The Overnight Report: Range-Bound?

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This story features FORTESCUE LIMITED, and other companies.
For more info SHARE ANALYSIS: FMG
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

Dominos

Wall Street had wobbled this month when two measures of US January inflation came in lower on an annual growth basis, but hotter than forecast. When on Friday night the January PCE came in actually higher than in December, Wall Street bottled. Stocks fell and bond yields shot up.

Any last vestige of hope for an imminent Fed pause was dashed. Assumptions of a soft landing or even “no landing” were reassessed. Forget China’s reopening, implications of stronger for longer interest rates and likely US recession had base and bulk metal prices falling. The US dollar surged and gold fell.

Locally, the materials sector lost a standout -3.2% yesterday. This was exacerbated by Fortescue Metals ((FMG)) going ex and falling -7.3%, but with BHP Group ((BHP)) and Rio Tinto ((RIO)) each falling -3% it was not just about dividends. Base metal, exotic metal and gold miners all dropped.

Energy managed to counter the trend, with only it (+0.3%) and utilities (+0.2%) posting a gain on the day. Oil prices did not go the way of other commodities on Friday night due to Russian production cuts, but Woodside Energy ((WDS)) also rose 1.3% post earnings result.

The Aussie ten-year yield rose 5 points to 3.87% and the two-year 7 points to 3.62%; real estate fell -2.1%. Not helping the mood regarding RBA rate hikes were ABS data showing company profits jumped 10.6% in the December quarter having fallen -11.5% in the prior quarter and against a market forecast of 1.8%. That result will help to underscore tomorrow’s GDP number.

And steel the RBA’s resolve.

Meanwhile, the banks remained flat yesterday and no other sector fell by more than -1%. Industrials dropped -0.8%, with earnings train crash of the day (almost literally) being Downer EDI ((DOW)), down -23.7%.

Discretionary fell -0.9%, with InvoCare ((IVC)) losing -10.9% on result.

The only earnings winner of any note in the ASX200 was TPG Telecom ((TPG)), up 5.9%. Stretch to the ASX300 and we get a 10.8% jump for Betmakers Technology ((BET)), which happens to be the second most shorted stock on the ASX.

The good news? I suggested in early February that when the ASX200 dropped back through support at 7500 the next stop would be 7200. At the nadir around midday yesterday the index was down -114 points at 7193. Then the buyers appeared.

The index still closed down -82 points, but at 7224, and this morning the futures are up 34 points. Wall Street has managed a modest recovery last night but I suggest the 7200 level is seen by many as a potential floor, at least for now.

Not Convincing

Having posted its worst week for the year last week, last night the Dow opened up 370 points. The S&P500 regained what should be support at 4000. But it was a blink and you’ll miss it affair.

By late morning Wall Street had given back most of the early gains, before bungling along to a close of only up 72 for the Dow. The S&P closed at 3982.

It may be the market initially misinterpreted data showing durable goods orders plunged -4.5% in January. Forecasts were for -3.6%. Weak data are good news for those hoping the Fed will see reason.

But Boeing took 250 orders for new planes in December, and only 55 in January. Remove the lumpy transport segment from the numbers, and durable goods orders otherwise rose 0.7%, which is indicative of a healthy economy.

Maybe the computers have not been taught that yet.

Otherwise, Wall Street commentators seem evenly split right now as to whether the S&P has to go back down and test its October low (3580), or whether the index is range-bound and we could yet be seeing the building blocks for a new bull market.

There is little disagreement on where the Fed will end up, and that it will stay there for some time. There is, however, disagreement on whether current earnings forecasts are still too ambitious, or whether they may now be bottoming out. There is also the issue of the enigmatic ten-year bond yield.

It makes sense that when the Fed pushes up the cash rate, bond yields should also rise accordingly, and they have. But when a recession is feared, long-end yields fall as investors shift into safety mode and avoid risky stocks. That’s why yield curve inversion, ten-year yield below two-year yield, is a recession signal.

There is agreement that if the Fed goes too hard it will cause a recession. On that basis, a push in the ten-year above 4% seems unlikely. The Fed has gone hard for a year but while there may be two or three hikes still to come, and maybe even 50 points in March, Wall Street is looking through to the light at the end of the tunnel.

That’s what stock markets are meant to do, at least in the medium term.

While it takes two opposing views to make a market, if no winner appears then Wall Street could indeed remain range-bound as the year plays out.

Before the next Fed meeting there will be data released for February jobs, retail sales, as well as the CPI and PPI.

Commodities

US bond yields only ticked back a little last night but the US dollar index dropped -0.5% after jumping 0.6% on Friday night.

This at least brought a stall in commodity prices.

The Aussie is nonetheless unmoved at US$0.6737 after its big drop on Friday night.

Today

The SPI Overnight closed up 34 points or 0.5%.

Today we’ll see the December quarter current account, including trade numbers, and we’ll also see January retail sales and private sector credit.

China reports its February PMIs and the US sees monthly consumer confidence.

Today is the last day of the February result season. Traditionally that makes it Harvey Norman ((HVN)) day. There is also a slew of other companies reporting but mostly small.

Not so small are some of today’s ex-dividends. The list includes Amcor ((AMC)), Domino’s Pizza ((DMP)), Origin Energy ((ORG)) and Worley ((WOR)).

For a calendar of earnings result releases and a summary of earnings results to date, refer to FNArena's Corporate Results Monitor (https://www.fnarena.com/index.php/reporting_season/)

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.

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available on the FNArena website.  Click here. (Subscribers can access prices on the website.)

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