The Overnight Report: Trouble From Abroad

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This story features MEGAPORT LIMITED, and other companies.
For more info SHARE ANALYSIS: MP1
The company is included in ASX200, ASX300, ALL-ORDS and ALL-TECH

By Greg Peel

Nice While it Lasted

The ASX200 surged on further yesterday in the wake of Wednesday’s lower than expected CPI numbers, which raised hopes of an RBA pause and sent bond yields lower.

The resources sectors went against the tide on a fall in coal prices and a drop back for iron ore after earlier Chinese stimulus hopes. Energy fell -0.5% and materials fell -1.0%.

The big winners on the day included real estate (3.3%) and discretionary (2.1%), reflecting RBA hopes and another -8 point fall in Aussie yields.

All other sectors posted solid gains including technology (2.2%), spurred on by a strong result from Meta, and healthcare (1.9%), as lower yields mean a lower Aussie.

A seeming laggard but still significant to the index was a 0.8% gain for the banks. Even staples rose 1.2%.

But it may all come to naught.

News is the Bank of Japan may “tweak” its yield curve control policy when it meets today. More on that below, but in simple terms, US yields have surged and equities have tumbled, and our futures are down -44 points this morning.

Among individual stocks yesterday, Megaport ((MP1)) provided a quarterly update and jumped 14.4%.

Since bottoming in April, Megaport is up around 167%.

Furniture retailer Adairs ((ADH)) jumped 10.7%.

Among miners reporting production numbers, it was a win for copper and a loss for gold, as Sandfire Resources ((SFR)) rose 9.0% and Regis Resources lost -10.8%.

I could go on, but today will be a different story. US yields are up, gold is down, the S&P lost -0.6% and it appears we may see yesterday’s gains wiped out.

7500 will have to wait.

Sayonara

The first estimate of US June quarter GDP suggested 2.4% growth – up from 2.0% in March and well ahead of 1.8% forecasts. The “no landing” camp cheered, and stock indices rose yet again. The Dow looked like it may hit a 14-day winning streak. The last time that happened was 120 years ago.

But around lunchtime, two things happened. Firstly, an auction of US seven-year bonds met weak demand.

But more importantly, news came through the Bank of Japan may be set to “tweak” its yield curve control policy at today’s meeting.

The BoJ first implemented YCC back in 2016, which has the central bank buying Japanese bonds in order to cap the ten-year yield at 0.5% and maintain a positive yield curve (unlike the US, where the yield curve has been inverted post covid).

Japan’s longstanding low rates – going back decades – gave birth to the so-called “yen carry trade”, which has Japanese pension funds borrowing in low-rate yen and buying massive amounts of US bonds, paying a higher yield.

But recently, inflation has been on the rise in Japan – something anyone under the age of about thirty would never have experienced. To that end, the BoJ is reportedly considering lifting the YCC cap. If the yen carry trade becomes less inviting (it comes with exchange rate risk), and yields are looking better at home, this could lead to selling in US Treasuries.

Hence, the US ten-year jumped 16 points last night to over 4%. That level has been a line in the sand for equities this year. Last year it was 3% that set selling in train.

So the indices turned tail and any thought of the Dow breaking the record were dashed. If ever Wall Street is set for a correction and doesn’t need much to set one off, it’s when everyone is calling “overbought”.

On the other hand, we’re not quite past half of S&P500 stocks reporting, but the net score to date is a 7.1% beat on earnings, compared to a long-term average of 4.1%. Mind you, this is after analysts considerably marked down expectations, to a -9.6% fall in earnings.

The June quarter is expected to see an earnings trough.

Meta bucked the Nasdaq trend in rising 4%, having posted earnings in Wednesday night’s aftermarket (after which it initially rose 7%).

This morning in the aftermarket, Intel reported and is currently up 8%.

But it hasn’t been all beer & skittles. eBay reported during the session and fell -10.5% on a miss, and Mexican fast food chain Chipotle complained of food inflation and dropped -10%.

Next week we’ll see Apple and Amazon.

Commodities

Stimulus? Stimulus? Wherefore art thou stimulus?

Beijing’s actual policy detail will apparently be rolled out gradually over the coming weeks. There was no language from this week’s Politburo meeting indicating major fiscal or monetary stimulus, and as Mining.com reports, it’s hard to find anyone who sees a return to the type of massive outlays that Beijing kick-started its economy with after the global financial crisis.

Gold has responded to rising US yields.

There’s no stopping oil. WTI hit US$80/bbl last night for the first time since April, even as the US dollar shot up 0.7%.

The Aussie is down -0.6% at US$0.6714.

Today

The SPI Overnight closed down -44 points or -0.6%.

Today we’ll see Australia’s June quarter PPI numbers and month of June retail sales.

The BoJ meets.

The US will see June PCE inflation and consumer sentiment.

Quarterly updates are due today from Siteminder ((SDR)) and Omni Bridgeway ((OBL)).

Syrah Resources ((SYR)) holds its AGM.

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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