Overnight: Breathe A Sigh

World Overnight
SPI Overnight (Sep) 6239.00 – 7.00 – 0.11%
S&P ASX 200 6299.60 + 47.40 0.76%
S&P500 2839.96 + 18.03 0.64%
Nasdaq Comp 7870.89 + 51.19 0.65%
DJIA 25299.92 + 112.22 0.45%
S&P500 VIX 13.31 – 1.47 – 9.95%
US 10-year yield 2.90 + 0.02 0.63%
USD Index 96.68 + 0.39 0.41%
FTSE100 7611.64 – 30.81 – 0.40%
DAX30 12358.87 + 0.13 0.00%

By Greg Peel

Damn the Torpedoes

No prizes for guessing where the ASX200 pulled up yesterday following a rather out of the blue market-wide rally. Yep, right on 6300.

I have noted in recent Reports that the local earnings season is facing the headwind of macro fears and hence a final break up through the 6300 brick wall would take a solid earnings season outcome. Yesterday was actually quite a mixed bag in terms of results and responses. But two stood out.

They’re not really earnings reports, but yesterday’s quarterly updates from ANZ Bank ((ANZ)) and National Bank ((NAB)) were the main drivers of the index gain.

Shaw stockbroking noted ANZ shares (+1.6%) rose on the back of an unexpectedly low bad debt charge and customers transitioning away from interest only loans, whilst the NAB (+1.5%) result was well received on the back of rising revenue and small business lending growth, despite warning of a likely RC compliance cost the bank could not yet quantify.

Commonwealth Bank ((CBA)) reported its half year last week and Westpac is yet to pipe up, but they rose 1.2% and 2.2% in sympathy. The financials index thus rose 1.1% to provide the bulk of the index gain, which was in place by 11.30am.

Thereafter it was a matter of not being able to push through.

Whether it was bank relief that triggered a sharp rebound or whether anticipated Turkish relief was a driver is unclear. But what is clear is that every sector closed in the green, bar one.

Which brings us to the day’s official earnings results. Cochlear ((COH)) disappointed on FY19 guidance and fell -3.0%, ensuring the healthcare sector closed down -0.2%, to be the only blot. Challenger Financial ((CGF)) was the biggest ASX200 loser on the day in falling -6.9%, after posting a decline in profit. But Challenger was mown down by the banks within the financials sector.

Similarly, consumer discretionary rose 0.8% yesterday despite Domino’s Pizza ((DMP)) posting a miss and dropping -6.5%. Why is wine a staple when pizza isn’t?

But perhaps the most surprising sector move was that of materials. Sure, Whitehaven Coal ((WHC)) announced a special dividend with its result and rallied 1.3%, but the sector’s gain of 0.8% came in the face of weaker metal prices, particularly that of gold. And in the face of weak Chinese data.

Yesterday Bejing revealed Chinese industrial production rose 6.0% (year on year) in July when 6.3% was forecast, retail sales rose 8.8% against a 9.1% forecast, and fixed asset investment rose 5.5% year to date when 6.0% was forecast.

Growth in fixed asset investment is at its worst level since 1996.

The obvious villain to point to is US tariffs, but a focus on reducing debt is also impacting on China’s economy as are attempts to curb excessive house prices in some areas. These data confirm what all were expecting – that the Chinese economy is continuing to slow. Once upon a time such numbers would spark a sell-off in the Australian market, led by materials. Not yesterday.

We head into today’s session with Wall Street having rebounded from Turkey fears but the local futures down -7 points. Gold has steadied but metals and oil prices are all notably lower. It’s a big day of earnings results today including a handful of heavy hitters.

But we’ll start with a handicap as CBA goes ex.

Turkish Delight

The Turkish lira rebounded 8% last night following a pledge from the Turkish central bank to provide “all the liquidity” local financial institutions need.

Wall Street had sagged as the lira plummeted but there was no great sense of urgency. It thus stood to reason that any sign of stability in the Turkish currency would provide for a snap-back rally.

All S&P500 sectors finished in the green, with financials unsurprising outperformers. But what really caught Wall Street’s attention last night was the consumer discretionary sector.

Luxury retailer Tapestry, where Carole King buys her handbags, leapt 12% following its June quarter earnings result and accompanying upbeat outlook. Tapestry was one of many US retailers posting weak results in the March quarter, leading investors to dump the sector in general in favour of growth stocks and encouraging the shorters to circle. Many big retail names were around 15% shorted, making the sector as a whole the most shorted.

There was clearly a squeeze going on last night as a number of big retail names, including department stores, enjoyed sympathetic rallies. On the other hand, big box hardware retailer Home Depot (Dow) fell -0.5% after beating on top and bottom lines, hence it must have been priced for perfection.

So it was a combination of Turkish relief and retail recovery that ensured all four main US indices were stronger last night. But is the Turkey story now over?

Turkey has borrowed more money in foreign currencies as a percentage of GDP than any other country. The collapsed currency means soaring interest payments on foreign currency loans. The Turkish central bank is no longer independent, thus cannot respond in the usual manner by raising interest rates, unless the president relents. As to “all the liquidity”, it’s not clear where that will come from unless a white knight – perhaps a large non US-allied nation – comes to the rescue.

But then Russia and China are both up to their eyeballs as well. What price turning a NATO member? At least, experts suggest, Turkey is isolated in its predicament, less able to do anything in response than other EMs, now also hurting.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz) 1193.70 + 0.60 0.05%
Silver (oz) 15.03 + 0.06 0.40%
Copper (lb) 2.72 – 0.03 – 1.18%
Aluminium (lb) 0.91 – 0.01 – 1.33%
Lead (lb) 0.93 – 0.02 – 2.47%
Nickel (lb) 6.01 – 0.15 – 2.50%
Zinc (lb) 1.11 – 0.02 – 1.37%
West Texas Crude (Sep) 66.63 – 0.78 – 1.16%
Brent Crude (Oct) 72.10 – 0.78 – 1.07%
Iron Ore (t) futures 67.96 – 0.62 – 0.90%

The US ten-year bond yield jumped back 2 basis points to 2.90% last night as fears eased, which spurred on the banks, but still the US dollar index rose ever higher. This did not bode well for commodity prices, as the table above suggests.

At least gold steadied.

The Chinese data would have a lot to do with the falls as well.

And those data also are likely behind a full -1% fall for the Aussie against the greenback’s 0.4% gain.

Today

The SPI Overnight closed down -7 points.

China will release house price numbers today and tonight sees industrial production and retail sales data in the US.

Australia will see the Westpac consumer confidence survey and the June quarter wage price index.

It’s the first notably big day in the local earnings season. Among today’s reporters we find ASX Top 20 members CSL ((CSL)), Insurance Australia Group ((IAG)), Wesfarmers ((WES)) and Woodside Petroleum ((WPL)). But there are many more.

And note CBA goes ex-dividend from the bell, ensuring an opening handicap.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
AGL AGL ENERGY Downgrade to Hold from Buy Deutsche Bank
    Downgrade to Underweight from Equal-weight Morgan Stanley
AMP AMP Downgrade to Hold from Add Morgans
AZJ AURIZON HOLDINGS Downgrade to Neutral from Outperform Credit Suisse
    Downgrade to Neutral from Buy UBS
BPT BEACH ENERGY Downgrade to Underperform from Neutral Macquarie
BSL BLUESCOPE STEEL Downgrade to Hold from Buy Deutsche Bank
FLT FLIGHT CENTRE Downgrade to Sell from Neutral Citi
GPT GPT Downgrade to Neutral from Buy Citi
    Downgrade to Neutral from Outperform Macquarie
    Downgrade to Hold from Accumulate Ord Minnett
IGO INDEPENDENCE GROUP Upgrade to Neutral from Underperform Macquarie
JHX JAMES HARDIE Upgrade to Hold from Lighten Ord Minnett
MFG MAGELLAN FINANCIAL GROUP Downgrade to Neutral from Outperform Credit Suisse
MGR MIRVAC Downgrade to Neutral from Buy Citi
MMS MCMILLAN SHAKESPEARE Upgrade to Buy from Neutral Citi
NHC NEW HOPE CORP Downgrade to Hold from Add Morgans
REA REA GROUP Upgrade to Neutral from Underperform Macquarie
    Upgrade to Add from Hold Morgans
SGM SIMS METAL MANAGEMENT Downgrade to Hold from Accumulate Ord Minnett
SUN SUNCORP Downgrade to Neutral from Buy Citi
WTC WISETECH GLOBAL Downgrade to Neutral from Buy Citi
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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