The Overnight Report: Nothing To See Here

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This story features LATITUDE GROUP HOLDINGS LIMITED, and other companies.
For more info SHARE ANALYSIS: LFS
The company is included in ALL-ORDS

By Greg Peel

Sneeze, Cold

Following Wall Street’s tumble on Friday night following the Credit Suisse issue, our futures closed down -98 points on Saturday morning. Just before our market opened yesterday came the news of the government-assisted UBS rescue of Credit Suisse. That would be why, when the ASX200 opened down -60 points in the first ten minutes, by midday it was only down -20.

But that was enough for the just-get-me-out sellers. The index closed down -96.

Last night, on the Credit Suisse news, markets in Europe, the UK and US all rallied over 1%. This morning our futures are up only 0.7%. As of yesterday’s close, the ASX200 is down over -6% from March 7. As of last night’s close, the S&P500 is down -3%.

Ignoring an unrelated cyberattack on Latitude Financial ((LFS)), to date we have heard nothing of any stress in our own banking sector. Financials fell -1.7% yesterday. There was no respite from bond yields, as the ten-year fell -15 points to 3.23% and the two-year -19 to 2.84%. Insurers were hit hard.

While lower yields should support bond-proxies, commercial real estate is seen as under pressure globally as a potential victim of the banking sector issue. Real estate fell -2.5%.

The fall in oil prices had energy down -3.0%. I suggested yesterday materials might be the only sector to close in the green given the strong rally in the gold price, but while all top five index winners yesterday were gold miners, news out of China had iron ore prices and miners falling.

China’s National Development and Reform Commission said on Friday it would look yet again at measures to curb “unreasonable” iron ore prices and urged trading firms to avoid hoarding and inflating prices. And China’s major steel city, Tangshan, will be forced to curb production due to pollution issues. Materials fell -0.8%.

You know defensives are nowhere to hide when staples (-1.9%) fall further than discretionary (-1.4%), but it seems Telstra ((TLS)) might be one little port in a storm. Communication services rose 0.4% to be the only sector in the green.

Utilities and industrials did at least manage to fall less than -1%.

Last night we saw oil prices rebound slightly, and US bond yields bouncing back again, which had gold off a bit.

The minutes of the March RBA meeting are out today but whether anything therein remains relevant is questionable. We should at least get a better handle on the board’s thinking on a pause, and the events of the last ten days are not about to swing the RBA back to hawkish again.

No Panic

The US ten-year yield rose 9 points to 3.48% and the two-year 12 points to 3.97% as wild volatility in bond markets continued.

At 3950, the S&P500 remains firmly within its range of the past several months. Consensus is we are not experiencing GFC 2.0, and the market is pricing in a 75% chance the Fed will hike by 25 points on Wednesday night for a pause. While a pause might be the blessed relief Wall Street has been hoping for since last year, it would also imply the Fed sees a problem that is more grave than it so far appears.

The ECB stuck to 50 as it had flagged, so the Fed should go 25.

The market then expects the Fed to start cutting rates in the second half of this year to counter a recession. While the banking crisis may not lead to wholesale meltdown, it will lead to banks across America being forced to tighten their lending standards, making finance harder to come by. This will be an issue when businesses need to roll over existing loans.

Ratings agency S&P last night proved to be its ever-useful self, downgrading its credit rating on First Republic Bank to junk level, triggering a further -47% plunge in the share price. Where was S&P’s warning earlier? The bank has been propped up by US$30bn in deposits from a consortium of the largest US banks and is looking to raise capital. This doesn’t help.

Hindsight is a wonderful thing.

Perhaps the most encouraging feature of last night’s comeback rally was its breadth. Rallies last week were primarily driven by Big Tech, perceived as defensive safe havens, but last night saw support across the board. Microsoft even fell -3%.

The VIX volatility index on the S&P500 is sitting at 24, which does not signify any elevated level of fear.

Commodities

While moves in base metal prices have not been too encouraging over recent sessions, it’s only really been oil that has shown signs of pricing in recession.

And gold, as it responds to the huge plunge in US bond yields that also signal recession.

The Aussie is up slightly at US$0.6718.

Today

The SPI Overnight closed up 45 points or 0.7%.

The minutes of the March RBA meeting are out today.

Japan is closed.

The US will see existing home sales.

New Hope Corp ((NHC)) reports earnings today. Sandfire Resources ((SFR)) holds its AGM.

Cochlear ((COH)) 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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