The Overnight Report: Not Waiting To Find Out

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            [1] => ((CWN))
            [2] => ((SKC))
            [3] => ((APX))
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            [0] => WDS
            [1] => CWN
            [2] => SKC
            [3] => APX
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This story features WOODSIDE ENERGY GROUP LIMITED, and other companies.
For more info SHARE ANALYSIS: WDS
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

Would the last one to leave…

It didn’t take long for investors to once again exit the banks in droves yesterday. The sector ultimately closed down -2.1% on top of Wednesday’s -2.9% rout in the wake of the RBA rate hike.

The risk of bad debts and foreclosures is one thing, but the market is also looking at an inevitable competition-driven increase in deposit rates, leading to increased demand, while demand falls off on the lending side, undermining any margin benefit.

It was setting up to be a mostly bank-driven fall but when the recent saviour – materials – also turned tail as iron ore prices fell, to close down -2.2%, nothing could save the day. The big jump in oil prices overnight could only provide for a 0.6% gain in energy, with Woodside Energy ((WDS)) gaining another 1.9%.

Energy was the only sector to close in the green. Staples (-0.2%) and healthcare (-0.2%) showed their defensives colours but all other sectors lost over -1%.

Judging by a -1.3% plunge for the Aussie, two days after a surprise rate hike, selling was not just domestic.

CBA economists have cut their Australian GDP growth forecasts to 3.5% in 2022 from a prior 4.5%, and to 2.1% in 2023 from 3.1%. They expect headline inflation to hit 6.25% this year (last print 5.1%).

AMP believes inflation will hit 7% in the September quarter, with a full percentage point provided by energy prices, and the core rate (ex food & energy) to reach 5.5% (from 3.7%).

The Aussie ten-year yield rose 5 points to 3.59%.

Falls in commodity prices came even as China reported an increase in activity with lockdowns easing. Exports rose 16.9% year on year in May, up from 3.9% in April and well ahead of 8.0% forecasts. Imports held steady at 4.1%, when 2.8% was forecast.

China’s coal imports nonetheless fell -2.3% year on year, with May showing 20.55mt purchased when April saw 23.55mt.

And parts of Shanghai are again being locked down for testing, despite a timeline to ease restrictions by the end of the month.

Woodside was one of few stocks to buck the trend yesterday, making it into fifth spot with just a 1.9% gain. Crown Resorts ((CWN)) rose 2.0% after the regulator cleared the way for private equity to take over the company, subject to conditions. The winner on the day was Kiwi casino SkyCity Entertainment ((SKC)), which is yet to be scrutinised. It rose 2.8%.

The losers’ board was a mixed bag, led down by one-time takeover target Appen ((APX)), which fell -7.1%.

It won’t get any better today. The banks may try to find a level but with Wall Street running scared, our futures are down another -55 points this morning.

Not worth the risk

The assumption is tonight’s US May CPI number will show a second month of easing on an annual basis from forty-year highs. The fear is it won’t, or at least will not be meaningful enough to confirm inflation has peaked.

There is a slight problem in economists forecasting 0.7% month on month growth, which is twice that of April. April saw annual inflation ease to 8.1% from 8.3% — the right direction but hardly inspiring.

Goods inflation is expected to ease, if for no other reason than cycling the big moves up of last year when supply constraints bit. Energy prices are nevertheless unlikely to show any relief, noting April saw a pullback in oil prices based on Chinese lockdowns, and prices are currently as high as they’ve been this year (or last).

The swing factor is that of services inflation. I noted yesterday prices for the likes of flights and hotels have surged, as businesses take advantage of pent-up, post-lockdown demand to recover losses from the prior two years. The same can be said for the prices of sport/concert tickets, restaurant meals – any service unavailable during covid.

The flipside is the shift away from goods that were loaded up on during lockdowns. US Target’s well documented oversupply of unmoveable inventory is testament. Target will now begin a fire sale, which is disinflationary, but the impact depends on how many retailers are in the same boat.

Between energy and services prices, hopes of a meaningful easing of inflation may be dashed, only steeling the resolve of the Fed.

That said, the last two sessions have seen Wall Street setting up for a disappointing result. Last night the Dow doubled its losses in the last hour. With the US ten-year yield holding above 3%, tech stocks, and in particular Big Tech stocks, were sold down again last night, leading to further Nasdaq underperformance.

Apple, which is in all three indices, fell -3.6%. Meta Platforms, which some of you might remember as Facebook, fell -6.4% as the company celebrated its ticker code change to META from FB.

Strap yourself in.

Commodities

The Chinese government has shut down the Minhang district of Shanghai – population 2.7 million – for mass testing, one week after restrictions began to ease. Given Xi’s stubborn zero-covid policy, commodity traders are concerned over what the testing might find.

As the sea of red above attests, any relief from the improved Chinese trade numbers was overridden.

The Aussie is down -1.3% at US$0.7101, with the US dollar index up 0.7%.

Today

The SPI Overnight closed down -55 points or -0.8%. It closed down -54 points yesterday morning, and the index fell -101.

How much further can the banks fall?

China will release its May inflation numbers today ahead of the US tonight, which will also see consumer sentiment.

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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