The Overnight Report: Civil Unrest, Capital Gain

World Overnight
SPI Overnight (Jun) 5837.00 + 9.00 0.15%
S&P ASX 200 5819.20 + 63.50 1.10%
S&P500 3055.73 + 11.42 0.38%
Nasdaq Comp 9552.05 + 62.18 0.66%
DJIA 25475.02 + 91.91 0.36%
S&P500 VIX 28.23 + 0.72 2.62%
US 10-year yield 0.66 + 0.01 2.16%
USD Index 97.80 – 0.54 – 0.55%
FTSE100 6166.42 + 89.82 1.48%
DAX30 11586.85 – 194.28 – 1.65%

By Greg Peel

Material Gains

The ASX200 fell -50 points in the first ten minutes yesterday, despite the futures closing up 24 on Saturday morning. If this was a reaction to the escalating riots in the US over the weekend, it was not a reaction that gained any traction. The index spun sharply and tracked straight up to what would hold as the day’s high by lunchtime.

The baton was passed yesterday to the materials sector (+3.1%) from last week’s leader, the banks (+0.3%). Gold is on the move up again, but yesterday was all about the iron ore price surging above the US$100/t mark. It’s currently a demand/supply win/win for iron ore, with Brazilian supply constrained by the virus and China’s economy reopening with further plans for infrastructure investment.

Beijing released its official May manufacturing PMI on Sunday, which at 50.6% suggests an industry expanding slightly. Caixin’s independent take, out yesterday, corroborated with 50.7.

Underscoring China sentiment were the announcements made by President Trump on Friday night in response to Beijing’s move on Hong Kong, which were not as harsh as was feared.

And while the focus for the materials sector is typically on iron ore, building materials are also materials. The government’s new housing stimulus announcement over the weekend had Adbri ((ABC)), the artist formerly known as Adelaide Brighton, up 8.8% yesterday and Boral ((BLD)) up 6.8%. along with Bingo Industries ((BIN)), which takes away the rubbish, up 7.2%. Fortescue Metals ((FMG)) had to take a back seat on 6.4%.

Topping the winners’ board was shipbuilder Austal ((ASB)), kicking on from Friday’s 10% rally with another 9.3%.

Profit-taking in the healthcare sector came to an abrupt halt yesterday after CSL ((CSL)) provided an update. It rose 3.1% and the sector 2.0%.

It was a risk-on session, as evident in consumer discretionary rising 1.3% and staples falling -0.3%, along with telcos (-0.3%) and utilities (-0.4%). All other sectors closed modestly in the green, although energy stood out with a 1.8% gain.

On the downside, Southern Cross Media was due a pullback after a sharp bounce. Shopping Centres Australasia ((SCP)) fell -3.8% even as more stores and food outlets reopened, but this is likely in response to its rival.

Vicinity Centres ((VCX)) yesterday joined the long list of companies raising new capital, looking for $1.4bn at an -8% discount. At the lower end of the scale, Iress ((IRE)) is looking for $170m, to fund an the acquisition of Onevue Holdings ((OVH)).

House prices across Australia’s capital cities fell -0.5% in May, CoreLogic reported, which is not too scary. But wait until mortgage deferrals and JobKeeper expire. In theory, the government’s stimulus for housing construction should also weigh on prices.

The US futures began to tip over towards the end of local trading yesterday but Wall Street turned that around overnight. Our futures are up 9 points this morning.

America Burns

The Dow opened down -160 points last night as the market responded to the weekend’s riots. But the reaction did not last long, and soon the major indices were heading higher once more, again led by the Nasdaq.

On a weekend when more businesses were set to reopen, they weren’t, and in many cases they were looted. At a time when online retail is surging, Amazon has instructed its delivery drivers not to risk their lives for the sake of a few parcels. It seems a fair call to assume an economic impact as the unrest continues.

However, history suggests this is not the case, with evidence from more recent bouts of protests, and back to Rodney King and even 1968, suggesting the impact is minimal in the medium term.

Meanwhile, Trump plays to his redneck supporter base, with the election now only six months away and no campaigning. Not part of the solution.

Wall Street looked through the immediate issue to the fact more and more businesses are now reopening across the country. One case in point are casinos, back to 50% capacity this week, that is if you can safely negotiate your way down the Las Vegas strip.

Aside from the usual Big Tech leadership, investors again piled into the beaten-downs last night, including airlines and cruise lines. But here’s an interesting comparison, reflecting the current state of play.

Zoom Video rallied 10% last night, ahead of tonight’s earnings release, to be up 200% year to date. That means Zoom’s market cap is now ten times greater than that of America’s biggest airline, United. Or put another way, greater than all four of the biggest US airlines combined, and also bigger than GM.

Over in the Cold War, China yesterday told its state-owned agri-business companies to pause their purchases of US products such as pork and soybeans, in defiance of phase one. It’s a bit of a damp squib, considering when phase one was signed, no one believed China could ever meet the target set for purchases of US goods.

More concerning right now is the potential side effect of the protests, being the collapse of social distancing. The facts are none too encouraging. Black Americans are twice as likely to die from the virus, and black Americans make up 75% of the frontline workers in the epicentre of New York.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz) 1738.80 + 10.10 0.58%
Silver (oz) 18.28 + 0.44 2.47%
Copper (lb) 2.42 – 0.00 – 0.01%
Aluminium (lb) 0.68 – 0.00 – 0.17%
Lead (lb) 0.74 + 0.01 0.87%
Nickel (lb) 5.63 + 0.10 1.76%
Zinc (lb) 0.89 + 0.01 0.64%
West Texas Crude 35.56 + 0.07 0.20%
Brent Crude 38.49 + 0.65 1.72%
Iron Ore (t) futures 100.50 -0.40 -0.40%

The US dollar index fell -0.6% last night, which is a lot for a trade-weighted index, no doubt due to the riots. This provided further support for gold, but not particularly for real commodities.

And while the Australian market might be cheering on iron ore, and government stimulus, the Aussie is playing killjoy with a massive 2.2% gain overnight, to US$0.6803.

Clearly they were all short again.

Today

The SPI Overnight closed up 9 points.

The RBA meets today, just as economists start questioning whether negative interest rates might not actually be a bad idea. Let’s face it, the economies of Europe and Japan have been surging.

Won’t happen.

We see data today for March quarter company profits and inventories and the current account, including the terms of trade, in the lead up to tomorrow’s GDP release.

Gather your children around and regale them with just what life was like way back in the March quarter.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
AGL AGL Energy Downgrade to Hold from Add Morgans
APT Afterpay Downgrade to Hold from Add Morgans
AST Ausnet Services Upgrade to Hold from Lighten Ord Minnett
BEN Bendigo And Adelaide Bank Upgrade to Neutral from Underperform Credit Suisse
BIN Bingo Industries Upgrade to Buy from Neutral Citi
BKL Blackmores Upgrade to Neutral from Underperform Macquarie
BKW Brickworks Upgrade to Outperform from Neutral Macquarie
BPT Beach Energy Downgrade to Neutral from Outperform Macquarie
Downgrade to Hold from Add Morgans
CGC Costa Group Upgrade to Add from Hold Morgans
CSL CSL Upgrade to Buy from Neutral Citi
CTD Corporate Travel Downgrade to Neutral from Outperform Credit Suisse
EVT Event Hospitality Downgrade to Neutral from Buy Citi
FNP Freedom Foods Downgrade to Hold from Add Morgans
LOV Lovisa Downgrade to Sell from Buy Citi
MTO Motorcycle Holdings Upgrade to Add from Hold Morgans
NHC New Hope Corp Downgrade to Neutral from Outperform Credit Suisse
NTD National Tyre & Wheel Upgrade to Add from Hold Morgans
VCX Vicinity Centres Upgrade to Outperform from Neutral Credit Suisse
VEA Viva Energy Group Upgrade to Add from Hold Morgans
WEB Webjet Downgrade to Neutral from Outperform Credit Suisse
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.

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