The Monday Report – 16 May 2022

This story features BLOCK INC, and other companies. For more info SHARE ANALYSIS: SQ2

By Greg Peel

Oversold Rally (1)

Wall Street closed slightly weaker on Thursday night but not before surging back from the day’s (and week’s) lows at the point the S&P500 reached a -20% correction. This provided some hope for the Australian market on Friday.

Having crashed through 7,000 points from Tuesday’s opening and then recovering, the ASX200 held valiantly on to 7,000 through to mid-morning on Thursday when once again the sellers won out. But if the signs on Wall Street were signalling “oversold” on Thursday night, locally the call was equivalent.

It didn’t hurt that US BNPL company Affirm had reported in Thursday night’s aftermarket and jumped 30%. Block ((SQ2)) duly jumped 15% in our market on Friday and Zip Co ((Z1P)) 5.9%, firing up the tech sector in general which ultimately closed up 7.0% on the day. Tyro Payments ((TYR)) rose 9.8%. It was a day for everything that had been beaten down on inflation/rate hike fears to come roaring back.

No more was this evident than in the consumer sectors, with discretionary up 2.4% and staples returning to a more familiar 0.8%, while communication services rose 2.1%. Megaport ((MP1)) jumped 9.6%.

One of most beaten down sectors of all throughout the week was real estate, and it bounced 3.0%.

CSL ((CSL)) has been holding out relatively well since its plasma collections returned to normal but it jumped 3.3%, taking the healthcare sector up 3.0% with some help from the highly volatile medical duo of Polynovo ((PNV)), up 14% to top the index, and Clinuvel Pharmaceutical ((CUV)), up 13.5%.

Healthcare was the winner among the big cap sectors but the banks did their bit, up 1.4%, while energy rose 2.5% on a bounce in oil prices and materials dismissed lower metals prices and gained 1.6% after a tough week.

All sectors closed in the green.

The index had opened higher from the bell, regaining the 7000 mark in the first 20 minutes. From that point the buying fed on itself, and it was a steady path upwards to close on the high of the day.

So, is all forgiven?

Such snap-back rallies from oversold positions are part and parcel of the bear market, although the ASX200 had not fallen by as much as -10% let alone -20% before Friday. The index closed down -1.2% for the week.

The reason we have not fallen so hard is because earlier on, we were rallying on surging commodity prices. China soon put an end to that, and Beijing is continuing to tighten restrictions.

One interesting stock move on Friday was that of a2 Milk ((A2M)), which fell -1.5% despite the US suffering a critical shortage of baby formula and now scrambling to secure imports.

Oversold rally (II)

Michigan Uni’s bi-monthly index of US consumer sentiment fell to 59.1 points from the end-April’s 65.2 to mark its lowest level in more than 10 years.

In other news, Fed chair Jerome Powell said in an interviewer “the question whether we can execute a soft landing or not, it may actually depend on factors that we don’t control”.

But Wall Street shrugged. The signs were there on Friday (not for the first time) that the stock market had reached oversold levels, and the bounce off the -20% mark for the S&P500 during Thursday night’s session was one of the strongest to date.

Despite Friday night’s solid bounce, the S&P500 still closed down -2.4% for the week, to mark its first six-week losing streak since 2011. The Dow posted seven down-weeks for the first time since 2001.

Wall Street nevertheless remains concerned about the US economy, and about what the Fed might do to it. Critical to the US economy is the consumer, thus weak sentiment numbers are not encouraging.

But such sentiment stands in contrast to the ongoing “reopening” trade, most notable in airline and hotel bookings running rampant despite prices also running rampant, impacted by airline fuel costs. Analysts point to such contrast to suggest pent-up demand from covid-weary consumers, supported by their sound household balance sheets, is sufficient to stave off a consumer spending strike.

At least in the short term.

But sudden snap-back rallies are part and parcel of bear markets, so no one is prepared at this stage to call a bottom.

Interesting news on Friday was that Elon Musk had declared, via a tweet, that his bid for Twitter was “on hold”. This had Twitter shares down -10% and Tesla shares up 6% given Musk had warned he may need to use Tesla shares as collateral.

The problem is a question over the number of “fake” accounts on Twitter which might falsely overblow account numbers. Musk is prepared to cop a small amount, but not too large an amount, so for now that has to be determined.

Commodities

A mixed night for metals/minerals for once.

Gold continues to quietly lose its lustre, not helped by the US 10-year yield jumping back 12 points to 2.94% on Friday night, ending a bout of safe-haven buying.

News that Sweden and Finland may be shortly set to join NATO has driven oil prices higher again.

The Aussie has joined in the snap-back, rising 1.1% to US$0.6935 after it, too, had arguably fallen too far in too short a space of time.

Despite the ASX200  jumping 1.3% on Friday ahead of the anticipated Wall Street bounce, the 2.4% gain for the S&P500 had our futures up another 54 points, or 0.8%, on Saturday morning.

The Week Ahead

The minutes of the May RBA meeting are out tomorrow, ahead of the March-quarter Wage Price Index on Wednesday. The WPI result was previously considered critical to RBA policy, given the board’s focus on struggling wage growth, but that was quickly overridden by the April CPI numbers.

Our April jobs numbers are out on Thursday, just ahead of you know what on Saturday.

China will report April industrial production, retail sales and fixed asset investment data today.

The US will see industrial production and retail sales numbers tomorrow night, along with housing data throughout the week and the Empire State and Philadelphia Fed activity indices.

The eurozone and UK report April CPIs on Wednesday.

In a busy week for the local stock market, James Hardie ((JHX)), United Malt Group ((UMG)), Aristocrat Leisure ((ALL)), Nufarm ((NUF)) and Webjet ((WEB)) report earnings.

There are a number of AGMs across the week, including those of Eagers Automotive ((APE)), Adbri ((ABC)), BHP Group ((BHP)) and Woodside Petroleum ((WPL)).

Perseus Mining ((PRU)) holds its AGM today, while Goodman Group ((GMG)) provides an update.

Macquarie Group ((MQG)) goes ex-dividend.

The Australian share market over the past thirty days…

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