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Overnight: Earnings vs Yield

World Overnight
SPI Overnight (Jun) 5874.00 + 6.00 0.10%
S&P ASX 200 5886.00 + 17.20 0.29%
S&P500 2670.29 + 0.15 0.01%
Nasdaq Comp 7128.60 – 17.52 – 0.25%
DJIA 24448.69 – 14.25 – 0.06%
S&P500 VIX 16.34 – 0.54 – 3.20%
US 10-year yield 2.97 + 0.02 0.75%
USD Index 90.93 + 0.61 0.68%
FTSE100 7398.87 + 30.70 0.42%
DAX30 12572.39 + 31.89 0.25%

By Greg Peel

The US ten-year yield threatened to breach 3% last night, undermining strength in earnings results.

Looking For Love

It was another meandering session on the local market yesterday, with the ASX200 closing higher on low volume, largely due to the banks. Despite AMP ((AMP)) falling another -3% as inevitable class action talk emerges, the Big Four found some buyers after an extended period of RC-related weakness.

Three of the four (not CBA) report earnings next month, beginning next week, as will Macquarie Group ((MQG)). Meanwhile, Bendigo & Adelaide Bank ((BEN)) topped the ASX200 leaders’ board yesterday with a 4.9% gain on a broker upgrade. Peer Bank of Queensland ((BOQ)) has had a tough time since its recent result release while Bendelaide reports on the standard financial year cycle.

Financials rose an unfamiliar 0.7% yesterday, supported by materials (+0.8%) on a rising Asian iron ore price. Healthcare (-0.5%) and energy (-0.6%) provided most of the offset.

There was a good deal of individual stock action outside the ASX200 yesterday.

Consumer services comparison platform iSelect ((ISU)) issued a profit warning of significant magnitude, cutting guidance by some -60%. Volatility in all of the areas of health, energy and telcos was blamed, as the MD fell on his sword. The share price fell -55%.

Local Amazon pretender Kogan ((KGN)) suffered an Icarus moment after providing a trading update and falling -18%.

On the flipside, Myer ((MYR)) announced a new CEO – someone with a track record of turning failing retailers around – and it shot up 8.5%. As of last week, Myer shares were over 11% shorted.

We are likely in for another quiet session today, amidst school holidays and ahead of tomorrow’s public holiday. There will likely be some movement in alumina/aluminium stocks nonetheless. More on that in a moment.

Fear of Three

The US ten-year bond yield traded up to 2.996% last night – its highest level for the year and since January 2014. At that point the Dow was down -134 points. The ten-year then slipped back to 2.97% and Wall Street recovered to a flat close.

The great faith that had been placed in this US earnings result season providing the impetus to drag stock markets out of the trade tariff and geopolitical mire is being headed off at the pass by rising yields and rising inflation concerns. Earnings results continue to surprise as hoped, but all eyes are on those yields.

The WTI oil price continues to inch towards US$70/bbl. The Brent price is already at US$75/bbl. The famed US driving season is set to begin in a couple of months and rising “gas” prices pose a threat. But oil is a significant input cost for most industries, and it’s not just oil. Commodity prices, mostly sanction-driven, have been surging, including those of soft commodities.

Wholesale prices are on the rise and the question is as to just much of that can be passed onto consumers. At the same time, Trump’s massive budget deficit lingers as a longer-term threat to the US economy. Rising rates should be positive for at least the US banks, but the flattening yield curve is putting a dampener on that sector as well.

With inflation on the move, the risk is the Fed does decide to hike four times this year instead of three. The market is now pricing in a 40% chance of a fourth hike, up from 28% in March.

There is much concern the Fed is going to blow it. There is much fear that the 3% mark for ten-year – no more significant than it is a round number – is the line in the sand that could tip the stock market over, strong earnings or otherwise.

By the same token, others suggest 3% may also be the line in the sand at which those investors who have shunned fixed interest in recent times decide now might be the time to readjust portfolios. As long bond yields rise, they begin to look more attractive against dividends per share in the equity market that have fallen during the big rally of 2017.

Then again, aside from strong earnings numbers there is much anticipation that this earnings season will bring with announcements of increased dividends and share buybacks, as companies use their tax cut windfalls to benefit shareholders rather than the US economy.

The bottom line is there is no clear answer on what might happen at 3%, if indeed that level is breached.

The US earnings season has only just got underway. This week sees 40% of the S&P500 reporting.


Spot Metals,Minerals & Energy Futures
Gold (oz) 1324.20 – 11.00 – 0.82%
Silver (oz) 16.57 – 0.51 – 2.99%
Copper (lb) 3.14 – 0.02 – 0.48%
Aluminium (lb) 1.03 – 0.08 – 7.11%
Lead (lb) 1.06 – 0.02 – 1.52%
Nickel (lb) 6.44 – 0.19 – 2.89%
Zinc (lb) 1.47 + 0.01 0.76%
West Texas Crude (Jun) 68.38 + 0.28 0.41%
Brent Crude (Jun) 75.01 + 1.32 1.79%
Iron Ore (t) 67.55 + 0.70 1.05%

We recall that the latest increase in US sanctions against Russia, in light of the chemical attack against Syria, included an extension to Putin’s circle of oligarchs. One of those is Oleg Deripaska, head of aluminium producer Rusal. Sanctions against Deripaska effectively mean sanctions against Rusal and its aluminium exports. The aluminium price has leapt over 20% since the announcement.

In the interim, companies such as Rio Tinto ((RIO)), which has dealings with Rusal in its own aluminium business, have been forced to prepare for the sanctions coming into effect, including declaring force majeure on delivery contracts.

Last night the US Treasury announced it would extend that period by five months. The Treasury also said it would be prepared to discuss lifting the sanctions on Rusal, if Deripaska relinquishes control of the company.

Last night the aluminium price fell -7% on the LME. This morning there will be some rather frustrated local analysts, who have just finished upgrading their aluminium/alumina price forecasts and subsequent miner earnings forecasts on the back of the sanctions.

In other commodity news, the gold price continues to fall as the US dollar continues to rise. The rising greenback is having no effect, as yet, on oil prices.

It is on the Aussie however, which is down -0.9% at US$0.7606.


The SPI Overnight closed up 6 points.

Australia’s March quarter CPI numbers are due later this morning.

Beach Energy ((BPT)) and Fortescue Metal ((FMG)) release quarterly production reports today, Blackmores ((BKL)) provides a quarterly update, and Iluka Resources ((ILU)) and OZ Minerals ((OZL)) hold AGMs.

Holiday tomorrow. This Report returns on Thursday with a wrap of both interim Wall Street sessions.

Lest we forget.

Rudi will connect with Sky News Business via Skype at around 11.15am to discuss markets and broker calls.

The Australian share market over the past thirty days…

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The content of this information does in no way reflect the opinions of FN Arena, or of its journalists. In fact we don't have any opinion about the stock market, its value, future direction or individual shares. FN Arena solely reports about what the main experts in the market note, believe and comment on. By doing so we believe we provide intelligent investors with a valuable tool that helps them in making up their own minds, reading market trends and getting a feel for what is happening beneath the surface. This document is provided for informational purposes only. It does not constitute an offer to sell or a solicitation to buy any security or other financial instrument. FN Arena employs very experienced journalists who base their work on information believed to be reliable and accurate, though no guarantee is given that the daily report is accurate or complete. Investors should contact their personal adviser before making any investment decision.



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