Overnight: Nasdaq Attack

World Overnight
SPI Overnight (Jun) 6332.00 + 18.00 0.29%
S&P ASX 200 6320.50 – 76.40 – 1.19%
S&P500 2744.45 – 7.61 – 0.28%
Nasdaq Comp 7333.02 – 120.13 – 1.61%
DJIA 24819.78 + 4.74 0.02%
S&P500 VIX 18.86 + 0.15 0.80%
US 10-year yield 2.08 – 0.06 – 2.85%
USD Index 97.23 – 0.52 – 0.53%
FTSE100 7184.80 + 23.09 0.32%
DAX30 11792.81 + 65.97 0.56%

By Greg Peel

Swift change of mood

We can safely say that the market euphoria experienced after the Coalition victory and any excitement over an RBA rate cut have now been fully wiped out after yesterday’s session on the ASX. The Australian market had outperformed even as Wall Street fell on tariff fears so eventually reality had to bite.

There was little discrimination. Only a few pockets of the market – gold stocks and defensive yield payers – saw gains yesterday amidst widespread selling that saw very uniform sector falls. Worst hit was energy (-1.8%) on a big drop in the oil price but most sectors fell around -1.5%.

The “outperformers” on the day were utilities (-0.2%) and healthcare (-0.5%).

The local market followed Wall Street down after Donald Trump’s threat of an accelerating tariff on all Mexican imports if Mexico does not stem the tide of illegal immigrants, suggesting Trump is now prepared to use tariffs as a political weapon not just a trade weapon. Who’s next?

The story is Trump’s trade advisors have been pushing for tariffs to also be placed on Australia, specifically aluminium exports that have increased significantly since tariffs were placed on other US trading partners. Whatever Turnbull said to Trump at the time of the first tariffs being imposed obviously struck a chord. Trump rejected his advisors’ demands on the basis the US and Australia have a “special relationship”.

And it has been pointed out Australian exporters are not “dumping” aluminium at cheap prices but rather playing fairly by market rules.

The whole tariff issue has now reached a point at which where if Australia’s not next, someone surely will be. Japan and the EU are quaking. As for China, well it seems any resolution there is now a distant hope.

Even if Australia is not next, the market wasn’t taking any chances yesterday. The biggest drop among ASX stocks was suffered by heavy machinery hire company Seven Group ((SVW)), which has the Caterpillar concession in WA. It fell -7.4%. Other mining contractors were hit, with ALS ltd ((ALQ)) and Ausdrill ((ASL)) also among the top five losers.

Outside of EclipX Group ((ECX)), which shot up another 19.6% yesterday on broker upgrades, every top five winner on the day was a gold miner, including the leviathan Newcrest Mining ((NCM)).

Not helping the mood late in yesterday’s session were the Dow futures, which were suggesting another -120 point drop. After trending down all day, the ASX200 closed on its low.

Mostly Cloudy

There is no ACCC equivalent in the US. It seems that when it comes to competition, or “antitrust”, concerns, it’s a race between the Department of Justice and the Securities Exchange Commission as to who will lead the inquiry.

Last night brought news the DoJ is going after Apple and the SEC after Alphabet (Google). Also slated for scrutiny are Facebook and Amazon. A common theme among these names is their “cloud” businesses. All US stocks operating in the cloud were trashed last night, along with big falls for the biggies.

The heavy cap-weighting of FANG in the Nasdaq was evident in a -1.6% fall for that index, into correction territory. Caps are more diluted in the S&P (-0.2%), while only Apple appears in the Dow (flat).

Basically the rest of Wall Street consolidated last night after a solid month of falls.

Helping to head off any further general weakness was a suggestion from St Louis Fed president and FOMC member James Bullard that a Fed rate cut may be warranted “soon”.

One reason to cut would be to counter the impact of Trump’s trade war, but as Bullard sensibly pointed out, the FOMC can’t just knee-jerk respond to every day to day development on the tariff front, which is rather fluid. The other reason would be stubbornly low US inflation. The US bond market is also indicating a cut is needed.

The US ten-year yield fell another -6 basis point last night to 2.08%. The US dollar index plunged -0.5%. Both the lower greenback and escalating trade tensions provided the gold price with another adrenalin injection. It’s up twenty dollars.

The US manufacturing PMI for May came in at a two-and-a-half-year low of 52.1, down from 52.8 in April and below forecasts. This data point is considered a reliable indicator of economic health.

The question now is, cloud companies aside, as to whether the six-week run of losses on Wall Street must soon come to an end, and whether the bond market has now become short-term overbought. Only a couple of times in recent decades has Wall Street seen a streak of more than six weeks.

But what has to change? Well, clearly some positive news on trade would be good, but it’s hard to see where that’s going to come from. Realistically it’s up to the Fed.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz) 1324.80 + 19.90 1.53%
Silver (oz) 14.77 + 0.21 1.44%
Copper (lb) 2.63 + 0.01 0.26%
Aluminium (lb) 0.79 – 0.01 – 0.72%
Lead (lb) 0.81 + 0.01 0.76%
Nickel (lb) 5.37 – 0.06 – 1.09%
Zinc (lb) 1.19 – 0.02 – 2.04%
West Texas Crude 52.85 – 0.50 – 0.94%
Brent Crude 60.80 – 1.19 – 1.92%
Iron Ore (t) futures 97.95 – 1.85 – 1.85%

Gold was once again the only bright light among commodities last night, if one can call it a commodity. Copper held up, but all about were further falls.

Talk of a Fed rate cut has rather offset the impact of an RBA rate cut as far as the currency is concerned. Typically, falling commodity prices are countered by a falling Aussie. Last night the Aussie jumped 0.6% to US$0.6976.

Today

The SPI Overnight has provided a ray of hope in closing up 18 points or 0.3%.

Yesterday’s Australian company profits numbers for the March quarter disappointed. This was somewhat offset by inventory numbers, but inventory growth can be either a positive or negative sign.

Today we see the current account, including the terms of trade, and also April retail sales.

The Fed chair speaks tonight. Listen up.

Incitec Pivot ((IPL)) goes ex-div.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
AMS ATOMOS Downgrade to Hold from Add Morgans
ANN ANSELL Downgrade to Neutral from Outperform Macquarie
BKL BLACKMORES Upgrade to Equal-weight from Underweight Morgan Stanley
BLD BORAL Downgrade to Underperform from Neutral Credit Suisse
CGC COSTA GROUP Upgrade to Add from Hold Morgans
Downgrade to Neutral from Outperform Macquarie
ECX ECLIPX GROUP Upgrade to Outperform from Neutral Credit Suisse
GNX GENEX POWER Upgrade to Speculative Buy from Hold Morgans
GUD G.U.D. HOLDINGS Downgrade to Neutral from Outperform Credit Suisse
IRE IRESS MARKET TECHN Downgrade to Hold from Accumulate Ord Minnett
LNK LINK ADMINISTRATION Downgrade to Neutral from Buy Citi
NWH NRW HOLDINGS Downgrade to Neutral from Buy Citi
SBM ST BARBARA Upgrade to Neutral from Underperform Credit Suisse
SIG SIGMA HEALTHCARE Upgrade to Neutral from Sell Citi
TLS TELSTRA CORP Downgrade to Hold from Accumulate Ord Minnett
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.

View more articles by Greg Peel →