The Overnight Report: Turnaround Tuesday

Daily Market Reports | Jul 21 2021

This story features AGL ENERGY LIMITED, and other companies. For more info SHARE ANALYSIS: AGL

World Overnight
SPI Overnight (Jun) 7210.00 + 49.00 0.68%
S&P ASX 200 7252.20 – 33.80 – 0.46%
S&P500 4323.06 + 64.57 1.52%
Nasdaq Comp 14498.88 + 223.89 1.57%
DJIA 34511.99 + 549.95 1.62%
S&P500 VIX 19.73 – 2.77 – 12.31%
US 10-year yield 1.21 + 0.03 2.37%
USD Index 92.97 + 0.14 0.15%
FTSE100 6881.13 + 36.74 0.54%
DAX30 15216.27 + 83.07 0.55%

By Greg Peel

We Shall Overcome

Well I got that wrong. I was anticipating that after a nervous Monday, in which the ASX200 initially fell -100 points but recovered to be down -60, Wall Street’s Monday night plunge would have opened the floodgates. The futures suggested -68 but I saw -120.

The index was playing to script in the first 15 minutes, down -80 points, but swung on a dime at 7200 to charge back to be only down -44 ahead of the 11am update. Then at 1pm, it was almost back to square.

South Australia has gone into lockdown, and Melbourne’s lockdown has been extended. But in Sydney, a case-count of 78 was encouraging, as was Gladys’ promise that construction can recommence on July 31.

But the day wasn’t over yet. Back to square was enough to bring in a new wave of selling, and mid-afternoon the index was down -50 points again. This annoyed the earlier buyers, so a late comeback closed the session at -33.

The energy sector was hit again (-1.6%) to mark a second day of selling post the OPEC agreement, and utilities copped (-1.7%) with AGL Energy ((AGL)) down -2.4%. But there was also underlying action in the sector.

It has long been a subject of speculation, and finally yesterday Santos ((STO)) took a swing at Oil Search ((OSH)). Santos is the junior partner alongside Oil Search in PNG LNG. Oil Search immediately rejected the bid. But with the stock now in play, investors pushed its value up 6.3% and sold Santos down -5.0%.

Also in play, in a general sense, is the BNPL sector. Consolidation in such a fast growing industry is seen as inevitable given the extent of competition, and the rumour yesterday was Zip Co ((Z1P)) is the first target. It rose 5.4%.

The banks held out well yesterday, with ANZ Bank ((ANZ)) announcing a buyback, so it were the insurers that dragged financials down -0.2%. Insurers dislike low yields even more so than banks, and the Aussie ten-year fell -6 basis points yesterday to 1.20%, to stay in step with the US.

Helping bond yields fall and stocks rise yesterday morning was the release of the minutes of the July RBA meeting. Bearing in mind Sydney’s new covid outbreak had only just hit at that time, the RBA emphasised it has the “flexibility to increase or reduce weekly bond purchases in the future, as warranted by the state of the economy at the time”.

To that end, economists now believe plans to further taper QE in August will be put on hold.

Materials was the worst performing sector on the day (-1.8%), led down by a poor response to BHP Group’s ((BHP)) production report. Healthcare was once again a saviour (+0.9%), on the combination of the Aussie’s plunge and the covid-winners within.

Small moves up and down were posted by other sectors.

Wall Street’s bounce has our futures up 49 this morning, which if accurate would have the ASX200 back near 7300 – the point at which nothing has happened for a month.

What Changed?

Absolutely nothing. America was in the same place last night as it was on Monday night.

Texas is back to recording 3000 new cases a day. There is no way the Republican-held state would lock down – nor even mandate masks. Data shows some 99% of US delta cases are among the unvaccinated.

Last night’s bounce was purely technical. Six times this year Wall Street has suffered a sharp plunge down to the 50-day moving average for the S&P500, marking around a net -3% pullback to get there. Last night was the sixth time the market has bounced straight back.

The Dow did not fully recover, but the S&P got very close, and the Nasdaq is up over two days. Each pullback this year has been ultimately followed by new highs.

It is hard to find any Wall Street commentator who does not foresee the S&P closing out 2021 higher from here. Even with the potential for a decent correction in between. Of course, corrections do typically come when everyone is bullish.

Supporting bullishness is the “Fed put”. Powell is resolute that there will be no tapering QE in the foreseeable future. Wall Street had been pricing in a tapering announcement as early as next month (Jackson Hole), but appreciates that delta is an excuse for the Fed to stay its course.

You can’t fight the Fed. And were the situation to get really bad, the Fed can always up the ante. Fed officials always deny their policy can be impacted by any major stock market corrections, but history suggests that’s rubbish. Late 2018 was a classic example.

And with the US ten-year back down at 1.21% (up 3bps last night), the TINA effect is alive and well.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz) 1809.90 – 2.70 – 0.15%
Silver (oz) 24.93 – 0.23 – 0.91%
Copper (lb) 4.22 + 0.01 0.13%
Aluminium (lb) 1.10 – 0.03 – 2.51%
Lead (lb) 1.04 – 0.01 – 0.50%
Nickel (lb) 8.50 + 0.06 0.66%
Zinc (lb) 1.33 + 0.00 0.05%
West Texas Crude 67.42 + 1.00 1.51%
Brent Crude 68.62 – 0.11 – 0.16%
Iron Ore (t) 220.05 0.00 0.00%

Russia intends to impose a 15% export tax on aluminium.

Elsewhere, metal price movements were subdued, and iron ore is indeed unchanged.

I said yesterday gold tends to need a day to think about it (ie selling gold to cover margin calls on stocks), but the risk has passed.

WTI crude bounced back 1.5% after falling -7.5% on Monday night, but Brent isn’t having it.

The Aussie is down -0.2% at US$0.7330.

Today

The SPI Overnight closed up 49 points or 0.7%.

Today brings a preliminary read on June retail sales.

Production reports are due from South32 ((S32)) and Syrah Resources ((SYR)).

Atlas Arteria ((ALX)) provides a quarterly update.

Cimic Group ((CIM)) reports half-year earnings.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
ABP Abacus Property Downgrade to Neutral from Outperform Macquarie
ARF Arena REIT Downgrade to Neutral from Outperform Macquarie
COH Cochlear Downgrade to Equal-weight from Overweight Morgan Stanley
CPU Computershare Downgrade to Hold from Add Morgans
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
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.

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.)

(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)

All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts on the website and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided. www.fnarena.com

FNArena is proud about its track record and past achievements: Ten Years On

Share on FacebookTweet about this on TwitterShare on LinkedIn

Click to view our Glossary of Financial Terms

CHARTS

AGL ALX ANZ BHP CIM OSH S32 STO SYR Z1P

For more info SHARE ANALYSIS: AGL - AGL ENERGY LIMITED

For more info SHARE ANALYSIS: ALX - ATLAS ARTERIA

For more info SHARE ANALYSIS: BHP - BHP GROUP LIMITED

For more info SHARE ANALYSIS: CIM - CIMIC GROUP LIMITED

For more info SHARE ANALYSIS: OSH - OIL SEARCH LIMITED

For more info SHARE ANALYSIS: S32 - SOUTH32 LIMITED

For more info SHARE ANALYSIS: STO - SANTOS LIMITED

For more info SHARE ANALYSIS: SYR - SYRAH RESOURCES LIMITED

For more info SHARE ANALYSIS: Z1P - ZIP CO LIMITED