The Overnight Report: Inflation Weighs

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This story features MAGELLAN GLOBAL FUND, and other companies.
For more info SHARE ANALYSIS: MGF

By Greg Peel

Bank Run

It’s not every day you see the top five ASX200 losers’ board dominated by banks. Add in the ridiculously volatile Magellan Financial ((MGF)) and all five losers yesterday were financials. Bendigo & Adelaide Bank ((BEN)) led out with a -7% plunge, down through Westpac ((WBC)), Commonwealth Bank ((CBA)) and on to Bank of Queensland ((BOQ)) with -4%. National Bank ((NAB)) fell just under -4% while ANZ Bank ((ANZ)) outperformed with only a -2% loss.

Clearly Tuesday’s 50 points RBA rate hike has sparked a run on the banks. The market has decided any benefits higher rates will provide the banks in terms of net interest margin – and they’ve wasted no time in matching the RBA — will be swept away by a fall-off in loan demand and an increase in bad debts and foreclosures. The more mortgage-concentrated banks copped the biggest losses.

The market had been well prepared for an RBA rate hike, be it 25 or 40 points, but 50 obviously was too much of a shock. Particularly now NAB economists, for one, are forecasting a follow-up 50 points in July, and again in August.

Financials were the only sector to close in the red yesterday, by a significant -2.9%. That loss countered significant gains elsewhere.

Oil prices rose on Tuesday night, but a 4.2% jump for the energy sector seems disproportionate. It looks like investors had a delayed reaction yesterday to Morgan Stanley’s glowing view on post-merger Woodside Energy ((WDS)), given the gas giant jumped 5.6%.

Pipeline company APA Group ((APA)) rose 4.6% after the CEO talked up the need for gas to be the rock under Australia’s necessary energy transition. Utilities rose 3.2%.

Australian investment firm IFM revealed it had taken a 15% stake in Atlas Arteria ((ALX)) and was looking to go the whole hog. That stock jumped 16.2% and industrials rose 2.0%.

The Biden Administration is increasing its efforts to wean America off Russian enriched uranium exports and focus domestically. The market was likely assuming an ally like an Australian company would also count as a source. Paladin Energy ((PDN)) rose 13.5%. Materials rose 1.9%.

It would have been a cracker of a session had the RBA not spoiled the party. Even real estate and discretionary made slight gains, and healthcare jumped 1.4%.

But alas, Wall Street has suffered another of its own rate scares overnight, and our futures are down -54 points this morning.

Rates and Oil

After staging a valiant comeback on Tuesday night, last night it was all too much for Wall Street when the US ten-year yield again pushed through 3%, and WTI crude passed US$120/bbl.

On the rate front, speculation continues there will be no pause in 50 points hikes from the Fed at the next three meetings at least, and even Australia’s “surprise” 50 points hike made the news.

The last time WTI hit US$120/bbl it was a knee-jerk reaction when Russia invaded and it didn’t last long. This time the breach follows a slow and steady grind upwards, reflecting post-covid demand meeting years of production underinvestment in the US, the incapacity of OPEC to much increase production even if it wanted to, and Europe’s push to cut itself off from energy import reliance from Russia.

Analysts are now suggesting US$150/bbl would not be a surprise. Higher oil prices are great for oil producers, but economy-busting otherwise. Energy was the only S&P500 sector to close in the green last night (+0.2%). Investors took to the dividend-paying sectors of real estate (-2.4%), utilities (-2.0%) and industrials (-1.8%).

Wall Street is nervously eyeing off tomorrow night’s May CPI print. The assumption is the annual inflation rate will indeed ease, given it’s cycling last year, but not by enough to provide any lasting relief. Month-on-month inflation is forecast to still be rising.

And it wasn’t just the RBA making news on Wall Street last night. Yesterday the Reserve Bank of India hiked its rate by 50 points for the second consecutive month, to 4.9%. The ECB meets tonight.

The question now is whether Wall Street can hold on to learn what the May CPI numbers are or, after last night’s performance, lose its bottle and run scared tonight.

Commodities

Last night’s particular jump in oil prices is attributed to a surprise fall in weekly US petrol inventories. Analysts had assumed sky-high prices at the pump would deter Americans from traditional road trips in the famed summer driving season. But not so, it appears. After two-years of summer lockdowns/restrictions/fear, they just want to get away.

The same trend is evident in US airline and hotel bookings, again despite surging prices. Cruise lines have otherwise missed out, as no one wants to be stuck on a plague ship.

Bear in mind Americans still pay about half the petrol price we do, and about a quarter of the UK price.

Having shot up 0.5% on Tuesday night post 0.5% rate hike, the Aussie is back down -0.5% to US$0.7195 on greenback strength.

Today

The SPI Overnight closed down -54 points or -0.8%.

As the quiet week for the economic/corporate calendar continues, the ECB meets tonight as noted and today China will release May trade numbers.

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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