The Overnight Report: Never Mind Wall Street

Array
(
    [0] => Array
        (
            [0] => ((RMD))
            [1] => ((DMP))
            [2] => ((CKF))
            [3] => ((GNC))
            [4] => ((SGM))
        )

    [1] => Array
        (
            [0] => RMD
            [1] => DMP
            [2] => CKF
            [3] => GNC
            [4] => SGM
        )

)

This story features RESMED INC, and other companies.
For more info SHARE ANALYSIS: RMD
The company is included in ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

Rate Hike?

The ASX200 meandered around yesterday between a -30 point loss and a slight mid-session gain before closing down -15. With NSW shut, not much more could have been expected. There’s an RBA rate decision pending today.

Economists remain very much in the on-hold camp, but it would appear the market has become less sure. Following rates in the US, the Aussie ten-year bond yield has risen from 4.10% at the September meeting to 4.50% today. Headline inflation rose in August, due to energy prices, and core inflation remained sticky.

House prices continue to rise, defying rate hikes to date.

The worst performing sectors yesterday were healthcare (-1.3%), staples (-1.1%) and discretionary (-0.9%), which suggests fear of an RBA rate rise. But the picture is less clear.

Healthcare was down because ResMed ((RMD)) has turned tail and gone back the other way, down another -2.8% yesterday. Discretionary was hit by fast falls for the likes of Domino’s Pizza ((DMP)), down -4.1%, and Collins Foods ((CKF)), ie KFC, down -3.0%, while GrainCorp’s ((GNC)) -4.0% drop impacted on staples.

And if yesterday really was a matter of rate hike fear, we would not have seen real estate up 0.3% and utilities 0.6%. There was no bond market to go by.

The banks were a little unsure (-0.3%), and otherwise it was materials that held the ship together with a 0.6% gain. Lithium miners again starred.

There’s little point in debating further. The S&P500 closed flat last night, despite an 11 point jump in the US ten-year yield, and our futures are down -96 points, or -1.4%, this morning.

Like, wow.

Such a fall would send the index crashing through 7000 to challenge the March low of 6955, marked during the SVB crisis. Failure to hold that, and we’re looking at the October low last year of under 6700.

Oil prices dipped again last night, which should be cheered, except by the energy sector. The big iron ore miners were down some -2% in New York as Wall Street took to the S&P materials sector. Iron ore prices should be little moved this week with China on holiday.

Gold has taken another leg down on higher US yields. One saving grace is the Aussie dollar, down -1.1% on a surge in the US dollar, which supports exporters and offshore earners such as the big healthcare names.

Not so good for importers of consumer goods.

So, brace yourselves. Can the RBA save the day at 2.30pm?

How high can they go?

Wall Street was stronger early in the session last night as expected, reflecting relief with regards the averted government shutdown. But bond yields began to rise.

There was nothing specific to prompt what was ultimately an 11 point increase in the US ten-year yield, to 4.68%. The US manufacturing PMI for September did show a better than expected increase, to 49.0 from 47.8, but remains in contraction. It’s been in contraction for eleven months — the longest run since the GFC.

Speaking of the GFC, prior to that event the US ten-year was often in the 4-5% range and did not upset bull markets in equities. The problem is, as oft noted, there’s a whole generation of market participants and investors who have known only near-zero rates their entire careers.

The other problem is the GFC and pandemic provided zero rates that prompted the surge in growth stocks, which could borrow at next to nothing. And established companies could borrow and use those funds to constantly buy back shares. That’s not a viable play anymore.

But – and it’s a big but – the S&P500 ultimately finished the day flat. The Nasdaq, which should be scared witless by such a hike in yields, rose on the day.

The Nasdaq was led, as usual, by the Mega Techs. The Mega Techs generate so much cash they don’t know what to do with it. And if you’re sitting on a pile of cash, and rates are rising, you’re winning anyway.

Coming back to problems, US yields are rising simply because there’s too much supply and not enough buyers. The US economy is, granted, stronger right now than was expected, but with the US Treasury and the Fed flooding the market with bills and bonds, and Japan and China no longer buying at levels they used to, even an investor “flight to safety” into bonds would meet a brick wall.

Which begs the question: just how high can yields go?

It didn’t help that last night Fed governor Michelle Bowman declared that multiple rate hikes may be needed from here to get inflation down to 2%.

This against a not uncommon view that the Fed is already done hiking.

The Fed does not meet until early November. In between is the September earnings season. That’s where the rubber will hit the road.

Commodities

With China closed, base metal and mineral prices will likely remain quiet.

Not so gold, which has collapsed after breaking down and cannot fight rising yields.

The WTI oil price began last night’s session with a jump to over US$95/bbl, after data showed crude held in storage at Cushing Oklahoma, which drives the futures price, had fallen close to what is considered the “operational minimum”. Having reached its highest level in over a year, WTI suddenly found long-awaited sellers.

The US dollar is up a solid 0.8% on yields and the Aussie is down -1.3% at US$0.6365.

Today

The SPI Overnight closed down -96 points or -1.4%.

The RBA decision is out at 2.30pm.

We’ll also see data today for building approvals, house finance and job ads.

China is closed.

The US will see increasingly important job openings.

Sims ((SGM)) goes ex-div.

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.

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available on the FNArena website.  Click here. (Subscribers can access prices on the website.)

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author's and not by association FNArena's – see disclaimer on the website)

All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts on the website and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided. www.fnarena.com

FNArena is proud about its track record and past achievements: Ten Years On

Click to view our Glossary of Financial Terms