The Overnight Report: Back To Weakness

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The local market is set-up for renewed selling pressure on Thursday morning.

World Overnight
SPI Overnight	7598.00	– 33.00	– 0.43%
S&P ASX 200	7699.80	+ 19.20	0.25%
S&P500	5199.50	– 40.53	– 0.77%
Nasdaq Comp	16195.81	– 171.05	– 1.05%
DJIA	38763.45	– 234.21	– 0.60%
S&P500 VIX	27.85	+ 0.14	0.51%
US 10-year yield	3.97	+ 0.08	2.06%
USD Index	103.21	+ 0.24	0.23%
FTSE100	8166.88	+ 140.19	1.75%
DAX30	17615.15	+ 260.83	1.50%

By Chris Weston, Head of Research, Pepperstone

Good morning.

European equity indices may have closed in the green (EU Stoxx closed +2.2%), but our current calls suggest if the respective EU indices were to open now, many of those that bought into today’s rally would be underwater. Asia equity looks set for a weaker open, with the NKY225 called to open -2.5%, with the ASX200 -0.7% and HK -0.8%.

Much can change in this higher volatility regime that traders operate in, and as we saw that front and centre yesterday, where we were calling the NKY225 down hard on the open, yet the buyers stepped in as soon as cash equity trading got underway, and we saw an impressive 8% rally.

We look to the S&P500 and NAS100 futures, where the buyers were making their presence felt, with S&P500 futures rallying into 5395 – but as we have seen in the past 3 sessions, there is clearly heavy supply that kicks in around the 100-day MA, with 5350 capping intraday rallies and until we can see a close above these levels then I would refrain from expressing a view of buying the rip after this dip in risk.

What has been widely discussed (and traded) was the -2.6% reversal lower in the S&P500 (-3.4% in the NAS100) through US cash equity trade, and this could prove to be fairly damaging to the bull’s psyche. The intraday tape seen here could also resonate in Asia, as the buyers in US equity trade simply went missing and Asia-based traders will be considering the possibility that we now see a break of 5200 (S&P500 futures), which could take us towards the 200-day MA (5049).

There was no immediate smoking gun for the reversal, but the selling did get legs when we saw the poor US 10-year Treasury auction, with the yield on the US 10-year pushing higher towards 4%, resulting in the US 2s v 10s Treasury curve moving ever closer to un-invert. 

The selling in the AI-rated names (Nvidia closed -5.1%, Broadcom -5.3%) was also in play, backed by some punchy moves in Super Micro Computers which reported poor numbers and closed -20%. One for the radar, as the shorts are going to work in SMCI, with the stock having lost -50% since 16 July. Tesla also attracts good selling interest, and I would look at shorts here, with a stop on a move above US$210.

The move higher in Treasury yields may have been a headwind to risk, but if the JPY has been a key focal point and influence of broad market direction, then the intraday moves seen in USDJPY and alike suggest the effect may have waned today. 

By way of event risk in Japan, we get June balance of payments, and bank lending, while RBA Gov Bullock speaks I am skeptical we hear anything overly market-moving given we only heard her press conference on Tuesday, so I would have few concerns with holding AUD exposures through today’s speech. In US trade the focus shifts to the weekly jobless and continued claims, and this could be market-moving, especially if the jobless claims rise above 250k.

Today’s Asia session could be important, as many had bought the dip with the hope that we see real follow-through buying and the upside momentum building. Looking at the set-up in US indices, the reversal we saw will possibly impact that view, and it’s clear that we have not been given all clear just yet – this is a day trader’s market, and one where the ability to react and be nimble to two-way opportunity is there.

We are all data dependent and the market curves answers that may not be known overnight where either the US (and global) data come in hotter, in which case we can add confidence that US hard landing fears are truly overdone and risk assets (such as equity) can climb the wall of worry.

Conversely, the data continue to deteriorate, in which case market players continue to de-risk and look to push central bankers to share the vision price by markets then, if the Fed et al don’t come to the party, the markets will search out where the strike price on the central bank put sits.

On the calendar today:

-RBA Governor Bullock Speech

-AMP ((AMP)) earnings report

-Charter Hall Long WALE REIT ((CLW)) earnings report

-Coronado Global Resources ((CRN)) earnings report

-Light & Wonder ((LNW)) earnings report

-Mirvac Group ((MGR)) earnings report

-Transurban ((TCL)) earnings report

-NexGen Energy Canada ((NXG))

-Piedmont Lithium ((PLL))

-US Jobless claims

-US June Consumer Credit

Corporate news in Australia:

-The Albanese government will fund a 15%, $3.6b, pay rise for childcare workers over 2 years on the proviso their employers agree to limit fee increases until after the election

Spot Metals,Minerals & Energy Futures
Gold (oz)	2423.50	– 7.40	– 0.30%
Silver (oz)	26.70	– 0.37	– 1.37%
Copper (lb)	3.93	– 0.08	– 2.02%
Aluminium (lb)	1.02	– 0.01	– 1.18%
Nickel (lb)	7.30	– 0.08	– 1.11%
Zinc (lb)	1.16	– 0.02	– 1.80%
West Texas Crude	75.44	+ 2.46	3.37%
Brent Crude	78.50	+ 2.18	2.86%
Iron Ore (t)	101.71	– 1.15	– 1.12%

Rania Gule Senior Market Analyst at XS.com

Crude oil (WTI) ended a four-day losing streak, trading today, Wednesday, at around US$72.50 per barrel. Oil prices are receiving support from growing concerns about supply shortages and disruptions due to ongoing geopolitical tensions in the Middle East.

Particularly, Hamas announced on Tuesday the appointment of Yahya Sinwar as its new leader in Gaza following the assassination of former political bureau chief Ismail Haniyeh. There are fears of a potential escalation in the region, as Iran and its allies have vowed to retaliate against Israel and the United States for Haniyeh’s death. This might provide some short-term fundamental support for oil prices.

In my opinion, the chances of a rebound in oil prices may be limited due to negative demand sentiment. Chinese trade data has shown that daily crude oil imports in July fell to their lowest level since September 2022, impacting the world’s largest crude oil importer.

The American Petroleum Institute (API) reported a 0.18 million-barrel increase in the weekly crude oil inventory for the week ending August 2, which is less than the expected 0.85 million barrels. This follows a previous decline of 4.495 million barrels. The U.S. Energy Information Administration is scheduled to release its crude oil inventory report later today, coinciding with estimates of a global oil stock decline of about 400,000 barrels per day in the first half of 2024, with expectations of a drop of about 800,000 barrels per day in the second half of the year. This, in my view, might keep oil prices stable within the range of US$85 to US$70 in the long and medium term.

Especially since OPEC and other producers, including Russia (OPEC+), are sticking to their plan to gradually end voluntary production cuts starting in October. Even though OPEC’s oil production increased in July, despite the ongoing production cuts by the group, this, in my view, alleviates concerns about potential supply disruptions in the markets.

It is also important to note the movements in the dollar index, which is taking hit after hit. In natural risk-off movements, although the U.S. dollar is considered a haven, and since the same U.S. data triggered risk-off sentiment in the markets, it does not make sense for investors to hold on to the dollar anymore. This naturally directs investments to safe bonds, with expectations that these high returns will end soon after Federal Reserve Chairman Jerome Powell hinted at the possibility of an interest rate cut in September.

The question for this week, in my opinion, is whether the markets are overreacting to this and whether this is an ideal moment to buy on dips across all assets. In my view, yes, the markets have somewhat overreacted because when we look at the prices on the charts, we find them at very healthy correction levels for the recent exaggerated highs.

On the other hand, despite the recent drop in oil prices, Saudi Arabia is convinced that Asia will continue to grow and demand, raising its prices to that region for the first time in three months. Libya has also begun to cut production at the Sharara oil field by at least 50,000 barrels per day to only 210,000 barrels, and with developments, headlines have emerged indicating that the field has stopped production entirely.

Fortex data shows that the amount of oil floating in tankers has decreased by 31% from last week, which might indicate a recent demand recovery in my view. Overall, commodities are following the global sell-off wave, although losses in the commodity sector seem somewhat limited compared to larger losses in stock markets.

Futures data reveals that many hedge funds have liquidated large portions of their crude oil positions, which might mean that a bearish market could be near after the current upward correction. The stock market needs to return to normalcy after recent declines, and I believe this is the final domino for market stability or entering a recession.

The Australian share market over the past thirty days

Index	07 Aug 2024	Week To Date	Month To Date (Aug)	Quarter To Date (Jul-Sep)	Year To Date (2024)
S&P ASX 200 (ex-div)	7699.80	-3.06%	-4.85%	-0.87%	1.44%

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
CWY	Cleanaway Waste Management	Upgrade to Buy from Neutral	UBS
RHC	Ramsay Health Care	Downgrade to Hold from Accumulate	Ord Minnett

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.)

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