The Overnight Report: Rinse And Repeat

This story features NATIONAL AUSTRALIA BANK LIMITED, and other companies. For more info SHARE ANALYSIS: NAB

By Greg Peel

The Big Switch

Quiet day was it? ASX200 down only -5 points? Hardly.

It’s not often you’ll see eight ASX200 sectors close lower on the day and only two close higher, to produce less than a -0.1% net move. But that was the case yesterday. It was all about one sector – the banks.

Australian bank stocks have an unwavering track record of following US banks stocks through hell and high water, even if there is little connection to be made under the circumstances. On Tuesday night beaten-down US bank stocks took off in a frenzy as investors jumped into the get-out-of-home theme, which implies an easing of loan loss risk.

Australian investors could have figured out for themselves that the same does actually apply downunder, given a pace of reopening more rapid than anyone had expected a couple of months ago. But it took Wall Street to provide a wake-up call and so it was yesterday saw the Australian financials index close up 5.3%.

Take a photo, you won’t see that very often.

Adding to bank excitement was a note out yesterday morning from UBS, suggesting the “chance of a 'risk-on' bank re-rating to book value cannot be ruled out”. The broker may have to put out another note this morning saying “told you”.

Given the excitement, National Bank ((NAB)) took the opportunity yesterday to announce an increase in the SPP portion of its capital raising to $1.25bn from a prior $500m, citing overwhelming demand. Dilutionary? NAB rose 7.8%.

The call from the open was clearly the wrong one as the index fell -67 points in the first 15 minutes before spinning around sharply. It then rallied 122 points to 2pm. Only then did the sellers step in to calm the waters. Or maybe that was the point early buyers of banks had to decide what to sell to fund their purchases.

The obvious choice was healthcare, and within the sector, Australia’s biggest company. CSL ((CSL)) dropped -6.4% and the sector closed down -5.0%.

Aside from energy (+1.2%) and consumer staples (flat), every other sector had to be trimmed as well to balance gains of 4.9% to 8.6% for the Big Four. Beyond healthcare, materials was the next worst (-2.5%) as investors bailed out of gold stocks on the double whammy of a lower USD gold price and surging Aussie.

Indeed, all five of the top ASX200 losers on the day were gold miners, posting falls of between -11.2% and -8.3%. Such volatility suggests the miners are being used as the proxy for gold itself, which is the hedge against further economic stress.

On the upside, we saw Southern Cross Media ((SXL)) post its third super-session in a row, and to date its best, in rising another 27%. Mind you, it bottomed at 10c.

Virgin Money UK ((VUK)) joined in the bank theme in rising 15.5% despite the UK looking more and more like a basket case.

McMillan Shakespeare ((MMS)) jumped 9.7% on the back-to-work theme, UR Westfield ((URW)) also kicked on (9.0%), and making up the top five were ANZ Bank ((ANZ)) and Westpac ((WBC)), up 8.6% and 8.0% respectively.

The laggard was Commonwealth Bank ((CBA)), up a mere 4.9%, given analysts spend their lives dedicated to the proposition that CBA is always relatively overvalued.

Wall Street was at it again last night, and our futures are up 50 points this morning. If accurate, that would mean re-conquering 5800, although still shy of yesterday’s intraday high of 5835.

Don’t Miss Out!

The Fed Beige Book revealed economic activity through to May 18 fell sharply in most of the twelve Fed districts, amid mass unemployment and the challenge of bringing employees back to work in current circumstance. But is it a revelation?

More concerning was the US Secretary of State officially declaring that Hong Kong is no longer autonomous from China, a move that could revoke two decades of special economic privileges. President Trump has said he will decide by the end of this week his response to China’s new security laws, prompting Beijing to fire back with threats of retaliation, yada yada.

Asked last night whether there was any consideration of closing down operations in Hong Kong, the Goldman Sachs COO said only that management is watching the situation closely.

Lawmakers in Washington also are pushing ahead with legislation that would require all companies listed on US stock exchanges to submit to audits reviewable by the US Public Company Accounting Oversight Board — a move that could force a number of Chinese companies to delist.

The Dow had opened up over 300 points last night but gave that back by mid-morning. However, the drop took the average back to the 25,000 mark, which seemed a suitable springboard. The subsequent rally was steady up until the last half hour, when there was a final flurry.

The session ultimately proved a repeat performance of Tuesday night. The Dow closed up 2.2%, the S&P500 1.5%, and the Nasdaq 0.8%.

The big movers that led the initial rally – the stay at home winners – were again sold off to fund a rotation into the early losers, which now offer value on the back-to-business theme. FAANMG, Walmart et al aren’t being slammed, they’re just seeing some profit-taking, while the beaten-downs continue their comeback.

Rarely does profit-taking in the mega-caps last more than one session, maybe two, so it will be interesting to see how we go tonight. Talk now is of whether the cyclicals have gotten ahead of themselves.

The banks once again led the charge among S&P sectors last night, up another 4.3%, with industrials next best on 3.3%, hence another session of Dow outperformance. IT and communication services, which cover most of the mega-caps, posted 0.5% gains.

Your airlines, cruise lines and casino stocks are among those leading the second wave rally, albeit from close to death prices at the bottom.

Commodities

Rising US-China tensions are typically not good for base metal prices.

On top of that, Russia is now considering easing its crude supply cuts in July.

The Aussie did manage to fall back a bit after Tuesday’s surge, down -0.4% to US$0.6623.

Today

The SPI Overnight closed up 50 points or 0.9%.

Australian March quarter construction work done fell less than expected (-1.0%) but economists note this number is mostly pre-pandemic. And the bulk of the fall was in apartments – a trend that was already underway.

Today brings March quarter private sector capex.

The US will see data for durable goods orders.

Gold Road Resources ((GOR)) holds its AGM today.

The Australian share market over the past thirty days…

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