The Overnight Report: As You Were

Daily Market Reports | Jun 22 2021

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

World Overnight
SPI Overnight (Jun) 7244.00 + 89.00 1.24%
S&P ASX 200 7235.30 – 133.60 – 1.81%
S&P500 4224.79 + 58.34 1.40%
Nasdaq Comp 14141.48 + 111.10 0.79%
DJIA 33876.97 + 586.89 1.76%
S&P500 VIX 17.89 – 2.81 – 13.57%
US 10-year yield 1.48 + 0.03 2.34%
USD Index 91.86 – 0.37 – 0.40%
FTSE100 7062.29 + 44.82 0.64%
DAX30 15603.24 + 155.20 1.00%

By Greg Peel

Banks Flattened

Yesterday’s Australian government bond market action:

Two-year yield 0.07%, up 3 basis points; five-year 0.84%, -1bps; ten-year 1.49%, -9bps; fifteen-year 1.85%, -10bps.

Result? ASX financials sector down -3.1%, led by Commonwealth Bank ((CBA)), down -5.4%, and providing the majority of yesterday’s -1.8% plunge for the ASX200.

Admittedly, CBA’s fall was exacerbated by the announced sale of its general insurance business, leaving CBA as simply a bank and nothing else. But the bottom line is yesterday brought about a sharp flattening of the yield curve. Banks borrow short (deposits through to five-year bond issuance) and lend long (eg 20-30 year mortgages), so the greater the spread between short and long rates the greater the earnings.

Insurance companies also rely on higher long term rates in which to invest premiums to cover claims. They were trashed yesterday too.

All bar two sectors closed in the red yesterday, but it’s a long way down from the banks to -2.1% for utilities — the smallest of the sectors by market cap – and -1.7% for materials – the second largest sector – along with energy (-1.7%), industrials (-1.7%), and consumer discretionary (-1.6%).

So it was almost a Sell Everything session, mimicking Wall Street, although not all sectors were sold down hard. Most notable was healthcare (-0.3%), with currency tailwinds blowing a gale, staples (+0.2%), which don’t have a lot of correlation to yield curves, and technology (+0.2%).

Among individual stocks, a 2.5% gain for Afterpay ((APT)), ahead of Amazon Prime Day, put it at the top of charts, while the losers were led by gold mining-related services companies, with Codan ((CDA)) down -11.8%, NRW Holdings ((NWH)) down -7.0% and Perenti Global ((PRN)) down -6.5%, just after analysts have begun talking up the services sector.

The gold price bounced last night, as did the Aussie dollar.

I could go on, but there’d be little point. Wall Street completely flipped last night and our futures are up 89 points this morning.

We might however note there’s a bit of a fire sale season afoot. CBA has sold its insurance business, Boral ((BLD)) has sold its (profitable) North American Building Products business, and has its NorthAm fly ash business up for sale, while Iluka Resources ((ILU)) is looking for a buyer for its (unprofitable) Sierra Leone rutile business.

Go on, take the money and run.

With Wall Street having reversed hard last night, it’s a fair bet Australia’s banks will do the same today. Oil prices jumped last night, so the same should be seen in energy. Materials will benefit from the gold price bounce, but countered by iron ore (-5%).

There likely won’t be much of a chance to get on board, with the futures up 1.2%.

Bullard Dust

On Friday night, St Louis Fed president James Bullard put the cat amongst the pigeons by suggesting it was natural for the Fed to tilt a little bit more hawkish to contain inflationary pressures. It has been noted that Bullard has a history of being a Fed policy outlier, and of dropping the odd Fedspeak bombshell (often to later water down his comments).

Importantly, he is not currently an FOMC voting member.

Tonight the Fed chair will make a regular testimony to Congress, the transcript of which was released last night just before the close of Wall Street, in which he remains firm that inflation is transitory, and the US economy still requires monetary policy support.

Powell cites risks of a slowing vaccination rollout (30 states look like falling short of Biden’s July 4 target), the impact of the delta variant, and the fact millions of Americans are still out of work.

While the statement was released long after Wall Street had already bounced hard, the point is many investors stood aside on what was considered a rather bizarre Friday night session to let the Nervous Nellies bail out. Last night they moved in, waving Jay Powell flags.

After all, it was the first day of summer.

Last night saw the complete reverse of Friday night, with the Dow outperforming, the Nasdaq underperforming and the S&P500 going right back to where it had been on Thursday night.

The US ten-year yield recovered 3bps to 1.48%, the US dollar fell back -0.4%, gold bounced twenty bucks and WTI crude jumped 3% (more on that below).

No surprise that banks and energy led the S&P sectors.

So it’s a case of as you were, and we find Wall Street back at an elevated valuation with investors having apparently decided on what Fed policy actually is, after a few sessions of confusion and turmoil.

In a couple of weeks a great reckoning will come when June quarter earnings results begin to be released.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz) 1783.40 + 19.60 1.11%
Silver (oz) 25.94 + 0.15 0.58%
Copper (lb) 4.18 – 0.00 – 0.02%
Aluminium (lb) 1.09 + 0.01 0.58%
Lead (lb) 0.98 + 0.01 1.07%
Nickel (lb) 7.88 + 0.04 0.46%
Zinc (lb) 1.29 – 0.00 – 0.02%
West Texas Crude 73.66 + 2.02 2.82%
Brent Crude 74.93 + 1.42 1.93%
Iron Ore (t) 206.55 – 10.75 – 4.95%

One day the pundits suggest a new Iran nuclear deal is close, the next day they see it as far off, if at all. And even if a deal was reached, the belief is OPEC would keep a lid on fresh Iranian oil exports, lest they undo all the good work (rising prices) their productions quotas have done so far.

While it was hoped a new deal could be struck with the incumbent Iranian government before the new one moved in, that now seems unlikely. The new president, who has previously been the target of US sanctions due to human rights abuse, has said he has no intention of ever meeting with President Biden. For his part, Biden said he has no plans anyway.

Last night one US research house set a US$100/bbl target for Brent in 2021.

Base metal markets went a bit quiet last night, but not so iron ore. Beijing is probably trying to figure out a new way to push down iron ore prices without upsetting its own steel production. Good luck.

Gold has rebounded on the US dollar dip, but it’s a long road back to US$1900/oz. Especially if inflation indeed proves transitory.

The plunge in the Aussie dollar since the Fed meeting has been rather spectacular, so no surprises in a 0.8% bounce last night, to US$0.7541.

Today

The SPI Overnight closed up 89 points or 1.2%.

Very little on the calendar today, with the Fed chair’s testimony to Congress tonight (plus Q&A) the highlight.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
CGF Challenger Downgrade to Neutral from Buy UBS
COL Coles Downgrade to Neutral from Buy Citi
Downgrade to Neutral from Outperform Credit Suisse
CSL CSL Downgrade to Neutral from Outperform Macquarie
EVT Event Hospitality & Entertainment Downgrade to Neutral from Buy Citi
FLT Flight Centre Travel Upgrade to Neutral from Underperform Credit Suisse
ILU Iluka Resources Downgrade to Hold from Accumulate Ord Minnett
IVC Invocare Downgrade to Sell from Neutral Citi
JMS Jupiter Mines Downgrade to Neutral from Outperform Macquarie
NHC New Hope Upgrade to Outperform from Neutral Credit Suisse
NIC Nickel Mines Upgrade to Buy from Neutral Citi
RIO Rio Tinto Downgrade to Sell from Neutral UBS
S32 South32 Upgrade to Outperform from Neutral Macquarie
SUN Suncorp Downgrade to Hold from Add Morgans
WAF West African Resources Upgrade to Outperform from Neutral Macquarie

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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CHARTS

APT BLD CBA CDA ILU NWH PRN

For more info SHARE ANALYSIS: APT - AFTERPAY LIMITED

For more info SHARE ANALYSIS: BLD - BORAL LIMITED

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

For more info SHARE ANALYSIS: CDA - CODAN LIMITED

For more info SHARE ANALYSIS: ILU - ILUKA RESOURCES LIMITED

For more info SHARE ANALYSIS: NWH - NRW HOLDINGS LIMITED

For more info SHARE ANALYSIS: PRN - PERENTI GLOBAL LIMITED