Overnight: A Different Inversion

By Greg Peel

Good Result

There’s hope for the local result season yet. After the first two weeks, the miss to beat ratio was running at an unprecedented 33/21% — the highest On FNArena’s record. But result releases are heavily stacked within the second two weeks of the month and as of analyst assessments of results up to Tuesday, that ratio has come in to 26/22%.

Yesterday’s results, the assessments of which will be collated in FNArena’s Monitor today, appear to be net positive if market responses are a guide. Positive results were the main reason the ASX200 rallied 29 points yesterday despite the futures indicating the opposite yesterday morning.

And despite June quarter construction work done coming in with a -3.8% decline when -1.0% was forecast.

We should also note that the reason the telco sector bucked the trend in falling -1.2% is because Telstra ((TLS)) went ex, providing an index handicap from the open.

Otherwise, utilities, down less than -0.1%, and financials, down -0.2%, were the only sectors to close in the red. In the case of the latter, Macquarie Group ((MQG)) announced a capital raising, forcing fund managers to trim bank positions in order to free funds to reposition in Macquarie.

On the other side of the ledger, IT enjoyed another surge (+3.6%). We recall that as the market suffered severe volatility over the month, high PE growth stocks were typically the first to be jettisoned. Bargain hunters have moved back in. Yesterday Afterpay Touch ((APT)), having rallied on anticipation of its result on Tuesday, rallied 9.3% on its actual result release.

It worked for Afterpay, could it work for Appen ((APX))? It rallied 10.8% to top the leaders’ board yesterday ahead of its result release today.

Other rallies post-result were posted by Bega Cheese ((BGA)) and OZ Minerals ((OZL)), while the standout outside the index was HR software company Livehire ((LVH)), which jumped 37%.

Bargain hunters were not restricted to IT, but also moved in on stocks that had been knocked down on their result releases on Tuesday, including G8 Education ((GEM)), up 8.6%, Hub24 (HUB)) up 8.4% and Boral ((BLD)), up 6.6%.

It was not, however, the case for Speedcast International ((SDA)), which is now at risk of burning up on re-entry. The satellite company lost another third of its value yesterday, having lost a third of its then value on Tuesday’s result, and having lost half of its then value in July on a profit warning. Debt is the issue, and brokers are bailing.

A special mention to Bellamy’s Australia ((BAL)), which I highlighted yesterday as being 15.8% shorted last week. On its result, Bellamy’s share price fell -15% before closing down -1.4%.

Having initially followed the iron ore price like puppy dogs, the big miners have more recently detached themselves from day to day volatility. The iron ore price fell sharply again on Tuesday night but the big miners posted rallies yesterday. Gold stocks are nevertheless still in puppy dog mode, so Tuesday night’s gold price rally also contributed to the materials sector standing out yesterday with a 1.8% gain.

Woolworths ((WOW)) is in the result frame today, along with Ramsay Health Care ((RHC)) and the aforementioned Appen.

The futures are down -9 points this morning despite Wall Street’s rally, but they were down yesterday morning too.

Dog Days

The US summer vacation period is coming to a close, culminating in the Labor Day long weekend at the end of this week, which is also the end of the month. Over the first two weeks of September, life, and volumes, will return to normal on Wall Street.

Volumes were certainly still on holidays last night as Wall Street fell into a bit of an upward hole. There was no real impetus for the rally – the yield curve remains inverted, the trade war rages on (the White House confirmed new tariffs will go ahead on September 1), and Boris Johnson is proroguing parliament, much to the disgust of his critics, and may yet face a vote of no confidence.

Rather, sectors which have been beaten down of late suddenly found buyers, and there were few sellers around to counter. Banks and energy led the charge – the two most beaten down sectors of the year. Banks defied further falls in bond yields and while oil prices did rally, energy companies have been steadily falling this year whether oil is down or up.

There’s a hint of end of month squaring here, and of perceptions of sectors being oversold. But there is also another factor to consider.

A different inversion was the hot topic last night. The yield on the US thirty-year bond has now fallen below the net dividend yield on the S&P500 (1.9% and no franking, whoohoo!). This is being cited as a possible trigger for investors to cash in on bond profits and move into equities.

Adding weight to this possibility is the simple maths of the “balanced fund”, which typically holds 60/40 equity/fixed interest allocation. The sheer strength of the bond market rally over the past month, coupled with an equity market that has dropped from its highs (albeit flat for the year), implies balanced fund managers will need to reweight to return to their mandated ratio. That is, sell bonds and buy stocks.

Of course, we must take this in the context of we’re only one tweet away from disaster. But recession fears are fading despite yield curve inversion, and US economic data continue to dismiss that possibility. With stocks now paying a better return than bonds (nominally, ignoring risk/reward), talk is of a bull market ready to recommence.

Perhaps.

Commodities

Nickel’s at it again, on supply-side issues, while iron ore and gold had quiet sessions.

Oil prices rallied on Tuesday night in anticipation the weekly US crude inventory numbers would show a drawdown, and rallied again last night when the weekly US crude inventory numbers showed a drawdown.

This time the Aussie did what it should be doing, falling -0.2% to US$0.6736 on a 0.2% rally in the greenback.

Today

The SPI Overnight closed down -9 points.

Perhaps the most important GDP component in our economy outside export prices, private sector capex and capex intentions, is out today for the June quarter.

The US will see a revision of June quarter GDP.

As noted, Appen, Ramsay Health Care and Woolies are among those companies reporting today, while REA Group ((REA)) is among a decent list of stocks going ex-div.

The Australian share market over the past thirty days…