The Monday Report – 29 June 2020

This story features WESTPAC BANKING CORPORATION, and other companies. For more info SHARE ANALYSIS: WBC

World Overnight
SPI Overnight (Sep)	5757.00	– 91.00	– 1.56%
S&P ASX 200	5904.10	+ 86.40	1.49%
S&P500	3009.05	– 74.71	– 2.42%
Nasdaq Comp	9757.22	– 259.78	– 2.59%
DJIA	25015.55	– 730.05	– 2.84%
S&P500 VIX	34.73	+ 2.51	7.79%
US 10-year yield	0.64	– 0.04	– 5.64%
USD Index	97.43	+ 0.03	0.03%
FTSE100	6159.30	+ 12.16	0.20%
DAX30	12089.39	– 88.48	– 0.73%

By Greg Peel

The Blind Leading the Blind?

Does the Australian stock market blindly follow Wall Street around each session, irrespective of differing underlying fundamentals?

On Thursday night the US financials sector of the S&P500 rose 2.7% and energy rose 1.9% to be the best sector performers. On Friday the financials sector of the ASX200 rose 2.7% and energy rose 1.9% to be the best sector performers.

The banks rallied on Wall Street on the news of an easing of a couple of post-GFC regulations, in a regulatory system completely separate to our own. Admittedly, The Federal Court did decide on Friday Westpac ((WBC)) did not breach responsible lending laws in approving home loans in 2011-15, as ASIC had alleged, which was an individual boost for that bank.

But otherwise, the equal sector gains are just too uncanny.

And the 2.7% gain for our banks ignored the news after the bell on Wall Street regarding Fed stress tests. That news was that everyone passed, which is fine, albeit Goldman Sachs was a bit short on its required capital buffer.

More importantly, the Fed has capped US bank dividends on the basis of a rolling four quarter average, which implies once the banks cycle virus-impacted quarters the risk is some banks’ dividends will need to be cut.

Even more concerning to investors is that there will be another round of stress tests in six months’ time, rather than the usual twelve, implying the Fed could either tighten or loosen the rules set on Thursday night. Investors do not like such uncertainty.

Can you see where this is heading? The US financials sector plunged -4.3% on Friday night. Goldman Sachs fell over -8%. The ASX200 closed up 86 points on Friday, with the Dow down -100 points as it closed, and our futures closed down -91 points on Saturday morning.

No sympathy.

All ASX200 sectors closed in the green on Friday except for healthcare, which was benched for the session. Materials (+1.8%) stood out thanks to iron ore and gold while all others rose 0.7-0.8%.

Qantas ((QAN)) came back on the boards from its capital raising and dropped -9.1% on dilution, and on a balance of staff layoffs (lower costs) and the increasing virus issue in Victoria, threatening domestic flights.

Qantas was the worst index performer, while best performer was fund manager IOOF Holdings ((IFL)), which rose 8.5% on a broker upgrade.

Not worth going into any further detail – we’ll be down today, and if we’re down -100 points, the index will be square for June.

Thanks for playing.

Trouble in Paradise

After the bell on Thursday, just as the bank stress test new was hitting the wire, Nike reported a miss on earnings. On Friday night the stock fell -7.6% which, along with Goldman Sachs (-8.7%), ensured the Dow underperformed the other indices on the day.

It was another piece of news known by the Australian market on Friday.

Also falling by over -8% on Friday night was Facebook. One by one major US companies are lining up to boycott the social media platform by pulling their advertising due to Zuckerberg’s refusal to censor “hate speech”, rather supporting “free speech”. And it’s no small bickies. Advertising is Facebook’s cash cow, and the companies pulling their ads typically spend millions a month.

On Friday night it was the turn of major consumer staples producer Unilever, along with Honda. As the list grows, the pressure builds on other companies to join the boycott, lest they been seen as latently supporting Zuckerberg’s stance, at a time ESG becomes all the more a consideration for investors.

Friday night also brought news the US Department of Justice and state attorneys are considering an investigation into to Apple’s app store. Apple fell -1.8%.

Indeed all the Big Tech stocks closed lower on the day, failing to provide the support they had been during the month.

And the case-count continues to grow, up 30% on a rolling seven-day average. Some states have paused their re-opening plans. On Friday night, both Texas and Florida went a step further and announced the re-closure of some venues, such as bars, and re-restricted patron numbers at other venues.

It is the first step backwards.

The news understandably hit “reopening stocks” such as airlines. But the good news is that the president is doing all he can in these troubled times.

On Friday night he met with his virus crisis advisory team for the first time in two months. He is also considering imposing tariffs on some US$3.1bn worth of goods from France, Germany, Spain and the UK, on products, including beer, gin, olives and trucks. And he is considering reimposing a tariff on Canadian steel.

That’ll help.

The S&P500 is now down -50 points in June.

Commodities

Not much going on in metals, other than gold’s steady climb.

Despite OPEC production cuts, oil prices face the headwind of the growing virus issue in the US, curbing the summer driving season, and the assumption international borders will be closed to the US and many other countries for longer than first feared.

The Aussie is down -0.4% at US$0.6863.

The SPI overnight closed down -91 points or -1.5% on Saturday morning.

The Week Ahead

Tomorrow is EOFY. While Wall Street might be dictating the terms, unrelated volatility may be ahead today and tomorrow.

Wednesday is the first of the month, meaning global manufacturing PMI day (June), followed by services PMIs on Friday, except for China, which will post both tomorrow.

Australia will also see numbers for private sector credit tomorrow, house prices on Wednesday and trade on Thursday.

The US is closed on Friday given the Fourth of July falls on the weekend, meaning the June US jobs numbers will be brought forward to Thursday, with private sector numbers due on Wednesday.

The US will also see numbers for pending home sales, consumer confidence, construction spending, factory orders and trade across the week.

The minutes of the last Fed meeting are out on Wednesday.

Fisher & Paykel Healthcare ((FPH)) reports earnings today followed by Collins Foods ((CKF)) tomorrow.

Today is Super Dividend day on the local market, when just about every REIT, property developer, infra-fund and similar goes ex at the same time. This ensures that before we even get to sentiment today, the ASX200 will open with a handicap.

Spot Metals,Minerals & Energy Futures
Gold (oz)	1771.50	+ 6.30	0.36%
Silver (oz)	17.80	– 0.01	– 0.06%
Copper (lb)	2.69	+ 0.03	1.10%
Aluminium (lb)	0.72	+ 0.01	1.84%
Lead (lb)	0.80	– 0.00	– 0.04%
Nickel (lb)	5.66	+ 0.05	0.86%
Zinc (lb)	0.93	+ 0.00	0.14%
West Texas Crude	38.49	– 0.55	– 1.41%
Brent Crude	41.02	– 0.35	– 0.85%
Iron Ore (t) futures	104.35	– 0.25	– 0.24%

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
CL1	Class	Upgrade to Buy from Hold	Ord Minnett
CRN	Coronado Global Resources	Upgrade to Buy from Neutral	UBS
CZI	Cassini Resources	Downgrade to Hold from Buy	Ord Minnett
FNP	Freedom Foods	Downgrade to Neutral from Buy	Citi
FXL	Flexigroup	Downgrade to Neutral from Outperform	Credit Suisse
ORE	Orocobre	Downgrade to Neutral from Outperform	Credit Suisse
QUB	Qube Holdings	Downgrade to Neutral from Buy	Citi
		Downgrade to Reduce from Hold	Morgans
		Downgrade to Hold from Buy	Ord Minnett
		Downgrade to Neutral from Buy	UBS
SFR	Sandfire	Upgrade to Buy from Neutral	UBS
SHL	Sonic Healthcare	Downgrade to Hold from Add	Morgans
TCL	Transurban Group	Downgrade to Neutral from Buy	UBS
WPL	Woodside Petroleum	Upgrade to Buy from Hold	Ord Minnett
WSA	Western Areas	Upgrade to Buy from Hold	Ord Minnett
		Downgrade to Neutral from Buy	UBS

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

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