The Overnight Report: Confidence Lost

Daily Market Reports | Jun 29 2022

This story features WOODSIDE ENERGY GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: WDS

World Overnight
SPI Overnight 6592.00 – 84.00 – 1.26%
S&P ASX 200 6763.60 + 57.60 0.86%
S&P500 3821.55 – 78.56 – 2.01%
Nasdaq Comp 11181.54 – 343.01 – 2.98%
DJIA 30946.99 – 491.27 – 1.56%
S&P500 VIX 28.36 + 1.41 5.23%
US 10-year yield 3.21 + 0.01 0.38%
USD Index 104.50 + 0.54 0.52%
FTSE100 7323.41 + 65.09 0.90%
DAX30 13231.82 + 45.75 0.35%

By Greg Peel

Too Low For Zero

Beijing and Shanghai both recorded zero cases of covid yesterday, suggesting the gradual reopening is back on track, at least until one case is found somewhere and the whole place locks down again.

The Chinese government also said it will shorten the quarantine time for international travellers and those who have come into close contact with covid patients to 10 days from 21 days. Beijing will also loosen its testing requirements for people in quarantine.

Yesterday the news put resources stocks back in the spotlight once more. Earlier in the year commodities had been our saviour as other sectors faltered on rate hikes, ensuring the Australian market outperformed Wall Street and other markets, until China began locking down again.

Yesterday the energy sector rose 3.6%, with help from higher oil prices, along with utilities, up 3.2%. Materials rose 3.0% on signs of falls easing in metal prices. The standouts were Woodside Energy ((WDS)) and AGL Energy ((AGL)), each up 4.3%, BHP Group ((BHP)) up 4.3% and Rio Tinto ((RIO)) up 3.0%.

Aside from a little help from the volatile real estate sector, which rose 1.1%, there was little support elsewhere.

Consumer discretionary ended a couple of days of relief buying with a -1.3% fall. This despite Collins Foods ((CKF)) topping the index with an 11.5% jump on its earnings result, and announcing a third KFC price rise for the year.

The banks fell -0.3%, with Macquarie Group ((MQG)) issuing new debt, and healthcare ticked up 0.1% when profit-taking in Imugene ((IMU)) had it down -10.4%. A follow-through of the prior two days of relief rally did not eventuate, as it was all about resources and nothing else.

It’s all over anyway. With Wall Street turning tail last night our futures are down -84 points this morning. Resources nevertheless should hold up again, on another oil price increase and some meaningful upside in metals prices overnight, but for the rest, and particularly tech, it’s back to the same old tune.

Another One Bites The Dust

Yet another 2022 relief rally on Wall Street has proven to be a blink-of-an-eye affair, with US indices once again tumbling last night. The culprit was the latest Conference Board monthly consumer confidence survey.

The Board's consumer confidence index for June fell to 98.7 from 103.2 in May, below expectations for a reading of 100, to mark a 16-month low. The report's expectations index, which is based on consumers' short-term outlook for income growth, the job market, and overall business conditions, fell to 66.4, its lowest reading since March 2013.

Inflation expectations rose yet again. Inflation expectations are considered critical by the Fed, as they tend to be self-fulfilling. If you expect to pay more you will, at least until you can’t afford it. That’s what the Fed is trying to achieve with rate hikes – falling demand – but we’re not there yet.

The signs are there however, given falling consumer confidence is also self-fulfilling. So last night the R-word raised its ugly head once more. And still the debate rages, between those foreseeing a slowdown but not a recession, and those who believe the US is probably already in a recession (noting the GDP data lag).

ARK Invest CEO Cathie Woods admitted last night that she (like the Fed and others) had underestimated supply-chain disruptions and geopolitical factors like the war in Ukraine that have exacerbated inflationary pressures beyond what she had anticipated. She is among those believing a recession is already in train, pointing specifically to otherwise “best-managed” companies that have gotten their inventory positions very wrong (See: Walmart, Target).

“We were wrong on one thing and that was inflation being as sustained as it has been…inflation has been a bigger problem but I think it has set us up for deflation,” Wood told CNBC.

Nike (Dow) reported a beat on earnings in Monday night’s aftermarket and opened last night up 3%. It also reported a 23% year on year increase in inventories, and issued sluggish guidance, and closed down -7.7%.

According to FactSet, analysts expect earnings for S&P500 companies to grow by 4.3% during the second quarter, which would be the slowest pace of quarterly earnings growth since the fourth quarter of 2020. Those expectations have been downgraded by a full percentage point since March, but in most everyone else’s opinion remain too high.

Even if they’re not too high, it will be September quarter or full-year guidance that the market fears. Or worst still, vague or no guidance given current uncertainties (war, lockdowns).

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz) 1820.40 – 2.30 – 0.13%
Silver (oz) 20.82 – 0.31 – 1.47%
Copper (lb) 3.84 + 0.06 1.70%
Aluminium (lb) 1.24 + 0.01 1.09%
Lead (lb) 0.89 + 0.00 0.28%
Nickel (lb) 10.62 + 0.18 1.73%
Zinc (lb) 1.58 – 0.00 – 0.18%
West Texas Crude 111.76 + 2.19 2.00%
Brent Crude 118.15 + 3.00 2.61%
Iron Ore (t) 129.68 + 1.15 0.89%

Go China.

Doesn’t much help the inflation situation nevertheless (but good for Australia).

Also helpful, if you’re not planning a trip to the US or buying an iPhone, is another -0.3% fall in the Aussie to US$0.6908.

Today

The SPI Overnight closed down -84 points or -1.3%.

Today we’ll see local May retail sales numbers.

Don’t be alarmed when the real estate, utilities and industrial sectors open lower this morning (irrespective of Wall Street influence), as all REITs, property developers, infra funds and similar go ex-dividend together today.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
APX Appen Upgrade to Neutral from Underperform Macquarie
COL Coles Group Downgrade to Lighten from Hold Ord Minnett
EVN Evolution Mining Upgrade to Add from Hold Morgans
HVN Harvey Norman Upgrade to Buy from Hold Ord Minnett
ILU Iluka Resources Upgrade to Buy from Sell Citi
JBH JB Hi-Fi Downgrade to Hold from Buy Ord Minnett
MTS Metcash Downgrade to Neutral from Outperform Credit Suisse
NWH NRW Holdings Downgrade to Neutral from Outperform Macquarie
PMV Premier Investments Downgrade to Hold from Accumulate Ord Minnett
SKC SKYCITY Entertainment Upgrade to Outperform from Neutral Credit Suisse
WES Wesfarmers Downgrade to Lighten from Hold Ord Minnett
WOW Woolworths Group Downgrade to Hold 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

AGL BHP CKF IMU MQG RIO WDS

For more info SHARE ANALYSIS: AGL - AGL ENERGY LIMITED

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For more info SHARE ANALYSIS: MQG - MACQUARIE GROUP LIMITED

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For more info SHARE ANALYSIS: WDS - WOODSIDE ENERGY GROUP LIMITED