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The Overnight Report: No Fed Rate Cut

Daily Market Reports | May 02 2019

World Overnight
SPI Overnight (Jun) 6320.00 – 30.00 – 0.47%
S&P ASX 200 6375.90 + 50.40 0.80%
S&P500 2923.73 – 22.10 – 0.75%
Nasdaq Comp 8049.64 – 45.75 – 0.57%
DJIA 26430.14 – 162.77 – 0.61%
S&P500 VIX 14.80 + 1.68 12.80%
US 10-year yield 2.51 + 0.00 0.08%
USD Index 97.65 + 0.13 0.13%
FTSE100 7385.26 – 32.96 – 0.44%
DAX30 12344.08 + 16.06 0.13%

By Greg Peel

Buy in May

A steep rally from the open of the ASX200 yesterday appeared to confirm Tuesday weakness was indeed about end of month profit-taking more than anything else, but the real kicker was nevertheless a “not as bad as feared” earnings report from ANZ Bank ((ANZ)).

The banks have become difficult investment choices of late, as the market weighs up solid yields against the possibility of dividend cuts and the sheer uncertainty underscored by rolling increases in remediation provisions. ANZ did not cut its dividend and a beat on earnings saw the stock up 2.8%.

The report lifted all bank stocks, other than Bank of Queensland ((BOQ)) which went ex-div, taking the financials sector up 1.5% to provide a big chunk of the 50 point index rally. Even the hot-to-trot BNPL stocks (buy now, pay later) joined in, with Zip Co ((Z1P)) and Afterpay Touch ((APT)) helping the IT sector up 2.5%.

But if not for a couple of individual drags, all sectors would have closed in the green, suggesting investors were keen for a strong May.

AGL Energy ((AGL)) fell on Tuesday after providing a weak outlook at the Macquarie conference and went on with it yesterday, leading utilities to a -0.1% fall. Super Retail ((SUL)) went from hero on Tuesday, after a positive trading update, to zero yesterday, falling -8.8% on a rethink and a downgrade from UBS, albeit only to Neutral. Consumer discretionary fell -0.3%.

Otherwise, energy (+0.9%), materials (+0.3%) and telcos (+0.9%) all bounced back after a round of profit-taking. Healthcare (+0.6%) had already seen profit-taking and just kept on keeping on while staples, which have crept up steadily of late, sat it out. Industrials (+1.0%) rounded out the gains.

There was likely a consideration that Wall Street might have been set for a strong session last night, given a solid rally for Apple in the aftermarket post its earnings result. But this has not been the case.

Indeed, our futures are down -30 points this morning. The market giveth…

Last night was the first time Wall Street actually did anything beyond the incremental but our market seems to be flying around for no definitive reason. If we are down -30 points today that will be -30, +50, -30 in three days.

In economic news, the average Australian house price fell -0.5% in April to continue the woe, although it does appear the pace of decline has started to slow. Light at the end of the tunnel?

Transitory

Wall Street spent most of the session a tad higher last night, with the S&P500 again ticking up to a fresh (intraday) high, ahead of the release of the Fed statement. That statement provided for a brief kick higher.

The reason for the kick was a reference in the statement to low inflation. Such a reference might imply, if one is trying desperately to interpret subtle central bank speak (as computers do), that Wall Street is right in thinking a Fed rate cut is coming before the end of the year, maybe two.

Wrong.

In his press conference, Chair Jerome Powell declared low inflation to be merely transitory. No need to panic. Hence the implication is: no rate cut.

The concept of “transitory” low inflation harks back to the Yellen era, in which low inflation was declared to be such at pretty much every meeting. It’s still low and, apparently, still transitory. Just how long is a transitory timeframe?

Wall Street is not prepared to mull over the answer. The rally back from the December bottom was sharp at first but far more incremental of late, such that new highs have been eked out rather than crashed through. This suggests a level of doubt. Earnings have proven to be better than expected but not so much to shift the PE dial notably back down from expensive territory.

Wall Street was ripe for a pullback. Powell started the rally from December and appears now to have ended it. Although we’ll have to wait and see how traders respond tonight after they’ve had more time to think about it.

Had it not been for mega-cap Apple, falls in all three major indices would have been more pronounced. Apple closed up 5%, having been up 7% ahead of the Fed statement.

Meanwhile US economic data continued to be mixed.

The ADP private sector jobs number for April came in at 275,000 additions when 176,000 was forecast. Wall Street typically reserves its judgement for the official non-farm payrolls report, which is due on Friday night.

The US manufacturing PMI fell sharply to 52.8 in April from 55.3 in March when 54.7 was forecast.

Construction spending fell -0.9% in March when -0.4% was forecast.

Should have a rate cut.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz) 1276.30 – 6.80 – 0.53%
Silver (oz) 14.65 – 0.27 – 1.81%
Copper (lb) 2.88 – 0.03 – 0.95%
Aluminium (lb) 0.80 – 0.02 – 2.18%
Lead (lb) 0.85 – 0.02 – 2.73%
Nickel (lb) 5.50 – 0.05 – 0.90%
Zinc (lb) 1.31 – 0.02 – 1.19%
West Texas Crude 63.61 + 0.14 0.22%
Brent Crude 72.15 + 0.09 0.12%
Iron Ore (t) futures 94.55 0.00 0.00%

The US dollar index rallied on the dismissal of Fed rate cut expectations which could explain why base metal prices tanked last night, except that the LME closed before Powell opened his mouth. Commentary suggests an option expiry sparked initial weakness, technical selling was then triggered, and with China off for May Day, a hole opened up.

The greenback does otherwise explain gold.

And the Aussie, down -0.5% at US$0.7012. Can we see the sixties this time?

Today

The SPI Overnight closed down -30 points or -0.5%. Maybe futures traders think that if the Fed’s not going to cut on low inflation, maybe the RBA won’t either.

China and Japan remain closed today but Europe’s back tonight.

The Bank of England holds a policy meeting.

National Bank ((NAB)) follows in ANZ’s wake today with its earnings report. If anyone is going to cut dividends…

Janus Henderson ((JHG)) and Pendal Group ((PDL)) publish quarterly earnings today and Woolworths ((WOW)) delivers quarterly sales numbers.

AGMs will be held by AMP ((AMP)), Iress ((IRE)), Santos ((STO)) and Woodside ((WPL)).

Amcor ((AMC)) holds a scheme meeting with regard the Bemis acquisition.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
BPT BEACH ENERGY Downgrade to Sell from Neutral Citi
DHG DOMAIN HOLDINGS Upgrade to Neutral from Underperform Macquarie
Downgrade to Underperform from Neutral Credit Suisse
Downgrade to Reduce from Hold Morgans
Downgrade to Hold from Accumulate Ord Minnett
HLS HEALIUS Upgrade to Neutral from Underperform Credit Suisse
IGO INDEPENDENCE GROUP Upgrade to Outperform from Neutral Macquarie
Upgrade to Buy from Neutral UBS
MGR MIRVAC Downgrade to Lighten from Hold Ord Minnett
NUF NUFARM Downgrade to Hold from Add Morgans
OGC OCEANAGOLD Upgrade to Neutral from Underperform Credit Suisse
ORI ORICA Downgrade to Neutral from Buy UBS
PLS PILBARA MINERALS Upgrade to Hold from Lighten Ord Minnett
RBL REDBUBBLE Downgrade to Reduce from Add Morgans
REA REA GROUP Downgrade to Lighten from Hold Ord Minnett
RRL REGIS RESOURCES Upgrade to Neutral from Sell UBS
SUL SUPER RETAIL Downgrade to Neutral from Buy UBS
SXL SOUTHERN CROSS MEDIA Downgrade to Neutral from Buy UBS
SXY SENEX ENERGY Downgrade to Neutral from Buy Citi
VHT VOLPARA HEALTH TECHNOLOGIES Downgrade to Lighten from Buy Ord Minnett

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

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available on the FNArena website.  Click here. (Subscribers can access prices on the website.)

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author's and not by association FNArena's – see disclaimer on the website)

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AGL AMC AMP ANZ APT BOQ IRE JHG NAB PDL STO SUL WOW WPL Z1P