The Overnight Report: The Nervous Wait

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World Overnight
SPI Overnight	7615.00	– 19.00	– 0.25%
S&P ASX 200	7680.60	+ 31.00	0.41%
S&P500	5240.03	+ 53.70	1.04%
Nasdaq Comp	16366.85	+ 166.77	1.03%
DJIA	38997.66	+ 294.39	0.76%
S&P500 VIX	27.71	– 10.86	– 28.16%
US 10-year yield	3.89	+ 0.10	2.72%
USD Index	19.93	– 82.82	– 80.60%
FTSE100	8026.69	+ 18.46	0.23%
DAX30	17354.32	+ 15.32	0.09%

Good morning.

Equities have had their initial knee-jerk bounce post panic-driven sell-off, so what comes next?

Overnight, US equities bounced also taking guidance from a fierce recovery in the Japanese market, which had been the trigger and the worst casualty.

European share markets ended higher too, having experienced their steepest three-day decline since June 2022.

Local futures are signalling the ASX200 already had its bounce yesterday. Today might be more of a wait and see what happens next session.

Adding to overall cautiousness is that all three benchmarks in the US have retreated in the final half hour of the day. Still, gains are ranging between 0.8% to 1.2%.

Earnings reports released by Uber and Caterpillar have been positively received.

Five of the magnificent seven had a positive session, paced by Meta and Nvidia, Apple and Alphabet are the laggards.

The US Treasury sold US$58bn of 3-year notes at a yield of 3.81% into solid demand. The US 10-year Treasury yield rose by 11 points to 3.89%. The US 2-year Treasury yield lifted 9 points to 3.98%.

Base metals and energy prices bounced too. Gold has continued to struggle and iron ore futures slipped -US$1.32 or -1.3% to US$102.86/tonne as wider losses induced production cuts among steelmakers in China and lingering high portside inventories reportedly weighed on sentiment.

Economists at NAB highlight the fact the Atlanta Fed’s Q3 GDP Now’ estimate sits at 2.9% which does not align with resurgent recession fears.

They also make the point US Treasury yields are now broadly in the region where they were prior to Friday’s Payrolls.

Yesterday’s push back against too many predictions made with confidence around the traps by RBA governor Bullock has seen the local bond market trimming their pricing for rate cuts, NAB highlights.

December 2024 cumulate pricing has been trimmed from 32bp to 24bp, and end-2025 is at 93bp from over 100bp. NAB retains its view that the RBA will keep rates on hold until H1 2025, having pencilled in May 2025 for the first cut.

On the calendar today:

-Arcadium Lithium ((LTM)) earnings report
-Pacific Smiles ((PSQ)) ex-div 7c (100%)
-RBA officials Sarah Hunter and Natasha Cassidy both appear before the Senate Select Committee.

-New Zealand 2Q Unemployment

-China July Trade Balance

US earnings season: CVS Health, Disney, Lyft, Novo Nordisk, Occidental Petroleum, Robinhood and Shopify are on the schedule today

Corporate news in Australia:

-Westpac ((WBC)) has closed RAMS Financial to new home loan applications
-St George Mining ((SGQ)) is acquiring Brazil’s Araxa niobium project for -$38m and raising $21.25m to fund the purchase and initial drilling
-Yancoal Australia ((YAL)) is reportedly pursuing Anglo American’s Queensland coal mines for up to -$5bn
-Treasury Wine ((TWE)) takes substantial impairment, divests lower margin brands
-Mosaic Brands ((MOZ)) has entered “safe harbor” to protect its directors from personal liability while they restructure the struggling business

Spot Metals,Minerals & Energy Futures
Gold (oz)	2430.90	– 21.10	– 0.86%
Silver (oz)	27.07	– 0.29	– 1.06%
Copper (lb)	4.01	+ 0.00	0.08%
Aluminium (lb)	1.04	+ 0.02	2.00%
Nickel (lb)	7.39	+ 0.10	1.31%
Zinc (lb)	1.18	– 0.01	– 1.10%
West Texas Crude	72.98	– 0.94	– 1.27%
Brent Crude	76.32	– 1.01	– 1.31%
Iron Ore (t)	102.86	– 1.32	– 1.27%

Michael Brown Market Analyst at Pepperstone

When considering financial markets from a broader perspective, and particularly the equity space, there is one concept, more than any other, that typically exerts the most influence. This is, of course, liquidity.

Since the GFC, and even more so since the pandemic, changes in central bank liquidity have shown a strong tendency to drive price changes in global equities.

The logic here is relatively straightforward central banks injecting liquidity, either by lower overnight interest rates, or by virtue of stimulative balance sheet policies, creates’ money within the financial system, which must then find its way of being put to use. More often than not, that use case is found in the stock market.

Here, there may well be some good news for equity bulls, after the sell-off that has marred the early days of August.

Not only was that sell-off unfounded from a fundamental perspective –with both earnings and economic growth both remaining solid- it was also likely exacerbated by thinner than usual trading volumes, given the time of year.

In any case, Fed reserve balances a proxy for liquidity have begun to rise once more over the last couple of weeks, potentially posing a tailwind to equities, when the current bout of turbulence dies down. In this respect, the upcoming July retail sales print, on 15th Aug, may well be the most important data to watch, given the growth scare’ narrative that appears to be gaining traction in some quarters. Despite, that is, Q2 GDP growth of 2.8% annl. QoQ, and the Atlanta Fed’s GDPNow metric forecasting 2.5% growth in the three months to September.

Taking a further step back, and looking ahead to the remainder of the year, the liquidity backdrop is likely to become increasingly supportive, on a global level. A -25bp Fed cut in September is a near-certainty, with more aggressive -50bp moves likely off the table for now, though further reductions will follow as Powell & Co. normalise policy through the remainder of this year, and next. A similar, likely gradual, pace of cuts will also be followed by other G10 central banks excluding the BoJ as policymakers obtain greater confidence that inflation is sustainably returning towards the 2% target.

There is also the issue of central bank balance sheets. As rates continue to decline, it becomes increasingly likely that balance sheet run-off, or quantitative tightening programmes, will come to an end. It would be rather odd to ease policy with rates, while simultaneously tightening policy via the balance sheet.

The BoE are likely the first to adjust plans here, probably bringing active gilt sales to an end at the September MPC meeting, amid increasing signs of tighter financing conditions for UK banks, and as usage of the BoE’s S/T repo facility hits fresh records on a weekly basis. Other G10 central banks are also likely to closely examine balance sheet plans as rates continue to normalise.

Lastly, there is the central bank put’ to be considered. As has been discussed at some length, were economic conditions to warrant it, with the battle against inflation now effectively won, policymakers have both the ability, and the will, to deliver sizeable support if needed. Say, in the event of unexpected labour market weakness, or an exogeneous growth shock. This, if it were to occur, would provide a further liquidity injection.

In short, while central banks would be wise to stand firm amid the current market sell-off, which by most reasonable metrics is overdone, not only does the fundamental equity bull case remain intact, but liquidity could provide a further fillip to any would-be dip buyers.

The Australian share market over the past thirty days

Index	06 Aug 2024	Week To Date	Month To Date (Aug)	Quarter To Date (Jul-Sep)	Year To Date (2024)
S&P ASX 200 (ex-div)	7680.60	-3.31%	-5.09%	-1.12%	1.18%

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
CWY	Cleanaway Waste Management	Upgrade to Buy from Neutral	UBS
NWS	News Corp	Downgrade to Neutral from Buy	UBS
ORA	Orora	Downgrade to Neutral from Buy	Citi
RHC	Ramsay Health Care	Downgrade to Hold from Accumulate	Ord Minnett
SWM	Seven West Media	Downgrade to Sell from Neutral	UBS

For more detail go to FNArena’s Australian Broker Call Report, which is updated each morning, Mon-Fri.

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available on the FNArena website.  Click here. (Subscribers can access prices on the website.)

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author’s and not by association FNArena’s – see disclaimer on the website)

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