The Overnight Report: Banks And Oil

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World Overnight
SPI Overnight (Sep)	6180.00	– 12.00	– 0.19%
S&P ASX 200	6241.50	– 26.90	– 0.43%
S&P500	2798.43	– 2.88	– 0.10%
Nasdaq Comp	7805.72	– 20.26	– 0.26%
DJIA	25064.36	+ 44.95	0.18%
S&P500 VIX	12.83	+ 0.65	5.34%
US 10-year yield	2.86	+ 0.03	0.95%
USD Index	94.50	– 0.18	– 0.19%
FTSE100	7600.45	– 61.42	– 0.80%
DAX30	12561.02	+ 20.29	0.16%

By Greg Peel

Defensive Move

If we break down the sector moves for the ASX200 yesterday we see there is a clear shift towards a more defensive position. However such shifts have been apparent on occasion lately, only to be usurped a session or two later by a strong risk-on rally, so we can’t jump to solid conclusions.

The banks, resource sectors and IT all fell back yesterday and healthcare was the stand-out worst performer with a -1.9% drop. Perhaps not so surprising amidst a strong uptrend that has seen both CSL ((CSL)) and Cochlear ((COH)) join the two hundred club.

Telcos, consumer staples and utilities all rallied to support the defensive theme.

Drawing focus yesterday were Chinese economic data.

China’s GDP grew by an annual rate of 6.7% in the June quarter, down from 6.8% in March but in line with expectations, and comfortably above Beijing’s 6.0-6.5% target for 2018. Such a result typically evokes fearful cries of “China is slowing!” but as China’s economy matures, each percentage point of GDP growth requires an ever greater quantum of output.

In the month of June, Chinese retail sales grew by 9.0% year on year, up from 8.5% in May, and in line with expectations. Industrial production rose 6.0%, down from May’s 6.8%, and below 6.5% expectation. Fixed asset investment grew 6.0% year to date, below the 6.1% rate in May.

While a bit of a mixed bag, the numbers must be taken in the context of the government’s ongoing push for structural reforms – reforms which set China on a more stable footing but will inevitably cost GDP points in the interim.

It’s All Happening

The big news across the globe this morning is Trump’s dismissal of US intelligence in siding with Putin on the Russian president’s denial of any involvement in election tampering. The political world is up in arms, but while such an issue might have rocked Wall Street last year, this year such Trump antics tend to be met with a shrug.

The theory is the Russians “have something” on Trump. He does little to indicate otherwise.

But life goes on on Wall Street, where currently earnings are in full focus. After a slow start from the big banks on Friday night, last night saw Bank of America beat on the top and bottom lines and enjoy a 4.3% rally in response, which is quite a big move for a big bank.

BofA’s result restored faith in what is expected to be another strong earnings season. Netflix has nevertheless somewhat upset that apple cart with its after-the-bell result, but we’ll come to that.

A rally in financials was offset by weakness in the energy sector. Oil prices tumbled over -4% last night on a confluence of issues.

Libya has reopened its ports, bringing lost production back on line. Russia is set to increase production, which it had flagged anyway as a counter to lost Iranian and Venezuelan exports, but has also been asked by President Trump to do so, and he and Vlad are great buddies.

The twist is that despite talking tough on Iranian sanctions, in line with Trump’s desire to bring the oil price down the White House is talking sanction exemptions when it comes to Iranian oil. And to add further clout to price reduction attempts, there is also talk of a release of oil from the US strategic reserve.

Throw in a fresh report from the IMF suggesting global growth is slowing, mostly thanks to the EU, UK and Japan, and warning a further slowing in the event of a trade war, and last night oil traders had nowhere to hide.

The end result was a relatively flat outcome for the S&P500, with financials balancing energy. The two point fall took the index back below the 2800 mark but only just – not enough to derail the “break out” as far as traders are concerned.

The Dow was a little stronger while the Nasdaq dipped -0.3% ahead of a run of FANG and other earnings results this week. Which brings us to Netflix.

Netflix rose 1.1% in the session and as I write is down -14% in the aftermarket despite beating on earnings and posting in line on revenue. The issue was one of much slower than expected global subscriber growth.

Has Big Tech just been smoke and mirrors all along, just like it was in 2000? Not so. Netflix’ share price has doubled in the year to date, rendering a -14% drop neither surprising nor substantial in the context. Maybe the FANGs have run up a bit too far, but on any consolidation there is bound to be a queue of previously slow buyers.

And still among the FANGs, Amazon’s much vaunted Prime Day ran into issues last night when the website became inaccessible. Amazon actually rallied 0.5% in the session and is down a mere -1% aftermarket, suggesting Wall Street does not see Netflix disappointment as contagious.

It will nevertheless be interesting to see how the Nasdaq fares tonight.

Tonight’s earnings reports include those of American Express (Dow), Alcoa, eBay and Morgan Stanley.

Commodities
 

Spot Metals,Minerals & Energy Futures
Gold (oz)	1240.20	– 0.80	– 0.06%
Silver (oz)	15.76	– 0.03	– 0.19%
Copper (lb)	2.80	– 0.02	– 0.88%
Aluminium (lb)	0.96	+ 0.01	1.58%
Lead (lb)	0.98	– 0.01	– 1.10%
Nickel (lb)	6.18	– 0.11	– 1.83%
Zinc (lb)	1.14	– 0.05	– 3.96%
West Texas Crude (Aug)	68.00	– 3.01	– 4.24%
Brent Crude (Sep)	71.97	– 3.36	– 4.46%
Iron Ore (t)	63.00	– 0.50	– 0.79%

The long list of reasons why the oil price fell last night can also include slower Chinese growth. The result was exactly as expected, yet LME traders also cited China in selling down all but aluminium among the base metals last night, with zinc continuing its spiral into a black hole.

The iron ore price response was a little more muted.

The US dollar index fell -0.2% but weaker commodity prices held the Aussie in check at US$0.7420.

Today

The SPI Overnight closed down -12 points or -0.2%.

The minutes of the July RBA meeting are out today.

US industrial production numbers are due tonight. Last night saw a 0.5% jump in US retail sales in June, as forecast.

Oil Search ((OSH)), Rio Tinto ((RIO)) and Saracen Minerals ((SAR)) all provide June quarter production reports today.

Rudi will connect with Sky News Business via Skype this morning, but at around 10am instead of the usual 11am.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
AWC	ALUMINA	Upgrade to Outperform from Neutral	Credit Suisse
CLW	CHARTER HALL LONG WALE REIT	Downgrade to Neutral from Buy	UBS
FPH	FISHER & PAYKEL HEALTHCARE	Downgrade to Sell from Neutral	Citi
HPI	HOTEL PROPERTY INVESTMENTS	Upgrade to Accumulate from Hold	Ord Minnett
IVC	INVOCARE	Downgrade to Neutral from Buy	Citi
LOV	LOVISA	Downgrade to Underweight from Equal-weight	Morgan Stanley
ORA	ORORA	Downgrade to Sell from Hold	Deutsche Bank
ORG	ORIGIN ENERGY	Upgrade to Buy from Neutral	Citi
SHL	SONIC HEALTHCARE	Upgrade to Neutral from Sell	Citi
SKI	SPARK INFRASTRUCTURE	Downgrade to Underperform from Neutral	Credit Suisse
SYD	SYDNEY AIRPORT	Downgrade to Underperform from Neutral	Credit Suisse

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

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