The Overnight Report: Not A Good Start

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            [6] => ((RIO))
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This story features WHITEHAVEN COAL LIMITED, and other companies.
For more info SHARE ANALYSIS: WHC
The company is included in ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

Complacent

While a 29 point rally for the ASX200 is not much to write home about in the current context, it was interesting to see all sectors bar two closing in the green yesterday. Most notable were solid gains for resources.

Energy rose 1.7%, utilities 1.0% and materials 1.6% after big falls this week. Commodity prices had stabilised overnight but no more, so clearly some bargain hunting was in order.

Bad call. Metal prices have been trashed overnight. Copper is down -2.5%, nickel -5%, iron ore -5% and gold -1.5%, and that’s not all of them. The oils were only slightly lower.

Coal is one commodity not being trashed on recession fears, given global power generation issues due to the war. Soaring prices reportedly now have Beijing rethinking its ban on Australian coal. Whitehaven Coal ((WHC)) and New Hope Corp ((NHC)) have both at various times appeared regularly in the index top five winners lately. Yesterday it was Whitehaven (+6.5%).

The only sectors to close in the red were the banks (-0.8%) and real estate (-1.1%). After a positive week to date, profits were likely taken on the banks ahead of last night’s US bank earnings reports, as where go US banks typically go Aussie banks as well. But there was also the matter of the June jobs numbers.

June saw 88,000 new jobs created, going a long way to closing the previously yawning vacancy-unemployment gap. Economists had forecast 30,000. The unemployment rate plunged to 3.5% from 3.9% — a number last seen in 1974. A central bank has but two mandates – full employment and price stability. The RBA can clearly tick one box.

That means full focus on price stability, aka inflation. While strong employment can only be cheered, it’s also inflationary – more money in wallets. Since the RBA hiked by 50 points early this month, economists have agreed another 50 is due next month. Some are now saying 75, on the strength of the jobs report.

The Fed last went 75, and Australia’s economic lookalike – Canada – just went 100. The June CPI result will be out the week before.

For the banks, rate hikes offer the double-edged sword of better loan margins but lower loan demand and higher defaults. For real estate, higher rates undermine REIT yields.

Inflation? One sector managing only a small gain yesterday were consumer staples. Bega Cheese ((BGA)) fell -8.5% on a warning of the impact of surging milk prices. Yesterday Coles ((COL)) put its infamously low milk prices up, up.

On last night’s activity on Wall Street and metals markets, our futures this morning are down, down. By -52 points.

Don’t bank on it

US wholesale inflation rose by 1.1% to June from May when economists had forecast 0.8%, to 11.3% year on year, up from 10.9% in May and up from 2% eighteen months ago.

JPMorgan (Dow) and Morgan Stanley issued earnings results that both missed expectations.

The Dow was down over -600 points from the open.

We can dig down into both.

While headline PPI might be 11.3%, if we take out food and energy the core PPI posted its smallest month-on-month gain in four months of only 0.3%, and year on year came in at 6.4%, down from 6.7% in May. Oil prices have since tumbled, and so have grain and other food prices.

JPMorgan’s miss was largely due to shifting more earnings into loan loss provisions, despite Jamie Dimon lauding the strength of US consumer and business credit demand after last month warnings of a “hurricane” a-coming. JPMorgan closed down -3.5%. The bank also suspended its buyback.

Morgan Stanley’s miss was attributed to a fall in investment banking earnings (IPOs etc) while other areas performed well. It only fell -0.4%. The remaining Big Banks, due to report tonight and next week, all responded negatively. The financials sector fell -1.9% to be the worst performing S&P500 sector, along with materials (-1.9%).

But only after Wall Street staged a comeback, led by a technology sector (+0.9%) heartened by a strong earnings result from Taiwan Semiconductor (TSMC).

And more generally by comments Fed governor Christopher Waller, who said “Looking toward the FOMC’s next meeting July 26-27, and with the CPI data in hand, I support another 75 basis point increase”. Wall Street has been fearing a 100 point increase, and the PPI did little to ease that fear.

If traders took those comments as blessed relief, they rather ignored what Waller went on to say: “We have important data releases on retail sales and housing coming in before the July meeting. If those data come in materially stronger than expected it would make me lean towards a larger hike at the July meeting to the extent it shows demand is not slowing down fast enough to get inflation down”.

Whether it’s 75 or 100, consensus still has the S&P500 trading down to or below 3500 before any chance of a bottom, and the earnings flood that is about to hit will be the catalyst.

Commodities

Just when you thought commodity prices may have found a bottom, they haven’t. Central bank rate hikes across the globe, including commodity-exporter Canada’s 100 points, along with the hot US PPI and another 0.6% jump in the US dollar, had metal traders capitulating last night.

Markets typically find a bottom on capitulation. Data from the LME show base metals inventories are at very low levels, with no one stocking up ahead of a recession. At some point, the demand/supply balance will come into play.

The Aussie is down -0.1% at US$0.6751, as any impact from the strong jobs number was offset by the greenback.

Today

The SPI Overnight closed down -52 points or -0.8%. It’s the last day of the school holidays so until next week, the market will remain thin and vulnerable.

China will report June quarter GDP today, along with monthly retail sales, industrial production and fixed asset investment.

The US will also report retail sales and industrial production, along with the latest consumer sentiment index.

Eagers Automotive ((APE)) and Mirvac Group ((MGR)) hold AGMs today, and Rio Tinto ((RIO)) issues its quarterly production report.

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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