The Overnight Report: Tenuous Territory

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This story features ALS LIMITED.
For more info SHARE ANALYSIS: ALQ
The company is included in ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

Oh Canada

On Wednesday the Aussie yield curve mildly inverted and that remained the case yesterday, but only after a 17 point leap in the ten-year to 3.99% and 14 in the twos to 4.02%. The jump was sparked by the surprise Canadian rate hike of 25 points to 4.50% after four whole months of pause.

Canada’s is an economy much like our own.

The jump in yields played havoc with the ASX200 technology (-3.8%) and real estate (-2.5%) yesterday and weighed on consumer discretionary (-1.4%), communication services (-1.3%) and healthcare (-1.0%), not discerning between cyclicals and defensives.

In economic news, Australia’s trade surplus fell to $11.2bn in April from a second highest level $14.8bn in March, below economist expectations. Exports fell -5.0%, mostly in metals and minerals, while imports rose 1.6% boosted by aircraft purchases.

Exports to China fell -15.4%.

The good news is this was way, way back in April, and iron ore and coal prices have since rebounded, and they were still at it yesterday. Materials (including iron ore) rose 0.6% and energy (including thermal coal) rose 1.3% to provide the counter to falls elsewhere, while utilities chimed in with 0.9%.

The two big thermal coal miners topped the index table.

The banks had the day off and staples and industrials provided some mild support.

In Australia we saw one pause in rate hikes, back in April, but since then we’ve seen two “surprise” hikes and a warning from the RBA there may still be more to come. It had looked like Canada’s hiking cycle had reached and end but no – inflation remains sticky so the BoC was forced to go again.

Investors decided this does not bode well for Australia.

The good news is Wall Street found a new lease of life last night and our futures are up 29 points this morning. Bond yields fell in the US.

Bear Market Exit?

The S&P500 closed close to 4300 last night and in so doing, “technically” exited the bear market that began last year. After rotation out of Mega Techs was evident on Wednesday night on Wall Street, last night the Nasdaq spun around and all three major indices had strong sessions.

The prompt was weekly new jobless claims, which rose by 28,000 last week to 261,000, close to a two-year high. The market has been waiting all this year for signs of increasing unemployment from historically low levels, as rate hikes bite and the economy slows. But until recently, claims have remained stubbornly around the 200,000 mark.

Maybe now the impact is beginning to flow through.

The data only serve to strengthen expectations the Fed will pause next week. Although the market is still assuming it will only be a “skip” and a July hike is still possible. We’ll also see the May CPI number ahead of the Fed which could shift the thinking either way.

Meanwhile, having “exited” the bear market Wall Street is now at a pivot point. Is the exit enough to prompt a new wave of buying? Cash levels held by fund managers are at historically high levels given yields of 5% are available in money market funds and short duration Treasuries which is a safer play than the risky stock market, but fund managers cannot afford to miss out for too long if their bearishness proves misplaced.

That’s only one side of the argument. The other is the expectation of a sufficient economic slowdown, as the Fed at least keeps rates higher for longer, rising unemployment, which may now have begun, to lower corporate earnings ahead. After the surge up to retest the August high, talk is of exuberance being overblown, the market must correct, and a return to the October low is still a possibility.

The market had expected a recession to appear in the “back half” of 2023, but now the timing has shifted more to 2024. Quietly growing is an expectation the recession will be so mild as to not much impact the stock market.

Another factor supporting the positive argument is the VIX volatility index on the S&P500 is now way down in low risk territory, below 14. While this can prove a contrary indicator, suggesting complacency, it also means buying downside protection (put options) to hedge upside bets is relatively cheap.

Taking the bearish view opens an investor up to being steamrolled in the wrong direction on short-covering and all that cash flowing back into the market.

We recall that back last August, which was the last time the S&P500 was this high, Fed chair Jerome Powell used his Jackson Hole speech to rail against market foolishness which at that point was also assuming the Fed was close to completing its rate hike cycle.

Having reached close to 4300, the S&P then fell to under 3600 in October.

Commodities

A rumour spread last night the US and Iran were close to reaching a nuclear agreement, implying Iran would stop enriching uranium to weapons-grade and the US would thus lift sanctions on Iranian oil exports. Oil prices plunged -5%.

The White House then issued a statement saying we don’t know what you’re talking about, and prices rebounded, although not all the way back.

Yesterday, Aussie bond yields shot up but last night US yields were lower, resulting in the US dollar falling -0.8% and the Aussie jumping 0.9% to US$0.6718.

Gold also enjoyed a rebound.

Today

The SPI Overnight closed up 29 points or 0.4%.

China releases May inflation data today.

ALS Ltd ((ALQ)) goes ex.

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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