The Overnight Report: Text Book – Smat News

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World Overnight
SPI Overnight 6463.00 + 48.00 0.75%
S&P ASX 200 6523.80 + 90.40 1.41%
S&P500 3764.79 + 89.95 2.45%
Nasdaq Comp 11069.30 + 270.95 2.51%
DJIA 30530.25 + 641.47 2.15%
S&P500 VIX 30.19 – 0.84 – 2.71%
US 10-year yield 3.31 + 0.07 2.10%
USD Index 104.41 – 0.07 – 0.07%
FTSE100 7152.05 + 30.24 0.42%
DAX30 13292.40 + 26.80 0.20%

By Greg Peel

Trust Me

“I don’t see a recession on the horizon here,” said the RBA governor in a Q&A session yesterday – the same governor who insisted the cash rate would remain near zero until 2024.

Grains of salt were distributed at the exits.

Philip Lowe has been given the credit for yesterday’s 1.4% rebound in the ASX200 but the signs were already in place before the market opened. The futures were up 0.7% overnight without any lead from Wall Street. Investors no doubt decided they did not need Wall Street to tell them that after two of the worst weeks since the 2020 covid crash, the market was oversold.

Wall Street came to the same conclusion last night.

The minutes of the June RBA meeting were released yesterday and revealed a lengthy discussion about whether the hike should be 50 points or 25. History shows 25 points hikes have been the norm but 50 points was settled on, basically because it would still leave the cash rate below 1% (0.85%) and, in not so many words, the board had gotten the inflation outlook so horribly wrong.

It’s not to say Lowe is wrong in his “no recession” call, citing low unemployment, solid household savings and still-high commodity prices supporting the economy. But he admits rate rises will send some households to the wall.

Investors took his words as a good trigger point to pile back into the banks yesterday, which had been slaughtered since the 50 points hike. While energy was the best performing sector (+2.9%) given oil prices stopped falling, a 2.7% jump in the banks provided the bulk of the index points.

Consumer staples jumped 2.0% after a torrid period of food inflation, and food unavailability (everyone’s moaning about iceberg lettuce – there’s not a broccoli in sight either), but elsewhere there was a switch out of defensives yesterday as cyclicals again took charge.

Healthcare fell -0.9%, utilities -0.8% and real estate -0.6%.

Materials also bounced back (+1.6%) after being carted on Friday, without commodity price increases of any note, and consumer discretionary rose 1.6% despite economist consensus expecting another 50 points RBA hike next month, now that the board has a taste.

We are now in the run-up to the end of the financial year, implying discretionary should see a bit of an EOFY sales boost, but also fund managers would like to end an ugly six months on a slightly brighter note.

While both stocks and bonds have been heavily sold down in recent months, stocks have underperformed, suggesting balanced funds will need to buy equities to adjust weights back to 60/40.

Wall Street took the lead from us last night, but still our futures are up another 48 points this morning.

No Trigger

Wall Street bounced hard last night for no particular reason other than it was about time.

Friday night saw an attempt to stabilise, but traders do not like taking positions home over a long weekend. Friday night also marked the end of a run of central bank policy meetings.

By many metrics, the US stock market had become as oversold as it just about has ever been after the Fed’s shock 75 points hike sparked elevated recession fears. Consensus suggests a possibility Wall Street can continue to rally back into the end of the quarter and beyond, at least until earnings reports start rolling out from mid-July.

On the matter of recession, analysts and investors remain polarised, but the midpoint of the argument would be “if there is a recession it will only be shallow”.

The Fed is confident it can bring the US economy in for a soft landing – slower growth but not contraction – but then it has to be. Given its track record of being way behind the curve, there is a growing feeling the Fed will end up getting ahead of the curve with unprecedented consecutive 75 pointer and 50s thereafter, before having to rein policy back in again.

Much depends on those June quarter earnings results, and on September quarter guidance. It appears no one believes current earnings forecasts are anything but too high, which makes you wonder what stock analysts are actually up to, but given companies always try to provide guidance that will set them up for an earnings beat, who knows?

We do know, nevertheless, that stock valuations have fallen a long way and thus likely have priced in weak expectations, so further downside risk is limited even if earnings do come in short, or guidance disappoints.

For the big multinationals, it’s not just supply-side inflation and weak consumer sentiment they have to contend with, but also a US dollar which has surged since the March quarter reporting season.

If earnings results do beat on average, and average is about 65% of S&P500 stocks, maybe a bottom could be retrospectively called. It will depend on how far a rebound rally could run before results start flowing.

It’s still nigh on impossible to find anyone who doesn’t think any bounce will be nothing more than a classic “bear market rally”.


Spot Metals,Minerals & Energy Futures
Gold (oz) 1832.70 – 6.00 – 0.33%
Silver (oz) 21.66 + 0.10 0.46%
Copper (lb) 4.08 + 0.03 0.77%
Aluminium (lb) 1.24 + 0.01 0.78%
Lead (lb) 0.93 + 0.01 1.09%
Nickel (lb) 11.54 – 0.11 – 0.92%
Zinc (lb) 1.67 + 0.05 2.90%
West Texas Crude 110.65 + 0.38 0.34%
Brent Crude 114.92 + 0.79 0.69%
Iron Ore (t) 128.93 + 0.93 0.73%

A bit of relief across the board.

Note that having been the worst performer all last week on fears of fuel demand falling off a cliff in a recession, the S&P energy sector was the best performer last night (+5.5%) on a teeny bounce in oil prices, with daylight down to consumer discretionary (+2.8%).

The Aussie is up 0.2% at US$0.6969. Keep your jokes to yourself.


The SPI Overnight closed up 48 points or 0.8%.

The UK reports May inflation numbers tonight.

Jerome Powell will provide a testimony to the US Senate (to explain what the hell 75 was all about).

The Kiwis are active today. Fletcher Building ((FBU)) hosts an investor day and Fisher & Paykel Healthcare ((FPH)) goes ex.

The Australian share market over the past thirty days…

BGA Bega Cheese Downgrade to Neutral from Buy UBS
CVN Carnarvon Energy Upgrade to Outperform from Neutral Macquarie
EVN Evolution Mining Upgrade to Buy from Neutral UBS
GMA Genworth Mortgage Insurance Australia Downgrade to Underperform from Outperform Macquarie
GUD G.U.D. Holdings Downgrade to Neutral from Buy Citi
LFS Latitude Group Downgrade to Neutral from Outperform Macquarie
LNK Link Administration Upgrade to Add from Hold Morgans
RMD ResMed Upgrade to Buy from Accumulate Ord Minnett
SIQ Smartgroup Corp Downgrade to Neutral from Outperform Credit Suisse
TRJ Trajan Group 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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