The Overnight Report: Don’t Mention Inflation

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World Overnight
SPI Overnight	7396.00	+ 12.00	0.16%
S&P ASX 200	7413.70	+ 38.80	0.53%
S&P500	4536.19	+ 16.56	0.37%
Nasdaq Comp	15121.68	– 7.41	– 0.05%
DJIA	35609.34	+ 152.03	0.43%
S&P500 VIX	15.49	– 0.21	– 1.34%
US 10-year yield	1.64	+ 0.00	0.06%
USD Index	93.61	– 0.16	– 0.17%
FTSE100	7223.10	+ 5.57	0.08%
DAX30	15522.92	+ 7.09	0.05%

By Greg Peel

Banks are Back

With the futures up 40 points yesterday morning the ASX200 opened up 50 in the first ten minutes then kicked on to be up 75 late morning. It was a gradual slide backwards from there.

By the close, it were the banks that led the session (+1.0%), as the Aussie ten-year bond yield rose another 7 points to 1.79%.

By rights, higher yields should weigh on dividend payers and that worked yesterday for telcos (-0.5%), but not for any other of the usual suspects, which were all modestly higher.

Industrials were the exception, up a full 0.9% after Atlas Arteria ((ALX)) and Sydney Airport ((SYD)) provided trading updates.

The big loser on the day was energy (-1.0%), after Beijing declared it was going to ensure thermal coal output increases to 12mt per day. That snuffed out the coal price rally for now, sending Whitehaven Coal ((WHC)) down -7.9% to be the worst index performer on the day.

Beyond that, AGM season is making its mark as the daily number of meetings increases. Kogan ((KGN)) was a winner on that front (+6.7%), suggesting its inventory woes were over, while Flight Centre ((FLT)) didn’t fare as well (-4.8%).

Worley announced it had won a big low-carbon energy plant contract from Shell, and rose 7.5%, noting such a contract alleviates some of the ESG pressure on the company.

Technology actually topped the percentages yesterday (+1.1%), despite rising yields, in following the Nasdaq.

While there was a lot of movement in individual stocks yesterday, sentiment remains positive from an index perspective, and the 7400 level has been recaptured.

That said, another rally on Wall Street took the S&P500 up 0.4% last night to within a whisker of its all-time high, yet our futures show a more staid 0.2% this morning.

What is yet to make much of a mark is the Aussie, which has been rising with bond yields and this morning is back over the US75c mark. Healthcare did not seem to mind yesterday (+0.4%), while for resources stocks, ongoing rallies (ex iron ore) in commodity prices are overcoming currency drag for now. Materials did only rise 0.2% yesterday nonetheless.

The nickel price jumped 4% last night, and gold has regained some ground.

There’s a longer list of AGM and quarterly updates today, including meetings for Transurban ((TCL)) and Wesfarmers ((WES)) and production reports from Woodside Petroleum ((WPL)), Santos ((STO)) and South32 ((S32)).

Almost There

Germany’s wholesale inflation (PPI) rose to 14.2% annual in September, up from 12.0% in August and ahead of a forecast 12.7%. Germany is of course a global manufacturing powerhouse.

The US economy is still growing at a solid pace, last night’s Fed Beige Book revealed, but labour shortages and supply-chain bottlenecks are restraining growth and triggering higher inflation. This latest Beige Book cited labour shortages 26 times compared to just six mentions in January.

Fed governor Randal Quarles said last night he was beginning to focus more of his attention on inflation and that there are “significant upside risks” to the widely-shared view that price pressures will decline sharply next year.

Thanks, said Wall Street, but we knew that already. And given no one expects the Fed to do anything other than announce the start of tapering at its meeting next month, any sort of taper tantrum is well off the cards. The Fed would have to shift suddenly to a hawkish stance to upset Wall Street, suggesting the first rate rise is a lot closer than the Fed has to date suggested. But tapering? Bring it on!

The Fed is currently being seen as part of the problem more so than part of the solution, particularly in regards to inflation. Low mortgage rates have US house prices up 19% year on year (sounds familiar) and the US is just not used to such a rise.

Meanwhile, earnings results continue to support Wall Street’s move back towards all-time highs, with the S&P500 now within -0.25% of the August mark.

Not so for Netflix, which fell -2% last night following Tuesday night’s aftermarket report.

Nor Tesla, which reported this morning in the aftermarket, beat solidly on revenue and earnings, and is little moved.

Fundstrat Global Advisors lifted its end-year S&P500 forecast to 4,800 from 4,700 in a note to clients last night. Respected founder Tom Lee said they see a “strong risk-on environment” as underway, helped by a typically strong year-end seasonal pattern that follows October.

Has Santa had both doses yet?

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz)	1782.00	+ 12.70	0.72%
Silver (oz)	24.28	+ 0.62	2.62%
Copper (lb)	4.75	– 0.02	– 0.33%
Aluminium (lb)	1.40	– 0.02	– 1.20%
Lead (lb)	1.08	– 0.01	– 1.35%
Nickel (lb)	9.53	+ 0.37	4.00%
Zinc (lb)	1.66	+ 0.01	0.45%
West Texas Crude	83.87	+ 1.04	1.26%
Brent Crude	85.80	+ 0.81	0.95%
Iron Ore (t)	124.45	+ 0.95	0.77%

Vale cut its nickel production guidance for its mine in Canada last night, due to a strike. The world’s largest refined nickel producer, Norilsk Nickel, reported lower production in the September quarter. The Philippines, the world’s second largest producer, announced production may be -10% below annual average this year due to frequent rains and a subsequent drop in vessels coming in.

Iron ore appears to be settling in the US$120/t range, which not so long ago would have been considered a very high price. It’s still a very high price compared to the cost of production for the big boys, so analysts still expect substantial dividends.

Mind you, every time I say it looks like iron ore is settling it shoots off again.

The US ten-year yield barely moved last night but gold found some buyers. All this talk of inflation must be having some effect.

Bitcoin in the meantime has hit a new record high, boosted by the listing of a new ETF on bitcoin futures. The purists will be hating the concept of not just a futures contract, but an ETF on a futures contract, which flies in the face of the currency’s raison d’etre as an asset outside the system.

But they’ll be liking the price.

The Aussie is up another 0.6% at US$0.7519.

Today

The SPI Overnight closed up 12 points.

NAB will release a September quarter summary of business conditions and confidence today.

I have highlighted some of today’s corporate events, please see the FNArena Calendar for the full list.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
ALL	Aristocrat Leisure	Upgrade to Outperform from Neutral	Macquarie
ALX	Atlas Arteria	Upgrade to Add from Hold	Morgans
AWC	Alumina Ltd	Downgrade to Neutral from Outperform	Credit Suisse
BAP	Bapcor	Upgrade to Add from Hold	Morgans
BHP	BHP Group	Upgrade to Add from Hold	Morgans
BSL	BlueScope Steel	Downgrade to Equal-weight from Overweight	Morgan Stanley
CL1	Class	Downgrade to Hold from Buy	Ord Minnett
EVN	Evolution Mining	Downgrade to Neutral from Outperform	Credit Suisse
GPT	GPT Group	Upgrade to Equal-weight from Underweight	Morgan Stanley
		Downgrade to Neutral from Outperform	Credit Suisse
HMC	HomeCo	Upgrade to Hold from Lighten	Ord Minnett
IEL	IDP Education	Downgrade to Hold from Add	Morgans
IGO	IGO	Upgrade to Outperform from Neutral	Credit Suisse
SRL	Sunrise Energy Metals	Downgrade to Neutral from Outperform	Macquarie
SXY	Senex Energy	Downgrade to Neutral from Buy	Citi
		Downgrade to Neutral from Outperform	Credit Suisse
		Downgrade to Hold from Add	Morgans
		Downgrade to Hold from Buy	Ord Minnett
TCL	Transurban Group	Upgrade to Add from Hold	Morgans
VMY	Vimy Resources	Downgrade to Hold from Add	Morgans
WAF	West African Resources	Downgrade to Neutral from Outperform	Macquarie
WOR	Worley	Upgrade to Buy from Neutral	UBS
WPL	Woodside Petroleum	Downgrade to Neutral from Outperform	Macquarie

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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