The Overnight Report: No Recovery Rally

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            [0] => ((CYL))
            [1] => ((CSC))
            [2] => ((IPX))
            [3] => ((ORA))
            [4] => ((LFS))
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            [0] => CYL
            [1] => CSC
            [2] => IPX
            [3] => ORA
            [4] => LFS
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This story features LATITUDE GROUP HOLDINGS LIMITED, and other companies.
For more info SHARE ANALYSIS: LFS
The company is included in ALL-ORDS

Oil first rallied, then retreated. Equities played the opposite card, recovering toward the close of trade.

SPI futures are indicating no enthusiasm for a recovery rally locally on Friday.

Yesterday's session in Australia was brutal. European markets suffered even more.

The Aussie dollar strenghtened overnight.

Good morning (but is it?),

That sound we’re all hearing in the background is one big sigh from investors, glad the world has yet again escaped maximum oil damage, but also expressing disappointment the Strait of Hormuz saga continues with no end in sight.

Clearly, the price of oil, and the damage to global economy, is front and centre inside the White House and for its Israeli ally in this war. 

As the oil price spiked once again, Israel’s prime minister said his country would not target any more Iranian energy assets and Israel is helping the US reopen the Strait of Hormuz.

Trump repeated putting boots on the ground in Iran remains a non-option.

As the price of oil declined (more so in the US than elsewhere) equities staged a cautious recovery from earlier falls.

SPI futures are suggesting no enthusiasm for a Friday recovery for the ASX, however.

J.L. Bernstein:

Brent hit US$119 this morning and the Dow was down almost -500 points.

By afternoon, oil reversed below US$95 after Netanyahu said the war could end sooner than people think and Trump ruled out ground troops.

Stocks clawed back to nearly flat. Three weeks into this conflict and I think the market is running out of patience for headlines that don’t lead anywhere.

Treasury Secretary Bessent floated lifting sanctions on 140m barrels of Iranian oil already at sea.

That pulled Brent back to around US$106 and WTI near US$94. The WTI-Brent spread blew out past US$17 intraday, widest since 2013. That gap tells you how insulated U.S. supply is versus the rest of the world.

Konstantinos Chrysikos, Head of Customer Relationship Management at Kudotrade:

Gold extended its losing streak on Thursday, falling to its weakest point in multiple weeks as interest rate expectations continued to shift toward fewer rate cuts.

The Federal Reserve kept its interest rates unchanged as inflationary concerns continue to be fueled by rising oil prices. With forecasts now pricing out near-term easing entirely, pushing the first expected cut until next year, yields have firmed, eroding gold’s appeal as a non-yielding asset.

Looking ahead, gold’s near-term trajectory could remain weighed down by the current inflationary concerns. In this regard, the market could remain exposed to the developments in the Middle East and their impact on energy prices.

The current limited visibility for an off-ramp for the tensions in the region could continue to put pressure on gold. New economic data could also affect the metal to a certain extent if monetary policy views change drastically. Today’s jobless claims data could shed some light on the state of the job market, although its impact could be limited under current conditions.

J.L Bernstein: Gold Takes a Beating From Record Highs

Gold is having its worst week since 1983, falling below $4,600/oz after a seven-session losing streak.

The selloff looks ugly in isolation but context matters here. Gold hit an all-time high of US$5,608 in January and is still up more than 51% year-over-year.

What’s driving the pullback is straightforward: rate cut hopes are dead, the dollar is strengthening, and zero-yield assets look bad when bonds are paying you.

Same dynamic played out in 2022 after Russia invaded Ukraine. I think this is a shakeout from extreme levels, not the end of the gold trade.

Damian McIntyre, Head of the Multi-Asset Solutions at Federated Hermes:

Commodity Ripple Effects Deepen

The ‘second-order’ effects of the higher oil price and the closure of the Strait of Hormuz are now being seen as the cost of other commodities begins to rise.

As just one example, Qatar accounts for some 30% of the world’s helium output as a byproduct of Liquefied Natural Gas processing.

But it’s other areas too. The price of urea –-a crucial component of agricultural fertilizers-– has surged. So has the price of plastics feedstocks in the form of Polypropylene (PP) and polyethylene (PE). All three are derivatives of oil and natural gas production and processing so it’s not surprising they’ve been affected.

But even other areas such as aluminium have been hit. Again, this shouldn’t be a surprise as Gulf producers account for around 9% of global aluminium output so, of course, the closure of the Strait of Hormuz will make a difference.

National Australia Bank:  

The Bank of England, in announcing a unanimous (9-0) decision to keep rates at 3.75%, said that all members ‘stand ready to act’ to contain inflation and that it is alert to second round effects from the energy price shock.

While this was not a meeting at which new forecasts were due, the BoE did say it now sees inflation at 3% in Q2 (not the fall back to close to 2% previously expected) and that there is a risk of 3.5% in Q3. Post the meeting,

Governor Bailey made an appearance before the media in which he cautioned against strong conclusions about BoE rate hikes, noting rates are already high, demand relatively soft and that the BoE is facing a ‘very different context’ than in 20-22.

This did see market pricing for a 30 April rate hike pared back, but we still ended the day with a 60% chance of quarter point move next month (from zero before the meeting).

Post the ECB meeting at which the key Deposit Rate was left at 2%, the ECB says that the war poses upside inflation risk, downside growth risks and that the ECB is well positioned to navigate this uncertainty, noting longer term inflation expectations are well-anchored. 

Subsequent source stories, that as usual have come from the more hawkish side of the ECB governing Council spectrum, indicates the possibility of an April rate hike, or at least the start of a discussion about one, the suggestion being that June is currently seen as a more likely date for a hike than April but that the latter in not out of the question depending on the course of energy prices between now and then.

The Swiss National Bank was also unchanged, at 0.0%. Afterwards SNB chief Schlegel suggested increased tolerance for CHF strength to quell the inafltion impact of oil prices, while reiterating that the bar to negative rates remains ‘elevated’. The Swedish Riksbank was also unchanged as expected and says it expects rates to remain at the current 1.75% for ‘some time to come’.

Data offshore Thursday has been summarily ignored by markets. UK labour market data, on another day, might have sealed the deal for a March BoE rate cut given UK earnings growth was softer than expected, particularly for private weekly earnings excluding bonuses, down to 3.3% from 3.4% against a rise to 3.5% expected.(and whole-economy weekly earnings ex-bonuses down to 3.8% from 4.2%). 

Weekly US jobless claims were a lowly 205k (215k expected) though this might be painting a somewhat flattering picture of labour market strength/resilience given that new entrants (e.g. recent graduates) can’t claim, while more currently unemployed people have been so for more than 26 weeks so no longer entitled to benefits. Elsewhere, US New Home Sales were much weaker than expected (down 17.6% in January) though winter snowstorms in late January likely explain this.

The Philly Fed Business Outlook index rose to 18.1 from 16.3 against an expected fall to 8.0.

Yesterday’s February local labor market report saw the unemployment rate lift to 4.3% from 4.1 % (4.1% consensus) despite strong employment growth of 49k (+30k NAB, +20k consensus).

The rise in unemployment was alongside a two tenths rise in participation to 66.9%, back to where it was in October last year. Although the unemployment rate rose, employment growth was strong and other indicators such as the underemployment rate (5.9%) and employment-to-population ratio (64.0%) were steady and consistent with a labour market that remains somewhat tighter than the RBA considers consistent with full employment.

This isn’t expected to have a material impact on the RBA but at the margin will reduce emerging concerns that the labour market was even tighter than they had assessed in February.

In markets, bonds are in a world of hurt driven by the prospect of higher central bank policy rates in response to oil and gas price-driven jumps in inflation, led by the UK short end where 2-year gilts are up 30bps on the day post the BoE.

German 2-year yields are up 14.5ps post the ECB, Canada 13bps and the US 8bps. Smaller moves at the longer end, so pronounced bear curve flattening, US 10s up just 0.6bps, UK gilts +11bps and Germany about 2bps.

10-year Australia futures were up as much as 8.5bps on Thursday’s local close before paring the yield gain to 4bps later in the overnight session.

In equity markets, losses have been led by Japan (Nikkei -3.4%) followed by Europe with the Eurostoxx 600 off -2.4% led by a -2.8% drop for the German DAX. UK FTSE also down -2.4%.

US market losses have been smaller coming into the close, with the NASDAQ and Dow Jones each off -0.3% and the S&P 500 showing a small (0.1%) gains and the Russell 2000 a bigger 1.4% rise.

In FX shifts in central bank rate expectations have dominated the continued risk-off equity market tone to see the US dollar broadly weaker (DXY -1.05%, BBDXY 0.75%).

GBP, JPY and EUR gains drive the bulk of the USD index losses, USD/JPY down1.4% (April BoJ rate hike pricing is up to 62% from 54%), EUR/USD up 1.2% 1.1587 and GBP/USD 1.4% to 1.3435.

NZD has outperformed AUD, but both are stronger, NZD by 1.4% and AUD 0.9% to 0.7090.

In commodities the European gas price benchmark jumped 30% on the Qatar gas field damage reports before easing back to end Thursday up 15%. Brent crude rose to as high as $119 before slipping back to just below $110 in afternoon US trade.

Elsewhere demand destruction or fears thereof remains the dominant theme, with copper off 2.3%, zinc 2% and aluminium 4.6%. Gold is off another 6.5% to $4,625 while iron ore is little changed.

In credit market, spread widening in Europe continues with sub-investment grade debt suffering much more than investment grade. The iTraxx crossover index finished up 12bps at 312.7, with iTraxx Europe (IG) out 3bps to 65.4 and US IG up just 0.5bp to 61.3.

US cash bond spreads were overall flat but with financials continuing to underperform, its sub-index out 1.8bps. Issuance has all but dried up in Europe (no IG sales Thursday) while Bloomberg says that three planned US IG issuers stood down amid current market volatility.

Corporate news in Australia

-Star Minerals completes conditions to sell project to Catalyst Metals ((CYL)) for $2.75m

-Capstone Copper ((CSC)) mulls $600m-plus sale of Cozamin mine

-NSW bans new greenfield coal mines, allows extensions of existing operations

-IperionX ((IPX)) faces short seller pressure after accounting error sparks concerns

-Orora ((ORA)) names Paul Victor as CFO, replacing Shaun Hughes who is relocating to France

On the calendar today:

-NZ Feb Trade Bal

-JP Public Holiday

-EZ ECB Main refinancing rate

-US Jan New Homes sales

-LATITUDE GROUP HOLDINGS LIMITED ((LFS)) ex-div 5c (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.

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