The Overnight Report: Profit-Taking

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

By Greg Peel

No Joy

After Tuesday’s big RBA-related sell-off, the futures were positive yesterday morning and the ASX200 opened up 35 points, only to fade away all session. Speaking yesterday, the RBA governor justified the hike:

“I want to make it clear, though, that the desire to preserve the gains in the labour market does not mean that the Board will tolerate higher inflation persisting. There is a limit to how long inflation can stay above the target band. The longer it stays there, the greater the risk that inflation expectations adjust and the harder, and more costly, it will be to get inflation back to target. If inflation stays high, this will damage the economy and all Australians will feel the effects”.

Most economists had pencilled in one more rate hike before a peak, which we got this week, but now they assume another. Goldman Sachs is now forecasting a peak rate of 4.85%, or three more hikes to come.

The banks fell a further -0.7% yesterday after being sold off on Tuesday, providing the bulk of the offset against gains elsewhere, while energy lost -0.7% on lower oil prices.

Beach Energy ((BPT)) didn’t help, falling -8.1% after a test well came up dry.

Materials stood still for once.

Consumer discretionary was hammered on Tuesday but made a 0.8% comeback, helped by the ongoing rethink for IDP Education ((IEL)), which clawed back another 3.6%. It didn’t help real estate though, which lost -0.4%.

Technology rose 0.6% and will go the other way today, while healthcare (+0.4%) and utilities (+0.4%) appeared to play defensives. Polynovo ((PNV)) provided a positive sales update and rose 15.8%. Origin Energy ((ORG)) received a private equity takeover bid for its Energy Markets business but rose only 0.1%.

Adding to the woes of higher interest rates, the government looks set to impose some sort of tax levy to fund the inevitable growth in aged care demand. Residential aged care company Estia Health ((EHE)), which is not in the index, has received a takeover bid and rose 13.3% yesterday.

Further adding to the woes, although seemingly not making much difference to the stock market yesterday, was March quarter GDP growth of 0.2.%, below 0.3% estimates and down from 0.5% in the prior quarter. Annual growth was 2.3%, when 2.4% was forecast.

Aussie bond yields responded with a 2 point increase in ten-year to 3.82% and 4 points for the two-year to 3.87%.

The yield curve has inverted.

Rotation Day

“Based on the accumulation of evidence, Governing Council decided to increase the policy interest rate, reflecting our view that monetary policy was not sufficiently restrictive to bring supply and demand back into balance and return inflation sustainably to the 2% target”.

Sound familiar? After four months of pause, the Bank of Canada last night hiked by 25 points to 4.75%. Reports suggest this move, and also a similar move by the RBA this week, heightened fears last night that the Fed would follow suit.

Yet the market is still pricing in only around a 30% probability of the Fed going again. If the Fed does indeed pause, the market has over a 50% chance of a hike in July.

The US ten-year bond yield nevertheless rose 9 points last night and the two-year 3 points. This was enough on the day to prompt investors into taking some profits on the high-flying tech names that have led the S&P500 to recent highs. The Mega Techs suffered (for them) large falls of -2-3%.

The AI-led tech theme is not over. It just needed some cooling off. This week to date has seen Wall Street flip-flopping between growth and value, such that the Dow outperformed last night against a solid fall in the Nasdaq, as it did on Monday night, but not Tuesday night, which went the other way.

What has nevertheless been consistent is the Russell small cap index, which added another 1.8% to become a waking Kraken. Small caps typically suffer as bond yields rise. So does the Nasdaq, but not every time.

Wall Street has four more sessions to get through before the Fed makes its rate decision, which will be preceded by the May CPI data. Meanwhile, the S&P500 is little changed since last Friday’s debt ceiling/jobs surge.

Commodities

Yesterday China reported a -7.5% year on year fall in exports in May, down from 8.5% growth in April, against a forecast -1% fall. The news was blamed for a fall in the copper price, but as to why zinc was up is not clear.

The data do nevertheless continue to fuel expectations of Chinese stimulus, but still no news on that front.

The oils can’t seem to make up their mind between weaker global growth and Saudi production cuts.

Gold has succumbed to higher US yields.

The Aussie is down -0.2% at US$0.6656.

Today

The SPI Overnight closed down -13 points or -0.2%.

Australia releases April trade numbers 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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