The Overnight Report: As You Were

This story features NATIONAL AUSTRALIA BANK LIMITED, and other companies. For more info SHARE ANALYSIS: NAB

World Overnight
SPI Overnight (Jun)	7023.00	+ 49.00	0.70%
S&P ASX 200	6982.70	– 62.20	– 0.88%
S&P500	4112.50	+ 49.46	1.22%
Nasdaq Comp	13124.99	+ 93.31	0.72%
DJIA	34021.45	+ 433.79	1.29%
S&P500 VIX	23.13	– 4.46	– 16.17%
US 10-year yield	1.67	– 0.03	– 1.59%
USD Index	90.72	– 0.06	– 0.07%
FTSE100	6963.33	– 41.30	– 0.59%
DAX30	15199.68	+ 49.46	0.33%

By Greg Peel

Support Fails

Twice the ASX200 bounced off support at 7000 yesterday but on the third attempt, failed. Late selling then accelerated to the close.

But never mind, Wall Street has bounced overnight and our futures are up 49 points this morning.

If we look at sector falls for discretionary, industrials, materials, telcos and utilities of one percent or more we could conclude it was a case of market-wide selling following Wall Street’s inflation scare, but the session was a lot more mixed. Staples and energy were relatively flat, healthcare gained 1.0% and the banks fell only -0.4% net of both National Bank ((NAB)) and Westpac ((WBC)) going ex, which effectively means outperformance.

Staples were supported by an index-topping 5.3% for GrainCorp ((GNC)) after the company reported earnings. Chinese target Treasury Wine Estates ((TWE)) rose 2.7% following an investor day which outlined a push to make Penfolds the world’s leading premium brand.

Healthcare enjoyed the effect of a big drop in the Aussie dollar overnight, and presumably some support from a very healthcare-friendly budget. Realistically the market has not had a chance to display a clean budget response due to Wall Street volatility.

G8 Education ((GEM)) gained 2.0% nonetheless, on child care support, and Cimic Group ((CIM)) 2.9% on infrastructure spending.

While everyone else runs scared from inflation, banks enjoy the thought of higher rates and better net interest margins.

Materials was the second worst performing sector (-1.7%). Do not be fooled by an unchanged spot iron ore price overnight – the Singapore exchange was closed yesterday. Chinese iron ore futures nevertheless plunged -7.5% in an inevitable pullback from the recent parabolic rise.

It was also a rough day for mining services company Perenti Global ((PRN)), which fell -29.2% on a profit warning, while Fortescue Metals ((FMG)) pulled back -4.0%.

Technology was, of course, the worst performer (-4.7%) after another bad night for the Nasdaq, but aided by a revenue miss for Xero ((XRO)), which fell -13.0%. Otherwise, another -5.4% drop for Afterpay ((APT)) suggests UBS critics may soon be silenced.

But all is forgiven on Wall Street – apparently a bit of inflation is okay – so we should be back above 7000 today and perhaps wondering what all the fuss was about. It is a Friday nonetheless, so anything is possible.

On second thoughts…

And you thought 4.2% annual US CPI inflation was scary. Last night’s wholesale inflation (PPI) number for April came in at 6.2%. Month on month the PPI rose 0.6% when 0.3% was forecast.

But in the end it wasn’t much of a surprise after the CPI print. The bulk of growth in the CPI can be attributed to the rise in input costs, with prices of raw materials such as copper and lumber, soaring, along with computer chips given the global shortage. The chip shortage is being addressed with the construction of more manufacturing capacity.

But it takes a bit longer to find and develop a new copper mine, or to grow trees. This plays into the transitory versus structural inflation debate. While US housing demand may ease at some point, all agree the world is going to need a lot more copper to feed the twenty-first century green economy, and EVs are only a start.

Yet after panicking on Wednesday night, last night Wall Street bounced. It wasn’t clear cut – the indices surged on the open, fell back heavily (Nasdaq was up 1.5% and returned to flat), rallied again, and then saw a bit of late selling. The Dow was up over 600 points in the morning.

The counter argument to Wednesday night’s panic is that a little inflation is actually a good thing. Even 3-4%. Not good for young growth stocks, but good for more traditional industries and not really a worry for established tech mega-caps, which commentators agree are really the new defensives.

Strong inflation is a sign of a strong economy, and wage inflation means more money in consumer pockets. One day the Fed will be forced to move, if it finds not all of 2021’s inflation jump is transitory. The risk is “stagflation”, where runaway inflation actually leads to a weaker economy. We saw this in the seventies, but in the seventies inflation was well into double-digits, and central banks did not back then have a mandate to control it.

The US weekly new jobless claims number fell to 473,000 to continue its downward trend. This is a positive sign for Wall Street.

The energy sector nevertheless missed out on the spoils last night, after oil prices fell -3%. This was because the Colonial Pipeline that was hit by a ransomware attack reopened, when earlier a reopening was not expected before the weekend.

It reopened because the company paid the ransom. Who’s next?

In other news, Elon Musk threw the crypto world into chaos by announcing Tesla would no longer accept bitcoin as payment, having only recently announced it would. The reason, said Elon in a tweet, is because of the environmental cost of crypto mining.

Bit of a change of tune. It had also been questioned before last night as to how bitcoin acceptance actually works. Are there two price schedules, one in dollars and one in bitcoin? Or does a $50,000 Tesla need to be paid for in US$50,000 worth of bitcoin on the day? If it is the latter, what’s the point?

Bitcoin fell -10% last night as all popular cryptos tanked, and crypto fans burnt effigies of their former hero.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz)	1826.50	+ 11.10	0.61%
Silver (oz)	27.09	+ 0.11	0.41%
Copper (lb)	4.71	– 0.11	– 2.21%
Aluminium (lb)	1.11	– 0.03	– 2.56%
Lead (lb)	0.97	– 0.02	– 2.10%
Nickel (lb)	7.86	– 0.25	– 3.07%
Zinc (lb)	1.32	– 0.03	– 2.52%
West Texas Crude	63.82	– 2.26	– 3.42%
Brent Crude	67.00	– 1.92	– 2.79%
Iron Ore (t)	233.10	0.00	0.00%

As noted, ignore the unchanged iron ore price. With futures prices tumbling yesterday, one presumes this will be reflected in Singapore trading today.

Weakness in base metals, other than the likes of copper probably due a pullback as well, is attributed to the US inflation numbers suggesting higher interest rates, thus a stronger US dollar.

The US dollar popped on Wednesday night but was steady last night, so the Aussie is also steady at US$0.7725.

Today

The SPI Overnight closed up 49 points or 0.7%.

The US will see April industrial production and retail sales numbers tonight. Wall Street has been cheering on solid gains in retail sales recently. Will traders be so thrilled with a good number now?

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
A2M	a2 Milk Co	Downgrade to Underperform from Neutral	Macquarie
DCN	Dacian Gold	Upgrade to Neutral from Underperform	Macquarie
IAP	Irongate Group	Downgrade to Neutral from Outperform	Macquarie
QUB	Qube Holdings	Upgrade to Accumulate from Hold	Ord Minnett
REG	Regis Healthcare	Upgrade to Outperform from Neutral	Macquarie
SUN	Suncorp	Downgrade to Neutral from Buy	Citi
		Downgrade to Hold from Add	Morgans
VUK	Virgin Money Uk	Upgrade to Hold from Reduce	Morgans

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

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