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The Overnight Report: Virus Peak?

Daily Market Reports | Feb 12 2020

World Overnight
SPI Overnight (Mar) 7000.00 + 10.00 0.14%
S&P ASX 200 7055.30 + 42.80 0.61%
S&P500 3357.75 + 5.66 0.17%
Nasdaq Comp 9638.94 + 10.55 0.11%
DJIA 29276.34 – 0.48 – 0.00%
S&P500 VIX 15.18 + 0.14 0.93%
US 10-year yield 1.59 + 0.04 2.78%
USD Index 98.73 – 0.12 – 0.12%
FTSE100 7499.44 + 52.56 0.71%
DAX30 13627.84 + 133.81 0.99%

By Greg Peel

Index Buying

Since the initial virus-related plunge a couple of weeks ago, the Australian market has traded in a sector and stock-specific manner depending on exposure to the Chinese economy. Healthcare and consumer staples have proven to be defensive stalwarts, resources sectors have borne the brunt, and anything related to tourism, travel, education and the Chinese consumer has struggled.

Yesterday was, in contrast, a simple case of “buy the index”. The ASX200 rose 0.6% and just about every sector posted a similar gain. IT jumped 1.7% but that’s a typical move for the high-growth sector. Telcos (+1.0%) were the only real outperformer.

WHO has called the coronavirus a bigger threat than terrorism, but local analysts continue to cite past experiences, such as SARS, to suggest it will end up as a one quarter blip. This implies stocks and sectors knocked down in the past two weeks are offering value ahead of what analysts assume to be an inevitable recovery.

Cochlear ((COH)) is a case in point. Chinese hospitals are currently deferring non-urgent operations due to the virus risk, and that includes implants. Cochlear has thus downgraded guidance, while noting that SARS affected a material one quarter reduction in sales followed by a swift resurgence as the backlog was cleared.

Cochlear fell -3.4% yesterday, but healthcare rose 0.7%.

Despite the mounting death toll, virus impact fears are easing. Buy everything.

Yesterday’s star was Challenger ((CGF)), which popped 13.9% on a knock-out earnings result. The Japanese are keen on annuities, it seems.

On the downside, Monday’s star JB Hi-Fi ((JBH)) fell back -3.9% after brokers applauded the company’s result but agreed the stock had run too far.

In economic news, NAB’s survey showed business conditions held up in January, at 2.6 on the index compared to 2.7 in December. Either the bushfires have not impacted as significantly as assumed, or conditions in non-affected areas improved enough to offset. Confidence also improved, albeit to -0.8 from -2.5.

NAB noted that virus impact will not be captured until the next survey.

It was a good day for the banks yesterday, on news housing finance surged 4.4% in December, driven by the best monthly result for owner-occupiers (+5.1%) since August 2015. A 2.8% rise in investor loans took that segment into positive year on year territory for the first time since August 2017, taking overall annual growth in home loans to 17.9% — again the strongest since August 2017.

Clearly the loan numbers are “cycling weak comps” as they say, given a year ago we were in a Major Housing Crisis, but it looks like the RBA has its old headache back to contend with.

I’m Getting Better

China’s National Health Commission yesterday said in its daily update that 108 coronavirus deaths were reported in the previous 24 hours, bringing the total to 1,016 deaths in mainland China since the disease emerged in December. The number of new, confirmed cases fell to 2,478 from 3,062 a day earlier, bringing the total to 42,638 on the mainland, including some of whom have since recovered and been released from treatment.

This suggests the rate of infection is slowing. The virus now also has a name: COVID-19. Scientists really need a marketing department.

Wall Street opened with a flourish last night on the news, further buoyed by Fed chair Jerome Powell’s testimony to Congress in which he noted the FOMC is monitoring the virus impact closely. This implied to Wall Street were there to be a notable US economic impact the Fed was ready to cut.

But the wind then came out of the sails on a slew of news during the session.

Athletic apparel company Under Armour downgraded guidance due to the virus impact, and fell -16.7%. The reality is the company’s December quarter sales were weak anyway.

Boeing (Dow) reported zero orders in January. It’s the first time the company has seen zero January orders since 1962.

After two long years, the government finally approved the merger of US telcos Sprint and T-Mobile. The decision was worth 12% for Sprint and 77% for the more junior T-Mobile. The suggestion now is that for the first time in their history, US telco leviathans and Dow components AT&T and Verizon will now face genuine competition. Both were sold.

The Federal Trade Commission announced last night it will investigate acquisitions made by the US tech giants – Apple, Amazon, Facebook, Google, Microsoft – over the past decade. The FTC wants to determine whether there is a trend of hoovering up all new innovation into their conglomerates and shutting out everyone else.

While commentators see the potential for investor concern, the fact is said acquisitions run into the hundreds. There is doubt the FTC even has the manpower to investigate.

Wall Street thus closed flat but it had already returned to all-time highs in the midst of the virus scare, and reacted to net positive earnings results. It’s hard to see what the next catalysts will be. In theory an easing in virus spread is already priced in.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz) 1567.90 – 5.20 – 0.33%
Silver (oz) 17.63 – 0.12 – 0.68%
Copper (lb) 2.60 + 0.03 1.31%
Aluminium (lb) 0.77 0.00 0.00%
Lead (lb) 0.83 + 0.01 1.73%
Nickel (lb) 5.93 + 0.09 1.55%
Zinc (lb) 0.98 + 0.01 0.67%
West Texas Crude 49.79 + 0.25 0.50%
Brent Crude 53.93 + 0.69 1.30%
Iron Ore (t) futures 85.55 + 3.85 4.71%

For some reason we’re not getting a reading from the LME on aluminium this morning. Otherwise, between the base metals and iron ore we might call a relief rebound.

Oil prices have improved, but still hang in the balance depending on production cuts.

The Aussie has shot up 0.5% to US$0.6715.

Today

The SPI Overnight closed up 10 points.

It’s a sizeable day in the local earnings season today, albeit nothing like what’s yet to come. Highlights today include Commonwealth Bank ((CBA)), CSL ((CSL)) – that one had better be good – Carsales ((CAR)), Insurance Australia Group ((IAG)) and James Hardie ((JHX)).

For a full list of earnings results due today please refer to the FNArena Corporate Results Monitor (https://www.fnarena.com/index.php/reporting_season/).

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
BLD BORAL Upgrade to Hold from Lighten Ord Minnett
Downgrade to Underperform from Neutral Credit Suisse
COL COLES GROUP Upgrade to Neutral from Underperform Credit Suisse
Downgrade to Reduce from Hold Morgans
FLT FLIGHT CENTRE Downgrade to Hold from Buy Ord Minnett
JBH JB HI-FI Upgrade to Outperform from Neutral Macquarie
Downgrade to Sell from Neutral Citi
KMD KATHMANDU Downgrade to Neutral from Outperform Credit Suisse
MGR MIRVAC Downgrade to Equal-weight from Overweight Morgan Stanley
OSH OIL SEARCH Upgrade to Hold from Lighten Ord Minnett
REA REA GROUP Downgrade to Underperform from Neutral Macquarie
SM1 SYNLAIT MILK Upgrade to Neutral from Underperform Credit Suisse
Upgrade to Neutral from Underperform Macquarie

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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CHARTS

CAR CBA CGF COH CSL IAG JBH JHX