The Overnight Report: Better The Devil You Know

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            [6] => ((NAB))
            [7] => ((ECX))
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            [7] => ECX
            [8] => RIO
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This story features ARB CORPORATION LIMITED, and other companies.
For more info SHARE ANALYSIS: ARB
The company is included in ASX200, ASX300 and ALL-ORDS

By Greg Peel

Playing it Safe

After Wall Street indicated it had probably exhausted its Fed-scare pullback on Tuesday night, yesterday the ASX200 leapt 50 points from the opening bell, but it was all over in a heartbeat.

The index spent the rest of the day dropping back to close down -11, ahead of what was still an anything-could-happen Fed decision last night. With that decision now made, Wall Street has surged, but our futures are only suggesting a 0.4% rally today to the S&P500’s full 3%.

Locally yesterday it appeared the market was undertaking some portfolio realignment in the wake of the surprise 25 point RBA rate hike, although trading updates at this week’s Macquarie Conference are also playing their part at the individual stock level.

Real estate fell another -1.5% to post the market’s worst performance for a second day running, as the “inflation hedge” sector succumbs to higher rates. The Aussie ten year yield jumped 16 points to 3.55% yesterday as the market took a mere 10 basis points, being the 25 point hike instead of the expected 15, as a sign the RBA, like the Fed, has suddenly woken up and become hawkish.

Consumer discretionary fell -1.0% as one might expect on higher rates but ARB Corp ((ARB)) led the sector down with a chart-topping -11.2% drop after updating at the aforementioned conference.

The travel stocks had been enjoying rebound rallies this week after Qantas Airways ((QAN)) saw some light at the end of the hanger, but Flight Centre ((FLT)) took some of the wind from under the wings in at its trading update and fell -6.7%.

Consumer staples (-0.5%) did seem to be interest rate-hit despite strong updates from the big supermarkets this week (and Costa Group ((CGC)) was down again), while industrials bucked the trend with a 0.6% gain – not quite so yield sensitive now Sydney Airport is gone – and healthcare’s fight-back continued 0.6% now the blood is back in CSL’s ((CSL)) bank.

Materials fell -0.9% as metal prices continue to succumb to Chinese lockdowns but energy managed a 0.8% gain despite lower oil prices, likely in anticipation of EU banning Russian exports. It now has, sort of, and WTI jumped 5% last night.

The last one out of BNPL must soon be ready to turn out the lights – Zip Co ((Z1P)) fell -10.8% yesterday and technology -1.0%.

After much thought the market has decided rate rises are good for banks, at least in the short term, and a less-worse than expected result from ANZ Bank yesterday helped the financials sector up 0.7%.

But as noted, if giving up an early 50 point gain yesterday was simply playing it safe ahead of the Fed, the 31 point rally suggested by the futures this morning seems a bit limp given Wall Street relief.

Admittedly, metals prices continued to fall last night.

And Breathe Out

Wall Street was flat all session last night up to the 2pm Fed release. It then took off like a rocket, in two stages of relief.

Wall Street had been expecting a 50 point rate hike at this meeting ever since March brought 25 points, but as the latest stock market swoon suggested, when the US ten-year hit 3%, fear was growing the Fed might go a full 75.

It didn’t, which represented relief stage 1. But the next fear was if it “only” went 50 in May, it might go 75 in June.

It won’t. At his subsequent press conference, Jerome Powell put any notion of a 75 point hike to bed. Relief stage 2. And then he pretty much confirmed the next two hikes, in June and July, would also be 50s.

Thereafter, well Wall Street assumed maybe back to “normal” 25 point hikes, but the six-week cycle of Fed meetings means there’s no August meeting, and a lot more data will have crossed the FOMC’s desk by September.

The Fed also confirmed reduction to its US$9trn balance sheet will commence on June 1.

It may seem strange that Wall Street would leap 3% on a day when 150 points of rate hikes, to 1.75-2.00% by July, have now all been locked in. But while the Ukraine war and Chinese lockdowns have clearly been reasons for bearishness on Wall Street these past couple of months, from as early as January the real fear has centred around monetary policy. Would the Fed counter its “behind the curve” mistake by going too far the other way?

One might argue three consecutive 50 point hikes is clear capitulation, but as noted, Wall Street feared worse. And as is so often noted, uncertainty is a market’s biggest enemy. That uncertainty has now gone, for now.

This is clearly evident in the VIX volatility index on the S&P500 being at 36 two sessions ago and falling to 25 last night – not fully relaxed, but no longer panicked.

The US ten-year yield fell back -4 points to 2.92%, but the two-year – seen as the closer Fed rate proxy – fell back -16 point to 2.61%.

It was a “buy everything” session in stock markets. Each of the three major indices moved in lockstep, while every S&P sector and every Dow stock closed in the green.

While last night provided blessed relief, and a “Buy in May” period may now follow as had already been suggested by some, you won’t find anyone believing the top of the S&P500’s range in 2022 is under threat. Relief will only last so long before rates start to bite.

Commodities

One can put the argument that higher rates mean a higher cost of investment in mining but it is the no-end-sight Chinese lockdowns that continue to weigh on metals price, with thin markets assured by China being on holiday.

The story is different for the oils, with the EU taking a further step towards a blanket ban on Russian oil imports.

It’s all well and good, except that (a), the plan is to wind down exports over six months, (b) Kremlin-friendly Hungary has been offered exemption until 2023, but wants pipeline oil from Russia to be exempted altogether, (c) Slovakia has been offered exemption until 2023 but has asked for three years, and (d) the Czech Republic, not exempted, has asked for two-three years.

By which point Ukraine could be a car park.

How do you put fire back into the belly of a moribund Aussie dollar? Don’t raise US rates by 75 points! With the US dollar index down -0.9% on that basis, the Aussie is up a whopping 2.3% at US$0.7261.

Today

The SPI Overnight closed up 31 points or 0.4%.

Locally we’ll see numbers for building approvals and trade today.

Chinese and Japanese markets are again closed.

The Bank of England holds a policy meeting.

National Bank ((NAB)) reports earnings today, along with Eclipx Group ((ECX)).

Rio Tinto ((RIO)), QBE Insurance ((QBE)), Janus Henderson ((JHG)), HT&E ((HT1)) and Iress ((IRE)) hold AGMs today.

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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