The Overnight Report: Escalation

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

World Overnight
SPI Overnight (Jun)	6142.00	+ 36.00	0.59%
S&P ASX 200	6102.10	– 2.00	– 0.03%
S&P500	2762.59	-11.16	-0.40%
Nasdaq Comp	7725.59	– 21.44	– 0.28%
DJIA	24700.21	– 287.26	– 1.15%
S&P500 VIX	13.35	+ 1.04	8.45%
US 10-year yield	2.89	– 0.03	– 1.13%
USD Index	95.00	+ 0.24	0.25%
FTSE100	7603.85	– 27.48	– 0.36%
DAX30	12677.97	– 156.14	– 1.22%

By Greg Peel

Trade Off

The ASX200 shot up 47 points in the opening twenty minutes yesterday, barrelling through the prior closing high of 6130 to almost reach the prior intraday high of 6150. Twenty minutes later it was only up 17. A second, late morning run-up also failed before macro factors began to weigh.

Given China has retaliated to Trump’s original tariffs with tariffs of its own, Trump has announced a 10% tariff on another US$200bn of Chinese imports. If the Chinese again retaliate, Trump has yet another US$200bn in the chamber.

None of this applies immediately, and still there is talk of the “possibility” of descending in a trade war. How much further do we need to descend? Looks pretty war-like already. But the sticking point for the US is Beijing’s lack of any response to US calls to address intellectual property theft. Trump has now pointed the trebuchets at China’s castle wall in the expectation this just might be what’s needed to produce a white flag.

For it is generally acknowledged that if war really does break out, the US will win. There might be US collateral damage, but in the end the Chinese economy is already at risk of slowing, the US economy is powering ahead, and between the two, China is less self-sufficient.

The Shanghai index fell -3.8% yesterday. A while back we were used to Chinese stock market volatility, but that’s actually the biggest one-day fall in two years. Japan chimed in with a -1.8% fall for the Nikkei.

By the afternoon, as Asian markets sagged, the Australian market tracked back to a flat close.

Ultimate sector moves were a mixed bag. Materials (-1.3%) was the worst performer on weaker commodity prices, while energy (+0.7%) rebounded in line with the oil price.

The big banks stalled after a couple of strong sessions, leading Macquarie Group ((MQG)) to guide the financials sector up 0.2% following a broker upgrade. No upgrade was needed for market star CSL ((CSL)), which hit a new all-time high and ensured healthcare (+2.0%) was the winner on the day.

Aside from its defensiveness, market dominance and growth trajectory, CSL benefits from a lower Aussie, which was down -0.2% yesterday morning and is down another -0.6% this morning. The Aussie is now down -3% since the ECB meeting last week.

That makes it attractive to offshore investors, not just because prices are lower in foreign currency terms, but because Australia’s world-leading dividend yields are grossed up in foreign currency terms, which makes our market a go-to in times of global tension, ineligibility for franking notwithstanding.

To that end, the Dow’s down another -300 overnight and yet the SPI futures are up 36 points this morning.

The Turn of the Screw

Following on from weakness in Asian markets, Europe’s major stock markets fell over -1% last night. That spilled into the US, and hence the Dow was quickly down over -400 points.

But as is often the case, once Europe closed, Wall Street began a recovery. And while the Dow may have still closed down -1.2%, half of that loss can be attributed to just two components – Boeing and Caterpillar. Again we note that while not nearly the biggest market cap in the US, Boeing trades at the highest share price by quantum in the Dow price average and thus provides the biggest individual influence.

The S&P closed down only -0.4% and the Nasdaq -0.3%. The Russell small cap index closed slightly higher, and every up-day is another new all-time high.

Within the Nasdaq, tech stocks were split. Apple is one company with Chinese exposure risk, both through iThing sales and the fact those iThings are assembled in China. Apple led down the tech sector of the S&P. But on the flipside, Amazon and Netflix both surged to new all-time highs.

Of course, while we think of these two as “tech”, being part of FANG, they are actually consumer discretionary stocks. Both threw China in the too-hard basket long ago, and thus have no trade war exposure.

Thus as the dust settled on 24 hours of global trade, the conclusion is Wall Street held up pretty well. While most on Wall Street are free trade advocates, there is a begrudging acceptance that something really has to be done about China’s trade practices, and despite the short term pain, perhaps long term gain might be achieved through Trump’s heavy-handed tactics.

There is hope that this latest escalation really will bring Beijing to the table.

In the meantime, safe havens are popular again. Having recently jumped up to 3% for the second time this year, the US ten-year yield is back at 2.89%. The US bond-proxy sectors finished in the green last night. The yen is stronger but not sufficiently to usurp the US dollar index, which is up 0.2%.

The stronger greenback is holding back gold’s safe haven potential.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz)	1274.40	– 3.50	– 0.27%
Silver (oz)	16.27	– 0.17	– 1.03%
Copper (lb)	3.11	– 0.06	– 1.94%
Aluminium (lb)	0.98	– 0.02	– 2.20%
Lead (lb)	1.09	– 0.01	– 0.61%
Nickel (lb)	6.62	– 0.17	– 2.45%
Zinc (lb)	1.39	– 0.03	– 2.05%
West Texas Crude (Jul)	65.06	– 0.77	– 1.17%
Brent Crude (Aug)	75.02	– 0.34	– 0.45%
Iron Ore (t)	64.25	– 1.75	– 2.65%

The greenback is also dragging on metals prices, but trade war fears are the primary driver. Again we see -2% falls across the major base metals.

The Chinese returned from holiday to send iron ore down -2.5%.

With the OPEC meeting approaching, oil traders, too, are nervous.

The offset to all of the above is the Aussie is down -0.6% at US$0.7380.

Today

The SPI Overnight closed up 36 points or 0.6%.

The RBA governor will speak tonight.

Telstra ((TLS)) hosts an investor day.

Sydney Airport ((SYD)) releases monthly traffic stats.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
BAP	BAPCOR LIMITED	Downgrade to Neutral from Buy	UBS
BOQ	BANK OF QUEENSLAND	Upgrade to Outperform from Neutral	Credit Suisse
CL1	CLASS	Upgrade to Buy from Neutral	UBS
GMG	GOODMAN GRP	Downgrade to Lighten from Hold	Ord Minnett
GUD	G.U.D. HOLDINGS	Upgrade to Neutral from Sell	UBS
MGR	MIRVAC	Downgrade to Neutral from Outperform	Credit Suisse
MQG	MACQUARIE GROUP	Upgrade to Overweight from Equal-weight	Morgan Stanley
NHF	NIB HOLDINGS	Upgrade to Neutral from Underperform	Credit Suisse
SUL	SUPER RETAIL	Downgrade to Neutral from Buy	UBS

For more detail go to FNArena's Australian Broker Call Report, which is updated each morning, Mon-Fri.

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