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The Overnight Report: Over To You Jay

Daily Market Reports | Jun 16 2021

This story features COMMONWEALTH BANK OF AUSTRALIA, and other companies. For more info SHARE ANALYSIS: CBA

World Overnight
SPI Overnight (Jun) 7377.00 – 12.00 – 0.16%
S&P ASX 200 7379.50 + 67.20 0.92%
S&P500 4246.59 – 8.56 – 0.20%
Nasdaq Comp 14072.86 – 101.29 – 0.71%
DJIA 34299.33 – 94.42 – 0.27%
S&P500 VIX 17.02 + 0.63 3.84%
US 10-year yield 1.50 – 0.00 – 0.13%
USD Index 90.53 + 0.02 0.02%
FTSE100 7172.48 + 25.80 0.36%
DAX30 15729.52 + 55.88 0.36%

By Greg Peel

Blue Chip Binge

There was a clue in the 46 points gain for the SPI futures overnight ahead of the long weekend when Wall Street went nowhere. The extra 13 points gain on Monday night suggested traders could see what was coming. If you're going to hit the market with a big buy order, cover yourself first.

And indeed the ASX200 was up 50 points in the first fifteen minutes, and up 75 late morning. A simpler way to "buy Australia", rather than buy 200 stocks, is to replicate the index to some 85% or so of market-cap buying only the mega-cap names mostly the top 20. Either you stick with this replication portfolio or you quietly diversify out into a wider portfolio once the initial dust has settled.

The banks collectively represent the largest chunk of market cap and financials rose 1.3%, led out by the largest bank, Commonwealth ((CBA)), and including the fifth bank top 20 member, Macquarie Group ((MQG)).

Australia's largest index constituent is nonetheless CSL ((CSL)), so healthcare rose 2.0%, with an added kicker from ResMed ((RMD)), which posted a chart-topping 6.8% gain after ventilator rival Philips announced a recall of its competing product.

Consumer discretionary rose 1.4% — Wesfarmers ((WES)) and staples rose 1.5% — Woolworths ((WOW)) and Coles ((COL)).

But not every top 20 stock was an automatic inclusion. Telstra ((TLS)) was left in the gate, closing flat on the day. Newcrest Mining ((NCM)) went in the other direction, with the gold price having fallen significantly from Friday night.

On the other hand, Afterpay ((APT)) had reached top 20 territory at its heights but before potential inclusion has pulled back. It rose over 2% to provide for a 1.6% gain for technology.

a2 Milk ((A2M)) is not quite a mega-cap but it rose 5.4%. Either the big buyer wanted some diversification or this is an unrelated gain after a tough time for the company.

The big miners were included but the gold tide kept materials to only a 0.2% gain. Similarly, Transurban ((TCL)) joined in but industrials rose only 0.1% as Austal ((ASB)) fell -9.0% following an earnings downgrade.

The index peaked at 2pm before drifting back slightly. While we could throw up some possible outside fundamental drivers, such as in-principle agreement on an Oz-UK free trade agreement (details yet to be decided, 15 year transition period), it appears yesterday's was not an on-the-day fundamental rally.

The minutes of the RBA meeting came out yesterday, but there was nothing market-moving therein given forward guidance the board has been providing recently. We know that next month's meeting will bring a decision of the go-forward for QE.

The minutes expanded on that decision, noting three options: go again with another $100bn of bond purchases over the next six months; reduce the amount being purchased each month but extend the time period; or move to a more reactive model, reviewing purchase levels more frequently.

No option specifically suggests raw tapering at this stage.

With the buy order presumed completed, and a slightly weak session on Wall Street, our futures are down -12 points this morning, which does not suggest we go right back down again. We did, however, see resistance at the next round number, 7400. Mind you, 7300 was rather easily conquered.

Wholesale Concerns

If you thought a May US CPI of 5.0% was a bit of a worry, try a 6.6% PPI on for size.

The elevated CPI has been mostly blamed on supply shortages meeting rebounding demand, and those shortages are more clearly reflected at the wholesale end of the producer price index. Rising input prices have led to higher retail prices, but the gap of 5.0% to 6.6% suggests retailers are not fully passing on price increases, thus copping lower margins, which equate to lower earnings on revenue.

Which is why the June quarter US earnings result season, which kicks off next month, is being seen as the most critical in a long time.

To rub salt into the wound, US retail sales fell -1.3% (month on month) in May. We might conclude there is thus no more room for retailers to raise prices, and thus margins, as demand will drop. But it's not all so clear cut.

April's sales result was revised upward, for starters. A drop in demand may simply be the result of Biden's stimulus cheques from February having now been spent. The chip shortage has caused reduced auto production, and auto is a big chunk of both CPI and PPI. And the dip in May looks minimal given the surging year-on-year retail trend.

We must also remember that last May no one was buying anything much, beyond food and home office equipment, so when cycling that period these big numbers are not quite as alarming.

Yet while Wall Street was happy to shrug off the May 5.0% CPI, despite having tanked on April's then 4.2% shock, last night's response was clearly more cautious. The Nasdaq had been outperforming in recent sessions but being the most exposed to inflation, underperformed last night.

The US ten-year bond yield nevertheless did not move from 1.50%.

The pullback for the Nasdaq, and subsequently a dip from an all-time high for the S&P500, comes ahead of tonight's Fed statement release, and thus is not so surprising.

So it's all eyes on the Fed tonight.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz) 1858.70 – 7.20 – 0.39%
Silver (oz) 27.66 – 0.16 – 0.58%
Copper (lb) 4.34 – 0.17 – 3.86%
Aluminium (lb) 1.13 – 0.01 – 1.06%
Lead (lb) 0.98 – 0.00 – 0.34%
Nickel (lb) 7.99 – 0.26 – 3.20%
Zinc (lb) 1.36 – 0.01 – 0.67%
West Texas Crude 72.12 + 1.24 1.75%
Brent Crude 74.28 + 1.19 1.63%
Iron Ore (t) 222.35 + 0.05 0.02%

The US PPI is one thing but the Chinese PPI hit a 12-year high in May, prompting Beijing to announce a step-up in commodity price monitoring. Actions might include an increase in futures margins, intended to curb speculation, or other measures to take communist control of a capitalist market.

Hence the big falls in copper and nickel in particular last night.

The oils pressed merrily onwards nonetheless.

The US dollar is unmoved but the Aussie is down -0.3% and back under 77 at US$0.7686 which could represent metal price falls and/or no firm suggestion of tapering from the RBA.

Today

The SPI Overnight closed down -12 points.

China will report May industrial production, retail sales and fixed asset investment data today.

Fed tonight.

G8 Education ((GEM)) provides a strategy update today.

Auckland International Airport ((AIA)) releases May traffic stats.

The Australian share market over the past thirty days

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
ALX Atlas Arteria Downgrade to Hold from Add Morgans
BSL Bluescope Steel Upgrade to Outperform from Neutral Macquarie
COL Coles Group Upgrade to Outperform from Neutral Macquarie
DOW Downer Edi Downgrade to Lighten from Hold Ord Minnett
IGO IGO Downgrade to Underweight from Equal-weight Morgan Stanley
NHC New Hope Corp Downgrade to Neutral from Outperform Macquarie
REG Regis Healthcare Upgrade to Add from Hold Morgans
WOW Woolworths Downgrade to Neutral from Outperform Macquarie

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

Allovernight 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.)

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author's and not by association FNArena's – see disclaimer on the website)

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CHARTS

A2M AIA ASB CBA COL CSL GEM MQG NCM RMD TCL TLS WES WOW

For more info SHARE ANALYSIS: A2M - A2 MILK COMPANY LIMITED

For more info SHARE ANALYSIS: AIA - AUCKLAND INTERNATIONAL AIRPORT LIMITED

For more info SHARE ANALYSIS: ASB - AUSTAL LIMITED

For more info SHARE ANALYSIS: CBA - COMMONWEALTH BANK OF AUSTRALIA

For more info SHARE ANALYSIS: COL - COLES GROUP LIMITED

For more info SHARE ANALYSIS: CSL - CSL LIMITED

For more info SHARE ANALYSIS: GEM - G8 EDUCATION LIMITED

For more info SHARE ANALYSIS: MQG - MACQUARIE GROUP LIMITED

For more info SHARE ANALYSIS: NCM - NEWCREST MINING LIMITED

For more info SHARE ANALYSIS: RMD - RESMED INC

For more info SHARE ANALYSIS: TCL - TRANSURBAN GROUP LIMITED

For more info SHARE ANALYSIS: TLS - TELSTRA GROUP LIMITED

For more info SHARE ANALYSIS: WES - WESFARMERS LIMITED

For more info SHARE ANALYSIS: WOW - WOOLWORTHS GROUP LIMITED