The Overnight Report: A Time To Rally

Daily Market Reports | May 18 2022

This story features COMMONWEALTH BANK OF AUSTRALIA, and other companies. For more info SHARE ANALYSIS: CBA

World Overnight
SPI Overnight 7181.00 + 70.00 0.98%
S&P ASX 200 7112.50 + 19.50 0.27%
S&P500 4088.85 + 80.84 2.02%
Nasdaq Comp 11984.52 + 321.73 2.76%
DJIA 32654.59 + 431.17 1.34%
S&P500 VIX 26.10 – 1.37 – 4.99%
US 10-year yield 2.97 + 0.09 3.16%
USD Index 103.30 – 0.93 – 0.89%
FTSE100 7518.35 + 53.55 0.72%
DAX30 14185.94 + 221.56 1.59%

By Greg Peel

It’s a tough one

“An argument for an increase of 40 basis points could be made given the upside risks to inflation and the current very low level of interest rates. However, members agreed that the preferred option was 25 basis points. A move of this size would help signal that the Board was now returning to normal operating procedures.”

This paragraph from the minutes of the May RBA meeting, released yesterday, has sparked quite a debate among economists. In short, what do “normal operating procedures” imply?

For most it would seem like tying a 25 point decision in with “normal” implies ongoing rate hikes from here will only be 25 points. But then “normal” has, forever pre-2020, been cash rate levels of quarter percentage point increments, not the 0.35% we have now, nor a 0.6% level another 25 would bring.

So could we say we need 40 to get back to normal? The RBA certainly considered such, based on higher than expected March quarter inflation and evidence wages were rising. Today we see the next critical data set economists had highlighted along with the CPI, being the March quarter wage price index.

If it comes in “hot”, which would be 1% or more, then maybe 40bp is inevitable, but we could also conclude all this quibbling is, ahem, pointless. The two-year yield is already above a “neutral” 2.5%. Just get on with it.

Still, the stock market is hanging on every cash rate point, as evidenced by an opening 36 point gain in the ASX200 evaporating by lunchtime once the minutes had been released, following a choppy morning. By the close, gains in the resources sectors, and some help from the Commonwealth Bank ((CBA)), offset weakness elsewhere.

On rebounds in metal/mineral prices and ongoing strength in oil, the materials sector rose 1.1% and energy 2.1%, dragging utilities up 1.3%.

CBA rose 1.7% after launching a new digital home loan, called Unloan. I hope no one was paid too much to come up with that catchy label. Unloan will (currently) offer 2.14% to owner-occupiers who refinance and 2.44% to investors.

Financials rose 0.7% yesterday, while consumer staples posted a more familiar 0.6% gain. Keep a watch on the supermarkets today however, to see if anyone pays attention to Walmart’s earnings result overnight (more on that below).

All other sectors closed in the red, and all by around -1%, which suggests fear a 40 point hike is indeed coming.

Every top five index winner yesterday was a resource stock, covering the spectrum form oil to coal, rare earths and lithium. Lynas Rare Earths ((LYC)) topped the pops with 6.5%.

The news on Monday was that private equity firm CVC had made a bid for Brambles ((BXB)), sending that stock up 11%. News yesterday was that CVC had walked away, citing “market volatility”.

Dunno why it wasn’t volatile on Monday, or any other day this year. Brambles fell -7.6%.

In the right place

Walmart (Dow) reported earnings last night that missed substantially, blaming food and fuel inflation. June profit guidance was cut to a year on year reduction. The stock fell -11% — Walmart’s single worst day since the ’87 crash.

The result came as a shock, considering every man and his dog have been hiding out in grocery and other consumer staples names amidst this year’s wider sell-off. Maybe the inflation situation is finally having an impact.

Yet Home Depot (Dow), which is a US Bunnings, also reported and rose 1.7%, and it’s classed a discretionary. US retail sales rose a healthy 0.9% in April, suggesting the consumer is not yet dead. But then how much of the gain is volume and how much is price?

Industrial production rose 1.1% in April when economist had forecast 0.5%. These sorts of numbers would bring solace to the Fed, as it tries to manage a “soft landing” for the US economy by “expeditiously” raising rates. Jerome Powell reiterated his hawkishness last night – nothing new, but the ten-year yield jumped back 9 points to 2.97%.

Yet the stock market rallied.

This suggests that what other Fed speakers were implying last night is correct. The market is now where it should be, having fallen -20% (S&P500).

And that’s fuel for a bounce. Everyone is expecting a bounce now, but then everyone believes it will prove to be only a classic bear market rally – swift and sharp, but ultimately brief. But it is when everyone thinks one thing that the opposite typically happens.

To back that up, data from Bank of America last night showed global fund managers are currently sitting on levels of cash not seen since 9/11, the net short position on tech stocks is the greatest since 2006, and funds are running the biggest Underweight in equities since March 2020.

Could yet be a big bear market rally.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz) 1815.70 – 8.20 – 0.45%
Silver (oz) 21.65 + 0.05 0.23%
Copper (lb) 4.23 + 0.14 3.41%
Aluminium (lb) 1.39 + 0.03 2.55%
Lead (lb) 0.95 + 0.02 2.13%
Nickel (lb) 11.96 – 0.46 – 3.73%
Zinc (lb) 1.66 + 0.05 3.32%
West Texas Crude 112.40 – 1.80 – 1.58%
Brent Crude 112.65 – 1.59 – 1.39%
Iron Ore (t) 131.58 – 0.92 – 0.69%

Please note that due to technical issues yesterday with our LME feed, the above base metal price movements represent two sessions.

The rebounds over two days would reflect the news Shanghai will gradually move to reopening over June.

Oil prices fell back a bit last night on news Biden is looking to ease sanctions on the Venezuelan government, in order to encourage a resumption of talks with the US-backed opposition party. All of which implies a move for the US to source Venezuelan oil.

Despite the jump up in US bond yields, the US dollar index took quite a tumble last night in falling -0.8%. The Aussie is thus up 0.5% at US$0.7030.

Today

The SPI Overnight closed up 70 points or 1.0%.

As noted, the wage price index is out today locally.

The eurozone and UK will see April inflation numbers tonight.

Eagers Automotive ((APE)) and Telix Pharmaceuticals ((TLX)) hold AGMs.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
ATA Atturra Downgrade to Hold from Add Morgans
CSR CSR Downgrade to Neutral from Outperform Macquarie
GNC GrainCorp Downgrade to Equal-weight from Overweight Morgan Stanley
PMV Premier Investments Upgrade to Buy from Neutral Citi
WES Wesfarmers Downgrade to Sell from Neutral Citi
XRO Xero 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.

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.)

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author's and not by association FNArena's – see disclaimer on the website)

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CHARTS

APE BXB CBA LYC TLX

For more info SHARE ANALYSIS: APE - EAGERS AUTOMOTIVE LIMITED

For more info SHARE ANALYSIS: BXB - BRAMBLES LIMITED

For more info SHARE ANALYSIS: CBA - COMMONWEALTH BANK OF AUSTRALIA

For more info SHARE ANALYSIS: LYC - LYNAS RARE EARTHS LIMITED

For more info SHARE ANALYSIS: TLX - TELIX PHARMACEUTICALS LIMITED