The Overnight Report: One Day Wonder

Daily Market Reports | May 20 2020

World Overnight
SPI Overnight (Jun) 5491.00 – 83.00 – 1.49%
S&P ASX 200 5559.50 + 99.00 1.81%
S&P500 2922.94 – 30.97 – 1.05%
Nasdaq Comp 9185.10 – 49.72 – 0.54%
DJIA 24206.86 – 390.51 – 1.59%
S&P500 VIX 30.53 + 1.23 4.20%
US 10-year yield 0.71 – 0.03 – 4.44%
USD Index 99.57 – 0.03 – 0.03%
FTSE100 6002.23 – 46.36 – 0.77%
DAX30 11075.29 + 16.42 0.15%

By Greg Peel

No Momentum

If you were hoping to get on the rally yesterday morning, driven by big gains on Wall Street overnight and supported by our futures, you would have missed out. The ASX200 opened up 140 points in the first ten minutes. Thereafter it slipped back to around the +100 level at which it remained stuck for the rest of the session.

This was not a rally per se but an opening step-jump, unsupported by any momentum on the buy-side. Wall Street has given back a good third of Monday night’s rally last night, and our futures are down -83 this morning. Thanks for playing.

Ten minutes in, the index hit 5600, to mark the highest level to date post-crash, exceeding the 5540 peak on April 30, which was little more than an end-of-month flurry. At 5600, the index had rebounded 33%, to be -22% down from the February intraday (all-time) high.

But today we go down again.

The resource sectors again led the gains yesterday, again by a significant margin. Not only were iron ore and oil prices up on Monday night, base metal prices had also had a run. Materials rose 3.5% and energy 4.2%.

The iron ore situation is an interesting one in the context of China’s barley tariff, which is nothing more than thinly veiled retaliation. Beijing’s accusation that Australian barley is “below cost” due to being “government subsidised” relates to the Murray-Darling Scheme’s allocation to irrigators. The Murray and Darling Rivers, as we all know, flow majestically through the Western Australian plains.

Could China next target iron ore? Well, it could buy more from Brazil, except that Brazil is also in loggerheads with China and is suffering from one of the worst virus outbreaks, impeding on production. After that…

Beyond the resource sectors, we drop down to a 2.2% gain for consumer discretionary. Given staples fell -0.6%, we can call yesterday a risk-on rotation. The only other sector to close in the red was healthcare (-0.9%), while telcos (+0.5%) underperformed.

The banks had a good session (+1.8%), after having had a good session on Friday, and a bad one on Monday. They had a good session yesterday because US banks outperformed overnight. Last night they underperformed.

Leading individual stocks was retail landlord UR Westfield ((URW)), bouncing 11.4% on overnight news of a sizeable and coordinated EU relief package. Building materials manufacturer James Hardie ((JHX)) followed with 11.2% on a positive earnings result and outlook, albeit no formal guidance, and no dividend.

Outside the index, Baby Bunting ((BBN)) reported a 13% year on year jump in second half sales and a 66% increase online. Those baby wipes were pretty popular around the time of Toilet Paper & Hand Sanitiser Madness.

The minutes of the May RBA meeting came out yesterday and included:

“…as the Bank's policy package had been introduced only recently, members assessed that the best course of action was to maintain the current policy settings and monitor economic and financial outcomes closely.”

On the fiscal side, some rolling interim data from the ABS suggest the labour market is now stabilising, largely reflecting the long-awaited arrival of JobKeeper payments. ANZ Bank’s economists responded:

“The success that policy has had in stemming a greater decline in jobs and wages is to be celebrated and helps explain the relative strength in household spending and consumer sentiment. But there is a risk that the withdrawal of JobKeeper could see underutilisation continue to rise over a longer period and be counterproductive to improving economic and social outcomes.”

We still have it all ahead of us.

Triple-Top

After Monday night’s big rally, Wall Street was content last night to bang along the flat line for most of the session, wondering what to do next. What was notable nonetheless was that the sectors that led the rally on Monday night – the beaten-down banks, industrials, energy and discretionary – all fell back again last night, while the stocks that sat back on Monday night – mostly Big Tech – resumed their typical leadership.

At around 3pm a report hit the wires from Boston Globe Media casting doubt over the excitement generated by Monday night’s announcement from biotech Moderna, which noted success in a phase one trial of its vaccine candidate. Moderna’s announcement was mostly anecdotal, the report pointed out, with little in the way of hard data to back up the success noted in all of eight patients.

The report was backed up by biotech analysts who pointed out that in biotech land, only a 15-20% success rate is modelled for new drugs after phase one trials, based on historical experience, with that rate increasing only after phase two and then phase three, if the drug goes that far. Wall Street responded on Monday night as if a vaccine was on its way.

And so Wall Street began to fall back, and the selling accelerated into the close.

Around the same time, the Boston Fed president was providing a rather dour outlook for the US economy, despite re-openings, noting Boston is another virus hotspot alongside New York.

So the Dow gave back over a third of Monday night’s gains. The Nasdaq, which had been positive all session and rose to be within only 5% of its all-time high, swung into the negative on the death.

The fall-back now means the S&P500 has seen a triple-top around the 2950 level. History suggests markets can be allowed two attempts to break through a level, but not three. Three means the rally has failed.

Meanwhile, President Trump, while popping hydroxychloroquine pills his chief medical advisor has warned could kill him, suggested last night he may permanently cut off US funding of the WHO, accusing it of cooperation with China in playing down the early stages of the pandemic, which, as we recall, was at that stage only an epidemic, according to Daltrey, Townshend and friends.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz) 1744.70 + 12.70 0.73%
Silver (oz) 17.34 + 0.37 2.18%
Copper (lb) 2.40 + 0.01 0.26%
Aluminium (lb) 0.66 – 0.00 – 0.47%
Lead (lb) 0.74 + 0.01 1.27%
Nickel (lb) 5.51 + 0.10 1.84%
Zinc (lb) 0.91 + 0.00 0.50%
West Texas Crude 32.50 – 0.24 – 0.73%
Brent Crude 34.50 – 1.08 – 3.04%
Iron Ore (t) 97.95 + 1.80 1.87%

Base metal prices remained mostly positive last night, while iron ore is looking Bradman-esque.

Gold doesn’t suffer dips for very long in these times, and last night the US-ten-year bond yield, which had risen 10 basis points on Monday night, fell back -5.

The WTI expiry passed without a murmur. Most notable is the slamming shut of the Brent-WTI spread, now storage capacity has begun to re-emerge in Oklahoma.

The Aussie is a tad higher at US$0.6536.

Today

The SPI Overnight closed down -83 points or -1.5%.

The ABS will today release some preliminary numbers for April retail sales.

The minutes of the last Fed meeting are out tonight.

Sydney Airport ((SYD)) releases (lack of) traffic numbers.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
BLD Boral Downgrade to Neutral from Outperform Credit Suisse
BRG Breville Group Downgrade to Neutral from Outperform Macquarie
CHC Charter Hall Upgrade to Outperform from Neutral Credit Suisse
Upgrade to Accumulate from Hold Ord Minnett
Upgrade to Buy from Neutral UBS
DXS Dexus Property Downgrade to Neutral from Buy Citi
ELD Elders Downgrade to Hold from Add Morgans
GPT GPT Group Upgrade to Buy from Neutral Citi
PRU Perseus Mining Upgrade to Buy from Neutral Citi
WPL Woodside Petroleum Downgrade to Neutral from Outperform Macquarie
XRO Xero Downgrade to Neutral from Outperform 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.)

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