The Overnight Report: Bonds Hold On

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

World Overnight
SPI Overnight (Jun)	6125.00	+ 10.00	0.16%
S&P ASX 200	6130.60	+ 4.40	0.07%
S&P500	2818.46	+ 20.10	0.72%
Nasdaq Comp	7691.52	+ 53.98	0.71%
DJIA	25657.73	+ 140.90	0.55%
S&P500 VIX	14.68	– 1.65	– 10.10%
US 10-year yield	2.41	– 0.01	– 0.25%
USD Index	96.84	+ 0.30	0.31%
FTSE100	7196.29	+ 18.71	0.26%
DAX30	11419.48	+ 72.83	0.64%

By Greg Peel

M&A Day

Stability returned to the local market yesterday, following Wall Street’s lead, as the shock of plunging US bond yields gave way to a level of stability. From an ASX200 perspective it was a dull old session, the index dipping a bit early, grafting back and dipping again at the close for a dead rubber.

All the action was in individual stocks.

I don’t think anyone saw this one coming. It was known Wesfarmers ((WES)) was on the hunt for a new investment to spend its Coles money on, other than shareholder returns, but who knew Lynas Corp ((LYC)) was in the frame? One minute the company is selling Corn Flakes and the next it wants to process dysprosium in Malaysia.

Wesfarmers' bid for the rare earth producer had Lynas shares up 35% to top the leaders’ board yesterday and Wesfarmers shares down -3.5%, which was enough for a place among the top five losers. Concern has been raised over Wesfarmers introducing sovereign risk into its mix – Lynas’ relationship with the Malaysian government has been no less than a volatile one to date – but at this stage the bid is “conditional, non-binding and indicative” so not exactly a commitment.

There was no takeover bid announced for Challenger ((CGF)) but expectations are there may soon be. The company’s shares jumped 9% yesterday after Japanese partner Mitsui Sumitomo announced it had lifted its stake to over 15% and was seeking a seat on the board. Challenger’s share price has drifted off ever since a disappointing earnings result in February, so speculation is a timely bid may be forthcoming.

Then there’s the M&A that wasn’t. EclipX Group ((ECX)) fell yet another -12% yesterday and is now down -70% since a weak trading update drove potential merger partner McMillan Shakespeare ((MMS)) to pull the pin.

At the sector level, energy (-1.1%) saw an ongoing exit yesterday but may be due a rebound today. Materials (+0.8%) were aided by the Lynas move but remain elevated due to flooding around Port Hedland and the ramifications for iron ore, as well as support for goldminers.

Challenger could not head off a -0.2% dip for financials as bank remediation concerns linger, while consumer discretionary (-1.2%) posted the biggest fall of the session, offset by yield paying defensives (telcos up 0.3%, utilities 1.4%) which look more attractive with an Australian ten-year yield at 1.75%.

So plenty of movement behind the scenes but another wise flat day for the index, which must be feeling a lot like Sisyphus at the moment as it again looks up at 6200 and sees it a long way off.

Stability

Last night the Secretary of State warned his Russian counterpart that the US would not “stand idly by” if Russia continues to send military personnel to Venezuela to prop up a Maduro government the US and its allies fail to recognise. Sanctions on both Venezuela and Iran are one reason oil prices have been supported this year.

And last night we saw another escalation of hostilities between Israel and Palestine which (a) are not uncommon and (b) have nothing to do with oil other than the risk of more widespread Middle East tension. Typically the oil price adds a risk premium at such times and last night WTI regained US$60/bbl with a 2% gain.

The energy sector thus led the S&P500 higher last night. Following hot on its heels were financials.

US banks were slammed when the ten-year yield plunged over a couple of sessions but Monday night’s trade did see some late bargain hunting, and as yields stabilised last night, the buyers piled back in. Indeed, every S&P sector closed in the green but it was still a case of watch those bonds!

The ten-year yield ticked back up slightly early in the session, which had the Dow up 280 points, then fell back to be slightly lower, which saw the Dow only 35 points up, before closing relatively flat at 2.41%, which allowed the Dow to close up 140. The main point is the yield didn’t go on with it after falling through 2.40%, which now is providing support.

Also providing support is the 2800 level in the S&P, which has proven both resistance and support as Wall Street has fallen and recovered over the past six months. At last night’s lows the S&P hit 2803 before rebounding.

While stability may have returned for now, the US Fed funds futures are currently predicting a better than 50% chance the Fed will cut rates by September. Quite a turnaround. Last night’s US data suggest this may not be a silly prediction.

Housing starts fell -9% in February from January. Case-Shiller’s 20-city house price index rose 0.2% in January, its slowest pace in over six years. The Conference Board’s consumer confidence index has fallen to 124.1 this month from 131.4 last month.

Meanwhile, across The Pond, it seems the lunatics have taken over the asylum. The UK parliament has wrested control of Brexit away from the prime minister in a vote which saw several (more) ministers resign and must now surely test Theresa May’s staying power. From tonight the Commons will start voting on whether they want May’s deal, a softer deal, another referendum…

Somehow resolution seems no closer.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz)	1315.10	– 6.80	– 0.51%
Silver (oz)	15.40	– 0.12	– 0.77%
Copper (lb)	2.88	– 0.01	– 0.31%
Aluminium (lb)	0.84	– 0.00	– 0.38%
Lead (lb)	0.90	– 0.00	– 0.52%
Nickel (lb)	5.79	– 0.04	– 0.61%
Zinc (lb)	1.30	+ 0.02	1.49%
West Texas Crude	60.05	+ 1.10	1.87%
Brent Crude	68.08	+ 0.82	1.22%
Iron Ore (t) futures	84.80	– 0.15	– 0.18%

Metals prices continue to mostly drift lower as markets await this week’s ongoing US-China trade talks, although zinc bucked the trend.

As US yields stabilise, the US dollar index has recovered 0.3% but the Aussie is also up 0.3% this morning at US$0.7133.

Gold fell back on the dollar rebound.

Today

The SPI Overnight closed up 10 points.

The RBNZ holds a policy meeting this morning, ECB president Mario Draghi will speak tonight, and delayed January US trade numbers are due.

Japara Healthcare ((JHC)) and UR-Westfield ((URW)) are among today’s stocks going ex-div.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
BKW	BRICKWORKS	Downgrade to Hold from Buy	Deutsche Bank
CKF	COLLINS FOODS	Upgrade to Add from Hold	Morgans
EPW	ERM POWER	Downgrade to Hold from Add	Morgans
SBM	ST BARBARA	Upgrade to Neutral from Underperform	Credit Suisse
		Upgrade to Accumulate from Hold	Ord Minnett
SIG	SIGMA HEALTHCARE	Downgrade to Sell from Neutral	Citi
		Downgrade to Sell from Neutral	UBS

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

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