The Overnight Report: The Other Ceiling

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

By Greg Peel

Yay, Job Losses

The debt ceiling-fuelled rally overnight on Wall Street had the ASX200 firing out of the blocks yesterday morning to be up 59 points in the first half hour, before sanity prevailed and by late morning the index was up only 27, ahead of the April jobs numbers.

Speaking of firing, Australia lost -4300 jobs in April and the unemployment rate rose to 3.7% from 3.5%. The index shot up again. Surely the RBA must pause in June.

It faded towards the close nevertheless to be up 37, reversing one of the two weak sessions prior, but had there been no jobs report this would be a reasonable expectation on Wall Street strength in the first place.

To put things into perspective, Australia may have lost -4300 jobs but it gained 61,100 in March, and 108,000 over the three months to April. The unemployment rate actually rose to 3.66% from 3.54%. Combine the loss with the unchanged rate of wages growth in the March quarter and yes, the RBA will likely pause in June, but economists had already pencilled that in.

Economists still see another hike in the next two-three months.

Technology was the star yesterday (+2.9%) as the Nasdaq fired up again, so all Australia’s listed AI stocks got a boost. Well, Xero ((XRO)) reported earnings and rose 8.9%, which helped.

Materials was next best with 1.2% despite a drag from gold miners, which will drag even further today, while energy rose 0.9% on news of potential coal mine closures in China due to safety reasons. There was also an easing of tensions with China in general, evidenced by a recommencement of timber exports.

We still need wine, barley, lobsters etc, but it’s a start.

The banks rose 0.7% on the prospect of a pause which underscores what looked like a risk-on session, except that there were mixed blessings among other sectors.

Communication services, healthcare and real estate closed lower but so did discretionary, while staples, industrials and utilities all rose.

Discretionary was hit by a negative response to the result from sector heavyweight Aristocrat Leisure ((ALL)), which fell -3.1%.

There had been some trepidation ahead of Nufarm’s ((NUF)) result, with ag results proving a mixed bag up to now, but the numbers provided enough relief to send the stock up 14.2%.

It was a wild night on Wall Street which ended with a significant surge to the close, mostly tech-led again despite rising US bonds yields.

As a debt ceiling resolution (supposedly) nears, gold has taken a tumble.

What Now?

And here we are again. Following a last-hour surge on Wall Street, the S&P500 hit 4200 on the bell and stopped. The Dow was down -200 mid-session and closed up 115.

The S&P has twice run up to near 4200 since the October low and twice backed away, in both cases back towards 3800, which in both cases has established the range of 3800-4200 the index has been in all year with seemingly no way out.

Downside moves have been largely due to Fed hawkishness, and upside driven by hope the Fed might be done, although the latest rally has had a lot to do with the sudden emergence from the deep of AI. Yes, we’re all going to get sick of hearing about it.

Last night’s news was something to do with generative AI replacing apps on Android phones, but I’ll let you work that one out on your own. Suffice to say Mega Tech again led the rally last night – spread across the three “tech” sectors of technology (Apple, Microsoft, Nvidia), communication services (Google, Meta) and consumer discretionary (Amazon, Tesla).

Communication services company Netflix jumped 9% after revealing the early success of its cheaper ad-based service.

It was not simply tech though, with other sectors enjoying a rally as well as evidence by the jump in the S&P, and reversal in the Dow. Walmart (Dow) reported a beat on earnings but guidance hinted at weaker times ahead for the consumer, so it rose 1.3%.

The mid-session dip last night was due to aforementioned Fed hawkishness.

St Louis president James Bullard said last night higher rates are insurance against inflation and he is “leaning towards” another hike in June. Bullard is so well-established as an uber-hawk he’s forced to wear a leather mask, and he’s not an FOMC member anyway.

Dallas president Lorie Logan is, and she said last night economic data don’t support a pause in June. The market is currently pricing in a 36% chance of another hike, hence 64% say pause.

But it’s the other elephant in the room that is dominating policy determination at the moment, and last night McCarthy said that an eventual bill to raise the borrowing limit needs to be on the House floor next week and that he can “see the path”. Meanwhile, the so-called Freedom Caucus of MAGA Republicans and Trump flag-wavers told McCarthy last night “no concessions”.

Trump told CNN he would default. Hopefully the Republicans’ slim majority in the House will negate the nutters.

Commodities

Hawkish Fedspeak is forcing Wall Street to rethink its insistence the Fed will be cutting in the second half of the year. The US ten-year rose 7 points last night and the two-year 12 points, and they’ve been ticking up gradually over the past few sessions.

Throw in more confidence over a debt ceiling resolution, and the collateral damage has been gold.

Everything else continues to worry about a stubbornly weak Chinese economy.

The Aussie is down -0.6% at US$0.6622, which makes sense on the jobs data, but the US dollar is up 0.6%.

Today

The SPI Overnight closed up 17 points or 0.2%.

We have a rest from off-cycle earnings reports today, before we get a handful more next week.

Embattled Syrah Resources ((SYR)) holds its AGM 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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