Overnight: Long Road Ahead

By Greg Peel

Consolidation I

China has locked down Harbin, a city of 10 million people in the north east, after 70 virus cases were reported and 4000 are being tested. The flare up has been attributed to a student returning from New York. Meanwhile, Beijing reports there are only two critically ill patients left in Wuhan.

As Ripley would say…

Yesterday CBA published its flash estimates of Australian April PMIs, suggesting manufacturing at 45.6, down from 49.1 in February and services at 18.9, down from 38.5.

In absolute terms, that services number is rather astonishing, but considering hospitality and non-essential retail are services, not such a shock amidst lockdowns.

Whether this helped take the wind out the sails of an opening rally for the ASX200 of 60 points is unclear, as fund managers began busily selling out of healthcare positions. Ramsay Health Care ((RHC)) completed its $1.2bn institutional placement yesterday, forcing a reweighting of stocks within healthcare sector allocations, particularly for index-tracking funds.

Ramsay itself fell -5.8% on the discounted placement as it came out of its trading halt but Australia’s biggest company, CSL ((CSL)), fell -2.0%. No reflection on CSL, just market rebalancing. The healthcare sector closed down -2.0%, well ahead of any other sector loss.

This offset gains in materials (2.2%) and energy (2.2%). In the latter case, the WTI oil price came back from the dead on Wednesday night and in the former case, yesterday’s ABS data would have been encouraging.

The Bureau published preliminary March trade data suggesting a 29% increase in Australian exports from the month before, and 16% year on year, mostly due to a bounce in iron ore exports to China as that country reopens. Imports rose 10%, albeit down -1% year on year, mostly reflecting mobile phones and laptops. Can’t think why.

On the balance, Australia’s trade surplus increased to $12.3bn from $6.3bn in February.

Beyond the aforementioned sectors, there was not a lot of movement yesterday by the close, although weakness in staples, telcos and utilities suggested the defensive trade from the prior session swung the other way, while a -0.5% drop for the banks is likely ahead of expected dividend cuts come earnings results next month.

Having fallen -35% and bounced back 25%, the market appears now to be in a typical “what next?” consolidation phase as it awaits more data, both economic and clinical, and looks ahead to a slow reopening. The news from Harbin won’t be speeding anything up, one presumes.

Among individual stocks, the standouts yesterday were Lynas Corp ((LYC)), which got the green light from the Department of Defense to trial a rare earth plant in the US, and rose 16.8%, and Santos ((STO)), which reported quarterly production and did not announce a capital raising. That was worth 6.8%.

Vale Radio Rentals, from whom my uni share house rented our first ever VCR. Owner Thorn Group ((TGA)) announced yesterday it would shut down the troubled business due to the virus – permanently – and that sparked a 60% rally for the stock.

Consolidation II

The Dow was up 400 points early in last night’s session, as the WTI oil price recovery gained some momentum, but then a news report from London killed the mood.

Citing a report accidently published early by the WHO, the Financial Times reported trials of Gilead’s remdesivir drug, for which there had been high hopes as an anti-viral, had returned disappointing results. Gilead described the trial as “inconclusive”.

This follows warnings that Trump’s pin-up drug hydroxychloroquine could actually be more harmful than beneficial as a virus treatment. Patients in the US that need this drug for totally different afflictions now can’t get any, since it’s been hoarded.

Wall Street made another plaintive attempt to rally later in the day but ultimately closed flat.

Last week saw another 4.4 million Americans file for the dole, taking the total to over 25 million. Economists had forecast 4.0 million.

A flash estimate of the US April PMIs had manufacturing dropping to 36.9 from 48.5 and services to 27.0 from 39.8.

Wall Street appears to be taking the weak economic data in its stride nonetheless, as it is all largely expected, and also appears unfazed by a -13.6% year on year drop in S&P500 earnings implied by March quarter corporate results to date.

Having rebounded 27% to the technically significant level of 2800, the S&P has effectively tracked sideways since the second week of April. Last night was the one month anniversary of the March 23 low.

Volumes have dropped off considerably in the past couple of weeks. Volatility has eased – we haven’t seen a four digit Dow move for a while now – but the VIX remains anchored above 40, suggesting no complacency is creeping in as yet.

Wall Street, too, is consolidating in what is becoming somewhat of a doldrums phase.

Commodities

The only standout here is another 19% rally for the June WTI price.

Either someone has a storage tank under their house, or the market is anticipating production cuts and corporate failures in the US oil industry anytime soon.

The Aussie is up 0.9% at US$0.6377 on the trade numbers.

Today

The SPI Overnight closed up 12 points.

It might be a Friday kind of Friday, with a holiday tomorrow, although there’s not a lot we can do to mark the day.

The US will see durable goods orders and consumer sentiment tonight.

Note there’s no holiday in lieu on Monday. The ASX is open.

Lest we forget.

The Australian share market over the past thirty days…