Overnight: Foiled Again

World Overnight
SPI Overnight (Sep) 6044.00 – 3.00 – 0.05%
S&P ASX 200 6091.00 – 41.00 – 0.67%
S&P500 3373.43 – 6.92 – 0.20%
Nasdaq Comp 11042.50 + 30.26 0.27%
DJIA 27896.72 – 80.12 – 0.29%
S&P500 VIX 22.13 – 0.15 – 0.67%
US 10-year yield 0.72 + 0.05 6.87%
USD Index 93.24 – 0.19 – 0.20%
FTSE100 6185.62 – 94.50 – 1.50%
DAX30 12993.71 – 64.92 – 0.50%

By Greg Peel

All in the numbers

The futures had suggested up 42 points yesterday morning which seemed a lot, and indeed the ASX200 turned tail and plunged after ten minutes. It wasn’t that futures traders were so wrong, it was the reality of earnings results on the day.

There were both very positive responses to earnings and guidance, and very negative responses. In the wash-up, the negatives outweighed the positives from an index point of view, providing the close of down -41.

The worst performing sector was telecommunication, down a standout -4.7% as Telstra ((TLS)) reported in line and held its dividend by paying a special, but disappointed on guidance.  It fell -8.4% and TPG Telecom ((TPG)) fell -5.1% in sympathy.

By contrast, AMP ((AMP)) declared a special dividend and a stock buyback which was worth 10.9%, despite flagging no final 2020 dividend. The capital return all came from the proceeds of the sale of AMP’s Life business, so it was a one-off opportunity for dividend hunters.

Utilities (-4.0%) were second worst performer, with sector heavyweight AGL Energy ((AGL)) falling -9.6% on its guidance.

The next worst sector were financials (-1.1%). This despite AMP’s jump and a 6.8% gain for QBE Insurance ((QBE)) on its result. The culprit was Commonwealth Bank ((CBA)), which fell -2.6% after brokers voiced their concerns of overvaluation (as always) after Tuesday’s result release.

The best performing sector was staples (+1.2%), as everyone got on the grog. Treasury Wine Estates ((TWE)) rallied a chart-topping 12.3% as it reported improving sales in China.

Consumer discretionary had everything going for it, with Premier Investments ((PMV)) jumping 6.7% on a sales update and short-covering still ongoing in the travel agents. But the sector closed down -0.2% after Breville Group ((BRG)) fell -8.4% on its result. Clearly the market had been too exuberant over the stay-at-home theme, espresso machines and toasted sandwich makers.

It looked like the ASX200 might have been set to recover late morning when surprisingly good July jobs numbers were released. But it was momentary, given they were only surprisingly good within their limited scope.

Australia added 115,000 jobs in the month when 30,000 were forecast, and both part-time and full-time gained. The unemployment rate ticked up to 7.5% from 7.4% in June, but only because participation increased. The reality is this result does not include JobKeepers and Seekers, thus all agree the “real” rate is into double digits.

And it wasn’t until August that Melbourne went into stage 4.

We note also that Victoria saw a very healthy drop in new case numbers yesterday. It was not enough to alter the mood.

Yesterday was the biggest day in the earnings calendar to date, but will still be dwarfed by just about every day for the next two weeks by number of reports. If yesterday is anything to go by, this season is set for a lot of very big moves in either direction on result releases.

Not surprising, given the uncertainty of the Days of Covid, and little in the way of corporate guidance, meaning forecasts are a very hit and miss affair.

Laboring the Point

For the first time since the pandemic began, the US reported less than one million new weekly unemployment claims last week. Great news. Except that another 963,000 Americans went on the dole, taking the toll to 13m-plus, on a very slow labour market turnaround.

If we can yet call it a turnaround.

The S&P500 again crossed above its February all-time high last night, before again drifting back in the afternoon. The rule of thumb under normal circumstances is three strikes and you’re out – a third failed attempt suggests a pullback to follow.

But these aren’t normal circumstances. Not with unlimited Fed support, few alternatives beyond shares, and a new fiscal package in the wings.

It was the fiscal package in the wings that soured the mood in the afternoon, given there isn’t one. Negotiations remain at a stalemate, and Congress won’t resume until after the Labor Day holiday (September 7).

It was another session in which tech outperformed over value and cyclicals, led, yet again, by Apple.

Apple’s 1.8% gain was nevertheless not enough to counter an -11.2% drop for Cisco Systems post result, which provided the bulk of Dow underperformance. Cisco is strictly a tech stock, but very old school and very left behind. Cisco was also the worst performer in the S&P.

The US result season is now beginning to wind down, albeit in a long tail, and with no news expected on fiscal stimulus for at least another three weeks, there’s a good chance Wall Street will do little more than consolidate below the all-time high for a period, barring anything from left field.

If that’s the case, it will leave the Australian market free to trade on earnings season fundamentals.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz) 1952.80 + 65.20 3.45%
Silver (oz) 27.48 + 3.44 14.31%
Copper (lb) 2.85 – 0.02 – 0.69%
Aluminium (lb) 0.78 – 0.01 – 0.98%
Lead (lb) 0.87 + 0.00 0.06%
Nickel (lb) 6.43 + 0.03 0.43%
Zinc (lb) 1.07 – 0.01 – 0.74%
West Texas Crude 42.34 – 0.22 – 0.52%
Brent Crude 45.06 – 0.25 – 0.55%
Iron Ore (t) futures 120.75 – 1.45 – 1.19%

The US bond sell-off gained pace last night, after weak demand for a thirty-year auction, sending the ten-year yield up another 5 basis points to 0.72%. It was all gold and silver needed to bounce back.

And if investors are now abandoning bonds, again we might assume there can’t be much of a pullback in stocks, because where else (apart from gold) can the money go?

The US dollar falling again did nothing much for other commodities, but thankfully the Aussie also fell a bit, to US$0.7150.

Today

The SPI Overnight closed down -3 points.

The RBA governor will provide a scheduled testimony to parliament today.

China will report July retail sales, industrial production and fixed asset investment numbers.

The eurozone will report June quarter GDP tonight.

The US will report July retail sales and industrial production along with fortnightly consumer sentiment.

Today’s earnings reporters include Newcrest Mining ((NCM)), Iluka Resources ((ILU)) and Baby Bunting ((BBN)), among others, while National Bank ((NAB)) provides a quarterly update.

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
DOW Downer Edi Upgrade to Buy from Neutral Citi
JBH JB Hi-Fi Upgrade to Neutral from Underperform Credit Suisse
JHX James Hardie Downgrade to Neutral from Buy Citi
MTS Metcash Upgrade to Buy from Neutral Citi
SEK Seek Ltd Upgrade to Hold from Reduce Morgans
Downgrade to Hold from Accumulate 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.

View more articles by Greg Peel →