The Overnight Report: Not There Yet

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By Greg Peel

Fighting Back

In a quieter session, the ASX200 managed to close slightly higher yesterday, but not before a little foray down to -60 points in the first hour. That was mostly recovered by lunchtime, and a last-hour kick took the index into the green.

A turnaround for the iron ore price certainly did its bit, but while Johnny-come-lately sellers have featured at the open of the past two sessions, the buyers have been poised and ready under 7000.

Materials managed a 0.9% gain by the close, while healthcare stood out as a defensive, up 1.7% despite ResMed ((RMD)) going ex-div. Real estate also caught a bid (+1.3%) after its multi-day thumping, with the Aussie 10-year yield falling back -6 points to 3.50%.

The consumer sectors, industrials and utilities also saw a bit of buying while technology closed down -0.6% and energy fell -0.1%, but that will flip today.

The biggest drag was financials (-1.1%), and while that included National Bank ((NAB)) going ex-div, banks and insurers were generally weak.

Westpac’s consumer confidence survey for May showed a fall in the index to 90.4 points from 95.8 to mark the lowest level since August 2020.

The day’s earnings reporters underwhelmed, CSR ((CSR)) rising 0.5% on its result but GrainCorp ((GNC)) falling -1.0%. The latter has nonetheless rallied 240% post-drought, including 25% since early April.

Lifestyle Communities ((LIC)) provided a positive update on Tuesday but the market did not much respond until brokers did yesterday, and upgrades were worth 15.1% taking the share price to the top of the winners’ board.

Topping the losers’ board was Link Administration ((LNK)), which told the ASX yesterday it had no idea why its share price fell -15.1%. Link is under a takeover proposal so there may have been a rumour about cold feet, but it’s news to management.

The good news overnight is metals prices finally found a bottom and have rebounded slightly, while the oils are up 6%.

The bad news is Wall Street selling resumed in earnest, and thus our futures are down -35 points this morning.

Parsing the Numbers

The US headline CPI rose 0.3% in April to mark the lowest monthly gain in eight months. The annual rate fell to 8.3% from 8.5% in March.

Woohoo! The Dow was up over 400 points in the morning.

But hang on. Economists had forecast 8.1% at the headline, and while the core rate (ex-food & energy) fell to 6.2% annual from 6.5%, it rose 0.6% month-on-month when 0.4% was forecast.

And let’s face it, the difference between 8.3% and 8.5% might suggest a peak, but it in no way suggests inflation relief. And the ongoing signs are not good.

The main drivers of the headline CPI were price rises in energy, new and used cars, and food. Energy prices came down in April when China went into lockdown but are stubbornly higher again as the war presses on. Car prices have been elevated for some time on lingering covid disruption and now that parts of China are in endless lockdown, the situation has not improved.

Food price rises are due to the war and soaring transport costs (see: energy).

The Dow closed down over -300 points.

But it was selling in the tech sectors that once again did the damage. Another -3% fall in the Nasdaq has dragged the index -30% from its high, and the S&P500 down -20%. A -5% fall in Apple last night has taken its retreat to -20% – the last of the original FANG’s to hit “bear market” territory.

Interestingly, the Nasdaq fell even as the US 10-year treasury bond yield dropped -7 points to 2.92%, and the 10-year fell even as inflation was higher than forecast and talk of a possible 75 point Fed rate hike is back in vogue.

But with US stocks clearly in a bear market, whether you want to be pedantic about -20% or not, a 10-year yield around 3% is beginning to look attractive as an alternative – and safe – investment.

Alas poor Tina, I knew her well.

One alternative at such a time might be gold, which was up last night, but not the other supposed “store of value”, being bitcoin, which fell under US$30,000 last night and is now down -56% since November.

So the debate is ongoing – when will it all end? The assumption is still that the market will find a bottom, and if history is any guide, could still rally to new highs in the second half of the year. For now, buying the likes of the Big Tech stocks after their major de-rating is at least a lower-risk proposition than it was a couple of weeks ago.

In 2021, investors jumped on any dip in Big Tech prices. In 2022, they jump on any rally. At some pint they will be exhausted. It’s just a matter of when.

Commodities

Ukraine has suspended some of the flow of Russian gas to Europe via pipeline. The problem is the pipeline runs through areas in Ukraine under either Ukrainian or Russian control at present, and Russia has been diverting gas into other pipelines.

Ukraine’s controlling authority said that Russian interference, including the unauthorized diversion of gas, had "endangered the stability and safety" of the system.

Oil prices are up 6%, as gas export prices are linked to oil prices.

Otherwise, nice to finally see a bounce in metal/mineral prices.

The Aussie is having a rest at US$0.6940.

Today

The SPI Overnight closed down -35 points or -0.5%.

The UK reports March-quarter GDP tonight.

The US PPI numbers are out tonight.

Orica ((ORI)) and Xero ((XRO)) report earnings today and Commonwealth Bank ((CBA)) provides a quarterly update.

There are a handful of AGMs being held today.

The Australian share market over the past thirty days…

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

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