The Monday Report – 25 July 2022

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            [3] => ((RIO))
            [4] => ((S32))
            [5] => ((MQG))
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This story features ZIP CO LIMITED, and other companies.
For more info SHARE ANALYSIS: ZIP
The company is included in ASX200, ASX300 and ALL-ORDS

By Greg Peel

Feeling Flat

The ASX200 actually fell -36 points from the open on Friday despite strength on Wall Street, likely due to the US aftermarket result and tumble for Snap, portending Wall Street weakness on Friday night.

It lasted all of ten minutes. Forty minutes in the index was back where it started, and there it basically remained all day. Maybe the local market has finally woken up to the fact we don’t have any social media stocks.

More notable was a -14 basis point fall in the Aussie ten-year yield, likely driven by the US equivalent having again fallen back through 3% on recession fears.

It’s a bit hard to tell these days whether the market sees higher yields as good or bad for banks, but on the lower yields, the banks gained 0.6% on Friday. More straight forward is real estate, which rose 0.9% to win the session.

The only other sector to close in the green, funnily enough, was technology (+0.15%). You didn’t have to be Nostradamus to predict the Nasdaq’s -1.9% fall on Friday night following the Snap result, but while we don’t have any social media stocks, we are rather well-represented in BNPL.

Zip Co ((ZIP)) rose yet another 13.5% on Friday to be up 50% since Tuesday’s close. The momentum algos are having a field day. Zip is now down only -89% from its high.

The worst performing sector on the day was communication services (-1.3%). Telstra ((TLS)) fell -1.3%, possibly due to the overnight result from AT&T in the US showing customers are being slow to pay their phone bills. REA Group ((REA)), which is also in the sector, fell -3.9%.

A drop in oil prices had energy and utilities both down -1.2%, and elsewhere moves were all under -1%.

A flat session was no great surprise ahead of what is a very, very big week in the US this week.

Wall Street fell on Friday night as expected, led down by Big Tech, but with the S&P500 down -0.9% our futures were only down -12 points on Saturday morning.

The Fed decision is due on Wednesday night, the first estimate of US June quarter GDP on Thursday night, and June PCE inflation on Friday night.

Apple, Amazon, Facebook, Google and Microsoft all report this week, amidst 175 S&P500 stocks, of which 12 are Dow stocks.

While Snap may again be a bit of a canary, it is much smaller than the names above.

It will nevertheless be a week of reckoning.

Bear Market Rally?

It certainly looked that way on Friday night when after a week of solid gains for the Nasdaq in particular, it all turned tail on Friday night. But it was all about Snap.

Snap closed down -39%. The social media platform had also taken a big tumble following its March quarter result, when it first bemoaned a slowdown in digital advertising, which at the time was blamed largely on the change in Apple’s privacy rules.

The June quarter saw the gradual build-up of fear of a recession, and recessions typically lead to companies cutting costs, with advertising spend being an obvious one. As had been the case after the March quarter, Snap’s June quarter result sent shock waves across the sector.

Facebook fell -7.6% and Google -5.6%, being the most exposed among the Mega Techs to digital advertising. But all of the big names, due to report earnings this week, saw falls on the day to reverse the Nasdaq’s stellar week.

Following on from AT&T’s Thursday night earnings miss, Verizon (Dow) reported and fell -6.7% on its own earnings miss – this time not due to slow bill-payers but simply to stiff competition in the telco space.

In economic news, a flash estimate of the US manufacturing PMI showed a plunge to 47.0 from 51.6 in June. The PMI had been on a flyer in 2021 “post-covid” (people keep saying that but there are more infections now than ever) before starting to slow in 2022. The drop to 47 implies US manufacturing is now contracting.

An estimate of the July composite PMI, which includes services with manufacturing, fell to 47.5.

Little wonder the US ten-year yield fell another -13 basis point to 2.78%. Falling long-end yields imply recession expectations, but we can also look at it in terms of Fed expectations. The reason most still believe the Fed will raise by 75 points this week and not 100, despite the 9.1% CPI print, is because of such a rollover of economic indicators.

The Fed wants to bring the economy in for a “soft landing” while fighting inflation. It does not want to be responsible for a “hard landing” by pushing rates up too far, too fast.

There are plenty of indicators inflation did indeed peak in June – lower commodity prices (including oil), a weaker housing market and a halt in new hiring across the tech sector all point to lower inflation numbers ahead.

But for stock markets, at the end of the day, it’s all about earnings. And we’re about to learn a lot more.

Commodities

Bounces in base metals prices are explained by the fact they had already fallen such a long way on Chinese lockdowns and global recession fears. Beijing keeps promising stimulus to promote a post-lockdown recovery, while expectations the Fed will only go 75 and not 100 are seen as a positive.

The US dollar has also stalled out over the past week after its recent surge.

That, along with lower bond yields, is at least helpful for gold.

The Aussie is down -0.1% at US$0.6928.

The SPI Overnight closed down -12 points on Saturday morning.

The Week Ahead

Fed on Wednesday night, US GDP on Thursday night. Monthly US releases during the week include consumer confidence, house prices and home sales, durable goods orders and on the Friday, PCE inflation.

One third of the S&P500 reports earnings.

The eurozone releases its GDP result on Friday.

Australia’s June quarter CPI data are out on Wednesday, followed by June retail sales on Thursday. The RBA meets next week.

China’s July PMIs are out on Friday.

The local August result season begins this week with some gun-jumpers, most notably Rio Tinto ((RIO)).

The quarterly report season is still ongoing for the miners, with South32 ((S32)) in the frame today.

Macquarie Group ((MQG)) holds its AGM this week.

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