The Monday Report – 04 July 2022

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            [1] => ((ASB))
            [2] => ((APA))
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            [2] => APA
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This story features BRAMBLES LIMITED, and other companies.
For more info SHARE ANALYSIS: BXB
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

Death Metals

The ASX200 gave up a promising start to the new year on Friday which saw the index up 55 points in the opening minutes despite a soggy end to the quarter on Wall Street. From that point the index moved steadily down all day to close down -28 points.

It was all about commodities.

Energy fell -3.4% and materials -2.1% to be the only sectors to close in the red on the day.  Oil and metals prices all fell on Thursday night but the most notable fall over Friday was that of iron ore, for which the futures plunged -11%.

The Chinese manufacturing PMI for June had been reported on Thursday at 50.2 – a bounce-back from May’s lockdowns but only just into expansion territory. Well-stocked Chinese steelmakers are seeing weakening demand amidst global recession fears and are deciding to idle their plants or bring forward regular maintenance.

Base metal prices tumbled again in London on Friday night but oil did manage a 2.5% bounce.

Real estate was the best performer on Friday (+1.5%) to continue a run of volatility in a sector once praised for its boringness.

As inflation began to surge last year, analysts as one recommended real estate and materials as hedges against inflation, on the back of inflation-linked rents in the REIT sector and the fact commodity prices are inflation personified. Then central banks began to get aggressive.

This caused bond yields to spike, thus undermining REIT returns, and so the real estate sector tumbled even as inflation continued to rise. Materials were a saviour earlier in the year but when central banks became even more aggressive, recession fears emerged, sending commodity prices south.

Those recession fears have also sent bond yields back down again, hence real estate is back in fashion.

Industrials were next best performer on Friday (+1.2%) with Brambles ((BXB)) rising 3.2% after the company abandoned its plans to make plastic pallets for Costco, deciding the returns were not sufficient. Shipbuilder Austal ((ASB)) jumped 25% after winning a contract with the US Coast Guard.

Utilities – another “boring” sector enjoying some rate relief — rose 1.2% despite weaker oil prices with APA Group ((APA)) seen as a pipeline to inflation protection.

Moves in other sectors were fairly minimal.

Wall Street staged a turnaround on Friday night, which seems to have sparked up some buying interest locally – a lot of buying interest. The futures closed up 96 points on Saturday morning.

Oversold?

The Dow dropped -290 points early in Friday night’s session on the release of the US June manufacturing PMI, which showed an easing in expansion to 53.0 from 56.1 in May. Economists had forecast 54.3. The result implies slowing demand, highlighted by the new orders segment of the survey falling into the negative.

As earnings season approaches, Wall Street continues to believe June quarter forecasts are too high but even if they’re not, September quarter and full-year guidance will be the critical factor. The market is particularly worried about the Target syndrome – companies which over-ordered inputs to counter supply shortages finding themselves stuck with excess inventory as demand slows.

This appears now to be the case in the chip industry, which is seeing a perverse balance of, as an example, General Motors being unable to shift new cars as they’re stuck on the lot awaiting chips, while at the same time chip-maker Micron has guided to being stuck with inventory as PC and smart phone demand slows in the second half.

Note that a chip is not just a chip – they come in all sizes, colours and denominations for specific purposes.

The good news is that aforementioned supply shortages are easing more rapidly now, and in GM’s case, all those cars sitting on lots have been pre-sold.

While the PMI result led Wall Street to a potentially weak start to the second half, indices steadily regained the early losses and moved into the green mid-session, sending the Dow up 321 by the close.

The US ten-year bond yield fell another -8 points on Friday night to 2.89% and subsequently fell -23 points in the week, which is basically unheard of. Yields are falling because the market assumes the Fed will itself force a recession and then have to back-track once it has.

Wall Street spent all June pricing in a recession, so how much further can stock prices fall?

That seemed to be the mood as Friday night ended on a brighter note ahead of the three-day weekend.

Commodities

The Week Ahead

Locally we’ll see numbers for job ads and building approvals today and tomorrow the RBA is expected to hike by another 50 points. Trade numbers are out on Thursday.

After closing tonight, the US will see factory orders, trade and jobs data this week, with private sector jobs out on Wednesday and non-farm payrolls on Friday.

The recession-driven downward spiral for base metal prices is not over yet.

Gold has failed to play its traditional inflation hedge role this year, given the US ten-year yield has run from 1.5% to 3.5%, but now yields are falling back just in time for inflation to start easing.

Supply shutdowns in Libya and strikes in Norway are why the WTI price has jumped back 2.5%. Note that the contradiction in the Brent price is due to a rollover into a new delivery month.

The Aussie has been rather trashed, down -1.2% at US$0.6817.

The SPI Overnight closed up 96 points or 1.5% on Saturday morning.

The Australian share market over the past thirty days…

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