The Overnight Report: Jittery Times

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This story features VIVA ENERGY GROUP LIMITED, and other companies.
For more info SHARE ANALYSIS: VEA
The company is included in ASX200, ASX300 and ALL-ORDS

By Greg Peel

False Start

Not sure why the ASX200 shot up 47 points in the first half hour yesterday, but half an hour later it was back again to be up only 13 points. Maybe an algo went rogue, or someone simply pushed the wrong button.

From that point the index drifted lower to the close on a collective lack of interest in holiday trade ahead of tonight’s US CPI result.

Materials were again the worst performing sector (-1.1%), unsurprisingly. Yesterday Chinese steel city Wugang announced a city-wide lockdown – the latest to do so. Combine Chinese lockdowns and recession fears and there’s seems no end in sight for the commodity price pullback.

Energy once again held up (+0.1%), but that will change today with oil prices collapsing overnight.

There was otherwise a defensive tone to yesterday’s trade, with staples up 1.2%, healthcare 1.1% and utilities 1.2%, although telcos missed out (-0.8%). Utilities were buoyed by a positive trading update from Viva Energy ((VEA)), worth 2.6%.

The banks provided support (+0.7%) despite the Aussie ten-year yield falling -11 points to 3.39%.

Consumer discretionary was relatively flat despite big tumbles in online retail. Temple & Webster ((TPW)) fell -16.6% and Kogan ((KGN)) -9.7% for no obvious reason, other than to follow similar moves in equivalent US stocks on Amazon Prime Day.

Brokers have also been scrambling over each other to slash retail earnings forecasts and multiples over the past week. But Eagers Automotive ((APE)) provided a trading update and rose 3.3%.

It was a quiet day for tech (-0.6%) but not so in BNPL Land. Wounded Zip Co ((ZIP)) shareholders breathed a sigh of relief when Zip announced it was abandoning its planned takeover of rival Sezzle ((SZL)). Zip rose 6.0% to top the index while Sezzle slipped -38.6%.

The index losers list was full of the usual suspects in tech and exotic metals.

Business confidence is understandably on the wane, with NAB’s survey for June showing a -5 point fall in the confidence index to a below-average +1.

Current conditions are nonetheless more buoyant, with NAB's index still well above average after a -2 points fall to +13. Capacity utilisation remains near record highs and forward orders remain solid.

Retail prices grew 2.9% in the quarter but expectations for inflation are over 6% in the same period, highlighting margin pressure.

It will likely be another quiet session today ahead of tonight’s US CPI, and if you needed any confirmation, the futures are unchanged this morning.

Oil Tanks

Talk of Russia turning off the gas to Europe has had oil prices holding up above US$100/bbl when commodity prices all about have been tumbling. Russia is closing the main Nord Stream 1 pipeline for ten days of maintenance, but Europe is steeling itself for the pipeline never to be switched back on.

Last night oil prices lost their bottle. In summer-thin trade, concerns over Chinese lockdowns and global recession, and the fact Biden is off to Riyadh to try to talk the Saudis into increasing production, had WTI crude down -8%.

Biden can do his best but oil analysts agree the Saudis, and OPEC in general, do not have enough spare capacity to make much of a difference.

The S&P500 energy sector fell -2%, which seems understated in the context of recent moves, but after a significant pullback in recent months the sector has found support at its 200-day moving average.

Otherwise Wall Street did a whole lot of nothing last night – again looking to tonight’s CPI – up until the final hour. Then the Dow suddenly fell -300 points before closing down -192.

Wall Street continues to fear tonight will bring a number in excess of 9% for the headline CPI, up from 8.6% in May, despite big falls in commodity prices in the interim. There are two reasons why inflation could yet be higher.

Those commodity price falls are all well and good but their impact does not immediately flow through to consumer prices. Producers order their raw materials ahead, manufacture their goods, send them to distributors and then on the retailers and all of that takes time.

The other issue is rent. Despite US house prices beginning to ease, rents have continued to rise steadily. Rents are one third of the CPI equation. And while landlords are quick to put rents up, they won’t put them down unless a tenant vacates, and no one likes to move too often.

Once past the CPI (and PPI on Thursday night), it’s on to June quarter earnings season. Forecast average earnings growth for the S&P500 has come down to 4.3% from 5.9% three months ago, on inflation-driven margin pressure and excess inventories, but still most believe that’s too high.

The elephant in the room is nevertheless energy sector earnings which make up a big chunk of that 4.3%.

The Big Banks begin to report from Thursday night.

Commodities

Goldman Sachs had been quite the champion of copper earlier this year, warning of an historically tight market, but with the copper price now down -40% from its high Goldman last night warned the slump may yet have much further to run.

With the US dollar steady, the Aussie has bounced back 0.4% to US$0.6761 following Monday night’s thumping.

Today

The SPI Overnight was unchanged.

The RBNZ is meeting this morning.

China will report June trade data.

Locally we’ll see the Westpac consumer confidence survey for July.

The US CPI release will be accompanied by the Fed Beige Book.

Link Administration ((LNK)), another likely takeover no-go, holds its AGM.

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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