The Overnight Report: Tariff Impacts Felt

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The company is included in ASX200, ASX300 and ALL-ORDS

The S&P500 eked out a new high while profit taking sent the Nasdaq lower ahead of Tesla, Alphabet and IBM earnings reports tomorrow. 

Rotation on the ASX continued yesterday out of banks and into materials and healthcare stocks (the laggards of FY25).

Futures are pointing to a positive start.

Good Morning,

The ASX200 rose 9ppts to 8677 on Tuesday with miners and healthcare leading the index, financials lagged as bank stocks continued to weaken. Nine out of eleven sectors rose.

What happened overnight: NAB Markets Today Research extract

A quiet night with a lack of any top-tier data or events. The S&P500 rose 0.1% to another record high while the US 10yr yield fell -3.4bps to 4.34%. Supporting bonds was Treasury Secretary Bessent easing pressure on Fed Chair Powell, stating he saw no reason for him to resign: “There’s nothing that tells me that he should step down right now” and “His term ends in May. If he wants to see that through, I think he should. If he wants to leave early, I think he should”. Meanwhile President Trump called on the Fed to cut rates to 1.0%. 

Tariffs remain front and centre ahead of August 1 and August 12. Bessent indicated the August 12 deadline for China is likely to be extended: “China, that deal expires on Aug. 12 and I’m going to be in Stockholm on Monday and Tuesday with my Chinese counterparts. And we’ll be working out what is likely an extension then”.

A US-Philippines deal was also unveiled, and last week’s US-Indonesia was confirmed, both at a 19% tariff rate. Tariffs so far appear to be settling around 20% which is at the higher end of the post-Liberation Day expectations.

Tariff impacts are now starting to be felt and reported by firms. GM shares fell -8.1% after it reported a -US$1.1bn tariff hit as it absorbed most of the tariff increases as it waits for the finalisation of trade deals with South Korea, Canada and Mexico before making firmer decisions. GM expects a greater tariff hit in coming quarters, and it is worth noting GM imports around half of the vehicles it sells in the US.

Forex markets have seen the USD (DXY) fall -0.5% over the past 24 hours. Gold meanwhile outperformed, up 1.0% to US$3,428.

Data has been very sparse. The very second-tier US Richmond Fed Manufacturing Index fell to -20 vs. -2 expected and -8 prior. Meanwhile in the UK, the monthly budget deficit was wider than expected at -GBP20.7 billion, above the -GBP17.5 billion expectations. A surge in debt-interest payments was one driver.

Chancellor Reeves emphasised the need to follow her self-imposed fiscal rules. Although the monthly budget number came as a surprise, borrowing in the first three months of the fiscal year was in line with forecasts by the Office for Budget Responsibility.

The RBA July Minutes came and went with little fanfare, making it clear that an August rate cut is very much alive if CPI plays ball. 

For your scribe the most interesting snippet was the Board’s discussion around productivity and uncertainty around neutral, which underscores why they want to be very gradual in cutting rates: “Members also observed that, if productivity growth proves to have been persistently lower than had been the case historically, the recent subdued outcomes for GDP growth may not have been far below the rate of growth in supply capacity. Similarly, it was difficult to determine with precision how far interest rates needed to fall before monetary policy was no longer restrictive, and so members observed that it might be prudent to lower interest rates cautiously as the required degree of policy restrictiveness declines.”

In Japan markets reopened after the public holiday on Monday and the weekend’s elections. The Nikkei was little changed while the JGB curve steepened. Concerns about fiscal sustainability could contribute to further volatility in Japanese markets and investors will be closely monitoring the 40-year JGB auction today.

Rising yields at the long end of the JGB curve, have contributed to record inflows from foreign investors for two consecutive quarters, despite the growing fiscal concerns. JGBs offer a decent yield pickup to US treasuries on a currency hedged basis.

Bloomberg reported Bank of Japan officials see little need to alter its monetary policy stance of gradually increasing interest rates following the election. The central bank will be closely monitoring the impact on inflation if the government loosens fiscal policy considerably. The market is pricing around 15bps of tightening by the end of the year which has been stable over the past few months.

Ed Yardeni Extract

The next couple of weeks will certainly be interesting. The FOMC will decide on whether to lower the federal funds rate (FFR) or not on July 30. On August 1, the US will impose reciprocal tariffs on goods imported from America’s trading partners. Furthermore, administration officials will undoubtedly continue to beat up on the Fed, especially if the FOMC decides not to lower the FFR next week. 

US Treasury Secretary Scott Bessent has called for a comprehensive review of the Federal Reserve, questioning its effectiveness and suggesting it has not succeeded in its mission. In a CNBC interview on “Squawk Box,” he criticized the Fed for “fear-mongering” over President Trump’s tariffs, noting that inflation has remained low despite these policies.

Bessent remarked, “They were fear-mongering over tariffs, and thus far we have seen very little, if any, inflation.” He also expressed frustration with the Fed’s staff, stating, “All these PhDs over there, I don’t know what they do.”

Investors appear to be anticipating that the FOMC won’t cut the FFR next week, but will signal that a September cut is likely. Fed Chair Jerome Powell may have to turn more dovish to avoid having two Fed governors (Christopher Waller and Michelle Bowman, both appointed by Trump) dissent next week.

At the same time, investors must also wonder if the stock market rally might be about to be walloped by Trump’s August 1 tariffs, after all, if they are too high and are countered with higher tariffs on US goods exported to the rest of the world. There is also a seasonal tendency for S&P500 rallies to stall in August and weaken during September before experiencing a year-end rally.

Corporate news in Australia

-Media reports suggest Fletcher Building ((FBU)) is considering selling its construction division.

-CC Capital looks set to takeover Insignia Financial ((IFL)) for $3.3bn.

-Perpetual’s ((PPT)) wealth unit has received bids from Bain Capital and AZ NGA for around $450m-$500m.

-Champion Iron Ore ((CIA)) has sold 45% of Canada’s Kami project to Nippon and Sojitz for CA$245m to co-develop the mine.

-Telix Pharmaceuticals ((TLX)) has been subpoenaed by the SEC over prostate cancer disclosures.

-Healthscope is moving ahead with plans to become a charitable organisation.

-WiseTech Global ((WTC)) announced restructuring plans to apply AI across the business which will result in redundancies.

On the calendar today:

-JP June Machine Tool orders

-US June existing home sales

-GENERATION DEVELOPMENT GROUP LIMITED ((GDG)) Qtr update

-ILUKA RESOURCES LIMITED ((ILU)) Qtrly update

-NORTHERN STAR RESOURCES LIMITED ((NST)) Qtrly update

-PALADIN ENERGY LIMITED ((PDN)) Qtr report

-WOODSIDE ENERGY GROUP LIMITED ((WDS)) Qtrly report

-WESTGOLD RESOURCES LIMITED ((WGX)) 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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