The Overnight Report: Overshot

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            [1] => ((CKF))
            [2] => ((SKI))
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            [2] => SKI
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This story features GRAINCORP LIMITED, and other companies.
For more info SHARE ANALYSIS: GNC
The company is included in ASX200, ASX300 and ALL-ORDS

By Greg Peel

Taper Tantrum

News this morning is the Stalinglad lockdown is set to be extended for another week. Gladys had correctly predicted case numbers would “bounce around”, and a four-day run of 35-16-35-18 is testament.

This was not known yesterday when the ASX200 again attempted to rally from the open, despite no Wall Street, to be up 30 points in the first half hour before easing slightly ahead of the 11am update. It appears the market was unsure about an 18 result, tracking sideways for an hour until someone pointed out the Dow futures were tumbling.

The index was down -25 by 2pm before rallying back to flat ahead of the 2.30pm RBA statement release. The release contained three surprises.

Well, two in the release – the other was Philip Lowe holding a press conference, a la the Fed governor. A new initiative?

The significant two were a tapering of bond purchases (QE) to $4bn per week from $5bn, with a further reassessment to be made in November, and the disappearance of “at the earliest” in the statement, in reference to the central bank’s 2024 first rate hike expectation.

The goal remains to see inflation sustainably within the 2-3% band and this will require a stronger labour market to encourage wage growth.  “The Bank's central scenario for the economy is that this condition will not be met before 2024.”

The ASX200 had been flat at 2.30pm and closed down -53.

The bottom has been seen in ultra-loose monetary policy, impacting on the yield paying sectors of banks (-0.5%), industrials (-0.9%) and telcos (-2.0%). Healthcare was also hit (-1.0%) on the implication of a stronger Aussie, although an initial jump up to almost US76c post-RBA was wiped out last night.

Technology (-1.9%) suffers from higher bond yields discounting growth, while consumer discretionary (-1.4%) suffers from higher household mortgage costs.

Utilities should by rights be in the yield-paying camp, but for the oil price factor. Energy was the only sector to close in the green yesterday (+1.5%) while utilities closed flat.

Higher oil prices drove energy. Oil prices have tanked overnight.

Weakness in the Dow futures during our session proved accurate, as Wall Street tumbled from the open last night. But an afternoon recovery had the S&P500 closing down only -0.2%, and our futures are similarly down -11 this morning, taking the lockdown news into account.

Ring the Bell

On Friday night the Dow hit its first new all-time high since May, while the S&P500 posted a seven-day winning streak (all new highs), having had a PB of eight in the last five years. The bell was rung.

Not a big bell however, more like one you’d summon the butler with. All three major indices tanked from the open, but when the Dow had fallen over -400 points, it was only back to last Wednesday's level.

Wall Street had opened lower when two elements accelerated the falls.

Firstly, the US services PMI fell to 60.1 in June from 64.0 in May. It’s a decent drop, but anything over 60 still implies very strong growth. Wall Street was already in selling mode, so fears that the US economic recovery may now be slowing only spurred things on.

Secondly, and with regard to a slowing recovery, there is growing concern in the US over the spread of the delta variant. News last night from Israel was that tests had found the Pfizer vaccine showing only 64% efficacy against delta compared to 95% for the original Wuhan virus.

But as stock prices fell, bond prices rose. The US ten-year yield fell -6 basis points to 1.37%.

Lower bond yields are positive for growth stocks, and the delta concerns are a reason to move back into covid-winners. The Nasdaq bottomed out mid-session and rallied straight back to close in the green, dragging the S&P off its lows and to a lesser extent, the Dow.

The Nasdaq was also supercharged by a 4.7% gain for Amazon after the US Department of Defense cancelled its US$10bn JEDI contract, signed under Trump, with rival Microsoft. For its part America’s largest company only closed flat on the day.

In contrast to the fall in bond yields, largely driven by the services PMI, anecdotal evidence was provided of Americans out and about for the July 4 holiday in numbers exceeding pre-pandemic levels, and of substantially higher prices in restaurants. I think they call that inflation.

But likely of the transitory kind.

Despite the noise, what was evident was another case of “buy the dip” on any stock market pullback, with pullbacks being less and less significant in 2021.

In other news, only days after its IPO, Chinese ride share company Didi dropped -20% to below its listing price after the Chinese government suspended Didi’s app due to “national security concerns”. At least, that was the excuse.

The reality is that Chinese companies typically dual-list in both New York and the communist stronghold of Hong Kong, while Didi listed only in New York, thus drawing the ire of the CCP.

Fearing that it’s losing control, Beijing is increasingly interfering in its own capitalist companies in order to rein them in, leading to foreign investors questioning whether it’s worth the risk. All US-listed Chinese companies took some level of a hit last night on the Didi news, and we note Uber is a 13% shareholder of Didi.

Commodities

It would be a long bow to draw to connect base metal price falls to a weaker services PMI, and the US dollar did rise 0.3%.

The fall in US bond yields saved gold from the greenback impact.

Having delayed a decision twice last week, OPEC and friends were still unable to reach an agreement on production quotas over the weekend. Initially the hold-up was the UAE unwilling to increase quotas, fearing slowing demand (delta impact).

But failure to reach any agreement raises the spectre of days of old, when OPEC lost control over the cartel and it was every producer for themselves.

The Aussie is down -0.5% over 24 hours at US$0.7496.

Today

The SPI Overnight closed down -11 points.

Nothing of note on the calendar today, other than GrainCorp ((GNC)), Collins Foods ((CKF)) and Spark Infrastructure ((SKI)) going ex.

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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