Overnight: Losing Faith

By Greg Peel

Material Gains

Futures traders weren’t expecting much for the local market yesterday morning as one might expect with Wall Street closed overnight, and a call of -2 points suggested a slow day of light trade.

Volume was indeed light in the session, but forty minutes after the bell the ASX200 was up 40 points.

And there it stayed all day until a final little slip at the close. It seems futures traders chose to ignore a decent rise in oil prices and another solid run for the iron ore price. But they are sticking to their guns – the futures are down -43 this morning with Wall Street closing on its lows.

Outside of IT (+2.2%), energy (+1.3%) and materials (+0.9%) led the index yesterday, ably supported by the banks (+0.5%) and telcos (+0.9%). But it was a “risk on” session overall. All sectors closed in the green bar utilities (-0.7%).

Smallish gains were posted by consumer staples, healthcare and industrials.

Data showing a steep fall in Chinese corporate profits in April may have provided some “risk on” incentive on a bad news is good news theme, the assumption being Beijing will need to ramp up the stimulus. The Shanghai index rose 0.6%.

Among individual stocks, online aerial photo-mapping service Nearmap ((NEA)) jumped 9.6% after Citi initiated coverage with a Buy rating and set a target price that was, prior to the open, 24% above the previous close.

Nearmap’s move seemed to reignite a bit of excitement in the IT sector.

On the flipside, Fisher & Paykal Healthcare ((FPH)) continued to fall (-5.2%) after brokers expressed their disappointment in Monday’s earnings report. The stock is currently carrying four from five Sell ratings in the FNArena broker database.

The “risk on” session may all come to naught today if the futures are accurate in a -43 point call. The iron ore price dropped back a bit yesterday, nickel gave back half of Friday night’s gain and gold has slipped on a stronger greenback.

Bonding Session

Donald Trump left Tokyo yesterday without having made any trade deal with Japan, but then a deal was not the anticipated goal of this trip. It was more of a “friendly”. Commentary suggests Prime Minister Abe “played” the US president like a violin, making him the centre of attention, taking him to the wrestling and to meet the Emperor and letting him win at golf.

A trade deal will no doubt be on the agenda soon, but is probably down the list from China. On that note, Trump tweeted yesterday that “They [China] would like to make a deal. We’re not ready to make a deal”.

Seemed pretty ready a few weeks ago.

Despite the tweet, Wall Street opened to the upside, with the Dow up 130 points from the bell. But then attention was drawn to an auction of US two-year Treasuries.

It was a stampede, with buyers unable to get enough of them. With yields in Europe and elsewhere falling post the EU elections, which showed a worrying shift towards Euro-sceptic parties, the US ten-year yield was also dragged down. This had the effect of widening the yield inversion from three-month rates to the ten-year.

As bond yields fell, Wall Street turned tail. The ten-year closed down -6 basis points at a two-year low 2.27%, and selling in US stocks accelerated to the close.

Unsurprisingly, financials were the worst performing sector. But not much was spared. Even bond-proxies such as utilities and defensives such as staples had weak sessions, having been go-to sectors recently.

With a “deal or no deal” Brexit now looking more likely come October, particularly if Boris gets up, and the EU struggling to hold itself together, the slowing global growth story is further underscored and this has investors running for the safe haven of government bonds. At some point lower bond yields will make stock yields look attractive, but for now falling bond yields are providing stock markets with weak macro signals.

The individual US economic outlook nevertheless remains robust. Last night saw the Conference Board’s monthly index of consumer confidence jump to 134.1 from 129.2 last month when economists had forecast 132.0. Given 100 is the crossover from pessimism into optimism, US consumers seem strangely buoyant considering the price of sneakers is about to go through the roof.

One can only look to record low unemployment.

Commodities

Iron ore’s run up past the hundred mark has been very much a two steps forward, one step back affair, and last night saw a step back.

Similarly, nickel reversed having jumped 4% on Friday night.

If bond buying is a flight to safety trade, it’s not being matched in gold.

The Aussie failed to shift last night despite a 0.2% rally for the US dollar index. It’s at US$0.6924.

Today

The SPI Overnight closed down -43 points or -0.7%.

It’s a pretty quiet global economic calendar today.

Note that Aristocrat Leisure ((ALL)) goes ex-dividend.

The Australian share market over the past thirty days…