The Overnight Report: Waiting Game

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This story features LYNAS RARE EARTHS LIMITED, and other companies.
For more info SHARE ANALYSIS: LYC
The company is included in ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

Risk On

On a combination of easing US recession fears, expectations of a lower PRRT increase than feared, and a solid response to Westpac’s result, it was back to risk-on for the ASX yesterday.

The futures had already suggested up 64 for the ASX200 following the strong US jobs report which Wall Street took to be positive on a recession basis despite implications for another Fed rate rise in June. The index opened up 72 but after settling back a bit, held its ground for the session.

The energy sector was already primed for a rebound following a bounce-back in oil prices on said jobs number, but reports that the planned increase to the Petroleum Resource Rent Tax due in tonight’s budget will not be as steep as feared provided an added boost, for a 2.5% gain.

A similar bounce in the iron ore price yesterday, along with a report from Morgan Stanley suggesting the lithium price pullback may now be over, led materials 1.6% higher.

Lynas Rare Earths ((LYC)) topped the charts with a 12.0% gain on news Malaysia had extended the company’s processing licence to 2024, helping to fill in the gap while the company builds its plant in Kalgoorlie.

But while resources led the charge, a well-received result from Westpac ((WBC)) had financials up 0.7%, despite the bank warning of falling margins in the second half. We’ve been anticipating that for a while.

Technology decided to follow the Nasdaq for the first time in a while (+1.0%), joining in with risk-on.

Elsewhere, staples was the only sector to fall on the day (-0.9%) as money shifted into cyclicals, with Woolworths ((WOW)) and stablemate Endeavour Group ((EDV)) finding sellers.

Communication services, industrials, real estate and utilities all rose around 0.3%, while healthcare was flat.

As expected, Aussie bond yields rose alongside US yields, with the ten-year up 7 points to 3.39% and the two-year up 9 to 3.17%.

Wall Street closed flat overnight as inflation data and debt ceiling negotiations loom this week, and our futures are down -8 points.

We might presume the most significant elements of tonight’s federal budget have now been previewed but there could be the odd surprise. Tune in tonight, it’s bound to be riveting viewing. Bit like the coronation.

Bank On It

The Fed last night issued its periodic report on the nation’s financial and economic health — a survey of market experts, economists, academics and others — that showed the biggest fears about current conditions.

“Frequently cited topics in this survey included persistent inflation and tighter monetary policy, banking-sector stress, commercial and residential real estate and geopolitical tensions,” the report stated.

The last report was issued in November, hence this is the first to address the ensuing regional bank crisis. Data released elsewhere last night confirmed that the bulk of the selling in regional banks since March was more about hedge funds going short than runs on deposits, and deposit flow has since stabilised.

“Overall, the banking sector remained resilient, with substantial loss-absorbing capacity,” the Fed report stated. “Policy interventions by the Federal Reserve and other agencies helped mitigate these strains and limit the potential for further stress.”

The US bank sector bounced back on Friday night, exhibiting a deal of short-covering, but things quietened down last night across the market in general as Wall Street awaits Wednesday night’s April CPI numbers.

Inflows to money market funds, paying much higher yields, nevertheless continue, and following the run of rate hikes cash has become as much of an investment as it is a safe haven, or parking lot. Over the weekend it was revealed that after a 12% rise in earnings in the March quarter, Warren Buffet’s Berkshire Hathaway currently has US$130bn in cash, and is in no rush to use it.

US Treasuries are still considered a safe haven in times of stress and after having been sold off on Friday on the jobs report, US bonds were sold again last night on the Fed report. The ten-year yield rose 7 points and the two-year rose 9.

With the CPI due on Wednesday night, presumably tonight will be steady on Wall Street as well, all things being equal.

Commodities

The LME was closed last night to join in the admiration of the king’s new hat.

The iron ore price bounce has been attributed to expectations of further stimulus from the Chinese government following a run of disappointing April manufacturing, construction and services data suggesting the economy is still struggling to recover from lockdowns.

The oil price rebound that kicked off Friday night on the jobs report, following a -7% fall for the week up to then, continued last night.

Commodity strength has the Aussie up 0.4% at US$0.6784 despite the US dollar gaining 0.2%.

Today

The SPI Overnight closed down -8 points.

Westpac releases its consumer confidence survey for May today and China reports April trade numbers.

Budget tonight.

Commonwealth Bank ((CBA)) wraps up the bank earnings season today with its quarterly update while Coronado Resources ((CRN)) reports quarterly earnings.

Worley ((WOR)) and Superloop ((SLC)) host investor days.

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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