The Overnight Report: Consolidation

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

By Greg Peel

Bank on it

The ASX200 opened up 90 points yesterday and closed up 116, suggesting in reality a quiet session.

The banks again led the charge in index terms, adding another 2.3% on top of Tuesday’s 4.2% as the Aussie ten-year yield fell another -8 points to 3.65% and the two-year -3 points to 3.10%.

Never mind that the RBNZ raised Kiwi rates by a fifth consecutive 50 points yesterday.

It is interesting that banks stocks should surge on lower rates, which reduce margins, but lower rates take the pressure off household stress and weak loan demand. Never before has a 25 point RBA rate hike brought such relief.

Technology was, of course, the highest percentage gainer, adding another 3.9% on top of Tuesday’s 4.8%, as the punters pile in to the most heavily beaten-down names, as is the case for the Nasdaq.

It’s the same story for consumer discretionary, adding 2.7% on top of 3.6%, as we’ll all now rush out and buy stuff again given only a 25 point rate hike.

In contrast, staples, which were the outperformers on the way down, sat out the session to be the only sector to close (just) in the red.

Utilities were similarly benign (+0.7%) while all other sectors posted gains of between 1.0-1.7%.

We actually managed to get a full five stocks onto the ASX200 top five losers board yesterday and a full twenty in the ASX300 top twenty losers, with smaller miners dominating both tables having led the pack over the prior two soaring sessions. The big miners nevertheless took the materials sector up 1.4%.

Energy rose 1.2% on higher oil prices ahead of last night’s OPEC-Plus meeting. That meeting brought a -2m barrel per day production cut when -1m was forecast and -500k was thought possible, but having rallied solidly for two sessions, the oils were up only 2% last night.

Joe Biden will be fuming at the Saudis, recently having visited to plead for exactly the opposite.

Bond yields were on the move back on Wall Street overnight but the US stock indices managed only modest falls. Similarly, our futures are down -27 points this morning.

True Grit

Last night’s data showed 208,000 jobs added in the US private sector in September, up from 185,000 in August and meeting forecasts of 200,000. No sign of any slackening in the labour market as yet. Wages were up 7.8% year on year compared to 7.7% in August.

The US ten-year yield jumped back 14 points to 3.76% and the US dollar rallied back 0.9%.

There was some better (bad) news in the form of the US services PMI, which fell to 56.7 from 56.9 in August. But aside from that being a minimal change, 56.7 is still a ripping pace of expansion.

Wall Street did nevertheless cling on to a fall in the prices paid sub-index, which fell to 68.7 from 71.5, but if 56.7 is ripping, well, 68.7? Pent-up demand post-restrictions has led to a services boom in the likes of dining, travel and entertainment and prices have shot up accordingly. This will, of course, ease over time and perhaps the first signs have emerged.

The Dow was down -430 points at its low last night.

Yet despite the bond yield and dollar headwinds, the Dow rallied back to be up 100 in the last hour before giving that up into the close.

Just as we always see slow-moving sellers sell into any initial attempts at a bounce off the lows, we may have last night simply seen late-moving buyers who missed out on the two days of surge. It’s a big punt ahead of tomorrow night’s non-farm payrolls report.

That report is setting up as a binary proposition – anything lower than the 275,000 additions forecast, down from 315,000 in August, would give the rally another leg up, but anything higher than 275k, or worse, than 315k, could kill the rally altogether.

One difference bringing some confidence, nonetheless, is the breadth of the rally to date compared to the rally in July. While the July rally was boosted by a lot of short-covering, it was mostly led by the Big Tech names and not so much by the broader market.

One US fund manager has noted that 97% of S&P500 stocks were up for the third time in the past five trading days, as of Tuesday, being the first time since at least 2000 that the broader market index has seen such strength at the stock level.

For a rally to have any lasting potential it must feature breadth.

But still there are few, if any, who believe any rally, no matter how strong, will still just be another temporary bear market rebound. New lows are still being forecast in 2023, when the recession is apparent.

Shorter-term, a lot will depend on tomorrow night’s jobs numbers, next week’s CPI and the following week’s kick-off of the September quarter earnings season.

Commodities

Russian aluminium giant Rusal has hit back at suggestions the LME might ban Russian metal, suggesting it would create uncertainty regarding the role of the exchange. Rusal is clearly talking its book but it does have a point. Exchanges should be apolitical, offering only a point of price-discovery and clearing, and not be an arbiter of geopolitics.

To that end, the LME said last night it won’t be rushed into a decision, but it has provided partners in the exchange with a paper considering the move. What point is sanctioning Russia while leaving the door open for it to dump its unsold metal on the world?

While there is always scepticism around OPEC production quotas and whether they can ever actually be achieved or stuck to, last night’s -2mbpd production cut has caused consternation and led to forecasts of Brent returning to US$100/bbl.

Biden is looking to a further release from the US strategic reserve as a counter.

Despite the US dollar bouncing 0.9%, the Aussie has held its ground at US$0.6498.

Today

The SPI Overnight closed down -27 points or -0.4%.

Australia’s August trade balance numbers are out today.

Imdex ((IMD)) holds its AGM.

ARB Corp ((ARB)) goes ex.

The Australian share market over the past thirty days…

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