The Overnight Report: Old News?

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This story features MEGAPORT LIMITED, and other companies.
For more info SHARE ANALYSIS: MP1
The company is included in ASX200, ASX300, ALL-ORDS and ALL-TECH

By Greg Peel

Two-Way Street

It was a wild old first hour on the ASX yesterday amidst school holiday-thin volume. The futures had suggested down -64 points with a nod to an overnight commodity price wipe-out and the ASX200 did head off in that direction, but only managed -42 before tech buyers broke through the barricades.

The rush was on to buy anything harshly beaten down recently and before 11am, the index was up 22 points. That rush blew itself out and two hours later the index was down -39 points, before settling in the afternoon to close down -34.

Technology still closed up 3.09% on the day, with the top four index winners all up over 10% and all tech stocks, in the form of Megaport ((MP1)), Life360 ((360)), EML Payments ((EML)), which also signed a deal in Spain, and Nanosonics ((NAN)). All of which could just as easily fall by as much on another day.

Stretch out to the ASX300 and the bulk of top 20 winners were tech.

Yet tech was not the best performing sector on the day. That prize went to real estate (+3.14%), just, following a full -15 point plunge in the Aussie ten-year yield, on a day all the major banks passed on the full 50 points RBA hike into variable mortgages.

Financials gained 0.9%, with insurers still providing a drag.

The consumer sectors have been knocked down lately on inflation/recession concerns – even staples – but they perked up yesterday and rose 1.6% each.

As the US dollar continues to rise, the Aussie continues to fall, and healthcare rose 2.0% yesterday. Every sector closed in the green, except for the ones that didn’t…

There had to be a counter, and that came in the form of a -5.0% plunge for materials, -5.8% for energy and -1.2% for its cousin, utilities. It was carnage across the miners and drillers, no less so than mega-cap BHP Group ((BHP)), which fell -5.6%.

The commodity space had become rather overcrowded as every analyst/strategist had been saying since inflation really became an issue earlier in the year that commodities are an inflation hedge. But that was before recession fears surfaced.

Suffice to say all of the top five index losers yesterday were miners/drillers.

Are we living in the seventies? On top of health workers and railway workers, Qantas Airways ((QAN)) engineers are talking strike action. We just need postal workers and brewery workers and we’ll have an authentic set.

With Wall Street closing modestly higher, our futures are up 35 points this morning, suggesting a square-up of yesterday’s losses.

But with WTI down another -1% and Brent falling below US$100/bbl, iron ore down -1%, copper down -1% and gold down another -US$27/oz, there’s not a lot of relief in sight among the inflation hedges.

Just a Minute

“Participants concurred that the economic outlook warranted moving rates to a restrictive stance of policy and they recognized the possibility that an even more restrictive stance could be appropriate if elevated inflation pressures were to persist.”

“Many members judged that the significant risk now facing the Fed was that elevated inflation could become entrenched if the public began to question the resolve of the committee to adjust the stance of policy as warranted.”

These are extracts from the minutes of the June Fed meeting, released last night, which brought the surprise 75 points hike. The FOMC also “judged that an increase of 50 or 75bp would likely be appropriate at the next meeting.”

Well yeah, we knew that, so another 75 later this month would not knock Wall Street for six. The stock market bungled along doing not much until the 2.00pm release, after which the Dow jumped 300 points.

Given consensus advice to investors is to “fade the rallies”, those gains were swiftly lost in the last half hour.

Last night the US two-year yield rallied to close at 2.97%, and the ten-year rallied to close at 2.92%. Inversion.

Will the Fed really go another 75 in July?

The June 75 points hike, coming shortly after Jerome Powell said 75 was “not on the table”, was sparked by the shock 8.6% May CPI print. Since then the major drivers of headline inflation – commodities – have tumbled in price on recession fears. There is also a suggestion rents have started to come off.

Next week brings the June CPI numbers, which should pick up some off that retreat in prices (which was also inspired by Chinese lockdowns) as well as cycling ever higher numbers from last year. The bulk of the retreat – including oil falling below US$100/bbl – has occurred just this past week, so won’t make the June CPI, but the Fed is not oblivious.

The fear is the Fed will now go too far, too fast, and will lead the US into recession, which the yield curve is beginning to price in.

The Fed could slow down…

Commodities

The US dollar continues to be the main enemy of commodity prices, up another 0.5% on its index last night as the euro continues its slide.

The demand destruction element is also a factor, particularly for oil, but then analysts agree downside is limited past the current -20% pullback because there simply isn’t enough global spare capacity to increase production, as Biden is pleading for, and kill off the inflation monster.

The Aussie is down another -0.2% at US$0.6787.

Today

The SPI Overnight closed up 35 points or 0.5%.

Both Australia and the US release May trade data 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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