The Overnight Report: Lock It In

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World Overnight
SPI Overnight (Jun)	7237.00	– 6.00	– 0.08%
S&P ASX 200	7335.90	– 18.80	– 0.26%
S&P500	4360.03	– 14.27	– 0.33%
Nasdaq Comp	14543.13	– 101.82	– 0.70%
DJIA	34987.02	+ 53.79	0.15%
S&P500 VIX	17.01	+ 0.68	4.16%
US 10-year yield	1.30	– 0.06	– 4.35%
USD Index	92.58	+ 0.21	0.23%
FTSE100	7012.02	– 79.17	– 1.12%
DAX30	15629.66	– 159.32	– 1.01%

By Greg Peel

No Idea

On Wednesday every sector bar technology closed stronger and yesterday every sector bar two closed lower. When the opening bell rang yesterday nothing happened. By 11.30am the index had struggled to up ten points before heading south all afternoon.

The two sectors posting gains were materials (+1.4%) on a pop in the gold price and utilities (+0.7%) as Spark Infrastructure came out of its trading halt and rose another 6.1%. Spark is prepared to chat to the consortium on the hunt, but not to allow due diligence.

Given the market was not fazed about the extended Sydney lockdown on Wednesday, probably focusing on federal/state government assistance, the new Melbourne lockdown was likely not the trigger for the sell-off.

China reported 7.9% year on year GDP growth in the June quarter, below 8.1% forecasts and down from 18.3% in the March quarter, bearing in mind China went into and came out of covid ahead of everyone else.

Month of June industrial production rose 8.3% year on year, ahead of a 7.8% forecast but down on May’s 8.8%. Retail sales rose 12.1%, ahead of an 11.0% forecast but down on May’s 12.4%. Fixed asset investment rose 12.6% year to date, ahead of a 12.1% forecast but down on 15.4%.

We may conclude that China’s economic growth is slowing – not so much of a surprise as the initial snap rebound subsides – but not slowing as rapidly as more recent forecasts.

The other news late morning was Australia’s unemployment rate falling to a decade low of 4.9%, from 5.1% in May. Old news unfortunately. The telling numbers within the report were a -1.8% fall in hours worked and a 0.5 percentage point increase in the underemployment rate in Victoria, due to the previous lockdown. Otherwise, the impacts of July lockdowns await the next data drop.

The biggest sector fall was that of healthcare (-1.4%), with CSL ((CSL)) bouncing around almost daily, sometimes in line with and sometimes not the Aussie dollar. Property fell -1.2%, which does make sense as lockdowns increase.

Ditto the banks (-0.7%), but why the mostly defensive sectors that went up on Wednesday went down yesterday makes little sense, other than, really, nobody knows what’s going on.

The recent fall in US bond yields may be adding to uncertainty and yesterday the Aussie ten-year fell -5 basis points to 1.29%, which, as of last night, is bang in line with the US equivalent. Falling yields only exacerbate bank woes.

Technology fell -1.2% as the BNPL wash-out continued, led by another -6.7% for Zip Co ((Z1P)). On the flipside, ARB Corp has proven a clear covid-winner and on a trading update rose 7.2%, helping to stem the fall in consumer discretionary (-0.04%).

Last night the S&P500 fell -0.3%, led down by Big Tech, but our futures are down a mere -6 points this morning, probably because we don’t have Big Tech.

Or we just have no idea.

Enough’s Enough

Recently the mega-cap FAAMG stocks have seen a revival and pushed to new highs after Wall Street came to decide these solid earners do not really belong in the “growth” basket, rather they are as defensive as a consumer staple. But they can’t keep hitting new highs every day.

Next week they start to report earnings, so best to lock in some profits now ahead of any “sell the fact” response, which in the early days of the season has already been the trend.

That’s the most likely explanation given the US ten-year bond yield fell another -6 basis points to 1.30% last night. Growth stocks are the ones who benefit most, in valuation terms, from falling yields.

But why do yields keep falling?

US industrial production rose 0.4% in June, but take out the impact of constrained auto production due to the chip shortage, and that becomes a solid 0.8%.

Weekly new jobless claims fell to a new covid low of 360,000, down -26,000 from the week before.

The Philadelphia Fed activity index slipped to 21.9 from 30.7 a month ago, but as a zero-neutral measure these are still runaway numbers. The Empire (New York Fed) index hit a record high of 43.0, up from 17.4.

It’s thus a bit hard to argue that lower US yields are the result of slowing US growth.

In a second day of testimony to Congress, Jerome Powell reiterated the Fed’s stance on monetary policy, but this can hardly be a driver for further yield weakness given he’s been reiterating till he’s blue in the face for the last three months.

While the FOMC is indeed “actively” talking about taper timing, the suggestion is only if the high inflation numbers seen in May-June persist to the end of the year will the Fed actually respond.

The truth may lie with delta. While delta is a randomly chosen Greek letter it is also used to denote probability in options valuation. And further spread of the variant is currently high probability.

Dr. Francis Collins, director of the US National Institutes of Health told CNN that the “delta variant is spreading, people are dying, we can’t actually just wait for things to get more rational.”

The standout pace of US vaccination has come to a halt, with Republican states well behind on dose numbers.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz)	1829.40	+ 2.10	0.11%
Silver (oz)	26.32	+ 0.09	0.34%
Copper (lb)	4.28	+ 0.08	1.82%
Aluminium (lb)	1.13	– 0.00	– 0.04%
Lead (lb)	1.05	+ 0.02	1.48%
Nickel (lb)	8.48	+ 0.06	0.71%
Zinc (lb)	1.34	+ 0.02	1.29%
West Texas Crude	71.65	– 1.48	– 2.02%
Brent Crude	73.33	– 1.26	– 1.69%
Iron Ore (t)	222.30	+ 4.45	2.04%

While the US dollar rose again last night, metal prices also rose. If the Chinese economy is indeed slowing, this suggests more stimulus is needed.

Delta is also a worry for oil producers, as continued spread suggests lower demand. But it also appears the UAE and Saudi Arabia have reached a compromise that implies some easing of OPEC production constraints.

Given stronger commodity prices, lockdowns are clearly weighing on the Aussie. It’s down -0.8% to the greenback’s 0.2% gain, at US$0.7424.

Today

The Bank of Japan meets today.

The US will see retail sales and consumer sentiment data tonight.

Alumina Ltd ((AWC)) and Rio Tinto ((RIO)) release quarterly reports while Auckland International Airport ((AIA)) reports June traffic stats.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
ABC	ADBRI	Upgrade to Equal-weight from Underweight	Morgan Stanley
ARF	Arena REIT	Downgrade to Equal-weight from Overweight	Morgan Stanley
BLD	Boral	Downgrade to Underweight from Equal-weight	Morgan Stanley
CSR	CSR	Upgrade to Overweight from Equal-weight	Morgan Stanley
GXY	Galaxy Resources	Upgrade to Buy from Accumulate	Ord Minnett
OGC	OceanaGold	Upgrade to Neutral from Underperform	Macquarie
ORE	Orocobre	Upgrade to Buy from Accumulate	Ord Minnett
PLS	Pilbara Minerals	Upgrade to Hold from Lighten	Ord Minnett
PNV	Polynovo	Downgrade to Hold from Accumulate	Ord Minnett
VEA	Viva Energy	Upgrade to Add from Hold	Morgans

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

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