Daily Market Reports | Feb 01 2021
This story features CSL LIMITED.
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The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS
| World Overnight | |||
| SPI Overnight (Mar) | 6507.00 | – 34.00 | – 0.52% |
| S&P ASX 200 | 6607.40 | – 42.30 | – 0.64% |
| S&P500 | 3714.24 | – 73.14 | – 1.93% |
| Nasdaq Comp | 13070.69 | – 266.46 | – 2.00% |
| DJIA | 29982.62 | – 620.74 | – 2.03% |
| S&P500 VIX | 33.09 | + 2.88 | 9.53% |
| US 10-year yield | 1.09 | + 0.04 | 3.41% |
| USD Index | 90.58 | + 0.13 | 0.14% |
| FTSE100 | 6407.46 | – 118.69 | – 1.82% |
| DAX30 | 13432.87 | – 233.06 | – 1.71% |
By Greg Peel
Some Sanity Emerging
Friday morning saw the Australian market again fall into lockstep with Wall Street, with the ASX200 jumping 80 points in line with a 400 plus rebound in the Dow overnight. But when the Dow futures again started heading south during the day, the wheels fell off.
On Wednesday night Wall Street tanked on the impact of the US short-squeeze trade. On Thursday Australian traders (human or otherwise) adopted a “sell first, ask questions later” approach, ignoring two specific facts: (1) the short squeeze was triggered in a handful of US stocks and was not a macro issue and (2), the S&P500 was up 10% from its pre-covid high last year while the ASX200 was still around -5% shy.
Part of the problem in the US is that while the short-squeeze may have triggered market-wide selling by hedge funds, Wall Street was already in a nervous mood, believing a correction may be nigh due to the market having become overly frothy. Which is not an accusation one could make about the Australian market overall.
It was thus heartening to see on Friday that the local market did not once again resort to “sell everything” mode when the Dow futures were down over -300 points. Selling was concentrated in only three sectors – financials (-1.6%), energy (-2.4%) and materials (-1.3%).
Of those three, we recall energy is individually being impacted by S&P putting all oil & gas stocks on negative credit watch, and materials is being impacted by a sharp correction in the iron ore price, due to Beijing’s plan to reduce steel production.
That just leaves the banks, and yes, they had enjoyed a solid run-up this year as vaccine news and Australia’s solid virus response eased fears of loan defaults, and investors salivated over 5-6% yields (one to two years out) in a zero interest rate world.
Healthcare, on the other hand, gained 1.4% on Friday to lead the positive sectors. Is a short-squeeze on a failing US game store reason to sell CSL ((CSL))? Didn’t think so. Smarter investors poked around for similar bargains presented by Thursday’s blind sell-off.
But on Friday night, Wall Street did it all again, replicating Wednesday night’s big fall. So are we set to blindly follow once more today? Based on Friday’s more measured session, and the fact our futures closed down only -0.5% on Saturday morning when the S&P500 had fallen -1.9% on Friday night, possibly not.
But it will likely again be a case of watching those Dow futures. The question is as to whether the GameStop affair will prove to be the blip that shook out the market briefly or the trigger that sets of a more broad and deep correction on Wall Street that many have been predicting.
Of course there’s no fundamental reason the Australian market must correct as well if that’s the case, but it will. Always does.
We have also learned in the interim that most (in population terms) of Western Australia has gone into a five-day lockdown due to a covid case being detected for the first time in many months. Once again, borders have slammed shut. But at the same time, Sydneysiders are now welcome anywhere, so there’s some trade-off.
A shout out to the residents of Peel.
Round Two
On Wednesday night Wall Street’s fall was reportedly driven by hedge funds selling to cover losses on short positions in GameStop et al. On Thursday night, online retail brokers had moved to restrict trading on short-squeeze targets, sparking a rebound for the broad market and selling in those targets.
So severe was the retail backlash against those brokers, including a class action now being progressed against youth-popular platform Robinhood, initial trading restrictions were wound back to merely limit the extent of individual trades.
So Wall Street did it all again on Friday night. GameStop rose 68%, AMC Entertainment 53%, Koss 52% and so on. Meanwhile Microsoft fell -2.9%, Apple -3.7% and Facebook -2.5%, to name a few. Last week all three posted very strong earnings results.
Interestingly, aforementioned short-squeeze targets will be reporting shortly. Is that when the music stops?
It has also been suggested that rather than simply cop the losses on the squeeze, hedge funds took the opportunity of inflated share prices to double down. If a stock’s worth shorting at twenty bucks then it’s clearly worth shorting at three hundred. It appears there’s an element of self-perpetuation here.
But what clouds Friday night’s repeat performance, which saw the Dow again close down over -600, and every S&P500 sector again close in the red, are two other factors. One being aforementioned pre-existing Wall Street nervousness that a correction was indeed due, and the other being vaccine news.
Johnson & Johnson and Novavax both announced the results of their vaccine trials on Friday night. Both vaccines are one-shot only, require no more than regular refrigeration, and are around 80-90% effective against your common or garden covid. The problem is they are both less effective against the UK strain, and only around 50% effective against the South Africa strain, both of which have been detected in the US.
This has Wall Street concerned, particularly given the rally from November, when the Pfizer and Moderna vaccines were announced, on the assumption vaccines will soon return the world to normal.
So it’s a question of how much of last night’s short-squeeze round two was a short-squeeze response alone, and how much might have happened anyway.
Meanwhile, Robinhood has had to raise US$1bn from venture capitalists and tap JP Morgan and Goldman Sachs for credit lines to shore up its balance sheet. One of the broker’s distinguishing features is that in order to reduce fees, and offer zero brokerage, the platform is its own clearing house. It does not have the protection of the central US clearing house.
Thus Robinhood is fully exposed to hedge funds going under, unable to cover short losses, but more worryingly to thousands of retail investors defaulting on margin loans when this music does ultimately stop.
Commodities
| Spot Metals,Minerals & Energy Futures | |||
| Gold (oz) | 1848.10 | + 4.80 | 0.26% |
| Silver (oz) | 26.98 | + 0.49 | 1.85% |
| Copper (lb) | 3.54 | + 0.07 | 2.09% |
| Aluminium (lb) | 0.90 | – 0.00 | – 0.18% |
| Lead (lb) | 0.91 | + 0.00 | 0.11% |
| Nickel (lb) | 8.02 | – 0.03 | – 0.43% |
| Zinc (lb) | 1.16 | – 0.00 | – 0.28% |
| West Texas Crude | 52.20 | – 0.12 | – 0.23% |
| Brent Crude | 55.04 | – 0.48 | – 0.86% |
| Iron Ore (t) | 158.05 | + 1.85 | 1.18% |
Iron ore and copper posted rebounds on Friday night, with not much going on elsewhere.
Nonetheless, the Aussie has taken another tumble, and is currently just as volatile as the stock market. It’s down -0.9% at US$0.7626, with the US dollar index up only 0.1%.
The SPI Overnight closed down -34 points or -0.5% on Saturday morning.
China posted its January PMIs yesterday. Manufacturing fell to 51.3 from 51.9 in December. Services fell to 52.4 from 55.7.
The Week Ahead
It would be helpful if Wall Street could quickly sort this mess out, because this week sees the beginning of earnings result season locally. We’ve already seen a couple of companies reporting, and from tomorrow the number of daily reporters begins to grow.
But as is always the case, the last two weeks of any four-week season is when the vast bulk of the market reports.
The RBA meets tomorrow but no changes are expected.
Today is manufacturing PMI day across the globe, and Wednesday is services PMI day.
Locally we’ll also see building approvals on Wednesday and updated releases for trade on Thursday and retail sales on Friday.
The eurozone reports December quarter GDP tomorrow night.
It’s jobs week in the US, with private sector numbers for January out on Wednesday night and non-farm payrolls on Friday night. Numbers for factory orders and productivity will also be released.
The Australian share market over the past thirty days…
| BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS | |||
| ALX | Atlas Arteria | Upgrade to Add from Hold | Morgans |
| ASX | ASX Ltd | Upgrade to Equal-weight from Underweight | Morgan Stanley |
| BWP | BWP Trust | Initiation of coverage with Underweight | Morgan Stanley |
| CPU | Computershare | Downgrade to Neutral from Buy | UBS |
| CQR | Charter Hall Retail | Upgrade to Equal-weight from Underweight | Morgan Stanley |
| CSL | CSL | Downgrade to Hold from Accumulate | Ord Minnett |
| CTD | Corporate Travel | Upgrade to Outperform from Neutral | Credit Suisse |
| DHG | Domain Holdings | Upgrade to Outperform from Neutral | Credit Suisse |
| EVN | Evolution Mining | Upgrade to Outperform from Neutral | Macquarie |
| HVN | Harvey Norman Holdings | Upgrade to Overweight from Equal-weight | Morgan Stanley |
| IGO | IGO | Downgrade to Neutral from Outperform | Credit Suisse |
| ILU | Iluka Resources | Downgrade to Underperform from Neutral | Credit Suisse |
| NAB | National Australia Bank | Upgrade to Neutral from Underperform | Macquarie |
| ORE | Orocobre | Downgrade to Neutral from Buy | Citi |
| Downgrade to Underperform from Neutral | Credit Suisse | ||
| RMS | Ramelius Resources | Upgrade to Outperform from Neutral | Macquarie |
| RWC | Reliance Worldwide | Upgrade to Buy from Accumulate | Ord Minnett |
| SBM | St Barbara | Upgrade to Neutral from Underperform | Macquarie |
| TNE | Technologyone | Upgrade to Buy from Sell | UBS |
| WEB | Webjet | Upgrade to Outperform from Neutral | Credit Suisse |
| WPL | Woodside Petroleum | Downgrade to Neutral from Buy | UBS |
| WSA | Western Areas | Downgrade to Neutral from Outperform | Macquarie |
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