Overnight: Earnings Overrule

World Overnight
SPI Overnight (Sep) 6211.00 + 3.00 0.05%
S&P ASX 200 6273.00 + 38.20 0.61%
S&P500 2850.40 + 10.05 0.35%
Nasdaq Comp 7812.01 + 9.33 0.12%
DJIA 25502.18 + 39.60 0.16%
S&P500 VIX 11.27 – 0.37 – 3.18%
US 10-year yield 2.94 – 0.02 – 0.51%
USD Index 95.38 + 0.22 0.23%
FTSE100 7663.78 + 4.68 0.06%
DAX30 12598.21 – 17.55 – 0.14%

By Greg Peel

Take Two

We recall that the ASX200 fell on Thursday following news the Chinese had upped the ante on US tariff retaliation, likely expecting Wall Street to follow suit. It didn’t, so we began Friday’s session by rallying all the way back from the open.

But over the rest of the session, the index faded back to square. The banks were weak thanks to the Treasurer’s comments, there was a US jobs report due on Friday night, and typically traders do not want to hold positions over the weekend, particularly if Donald Trump has his thumb at the ready.

Nothing transpired, the US jobs report was benign, so yesterday, it appears, the index simply achieved what it had set out to achieve on Friday – successfully.

The benign US jobs report allayed any fears of acceleration in rate hikes from the Fed, hence defensives were back in vogue yesterday. Telcos rallied 1.2%, utilities 0.6% and consumer staples 0.5%. Materials were a leader following a rally in the iron ore price, rising 1.3%.

The banks bounced back for some reason, regaining what they lost on Friday, and energy remained strong.

Only consumer discretionary and IT lost ground, but they were the two standout sectors on Friday.

On the individual stock front, Seek ((SEK)) topped the ASX200 losers’ board on the day with an -8.8% drubbing following the announced write-down of its Brazilian and Mexican operations, citing a deterioration in economic and political conditions. Ahead of its FY18 result release this month, Seek warned FY19 would be more muted.

Sigma Healthcare ((SIG)) countered with an 8% gain, topping the winners’ board, likely because directors have been buying shares. Sigma is down -50% year to date.

So a solid rally, but an unremarkable one for the most part.

Upward Drift

Wall Street’s session was similarly unremarkable, other than to note the Dow was down -150 points early on but rallied back to close up 39.

Early weakness reflected ongoing trade war concerns. China’s nationalist Global Times suggested yesterday that the country was ready for a “protracted trade war” and that Washington had “lost its mind”. This would have been met with a giggle from The Donald. The Shanghai index is down -20% year to date and keeps falling, while the S&P500 is up 6%.

Adding further fuel to Donald’s fire was news of a -4% plunge in German manufacturing orders in June, attributed to tariffs.  As far as Trump is concerned, the tariffs are “working big time”.

More breathtaking eloquence.

So still the theme continues – Wall Street is just not that worried about trade wars. Rather, punters are delighted with the earnings season. As the report count passes the 80% mark of S&P500 stocks, over 80% have posted earnings beats. It’s the best season ever since FactSet began tabling quarterly results. Mind you, they started in 2008.

Strong earnings results clearly reflect, to an extent, Trump’s tax cuts, but analysts point out that revenues and cash flows have also been strong regardless. Are the tax cuts working? All that new money is clearly being injected into the economy through investment in plant & labour, such that everyone’s a winner.

Or is it?

Goldman Sachs published a note last night predicting US share buybacks will hit the US$1 trillion mark in 2018, up 46% from 2017.

In terms of returning capital to shareholders, dividends are one choice and buybacks are another. If an investor receives dividends, they can choose what to do with that money – redeploy it or spend it. In the latter case, the economy wins. But buybacks simply raise the value of a shareholding through share count reduction, so unless the shareholder takes profits, it’s only a wealth gain on paper.

Whatever the case, buybacks mean it is the shareholders, not the economy, who wins.

While buybacks may hit the trillion, share counts are not actually reducing. That’s because on the other side of the ledger of a buyback, boards are issuing more share options to senior management. If the share count does not reduce, shareholders do not get the capital increase otherwise implied.

So when it’s all said and done, the real winners from Trump’s tax cuts are a handful of senior executives.

Not sure that was the idea.

Meanwhile, earnings season is in the final stretch but not the northern summer, which still has further to run and is ensuring volumes remain tepid.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz) 1207.20 – 6.10 – 0.50%
Silver (oz) 15.25 – 0.13 – 0.85%
Copper (lb) 2.75 – 0.02 – 0.60%
Aluminium (lb) 0.92 + 0.00 0.08%
Lead (lb) 0.95 – 0.00 – 0.29%
Nickel (lb) 6.12 + 0.09 1.51%
Zinc (lb) 1.19 – 0.01 – 0.46%
West Texas Crude (Sep) 68.90 + 0.41 0.60%
Brent Crude (Oct) 73.66 + 0.45 0.61%
Iron Ore (t) 68.95 + 1.50 2.22%

Again nothing particularly remarkable to report, other than to note iron ore seems to be on a bit of a tear all of a sudden.

Gold remains friendless with the US dollar index continuing to tick up, while the oils also ticked up as the re-established sanctions on Iran took effect last night.

The Aussie is down -0.2% to US$0.7384, matching the greenback’s gain.

Today

The SPI Overnight closed up 3 points.

What might excite the local market today? Well it certainly won’t be the RBA’s August policy statement.

Perhaps it will come down to the local earnings season, which has IOOF Holdings ((IFL)), Navitas ((NVT)), Reckon ((RKN)) and two Top 20 big hitters – Shopping Centres Australasia ((SCP)) and Transurban ((TCL)) – reporting today.

Rudi will connect with Sky News Business via Skype to talk share market and broker calls, scheduled for 10.30am this morning.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
AAD ARDENT LEISURE Downgrade to Lighten from Hold Ord Minnett
ALQ ALS LIMITED Upgrade to Hold from Lighten Ord Minnett
APA APA Upgrade to Buy from Neutral Citi
AQG ALACER GOLD Downgrade to Neutral from Outperform Macquarie
EVN EVOLUTION MINING Upgrade to Add from Hold Morgans
ING INGHAMS GROUP Downgrade to Neutral from Buy Citi
JHG JANUS HENDERSON GROUP Downgrade to Neutral from Buy Citi
ORA ORORA Downgrade to Neutral from Buy Citi
SUL SUPER RETAIL Downgrade to Hold from Buy Ord Minnett

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

Greg Peel

About Greg Peel

Greg Peel joined Macquarie Bank in 1986 and acquired trading experience in equities, currency, fixed income and commodities derivatives, ultimately being appointed director of equity derivatives trading. He later published In With The Smart Money (a plain English guide to the mysterious world of financial markets and derivatives) and acted as a consultant to boutique investment funds. In 2004 Greg joined FNArena as a contributing writer. He is now a director and principal of the company. Greg compliments the journalistic background of the FNArena team with lengthy experience as a financial markets proprietary trader.

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