The Monday Report (On Tuesday) – 15 June 2021

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World Overnight
SPI Overnight (Jun)	7368.00	+ 13.00	0.18%
S&P ASX 200	7312.30	+ 9.80	0.13%
S&P500	4255.15	+ 7.71	0.18%
Nasdaq Comp	14174.14	+ 104.72	0.74%
DJIA	34393.75	– 85.85	– 0.25%
S&P500 VIX	16.39	+ 0.74	4.73%
US 10-year yield	1.50	+ 0.04	2.67%
USD Index	90.51	– 0.05	– 0.06%
FTSE100	7146.68	+ 12.62	0.18%
DAX30	15673.64	– 19.63	– 0.13%

By Greg Peel

Friday

Friday’s session on the ASX looked rather a dull affair by the close but the index was down -28 points from the open and up 27 points heading into the last hour before closing up 9.

Such market indecision might be attributed to investor indecision regarding the path of inflation – a debate raging furiously on Wall Street.

While the Australian ten-year bond rate was flat on Friday it took a big fall on Thursday which is not good news for banks. Financials closed down -0.8% on Friday to be the counter for all other sectors finishing in the green bar industrials (-0.1%) and property (-0.7%).

Lower yields suggest no fear of inflation being structural, rather transitory as the Fed insists, and the RBA is holding off any change in policy to next month. Bear in mind financials also include insurers, and they’re facing yet another round of natural disaster payouts, this time in Victoria.

The two sectors recommended for investors who fear inflation is indeed structural are materials and property. Base metal prices were strong on Thursday night as was gold, while the oils kept ticking higher. Materials rose 1.4% on Friday to top the sectors.

But property fell, albeit after a notably strong week.

The sector set to lose from inflation is technology. It rose 1.3%.

If inflation is the issue du jour, consensus will no doubt require more months of data before any conclusion can be drawn.

Three of the top performing index stocks were gold miners, led out by chart-topping Resolute Mining (+7.7%) – the most volatile of them all.

There was not much to write home about among the top losers.

Despite only a small net gain, the ASX200 is at another new all-time high, hanging on above 7300. The path to get there suggests the inflation question may yet provide for a bumpy road ahead.

Friday Night

The Dow closed up 13 points while the S&P500 rose 0.2% and the Nasdaq 0.4%.

For the week, the Dow fell -0.8%, the S&P500 gained 0.4% to a new record and the Nasdaq gained 1.9%.

The outperformance of growth over value/cyclicals last week was largely a reverse of the week before, as the flip-flopping of the rotation trade continues, more recently on low volumes even before the true summer break. To see why growth won last week we need look no further than the US ten-year bond yield.

It fell -12 basis points to 1.46% over the week, despite the 5.0% headline CPI number on Thursday night, and ahead of this week’s Fed meeting. On the flipside to growth, US banks were losers over the week.

Expectations are growing that the Fed, meeting for the first time since both the May 5.0% and April 4.2% CPI results (while the RBA meets monthly, the Fed meets six-weekly), will need to say something other than the stoic mantra to date of inflation being transitory. It may maintain the transitory line, but now might be the time the FOMC suggests it will talk about talking about tapering.

Just in case their stubbornness proves misguided.

While the Michigan Uni fortnightly consumer sentiment index showed a rise to 86.4 on Friday night from 82.9 prior (forecast 84.4), those surveyed listed inflation as their greatest concern, particularly the rising prices of houses and cars.

Increased prices in big ticket items can weigh on consumer spending intentions across the board.

In the meantime, the S&P may have hit a new record high but over the week, and Friday night in particular, it was largely dullsville. The VIX volatility index hit a new post-covid low on Friday night, at under 16.

Wall Street clearly awaits the Fed meeting but also any progress on Biden’s infrastructure bill. A bipartisan group of Democrats and Republicans has put forward a counter-offer of US$579bn of infrastructure spending compared to Biden’s plan in excess of US$1trn. Not only is it a long way short, the bipartisan offer comes with no tax increases, while Biden wants an increased corporate tax rate and income tax increases for the wealthy, which will aid the funding of his bill.

Because it is a budget issue, only a simple majority (51 with VP casting) is required in the Senate rather than the 60 required for non-budget issues. But Biden would dearly love to have at least some bipartisan support for what he is trying to achieve.

Middle ground may yet be found, but as history suggests (history being 2020), it could yet take time.

Commodities

Perhaps there may be some light at the end of the tunnel nonetheless. Base metal price movements on Friday night, in the face of a 0.6% jump for the US dollar, may reflect such. All LME metals closed in the green, with copper up 1.9% and nickel up 2.4%.

Not so good for gold though, down -US$20/oz.

The oils kept ticking higher – up 0.9% for WTI.

The Aussie matched the dollar with a -0.6% fall to US$0.7710.

The SPI Overnight rose 46 points or 0.6% on Saturday morning. As to why such exuberance is unclear.

Monday Night

Another day, another new record high for the S&P500, once again achieved incrementally. This time, however, the Nasdaq also hit a new record, for the first time since April.

The bulk of gains were seen in the final half hour last night, with the Dow turning around a loss of over -200 points.

Sorry to sound like a broken record, but there was only one topic on Wall Street last night, again.

Last night we saw the US ten-year yield bounce back 4 basis points to 1.50% yet the Nasdaq hit a new record, ahead of the Fed meeting. It is assumed the Fed cannot ignore the two big inflation numbers since the last meeting and as such must say something, even if the FOMC’s view remains unchanged.

Something may include “this is exactly what we said would happen” but also “we will begin to talk about when tapering may be necessary”. We do know the Fed is happy to let inflation run “hot” for a period before seeing a need to rein it in, but will that run prove too extensive?

Time to play your “Nobody knows” card. Wall Street commentators are simply split down the middle on the inflation question.

On the topic, it’s only been 18 months but California is now back open for business, with all restrictions now lifted. Being the largest US state economy, California’s return should be a boost for Wall Street, but also another boost to inflation?

As vaccination rollout continues, the US is getting closer to opening up altogether. And now Novovax has declared its new vaccine to be at least 90% efficacious, including against the Delta strain. The vaccine still needs to go through the usual approval protocols, but history suggests there shouldn’t be any hurdles.

The Novovax vaccine is nonetheless different to the others, being protein-based.

While America leads the word in vaccination, the UK — also a world leader on that front — will now see restrictions extended for another month.

This puts paid, for now, to plans to open a New York-London flight corridor, which would represent the first US international route being opened post-covid.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz)	1865.90	– 11.90	– 0.63%
Silver (oz)	27.82	– 0.10	– 0.36%
Copper (lb)	4.51	– 0.00	– 0.08%
Aluminium (lb)	1.14	+ 0.02	1.34%
Lead (lb)	0.98	– 0.01	– 0.71%
Nickel (lb)	8.25	+ 0.05	0.63%
Zinc (lb)	1.37	0.00	0.00%
West Texas Crude	70.88	– 0.03	– 0.04%
Brent Crude	73.09	+ 0.40	0.55%
Iron Ore (t)	210.50	– 6.50	– 3.00%

Note: all moves are for last night only, except for iron ore, which is the next of Friday and Monday.

Aluminium had sat it out on Friday night but caught up with the pack last night.

Another -US$11/oz fall for gold is on top of the -US$20 fall on Friday night, this time with the US dollar flat. Gold is, of course, the traditional hedge against inflation.

There’s that word again.

The Aussie is also steady at US$0.7712.

The 46 point gain to Saturday morning for our futures looked out of place, but this morning the SPI Overnight has added another 13.

The Week Ahead

The much anticipated Fed statement and press conference are due on Thursday morning our time.

There’ll be more grist for the US inflation mill tonight when numbers for all of wholesale inflation (PPI), industrial production, retail sales and housing market sentiment (industry now suffering from soaring input costs) are released.

China reports May industrial production, retail sales and fixed asset investment data tomorrow.

New Zealand reports March quarter GDP numbers on Thursday.

Locally, the minutes of the June RBA meeting are out today, an RBA Bulletin will be released on Thursday and to that the governor will speak.

Thursday also brings May jobs numbers.

And the June quarter ASX derivatives expiry, which can lead to undue volatility.

On Friday the changes to the S&P/ASX indices announced last week become effective.

Across the week, Sydney ((SYD)) and Auckland International ((AIA)) airports will report May traffic numbers, Challenger ((CGF)) holds an investor day, Coles ((COL)) a strategy day and Woolworths an EGM to vote on the Endeavour demerger.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
BKW	Brickworks	Downgrade to Hold from Add	Morgans
BSL	Bluescope Steel	Upgrade to Outperform from Neutral	Macquarie
NHC	New Hope Corp	Downgrade to Neutral from Outperform	Macquarie

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

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