The Overnight Report: Mixed Messages & CPI

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            [8] => LNW
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This story features SANTOS LIMITED, and other companies.
For more info SHARE ANALYSIS: STO
The company is included in ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

SPI futures are suggesting a positive start on Wednesday, but CPI at 11am remains in focus.

Good morning,

Following a disappointing session locally yesterday, as early gains evaporated throughout the day, the Australian share market looks poised for yet another positive start on Wednesday.

Some caution should be expected ahead of the 11am release of CPI data.

Overnight, equities had a jump, pull, do-it-all-again session on mixed messages emanating from the war in Iran.

While US President Trump is talking about steady progress in negotiations, Iran’s deputy parliament speaker said the Strait of Hormuz will not reopen and there will be no negotiations.

As one newsletter put it: Markets Whiplashed by Trump’s Iran Rhetoric.

J.L. Bernstein: Wall Street’s Private Lending Machine Is Breaking Down

Big firms like Apollo $APO, KKR $KKR, and Ares $ARES spent years lending money to mid-size companies banks wouldn’t touch, then packaged those loans into funds and sold them to everyday investors promising 8% to 10% returns.

Problem is, those loans can’t be sold quickly like stocks, and now the borrowers are struggling.

The IMF estimates 40% of them have negative free cash flow.

So investors want out, the funds can’t pay everyone, and the gates are slamming shut.

Apollo told investors they’ll get less than half what they asked for, Ares is capping withdrawals too, and Moody’s cut a KKR fund to junk.

The sector has lost -US$265bn in market cap since September.

Anthropic Spooks the Software Trade

Anthropic released an update allowing its AI to take control of your computer to complete tasks autonomously.

Software stocks got hit hard in response.

The iShares software ETF $IGV is now down nearly a quarter this year as Wall Street prices in the possibility that AI agents replace the traditional SaaS business model faster than anyone expected.

Salesforce fell and Palantir led the losses.

National Australia Bank: 

The impact of the Middle East war on energy prices, input costs and supply chains was evident in the PMI reports released overnight with businesses reporting heightened uncertainty and inflationary pressures.

Central bank commentary continues to warn around the potential second round effects from the energy price shock, although caution appeared to be the consensus view.

News headlines on the Middle East remain mixed with Iran and Israel showing no sign of a letup and while the US administration continues to talk about formal discussions with Iran, the WSJ reported earlier this morning that the US is planning to deploy a team from the elite 82nd Airborne Division to the Middle East.

Market movements overnight have been contained but the support for bonds seen in the previous session was short lived with yields higher overnight.

It has been a choppy session for stocks and while European markets posted small gains, US equities are lower.

The USD is stronger, catching a bid on the above mentioned WSJ article.

The PMI reports released overnight have caught some by surprise given the swiftness in how inflationary pressures and weaker activity have impacted sentiment.

Of note was the UK PMI report where input costs rose at the fastest pace in more than three years driven by fuel, transportation and energy intensive raw materials.

The Eurozone composite PMI fell to a 10 month low of 50.5 (from 51.9) – with a drop in new orders and a rise in input costs. US composite PMI fell to 51.4 – near a one year low – with the fall largely driven by the services component as the manufacturing read surprised to the upside, rising to 52.4 (supported by a rise in production and new orders).

 Similar to the reads out of UK and Europe, companies in the US reported a spike in prices with the composite input prices index rising to the highest level since late 2022.

Turning to central banks – ECB members continue to point to being vigilant around second round effects from energy price shocks with the Dutch central bank Governor noting that second-round effects may be greater than in 2022 owing to more sensitive formation of inflation expectations.

San Francisco Fed President Mary Daly emphasized the need for the Fed to remain flexible given rapidly evolving risks, noting that too much forward guidance risks a false sense of uncertainty.

During yesterday’s session RBNZ Governor Anna Breman signalled that the RBNZ will not be rushing to raise rates in response to the Middle East conflict, noting that “a short-lived disruption and a temporary increase in petrol prices can — and should — be looked through from a monetary policy perspective if it is unlikely to have an impact on medium-term inflation”.

Equity markets reflect mixed performance overnight amid choppy trading. European stocks were little changed at the close while US stocks were weaker at the open and while these loses have been clawed back, US indices remain unchanged to lower on the day – NSADAQ the under-performer.

The geo-political backdrop remains in focus for most, but there was a reminder to start this week that the issues around private credit has not gone away.

Overnight the US$10.7 billion Ares Strategic Income Fund limited withdrawals to 5% of shares after clients sought to redeem 11.6%.

This followed the announcement on Monday from Apollo Debt solutions that it was imposing a similar cap following requests to withdraw 11.2% of shares.

Bond yields are higher with the front end of the US treasury curve under pressure following a weak 2-year bond auction. The US 2-year note auction tailed with a high yield of 3.936% vs 3.917% WI, while the bid to cover ratio came in at 2.44, down from 2.63 at the previous auction and lowest since May 2024.

There has been general support for the USD as safe haven flows return amid the ongoing geo-political uncertainty.

The AUD has been one of the worst performers in the past 24 hours, trading back below USD0.70.

While still well off the levels recorded earlier in the week oil prices have edged higher with Brent crude back above USD104 while WTI oil is above USD90 – both are up around 5%.

The Gold price has been steady at USD4,400 an ounce.

ANZ Bank:

Crude oil rebounded on fears of escalating tension in the Middle East. Despite President Trump pulling back from attacking Iran’s power infrastructure amid negotiations, signs of escalation in the conflict continue.

The Pentagon is looking to deploy a brigade combat team from the Army’s elite 82nd Airborne Division to the Middle East, according to the Wall Street Journal.

Several Arab states from the Persian Gulf have also expressed a willingness to join the US-Israel attacks on Iran, if critical infrastructure continues to be targeted. The developments helped walk back Monday’s price declines.

In the meantime, the impact of supply disruptions in the Middle East reverberate across the world.

Philippine President, Ferdinand Marcos Jr declared a year-long national emergency, as the conflict disrupts oil supplies.

He warned that grounding planes due to a shortage of jet fuel is a distinct possibility.

Across Asia, airlines are said to be reducing flights because of surging fuel prices. The demand for crude oil on the international market is expected to result in a surge in US exports.

Preliminary vessel tracking data from Kpler show at least 21 very large crude carriers are set to load on the US Gulf Coast next month. This signals a sharp jump in flows to Asia.

European gas prices dipped despite ongoing concerns about supply shortages. Hopes that talks between Iran and the US will end the conflict are the dominant issue in the market.

However, prices did pare the losses of late in the session after QatarEnergy declared force majeure on some supply contracts following last week’s attacks on its facilities.

Meanwhile, Iran has stopped gas exports to Turkey following an Israeli strike on its South Pars gas field last week.

Turkey is getting gas from Russia and Azerbaijan and has some stockpiles. But any sign of it dipping into the spot market will increase competition for LNG cargoes.

Those supply disruptions are already motivating some Asian countries to turn to alternative sources such as coal to cover the LNG shortfall. India is burning more coal, while South Korea has lifted caps on electricity from coal.

Copper’s recent recovery was short lived, as global inflation and growth concerns triggered by the Middle East conflict persist. That offset signs of increased buying from China in the lower price environment.

However, aluminium bucked the trend to end the session higher on the back on supply side disruptions.

The aluminium market is unsettled by the ongoing conflict, with some producers scaling back operations or suspending exports, as shipments of metal and raw materials through the Strait of Hormuz have effectively ceased.

Iron ore edged higher on supply side issues in Australia. A cyclone transiting the northeast coast is threating mining operations in the region.

Port Hedland, the world’s largest iron ore export port, is evacuating personnel. Further inland, open pit mines may also fall within the cyclone’s area of impact.

Gold oscillated as the market contemplated the impact of rising energy prices on monetary policy. Expectations of rate cuts by the Fed have significantly reduced over the past two weeks.

Konstantinos Chrysikos Head of Customer Relationship Management at Kudotrade:

Gold has stabilised to some extent after successive sessions in the red as markets continued to navigate increased uncertainty on the geopolitical direction in the Middle East.

While tensions and oil prices remain elevated, concerns about inflation and rising yields could continue to pose risks to gold.

At the same time, hopes of progress toward resolving the tensions could reduce the impact on the metal. As a result, the market could continue to react to new developments in the Middle East.

During the last three weeks, ETF flows remained negative, which could leave gold exposed to more downside if the trend continues.

A decline in tensions and a retreat in Treasury yields and the dollar could help reverse the direction in investment flows and gold recover as it continues to find support from other factors.

Ongoing tensions in Eastern Europe and continued central bank accumulation could limit downside risk in the meantime, and could support a recovery over the long term.

Corporate news in Australia

-Santos ((STO)) suffers breakdown at its brand new $6bn Barossa gas project in the Timor Sea forcing a shutdown of the company’s recently restarted Darwin LNG plant

-Domain Holdings ((DHG)), owned by CoStar, is undercutting REA Group’s ((REA)) price hikes to gain market share

-Commonwealth and Queensland governments have agreed a 10-year deal with Rio Tinto ((RIO)) to run its massive Boyne aluminium plant on clean energy

-Oracle launched an AI centre in Sydney to support businesses in adopting cloud and AI technologies

-Downer EDI ((DOW)) secured a $500m, five-year facilities management contract with Stockland ((SGP))

-Australian Prudential Regulation Authority warns climate risks may raise uninsured homes

-Telstra ((TLS)) is raising mobile plan prices, again

On the calendar today:

-AU Feb CPI

-JP BOJ Jan MonPol Minutes

-UK Feb CPI, PPI

-US Feb Import prices

-US Q4 Current Account

-FLIGHT CENTRE TRAVEL GROUP LIMITED ((FLT)) ex-div 12c (100%)

-LIGHT & WONDER INC ((LNW)) Hospitality/Gaming Roadshow

-NAOS EMERGING OPPORTUNITIES CO. LIMITED ((NCC)) ex-div 2.10c (100%)

-PERENTI LIMITED ((PRN)) ex-div 3.25c

-WASHINGTON H. SOUL PATTINSON AND COMPANY LIMITED ((SOL)) earnings report

-SERVICE STREAM LIMITED ((SSM)) ex-div 3c (100%)

-TUAS LIMITED ((TUA)) FY26 earnings 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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