The Overnight Report: Good Value

This story features FLIGHT CENTRE TRAVEL GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: FLT

World Overnight
SPI Overnight	7311.00	– 42.00	– 0.57%
S&P ASX 200	7384.20	+ 41.60	0.57%
S&P500	4443.11	– 12.37	– 0.28%
Nasdaq Comp	14969.97	– 77.73	– 0.52%
DJIA	34869.37	+ 71.37	0.21%
S&P500 VIX	18.76	+ 1.01	5.69%
US 10-year yield	1.48	+ 0.02	1.64%
USD Index	93.41	+ 0.08	0.09%
FTSE100	7063.40	+ 11.92	0.17%
DAX30	15573.88	+ 42.13	0.27%

By Greg Peel

Banking on it

The futures had suggested a tepid up 2 points yesterday morning but by midday the ASX200 was up 72. The index opened solidly and kept on going before Gladys announced her “road map” (have these people never heard of SatNav?) to provide an extra kick.

Enthusiasm faded in the afternoon to a 41 point gain. But beware, with the S&P500 down only -0.3% overnight our futures are down -42 points or -0.6% this morning, suggesting a big sell order may be set to hit the market today.

Rising US bond yields are driving US banks at present while energy continues to gain on the reopening trade and that is being mimicked downunder. The local banks led the charge yesterday, up 1.5%, to provide the largest index points contribution while energy (+1.8%) won on percentages.

Banks and energy again led Wall Street last night.

In the US and Europe, resurgent demand for energy is meeting slower moving supply, most notably of natural gas. The US domestic natgas price has more than doubled in 2021 while in Europe, imported (mostly from Russia) natgas bottomed out around five euros per megawatt hour in March 2020 and is now around seventy.

There is no direct connection to LNG export prices, as these are indexed to crude oil prices, but indirectly the demand/supply equation is in favour ahead of the northern winter.

The prospect of Australia’s biggest state economy reopening shortly is a positive for banks, reflected in rising bond yields but also in an easing of bad debt risk. It is also good news for travel, with the heavily shorted Flight Centre ((FLT)) and Webjet ((WEB)) jumping 7.5% and 5.2% yesterday.

Consumer discretionary rose 0.9%. Property, where you go to buy stuff, rose 0.6%. Industrials, which you drive on and also where you get on and off planes, recovered 0.5% after Friday’s yield-driven drop.

Sigma Healthcare ((SIG)) moved to gazump Wesfarmers ((WES)) yesterday in upping the bid for Australian Pharmaceuticals ((API)) with a cash/scrip offer, but neither stock is in the ASX200. The healthcare sector was the worst performer yesterday (-1.0%) thanks to CSL ((CSL)).

Technology chimed in with -0.7% on Nasdaq underperformance and we note Square – the driver of the Australian technology index – was down -1.7% last night.

As the iron ore price bounce continues, materials managed only +0.2%, with other metals not playing ball.

But as noted, this morning’s futures sell-off looks a bit overdone, likely for a reason.

Reopening Ahead

By now Republican senators will have rejected out of hand the House Democrats’ debt ceiling increase bill. The Democrats have more than one fall-back plan, but in this oh-so-very complicated US parliamentary system it all comes down to what can be passed with a simple majority and what requires 60%, such as this morning’s bill.

At the end of the day, the Dems are banking on the assumption even the Republicans aren’t stupid enough to allow the US to default on its debt, but in this day and age that’s a big call.

The US ten-year bond yield touched 1.50% last night before closing at 1.48%, up another couple of basis points. This is not quite reminiscent of the sudden yield spike seen earlier in the year, up to 1.75%, on the initial US reopening. Perhaps delta has left bond traders more cautious. But the trend is now clearly up.

The reopening of the US international border ahead in November is emblematic of renewed enthusiasm for the reopening trade, or should we say the re-reopening trade, and that means another rotation out of growth stocks and into value and cyclicals.

The winning sectors on the S&P500 last night were energy (+3.4%), financials (+1.3%) and materials (+0.8%) while the losers were healthcare (-1.4%), property (-1.2%) and tech (-1.0%).

Healthcare is non-cyclical and tech is beholden to higher yields but property is an interesting one. The simple equation is higher bond yields undermine the value of steady yield-payers but REITs have also oft been put up as an inflation hedge (rents rise with inflation) and higher-for-longer inflation expectations are the topic du jour.

Inflation is most evident in energy prices (see above) which, across the globe (with one exception) are reflecting the push away from fossil fuels towards renewables at a time the latter is not yet ready to satisfy demand.

Power shortages in China have led to forced factory production cuts, while a lack of available truck drivers has driven a seventies-style run on UK service stations to the point they’re all running dry, despite plenty of fuel at refineries.

It’s all fodder for the right wing but the bottom line is the great global energy transition will not be smooth.

Current inflation pressure is all about shortages and supply constraints and in another flashback to earlier days, Costco in the US has been forced to limit sales of toilet paper and bottled water.

We await the August reading for US PCE inflation due on Friday.

Commodities

Metals prices are a bit caught between supply shortages and demand curtailment (eg cuts at Chinese factories).

Iron ore continues to bounce, but that’s likely more technical than fundamental.

With oil and iron ore up, the Aussie is up 0.4% at US$0.7285.

Today

The SPI Overnight closed down -42 points or -0.6%.

We’ll see a revised read on August retail sales today.

China will release August industrial profit numbers.

The US sees consumer confidence and house prices (which like ours, are on a tear).

Spot Metals,Minerals & Energy Futures
Gold (oz)	1749.70	– 0.50	– 0.03%
Silver (oz)	22.61	+ 0.23	1.03%
Copper (lb)	4.23	– 0.00	– 0.03%
Aluminium (lb)	1.31	– 0.01	– 0.89%
Lead (lb)	0.98	+ 0.00	0.11%
Nickel (lb)	8.55	– 0.12	– 1.34%
Zinc (lb)	1.40	+ 0.00	0.32%
West Texas Crude	75.45	+ 1.47	1.99%
Brent Crude	79.33	+ 1.24	1.59%
Iron Ore (t)	118.65	+ 8.50	7.72%

Today

The SPI Overnight closed down -42 points or -0.6%.

We’ll see a revised read on August retail sales today.

China will release August industrial profit numbers.

The US sees consumer confidence and house prices (which like ours, are on a tear).

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
AGL	AGL Energy	Upgrade to Buy from Hold	Ord Minnett
AUB	AUB Group	Downgrade to Accumulate from Buy	Ord Minnett
AX1	Accent Group	Neutral	Citi
BAP	Bapcor	Upgrade to Buy from Neutral	Citi
FSF	Fonterra Shareholders Fund	Upgrade to Outperform from Underperform	Macquarie
SFR	Sandfire Resources	Downgrade to Neutral from Outperform	Credit Suisse
VTG	Vita Group	Downgrade to Hold from Buy	Ord Minnett

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

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