The Overnight Report: Soggy Start

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World Overnight
SPI Overnight (Jun)	7367.00	– 19.00	– 0.26%
S&P ASX 200	7491.40	+ 98.80	1.34%
S&P500	4387.16	– 8.10	– 0.18%
Nasdaq Comp	14681.07	+ 8.39	0.06%
DJIA	34838.16	– 97.31	– 0.28%
S&P500 VIX	19.46	+ 1.22	6.69%
US 10-year yield	1.17	– 0.07	– 5.25%
USD Index	92.07	– 0.10	– 0.11%
FTSE100	7081.72	+ 49.42	0.70%
DAX30	15568.73	+ 24.34	0.16%

By Greg Peel

Afterpay Day

The clue was in the SPI futures, which closed up 0.5% on Saturday morning after the S&P500 fell -0.5% on Friday night, and for no obvious reason. The trend this year has been that whenever the overnight futures make a seemingly oversized, contrarian move, a big buy/sell order is going to hit the ASX.

Yesterday saw the banks, healthcare, energy, discretionary, staples and utilities all rally 1.3-1.9%, and it’s pretty difficult to justify why. Industrials, property and telcos chimed in with around 0.6%. Other than a couple of specific events yesterday, this looks very much like a “Buy Australia” order from someone, probably foreign, aided by the present level of the currency.

It did admittedly follow a profit-taking session on Friday to end the month, but a hundred points? I doubt anyone saw that coming.

There were nonetheless two sideshows on the day.

Stealing the limelight was an 18.8% rally for Afterpay ((APT)), following an all-scrip offer from US payments disruptor Square. RIP Afterpay – at only seven years old, and only worth $39bn. You could hear a pin drop in the UBS trading room yesterday.

T’was only on Friday that all BNPL stocks were dragged down by a weak trading update from NZ-based Sezzle ((SZL)). Having fallen -11% on Friday, Sezzle bounced back 3.7%, but Afterpay’s biggest local rival, Zip Co ((Z1P)) jumped 9.0%.

The tech sector rose 6.5%.

Feeling a bit like Mother Theresa, who died on the same day as Diana, were Santos ((STO)) and Oil Search ((OSH)), which have agreed to merge. Despite predictions of BNPL consolidation, the Afterpay news came a bit out of the blue, whereas Oil Search has been in play for a while now.

So Oil Search rose 4.7% and Santos 0.6% and having been dwarfed all their lives by the biggest stock in the energy sector, the merger of the two will be a larger entity than Woodside Petroleum ((WPL)).

Throw in the Woolies/Endeavour split, and now with this merger, S&P is going to have a devil of a time working out who goes in and who goes out of the indices next month. At least they no longer have to consider Afterpay for the top 20.

Materials was the stand-out underperforming sector yesterday in only rising 0.1%, but that was in the face of a -7% plunge for iron ore. An iron ore pullback has long been suspected, if not for the actual reason it has, and Fortescue Metals ((FMG)), for one, only fell -2.1%.

The ASX200 was up 114 points at its peak yesterday, but baulked at the rarefied air above 7500. It still closed firmly at a new all-time high, but with the S&P500 down -0.2% our futures are down a similar -19 points this morning.

Normal programming restored.

Not With a Bang

The Australian market may have kicked off August in style but not Wall Street, although not for want of trying after it, too, saw end-of-month selling on Friday night. The Dow was up 360 points from the open.

The opening rally for the start of the new month can be put down to more solid earnings beats. As the June quarter progressed, the feeling was price/earnings ratios had stretched too far above their averages, zero rates notwithstanding, suggesting a likely sell-the-fact response to earnings season. While on a net basis sell-the-fact has not materialised, neither has Wall really gone anywhere despite almost 90% of companies reporting to date beating estimates.

Those PE levels are based on forward earnings forecasts, and S&P500 earnings have beaten those forecasts by an average 17%. In other words, E has risen while P has not, hence PE ratios have come back down to more realistic levels.

After peaking early, Wall Street then tracked a steady path downward. We might point to several factors of which any or all could have been influential: the US economy appears to have peaked; the Chinese economy has clearly peaked; delta; and another sharp dip in US bond yields.

On Friday, China’s July manufacturing PMI came in at 50.4, down from 50.9 in June, and missing 50.8 forecasts. While 50 still means expansion, the recent trend suggests a possible fall into contraction this month. Exacerbating the situation is a worrying delta outbreak in one Chinese province, and unlike certain Australian premiers, Beijing is typically swift to impose full lockdowns.

The US July manufacturing PMI fell to 59.5 from 60.6, when a rise to 60.9 was forecast. While anything around 60 implies a rapid clip of expansion, again the trend is quietly down.

This may explain why the US ten-year bond yield fell -7 basis points to 1.17% last night, or it could be delta fears, or it could simply be foreign buying. With yields in the likes of Europe and Japan low to negative, capital is shifting to where the yield is.

This despite the US about to hit its debt ceiling, again, and concerns over how this might play out in a hostile Congress. We recall Obama faced a hostile Congress in 2011, and the US government was subsequently forced to shut down, leading to a loss of AAA rating.

News last night is that the bipartisan committee on infrastructure has reached a new deal that they hope can be passed through the Senate as soon as late this week. In your dreams, said the Republican Senate leader.

Aside from the macro, Wall Street was all abuzz at the micro level as well last night. Apparently Square has forked out US$29bn worth of scrip to buy some Aussie BNPL company. But Wall Street liked it. Square rose 10%.

The biggest US BNPL pure-play, Affirm, rose 15%.                    

On another note, August is the US summer holiday peak, equivalent to January downunder. Interest in markets typically fades and volumes drop.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz)	1813.30	– 0.50	– 0.03%
Silver (oz)	25.40	– 0.06	– 0.24%
Copper (lb)	4.39	– 0.02	– 0.42%
Aluminium (lb)	1.19	+ 0.01	1.08%
Lead (lb)	1.11	+ 0.01	1.21%
Nickel (lb)	8.89	+ 0.00	0.02%
Zinc (lb)	1.39	+ 0.01	0.98%
West Texas Crude	71.26	– 2.69	– 3.64%
Brent Crude	73.20	– 2.21	– 2.93%
Iron Ore (t)	183.40	+ 2.90	1.61%

With base metal prices mixed, and iron ore making a slight comeback, the focus last night was on oil prices.

As is the case with iron ore, Beijing also wants to crack down on crude imports. And China’s economy is slowing, and it appears the US economy is slowing, and the delta situation is only getting worse (fears of further lockdowns), and OPEC is about to increase production, and there’s plenty of spare production capacity in the US.

The US dollar is down a bit, so the Aussie is up a bit at US$0.7359.

Today

The SPI Overnight closed down -19 points or -0.3%.

The RBA meets today.

Data are due for June building approvals and housing finance.

Credit Corp ((CCP)) and Centuria Office REIT ((COF)) report earnings.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
A2M	a2 Milk Co	Upgrade to Neutral from Sell	Citi
ANN	Ansell	Downgrade to Neutral from Outperform	Credit Suisse
CMM	Capricorn Metals	Downgrade to Underperform from Neutral	Macquarie
DHG	Domain Australia	Upgrade to Outperform from Neutral	Credit Suisse
FMG	Fortescue Metals	Downgrade to Neutral from Outperform	Credit Suisse
IRE	Iress	Downgrade to Neutral from Outperform	Credit Suisse
JHG	Janus Henderson	NeutralNeutral	Citi
MYX	Mayne Pharma	Upgrade to Neutral from Underperform	Macquarie
NAB	National Australia Bank	Upgrade to Add from Hold	Morgans
NIC	Nickel Mines	Downgrade to Neutral from Outperform	Macquarie
ORG	Origin Energy	Upgrade to Outperform from Neutral	Credit Suisse
		Downgrade to Hold from Buy	Ord Minnett
PAN	Panoramic Resources	Upgrade to Add from Hold	Morgans
SBM	St. Barbara	Downgrade to Neutral from Buy	Citi
SWM	Seven West Media	Upgrade to Buy from Accumulate	Ord Minnett

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

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