The Overnight Report: Let The Sunshine In

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            [3] => ((ALX))
            [4] => ((MP1))
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This story features SUNCORP GROUP LIMITED, and other companies.
For more info SHARE ANALYSIS: SUN
The company is included in ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

Still Too Low

There was always a chance the ASX200 would open lower yesterday following Monday’s big rally, and weakness on Wall Street (albeit all about Apple), but the opening fall was minimal and the index was largely square by the time the minutes of the July RBA meeting were released late morning.

The board had decided that “the level of interest rates was still very low for an economy with a tight labour market and facing a period of higher inflation”.

This is why the RBA hiked by 50 points. But the discussion was between 50 and 25, rather than anything higher, suggesting talk of a possible 75 point hike next month is misplaced. But, if interest rates are still too low, then another 50 looks in the bag.

There was great discussion about the “nominal neutral rate” of interest being higher than where it used to be – the balance between too easy and too tight – but you might as well waste time on lengthy discussions over Heisenberg’s Uncertainty Principle, given a neutral rate is something that simply flashes by on the way to a new one.

The minutes clearly had an impact nonetheless. The Aussie ten-year bond yield jumped 8 points to 3.51%, and tech was the hardest hit sector (-2.9%). Ramifications of higher rates were evident in falls for all non-resource sectors, while the banks weighed up higher margins and lower loan demand and stood still.

On that front, Suncorp Group ((SUN)) gave back the 5% it gained on Monday on the ANZ Bank ((ANZ)) takeover news, with brokers suggesting the price was no more than about right and there still being questions as to whether the ACCC will let the deal proceed.

Energy was the standout performer in jumping 2.5% following a 5% jump in oil prices on Monday night. Utilities were dragged along too (+1.0%).

Healthcare provided the biggest index points hit in falling -2.5%, which likely reflects the fact the formerly soaring US dollar has now seen a sharp pullback, and hence the Aussie has gone from looking like trading under US67c to this morning being back over US69c.

Materials was the disappointment (-0.9%) given bounces in metal/mineral prices overnight. The problem was a weak-ish production report from BHP Group ((BHP)), which resonated across a sector beset by supply chain issues, labour shortages and high fuel costs. BHP fell -1.0%.

But fear not, all will be forgiven today following a solid rally on Wall Street last night. Our futures are up 79 points this morning.

Then Suddenly…

There is no single factor one can point to to explain why Wall Street took off last night. Rather, it was a combination of factors.

Firstly there’s the technicals, involving 50-day moving averages and the fact the S&P500 has not retested its June low.

Then there’s the more real fact that amidst all the doom-and-gloom predictions about earnings forecasts being too high, results to date have produced higher earnings growth on a net basis than said forecasts, and subsequent earnings “beats”.

Mind you, only 10% of the S&P has reported so far, but Wall Street has homed in on bank results – not just the biggies but regionals too – in which one by one CEOs have lauded the strength of the US consumer, and of businesses. This suggests fears of a recession may well be overblown, or if there is to be a recession it would only be short and shallow.

One issue has been the aforementioned strength of the US dollar, and indeed a -6% fall for IBM (Dow) last night following an earnings beat has been attributed to the reported currency impact. Last night Johnson & Johnson (Dow) reported the same problem and it fell -1%, despite an earnings beat.

But, the dollar has been coming off sharply these past few sessions. More so last night after the ECB signalled it will likely raise by 50 points tomorrow night rather than the previously signalled 25, sending the euro back from the parity brink.

Netflix reported this morning in the aftermarket and it, too, bemoaned the currency impact. But the streamer only lost one million subscribers last quarter when Wall Street had assumed two million, so it’s currently up 7%.

Finally we can point to the contrarian signal of the closely-watched monthly survey by Bank of America showing global fund managers are at their most pessimistic since 2008. As a result they are net underweight US equities and overweight cash.

Looks like they may have spent some last night.

Of course we’ve been here before, many times this year. Big snap-back rallies that typically last only one or maybe two days before the negative trend resumes. At the risk of suggesting this time it’s different, this time the big rally has followed a period of consolidation above the most recent low in June, rather than a knee-jerk bounce off a new low as has usually been the case.

Still, many commentators have been expecting a decent rally from oversold levels, and historically July is a good month for rallies, yet consensus still has Wall Street having to go lower before it can close the year higher than here. Hence a recommendation to sell the rallies.

We might note that Apple drove the market lower on Monday night, falling -2% on news it plans to reduce hiring and spending due to the current economic outlook, and last night it rallied back more than 2% without any change in view.

Commodities

The number of new cases in China has jumped to almost 700 – yes, what the hell are they worried about?  We’ve got 7,000 or something – but mass testing has been upped in Shanghai and given one is not allowed to catch covid in China, cause Xi says so, it seems only a matter of time before residents are barricaded in their apartments once more.

Not promising for commodity prices.

Oil is not exempt from Chinese demand impacts but the issue here is elsewhere, in sweltering Europe. More than 40C in London last night – Poms are melting on the spot.

The Aussie, as noted, is up 1.3% at US$0.6901.

Today

The SPI Overnight closed up 79 points or 1.2%.

More interest rate speculation today – Philip Lowe will speak this morning. The new Treasurer plans a review into the RBA, because he had seen high inflation coming all along.

There is a long list today of (mostly smaller) miners and drillers providing quarterly reports.

Reports are also due from Atlas Arteria ((ALX)) and Megaport ((MP1)).

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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