The Overnight Report: Relying On Tech

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This story features SEEK LIMITED, and other companies.
For more info SHARE ANALYSIS: SEK
The company is included in ASX100, ASX200, ASX300, ALL-ORDS and ALL-TECH

By Greg Peel

Stall Speed

Yesterday saw another session in which the AX200 fell in the morning, to be down -25 points by lunchtime, and then rallied back in the afternoon to a flat close. In the wash-up, gains and losses among sectors balanced each other out.

The worst performing sector was utilities (-1.1%) as both the big energy providers fell, possibly on further consideration of the budget. The opposition leader last night made his party’s contrary approach to gas and electricity all too clear.

Materials fell -0.5%, balancing out falls for the big miners against a surge in exotics. Lithium miner Allkem ((AKE)) jumped 15.7% following its announced merger with US producer Livent in a deal brokers believe will release significant synergies. All FNArena database brokers have a Buy or equivalent rating on Allkem.

Allkem fired up its peers but iron ore miners dragged on the sector, falling on China’s inflation data.

China’s headline CPI rose a mere 0.1% year on year in April and the PPI fell -3.7%, worse than economists had expected.

“There is still a big gap between demand and its pre-pandemic trend,” Xing Zhaopeng, senior China strategist at ANZ Bank told the AFR. “We do not think domestic demand can improve significantly in the near-term.” It is estimated it would take three to five years to rebound.

The banks were flat yesterday and other sector down-moves were immaterial. On the upside, Technology won the day with a 1.4% lift as the Nasdaq holds its ground in the US (driven entirely by Mega Tech) while communication services rose 0.8%, helped by a 3.8% rally for Seek ((SEK)).

Staples managed to rise only 0.1% despite a 10.0% pop for GrainCorp ((GNC)) after reporting earnings.

Discretionary, energy and real estate posted small gains.

The Aussie ten-year and two-year yields fell -6 points yesterday after it was revealed, via the Freedom of Information Act, that economic modelling conducted by the RBA in September 2022 and based on the bank's economic forecasts from August 2022, considered the risk of recession as the central bank raised interest rates at the fastest pace in recent history.

Using the Sahm Rule, which defines a recession as when the quarterly average of the unemployment rate rises by at least 0.75% above its minimum over the previous 12 months, the senior analyst said some models put the risk of recession at 65% or more over the next two years.

"Estimates suggest the probability of a recession over the next two years could be as high as 80%," the note stated.

Puts a June rate hike in to perspective. If the RBA goes again, it will be a bad look for Chalmers’ budget.

On the China data, metal and oil prices have tumbled overnight, and the S&P500 closed down -0.2%, but our futures are only down -8 points this morning.

A Lot Going On

The headline US producer price index rose 0.2% in April compared to 0.3% forecasts and the annual rate fell to 2.3% from 2.7% in March. The core PCE rose 0.2% in April, having risen 0.1% in March, to an annual rate of 3.4%, down from 3.7%.

You would think those sorts of numbers would have Wall Street cheering, but no – Wall Street is already forecasting a better than 50% chance of a Fed pause in June and is more concerned about a recession.

Weekly new jobless claims rose 22,000 to 264,000 last week to the highest level since October 2021, and ahead of forecasts. Looks like some of those mass layoffs are starting to bite. We recall that Wall Street was very excited by the April jobs report, being that much stronger than forecast and sparking a rally. Hence last night’s data had the opposite effect.

In further news, the latest US regional bank in the cross-hairs – PacWest Bancorp – dropped -23% last night after data revealed the bank lost -9.5% of its deposits in a week, being the week in which PacWest announced it was “considering all options”.

I did warn such a statement is a death knell.

Having reported earnings in Wednesday night’s aftermarket, Disney (Dow) fell -8.7% on signs its streaming foray during the pandemic is losing steam, as consumers tighten their belts and decide which of the many offerings they will stick with.

It’s the reason Netflix recently broke with prior policy and added a cheaper version of its service, with ads.

Disney weighed on the Dow but an earlier -400 point fall was recouped to -221 by the close – similar to Wednesday night, but not as convincing.

Google rose 4.8% last night, having risen by a similar amount on Wednesday night following its conference, at which its AI progress was revealed. The Mega Techs are now locked in an AI battle, and investors have decided they’ll all be winners.

Commentators nevertheless bemoan the fact the US indices are currently being supported by Mega Tech gains, and not much else.

Wall Street also remains nervous about tonight’s debt ceiling negotiations at the White House. While digging himself a deeper hole at a CNN “town hall” in New Hampshire on Wednesday night, among other things, Trump called for a default.

Commodities

A lot of faith had been placed in China rocketing out of lockdowns but so far nothing seems further from the truth. We await Beijing’s response.

Meanwhile it’s red everywhere other than for the US dollar, which has underscored its reserve currency status with a 0.6% gain.

The Aussie is down -1.1% at US$0.6704, which will help offset commodity price falls for local producers.

Today

The SPI Overnight closed down -8 points.

The Bank of England last night hiked its cash rate by 25 points to 4.50%, ahead of tonight’s March quarter GDP result.

The US will see consumer sentiment data tonight.

REA Group ((REA)) and News Corp ((NWS)) quarterly earnings are out today.

QBE Insurance ((QBE)) and Ampol ((ALD)) hold AGMs.

Janus Henderson ((JHG)) goes ex (quarterly).

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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