The Overnight Report: Friday Bounce

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By Chris Weston, Head of Research, Pepperstone

Good morning,

-Asia equity opening calls
-Assessing positioning ahead of the weekend event risk
-Event risk for the trading session ahead
-Closing out Q2 and eyeing moves through July
-Markets on the day

We look ahead to another mixed open in Asia, with the ASX200 called +0.3% at 7782. We did see buyers step in and support early weakness in the ASX200 at 7654 yesterday, with a melt-up into the close, so perhaps that is indicative of better demand going into the final session of the month and quarter.

However, where these markets settle out today will be a strong focus, given there are a few landmines to unsettle and promote intraday movement. These risks play out through the session for traders to actively react too, but also over the weekend, so there is a need to consider the possibility of gapping risk for the Monday open.

We see the French 1st round election playing out on Sunday. The initial results of the 1st round vote are expected around 7 pm local time (3 am AEST).

We also get China PMI data due on Sunday, although no change on the month is expected, with the manufacturing index eyed at 49.5 and the services index at 51.1.

One consideration worth pointing out is we heard confirmation the China Communist Party Third Plenum is to take place between 15-17 July, so this could be a big event for Chinese markets, with headlines on potentially hard-hitting policy initiatives likely to impact market sentiment. One could argue that Chinese/HK equity markets will be range-bound into the Plenum.

Throughout the session ahead there will be some focus on the 1st US presidential debate on CNN at 9pm EDT as we opined yesterday, this is unlikely to be a volatility event for markets. However, it will be important in setting the stage, with Biden out to prove a point that he is fit and absolutely sound of mind to lead the US for another four years.

One suspects Biden will be thoroughly prepared to put on a show which could lift his polling to a small extent, and we should get polls from FiveThirtyEight et al soon after. The focus for markets falls on the debate around trade policy/tariffs, regulation, and economics (the deficit).

On the data side, we see Japan’s (Tokyo) CPI (consensus 2.3% vs 2.2% prior), UK Q1 GDP and ECB 1 & 3-year CPI expectations. The more impactful data points will be seen in the US though, with personal income and spending, the University of Michigan survey, and core PCE inflation (consensus 2.6% y/y / 0.1% m/m).

Should we get a surprise decline in US core PCE inflation month-on-month, and we could see some sizeable relief flow through equity markets, with USD sellers stating a case, and gold higher. Conversely, a read above 0.3% m/m, and more so any number that rounds up to 0.4% and the USD should rip higher, and equity could close out the last session of the quarter in the red.

Back to markets and we close out Q2 and look towards Q3 and the possibility for volatility, trends, and renewed opportunity. In equity land, the NAS100 has been the notable performer in Q3 (+9% QTD), followed by the HK50 (+7.1%), while notable underperformances have been seen in the CAC40 (-8.2%) and EU Stoxx 50 (-3.6%).

For whatever reason the NAS100 loves July.

By way of leads for Asia, the S&P500 closed +0.1% and the NAS100 +0.2%. The intraday tape was a chop fest, and lacked any real directional trend, so Asia has little to work with by way of absorbing sentiment. 57% of S&P500 stocks were higher, with REITS and discretionary names working well, with Amazon once again finding the love.

US Treasuries found buyers (US 2yr closed -4bp) with US weekly continued claims (the highest since 2021), and Q1 consumption being revised to 1.5% (from 2%) impacting. The USD had a mixed close on the day. Gold holds its range lows, with tailwinds from lower US Treasury yields resulting in price closing +1%, while the crude bulls win back control with US crude +1%.

On the calendar today:

-Australia: Private Sector Credit April

– Danakali ((DNK)) ex-div 0.924c

– Japan Industrial Production April

-UK GDP Q1

-US PCE deflator (May)

-US Personal Spending April

-US University of Michigan consumer sentiment

Corporate news in Australia:

-Online retailer Adore Beauty ((ABY)) will pay $25m in cash for beauty brand iKOU Holdings

-Insurance Australia Group ((IAG)) has renegotiated deals with global reinsurers and confirmed it’s on track to achieve profits and margins in line with prior guidance in FY24

-Treasurer Jim Chalmers has announced ANZ Bank’s ((ANZ)) proposal to buy Suncorp Bank ((SUN)) can proceed subject to enforceable condition

-Dexus ((DXS)) is selling three assets for $383m to repay debt

-Southern Cross Media ((SXL)) will not purchase assets from Australian Community Media

-Shareholder China Cinda has sold part of its equity in Yancoal Australia ((YAL)) with the aim of getting Yancoal into the ASX200

-Perseus Mining ((PRU)) no longer interested in Newmont Corp’s ((NEM)) Akyem gold mine in Ghana

-Ramelius Resources ((RMS)) has purchased a stake in Spartan Resources ((SPR))

-Speculation is (again) popping up about Agnico Eagle wanting to acquire De Grey Mining ((DEG))

Michael Brown Senior Research Strategist at Pepperstone

Summer markets appear to have arrived, a time characterised by thin volumes, and relatively low volatility; characteristics that should allow markets to continue to take the path of least resistance’, barring any unexpected exogenous shocks.

Without wishing to potentially jinx things, it would appear that summer markets’ are now well and truly upon us. Barring a brief bout of volatility stemming from end of month/quarter/half-year flows, market action of late has been akin to watching paint dry.

With the economic calendar remaining relatively barren until next Friday’s US jobs report which, of course, coming a day after Independence Day, will drop when few participants are at their desks this relative calm looks like it may persist for some time to come.

This begs the question of how market participants can adapt to these trading conditions, which if recent years are anything to go by are likely to persist until Labor Day in early-September.

Overall, the lack of volatility, light volumes, and likely light news- and data-flow, should all combine to see markets continuing to take the path of least resistance’ over the medium-term.

As has been the case for some time, said path continues to point to the upside for equities, albeit with the upcoming Q2 earnings season a risk, with growth remaining resilient, and the Fed put’ set to provide additional support.

Elsewhere, Treasuries seem likely to remain within a range until greater clarity on the timing of the first Fed cut is obtained, a base case which also applies to the dollar, as divergences between G10 central banks remain relatively narrow.

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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