The Overnight Report: Delta Dawns

Daily Market Reports | Jul 20 2021

This story features BHP GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: BHP

World Overnight
SPI Overnight (Jun) 7129.00 – 68.00 – 0.94%
S&P ASX 200 7286.00 – 62.10 – 0.85%
S&P500 4258.49 – 68.67 – 1.59%
Nasdaq Comp 14274.98 – 152.25 – 1.06%
DJIA 33962.04 – 725.81 – 2.09%
S&P500 VIX 22.50 + 4.05 21.95%
US 10-year yield 1.18 – 0.12 – 9.15%
USD Index 92.83 + 0.14 0.15%
FTSE100 6844.39 – 163.70 – 2.34%
DAX30 15133.20 – 407.11 – 2.62%

By Greg Peel

The Bigger Picture

To date, the local market has taken the new lockdowns with a grain of salt. It’s been choppy, but the ASX200 closed at 7358 on June 22 and 7348 last Friday. Presumably investors have put faith in recent history, which suggests state economies bounce back swiftly once the inmates are released.

But yesterday was a classic Wall Street sneeze/ASX cold situation as the index opened down -100 points, or -1.4% to the S&P500’s overnight drop of -0.8%. The problem is the concentration of market cap in banks and resources.

From the 11am update, nonetheless, the index recovered to close the session down -62. At 98 new cases in Sydney, the numbers are not going down, but nor are they going up, Zombie-style. A lockdown extension will be announced today for Melbourne and South Australia has moved to Level 4 restrictions because it has three cases.

Three cases. Last night was Freedom Day in the UK, with all restrictions lifted. The daily case count is north of 50,000 and rising. The argument is that vaccines do not stop you catching covid, but they do stop you being significantly ill. Over 60% of the UK is double-dosed.

So yesterday’s drop for the ASX200 was more a case of following Wall Street, as the US starts to become alarmed at its own fresh case surge. It’s all academic, given what had been a bit of a safety trade on Friday night on Wall Street became a full-blown capitulation last night.

If we take out a -2.4% drop for materials yesterday (gold price), -2.3% for energy (oil price expectation) and -0.9% for the banks (Australian ten-year down -5 basis points to 1.23%), the rest of the market was fairly balanced. Telcos (-1.0%) and industrials (-0.9%) took a hit, but the counter-punch was provided by healthcare (+1.6%).

Healthcare benefits from both the Aussie dollar’s drop, and the covid beneficiaries within the index which provide the likes of test kits and ventilators to the US.

The Aussie is again lower, and we knew about the OPEC-Plus production increases yesterday, which explains why our futures are only down -0.9% this morning to the S&P500’s -1.6% drop overnight. But the futures are only an indicator, and not typically played by share investors more prone to jump at shadows.

In other words, we might be down a lot more than -68 points.

We’ve seen this movie before

Cast your mind back sixteen months and recall that Wall Street dropped -35%, led by energy (world locked down) and banks (yields plunge as the Fed manned the barricades). The rebound was nonetheless swift and sharp, led by FANG and Friends, consumer staples, and a new breed of stay-at-home stocks such as Zoom and Peleton.

Last night the WTI crude price dropped -7.5% on OPEC’s production increases, and the US ten-year yield dropped -12 basis points to 1.18% as investors rushed to safety while exiting equities. The Dow was down -950 points at its low.

The hardest hit sectors/stocks were energy, the banks and anything considered a “reopening” trade, such as airlines, cruise lines, hotels and restaurants along with other cyclical industrials.

Falling only modestly were FANG and Friends and consumer staples. Closing solidly in the green were the stay-at-home stocks (Zoom actually did fall, but only because it announced a takeover). Peleton jumped 6% (although probably a bit of a Tadej effect there as well).

The Dow fell -2.1% to the Nasdaq’s -1.1%. All too familiar.

OPEC production aside, the overriding issue is delta. Wall Street looked across The Pond aghast at Freedom Day, and already the government has advised against travel to the UK. Australia’s lockdowns constantly come up in conversation, and we’re just the tip of a global iceberg.

The US case and death counts are now rising at a speed last seen early this year before the vaccine rollout began in earnest. Cases are concentrated in the pockets of the unvaccinated – Republican states. And this time it’s the more deadly delta.

While last night’s plunge was Wall Street’s biggest this year, there have been a few of these scary days along the way and each time the impact has lasted little more than a heartbeat. Typically markets have bounced back immediately.

It’s not likely that will be the case this time. No matter how stellar earnings reports might be, it’s old news. The September quarter is back to the future. Yet pundits remain convinced the bull market is still intact. We just have to get through some level of overdue correction.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz) 1812.60 + 0.60 0.03%
Silver (oz) 25.16 – 0.48 – 1.87%
Copper (lb) 4.21 – 0.05 – 1.21%
Aluminium (lb) 1.13 + 0.01 0.69%
Lead (lb) 1.04 – 0.01 – 0.84%
Nickel (lb) 8.45 – 0.13 – 1.55%
Zinc (lb) 1.33 – 0.02 – 1.22%
West Texas Crude 66.42 – 5.39 – 7.51%
Brent Crude 68.73 – 4.86 – 6.60%
Iron Ore (t) 220.05 – 1.05 – 0.47%

The interesting point about the oil price plunge is that energy analysts are actually calling OPEC’s agreement a positive outcome. Yes, production will be gradually increased, but just how long were the members going to sit there and let oil prices run, and let US producers benefit?

At least they have an agreement. As history suggests, a negative outcome would have been a breakdown in cartel cooperation leading to an “every man for himself” production surge. Meanwhile, US production has not grown despite rising oil prices. No one wants to lend money anymore to the fossil fuel industry, so no new holes are being drilled.

And now delta again threatens to shut down the world.

Metal prices were understandably to the weak side, while gold is unmoved. I don’t know why, but gold traders always need an extra day to think about it.

Providing some offset for our market is an Aussie dollar down another -0.8% at US$0.7347. We hadn’t seen 73 this year.

Today

The SPI Overnight closed down -68 points or -0.9%.

The minutes of the July RBA meeting are out today.

BHP Group ((BHP)) provides a production report, Sydney Airport ((SYD)) provides (a now redundant) June quarter update, and Ampol ((ALD)) shares its thoughts on what to do about Lytton.

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
ABP Abacus Property Downgrade to Neutral from Outperform Macquarie
ARF Arena REIT Downgrade to Neutral from Outperform Macquarie
BLD Boral Downgrade to Underweight from Equal-weight Morgan Stanley
CPU Computershare Downgrade to Hold from Add Morgans
CSR CSR Upgrade to Overweight from Equal-weight Morgan Stanley
DCN Dacian Gold Downgrade to Underperform from Outperform Macquarie
EVN Evolution Mining Upgrade to Neutral from Sell Citi
Downgrade to Neutral from Outperform Credit Suisse
Downgrade to Underperform from Neutral Macquarie
LNK Link Administration Upgrade to Add from Hold Morgans
MGH MAAS Group Upgrade to Add from Hold Morgans
MPL Medibank Private Downgrade to Hold from Add Morgans
OGC OceanaGold Upgrade to Neutral from Underperform Macquarie
PNV Polynovo Downgrade to Hold from Accumulate Ord Minnett
SKI Spark Infrastructure Downgrade to Hold from Add Morgans

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

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