The Overnight Report: A Stagflationary Whiff

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ASX200 futures are pointing to another positive open, post a flattish performance on Wall Street. The Australian market finished at a one-month high yesterday after three straight positive sessions.

Good Morning,

Ahead of Big Tech earnings and ongoing tariff concerns, Nasdaq took a breather overnight while the Dow rose as investors mull a big week of macro data and earnings reports.

What happened overnight: Extract from J.L. Bernstein

Markets feeling a bit wishy washy today as tech pulled back ahead of earnings week. Treasury Secretary Bessent placed the burden on China for trade de-escalation while Huawei’s AI chip development pressured Nvidia. 

Reports of declining Chinese vessel arrivals on west coast ports raise some supply chain woes. A solid rip into the close across the board is always nice to see on a Monday.

China’s Commerce Ministry denied any recent trade talks, contradicting Trump’s earlier claims. 

Bessent stated China must de-escalate, citing the 5-to-1 trade imbalance. Trump told The Atlantic no specific market level would trigger tariff easing. Japan’s trade negotiator visits the US April 30.

China-US vessel arrivals are declining. Port of LA projects a -35% import drop within weeks. Apollo warns of potential “Covid-like shortages” by May. Shein has already raised some prices up to 377%. The “de minimis” exemption ends Friday, impacting e-commerce.

Critical Week for Markets: Four Magnificent Seven companies report earnings, offering first detailed tariff impact assessments. Q1 GDP (Wednesday) and April Jobs Report (Friday) will provide the first major economic data covering the post-tariff period.

Potential Support Factors: JPMorgan shifted to “tactically bullish,” citing earnings potential and consumer resilience (stable employment, healthy balances, wage growth) that may offset macro concerns.

Australian Morning Focus from ANZ Bank Research, Commodity, Macro Focus

The Dallas Fed manufacturing index fell to -35.8 in April from -16.3. 

The gauge of business activity hit its worst reading since May 2020, based on responses from 87 Texas manufacturers, who highlighted tariff impacts in their responses. US tariffs. 

Bessent said “it’s up to China to de-escalate because they sell five times more to us than we sell to them.” 

He noted the US had further escalation tools, including an “embargo”, though “we’re very anxious not to have to use it.” 

Meanwhile Temu has started passing tariff costs onto US shoppers due to the 2 May removal of the de minimis rule, but products already in the US are not affected. 

Bessent said the US is seeking trade deals with 15-17 other countries and said he wouldn’t be surprised if a deal with India is announced first. 

In Europe, the Finnish ECB Governing Council member, Olli Rehn, said more cuts would be appropriate if the outlook shows an undershoot of the 2.0% inflation target, while vice president, Luis de Guindos, said he expects the disinflationary process to continue and that financial markets must be closely monitored: “Sharp adjustments in financial markets could become disorderly.” 

ANZ Research forecasts the policy rate will be cut to 1.75%.

Crude oil started the week on the back foot, with prices falling sharply after weak economic data suggest downside risks for demand. 

The Dallas Fed’s gauge of Texas manufacturing activity weakened significantly in April. This came as the prospect of a relatively quick resolution to the trade war between US and China was snuffed out. 

Easing geopolitical risks also weighed on the market. The US and Iran reported signs of progress in talks on a deal over Tehran’s nuclear program. 

The two sides agreed to meet again in Europe. President Putin declared a new temporary ceasefire in his war with Ukraine from 8-10 May. While this fell short of the permanent end to hostilities sought by President Trump, it does lower the risk of an escalation that would trigger additional US sanctions. 

European gas markets extended recent losses amid rising supplies in the region. LNG imports have been strong this year, triggered by weakness in Asia. 

China re-exported the highest volume of gas ever in a single month in April, according to ship tracking data from Bloomberg. 

Rising supply was compounded by weak demand. Above normal temperatures are forecast for the continent this week, reducing residual heating demand. North Asian LNG prices managed to eke out a small gain as the recent losses spurred interest from price sensitive buyers in the region. 

Base metals steadied as the market awaited developments in US trade negotiations. The market’s focus stayed on the US government, which is in talks with 17 key trading partners to flesh out deals after Trump unveiled his reciprocal tariffs earlier this month. Investors were unimpressed with support measures announced by the National Development and Reform Commission. 

While Chinese officials reiterated plans to step up support for the economy in the face of external challenges, that fell short of what the market was hoping for. Troubled firms will get loans they need, while assistance to diversify markets will also be provided. Physical markets continue to show signs of tightness. 

Copper inventories in Shanghai Futures Exchange warehouses saw a record weekly drop of 54,858t to 116.7kt. The continuous destocking in the Shanghai region has kept Shanghai spot copper premiums firm. 

Iron ore futures fell amid ongoing concerns of weaker demand. The Chinese market is facing pressure on reducing inventories amid the uncertainty that the trade war with the US presents. 

Vale, one of the world’s top iron ore producers, dismissed concerns that rising trade tension will weigh on the market. It expects prices to remain around US$100/t amid stable supply and consumption. 

It also reported solid demand from China. Data support these claims. China’s output of finished steel rose 20% m/m to 13.4mt. 

Gold prices gained as a weaker USD and lower US bond yields boosted investor demand. The prospect of weak economic data also provided some support. 

Sentiment wasn’t helped by data showing declining demand in China. Consumption in Q1 fell -5.96% y/y according to data from the China Gold Association. High prices were blamed for the weakness. Nevertheless, gold is likely to continue to benefit from its role as a strategic asset amid the fragmented geopolitical backdrop.

The View from Stephen Innes, SPI Asset Management

After one of the most brutal snap-backs since the 1950’s, courtesy of a -14% plunge pared to just a -1.5% month-to-date drop, I’ve flipped my tactical stance from bearish to bullish in under two months.

This isn’t a fundamental turn; it’s pure technical. Light positioning, thin liquidity and muted participation leave the market primed to drift higher unless a fresh tariff shock or a bond-yield spike derails the party.

Mega-cap tech earnings remain the rocket fuel. As Apple, Amazon, Microsoft and Meta line up to report, any beat will likely reinforce the rally, even if the bar is already front-run. At the same time, whispers of a trade-deal MoU continue to skew risk/reward positively.

Put it all together and the pain trade is still higherled by a narrow cohort of stocks, just like the Mag7 run in H1 2024.

That said, don’t mistake the technical lift for an all-clear on the economy. We’re still 12 months away from feeling the recessionary lagged impact of trade tensions on real-world growth.

Early signs of throttled Chinese shipments point to potential summer goods shortages, empty shelves and surging e-commerce prices could finally crimp consumption and usher in a recessionary swoon.

Until then, the macro data might hold up. Friday’s NFP will be the next litmus test, and there’s every chance consumption continues surprising to the upside. But hard data will eventually catch down to soft surveys, a recent Fed study confirms sentiment is down while spending is running above 2019 levels. Measure actual flows, not just the gloom-and-doom headlines.

Keep an eye on the S&P: another 1.5% rally and we’ll notch the first recovery of a 10%-plus month-to-date drop since 1950. That alone tells you how technical this move is, ride it, but respect the risks, and month-end rebalancing might have something to say.

A stagflationary smell, says Ed Yardeni 

“The Dallas Fed’s April M-PMI had a stagflationary smell today. New orders plummeted from flat to -20, and the general business activity index fell 20 points to -35.8, its lowest since May 2020.

Meanwhile, prices paid for inputs jumped to multi-year highs. The average of the business conditions indexes of the regional business surveys conducted by five of the 12 Fed district banks plunged in April and suggests that the national M-PMI did the same.“

Corporate news in Australia 

– Blackstone is looking at a major sell-off of AirTrunk’s data centres to unlock billions, testing investor appetite just months after its takeover.

– Alkane Resources ((ALK)) and Mandalay merge in $1bn deal to expand gold and copper production.

– Domain Group Holdings ((DHG)) extends CoStar’s due diligence on $2.8bn takeover bid.

– Telix Pharmaceuticals’ ((TLX)) glioma imaging agent, Pixclara, was not approved by the FDA, requiring more clinical evidence for future consideration.

– Challenger ((CGF)) is seeking partnerships to expand into private credit, with talks underway with potential partners like Orde Financial.

– WiseTech Global ((WTC)) founder Richard White quietly settles with ex-employee over sex-for-visa allegations as scrutiny of his leadership intensifies.

On the calendar today:

-NZ March employment

-AU RBA Assist Governor Speaking at Bloomberg

-EZ April economic confidence

-US April Consumer confidence

-US March Jolts

-US March Trade Bal

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-G8 EDUCATION LIMITED ((GEM)) AGM

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-UNIBAIL-RODAMCO-WESTFIELD SE ((URW)) AGM

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-WHITEHAVEN COAL LIMITED ((WHC)) Qtr Report

FNArena’s four-weekly calendar: https://fnarena.com/index.php/financial-news/calendar/

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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