The Monday Report – 03 August 2020

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By Greg Peel

Wall Street had provided a weak lead, as the US squirmed over increasing unemployment and a lack of any agreement on new stimulus, but realistically at some point Australia’s second wave had to make its presence felt. Thankfully the local market did not attempt to respond on Friday to after-the-bell FAAG results.

In the opening minutes the ASX200 fell through support at 6000 which made Friday’s drubbing technical as much as anything else. From there it was all south. Every sector closed in the red.

In percentage terms, energy was the worst performer in falling -3.1% on ramped-up re-lockdowns. And this is ahead of Melbourne going into stage 4 over the weekend, which all but takes vehicles off the road. Local driving and LNG exporting do not have any great correlation, but it’s a global phenomenon.

In market cap terms, a -2.8% fall for financials had the biggest impact. Bad loan fears are growing for the banks, and AMP ((AMP)) issued a profit warning which saw it fall -12.8% to be the worst performing index stock on the day.

Also issuing a profit “warning” was Super Retail ((SUL)), but this was a goodun’, sending the stock up 9.5% to be the best performer. Throw in stay-at-home beneficiary Harvey Norman ((HVN)), up 3.5%, and consumer discretionary became the surprise best performing sector in falling only -0.6% when staples fell a full -2.1%.

Industrials (-1.9%) and materials (-2.4%) rounded out the bigger falls, with lockdowns impacting the former and profit-taking in gold a feature for the latter. All other sectors roughly fell -1.5%. Not a lot of discrimination.

The virus provided the weight, the break of 6000 provided the release.

Friday night on Wall Street saw the Dow down over -300 at one point but a late rally swung the market around. The S&P closed up 0.8% which, after our performance on Friday, might have suggested a bit of a snap-back for the ASX200 this morning, yet on Saturday morning the futures closed down one point.

The Melbourne stage 4 lockdowns had yet to be announced.

If there is any silver lining it is that Friday re-set many stock prices to levels which may provide some buffer against upcoming earnings results. Never in anyone’s memory have earnings results been such a toss-up. And as we look to FY21, re-lockdowns are only going to make those earnings forecasts a guess as well, and we may once again see companies choosing not to issue any formal guidance due to uncertainty.

The earnings season begins with a whimper this week, picks up pace next week and then becomes an avalanche in the last two weeks of August.

Keeping the Doctor Away

After reporting after the bell on Thursday night, Friday night saw Amazon rally 4% and Facebook 7%, and Apple 10% to become the biggest listed company in the world. Apple is the only one of the three to be in each of the three major indices, so one might contemplate what S&P minus Apple and Dow minus Apple might have looked like on the day.

Indeed despite all three indices closing in the green, the advance/decline balance on the NYSE was two to one to the downside. The Russell small cap fell -1%.

Interestingly, Apple has announced a four-for-one stock split, taking it from a four hundred and something dollar stock to a one hundred and something dollar stock. This has no impact on its S&P500 market cap weighting, but it does mean Apple will drop from highest nominally priced and thus most influential Dow stock down into the middle of the pack of thirty stocks.

This is good. Even though the Dow’s very old hat, at least Apple won’t continue to provide a distorted impression.

As noted, the Dow was down over -300 points mid-session. A weak read on consumer sentiment was one influence, but the Democrats rejecting a Republican offer of a stop-gap period of extension to the US$600 a week unemployment benefit, until agreement can be reached, was a major negative.

This allowed the Republicans, including the president, to lay blame on the Democrats for cheques no longer coming and no sign of compromise on a new stimulus package. The Democrats do not, nonetheless, want a stop-gap, they want the US$600 to be extended to January. They believe any stop-gap agreement will mean a loss of leverage.

The Republicans have otherwise offered US$200 per week, after the stop-gap. No sign of middle ground at this point.

Just when it looked like Wall Street might tumble into the weekend, it turned around, and the Dow rallied back over 400 points. The last hour saw Apple rally from being 8% up on the day to 10% up. That was the driver.

Commodities

Precious metals saw only a brief bout of profit-taking before normal service resumed on Friday night. This is despite the US dollar having a rare up-day.

The dollar may otherwise have weighed on base metals, except for zinc, while iron ore is indeed unchanged.

The oils continue to slumber. One might have expected a fall on the ongoing global virus crisis but this is being countered by falling supply as marginal US oil companies hit the wall.

The Aussie has had a reprieve, falling -0.7% to US$0.7136 as one might expect as the Australian economy threatens to once again shut down, though it’s all relative.

The SPI Overnight closed down -1 point on Saturday morning.

The Week Ahead

It’s manufacturing PMI day across the globe, followed by services on Wednesday. China reported its numbers over the weekend, with manufacturing a better than expected 51.1 and services swinging into expansion at 51.9.

The US will see July jobs numbers this week – private sector on Wednesday and non-farm payrolls on Friday. Be very afraid. Consider that unless Congress gets its act together, everyone on government support will become officially unemployed in August.

The RBA meets tomorrow to remind us it’s there if needed, which it may well be. ANZ Bank provides job ad numbers today, the final June trade balance number is out on Tuesday and private sector credit on Friday.

China’s July trade balance is out on Friday.

The Bank of England meets on Thursday.

Local earnings results this week include Pilbara Minerals ((PLS)) today, Pinnacle Investments ((PNI)) tomorrow, Mirvac Group ((MGR)), Nick Scali ((NCK)) and ResMed ((RMD)) on Thursday and Insurance Australia Group ((IAG)) and REA Group ((REA)) on Friday, among others.

The Australian share market over the past thirty days…

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