The Overnight Report: Dow Steals The Show

Array
(
    [0] => Array
        (
            [0] => ((EBR))
            [1] => ((TLS))
        )

    [1] => Array
        (
            [0] => EBR
            [1] => TLS
        )

)

This story features EBR SYSTEMS INC, and other companies.
For more info SHARE ANALYSIS: EBR
The company is included in ALL-ORDS

US markets moved risk on again as oil prices weakened and investors rotated out of outperforming chips stocks into healthcare and financials, pushing the Dow Jones to a fresh record.

The Nasdaq lagged overnight.

After a weak performance on Thursday, ASX200 futures are signalling a positive start to Friday.

Good Morning,

The Australian market fell on Thursday with the materials sector leading the decline, down -3.2%. Utilities and consumer staples outperformed.

The ASX is closed on Monday for a public holiday.

For more details see https://fnarena.com/index.php/financial-news/calendar/

And to stay up to date on earnings season, check out the Corporate Results Monitor

https://fnarena.com/index.php/reporting_season/

Today’s Big Picture, J.L.Bernstein

Broadcom’s Miss Sparks a Rotation 

Broadcom $AVGO beat on earnings, but its AI chip forecast came in below what Wall Street was hoping for.

Investors took it as a reason to book profits on chips and rotate into banks and health insurers.

Around US$300 billion in market value vanished in one session, one of the worst single-day losses ever.

I think it’s a healthy breather, trees don’t grow to the sky.

Oil Eases, but the Supply Math Stays Tight

Crude pulled back after Israel and Lebanon agreed to renew their ceasefire, clearing a roadblock in the US-Iran talks.

Look past the price and the picture is tighter: spare supply is thin and the Strait of Hormuz is still choked.

A deal might not fix the underlying math.

Bitcoin’s Worst Week Since February 

Bitcoin is getting hit hard and has lost its grip on the market’s attention.

The trigger came today. Strategy, the biggest corporate holder, sold Bitcoin for the first time since 2022.

It was a small slice of their pile, but when the loudest buyer turns seller, people notice.

The money is rotating into the chip rebound and new listings instead.

ANZ Bank, Australian Morning Focus

Equity markets were firmer overnight as oil prices fell following a ceasefire agreement between Israel and Lebanon. The S&P500 was up 0.4%, and the Dow up 1.7%, even as AI stocks took something of a breather, with the Nasdaq unchanged. 

The EuroStoxx50 closed up 0.8%, and the FTSE 100 rose 0.3%. The yield on the US 10y Treasury note fell -2bp to 4.47%. Oil prices eased with WTI down -3.0% to US$93.0/bbl. Gold rose 0.9% to US$4,474.9/oz.

US labour productivity rose 2.8% y/y in Q1, maintaining the trend rise that has characterised the US economy in the post-pandemic years. There are many explanations for this, not least of which is the realignment of many workers to more productive firms following the pandemic lockdown. 

Strong productivity growth is disinflationary as workers can produce more output per hour worked. The gap between productivity growth and real wage growth has been widening at an increasing rate in recent decades and partly explains the strong performance of US equity markets. 

Euro area retail sales fell -0.4% in April, slightly weaker than expectations for a -0.3% fall, though this was tempered by upward revisions and came off a strong month. Automotive fuel sales volumes were down -2.7% in response to higher prices

US May nonfarm payroll data, due Friday, are expected to show hiring rose 85k last month, down from 115k in April but signalling that the labour market is stabilising, albeit at weak levels. The unemployment rate is expected to have been stable at 4.3%, held down by this year’s -0.6ppt decline in the participation rate to 61.8%. 

Average hourly earnings are projected to have risen 3.4% y/y, down from 3.6% in April, indicating the labour force is not a significant source of inflation. 

The FOMC will enter its communications blackout on Saturday, so there is little time left for members to comment on the data.

However, senior members have recently set a clear framework for assessing the current environment: there is no urgency to change interest rates given current energy prices and geopolitical uncertainties, but the effects of higher energy prices should prove transitory with inflation expected to fall back later this year. 

We think the underlying bias among the Board of Governors is to extend the rate cutting cycle once conditions allow.

June Swoon? Ed Yardeni, Yardeni Quicktakes extract

So far, the S&P500 bottomed this year on March 30 in response to the latest Gulf War. Since then, Fabulous Earnings Momentum (FEMO) during the Q1 earnings reporting season fuelled a remarkable 19.1% rally in the index, led by an amazing 44.5% increase in the S&P500 Information Technology sector.

On Tuesday, we raised the caution flag, suggesting a possible pullback over the next few weeks. We are concerned about warnings from Exxon and Chevron executives that global crude oil inventories are so low that the crude oil price could spike to US$150 a barrel unless the war ends very soon. 

We also expect the FOMC to pivot from an easing bias to a tightening bias at the committee’s next meeting later this month. We then expect the FOMC to raise the federal funds rate by 25bps in July. 

The financial markets are also expecting a rate hike, but late this year. The SpaceX IPO should be a big hit because everyone knows Wall Street has bent the rules to ensure the stock price soars initially. 

However, that could cause lots of volatility if a price spike triggers a wave of profit-taking. 

In any event, we view any pullback as a buying opportunity and maintain our 8250 target for the S&P500 by year-end. 

Might there be more FEMO ahead? 

Yes, but it might already be discounted by the market, making it vulnerable to even slight disappointments. A case in point is Broadcom’s -13% after-hours sell-off today, when the company’s solid earnings report was somewhat weaker than expected. 

S&P500 forward earnings is up 26.6% y/y through May. That’s as good as FEMO gets historically, with the exception of post-recession recoveries. 

Meanwhile, it is puzzling that oil prices remain around US$100 a barrel, despite warnings from oil industry leaders of much higher prices ahead. Apparently, oil tanker owners are paying Iran a “toll” to allow them safe passage out of the Persian Gulf. Russia is selling lots of oil to China and India.

The 2-year US Treasury yield is a good leading indicator of the federal funds rate (FFR). It is up to 4.08%, exceeding the current 3.50%-3.75% FFR range. 

It is anticipating a Fed rate hike in response to recent hotter-than-expected inflation reports and stronger-than-expected employment indicators. 

Another concern is that Q1’s FEMO seems to have stimulated irrational exuberance about the long-term earnings growth (LTEG) prospects of the S&P500.

Analysts’ heady expectations for LTEG are mirrored in the Nasdaq’s vertical ascent as well as momentum ETFs, semiconductors ETFs, quantum computing stock prices, emerging market ETFs bolstered by AI bets on Taiwan and South Korea.

Then again, some of the froth seems to be coming out of the Magnificent-7.

Last but not least, our two favourite  bull/bear rations remain relatively subdued, suggesting any pullback should be modest.

The cost of staying bullish, Ipek Ipek Ozkardeskaya, Swissquote

The persistent rise in oil prices amid multiple strikes in the Middle East sent oil prices toward US$100pb. And this time, rising oil prices dented risk appetite across major equity markets.

The S&P500 halted a 9-day rally as yields rose on inflation bets. Stronger-than-expected US data — a higher-than-expected ADP jobs report and a faster-than-expected expansion in ISM services — also supported the view that the US doesn’t need a rate cut in the coming months, not when the inflation threat is looming alongside Middle East uncertainties.

Indeed, the same set of data warned that input prices rose at the fastest pace in almost four years.

Not helping, tariffs were brought back onto the table. Yes, the Trump administration is now willing to slap 10%-plus tariffs on 60 trade partners to replace the current Section 122 tariffs that are set to expire — pointing at — drum roll — forced labour! Forced labour concerning partners such as the EU, the UK and Switzerland!

Fresh tariffs are, of course, no good news when it comes to inflation expectations. But no one knows whether they will remain in place, be ruled illegal, or be changed overnight. 

Some say the latest tweaks won’t increase the average tariff rate by much, anyway.

So, tariffs or not, activity in Federal Reserve (Fed) funds futures today gives a near 40% chance of a rate hike by October already. Higher energy prices compared to pre-Iran war are enough to justify a Fed reaction to a prolonged period of heavy supply disruption.

Note that this is a notable hawkish shift compared to pre-Iran-war expectations of two to three cuts this year.

So, as we progress toward the second half of this eventful week, hopes for lower – and even steady US rates evaporate by the day.

In reaction, the US dollar gained yesterday, supported by both stronger-than-expected economic data fuelling hawkish Fed expectations and higher oil prices, which are negotiated in US dollars.

Broadly, the Fed, the European Central Bank (ECB) and the Bank of England (BoE) may have resisted rate hikes in the first weeks of the Iran war, but many central banks, including Australia, Norway and several emerging-market central banks, took that step and raised rates.

The ECB is expected to hike its policy rates next week, while the BoE could hold fire at its next meeting but will have to face the ugly truth of rising price pressures at one of the subsequent meetings and hike as well.

What does it mean for broader markets?

It means trouble.

We have seen major equity indices rally regardless of rising global yields, ignoring Middle East risks, rising yields and/or prematurely pricing in the end of the war. But the prolonged war and notably higher oil prices do have concrete implications — notably for central bank policies — and those implications echo through economic activity, including investment decisions, income prospects and profit outlooks.

While earnings expectations — especially in technology-heavy economies such as the US, Taiwan and South Korea — are tilted to the upside on AI spending, the rest of the economy finds itself struggling with higher borrowing costs, supply-chain disruptions (due to the Iran war and trade war) and a weakening economic outlook.

If Middle East disruptions persist into 2027, global growth would slip to 1.8%, warned the OECD, instead of the baseline forecast of 3.1%.

So the question remains the same: how long can tech enthusiasm mask the ugly fundamentals, and could the rally extend to the rest of the market? 

The answer is yes, in theory, it can. If oil prices come down and pull yields lower, we could see this market rally further. And if not, the tech rally could extend as long as investors are willing to pay for the dream of an AI-fuelled future.

SpaceX’s debut next week will certainly divert attention away from the Middle East, potentially giving a fresh boost to tech enthusiasts.

But eventually, there are too many lights flashing red to rule out the likelihood of a summer correction.

Wednesday after the bell, Broadcom failed to meet analyst expectations on AI chip revenue forecast and the stock price fell in the afterhours trading. CrowdStrike, however, fell after beating expectations – a sign that profit taking is becoming increasingly attractive when valuations look stretched.

Bitcoin near critical support

What’s interesting in all this is Bitcoin’s decoupling from the technology space. The upside potential in memory chip makers, and now in physical AI companies, has been so compelling that Bitcoin’s upside potential has suddenly started looking less attractive.

Investors preferred piling into other hot trades — among them big companies (like Samsung, SK Hynix and Micron) with strong business outlooks, unlike traditional meme stocks such as GameStop.

They have delivered higher returns than Bitcoin while benefiting from actual earnings growth that justifies at least part of their price gains, also explaining the deteriorating interest in harder-to-price cryptocurrencies. Rising yields and expectations that rates will stay higher for longer also weigh more heavily on Bitcoin and its peers than on companies whose earnings are still growing rapidly.

Microstrategy’s Bitcoin sales were the last nail in the coffin: the company didn’t chose to sell its Bitcoin holdings, but forced to, to pay back the extra-high dividend of its ‘preferred shares’. It could’ve sold new stock, but alas the company’s value has been dropping along with Bitcoin’s.

Bitcoin is testing the critical February support. And the big issue is that as Bitcoin falls below its estimated mining cost (US$60-US$70K), the last obvious valuation anchor is disappearing. 

Without earnings, cash flows or a production-cost floor to lean on, there is little standing between Bitcoin and a sentiment-driven meltdown.

Kalshi traders now forecast that Bitcoin’s price will fall to below US$50K this year.

Corporate news in Australia:

• Bank of Montreal reportedly preparing a takeover bid for Euroz Hartleys
• Blackstone nearing a $26bn acquisition of HSBC Australia’s mortgage portfolio
• EBR Systems ((EBR)) seeking a $150m capital raising following a -57% decline in its share price
• SpaceX’s Australian IPO filing highlights the shares as highly speculative and high risk for retail investors
• Coinbase launching SpaceX pre-IPO perpetual futures for international investors
• Quadrant Private Equity accelerating portfolio exits, including Southern Star
• Telstra ((TLS)) finalising its $1.25bn share buy-back program
• Amazon Web Services and Pinterest sign a US$5.6bn cloud computing agreement to support AI-led growth initiatives
• Schneider Electric raises EUR800m in debt funding to support AI and data centre expansion and refinance existing borrowings
• Withdrawal restrictions at Partners Group have triggered concerns over private equity liquidity and prompted sector selling

On the calendar today:

-EZ 1Q GDP

-US April consumer credit

-US May Non farm payrolls

-US May unemployment

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