The Monday Report – 10 August 2020

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By Greg Peel

Material Concern

The futures had suggested down -15 points on Friday morning but the ASX200 immediately fell -40 points, back to the 6000 level, and spent the rest of the day bouncing around to finish roughly where it began.

All sectors bar one closed in the red but the standouts were materials (-1.5%) and healthcare (-1.2%).

Materials had been the star of Thursday’s trade on higher commodity prices which, to a great extent, lend themselves to a lower US dollar. But consternation set in on Friday when Donald Trump announced he intends to ban, on national security risk, TikTok, unless it sells its US business, and now WeChat, owned by Tencent, which is basically China’s Facebook-Google- Amazon all in one.

It’s a tenuous connection but the bottom line is escalating US-China tensions and as we have learned, that is not necessarily good for Australian exports if we deign to choose sides. Rio Tinto’s ((RIO)) CEO up in front of a parliamentary enquiry into why his company destroyed a sacred Aboriginal site didn’t help either.

Overnight, a “positive” US jobs number sparked a bounce for the US dollar which led to a swift reversal in the prices of gold, iron ore, copper and oil but also a merciful one percent drop in the Aussie, providing an offset. It begs the question of how investors might respond to the sector today, and we note the futures were up 0.7% on Saturday morning when the S&P500 closed flat.

For healthcare, the biggest drag has been the Aussie so there should be some relief today, except that ResMed ((RMD)) kept falling on Friday (-3.2%) post-result on broker downgrades. Note that FNArena database brokers have only one Buy on the stock between them.

The one winning sector was consumer discretionary, as heavily shorted travel agents had another run, with Corporate Travel Management ((CTD)) and Flight Centre ((FLT)) each jumping over 6%. This follows a White House decision to now allow US citizens to fly out of the country (it remains a mystery as to where) and a second round of direct government support for US airlines.

Star Entertainment ((SGR)) also seemed to like that news (+4.5%) while News Corp ((NWS)) rose 5.7% post result.

It was -3% odd falls for the top five index losers on the day which included ResMed, Fisher & Paykel Healthcare in sympathy, and money stocks Janus Henderson ((JHG)) and Virgin UK ((VUK)).

All other sectors closed down around the -0.5% mark apart from telcos, which were flat. The RBA made its contribution to general weakness in its quarterly Statement on Monetary Policy in winding back what had earlier been quite an upbeat 2020 forecast under the circumstances to less so given Victoria’s re-lockdown.

As to why the futures were up 42 points on Saturday morning is not immediately clear, with Wall Street doing little (other than a pullback for the Nasdaq) and the local result season ramping up this week.

The Buck Stops Here

The US added 1.76m jobs in July, down from 4.8m additions in June, due to re-lockdowns in Southern states. Forecasts were for 1.68m, so it was a slight “beat”.

Wall Street also liked that the unemployment rate fell to 10.2% from 11.1%, but this number is distorted by the US version of JobKeeper. That support has now ended, pending a second package from Congress, so the risk is unemployment surges back again in August.

Yet the data were enough to spin an ever-falling US dollar index around for once, sending it up 0.7%. The reverberations impacted the big US multi-national stocks, and the most multi-national of all is Big Tech. The Nasdaq had had a run of new highs all week, so it, too, was due a reversal.

There followed another occasional session of rotation out of growth and into value.

By rights Wall Street should have tumbled, given despite Friday being a deadline, Congress failed to reach an agreement on the second stimulus package.

I suggested on Friday that with the Democrats on US$3trn and the Republicans on US$1trn, maybe US$2trn might be a good compromise? And sure enough, on Friday night the Democrats came down to US$2trn, goading the Republicans into meeting them. The Republicans refused to budge. Having made the grand gesture, the Democrats will not go any lower.

Congress now goes on its summer break – hence the deadline.

The reason Wall Street didn’t plunge on the news was the belief that the president will now have to step in and use his executive powers, which he had threatened to do if an agreement could not be reached. For something has to be done, and presumably now it will be.

Yet the jury is still out on just what powers the president has when it comes to the public purse.

He does nevertheless have the power to ban Chinese websites. As noted, he has now added WeChat to TikTok.

This was another reason Big Tech sold off. US internet sites such as Facebook, Google and Amazon were banned in China from day one, but Apple, for example, has not been, nor US chip makers, so there is now a risk of retaliation if Trump makes good.

The question then is how much does China need Apple, and its large Chinese manufacturing base, and US chips, which drive most of China’s technology.

From the US side, anything could happen with an election approaching.

Commodities

Speaking of “due a pullback”, that was the case with the prior big winners of gold, copper, iron ore and, to a lesser extent, oil prices on Friday night, on a stronger dollar and increased US-China tensions.

The Aussie is down -1% at US$0.7162.

The SPI Overnight closed up 42 points or 0.7%.

The Week Ahead

Local earnings results will dominate the calendar from this week. Today’s reporters include Aurizon Holdings ((AZJ)), GPT Group ((GPT)) and James Hardie ((JHX)).

Local economic data include the NAB business confidence survey tomorrow and Westpac consumer confidence on Wednesday, along with the July jobs numbers on Thursday. We’ll also see the June quarter wage price index on Wednesday.

China releases inflation numbers today and industrial production, retail sales and fixed asset investment numbers on Friday. The US will also release inflation, retail sales and industrial production numbers across the week.

The UK reports June quarter GDP on Wednesday and the eurozone on Friday.

The Australian share market over the past thirty days…

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