|SPI Overnight (Jun)||6383.00||+ 21.00||0.33%|
|S&P ASX 200||6358.50||+ 26.10||0.41%|
|Nasdaq Comp||7575.48||+ 48.36||0.64%|
|S&P500 VIX||16.09||– 0.88||– 5.19%|
|US 10-year yield||2.12||+ 0.00||0.19%|
|USD Index||97.35||+ 0.22||0.23%|
By Greg Peel
Banking on it
The ASX200 took the lead from a 500 point Dow turnaround rally on Wall Street to shoot out of the blocks yesterday to a gain of 55 points in the first hour. But there the index peaked before methodically drifting lower in a straight line to the close to give back half those gains.
We might argue that the trigger for the turnaround was the weak GDP result, but the index didn’t plunge on the release, it calmly retreated. At 1.8%, annual growth is indeed at its weakest since 2009 but also matched consensus forecasts leading into the release. Importantly, government spending strength was required to offset ongoing weakness in household spending.
The result only serves to underscore universal belief the RBA will cut again in August, which, on the bad-news-is-good-news front, should not be a dampener for the stock market. It’s a matter of weighing up the benefits of a rate cut against the underlying reason rates are being cut – a slowing economy. Perhaps yesterday’s slow turnaround from the high was more a case of an overenthusiastic open.
At the end of the day it was all down to the banks. Financials rallied a standout 1.2%, well ahead of any other sector bar IT, which rose 2.01% but has very little market cap clout. While RBA rate cuts might help turn the housing market around, the reality is the lower the RBA rate the lower bank margins. Yet two of the majors decided to pass the full 25bps on when they had a chance to “reprice”.
Supporting the banks’ ability to pass on in full are lower costs on the other side of the ledger. The US ten-year bond rate has fallen from 3.25% to 2.10% in only a few months, bringing down the cost of US-sourced funding. On Tuesday night Wall Street rallied on the hint of a Fed rate cut in the offing, which implies even lower funding costs.
Put that together with fully-franked yields in the sixes, and the banks look more attractive on a combination of lower local and offshore rates.
Having slipped on Tuesday on a weak retail sales number, consumer discretionary finally decided rate cuts are a good thing, particularly when the GDP result points to more to come, hence it rose 0.8%.
Telcos fell -0.7% after private equity pulled its takeover offer for Vocus Group ((VOC)), sending that stock down -17.7%.
Moves in other sectors were more modest. It was all about the banks.
Wall Street has kicked on with it overnight and our futures are up 21 points this morning, suggesting we might recover yesterday afternoon’s losses. But the oil price has tanked again overnight, so that will provide a drag.
The US ADP private sector jobs report for May last night showed the addition of a mere 27,000 jobs. No economist forecast sat below 100,000. We may recall, however, that the April result came in at 271,000 and equally blew forecasts away, in the other direction.
So average out the two and we get a net 150,000 over each month which looks a little more realistic. Given that the US unemployment rate now sits at a multi-decade low beneath 4%, one has to assume the rate of jobs growth must begin to slow.
But for Wall Street, 27,000 was a godsend when one is hoping the Fed is preparing to cut. The S&P500 was sitting on the 2800 pivot point at the close on Tuesday night, having surged back to that level on a hint from the Fed, and it was touch and go as to which way the market would swing. The jobs number provided the kick.
More influential will be tomorrow night’s non-farm payrolls result, for which the ADP number has never been a reliable indicator.
Another development on Tuesday night related to trade. Not only did the Democrats voice their displeasure at Trump’s threat of tariffs on Mexican imports as a lever for action on illegal immigration, many Republicans voiced their opposition as well. This suggested such a move may not get through Congress.
Last night a delegation from Mexico met with US counterparts in the belief they could nut out a solution that would reel Trump back in. Even Kevin Rudd (a few prime ministers back), appearing on CNBC this morning, suggested Trump’s threat was likely just “bluster”.
It is also against WTO rules to use tariffs as a weapon against anything other than actual trade disputes. Not that Trump is a big fan of the WTO. Or Xi, for that matter.
So Fed hopes aside, Wall Street is also now assuming the Mexican tariffs won’t go ahead. It was this out-of-the-blue threat that sent the S&P crashing back down through its 200-day moving average in the first place.
What was notable about last night’s trade, which added another 200 to the Dow, was that it had much more of a defensive tone. On Tuesday night the defensives and bond-proxies were left behind in the snap-back rally as cyclical stocks were chased. Last night was more a case of the other way around.
One exception was Apple, which put in another strong session after Tim Cook said he did not believe any retaliation from China against the US would include a ban on iPhones. Apple provides market cap clout in all three major indices.
On the flipside, oil provided the drag.
|Spot Metals,Minerals & Energy Futures|
|Gold (oz)||1329.80||+ 4.70||0.35%|
|Silver (oz)||14.79||– 0.01||– 0.07%|
|Copper (lb)||2.62||– 0.02||– 0.63%|
|Aluminium (lb)||0.80||– 0.00||– 0.01%|
|Lead (lb)||0.84||+ 0.01||1.65%|
|Nickel (lb)||5.32||– 0.03||– 0.56%|
|Zinc (lb)||1.19||– 0.00||– 0.10%|
|West Texas Crude||51.69||– 1.26||– 2.38%|
|Brent Crude||60.59||– 0.88||– 1.43%|
|Iron Ore (t) futures||99.90||0.00||0.00%|
After two sessions of big falls, oil prices enjoyed a little bit of a recovery on Tuesday night as risk was once again “on”. But one must always fear the weekly US crude inventory chocolate wheel.
Last week saw inventories rise to their highest level in almost two years. The oil market is already jittery on the demand-side issue of slowing global growth, so additional supply-side concerns don’t help. The impact of lost Venezuelan and Iranian barrels no longer seems influential, and there’s been no developments lately on rising US-Iranian military tensions.
So oil was carted again last night. WTI has now fallen -22% from its April peak which, for animal lovers, implies a technical bear market.
Singapore was on holiday last night so no iron ore trading.
Growing expectations of a Fed rate cut are underpinning gold.
The US dollar index nevertheless bounced back a bit last night, allowing the Aussie to fall -0.3% on the GDP result to US$0.6967.
The SPI Overnight closed up 21 points or 0.3%.
Locally we’ll see April trade numbers today – the first for the June quarter.
The US will also see April trade numbers.
The ECB meets tonight.
The Australian share market over the past thirty days…
|BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS|
|AX1||ACCENT GROUP||Downgrade to Neutral from Buy||Citi|
|BLD||BORAL||Downgrade to Underperform from Neutral||Credit Suisse|
|CAR||CARSALES.COM||Downgrade to Neutral from Buy||UBS|
|CCX||CITY CHIC||Downgrade to Sell from Neutral||Citi|
|ECX||ECLIPX GROUP||Upgrade to Outperform from Neutral||Credit Suisse|
|IRE||IRESS MARKET TECHN||Downgrade to Hold from Accumulate||Ord Minnett|
|LNK||LINK ADMINISTRATION||Downgrade to Neutral from Buy||Citi|
|MHJ||MICHAEL HILL||Upgrade to Buy from Neutral||Citi|
|MTS||METCASH||Upgrade to Hold from Sell||Deutsche Bank|
|NWH||NRW HOLDINGS||Upgrade to Buy from Neutral||UBS|
|SBM||ST BARBARA||Upgrade to Neutral from Underperform||Credit Suisse|