The Overnight Report: Sticking With It

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

By Greg Peel

Material Bounce

It was another indecisive start for the local market yesterday, with the ASX200 rushing up 32 points in the first half hour, only to be back to square an hour later. Only then did it steady for a rally to the close, and for once the market-on-close orders were a net buy.

The trend is tentatively up from the July 1 low, but far from convincing, given investors are clearly struggling to know which way to turn.

The materials sector fell -5% on Wednesday following big falls in all miners, particularly the big ones, but the big ones rallied back yesterday on a strong iron ore price and the sector rebounded 2.5% to be the standout winner on the day.

Energy fell -5.8% on Wednesday but stopped dead yesterday. The oils bounced back 4% last night.

Technology rose 3% on Wednesday and fell -0.5% yesterday. I noted yesterday that EML Payments ((EML)) was among the several tech stocks posting a 10% gain “all of which could just as easily fall by as much on another day”. EML fell -9.9% yesterday.

Real estate eased off -0.3% after rallying 3% on Wednesday and healthcare also stopped dead, after rallying 2%. The consistent performers from Wednesday were consumer discretionary, up another 1.3%, and financials, up another 0.9%.

Analysts have recently taken a knife to their discretionary stock targets after slashing their sector PE multiple assumptions, citing stagflation/recession as reducing demand for non-essentials. But those same stocks have posted two days of solid rally as they return from the depths.

For financials we have to separate insurers from the banks, with the former watching the floods creep further up the NSW coast while the latter are enjoying, for now, the benefits of mortgage rate repricing.

In economic news, Australia recorded a record trade surplus in May – good news for a new government dealing with the debt of covid spending.

Exports grew a better than expected 9.5%, led out by coal (both prices and volumes strong) and travel (border reopenings). Imports rose by 15.9%, mostly reflecting fuel. Despite the imbalance we still managed to book $16bn to the good.

Wall Street last night took its rebound to a four-day run – the first since March – and this morning our futures are up 49 points.

It will be interesting to see which sectors investors decide to buy/sell today.

Sustainable?

Oil prices bounced back over 4% last night for little reason other than Wednesday’s night’s fall through the psychological US$100/bbl mark also represented a “bear market” – down -20% — and given global supply constraints it was all a bit too much.

It is a relief on the inflation front nonetheless, but one respected money manager speaking on CNBC last night believes oil will still go to US$150-200/bbl on the back of supply constraints, ongoing global demand growth, and a reduction in the US Strategic Reserve to dangerous levels.

The energy sector led another day of gains for the S&P500 but only represents 5% of the index by market cap. The biggest weighting is tech, spread across three sectors, and here the bargain hunting continued. Investors are buying back the solid names, such as Apple, but also the beaten-down “garbage”, as one commentator put it, simply because it’s been so beaten-down.

The meme idiots were at it again last night. GameStop announced a 4-for-1 stock split and the stock rallied 15%.

All talk continues to be of June quarter earnings forecasts still being too high but until this week, at least valuations were low enough to provide for an easier set-up for result beats and misses. Investors have this week been taking the punt, ahead of results, with Wall Street posting its first four-day winning streak since March.

Every rebound since that time has lasted one, maybe two days, before lower lows were visited. Is this one sustainable? It will all come down to earnings.

And to guidance, again highlighting the surging US dollar.

Last night Samsung announced its result which featured an 11% jump in profit and 21% jump in revenue mostly due to a surge in memory chip sales. All chip stocks thus saw solid rallies last night, from their lowly depths. Once high-flying Nvidia rose 5%, but had fallen -50% from its highs.

Shifting to the real world, after the bell last night Levi Strauss posted a beat on both earnings and revenue and, more importantly, maintained the same full-year guidance it had maintained after the March quarter. Recession or not, denim never dies.

Levi is clearly one company that would suffer from the surging currency. The stock is currently up 4% in the aftermarket.

It’s risky buying heading into tonight’s June jobs report. Economists are predicting 278,000 new jobs but Wall Street would like to see a miss in order to confirm easing inflation and thus encourage the Fed to back off.

Not too much of a miss nevertheless, as that would be rather recession-ish when Wall Street just wants to avoid one.

Once we get past jobs, the big number will be next week’s June CPI result, which will hit just as the big US banks unofficially kick off earnings season.

Commodities

Well that’s a bit more of a breath of fresh air.

As was the case in the oils, metal prices were due a bounce back from oversold conditions, so it remains to be seen if today's green-on-screen will hold.

The Aussie has also seen a bounce (likely short-covering), up 0.8% to US$0.6842.

Today

The SPI Overnight closed up 49 points or 0.8%.

US jobs tonight.

Goodman Group ((GMG)) holds its AGM.

Collins Foods ((CKF)) goes ex.

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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