Overnight: Accentuate The Positive

By Greg Peel

You Buy Now!

“We will decide who comes to this state and the circumstances in which they come,” said Gladys yesterday, before commencing negotiations with East German engineers. In the meantime, enchilada baits are being laid along the northern bank of the Murray laced with Hunter Valley wine – fatal to Victorians.

The news of the closure of the NSW border to Victoria turned a tepid 21 point gain for the ASX200 by 2pm into a -43 point loss by the close. Other states had already closed their borders to Victoria, or not reopened them, but when the two largest non-mining economies are disconnected, the ramifications must be considered.

Note that the Sydney-Melbourne air route is one of the busiest in the world. Or was.

What is most interesting about the market’s response is it flew in the face of everything going on elsewhere, and what has happened since.

Yesterday the China Securities Journal, which would equate to a state-owned AFR or WSJ, ran a front page article suggesting Chinese investors should “look forward to the wealth effect of capital markets” and the prospects for a “healthy bull market”. It was no doubt not lost on the Chinese that the government can, and does, buy stocks.

Not only did the Shanghai Composite jump 5.7% on the “news”, brokers reported a record number of new account openings.

The Chinese market had already fired up the Dow futures as the Australian market was falling in the afternoon, and sure enough European stock indices surged ahead and the Dow ultimately opened up around 400 points last night, all on CCP propaganda.

The ultimate rally on Wall Street belied new record case-counts in various states over the long weekend, most notably Florida, and Miami’s decision to re-close restaurants, gyms and other venues. Wall Street is ignoring its rising case-count. We’re not.

Nor is the local market prepared to join in the hype today. The S&P500 closed up 1.6% but our futures are only suggesting a 0.5% recovery today.

All sectors closed in the red yesterday bar one. IT managed a 0.2% gain led WiseTech Global ((WTC)), which rose another 4.3% and just keeps rising, and Afterpay ((ATP)), up 0.7% after announcing a Frequent Flyers deal with Qantas ((QAN)).

I hope those points don’t have an expiry date.

Healthcare (-1.8%) was the worst performer, which seems strange in the context, but investors always seem keen to dump their CSL ((CSL)) if things turn sour. Sector constituent Mesoblast ((MSB)) topped the index with an 11.3% gain, after one of its products was been given an expanded access protocol for use in the treatment of virus-infected children. But CSL casts too big a shadow.

Industrials fell -1.4% on the implications of an ongoing Victorian shutdown for toll roads and airports.

Adbri ((ABC)) fell another -6.8% to be the worst index performer, after brokers lined up to downgrade the stock. Materials fell -1.2%, while other sector falls were less significant.

We live in interesting times. The RBA meets today and will probably remind us of such.

Who Dares Wins

As one US commentator put it, “We have the Fed, they have state media”. The suggestion is that as Wall Street continues ever higher, the CCP is keen not to let the US win the stock market bragging rights.

Meanwhile, the US service sector PMI jumped to 57.1 in June from 45.4 in May – the biggest monthly gain since 1997 — further exciting investors. This follows a similar reversal for the manufacturing PMI, albeit only to just over 50.

This has to be put into context. PMIs are a second derivative measure. US PMIs fell into the low 40s in April suggesting extensive contraction as one might expect. May saw ongoing contraction, but at a slightly slower pace. June has seen a return to expansion, but from that lower base. The numbers by no means imply a “back to normal” scenario.

The services PMI followed on from Thursday night’s surprisingly good jobs numbers, which again had to be put into context. On a supposedly resurgent US economy and on the Chinese rally, the Dow jumped around 400 points from the open and basically stayed there. The Nasdaq, of course, again hit a new high, as tech again led the charge.

But can the US economy continue to rebound?

States with rising case-counts now number 38, with 2.9m Americans having been infected leading to 130,000 deaths. Texas is worried about running out of hospital beds. Florida is worried about running out of ventilators. More cities and states are moving to re-close parts of their economies. The long weekend brought more record daily counts.

Nothing to worry about, says Wall Street. The case-count is hitting records because more testing is being conducted compared to early in the game when the north-east was the epicentre. The average age of new patients is much lower than it was in the north-east given the youngsters have been picking up the virus at bars, and hence the mortality rate is much lower.

The US has had over three months to adapt to life under covid, and has proven to be able to soldier on. These and other arguments are being used to justify Wall Street’s onward-ever-upward trend. Mind you, the major drivers remain a handful of names, notably Big Tech, which are virus beneficiaries.

Tesla rose another 13% last night, and is up 220% for the year.

What could possibly go wrong?

Commodities

China will boost its economy with infrastructure spending. Got to be good for metals.

Morgan Stanley yesterday warned the iron ore price will fall to US$80/t due to increasing production restarts in Brazil. Deaf ears so far.

The US dollar index fell -0.4% in an ongoing downward trend, which most likely reflects the health situation more so than the economy. This was good for the gold price.

But bad for the Aussie, which is up 0.5% at US$0.6971.

Today

The SPI Overnight closed up 31 points or 0.5%.

The RBA meets.

That’s about all folks.

The Australian share market over the past thirty days…