The Monday Report – 29 June 2020

Daily Market Reports | Jun 29 2020

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.


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