Overnight: White Flag?

World Overnight
SPI Overnight (Sep) 6241.00 + 24.00 0.39%
S&P ASX 200 6268.30 + 52.70 0.85%
S&P500 2798.29 + 24.27 0.87%
Nasdaq Comp 7823.92 + 107.30 1.39%
DJIA 24924.89 + 224.44 0.91%
S&P500 VIX 12.58 – 1.05 – 7.70%
US 10-year yield 2.85 + 0.01 0.39%
USD Index 94.82 + 0.10 0.11%
FTSE100 7651.33 + 59.37 0.78%
DAX30 12492.97 + 75.84 0.61%

By Greg Peel

Whiplash I

Gotta feel sorry for the Poms, haven’t we? Yeah…nah.

It’s not every day that base metal, iron ore and gold prices fall and oil drops -6% that the result is a 0.9% rally for the ASX200, but we do live in strange times. There was no need to follow Wall Street down yesterday as Asian markets have been running ahead of US markets this week, being first respondents to new news on Chinese trade.

Wednesday’s fall in the local market was all about Trump’s announcement of a fresh round of tariffs on US$200bn of Chinese imports. Beijing’s initial response was one of “shock”, calling the move “totally unacceptable”. But this time, as was the case with regard the initial US$35bn of tariffs, Beijing did not threaten to fight back with the “same scale and intensity”.

When the US$35bn of US tariffs came into effect at midnight a couple of Fridays ago, a tit-for-tat US$35bn of Chinese tariffs came into effect at 12.01am. Trump’s new round of tariffs will not go into effect until next month, pending domestic consultation, but if we consider that Chinese exports to the US in 2017 were US$130bn, clearly this time China’s tit cannot match Trump’s tat.

Which may be why, following the usual protocol of hyperbolic diplomatic protest, one senior Chinese official said “If we have a problem, we should talk about it”. In response, the White House has hinted it is willing to reopen negotiations.

Well of course it is. That’s the whole point of the exercise.

Meanwhile, Trump is continuing in his role of world’s most unwelcome house guest by suggesting that if Theresa May continues to pursue a “soft Brexit” then there is no chance of a free trade agreement with the US.

Obviously the guy thinks he’s on a roll. Look out Vlad.

Energy was, indeed, the only sector to fall in the local market yesterday, down -1.1% on the oil price. But materials managed to hold flat. Otherwise, the star of the session was healthcare.

Trade war be damned. Citi has appointed a new analyst to CSL ((CSL)) and that analyst has lifted the broker’s target price to $232, to stand out as the only one of the eight major FNArena database brokers to have a +$200 target. CSL’s share price duly hit the magic $200 mark yesterday by rising 2.6%, and the sector subsequently rose 2.3%.

Providing the big index points, nonetheless, were the banks, which gained 1.4% after having a tough day on Wednesday. If someone can explain to me what exactly changed in the meantime, given domestic banking and foreign trade are not exactly peas in a pod, I’d be glad to hear it.

The only other stand-out sector yesterday was IT, sentiment for which is currently dominated by WiseTech Global ((WTC)). That stock rose 5.8% to again top the ASX200 leaders’ board – the company must have a choc-o-block trophy cabinet by now – and the sector rose 1.7%. Seems like WiseTech is trying to catch CSL, which five years ago was trading around $30.

Other sector moves were positive but not so notable.

The futures are up another 24 points this morning, with base metal and oil prices bouncing a bit. The Aussie has also bounced, up 0.5%.

Whiplash II

Everything discussed at the macro level above is applicable to Wall Street’s session overnight. There were no CSLs, just a complete about-face and full retracement of Wednesday night’s losses in the Dow. Big Tech resumed its position as the go-to sector, and the Nasdaq hit a new all-time high.

The critical level for the S&P500 is 2800, which has to date proven a barrier three times since March. On its fourth attempt, last night the S&P closed at 2798.

On the home front, the US annual CPI rate hit 2.9% in June – its highest level in six years. One year ago the rate was 1.6%. But month on month the increase was only 0.1% when economists had expected 0.2%.

The core CPI rose 0.2%, but only to 2.3% annual – a rate it has not exceeded at any time since the GFC.

So while the numbers look a little “hot”, they did not upset the apple cart of the market’s current Fed assumptions. The Fed maintains inflation is yet to reach target, despite the preferred core PCE measure hitting 2.0% in May. The US ten-year yield rose a single point to 2.85%.

The jury is still out on whether the Fed will implement two more hikes this year or one, with two critical factors underpinning policy uncertainty: a possible global trade war; and the fact two hikes would invert the US yield curve.

Trade and the Fed are Wall Street’s two biggest worries at present. Not that you’d know. Earnings season excitement is building, with the big banks opening the show tonight.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz) 1246.90 + 5.90 0.48%
Silver (oz) 15.92 + 0.15 0.95%
Copper (lb) 2.82 + 0.04 1.32%
Aluminium (lb) 0.95 – 0.00 – 0.42%
Lead (lb) 1.00 + 0.00 0.14%
Nickel (lb) 6.39 + 0.14 2.28%
Zinc (lb) 1.18 + 0.01 1.07%
West Texas Crude (Aug) 70.35 – 0.26 – 0.37%
Brent Crude (Sep) 74.49 + 0.30 0.40%
Iron Ore (t) 63.50 + 0.80 1.28%

Prices rebounded last night for the same reason stock markets rebounded. In the case of copper however, it looks like BHP ((BHP)) is still going to have its problems with Chilean union negotiations.

The US dollar index rose only 0.1%.

An easing of trade fears has the Aussie up 0.5% at US$0.7405.

Today

The SPI Overnight closed up 24 points or 0.4%.

China’s June trade numbers are out today, funnily enough.

And it’s Friday the thirteenth.

Rudi will connect with Sky News Business via Skype to talk share market and broker calls at around 11am.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
ALU ALTIUM Downgrade to Sell from Neutral UBS
APX APPEN Downgrade to Neutral from Buy UBS
BOQ BANK OF QUEENSLAND Upgrade to Buy from Neutral Citi
CLW CHARTER HALL LONG WALE REIT Downgrade to Neutral from Buy UBS
FPH FISHER & PAYKEL HEALTHCARE Downgrade to Sell from Neutral Citi
GTY GATEWAY LIFESTYLE Downgrade to Neutral from Buy UBS
ING INGHAMS GROUP Downgrade to Sell from Neutral UBS
IVC INVOCARE Downgrade to Neutral from Buy Citi
JIN JUMBO INTERACTIVE Upgrade to Add from Hold Morgans
LOV LOVISA Downgrade to Underweight from Equal-weight Morgan Stanley
MFG MAGELLAN FINANCIAL GROUP Downgrade to Hold from Add Morgans
NXT NEXTDC Downgrade to Sell from Hold Deutsche Bank
PDL PENDAL GROUP Downgrade to Hold from Add Morgans
SHL SONIC HEALTHCARE Upgrade to Neutral from Sell Citi
SKI SPARK INFRASTRUCTURE Downgrade to Underperform from Neutral Credit Suisse
SYD SYDNEY AIRPORT Downgrade to Underperform from Neutral Credit Suisse

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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