The Overnight Report: Oil Surges, SaaS Rallies

Array
(
    [0] => Array
        (
            [0] => ((BHP))
            [1] => ((BMN))
            [2] => ((GMD))
            [3] => ((BSL))
            [4] => ((BHP))
            [5] => ((MAF))
            [6] => ((MQG))
            [7] => ((ALX))
            [8] => ((MFG))
            [9] => ((ABB))
            [10] => ((ALD))
            [11] => ((BMN))
            [12] => ((CMM))
            [13] => ((GMD))
            [14] => ((LM8))
            [15] => ((OCL))
            [16] => ((RMC))
            [17] => ((RMC))
        )

    [1] => Array
        (
            [0] => BHP
            [1] => BMN
            [2] => GMD
            [3] => BSL
            [4] => BHP
            [5] => MAF
            [6] => MQG
            [7] => ALX
            [8] => MFG
            [9] => ABB
            [10] => ALD
            [11] => BMN
            [12] => CMM
            [13] => GMD
            [14] => LM8
            [15] => OCL
            [16] => RMC
            [17] => RMC
        )

)

This story features BHP GROUP LIMITED, and other companies.
For more info SHARE ANALYSIS: BHP
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

US markets recovered off intraday lows (again) with the Dow Jones experiencing the brunt of the selling while Nasdaq fell moderately, down -0.3%.

Investors continued to rotate out of the winners, industrial stocks and investment banks, into beaten down software stocks.

After a positive day yesterday, ASX200 futures are indicating a steep retreat today,

Will local software stocks follow the overseas lead?

Good Morning,

The Australian market retraced some of its losses from the previous two trading sessions on Thursday.

The ASX200 rose 39 points, or 0.4% to 8,940.

Technology stocks led the rally, up 4.5% and Materials lagged as BHP Group ((BHP)) went ex-dividend.

For those who thought the results season is now fully in the past, today sees a number of smaller sized mining companies release their financials, including uranium mine developer Bannerman Energy ((BMN)) and gold producer Genesis Minerals ((GMD)).

NAB Markets Today Research extract

The stock-bond correlation remains broken as tensions in the Middle East continue and inflation and growth concerns feed into financial market price action. Yields have surged overnight, led by Europe as investors re-think cash rate expectations amid fears of an inflationary supply shock as the rise in gas and oil prices persists. 

Clearly the length of the Middle East conflict is key to whether there will be a protracted negative energy supply shock, but for now investors are pricing in this risk as the shift higher in oil and gas prices continues. 

Developments overnight in the US-Iran conflict have not allayed fears this conflict could last for some time. Iran’s foreign minister has said there is no reason for talks, and that Iran had not asked for a ceasefire (which follows reports earlier in the session that Iran had asked for talks).

Fuelling investor fears around inflation and re-pricing on central banks has been central bank commentary. There have been several central bankers out overnight discussing the upside risk to inflation if the Middle East tensions persist.

While there is a recognition of the potential negative growth impact, for now, it is the former that appears most pressing in central bankers’ minds. 

ECB Nagel (who is at the hawkish end of the spectrum) sees, at least for now, the Middle East tension impacting euro-area inflation more than growth, and that the ECB’s commitment to delivering price stability remains firm. 

Fed Barkin said in a Bloomberg TV interview that “Textbook monetary policy would be you look through a short-term shock, but you don’t look through a long-term shock, and I think that’s a lot of the assessment people are going to have to make.” 

He also noted recent and expected data reflects “a couple months of relatively high inflation,” which “certainly puts pause to any conclusion that we’re done fighting this.”

In terms of data flow a round of positive US labour market data supported the re-pricing of Fed expectations. US initial jobless claims were unchanged at 213k (and slightly better than expected). 

Claims continue to track below year-ago levels and remain at a level that is consistent with a low pace of layoffs. Challenger and Co. reported only 48k job layoffs for February, the lowest February figure in four years, while the year-to-day total is down -2% on last year. US productivity growth was stronger than expected for Q4, at an annualised 2.8%.

For bonds, the unwinding of rate cut expectations has resulted in bear flattening overnight, but since last Friday the move across rates has been uniform. 

In terms of the re-think on central banks, it has been the ECB where the re-pricing has been greatest given the economies’ reliance on energy imports. The EUR OIS curve currently prices a cumulative 16bps of hikes by year end versus pricing cumulative -6bps of cuts priced late last week. 

The GBP OIS curve prices cumulative -23bps of cuts by year end (from -53bps of cuts priced late last week) while the US OIS curve prices cumulative -38bps of cuts (from pricing -56bps late last week). 

Closer to home the AU OIS curve prices cumulative 52bps of tightening by year end (from 36bps late last week). To put this in context in terms of the re-pricing in yields, US 2-year and 10 year bond yields are up around 20bps from Friday’s close; 2-year and 10-year Bund yields are up 24bps and 20bps, respectively; 2-year and 10-year Gilts are up 28bps and up 30bps, respectively while AU 3-year and 10-year bond futures are around 20bps higher in yield.

Equity markets are weaker overnight amid growth concerns. No surprise the energy sector is leading gains in US stocks while consumer staples, health care and industrials are leading the decline. Weighing on the US market was a news report that US officials have written draft regulations that would restrict AI chip shipments to anywhere in the world without US approval.

As for commodities, precious metals have seen selling pressure overnight with price action seen to be more a reflection of it being a source of liquidity rather than there being a change in view on fundamentals. Also weighing on the gold price were reports the Polish central bank chief said they were weighing up gold sales to pay for defense. 

The oil price has surged higher, above US$80/bbl intraday, with supply fears fueled by reports China has told major refiners to suspend exports of diesel and gas amid efforts to prioritise domestic needs.

The USD is stronger overnight with risk sensitive currencies under-performing — the AUD has slipped back below 0.70.

The Bloomberg dollar index is currently up around 1.6% on the week and if these gains are held into the end of the week, this will be one of the best weeks for the dollar since September 2022.

How will central banks respond to the Iran conflict? Michael Saunders, Oxford Economics extract

The old mantra that central banks are likely to look through the inflationary effects of energy price shocks no longer applies, at least not everywhere.

The new central bank playbook is to lean against risks that energy price shocks feed through to inflation expectations, and to adopt a robust approach that seeks to avoid major policy errors in a range of plausible outcomes.

Based on our analysis, the Eurozone and the UK are relatively vulnerable to potential second-round effects from the energy price surge triggered by the Iran conflict.

The US, Japan, Canada, and smaller non-euro European economies (Sweden, Switzerland, Norway) are less exposed.

Using our Global Economic Model, our updated energy price assumptions suggest inflation in Q4 this year for the UK and Eurozone will be roughly 0.5ppts-0.6ppts higher than previously expected – a greater impact than elsewhere.

However, the length and magnitude of the energy spike is highly uncertain. Our updated assumptions assume the energy price shock is relatively short-lived, but the effects on inflation and risks of second-round impacts will be greater if the conflict is more drawn out.

Against this backdrop, the Bank of England’s Monetary Policy Committee is likely to remain on hold for now, keeping policy in restrictive territory.

The European Central Bank is also likely to keep rates on hold in the near-term. But with rates already at a roughly neutral level, the ECB may opt to tighten this year if the surge in energy prices persists.

We still think the Federal Reserve is likely to ease gradually this year because at this stage the inflation effects of the energy price surge are likely to be relatively modest. That may change.

Until recent years, the standard approach by advanced economy central banks was to look through energy price shocks and not adjust monetary policy either way. 

In general, central bankers believed an energy price spike would cause a temporary inflation blip but have no lasting effects either way. 

This rested on two assumptions: (1) inflation expectations were well anchored and would not respond to the initial energy-driven rise in inflation; and (2) by eroding real incomes, higher energy prices would lead to softer growth that would provide a dis-inflationary offset.

With these assumptions, central banks generally believed an energy-driven inflation spike would not generate any second-round effects on pay or firms’ pricing strategies. 

Hence, when the direct effects of higher energy prices on inflation faded after a year or so, inflation would return to target anyway, without any need for a policy adjustment. All this would happen well before the typical horizon (18-24 months) at which monetary policy has its full effects.

If a central bank hiked rates in response to an energy-driven rise in inflation, it would probably face a medium-term inflation undershoot as effects of that tightening came through, after inflation had already fallen back. 

So, it would be unnecessary, and indeed counter-productive, to adjust monetary policy either way to the initial energy shock.

However, the experience of the last few years has shown that approach may no longer be valid.

Inflation expectations are not as well anchored as central banks had hoped, and hence an energy-driven inflation surge can create persistently higher inflation. 

The recent inflation spike (triggered by post-pandemic supply constraints and the energy price surge of 2022-23) led to significant increases in short- and longer-term inflation expectations. 

These fed through to higher pay deals and shifts in firms’ pricing strategies. Workers sought to recoup lost real wages and protect themselves against future price hikes, while –-with inflation expectations higher-– firms believed they could pass on extra costs to prices.

In countries with sharply higher energy prices, many governments responded with fiscal loosening to cushion the adverse effect on households’ real incomes and firms’ profits.

Hence, higher energy prices did not cause as much weakness in real activity –-and resulting disinflationary pressures from higher spare capacity-– as initially expected.

Straitjacket: Iran’s Chaos War Strategy, Ed Yardeni, Yardeni Quicktakes extract

On Tuesday, we warned: “We’ve been expecting a pullback due to excessive bullish sentiment, but now we expect a 10% correction from the high. It’s hard to imagine that the IRGC won’t use drones and speed boats to maintain their effective blockade of the Strait. If they are successful in doing so, the correction could be closer to 15%.”

When the war started, our initial thought was it might be a short one, given Iran’s government had been decapitated during the first hour of the war.

On Tuesday, we had second thoughts about the length of the war. The Iranian regime had prepared for the war by adopting a chaos strategy, launching missiles and drones not just at US and Israeli targets, but at its neighbours as well.

The strategy includes shutting down the Strait of Hormuz to all shipping.

By causing all this pain, Iran’s regime hopes it will pressure its adversaries to negotiate a ceasefire that keeps the regime in power.

Today, we read a Bloomberg article by James Stavridis, a retired US Navy admiral, titled “Iran Can Turn the Persian Gulf Into a Minefield.” 

The Admiral noted Iran has hundreds, if not thousands, of the small “fast mover” speedboats that can harass civilian shipping. 

In addition, he stated Iran “has been planning a Strait of Hormuz closure operation for decades and probably has more than 5,000 mines; just one hit can severely damage a thin-skinned tanker.” 

The US and its allies have minesweepers, but not enough of them. Oil prices rose again this morning on a report that Iran had struck an oil tanker with a missile in Iraqi territorial waters.

Stock prices fell on this news. In addition, the Trump administration dropped a bombshell on the semiconductor industry today. According to a Bloomberg report released this afternoon, the administration has drafted sweeping new regulations that would give Washington unprecedented control over global sales of AI chips from companies like Nvidia and AMD.

Soaring oil prices have driven up US bond yields since the war started. The longer the war lasts, the more it will straitjacket the Strait of Hormuz, increasing the risk of stagflationary economic outcomes in the US and other countries. In this scenario, the Fed would be in a straitjacket too, unable to cut rates because of rising inflation, even if the economy weakens.

So far, the increase in the 10-year Treasury bond yield has been relatively small because the rise in oil prices hasn’t boosted inflation expectations. However, in the past, there has been a strong correlation between the two variables.

If oil prices continue to rise, they are likely to boost inflationary expectations and the bond yield.

The only hedge against the war so far has been energy stocks and commodities. Gold hasn’t worked because the war has boosted the dollar’s foreign exchange value, as the US economy is likely to be more resilient to rising energy prices than most other countries.

Foreign stock markets are down more than the US stock market since the start of the war.

Rising oil prices are weighing on emerging market economies that import oil. The rising dollar is also weighing on the stock prices of emerging economies . 

In our opinion, this should prove to be a buying opportunity if the war ends soon, with shipping returning to normal in the Strait of Hormuz.

That’s still a likely scenario given the damage that Iran is experiencing.

Corporate news in Australia

-POSCO has criticised BlueScope Steel ((BSL)) over tariff protections while takeover discussions valued at $14.2bn continue

-Chinese authorities have warned traders against reselling BHP Group’s ((BHP)) iron ore cargoes as enforcement tightens

-The sale process for waste management company Bingo has shifted to a US led Moelis ((MAF)) team as Macquarie Group ((MQG)) and lenders explore buyer options

-Atlas Arteria’s ((ALX)) acquisition strategy has raised shareholder concerns, particularly about its increasing exposure to French toll roads

-Radiology group I-MED has appointed Barrenjoey ((MFG)), JPMorgan and Morgan Stanley to work on a potential IPO later this year

-KKR is looking at options to sell its disability housing investment, Synergis, for as much as $1bn

-Miami based, Starwood Capital is reported as bankrolling Blackstone’s $1.2bn purchase of Hamilton Island

-IPO hopeful SkinKandy has been out marketing this week, post initial guidance of a circa $299m raising and $400m valuation

-Pay.com.au is boosting its board in anticipating of its IPO

-London-listed Foresight is selling a 29.1% stake in Flinders Port Holdings, the largest seaport landlord in South Australia

-Salter Brothers and Kilara Capital have completed their first private equity deal through a joint venture, acquiring an 80-year-old battery wholesaler

-Corporate services provider Boardroom Pty Limited is preparing for a potential sale as it expands across Asia and interviews investment banks

-Online fashion retailer The Iconic has posted its first profit after 15 years, driven by technology upgrades and tighter cost control

On the calendar today:

-EZ 4Q GDP

-US Feb Unemployment rate

-US Jan Import Price Index

-US Jan retail sales

-AUSSIE BROADBAND LIMITED ((ABB)) ex-div 2.40c (100%)

-AMPOL LIMITED ((ALD)) ex-div 60.00c (100%)

-BANNERMAN ENERGY LIMITED ((BMN)) earnings report

-CAPRICORN METALS LIMITED ((CMM)) earnings report

-GENESIS MINERALS LIMITED ((GMD)) earnings report

-LUNNON METALS LIMITED ((LM8)) earnings report

-OBJECTIVE CORPORATION LIMITED ((OCL)) ex-div 13.00c

-RESIMAC GROUP LIMITED ((RMC)) ex-div 4.00c (100%)

-RESIMAC GROUP LIMITED ((RMC)) ex-div 9.00c (100%)

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.

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)

All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts on the website and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.

Find out why FNArena subscribers like the service so much: “Your Feedback (Thank You)” – Warning this story contains unashamedly positive feedback on the service provided. www.fnarena.com

FNArena is proud about its track record and past achievements: Ten Years On

Click to view our Glossary of Financial Terms