Overnight: Testing Times

By Greg Peel

Foiled Again

It appears local investors were drinking the Nasdaq Kool-Aid yesterday morning as the ASX200 shot up 33 points in defiance of a futures call of down -15. While there were the usual winners and losers among the day’s earnings reporters, the biggest day of the season proved to be more benign than most.

Only one reporting stock on the day made it onto the top five winners’ board, and only two to the losers’ board. There were no big cap winners to justify the opening rally. More likely the momo algos were behind the wheel.

But they knocked off at the midday bell, and down the index came in the afternoon, almost back to square. The suggestion is investors were squaring up ahead of Jackson Hole last night, but I don’t much buy it. I doubt there was much anticipation of anything new from the Fed, rather the square-up followed a misplaced opening rally.

(There was a bit of new new from the Fed nonetheless – more on that below.)

There was some positive local economic news, but that arrived late morning. June quarter private sector capex fell -5.9% from the March quarter – the biggest quarterly fall since 2016 — but economists had forecast -8.2%. Mining sector capex held up reasonably well in the quarter to temper falls in non-mining spend.

Mining sector capex actually rose 3.0% year on year in FY20 – the first annual rise since FY13 — mostly driven by large iron ore expansion projects in the Pilbara. Non-mining sector capex fell -10.0%.

FY21 capex expectations were increased from the March quarter, but not by much. And who would blame a company for holding off on the spending and hanging on to the cash at this time?

The earnings result winner on the day was Bega Cheese ((BGA)), which saw a handy 384% increase in profit in FY20. That’s a lot of cheese and vegemite sambos in lockdown. The stock rose 7.8% to be the best index performer.

On the flipside, Appen ((APX)) looked artificially unintelligent in falling -11.1% on disappointing FY20 margins, while Link Administration ((LNK)) fell short and dropped -9.5%.

The rest of the winners’ board were all stocks that had previously reported recently, and the rest of the losers board were stocks that reported on Wednesday. Reliance Worldwide ((RWC)) kicked on another 4.4% to the upside, while Wednesday’s reporting losers saw the boot put in yesterday – Whitehaven Coal ((WHC)) down a further -8.8%, Polynovo ((PNV)) -6.5% and Bravura Solutions ((BVS)) -6.1%.

Sector-wise, materials won the session (+1.2%) on a bounce-back in the iron ore price and consumer staples (+1.0%) had a cheesy grin. Utilities (-1.7%) suffered from more selling in AGL Energy ((AGL)) after going ex-div on Wednesday and the energy sector (-1.3%) suffered from oil prices going down instead of up despite this year’s first big Gulf hurricane.

The banks (-0.6%) mimicked Wall Street, again. That might change today.

Inflate or Perish

Jerome Powell was not expected to say anything much new at the Jackson Hole (virtual) symposium last night – he’s already indicated rates would be kept at zero for eternity. But he did pick the symposium, rather than next month’s Fed meeting, to announce a “shift” in Fed policy.

(Ben Bernanke famously used Jackson Hole to announce his QEs.)

Rather than retaining a fixed core inflation target of 2%, as has been the case since the 1980s, the Fed will now adopt a flexible target, meaning inflation will be permitted to run above 2% for a period in order to help stimulate employment.

Four points to note here: (1) This was sort of expected by economists anyway; (2) inflation has rarely hit 2%, let alone higher, since 2007; (3) while the move implies zero interest rates for even longer, the Fed had already pledged zero rates for even longer; and (4), Wall Street didn’t much respond.

Bonds did. The US ten-year yield jumped 6 basis points to 0.75%.

Wall Street was more excited about news from Abbott Laboratories of a new rapid test for the virus. It can be implemented remotely, takes fifteen minutes, will cost US$5, and 50 million per month will be produced from October. Trump immediately tossed in US$750bn.

While any news is good news in the global race to fight covid, it has been pointed out that 1.7m tests produced per day for a population of 330m people, let alone the planet, is not that flash. But it’s a breakthrough, and Wall Street loves a good breakthrough.

On any day there is such news – and we do get them on a fairly regular basis – Wall Street immediately swings into rotation mode. Trim off high-flying Big Tech and plough back into beaten down cyclicals. To that end, basically every sector that shot up on Wednesday night’s rally fell back again last night, and vice versa.

Best performing S&P500 sector was the banks, and worst performing communication services, in a complete reversal of Wednesday night.

These rotation sessions typically last between one and three days before vaccine/treatment excitement wanes and it’s back to buying growth again.

The Dow outperformed last night because of TikTok. Microsoft had been the first company with its eye on buying TikTok US, then Oracle stuck its hand up, and now Wal-Mart has decided to join forces with Microsoft to form a likely unassailable bidder. Both stocks rose on the day.

Wal-Mart? That’s like Woolies buying Facebook.

Commodities

The jump in US bond yields has gold down again.

Iron ore has also had another weak session. Maybe it has finally run too far?

Oil traders expect US Gulf refineries will bounce back quickly from Hurricane shutdowns.

Yesterday’s capex result, which feeds into GDP, has the Aussie up 0.4% as economists again have to lift their forecasts to simply “horrible” from “OMG”.

Today

The SPI Overnight closed down -9 points. Let’s see what the algos decide this morning.

Jackson Hole was well-timed this year, one night ahead of US July PCE inflation data – the Fed’s preferred measure.

The local results season peaked yesterday and while it rolls on through today and Monday, the daily stock count is much reduced.

The Australian share market over the past thirty days…