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The Overnight Report: Netflicked

Daily Market Reports | Apr 18 2018

This story features AMP LIMITED, and other companies. For more info SHARE ANALYSIS: AMP

World Overnight
SPI Overnight (Jun) 5842.00 + 24.00 0.41%
S&P ASX 200 5841.50 + 0.20 0.00%
S&P500 2706.39 + 28.55 1.07%
Nasdaq Comp 7281.10 + 124.81 1.74%
DJIA 24786.63 + 213.59 0.87%
S&P500 VIX 15.25 – 1.31 – 7.91%
US 10-year yield 2.81 – 0.02 – 0.64%
USD Index 89.50 + 0.07 0.08%
FTSE100 7226.05 + 27.85 0.39%
DAX30 12585.57 + 194.16 1.57%

By Greg Peel

More of the Same

Yesterday’s was yet another session in which the local market looked like it wanted to go somewhere but in the end it didn’t. Over five sessions, the ASX200 is down a net -7 points. Over the same period, the S&P500 is up 2%.

Not that we have to faithfully follow the US, but oil prices are strong, iron ore prices are hanging in there and aluminium prices are at their highest in years, dragging other base metals along for the ride. The problem on the other side is mostly the banks.

Or the financials in general. Yesterday it was AMP’s ((AMP)) turn to face the RC music, and the revelations were no less than damning. The stock fell -4.4% to top the ASX200 losers’ board on the day – not a common feat for the leviathan wealth manager.

Publicly listed fund managers need to satisfy both the investors in their products and investors in their shares. This can only be done by robbing one to pay the other. Why anyone would invest in either boggles the mind.

Financials (-0.3%) provided the biggest drag yesterday on an ASX200 that shot up 30 points from the open despite the futures being unchanged overnight, immediately fell back to be almost unchanged, had another go, failed, and ultimately closed unchanged. The index keeps banging its head up against the 200-day moving average, and surrendering.

We note that school holidays are underway in NSW and other states which typically leads to a drop-off in volumes. In this case the market is also suffering from a lack of direction.

The release of Chinese economic data yesterday appeared to be well received downunder initially, ahead of the now familiar afternoon drift.

China’s GDP grew by 6.8% year on year in the March quarter, as it did in December, and as forecast.

Industrial production grew 6.0% year on year in the month of March, down from 7.2% in February and below 6.2% expectation. Retail sales grew by 10.1%, up from 9.7% and ahead of 9.9% expectations. Fixed asset investment grew by 7.5% year to date, down from 7.9% and below expectations of 7.6%.

Somewhat of a mixed bag for the monthlies, but nothing to write home about.

Materials (+0.2%) had a quieter session after a good run-up and ditto energy (unch), as the oil price rise stalled. The coin has been coming up heads more often for Telstra lately and IT topped the charts in percentage terms with a 0.9% gain.

Computershare ((CPU)) continues to find support in that sector while we note Altium ((ALU)) and Wisetech Global ((WTC)) both featured in the top five ASX200 winners yesterday. Could we draw a very long bow and suggest anticipation that “tech” would have a good session on Wall Street last night, following a strong result from Netflix?

It’s a very long bow, but…

The Issue of “Tech”

Netflix reported earnings after the bell on Monday night and last night surged 9%. It was not so much about earnings and revenues, given Netflix is a “growth” company. It was about a 27% increase in subscriptions in the quarter, and guidance for better next time.

The Netflix result swung Wall Street’s attention back to “Big Tech”. When we talk Big Tech we talk FANG, which strictly is Facebook, Amazon, Netflix and Google, but the likes of Apple, Microsoft, Twitter, chipmaker Nvidia and others are also thrown into a general “FANG” mix.

The reality is Netflix is a television network by any other name and Amazon is a department store. Both reside in the S&P consumer discretionary sector and not in the technology sector that is 25% of S&P500 market cap. It’s just that both exploit 21st century technology.

What’s Facebook? Technology, or a pen pal service with advertising? Google is a phone book slash encyclopaedia.

But who cares? These are 21st century companies that at the very least exploit 21st century technology, and hence are considered “tech”. Standard & Poor’s has nevertheless now acknowledged that a 21st century US stock market looks a lot different to the 20th century version, and hence will soon introduce a new sector called “communication services”, which will capture the likes of Facebook, Twitter et al, while left in “technology” will be your less esoteric chip-makers, IBMs etc.

What the Netflix result did last night was simply remind Wall Street, amidst a lull in China/Syria/Russia issues, that these New World companies are where the growth lies. Quarterly result releases are confirming such, but it’s still early days in the season.

IBM reported after the bell and is down over -5%.

Among Dow components reporting during the session, United Health posted a strong beat and rose 3.6% (around 50 Dow points), Johnson & Johnson beat but slipped slightly, and Goldman Sachs posted its best quarterly trading result in years and dropped -1.7%.

The Goldman Sachs response had everyone confused, as was the case with JP Morgan last Friday. Is it simply because the banks had surged last year on Trump’s election, and run up into this results season?

Is it because the US yield is now the flattest it has been in a decade? This development has everyone’s attention on Wall Street at present.

Last night the spread between the US two-year and ten-year bond yields narrowed to around a mere 40 basis points. The fear is the curve will invert (negative spread). Inverted yield curves are typically the harbinger of recessions, but never before in history has the world seen coordinated QE.

The Fed is sticking to its three rate hikes in 2018 forecast, which is why the short end is rising. The ECB and Bank of Japan are continuing their QE policies for the time being, which weighs on long term yields globally. Add in fears around the sheer magnitude of the US deficit under Trump, and US long yields are going nowhere as short yields rise.

Banks make money by borrowing short term and lending long term. An inverted yield curve implies a loss-making proposition.

The financials sector was the worst performer on Wall Street last night.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz) 1347.20 + 1.70 0.13%
Silver (oz) 16.75 + 0.12 0.72%
Copper (lb) 3.09 – 0.02 – 0.78%
Aluminium (lb) 1.08 + 0.00 0.27%
Lead (lb) 1.07 – 0.01 – 0.79%
Nickel (lb) 6.42 – 0.07 – 1.04%
Zinc (lb) 1.42 – 0.01 – 0.40%
West Texas Crude (May) 66.67 + 0.33 0.50%
Brent Crude (Jun) 71.70 + 0.14 0.20%
Iron Ore (t) 64.45 + 0.40 0.62%

Base metals have finally taken somewhat of a breather.

Indeed, it was a relatively uneventful session all round for commodities.

The Aussie has remained little moved for a week, at US$0.7771 at present.

Today

The SPI Overnight closed up 24 points or 0.4% following Wall Street’s 1% rally, having closed unchanged the morning before on the same move.

Rio Tinto ((RIO)) releases its quarterly production report today, with perhaps an update on the Rusal situation.

Aurizon Holdings ((AZJ)) also releases quarterly data.

The Australian share market over the past thirty days…

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CHARTS

ALU AMP AZJ CPU RIO WTC

For more info SHARE ANALYSIS: ALU - ALTIUM

For more info SHARE ANALYSIS: AMP - AMP LIMITED

For more info SHARE ANALYSIS: AZJ - AURIZON HOLDINGS LIMITED

For more info SHARE ANALYSIS: CPU - COMPUTERSHARE LIMITED

For more info SHARE ANALYSIS: RIO - RIO TINTO LIMITED

For more info SHARE ANALYSIS: WTC - WISETECH GLOBAL LIMITED