The Overnight Report: Rebound

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

By Greg Peel

Sell First

The herd continued to stampede out of the Australian market yesterday, sending the ASX200 down -150 points to lunchtime before any sensibility was found. The extent of the carnage over the past three sessions suggests foreign investors have been rapidly reassessing their “risk” positions, and deciding to jettison first and then think about it later.

The plunge came even as Wall Street found some stability overnight, on the back of US depositor bail-outs. Once the index dropped through support at 7000 without blinking it was time to consider that enough was enough. The index regained 7000 to the close, and our futures are up 67 points this morning.

Financials were again hit hard, but a -1.4% fall for the sector was not the standout this time. It’s not just the banks that have copped selling on global contagion concerns, but insurers as well, thanks to plunging bond rates, and wealth managers, thanks to plunging wealth.

The collapse on bond yields ironically could not prevent another -3.4% fall for the technology sector, with the death of Silicon Valley Bank implying technology financing is now in a state of flux.

The Aussie ten-year yield fell -7 points to 3.45% and the two-year -16 points to 3.09%.

The historical pattern of banks and resources cancelling each other out – as had been evidenced ahead of last week’s dramatics – failed miserably as materials fell -1.6% and energy -2.8%. The US bank issue has brought forward expected recession timelines.

Materials was saved to some extent by gold, with all top five index winners on the day once again gold miners, but exotic miners were carted again and even a decent rise in the iron ore price couldn’t prevent selling in the big miners.

Sell Australia.

All sectors closed in the red and for once real estate responded to falling yields, albeit in falling only -0.3%. Utilities fell -0.3% and industrials -0.6% to imply some level of defensiveness, but staples (-1.3%) and healthcare (-1.3%) have large cap stocks that would be sold down in index orders.

Discretionary (-1.4%) had to weigh up the pros and cons of rate relief (RBA to pause?), general market sentiment, and the Westpac consumer confidence index which showed a stall at 78.5, but still near 30-year lows.

NAB’s business confidence index fell -10 points to -4, but the February survey will have preceded the “dovish” March RBA meeting. Conditions dropped only -1 point to +17, suggesting current activity is still holding up.

Unless things take a turn for the worse in the US, economists still believe the RBA will hike one more time before pausing, with some still expecting two more hikes.

While the futures are this morning finally suggesting a bounce, it might be up to our good mates in China to add further relief with their February data dump today.

All We Need

No US bank was reported to have gone under last night. The Dow jumped 490 points from the open. The hard-hit regional banks found some buyers, and US bond yields bounced sharply.

While a 17 point jump for the ten-year to 3.69% and 22 points for the two-year to 4.25% seems ridiculously volatile in an historical context, in the context of the last few days it’s a mild bounce.

Just when everything was going swimmingly, a Russian fighter jet had to go and bang into a US drone and send it plunging into the Black Sea. I, like you, immediately thought what the hell’s a US drone doing over the Black Sea in the current circumstances but apparently it’s quite routine.

Just after 3pm, the Dow was back to square.

World War III did not subsequently transpire nevertheless, so in less than an hour Wall Street took off again for a Dow close up 336.

Nothing if not volatile, yet the VIX on the S&P500 is trading at 23, suggesting only mild concern.

In other news, the US headline CPI rose 0.4% in February to an annual rate of 6.0%, down from 6.4% in January, and as forecast. A weaker than forecast number would have been helpful at this time but at least it wasn’t another “hot” result.

The core CPI nonetheless rose 0.5% when 0.4% was forecast, and the annual rate dipped only to 5.5% from 5.6%.

Apart from being sharply overbought, this would explain the rebound in US bond yields.

So the jury is out on whether the Fed will/should pause next week to let the dust settle or will/should go 25 points again given inflation remains a danger and is not coming down fast enough. We can probably safely say 50 points is off the table.

The sticking point, or “sticky” point, in the CPI are rents, which rose 0.8% in February to a 42-year high annual increase of 8.8%. Rents are supposed to be coming down.

The other issue is spending on services, such as travel at elevated air fares. That post-covid trend must surely burn itself out before too long.

Tonight we get the PPI, along with retail sales, before we await the Fed’s decision next week.

Commodities

The CPI still managed to rattle the oil market, implying the Fed still has to raise and amidst the banking crisis, a US recession is more a case of “when” and not “if”.

Metal markets stand poised for China’s data today.

The Aussie is up 0.2% at US$0.6882.

Today

The SPI Overnight closed up 67 points or 1.0%.

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

The US will see the PPI, retail sale and the Empire State activity index tonight.

Breville Group ((BRG)), Inghams Group ((ING)) and TPG Telecom ((TPG)) are among stocks going ex today.

For more detail go to FNArena's Australian Broker Call Report, which is updated each morning, Mon-Fri.

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