The Overnight Report: Sell Smalls, Await Data

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By Chris Weston, Head of Research, Pepperstone

Good morning.

-Is the rotation from tech into small caps over?
-US equity closes higher amid a tight range the calm before the storm?
-Microsoft’s earnings in focus and they will need to blow the lights out
-Our Asia opening calls suggest modest downside on open

As we close out of US trade and look ahead to what will be a modestly weaker open across the Asian equity bourses, where the term calm before the storm’ has been heard across the floors on the day.

We get set in preparation for a number of potential landmines, where agility will be key, but for now, we wrap up a session where the S&P500 and NAS100 closed a touch higher, with traders banking profits in small caps (the Russell 2k fell -1.1%) after the explosive run, with traders now questioning if the rotation from tech to small caps has run its course. We’ve also seen crude fall -1.8%, while the USD is firmer and US Treasury yields are down a touch at the long end of the curve.

Looking at the intraday tape, we see that the S&P500 had a whippy ride, with traders selling into moves into 5487 and buying weakness into 5444, with the index selling at the 44th percentile of this range a balanced market, where index traders had to square up and reverse positions throughout the day, with the S&P500 trading a tight 43-point high-low range on the day.

Market breadth reflected this dynamic with 55% of S&P500 stocks higher, with only consumer discretionary making a play, and notably this was Tesla and McDonald’s seeing a strong run on the day. Energy was the clear laggard, with crude lower, and finding sellers ahead of Thursday’s OPEC meeting

One suspects these subdued conditions will change, and we could easily see greater range expansion and volatility both at an index and single stock level. In the session ahead, we get spluttering’s of data in the form of US JOLTS job openings, consumer confidence and house prices, although when the real focal point is Wednesday’s Fed meeting and NFPs (on Friday), one suspects these economic data points won’t move markets too intently unless they miss the mark by a truly wide margin.

We also get earnings from AMD and Microsoft in the after-market session ahead and, certainly, Microsoft needs to deliver in spades as the bar is set high and long-only funds have accumulated a sizeable position in this name. Notably, there is focus on whether Microsoft can beat expectations on consensus growth metrics for its Azure business, and as we saw with Alphabet, FY25 capex guidance will come under huge scrutiny, and while the consensus here is for US$52bn, they will likely need to guide above US$60bn to meet the positioning.

Turning to Asia, and as detailed, our opening calls suggest a weaker open, especially for the ASX200 which once again shows it is struggling to find new buyers into 8000 there is little in the leads to really inspire buying activity on the open with commodities generally lower, with limited moves in bonds/rates. BHP Group ((BHP)), for example, looks to open -0.1% at $41.99.

Data are limited today, and what we do see won’t move markets, so this is a day for position/position management and to review broad exposures ahead of US earnings, and then tomorrow’s Aus CPI, BoJ meeting, German & EU CPI.

On the calendar today:

-Australian Building approvals

-Ansarada ((AND)) earnings report

-Corporate Credit ((CCP)) earnings report

-IGO Ltd ((IGO) Quarter report

-Perseus Mining ((PRU)) Quarter Report

-TechOne ((TNE)) investor briefing

-Eurozone 2Q GDP

-US July consumer confidence

Corporate news in Australia:

-According to The Australian, IFM, Pacific Equity Partners, and TPG Capital are set to advance to the next round for Healius’s ((HLS)) Lumus Imaging unit sale

-Boss Energy ((BOE)) withdrew its takeover bid for Energy Resources of Australia ((ERA)) after the NT government rejected the Jabiluka mining lease renewal

-Fletcher Building’s ((FBU)) Tradelink sale has reportedly attracted two final bidders, including secretive US billionaires

-According to the AFR, Lark Distilling ((LRK)) plans a major cash call with Barrenjoey Capital, following a -31.4% drop in its share price to 86c

-Regional Express Holdings ((REX)) has halted ASX trading after a report that it appointed Deloitte’s restructuring services following the departure of its executive chair (who wants back in). Deloitte has responded by declaring it is not involved

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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