The Overnight Report: New Month, More Rotation

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World Overnight
SPI Overnight (Jun)	7018.00	+ 14.00	0.20%
S&P ASX 200	7028.80	+ 3.00	0.04%
S&P500	4192.66	+ 11.49	0.27%
Nasdaq Comp	13895.12	– 67.56	– 0.48%
DJIA	34113.23	+ 238.38	0.70%
S&P500 VIX	18.31	– 0.30	– 1.61%
US 10-year yield	1.61	– 0.02	– 1.47%
USD Index	90.97	– 0.31	– 0.34%
FTSE100	6969.81	+ 8.33	0.12%
DAX30	15236.47	+ 100.56	0.66%

By Greg Peel

Sell in May (except banks & telcos)

It was text book stuff, right up until 11am yesterday. The last day of a strong month had seen profit-taking and the first day of the new month saw the buying return afresh. But when the ASX200 had risen over 40 points in the first hour, someone rang a bell.

The next couple of hours saw selling, and then the market lost interest in the afternoon.

It could have been a lot uglier, if not for the banks (+1.4%) and telcos (+1.2%).

For the banks it was all about a 5.0% gain for Westpac ((WBC)), after reporting a solid jump in profit (albeit cycling big write-downs in the prior period) and a -40% cost-out plan. You might want to pop into your local branch and bid farewell to the tellers.

The result floated all bank boats, ahead of results from ANZ Bank ((ANZ)) on Wednesday and National Bank ((NAB)) on Thursday.

A 3.0% gain for Telstra ((TLS)) was less cut and dried, driven supposedly by a fund manager suggesting potential M&A activity. Hard to see much room for more M&A in the pure telco space that wouldn’t raise the hackles of the ACCC, but perhaps we’re talking about those other bits of Telstra soon to be split off.

Yet TPG Telecom ((TPG)) jumped 5.4%, after a long period in the doldrums.

TPG took the silver and Westpac the bronze on the index podium yesterday, beaten only by PointsBet Holdings ((PBH)), with a further 5.6% gain post quarterly update.

Everywhere else, there was selling.

Technology was hit the hardest, down -1.9%, with heavyweight Afterpay ((APT)) down -3.1%, possibly following Nasdaq selling on Friday night.

Energy fell -1.0% on a lower oil price while materials fell -1.0% on a lower iron ore price.

It will be an interesting session for both those sectors today – iron ore is unchanged and with both China and Japan on holiday until Thursday, will probably stay that way for now. Base metal trading in London was closed last night for a UK holiday. But gold has popped over twenty dollars.

And oil prices have rebounded somewhat.

In other sectors the selling was less potent and fairly uniform.

If the trigger for the selling was a sell-off on Wall Street, it was misplaced, given Wall Street only did exactly what we did on Friday – square up for the month. The S&P500 started the new month with a rebound last night.

Could it be anything to do with economic data?

ANZ Bank job ads series showed another 4.7% rise in April to mark the eleventh such monthly increase. And it’s not just about the covid recovery – ads are up 28% on pre-pandemic levels. We recall that JobKeeper ended in March, driving expectations unemployment would see a blip back up in April, but the ongoing rise in job ads suggests it may not be so bad.

Which will catch the attention of the RBA. As for actual wage growth though, well that’s where any fears of an RBA change of heart may be unfounded.

Buy in May (except tech)

May on Wall Street began with a very familiar pattern. Yes, we could cite a text book rebound from squaring up on the Friday night, but not across all sectors.

It was a classic rotation session – into reopening cyclicals and out of tech growth – just as dominated sessions earlier this year. But what was missing was any influence from bond yields, with the US ten-year inching down -2 basis points to 1.60%.

The US dollar also pulled back -0.3% after a strong rally on Friday night, which, along with lower bond yields, is good for the gold price. But a US$23/oz kick after wallowing for a period seems like a lot.

Was there something else?

“We are seeing very substantial inflation,” Warren Buffett said at Berkshire Hathaway’s annual shareholder meeting on Saturday. “We are raising prices. People are raising prices to us and it’s being accepted.”

When the Oracle speaks, Wall Street listens.

The debate rages on as to whether such inflation is transitory, as the Fed insists (covid-related supply chain bottlenecks, eg chip shortage) or structural, as many fear (ultra-loose monetary policy, ultra-big fiscal spending, trillions in corporate and household savings waiting to be unleashed). So far, the numbers have been behaving themselves (CPI, PCE).

But for how long?

And not all at the Fed are “not even thinking about thinking about tapering”. Dallas Fed President and FOMC voting member Robert Kaplan said on Friday night it is now time to start discussing the extent of QE.

“At the earliest opportunity, I think it will be appropriate for us to start talking about adjusting those purchases.”

Inflation equals tapering (and rate hikes) equals a drag on forecast earnings for high growth stocks, which are mostly in the tech space.

Or we could look at last night’s rotation and simply suggest traders were taking profits after some of the big tech gains on earnings results last week. But then they were doing that on Friday night.

One thing we do know about the rotation trade is it has a habit of flipping over every now and then and going the other way. So it’s a bit early in the month to draw conclusions.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz)	1792.90	+ 23.80	1.35%
Silver (oz)	26.90	+ 0.99	3.82%
Copper (lb)	4.47	0.00	0.00%
Aluminium (lb)	1.10	0.00	0.00%
Lead (lb)	0.96	0.00	0.00%
Nickel (lb)	7.82	0.00	0.00%
Zinc (lb)	1.31	0.00	0.00%
West Texas Crude	64.49	+ 0.91	1.43%
Brent Crude	67.63	+ 0.87	1.30%
Iron Ore (t)	186.45	0.00	0.00%

UK closed, no LME trading.

China and Japan on holiday, no iron ore interest.

Data released last night showed oil demand has not faltered (yet) in India. Hence a rebound for oil prices after Friday night’s falls.

Gold as discussed.

The Aussie has regained all of what it lost on Friday night, jumping 0.6% to US$0.7767, which will take some of the gloss of the USD gold price jump.

Today

The SPI Overnight closed up 14 points or 0.2%.

The RBA meets today.

Housing finance numbers are due.

The US will see data for factory orders and trade.

China and Japan are closed.

Dexus Property ((DXS)) provides a quarterly.

May the Fourth be with you.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
COF	Centuria Office Reit	Downgrade to Neutral from Outperform	Credit Suisse
COL	Coles Group	Upgrade to Buy from Neutral	Citi
		Upgrade to Outperform from Neutral	Credit Suisse
EOS	ELECTRO OPTIC SYSTEMS	Downgrade to Neutral from Buy	Citi
GOZ	Growthpoint Prop	Downgrade to Neutral from Outperform	Credit Suisse
JBH	JB Hi-Fi	Upgrade to Outperform from Neutral	Credit Suisse
OGC	Oceanagold	Downgrade to Underperform from Neutral	Macquarie
PAN	Panoramic Resources	Downgrade to Hold from Add	Morgans
PBH	Pointsbet Holdings	Upgrade to Outperform from Neutral	Credit Suisse
		Upgrade to Buy from Hold	Ord Minnett
RMD	ResMed	Upgrade to Hold from Lighten	Ord Minnett
		Downgrade to Neutral from Buy	Citi
RSG	Resolute Mining	Upgrade to Buy from Neutral	Citi
		Upgrade to Outperform from Neutral	Macquarie
SBM	St Barbara	Upgrade to Buy from Neutral	Citi

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

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available on the FNArena website.  Click here. (Subscribers can access prices on the website.)

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