The Overnight Report: On The Chin

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

By Greg Peel

Spilt Milk

It was a resilient effort from the ASX200 from the opening bell yesterday, in the face of a drop on Wall Street following a week-long rally. But again it was all about buying in the morning, to up 32 points, and then selling in the afternoon, for a close of only up 9 points.

This time the index did not hit its head on the 6135 ceiling, making it only to 6129. Volume was relatively light.

The resources sectors were the anchors yesterday – energy was up 1.3% on ongoing oil price strength and materials gained 0.6% following some positive comments from BHP ((BHP)) and a 7% gain for Whitehaven Coal ((WHC)), after that company moved to full ownership of the Tarrawonga mine.

The local market’s attempt to break up into new (post-GFC) territory is taking its toll on the shorters. Whitehaven, not notably shorted, topped the ASX200 leaders’ board yesterday but it was followed by InvoCare ((IVC)), up 5.1% and 10.4% shorted as of last week, Domino’s Pizza ((DMP)), up 4.4% and 16.4% shorted and JB Hi-Fi ((JBH)), up 4.3% and 16.7% shorted.

JBH Hi-Fi and Domino’s are the second and third most heavily shorted stocks in the market. Also up there is Myer ((MYR)) at 11.5% shorted. Yesterday Myer (no longer in the ASX200) revealed its sales numbers fell again in the March quarter, but clearly not by as much as expected. That stock jumped 16%.

Short covering helped push the consumer discretionary sector up 0.7% yesterday but this was countered by stable mate consumer staples, which fell -0.8%.

In stark contrast to Myer, a2 Milk ((A2M)) announced a nine-month revenue increase of 70%, dragged down by marketing spend. Only 70%? A2 shares plunged -13% to top the ASX200 losers’ board, followed by peer Bellamy’s ((BAL)), down -10% in sympathy. Even supplier Synlait Milk ((SM1)) copped a -4% drop.

These companies had better lift their game. A 400% rise for a2 Milk in around eighteen months is just not good enough.

In economic news, the March quarter wage price index showed an increase of 0.5% in the quarter, missing 0.6% expectations, to a 2.1% annual rate. The March quarter CPI came in at 1.9%, so real wages are currently growing at 0.2% per annum. Don’t buy a house.

Japan’s March quarter GDP was forecast to dip -0.2% but instead fell -0.6% to break the country’s best run of economic growth in decades. This, despite a negative cash rate and ongoing QE. If another downturn were to hit global financial markets, Japan has no ammunition left.

Japan is these days very much in China’s shadow, but is still one of our major trading partners.

The ASX200 is struggling to breach 6135 but apparently holding above 6100. A slight recovery on Wall Street overnight has the futures up 11 this morning, so today will probably bring more of the same.

Yielding to Yield

Last night the US ten-year bond yield ticked up another couple of basis points to 3.10%, having jumped from 2.97% the night before. The big jump sparked a sell-off on Wall Street. Last night investors shrugged off the implications.

US industrial production rose 0.7% in April when 0.6% was forecast.

The US economy is strengthening, corporate earnings grew by 25% in the March quarter and inflation is behaving itself, for now. The increase in earnings has led to lower PEs at the same index level. Tax cut-related share buybacks and dividend increases are ensuring stock yields remain relatively attractive compared to bond yields, even above 3%.

Therefore, commentators suggest, there is nothing going on at the moment to suggest Wall Street should tumble, geopolitics notwithstanding. But nor is there any great incentive, following a quarter of 25% earnings growth, to push meaningfully higher. The rising oil price is now providing a headwind, as is the rising greenback. Typically a rising greenback is a headwind for the oil price.

Having said that, last night the Russell small cap index hit a new all-time high, surpassing the prior January peak.

Last night saw a win for the US consumer discretionary sector. Coincidentally, Myer-lookalike Macy’s, which is also heavily shorted in the US market, posted a surprise earnings result and jumped 10%. The company’s result and guidance provided a boost for the retail sector in general.

And like the Australian market, Wall Street is seeing ongoing strength in the resources sectors. Energy continues to play catch-up to the oil price, and last night materials was the best performer in the S&P500.

Commodities

This despite, for the first time in a very long time, no base metal price moving more than one percent. Indeed, very little to report on the commodities front, other than the Brent-WTI spread continues to blow out on Middle East tensions.

The Aussie has bounced back 0.6% to US$7515 despite the US dollar index ticking up another 0.1% and despite the “miss” on wages growth.

Today

The SPI Overnight closed up 11 points or 0.2%.

Australia’s April jobs numbers are out today.

Westpac ((WBC)) goes ex-dividend this morning so we’ll start with a handicap.

DuluxGroup ((DLX)) reports earnings, Link Administration ((LNK)) hosts an investor day while Adelaide Brighton ((ABC)), oOh!media ((OML)), Speedcast International ((SDA)) and Syrah Resources ((SYR)) hold AGMs.

Syrah is the most shorted stock on the market by a margin, at 21%.

The Australian share market over the past thirty days…

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