The Overnight Report: Headwinds A-Blowin’

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

By Greg Peel

Third Time Unlucky

Lord knows it tried – twice in fact. Yesterday the ASX200 fell -40 points from the open, despite modest strength on Wall Street overnight, before the buyers again returned and pushed the index back to down -20. It looked like the pattern of the previous two sessions would repeat.

But it wasn’t to be. By lunchtime the index was down -50 points when the buyers tried again. They got it back to down -30, but couldn’t hold on at the death.

The bad news is Wall Street, which had looked like it, too, might have been trying to form a base, caved last night. The good news is our futures are down only -24 points this morning with the S&P500 down -1.5%, but we’ll see just how accurate that might prove.

The pending US government shutdown likely impacted on sentiment yesterday, but sellers would have been looking more to a 9 point jump in the Aussie ten-year yield, in lockstep with the US equivalent, to 4.40%.

The Aussie ten-year is tracking close to the US ten-year but our two-year is over -100 basis points lower, which is why the Aussie dollar’s where it is. The US yield curve is around -50 points inverted while we’re the other way around with a “normal” curve.

The weakest link yesterday was nonetheless the materials sector, which fell -1.7% on lower iron ore prices that analysts have been expecting for some time.

The banks managed to hang in there (+0.1%), despite higher yields. Elsewhere, the impact was felt in technology (-1.9%), real estate (-1.4%) communication services (-0.6%) and discretionary (-0.5%).

Industrials (-0.5%) were weighed down by an ongoing descent for Qantas Airways ((QAN)) for reasons well publicised (-1.3%).

Healthcare managed to buck the trend (+1.1%) as investors finally stopped panicking over weight-loss drugs and listened to brokers insisting ResMed ((RMD)) is oversold. It rose 2.3%.

While the futures are suggesting this morning a retest of 7000 might be on the cards, the swing factor could well be today’s release of the August CPI, which could well come in hot on higher fuel prices.

If 7000 can’t hold, the next stop is the March low of 6900.

All Too Much

For the last couple of months, weakness on Wall Street has been blamed on two main factors – rising oil prices and rising yields. We could also add in the rising US dollar, driven by rising yields.

Right now Wall Street is also concerned about the three S’s: shutdown, strikes and student loan repayments, which recommence next week and will impact on consumer spending capacity. We could also add in another S: September.

The Dow posted its worst session since March last night and has broken down through its 200-day moving average.

The S&P500 is now down over -7% from its last peak.

The US ten-year rose only a couple of points last night to 4.56% but there’s a growing feeling it’s on its way to 5%. The bulls will tell you not to worry, as rising yields imply a strong economy which is positive for equities. If investors were panicking, they’d be diving out of stocks and into bonds.

The bears will tell you rising yields are not about the economy but about supply, in the form of the Fed’s QT. The economy is set to succumb to higher yields, and that can only mean weakness in equities.

Oil and yields still dominate concerns but coming back to the three S’s, concern is that a win by the UAW will only prompt other unions into striking for higher pay as well. So far we’ve had a strike at UPS settled in favour of the workers, an apparent deal between writers and Hollywood, and last night President Biden supported the UAW’s 40% pay rise demand (over four years).

Across-the-board wage rises would only further fuel inflation, forcing the Fed to hike further and hold on for longer.

The bulls, nevertheless, consider any pullback healthy, and would not be the least concerned if it blew out to -10 or -12%, as history suggest such a move is a regular, and ultimately beneficial, consolidation in any bull market.

Once through the seasonally weak months, the bulls have faith in the typically strong November-December period, and see the S&P500 at 4500-4600 by year end. Last night it fell below 4300.

So really, nothing to worry about.

In other news last night, the regulator is suing Amazon for being a monopoly. The FTC has had several goes at Amazon in recent years as the latter has acquired more and more horizontal businesses, and is yet to succeed. But Amazon fell -4%.

Open AI – the company behind Chat GPT – is looking towards a private share sale that would value the company at US$80-90bn. The last time shares changed hands in the unlisted Open AI, in January, the price valued the company at US$29bn.

Who said there was an AI bubble?

Commodities

Nothing dramatic, but weakness all round outside the oils. Concerns over Chinese property developers have resurfaced with Evergrande back in the spotlight.

Gold cannot fight against rising US yields, and will now test US$1900/oz once more.

The Aussie is down -0.4% at US$0.6399.

Today

The SPI Overnight closed down -24 points or -0.3%.

August CPI today, China reports industrial profits and the US durable goods orders.

Core Lithium ((CXO)) will reportedly release an earnings result today.

Ampol ((ALD)), Amcor ((AMC)), ASX ((ASX)), Aurizon Holdings ((AZJ)), Coles Group ((COL)), Endeavour Group ((EDV)), Iluka Resources ((ILU)), Mineral Resources ((MIN)), Pilbara Minerals ((PLS)), Worley ((WOR)) and Woolworths Group ((WOW)) all pay their dividends to shareholders today.

Fund managers will need to reallocate that cash back into the market, but they don’t have to do it straight away.

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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