The Overnight Report: Flat To Slightly Lower

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This story features REGIS RESOURCES LIMITED, and other companies.
For more info SHARE ANALYSIS: RRL
The company is included in ASX100, ASX200, ASX300 and ALL-ORDS

Markets moved into risk-off mode, with memory stocks leading the Nasdaq sell-off, while oil prices continued to rise as US-Iran tensions remained elevated.

The Strait of Hormuz is reportedly closed again, with the US imposing a blockade.

The US June CPI print is due on Tuesday (EST).

The Australian market shrugged off geopolitical concerns yesterday, ending the session flat.

ASX200 futures are pointing to a flat-to-weaker start on Tuesday morning.

Good Morning,

On Monday, the Australian market recovered from intraday losses to end broadly flat.

The ASX200 rose three points to 8,809. Technology led the declines, down -2.5%, while Telcos outperformed and buyers emerged in the Banking sector.

For SpaceX followers, the stock continued to fall overnight, down over -4% and approaching the IPO price of US$135.

Today’s Big Picture, J.L. Bernstein extract

Waller Brings A Rate Hike Back Into View

Fed governor Christopher Waller said a rate increase belongs on the table if this week’s inflation data stays hot.

His key point: core inflation started climbing in December, months before the war lifted energy prices.

That takes away the easy excuse. Traders now put July hike odds at better than one in three.

The Memory Trade Shakes

SK Hynix had its worst day ever in Seoul, three trading days after a hot Nasdaq debut.

The Kospi fell hard enough to trigger a trading halt. Raymond James said it was positioning, not fundamentals, and I agree.

Nothing changed about memory demand over the weekend. What changed is that everyone owned the same thing.

Gold Missed Its Moment

Oil ran toward US$80 on the blockade news and gold went the other way, dropping under $4,050.

Treasuries sold off too. Safe havens are supposed to work on a day like this.

When they don’t, the market is telling you it fears the inflation bill more than the war itself.

ANZ Bank Australian Market Focus, extract

Equity markets declined amid concerns about tech valuations and escalating geopolitical risks. Bond yields rose, led by the front end, as oil rallied. 

The S&P500 was down -0.8% and the Nasdaq down -1.6%, while in Europe, both the EuroStoxx and FTSE100 were little changed. 

The yield on the US 10y Treasury note rose 3.2bp to 4.62%, following on from lifts in European yields (UK 10y gilts up 10bp). 

In commodities, the active WTI future rose 4.4% to US$77.98/bbl, while gold fell -1.3% to US$4,000.30/oz.

President Trump said the US will reimpose the blockade of Iranian ships, transiting the Strait of Hormuz but allow passage to ships sailing under flags of all other countries.

He said on social media the US will be paid 20% on all cargoes as a fee for maintaining security. 

That fee is substantially higher than the original toll proposed by Iran. 

The market appears to be treating the proposed fee with a fair degree of scepticism. There is no legal basis for the US –-or any country-– charging such a fee, as US officials had pointed out regarding Iran’s toll proposal. 

Despite the end of the US-Iran ceasefire, the reinstatement of the US blockade and transits effectively halted, oil remains considerably lower than before the US-Iran Memorandum of Understanding was signed. 

The recent escalation in the Middle East has brought upside inflation risks back into focus, just as tonight’s US June CPI report is set to offer encouragement.

We expect headline CPI to have fallen -0.1% m/m and the core CPI to have risen 0.2% m/m in June. Such an outcome would show that the energy price shock has not broadened to underlying inflation. 

Following the move higher in oil prices, the market is now pricing-in close to a 40% chance that the Fed will hike at its meeting on 29 July.

We think the bar to hike is high. 

Whilst the FOMC’s reaction function has hardened under Chair Warsh, it remains data-dependent and focused on distinguishing relative price shocks from generalised inflation. 

The RBNZ will take some comfort from the fact that the hiking cycle is underway, given the Official Cash Rate remains well below the Committee’s central estimate of neutral (unlike in the US or Australia).

New Zealand’s hike this month was not based on an oil rebound but rather an improved economic outlook and potential lingering impacts from the earlier shock, but the situation in the Middle East creates upside inflation risk.

The Pulse of the Market RBC Capital Markets, Lori Calvasina extract

S&P 500 Sector Recommendation Shuffle

We are making a number of changes to our S&P500 sector views.

We are upgrading Technology to Overweight from Market Weight, while downgrading Communication Services to Market Weight from Overweight. 

With these moves, we are designating Technology as our preferred Growth-oriented sector. We are also mindful that, given Technology accounts for more than one-third of the market capitalisation weighting of the S&P500, it is difficult to be constructive on the S&P500 in the year ahead without taking a constructive view on the sector.

Several factors also argue for a more constructive stance on Technology specifically, including strong upward EPS and revenue revision trends, inflows to the sector that are trending higher (and rebounded after a week of steep outflows recently), and a positive performance outlook score among our US Technology analysts.

Technology valuations admittedly aren’t cheap, but in our latest update the sector is only slightly above its long-term average on median absolute and relative P/E.

While valuations in Communication Services look attractive in our work, we’ve seen some weakness emerge in our EPS revisions indicator for the sector, while Telecom flows (the closest proxy for the sector) have been choppy. Communication Services also received a negative performance outlook score for the US in our latest analyst survey.

We are upgrading Consumer Discretionary from Underweight to Market Weight.

Our survey inspired this decision, revealing far more negative views on consumer-oriented sectors across the globe, including the US, than we observed in most other areas.

We are often asked where the pain trades are in US equities, and our survey results made it clear that negative sentiment towards consumer-oriented sectors is one of them.

While investors have not been expressing bullish views on consumer sectors, clients have frequently sought our thoughts on the group in recent months.

In those conversations, we’ve acknowledged that although consumer confidence and sentiment readings remain weak, there have been some signs of stabilisation.

As is the case with Consumer Staples, Consumer Discretionary tends to outperform when consumer sentiment in the University of Michigan survey improves.

Looking beyond this top-down consideration, it’s worth noting that while our US analysts gave the sector a neutral performance outlook score, it was still somewhat better than the negative assessment from the Consumer Staples team.

The sector’s valuation profile is similar to Technology in our model, sitting only slightly above the long-term average on both a relative and absolute basis. EPS revisions are also fairly balanced.

Overall, the sector appears more deserving of a Market Weight rating than an Underweight rating.

We are downgrading Utilities to Underweight from Market Weight.

With the upgrade of Consumer Discretionary, we needed a new Underweight sector.

We are moving Utilities into this category for three reasons.

First, it is one of the most expensive sectors in the S&P500 according to our model.

Second, our US analyst team expressed only a neutral performance outlook in our latest survey, one of the least constructive assessments.

Third, fund flows into the sector have been weak recently.

Earnings and revenue revision trends remain positive, although they are weaker than those seen in several other sectors.

We would prefer to be Underweight a larger sector with a greater market capitalisation and are continuing to monitor for alternative opportunities.

What Else We’re Watching – Industrials and Energy

Industrials, which we rate Market Weight, was a candidate for a downgrade, as our model points to extremely expensive valuations and previously strong fund flows have begun to soften, although they have not yet turned negative.

However, fundamentals remain solid, supported by strong upward EPS and revenue estimate revision trends.

Industrials also received a positive performance outlook score from our US analysts despite a neutral valuation assessment, one of the least constructive responses in that category.

Meanwhile, Energy, which we also rate Market Weight, was considered for an upgrade.

Our survey showed the US Energy sector received positive scores from analysts across all non-mid-term questions and ranked among the strongest sectors for performance outlook.

The sector also screens as attractively valued in our model, while EPS revision trends remain robust.

What prevented an upgrade was the sharp deterioration in fund flows, which have turned deeply negative.

We like the idea of adding Energy exposure as geopolitical portfolio insurance, but we would prefer to see improving fund flow trends before upgrading the sector.

Our remaining sector views are unchanged.

Outlook for US Equities

There has been no change to our 12-month S&P500 target of 8,150 or to the key risks we continue to monitor.

The upcoming earnings season also provides an opportunity for investors to refocus on the superior EPS growth outlook associated with the AI theme and the Magnificent Seven, which remains embedded in consensus forecasts for 2026 through 2028.

Corporate news in Australia:

•  Regis Resources ((RRL)) has withdrawn its takeover bid for Vault Minerals ((VAU)) after a superior proposal from Genesis Minerals ((GMD)) 
•  oOh!media ((OML)) remains the subject of competing bids from Pacific Equity Partners, I Squared Capital and Oaktree Capital, with due diligence and negotiations continuing
• Stack Infrastructure is exploring a sale of its Asia-Pacific data centre business in a deal that could be valued at more than US$25bn
• Steadfast Group ((SDF)) is the target of a $6.7bn consortium bid, with KKR joining the acquisition group
• Blackstone has launched a $1bn sale process for Australian clinical trials group Nucleus Network
• Mondelez is assessing a potential acquisition of Arnott’s from KKR
• Ampol ((ALD)) has refinanced $400m of debt through a private credit facility provided by KKR
• Ceretas is seeking to raise $8m through an ASX IPO to fund clinical trials
• Allegro Funds has raised $550m for its fifth private equity fund, targeting technology investments across Australia and New Zealand

On the calendar today:

-NZ May Net Migration

-AU NAB June Business Survey

-AU Westpac Consumer Confidence

-JP May Industrial Prod’n

-CH June Trade Bal

-US June CPI

-METCASH LIMITED ((MTS)) ex-div 9.50c (100%)

-POLYMETALS RESOURCES LIMITED ((POL)) Qtrly update

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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