The Overnight Report: Resistance Wavering

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            [1] => ((NHC))
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            [3] => ((WDS))
            [4] => ((STO))
            [5] => ((BPT))
            [6] => ((S32))
            [7] => ((CAR))
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            [4] => STO
            [5] => BPT
            [6] => S32
            [7] => CAR
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This story features CORONADO GLOBAL RESOURCES INC, and other companies.
For more info SHARE ANALYSIS: CRN
The company is included in ALL-ORDS

By Greg Peel

False Hope

The futures had suggested up 9 points and the ASX200 closed up 16, which seems like a quiet day, except for the trip to up 50 points in the middle. I did warn derivatives expiry days can be volatile.

The rally was based on two factors – one of which was misconceived and one of which has reversed overnight. While the misconception was resolved in the fall back from up 50 yesterday, the reversal was resolved overnight – and the futures are down -50 points this morning.

The surge up to lunchtime was fuelled by a rise in Australia’s unemployment rate to 3.5% in August from 3.4% in July. In order to curb inflation, the RBA wants to see unemployment rise. Hence a 25 point rate hike might be on the cards next month rather than 50.

Except unemployment didn’t rise. 33,500 new jobs were added on a net of 58,800 full-time jobs. The unemployment rate rose because the participation rate rose – those looking for work. There is currently a job vacancy for every Australian looking for work, and that implies wages must rise.

In the US that ratio’s two to one, which is why US wages are rising much faster than Australian wages, and why the Fed is being so aggressive. But yesterday’s local numbers were nothing but strong, and in no way cause for the RBA to reconsider a 50 point rate hike next month.

Investors nevertheless bought the banks yesterday (+1.1%) following Tuesday’s steep fall, even as the Aussie ten-year yield rose another 5 points to 3.68% on the jobs numbers.

The big mover however was energy (+3.7%). Other than industrials (+0.3%) every other sector closed in the red. The energy sector surged on news I covered yesterday – that US rail workers had planned to strike, shutting down the economy and costing billions.

Coal miners Coronado Resources ((CRN)), New Hope Corp ((NHC)) and Whitehaven Coal ((WHC)), and gas producers Woodside Energy ((WDS)), Santos ((STO)) and Beach Energy ((BPT)) all shot up between 3-8%.

Last night Biden brokered a “tentative” deal which has averted the strike. The new worker contracts provide 24% pay increases over five years from 2020 through 2024 and include immediate payouts averaging US$11,000 upon ratification, in addition to an extra paid day off for workers.

Perrottet just had a heart attack.

Real estate was again the hardest hit sector yesterday (-1.0%), on further bond yield increases, and this time healthcare did not play defensive (-0.9%). Nor did utilities (-0.9%), or staples (-0.6%). Materials fell -0.4% helped by South32 ((S32)) going ex and falling -7.4%.

Just to rub salt in energy’s wounds today, oil prices are down -4% overnight.

Shaky Ground

Wall Street again chopped around in last night’s session, as had been the case on Tuesday night, and managed to come off its lows by the close, as had also been the case. But unlike Tuesday night, indices closed lower.

The S&P500 traded below the critical technical support level of 3900, but at the death closed above – at 3901. Hardly convincing.

In economic news, US retail sales rose 0.3% in August, having fallen -0.4% in July. Take out a 2.8% rise in auto sales, and the result was a -0.3% fall. And the data does not break down just how much of any gain can be attributed purely to inflation.

Industrial production fell -0.2% in August when a 0.2% gain was expected.

The US ten-year yield rose another 5 points to 3.46% and the two-year yield – seen as a proxy for where the Fed cash rate will reach – rose 14 points to 3.86%, further blowing out the two-ten inversion gap.

While this is not good news for the Nasdaq, sentiment was further dented when Adobe reported earnings, provided weak guidance, and announced the takeover of a private software company on a 50x PE multiple. Adobe fell -17%.

While it has been noted that price discovery and true valuation is difficult for an unlisted private company that doesn’t receive analyst scrutiny (ie 50x might be misleading), weak guidance was bad news enough.

According to data from Refinitiv, analyst September quarter earnings forecasts for the S&P500 have more than halved since the beginning of the quarter, to 5.1% from 11.1%. And still many believe they are too high.

It is noted however that take out forecast energy sector earnings and they’d be lower. Many also believe that at 17x, the forward S&P PE multiple is too high – the average is 15x and 12x in recessions. But again, take out Big Tech multiples and that number would be lower.

Either way, respected US billionaire investors have been lining up this week to warn Wall Street will go back to retest the June lows, or lower, somewhere in the 3000-3500 range on the S&P.

There is also a growing belief that when the Fed first started hiking rates its intention was to bring the US economy in for a soft landing by tackling inflation, but by now it’s a case of choose one or the other of tackling inflation and bringing the economy in for a hard landing, or avert a hard landing by easing back on the inflation attack.

Commodities

Nickel is returning to its bad old days of volatility earlier this year.

Gold has taken quite a hit.

Lower oil prices reflect the averted rail strike, but also an International Energy Agency report suggesting global oil demand will halt in the December quarter.

Despite the strong jobs numbers, the Aussie is down -0.7% at US$0.6700.

Today

The SPI Overnight closed down -50 points or -0.7% (new December front month).

China will report August retail sales, industrial production and fixed asset investment numbers today.

The eurozone releases its August CPI tonight.

The US will see consumer sentiment.

Carsales ((CAR)) goes ex today.

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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