The Overnight Report: Sticking To Script

This story features WHITEHAVEN COAL LIMITED, and other companies. For more info SHARE ANALYSIS: WHC

World Overnight
SPI Overnight	6770.00	– 50.00	– 0.73%
S&P ASX 200	6817.50	+ 1.80	0.03%
S&P500	3744.52	– 38.76	– 1.02%
Nasdaq Comp	11073.31	– 75.33	– 0.68%
DJIA	29926.94	– 346.93	– 1.15%
S&P500 VIX	30.52	+ 1.97	6.90%
US 10-year yield	3.83	+ 0.07	1.78%
USD Index	112.21	+ 1.04	0.94%
FTSE100	6997.27	– 55.35	– 0.78%
DAX30	12470.78	– 46.40	– 0.37%

By Greg Peel

On Balance

Yesterday the ASX200 chopped around in a 40 point range in quiet trade, before closing flat. The session was dominated by two factors – higher oil prices and higher bond yields.

The anticipation of, and confirmation of, OPEC-Plus production cuts has driven oil prices higher all week. Higher oil prices (and subsequently higher LNG prices) support coal as power generation source. Whitehaven Coal ((WHC)) topped the index winners list yesterday with a 7.2% gain. The energy sector rose 2.2% and utilities 1.1%.

Higher oil prices also drive an assumption of accelerated EV take-up, and hence support for lithium. Pilbara Minerals ((PLS)) came in second with 5.7% and materials rose 0.5%.

Of course, if lithium prices rise due to higher oil prices, the prices of EVs also go up. Ford has been forced to raise the price of its electric F150 pick-up in the US twice in the past two months due to higher input costs.

Speaking of inflation, yesterday’s data showed the August trade surplus coming in a little lower than expected, as a jump in imports (4.5%) outweighed increased exports (2.6%). The peak in the trade surplus has probably now been seen, as Europe heads into recession and Chinese lockdowns and property market woes reduce demand for our rocks.

Not coal though, or gas.

Aussie bond yields bounced yesterday following increases in the US, as the impact of last week’s Bank of England intervention wanes now Truss has dropped her income tax cuts, and the Fed keeps talking tough. The ten-year rose 7 points to 3.79% and two-year 10 points to 3.23%.

After a strong start to the week, the banks gave back -0.4%, and real estate once again found itself in a downdraught, falling -0.9%.

The consumer sectors were also impacted by higher rates, falling -0.7% (staples) and -0.8% (discretionary).

Other sectors posted mild gains or losses.

Standout moves outside the ASX200 yesterday included a 23.1% pop for Polynovo ((PNV)), after a sales update (the stock is over 7% shorted), and Appen ((APX)), which fell -11.7% after yet another guidance downgrade.

Inside the index (for now), Magellan Financial ((MFG)) fell -8.4% after revealing yet another funds under management rush to the exits. Magellan is also over 7% shorted.

The market won’t be so balanced today as Wall Street has failed to hang on this time against higher bond yields and a stronger dollar, and our futures are down -50 points this morning.

Couldn’t hang on

On Wednesday night US stock indices dropped initially following a solid private sector jobs report, which provided no impetus for the Fed to ease off. US bond rates and the dollar jumped as a result.

But the stock indices managed to claw back most of the early losses by the close.

Last night saw a rise in weekly new jobless claims, which is the sort of bad news Wall Street wants to see, but given the rise was negligible it was not bad enough. With non-farm payrolls looming tonight, US bond yields and the dollar rose again. Stock indices fell again, and this time didn’t come back.

The US ten-year yield rose 7 points to 3.83% and the two-year 11 points to 4.26%. The US dollar jumped 0.9%.

These moves were also influenced by ongoing Fed hawk-talk last night. The Minneapolis Fed president said it’s too early for the Fed to think about a pause in interest rate hikes because there’s little sign that inflation has peaked.

In reference to the futures market pricing in rate cuts next year, the San Francisco Fed president said “I don’t see that happening at all”. The Atlanta Fed president said the Fed should pause into next year to see how the economy’s faring, but not before hiking to 4.0-4.5% by the end of this year (implying 100-125 point hikes in the next two meetings).

Last week’s Bank of England intervention has clearly not rattled the Fed. This week’s lower rate hike from the RBA has been shrugged off. Many believe the Fed is now moving dangerously, focusing on inflation and ignoring financial conditions, and something is going to “break”.

Wall Street will be hoping tonight’s jobs number will be lower than the 275,000 forecast, and certainly not higher. A slowing in the pace of wage increases would also be welcomed, as would an increase in unemployment from a forecast unchanged 3.7%, but not due to higher participation.

Thereafter, next week’s CPI numbers will be critical. Commentators continue to point to real-time indicators of inflation now easing – including rents – but food prices remain elevated and oil prices are back on the rise.

To the latter point, the response from the White House to the OPEC production cut is to reconsider lifting sanctions on President Maduro and allow Chevron to start pumping oil again in Venezuela. The caveat would be for Maduro to resume long-stalled talks with the opposition on conditions needed to hold free and fair presidential elections in 2024.

The Republicans are up in arms, but the new left-wing government in Colombia intends to reach out to previously ostracised Venezuela and if the former left-wing president of Brazil is reinstated as expected, he will too, leaving the US increasingly on the outer.

No doubt voting Americans would just be happy to not see gasoline prices on the rise again. As would Democratic candidates for the upcoming mid-terms.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz)	1713.30	– 3.40	– 0.20%
Silver (oz)	20.65	+ 0.01	0.05%
Copper (lb)	3.46	+ 0.02	0.47%
Aluminium (lb)	1.17	+ 0.04	3.79%
Lead (lb)	0.91	+ 0.02	1.98%
Nickel (lb)	10.04	+ 0.03	0.35%
Zinc (lb)	1.38	+ 0.01	1.04%
West Texas Crude	88.86	+ 0.79	0.90%
Brent Crude	94.80	+ 1.08	1.15%
Iron Ore (t)	95.46	+ 0.25	0.26%

While the LME has warned it has not made any decision, metals markets are clinging on to the assumption the exchange will ban Russian metal. This continues to drive aluminium in particular.

Venezuela talk has not stalled the oils.

Gold has hung on manfully during two sessions of higher yields and dollar, but for how long?

The US dollar jump has the Aussie down -1.3% at US$0.6412 in what has been a rollercoaster ride of late.

Today

The SPI Overnight closed down -50 points or -0.7%.

German industrial production numbers are out tonight, which could be interesting, but the world’s focus will be on US jobs.

Today is the last day of Golden Week, hence China will return on Monday.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
ALD	Ampol	Downgrade to Equal-weight from Overweight	Morgan Stanley
EVN	Evolution Mining	Upgrade to Buy from Neutral	UBS
FLT	Flight Centre Travel	Upgrade to Hold from Sell	Ord Minnett
JHG	Janus Henderson	Downgrade to Underperform from Neutral	Credit Suisse
PLS	Pilbara Minerals	Downgrade to Hold from Buy	Ord Minnett
SGM	Sims	Downgrade to Hold from Buy	Ord Minnett
TCL	Transurban Group	Upgrade to Neutral from Underperform	Credit Suisse
VEA	Viva Energy	Downgrade to Equal-weight from Overweight	Morgan Stanley

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

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