Overnight: Never Lasts Long

World Overnight
SPI Overnight (Sep) 6130.00 + 42.00 0.69%
S&P ASX 200 6132.00 – 6.70 – 0.11%
S&P500 3380.35 + 46.66 1.40%
Nasdaq Comp 11012.24 + 229.42 2.13%
DJIA 27976.84 + 289.93 1.05%
S&P500 VIX 22.28 – 1.75 – 7.28%
US 10-year yield 0.67 + 0.01 1.82%
USD Index 93.43 – 0.22 – 0.23%
FTSE100 6280.12 + 125.78 2.04%
DAX30 13058.63 + 111.74 0.86%

By Greg Peel

Monkey See

The ASX200 opened slightly higher yesterday but after fifteen minutes fell -50 points, more in line with Wall Street overnight. Maybe one computer confused a plus for a minus. Thereafter the index chopped its way back to a flattish close.

For three sessions, Wall Street had experienced rotation out of Big Tech and into value/cyclicals, most notably on the third day, when US banks rallied against the tide and the Nasdaq tumbled. Yesterday our banks provided the best sector performance (+1.0%) and while we don’t have Big Tech we do have WiseTech – Global that is ((WTC)), which fell -8.4% to take the IT sector down -1.1%.

Tech stocks have seen some squaring up these past few sessions, presumably because earnings season is about to expose their clothing or lack thereof.

The best performing stock was UR Westfield ((URW)), which is either value writ large or a dead man walking depending on how you view the future of shopping malls. It rose 7.6%, followed by Virgin Money ((VUK)), a clear (and highly volatile) cyclical, which rose 5.7%.

We might have been able to put the bank rally down to Commonwealth Bank’s ((CBA)) earnings result, or more importantly confirmation of a dividend, but after a brief rally it actually fell on the day. It was left to the other majors to drive the gains, on announced cost cuts.

Profit-taking in CBA is no surprise – it has been massively overvalued relative to the other majors in the Days of Covid.

The worst performing sector on the day was, of course, materials, after a -US$100 plus fall in the gold price overnight, but while all gold miners were thumped, not one managed to make the top five index losers’ list. Iron ore miners also fell on the day, despite another solid jump for the iron ore price.

The worst performing stock was Seek ((SEK)), down -8.6% on its earnings result, followed by Mesoblast ((MSB)), down -8.6% as it awaits a decision from the FDA, then WiseTech. We can also throw in “tech” stock Netwealth ((NWL)), down -6.6%.

Telcos fell -1.3% ahead of Telstra’s ((TLS)) result today. Other sector moves were less impactful.

But just when you thought it might be best to jump on this Wall Street rotation theme, everything swung back the other way last night, at least in stock market terms. US bonds were otherwise up again, gold and silver fell further, and the US dollar went back to sliding once more.

Our futures are up 42 points this morning.

A Tale of Two Cities

Actually Apple and Microsoft are not so much cities as countries, as they are bigger than the economies of many a smaller nation. So when they both rally 3% the Dow rallies 1.0%, the S&P500 1.4% and the Nasdaq 2.1%.

That about sums up Wall Street overnight.

The S&P500 did briefly trade above its February 19 all-time high last night but closed just off it. Rather a remarkable achievement when you consider one third of S&P constituents are still down -20% or more for the year.

Tuesday night’s trade on Wall Street was a milestone in the sense that rotation out of growth and into value/cyclicals stretched into a third session when it had so far only ever lasted two sessions over the virus period. Clearly three days was a day too far for those itching to get in on the mega-caps they’d missed out on.

Are the lunatics running the asylum? No, it’s more a case of the kids running the classroom. Last night Tesla provided no news other than to announce a five-for-one stock split to be implemented on August 21. So if you own one share at US$1550 today, on August 21 (ceteris paribus) you’ll own five shares at US$310 and your investment value will be unchanged.

Tesla jumped 13% last night. Apple saw a similar response when it announced a stock split earlier in the month, but it also posted a strong earnings result at the time, so commentators dismissed the split as being the incentive for the rally.

Now they are convinced it was an incentive. Clearly, the Robinhooders don’t understand what stock split means. If you haven’t been keeping up, Robinhood is a zero-brokerage online trading platform very popular with millennials.

The last time a wave of stock-splits and a surge in young new investors was witnessed was in the late nineties, when the dotcom bubble sucked in the similarly naïve and the first dotcom brokerage – Etrade – offered only a US$20 commission, compared to an average US$300 at legacy houses.

It didn’t end well.

As one commentator put it on CNBC this morning, “If you can’t see that ten ten dollar bills and one hundred dollar bill are the same thing then I can’t help you”.

Meanwhile, Wall Street continues to be buoyed by an ongoing downtrend in the US case-count, which is assumed will soon be followed by the lagged death toll, and by the assumption a vaccine is not far off.

Meanwhile the Democrats last night turned down an offer from the Treasury Secretary to discuss stimulus, citing a waste of time when the White House is refusing to budge. The Republicans in Congress are also still miles away from the Democrats.

And there is still concern the president’s executively-ordered stop-gap support will be shot down in court. This is preventing employers moving ahead with new hirings, as that support may not last.

So I wondered aloud yesterday morning whether Day Three of rotation and a swift late drop on Wall Street was the harbinger of a bigger adjustment ahead, or just another head fake. It was a head fake.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz) 1887.60 – 22.40 – 1.17%
Silver (oz) 24.04 – 0.72 – 2.91%
Copper (lb) 2.87 – 0.03 – 1.12%
Aluminium (lb) 0.79 + 0.00 0.34%
Lead (lb) 0.87 + 0.01 0.65%
Nickel (lb) 6.40 – 0.05 – 0.72%
Zinc (lb) 1.07 – 0.01 – 1.35%
West Texas Crude 42.56 + 0.95 2.28%
Brent Crude 45.31 + 0.78 1.75%
Iron Ore (t) futures 122.20 + 0.75 0.62%

But not elsewhere.

Gold actually recovered almost half of its lost -US$100/oz during yesterday’s Asian session only to run into sellers once more and fall even lower. Ditto silver.

Commodity funds?

Selling in copper picked up pace, and all this despite the temporary bounce in the US dollar concluding.

The US ten-year yield ticked up another point to 0.67%.

Oil rallied on data showing US crude supplies fell for a third week in a row.

With the greenback down -0.2%, the Aussie is up 0.2% at US$0.7160.

Today

The SPI Overnight closed up 42 points or 0.7%, so get in there today and buy Australia’s Apple and Microsoft.

What?

Our July jobs numbers are out today.

Earnings reporters today include AGL Energy ((AGL)), AMP ((AMP)), Breville Group ((BRG)), Goodman Group ((GMG)), QBE Insurance ((QBE)), Telstra and Woodside Petroleum ((WPL)), and that’s just some of them.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
BRG Breville Group Downgrade to Neutral from Outperform Credit Suisse
CGF Challenger Upgrade to Outperform from Neutral Macquarie
CLW Charter Hall Long Wale Reit Downgrade to Hold from Accumulate Ord Minnett
JHX James Hardie Downgrade to Neutral from Buy Citi
MIN Mineral Resources Downgrade to Lighten from Hold Ord Minnett
REA REA Group Downgrade to Hold from Accumulate Ord Minnett
SKO Serko Upgrade to Buy from Hold Ord Minnett
SYD Sydney Airport Upgrade to Neutral from Sell Citi
Upgrade to Hold from Lighten Ord Minnett
WTC Wisetech Global Downgrade to Sell from Neutral Citi
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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