The Overnight Report: Rotation, Rotation

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A rotation out of Tech into energy, utilities, staples, and financials should see the local bourse open on a happy note today.

By Chris Weston, Head of Research, Pepperstone

Good morning,

-Rotation the play in US equity markets
-A mixed picture expected for Asia on open ASX200 called +0.5%
-European assets finding better buyers
-Commodity moves have been largely positive
-Crypto under pressure momentum works both ways
-Event risk for the session ahead

The rotation within S&P500 sectors is on and has picked up steam as we roll into month- and quarter-end, and we see the S&P500 closing out the cash session on the lows (5447.87).

A saturated position in tech gets unwound, with funds rolling into energy, utilities, staples, and financials the result has been dispersion in the closing price changes in the various US equity indices, with the NAS100 cash index closing -1.2%, while the Dow has gained +0.7% and US small caps +0.4%.

Nvidia (-6.7%) has been at the heart of the tech drawdown, with 11.14m shares traded and price settling below the 50-day MA for the first time since 1 May.

Interestingly, we see options traders having a preference to buy 1-month call volatility over 1-month puts, which suggests some are seeing a more pronounced upside move over this period and feel once we turn the quarter perhaps this corrective move will turn hard. Nvidia aside, we see Super Micro Computers (-8.7%), Broadcom (-3.7%), Amazon (-1.9%), QCOM (-5.5%) and Netflix (-2.5%) all getting attention from traders and seeing pronounced price moves.

S&P500 futures sit -0.4% lower from where Asia cash equity markets closed yesterday, however, Asian equity looks to diverge from this lead and our calls for the ASX200 and the HK50 look constructive (gaining 0.5% and 0.7% respectively), and again index composition matters most when explaining this divergence.

Importantly, 70% of stocks in the S&P500 closed higher, and this positive read-through should see ASX200 financials put in some needed points, with BHP’s ADR also indicating an open 0.2% higher.

US Treasuries have found small net buying activity, with yields lower by 1 to 2bp across the curve. There have been pockets of US tier 2 data out and a handful of Fed speakers, but not enough to really trouble the market a lot of noise and no real signal.

The moves in yield have impacted the USD to an extent, with the greenback closing lower against all G10 currencies. Although, I would also put this down to a slight calming of concerns around the French election, where we see the France-German 10yr yield spread -3bp to 76bp, and the CAC40 +1%.

In commodity land, crude volumes have picked up, where the re-test of the former breakout level of US$80.91 has found good support from the bulls, and we see a higher closing high the bulls have stated their case and the skew in the distribution has shifted to one where we see a higher probability of a further upside move into US$84.88, and even US$86.00 looks possible if this can kick in the session ahead.

Gold (+0.6%) holds rising trend support (drawn from the 10 June low) and runs into the 50-day MA, where the buyers have lost momentum a lot of chop on the higher timeframes, but the set-up would become more constructive for the bulls on a closing break of Friday’s high of US$2368. Copper closes out the session -0.1%, while SGX iron ore futures are +0.5%.

Our crypto flow has picked up, as one would expect when we see a -6.6% sell-off, with punchy moves across the various alts too. News that Mt Gox is redistributing Bitcoin to creditors may be weighing to an extent and adding to a developing bearish trend, as many of these creditors may look to sell these coins for cash.

We’ve also seen six days of outflows from the BTC cash ETF, and this is indicative of sentiment, but we could also be seeing an unwind of the basis’ trade, where funds have bought the BTC cash ETF and sold Bitcoin futures (as a pair) against the ETF and picked up a very healthy 10% yield as the basis’ or fair value converged into the futures expiration.

Whatever the reason, in my view, Bitcoin is a pure momentum vehicle and momentum works both ways, as we see in Nvidia et al and right now there are seemingly limited reasons to buy, and the sellers are having big effect and moving prices lower with ease.

Looking ahead, event risk that will truly concern traders is somewhat thin on the ground with Westpac consumer confidence (Australia) unlikely to move the AUD at all. We also get Canadian CPI (22:30 AEST) and that may impact the CAD, given that Canadian interest rate markets are implying a 50% probability of a 25bp cut at the upcoming BoC meeting on 24 July. In the US we see consumer confidence and house prices.

Corporate news in Australia

-Paladin Energy ((PDN)) ready to acquire Toronto-listed  Fission Uranium

-Synlait Milk ((SM1)) has warned shareholders a failure to approve a $NZ130m loan due on July 15 will lead to insolvency

-Myer ((MYR)) likes to purchase Premier Investments’ ((PMV)) apparel brands, including Just Jeans and Portmans

-Following more sackings at News Corp ((NWS)) locally, Seven West Media ((SVW)) is equally cutting staff numbers

– SkyCity Entertainment ((SKC)) has agreed to sell its 10% shareholding in Europe-based Gaming Innovation Group

-Yesterday, Cettire ((CTT)) shares were walloped following a severe profit warning by the company

-Also yesterday, shares in ResMed ((RMD)) yet again sold off following a release of survey data by Eli Lilly suggesting mild OSA sufferers might abandon CPAP treatment in a later stage during their treatment

-Also, unlisted Armaguard has been thrown a lifeline by major customers the Big Four banks, Australia post and Coles Group ((COL)) and Woolworths Group ((WOW))

On the calendar today:

-Westpac Consumer Confidence June

-Collins Foods ((CKF)) earnings report

-Steadfast Group ((SDF)) day two of investor briefings

In the US:

-House price index

Plus also: Apple is the first company charged under new EU competition law

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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