Daily Market Reports | Jun 18 2021
This story features COLES GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: COL
| World Overnight | |||
| SPI Overnight (Jun) | 7305.00 | + 38.00 | 0.52% |
| S&P ASX 200 | 7359.00 | – 27.20 | – 0.37% |
| S&P500 | 4221.86 | – 1.84 | – 0.04% |
| Nasdaq Comp | 14161.35 | + 121.67 | 0.87% |
| DJIA | 33823.45 | – 210.22 | – 0.62% |
| S&P500 VIX | 17.75 | – 0.40 | – 2.20% |
| US 10-year yield | 1.51 | – 0.06 | – 3.70% |
| USD Index | 91.91 | + 0.52 | 0.57% |
| FTSE100 | 7153.43 | – 31.52 | – 0.44% |
| DAX30 | 15727.67 | + 17.10 | 0.11% |
By Greg Peel
Some Way Off?
Up until yesterday, the RBA governor has been insisting “it is unlikely to be until 2024 at the earliest” before Australia will see its first post-covid rate rise. Yesterday he said simply it is “some way off”.
This vagueness added to a wild odd session on the ASX which began well before the open, as markets tried to interpret the Fed statement and press conference. The statement was hawkish, in regards FOMC member rate rise expectations, but the Fed chair was more dovish in his press conference responses.
US stocks markets rocked and rolled but what was definitive was a one percent gain in the US dollar index. While this was countered with a one percent fall in the Aussie, it was clear commodity prices, which had been driven by an increasingly crowded trade, would suffer.
Gold was the clear and present victim, and it fell -2.5%. The London Metals Exchange had closed by that time, and while still open after-hours, oil markets were also effectively closed. So we had to wait until tonight to see base metal and oil prices all fall heavily.
This was anticipated in a -1.8% fall for the materials sector yesterday, and -1.9% for energy.
But central bank-speak was not all that was impacting the market yesterday.
The ASX200 opened down -44 points and by lunchtime was back to square. In between came a rather astonishing jobs report.
Australia added 115,000 jobs in May when forecasts were for 30,000. Of that figure, 97,000 were full time jobs. The unemployment rate plunged to a pre-pandemic 5.1% from 5.5% when 5.4% was forecast, even as the participation rate increased. Hours worked rose and underemployment fell to 7.4% from 7.8%.
Irrespective of central bank rhetoric, the May numbers suggest the RBA's target of 4.5% unemployment, which is one half of the trigger for a rate rise, seems now a lot closer than 2024.
The Australian ten-year yield rose 9 basis points to 1.63%.
While defensive sectors have been to date beneficiaries of the “inflation trade”, in particular REITs, investment has been based on the assumption inflation will rise but actual rate rises will still be some way off. Well, they’re still some way off, according to Dr Lowe, but yesterday no one was mucking about.
Property fell -1.5%, telcos -1.9%, utilities 1-1%, and staples -1.5%. These are the steady dividend-paying sectors, along (these days) with materials. As bond rates rise those dividends are less attractive.
The big fall in staples was nonetheless largely attributable to a -4.5% plunge for Coles ((COL)), after management attempted to wow (pun intended) the crowd with its new “smarter selling” program, but made the mistake of revealing how much it would cost.
Having peaked out post jobs report, the ASX200 then slid through the afternoon to be down -27 at the close. It could have been a lot worse, but for the fact the one sector that specifically likes inflation and rate rises are the banks. They offset with a 0.8% gain.
The tech sector did its bit as well in rising 1.3%.
With all that was going on one can appreciate why it was a volatile day. But adding to the volatility was the fact it was ASX derivatives expiry day.
And what might today bring? Wall Street has seen fresh rotation into growth as the US ten-year yield fell back by -6 of the 7 basis points it jumped the night before. Gold is down another -2% as the US dollar is up another 1% but the Aussie is down another -0.8%.
Put it together – futures up 38 points.
Who to believe?
Jerome Powell has also been holding on to a 2024 expectation for the first Fed rate rise but Wednesday night’s “dot plots” showed a majority of FOMC members tipping 2023, and a handful even 2022. But then Powell told the gathered press one should take the dot plots “with a grain of salt”.
I noted yesterday one should always wait to the day after a Fed policy release to learn the true Wall Street reaction, with most steering clear of the initial late afternoon volatility on the day. If inflation really is a threat, and now that the Fed is going to start talking about tapering, one would expect growth stocks to lose out over value stocks and bond prices to fall.
Last night the Nasdaq rallied 0.9%, the Dow fell -0.6%, and the US ten-year yield fell back -6bps to 1.51%. The only consistent element from Wednesday night was a further 1% rally in the US dollar, and subsequent -2% additional fall in gold.
The biggest sector falls in the S&P500 last night were booked by banks, energy and materials, while the tech-heavy sectors countered to leave the S&P yet again flat. Those three sectors had become the most crowded trades, being the best performers year to date.
The other point to consider, of course, is: why is inflation rising? To which the answer is because the economy is recovering. And a strong economy is a good thing. The Australian economy is recovering well, if yesterday’s jobs numbers are anything to go by, and so is the US economy, although it’s proving to be a bit of a bumpy ride.
US jobs numbers have fallen short of expectations over the past two months. The weekly new jobless claims numbers have been trending down since February albeit with the occasional stumble. Last night’s data showed a 37,000 increase to 412,000 – the highest level in a month.
But at the same time, job vacancies continue to rise, and labour shortages impacting across many industries. Higher wages need to be offered to attract the right people.
Which implies inflation.
If anything was going to resolve the current battle between the transitories and the structurals this week, it is not the Fed.
Commodities
| Spot Metals,Minerals & Energy Futures | |||
| Gold (oz) | 1774.00 | – 37.90 | – 2.09% |
| Silver (oz) | 25.90 | – 1.05 | – 3.90% |
| Copper (lb) | 4.20 | – 0.11 | – 2.54% |
| Aluminium (lb) | 1.09 | – 0.03 | – 2.57% |
| Lead (lb) | 0.96 | – 0.03 | – 2.54% |
| Nickel (lb) | 7.87 | – 0.12 | – 1.48% |
| Zinc (lb) | 1.33 | – 0.03 | – 2.13% |
| West Texas Crude | 71.04 | – 1.11 | – 1.54% |
| Brent Crude | 73.12 | – 0.75 | – 1.02% |
| Iron Ore (t) | 220.80 | + 7.15 | 3.35% |
I think we have this covered, other than to note, as is typically the case, iron ore has ignored the US dollar surge.
Having laboured for an eternity in the 77-78 range, the Aussie is down -0.8% to US$0.7557.
Today
The SPI Overnight closed up 38 points which, if accurate, would make yesterday redundant.
The Bank of Japan holds a policy meeting today.
The quarterly changes to the S&P/ASX indices become effective after the market's close today.
Sydney Airport ((SYD)) reveals May traffic numbers.
Woolworths ((WOW)) shareholders get to decide whether spinning off the company’s pubs and bottlos is a worthy endeavour.
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 |
| COL | Coles | Upgrade to Outperform from Neutral | Macquarie |
| CSL | CSL | Downgrade to Neutral from Outperform | Macquarie |
| DMP | Domino's Pizza Enterprises | Downgrade to Hold from Add | Morgans |
| DOW | Downer EDI | Downgrade to Lighten from Hold | Ord Minnett |
| IGO | IGO | Downgrade to Underweight from Equal-weight | Morgan Stanley |
| ILU | Iluka Resources | Upgrade to Outperform from Neutral | Macquarie |
| REG | Regis Healthcare | Upgrade to Add from Hold | Morgans |
| SEK | Seek | Upgrade to Outperform from Neutral | Macquarie |
| SGM | Sims | Upgrade to Buy from Hold | Ord Minnett |
| SOM | Somnomed | Downgrade to Hold from Add | Morgans |
| SUN | Suncorp | Downgrade to Neutral from Outperform | Credit Suisse |
| WHC | Whitehaven Coal | Downgrade to Neutral from Buy | Citi |
| WOW | Woolworths | 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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