The Overnight Report: Grinding And Churning Up

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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 rose slightly, while investors continued to rotate between sectors.

Chip and memory stocks continued to sell off, while Big Tech stocks advanced.

After a positive session yesterday, ASX200 futures are pointing to another cautiously positive start.

Good Morning,

The ASX200 rose on Wednesday, up 33 points or 0.4% to 8,841.

BHP Group ((BHP)) led Materials, its shares up 1.7%.

Telcos fell -1.2% and were the worst performing sector.

After Rio Tinto’s ((RIO)) well-received quarterly update yesterday, today BHP Group will release its quarterly performance.

Alcoa ((AAI)) will be releasing its quarterly financials and Netwealth Group ((NWL)) is scheduled for a market update too, having already pre-released key indications beforehand.

FNArena’s four-weekly calendar: https://fnarena.com/index.php/financial-news/calendar/

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

Chips Gave Back The Morning, Big Tech Caught The Money

Semis flew at the open on ASML’s strong report, then handed it all back by midday.

Micron led the drop. But the money didn’t leave tech, it rotated.

Apple, Microsoft, Amazon, and Alphabet held firm and kept the market steady.

Fund managers just told Bank of America chips are the most crowded trade around, so a pullback was overdue.

Buffett Says He’s The One Who Bought Alphabet

Buffett told CNBC he started Berkshire’s Alphabet position himself, not his successor Greg Abel.

He owned the miss too, saying he should’ve bought years ago after watching Google’s ad engine up close through Geico.

His worry now is the AI tab. Everyone’s spending hundreds of billions, and he wants to see the returns first.

Same interview, he called this market friendlier to gamblers than investors.

June Prices Fell, And July Hikes Went With Them

Wholesale prices dropped in June, a day after a soft consumer read.

That was enough for traders to cut July rate-hike odds to 17 percent, down from 42 the day before.

Prices are still up around 3.5 percent over the year, so inflation didn’t vanish, it just rose slower than feared.

Williams says it’s peaked. That’s breathing room, not an all-clear.

ANZ Bank Australian Market Focus, extract

Equities rose and US bond yields fell as markets continued to pare expectations for rate hikes from the Fed. 

The S&P500 was up 0.4%. In Europe, the EuroStoxx and FTSE100 closed -0.2% and -0.1% lower respectively. 

The yield on the US 10y Treasury note fell -4bp to 4.55%. 

In commodities, the active WTI future rose 0.7% to US$80.3/bbl. Gold rose 0.2% to US$4,061.1/oz. 

US headline PPI fell -0.3% m/m, driven by lower gasoline prices. The core PPI rose 0.2% m/m. Both were below the consensus.

The goods PPI fell -1.4% m/m, nearly two-thirds of which reflected lower gasoline prices. The services PPI rose 0.2% m/m. Half of the increase reflected expanding margins for gasoline retailing. 

The components of the PPI most relevant to the core PCE, namely portfolio management fees, healthcare and airfares point to a soft core PCE print next week. 

The Fed released its Beige Book, and it painted a picture of mild improvement. The summary noted that, “economic activity increased at a slight to moderate pace in eleven of twelve Federal Reserve Districts in late May and June, while one District reported no change”. 

On the labour market, it noted that “employment rose on balance, with five Districts showing modest, moderate, or solid gains in employment, and with seven Districts experiencing little to no change. In the previous report, only one District had modest, moderate, or solid employment gains”. 

On inflation, “compared with the last reporting period, price growth was the same or slower in all Districts.” 

The Bank of Canada held its policy rate at 2.25%, as expected. The accompanying guidance signalled that it is likely to remain on hold for an extended period. 

The case for a July rate hike from the Fed has evaporated following yesterday’s soft inflation data. Both headline and core month-on-month inflation data were the weakest since 2020.

Our expectation is that we will continue to see progress on underlying inflation back towards the 2% target in coming months, and the Fed will remain on hold this year.

New York Fed President Williams reiterated that policy is well positioned to lower inflation and that there are encouraging reasons to believe inflation has peaked.

Global: Why the Middle East crisis is heading towards a long, messy muddle, Oxford Economics

• The contested nature of the US-Iran interim agreement casts further doubt on whether a lasting peace between the two countries can be achieved. With the ceasefire having collapsed and the Strait of Hormuz effectively closed once more, the prospects for a durable US-Iran peace look increasingly remote.
• We now consider the most likely scenario to be a long-term reduction in the use of the Strait of Hormuz. We will adjust our economic forecasts in August to reflect this.
• Neither the US nor Iran wants to keep the Strait completely closed, but both want to retain leverage to weaken the other’s position. Given the deep mistrust and each side’s reluctance to make significant concessions, prolonged tensions appear inevitable. As a result, shipping firms are likely to limit or halt voyages through the Strait, while Gulf states will redouble efforts to diversify export routes, gradually reducing the Strait’s strategic importance.
• The oil market is now structurally better equipped to absorb supply shocks. The energy transition has weakened oil demand growth, while supply continues to expand. Even so, the closure of the Strait has significant implications for oil prices, global growth and inflation, with the precise impact depending on the “new normal” level of Strait traffic, the extent to which other oil producers increase output, and the timing and scale of any rebound in Chinese oil demand.
• We think the most likely scenario is that low, fluctuating levels of traffic through the Strait spark intermittent oil price rallies, keeping average prices above US$80 per barrel for several quarters. In our Sustained Disruption scenario, which outlines the downside risks associated with prolonged disruption, the effective closure of the Strait would push oil prices to around US$130 per barrel and reduce global GDP growth to below 2% next year.

What This Choppy Marker Is Telling Investors, Lisa Shalett, Morgan Stanley extract

Markets have arrived at a brittle junction. After early hopes of a Middle East ceasefire helped spark a powerful spring rebound, the benchmark S&P500 Index surged some 20% to an all-time high in early June.

Since that peak, however, the market has been stuck.

Even as investors remain optimistic about corporate earnings, US stocks as a group have struggled to move higher. Instead, big shifts inside the S&P500 are often cancelling each other out, leaving the headline index largely churning sideways.

To understand what’s going on, start with the high bar markets have set. Corporate earnings expectations have risen sharply, and investors are looking for mid-20% y/y earnings growth over the next two months.

When expectations rise quickly, strong results can stop being fresh catalysts for markets to move higher because the good news is already assumed. At that point, markets often become more sensitive to small changes in the outlook, and price action can turn choppy or flatten as investors shift to debating what comes next.

The second issue is how concentrated the market has become. The 10 biggest stocks now make up roughly 40% of the benchmark index’s total value.

That top-heaviness matters because it can keep the index stuck, even if many other stocks are performing well. When a handful of mega-cap names carry that much weight, even a modest pullback can offset steady progress elsewhere.

Among the market’s largest technology companies, a tug of war has emerged around the AI trade.

On one side, semiconductor stocks continue to soar. Investors have driven leading chipmakers to extreme valuations, with the semiconductor sector now accounting for around 18% of the S&P500, compared with a long-term historical weighting of only around 3%.

At the same time, investors have punished the formerly dominant Magnificent Seven stocks, including the major hyperscale cloud providers, largely assuming these companies will continue burning through cash as they invest heavily in AI infrastructure.

The result is that one group of giant stocks is being bid higher while another is being marked lower, with those moves largely cancelling each other out at the index level.

That said, the Global Investment Committee believes the AI story is maturing in a way that could change which stocks emerge as future winners.

Recently, the committee has observed a clear change in tone from AI adopters. The initial phase of adoption focused on immersing employees in AI tools and maximising token usage. That phase now appears to be shifting towards a more disciplined approach, where enterprises place far greater emphasis on the cost and energy efficiency of their AI deployment.

This shift is driving what Morgan Stanley describes as “hybrid engineering” across the AI stack.

In practical terms, enterprises are becoming more willing to combine cutting-edge frontier AI models with lower-cost open-source or free models. They are also broadening the range of chips and AI accelerators they use, rather than assuming every workload requires the newest and most expensive hardware.

That evolution in the AI story is a key reason the Global Investment Committee believes investors should consider taking profits in global semiconductor stocks, particularly where earnings expectations appear stretched.

At the same time, the committee favours companies capable of thriving in a more hybrid AI environment, including selected hyperscalers adapting to growing demand for more cost- and energy-efficient AI solutions.

At the broader market level, Morgan Stanley expects the S&P500 to rise to between 8,000 and 8,300 over the next year. However, the committee believes the index may continue churning sideways into the US mid-term elections in November.

In this environment, investors are encouraged to maintain an above-average allocation to equities while remaining selective rather than buying the entire market indiscriminately.

Morgan Stanley also continues to emphasise global diversification, noting non-US markets have recently outperformed and diversification becomes increasingly important as market leadership rotates.

Corporate news in Australia:

• Perpetual Limited ((PPT)) received a sweetened $2.55bn takeover offer from Swedish private equity group EQT AB
• Southern Cross Media Group ((SXL)) sold its venture asset portfolio to LVP Capital
• Perth Radiological Clinic is attracting private equity bids in a potential $1bn healthcare transaction
• Jarden is reportedly the subject of a potential acquisition approach by a European investment bank
• Vulcan Energy Resources Limited ((VUL)) drew its first funding from the EUR2.2bn Lionheart financing facility
• L1 Capital’s ((L1G)) funds under management increased after its Gold Fund IPO attracted $428m of inflows
• Ares Management Corporation (NYSE: ARES) provided more than US$400m in private credit financing for Allegro Funds’ acquisition of Gull New Zealand and NPD

On the calendar today:

-EZ May Trade Bal

-UK May GDP, Ind Prod’n, Trade Bal

-US Jul Phil Fed

-US June Retail Sales

-ALCOA CORPORATION ((AAI)) FY26 earnings report

-AMP LIMITED ((AMP)) Qtrly update

-BHP GROUP LIMITED ((BHP)) Qtrly Update

-ELEVRA LITHIUM LIMITED ((ELV)) AGM

-NETWEALTH GROUP LIMITED ((NWL )) Qtrly update

FNArena’s four-weekly calendar: https://fnarena.com/index.php/financial-news/calendar/

The Australian share market over the past thirty days…

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