The Overnight Report: Strength In Defiance

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This story features CSL LIMITED, and other companies.
For more info SHARE ANALYSIS: CSL
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

Jitters

The futures had suggested up 58 points for the ASX200 on Saturday morning, but that was due to a rebound on Wall Street that pre-dated the attack on Israel. The index did manage to jump 44 points from the open yesterday but then banged its head against 7000, with prior support now becoming resistance.

The index then chopped its way back down on general concern regarding yet another war.

War in the Middle East typically leads to concern over oil supply, assuming a widening conflict in the region, and a move into the safe haven of gold. Oil prices have jumped 4% and gold is up close to US$30/oz.

Energy was thus the standout performer yesterday (+3.0%) and gold miners provided for a 0.4% gain for materials.

Healthcare also played safe haven (+0.9%) thanks to a 1.3% gain for CSL ((CSL)).

Aside from a 0.2% lift for utilities, all other sectors closed modestly in the red, ignoring a slight pullback in bond yields. Industrials lost -0.3% as Qantas Airways ((QAN)) responded to the oil price pop (-3.8%).

The banks (-0.1%) were little affected while technology saw the biggest fall (-0.5%).

If anyone is going to be concerned over conflict in Israel it’s Wall Street, but while it opened lower last night, it soon turned and rallied once more.

Our futures are up 30 points this morning, which would again have the index testing 7000.

While this particular Middle East conflict is a more sinister one, we’ve been here many times before. Typically there is initial fear but ultimately little impact on stock markets.

With no oil produced in either Israel or Palestine, oil fears relate to Iran’s support for Hamas, and any retaliation that may come from Tehran against Israel and particularly the US. The US banned exports of Iranian oil in 2018 (but has allowed for "illegal" exports in an attempt to appease the Iranian leadership).

Reports suggest Iran has been exporting record amounts this year, into a “dark market”. 

Interest Rates in Focus  

Wall Street opened lower last night on Middle East fears but as was the case on Friday night, soon turned around and rallied. While the circumstances may have been different, in both cases it comes down to interest rates.

Fed vice chair Philip Jefferson said last night a sharp rise in long-term yields could be the result of investors concluding the underlying momentum of the economy was stronger than previously thought and the Fed would need to keep rates higher for longer. But it could also arise from changes in investor attitudes toward risk and uncertainty.

“Looking ahead, I will remain cognisant of the tightening in financial conditions through higher bond yields and will keep that in mind as I assess the future path of policy. I will be taking financial market developments into account along with the totality of incoming data in assessing the economic outlook and the risks surrounding the outlook and in judging the appropriate future course of policy.”

Dallas Fed president Lorie Logan said in a speech if interest rates “remain elevated because of higher term premiums, there may be less need to raise the Fed funds rate. However, to the extent that strength in the economy is behind the increase in long-term interest rates, the FOMC may need to do more”.

A bit of a bet each way.

The question is as to whether the recent surge in US long bond yields is all about an economy that is stronger than feared, as Friday’s night’s jobs report would attest, or a simple matter of excess Fed and US government supply of Treasuries across the curve meeting limited offshore demand.

In the latter case, the market has tightened conditions to the tune of at least one more 25 point rate hike from the Fed, implying no need to go again.

The important point about Friday’s surprisingly strong jobs number is that it came with surprisingly limited wage growth, implying less pressure on inflation than would be assumed.

The US bond market was closed last night but the interest rates futures markets were open. The long-end futures saw a drop in yield ahead of the return of the physical market tonight.

While moves among some sectors were indeed a reflection of the new conflict – energy stocks up, airlines down, defence contractors up – Wall Street remains more focused on Thursday night’s CPI and Friday night’s PPI and initial bank earnings reports.

Thereafter, on results from the Mega Techs which follow in subsequent weeks.

Commodities

Oil prices are the clear standout and to that end, the Aussie is up 0.8% to US$0.6411 despite no move in the US dollar with the bond market closed.

Today

The SPI Overnight closed up 30 points or 0.4%.

The NAB business confidence survey for September and Westpac consumer confidence survey for October are out today.

Reece ((REH)) 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.

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