The Overnight Report: Trimming

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            [3] => ((CXO))
            [4] => ((IGO))
            [5] => ((BOQ))
            [6] => ((ALL))
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This story features METCASH LIMITED, and other companies.
For more info SHARE ANALYSIS: MTS
The company is included in ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

Not Convinced

The ASX200 gave up a 94 point morning rally yesterday only to fade in the afternoon to finish up 51, repeating a pattern that was prevalent early last week. Wall Street reversed overnight and out futures are down -38 this morning.

It was a clear risk-on affair yesterday, with technology up 1.9%, materials 1.5%, discretionary 1.3% and real estate 1.6%. We can call REITs a “risk” trade these days in the high interest rate environment and given the sub-sector of consumer-linked properties.

Risk was supported by falls in Aussie bond yields, although -5 points in the ten-years was far less dramatic than that seen in the US on Friday night.

Staples also did okay (+0.9%) despite the government’s move to unearth price gouging between the big two supermarkets, with Metcash ((MTS)) rising 2.8% on its earnings result.

Lower down the risk ladder were communication services (+0.6%) and industrials (+0.5%), while the banks managed 0.4%. As rates fall back, the risk of loan defaults decreases for the banks but the capacity for margin expansion diminishes.

Energy was one of only two losing sectors (-1.3%) on lower oil prices while utilities dropped -2.5% after Origin Energy ((ORG)) fell -3.9% before trading was halted.

A majority of shareholders voted in favour of the Brookfield consortium takeover but not the 75% required, as AusSuper made use of its blocking stake.

The gain for materials was all about iron ore and gold. Gold has flipped overnight and fallen back sharply. Meanwhile, lithium miners continue to be carted, with the likes of Sayona Mining ((SYA)), Core Lithium ((CXO)) and IGO Ltd ((IGO)) featuring in the top five losers and doing so almost every day for the past week or more.

One thing one can be sure of when it comes to exotic metals – it’s all boom and bust. Lithium went through a similar experience in the noughties, when EVs were first heralded as the next big thing.

In economic news, housing lending grew by 5.4% in October, driven by owner-occupiers (+5.6%), and a lot of them first home buyers (+6.2%). Lending remains -22% below the January 2022 peak, recalling that the RBA didn’t make its first move until May, but some 50% above the 2010-19 average.

Building approvals rose 7.5% but that’s due to a 19.5% increase in apartment approvals. Given governments, both state and federal, push towards high-density living, we should get used to it.

House prices rose 0.6%, but that’s down from 0.8% in September.

Given the lack of supply, ANZ Bank economists suggest prices should remain supported through 2024.

Rotation

Mark Zuckerberg has filed to sell some of his Meta shares for the first time in years, while Nvidia executives have also lined up to cash in on a tripling of the share price this year. This news, and the fact the S&P500 hit a 2023 high on Friday night, seemed a sufficient trigger last night for a bit of selling.

Bond yields have not fallen as fast as they have recently since the 1980s, so a 6 point bounce in the ten-years last night is hardly surprising as well.

For many a portfolio manager, investment in the Mag7 has run well ahead of percentage allocation, forcing a trimming of positions to maintain the desired percentage. One might say the same for fixed interest allocation.

The question then is what to do with that money? Trim your outperformers and allocate to the underperformers. All three major indices closed in the red last night but the Russell 2000 small cap closed up 1.0%.

The rotation rush is on, with commentators in agreement that while one must remain allocated to the Mag7, it’s time to diversify into the S&P493 and into small-mid caps for a 2024 play, particularly as bond yields recede.

Last night’s selling did not upset the Santa Rally.

Wall Street will now look ahead to Friday night’s November jobs report as the next critical indicator.

In one of the weirder M&A deals ever proposed, last night Alaska Airlines offered US$18 a share for Hawaiian Airlines. Hawaiian shares rose 192% in response, but that only took the share price to US$14, well short of the offer price, because the market is not convinced the deal won’t be blocked on competition grounds.

Now that’s a takeover premium.

Commodities

Yes, iron ore closed unchanged.

It looks like being long gold has become all a bit too popular. On Friday night the US ten-year yield fell -13 points and gold rallied US$36/oz. Last night the tens rose 6 points and gold fell -US43/oz.

The Aussie has been similarly whiplashed, rising 1% to yesterday morning and falling -0.8% to this morning at US$0.6618.

Today

The SPI Overnight closed down -38 points or -0.5%.

The RBA meets today. The market has the chance of a rate hike at 5%.

The September quarter current account is out today, including the terms of trade, ahead of tomorrow’s GDP release.

Bank of Queensland ((BOQ)) holds its AGM today.

Aristocrat Leisure ((ALL)) hosts an “ESG day”.

Really?

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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