The Overnight Report: Turnaround Tuesday

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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.)

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