westpac’s in June, so consumers will be more up to date with the current mood.

ANZ’s job ad numbers for May are also out today. Housing finance numbers are out tomorrow, but for April.

China will report inflation numbers tomorrow, while the US will see the CPI tomorrow and PPI on Thursday, along with consumer sentiment on Friday.

The Fed releases a policy statement on Wednesday night.

Domino’s Pizza ((DMP)) provides an update today and Link Administration ((LNK)) holds its AGM, while Stockland ((SGP)) and Smartgroup Corp ((SIQ)) have their AGMs tomorrow and Worley ((WOR)) hosts an investor day.

The Australian share market over the past thirty days…

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