The Overnight Report: Retail Rebound

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World Overnight
SPI Overnight	7176.00	+ 69.00	0.97%
S&P ASX 200	7105.90	– 49.30	– 0.69%
S&P500	4057.84	+ 79.11	1.99%
Nasdaq Comp	11740.65	+ 305.91	2.68%
DJIA	32637.19	+ 516.91	1.61%
S&P500 VIX	27.50	– 0.87	– 3.07%
US 10-year yield	2.76	+ 0.01	0.25%
USD Index	101.77	– 0.33	– 0.32%
FTSE100	7564.92	+ 42.17	0.56%
DAX30	14231.29	+ 223.36	1.59%

By Greg Peel

Little Faith

All week the ASX200 has failed to gain any traction since its bounce-back a week ago from the US retail-led tumble and yesterday morning the futures could only come up with a suggestion of a 0.2% gain when the S&P500 had rallied 1.0%.

The futures were right, for an hour, and then at 11am the market fell into a hole.

I have suggested this week there appear to be willing sellers on any rally and perhaps we saw a big market sell order hit at that time, for every sector would have closed in the red if not for a takeover bid for Appen ((APX)), which sent that stock up 29% before a trading halt and helped the tech sector up 1.0%.

The March quarter private sector capex numbers came out at that time, but were not market-wrecking. Capex fell -0.3% quarter on quarter having risen 2.3% and 1.5% in the prior two, but it is clear the issue is not one of a lack of demand but of those same old supply and cost problems, along with a lot of rain, stymying execution.

Indeed, FY23 capex plans rose 11.8% and are up 15.4% year on year.

We also learned the energy regulator knows how to put the boot in when we’re down, lifting default prices by up to 18.3% in NSW, 12.6% in Queensland and 9.5% in SA.

The energy sector fell -0.9%, likely as estimates suggest China’s LNG imports have fallen -2mt in May from last year to 5.1m tons as many traders stayed on the sidelines while covid was spreading.

The China Coal Transportation and Distribution Association said at a briefing China’s demand for thermal coal is likely to keep falling through the rest of the first half. New Hope Corp ((NHC)) also provided an update yesterday and fell -7.8%.

Materials fell -1.0%.

Endeavour Group’s ((EDV)) investor day sparked a -6.0% fall and put the frighteners through the supermarket sector, with consumer staples suffering the biggest fall of -2.5%. If you can’t flog beer and pokies right now, what hope is there?

But, will all be forgotten today? We recall last Friday gave us a nice rally and this morning the futures are up 69 points following a solid night on Wall Street, which was not just about tech companies we don’t have.

Not all retailers are created equal

You’ll recall that last week Walmart and Target shocked Wall Street with weak results and guidance, sparking a swift de-rating of anything consumer-facing, leading to loss in faith in the supposedly strong US consumer, and underscoring fears the US was headed into recession.

Last night department chain Macy’s posted its report, and jumped 19%. Ditto high-end homewares chain Williams-Sonoma, which jumped 13%. And low-end chains Dollar General and Dollar Tree similarly jumped 14% and 22%.

Notwithstanding they were rebounding from last week’s sector de-rating, the point is rumours of the demise of the US consumer are exaggerated. It’s just that Walmart, and to a greater extent Target, got it wrong.

Ultimately it was not a drop in demand that sent Target down -42%. The retailer just mistimed the shift back into work, school and going-out wear from lockdown lounging-around-the-house wear, and got stuck with unmoving piles of trackie-daks et al.

And maybe Gap did too. It has just reported this morning and is down -13% in the aftermarket.

It didn’t hurt that the retail results were posted in a market already back in rally mode. I noted yesterday that leading chip-maker Nvidia had reported in the aftermarket and was down -6% in an initial response, but last night it closed up 5%, swept up in the Nasdaq tide.

The Dow posted its fifth consecutive gain – it’s longest in two months.

So if the consumer is not actually dead, will the US avoid recession? That will be up to the Fed, but a fall in weekly new jobless claims, as reported last night, confirms workers are not being laid off in these difficult times, and it is jobs and job security that underpins the consumption on which the US economy so heavily relies.

Is Wall Street headed back to new highs then? Try and find one analyst/investor who believes that’s the case. There are certainly projections being published suggesting the S&P500 finishes 2022 higher than where it is now, but consensus suggests the current rebound will again run out of steam and a true capitulation bottom is yet to be seen.

Views simply differ on how far and for how long this particular bear market rally can run, given it is the fifth attempt this year and so far looking the most promising. But if everyone’s in the same boat – believing it’s no more than a bear market rally – then history would suggest the opposite must be true.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz)	1850.60	– 3.00	– 0.16%
Silver (oz)	22.00	+ 0.03	0.14%
Copper (lb)	4.26	+ 0.01	0.17%
Aluminium (lb)	1.39	– 0.00	– 0.29%
Lead (lb)	0.97	+ 0.01	1.31%
Nickel (lb)	12.04	– 0.02	– 0.14%
Zinc (lb)	1.70	+ 0.00	0.15%
West Texas Crude	114.09	+ 3.76	3.41%
Brent Crude	117.64	+ 3.33	2.91%
Iron Ore (t)	132.47	– 0.87	– 0.65%

Clearly the standout move here is in the oils, which appear to have responded tardily to Wednesday night’s US inventory data, which showed a greater than expected drop in both crude oil and gasoline heading into the US summer “driving season”, which begins this weekend.

Also buoying sentiment is the pending meeting of EU members to discuss a ban on Russian energy imports. Hungary remains the stumbling block, but is not offering a straight-out “no”. The government is demanding funds to upgrade its infrastructure, which presumably implies it’s just not capable of receiving LNG (rather than pipeline gas) at this point, as other countries make the switch.

If this issue can be overcome, then…

Great from a geopolitical perspective – cutting off Putin’s cash flow – but not so great when we see local petrol prices already creeping back up above $2.00/litre.

The Aussie is up 0.1% at US$0.7098.

Today

The SPI Overnight closed up 69 points or 1.0%.

Today we’ll see April retail sales numbers.

But the biggie will be US April PCE inflation, due tonight.

Appen ((APX)) holds its AGM today, which takes on a different tone from what might have been.

Select Harvests ((SHV)) reports earnings.

CSR ((CSR)) goes ex.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
ALQ	ALS	Upgrade to Add from Hold	Morgans
CGF	Challenger	Downgrade to Lighten from Hold	Ord Minnett
DXI	Dexus Industria REIT	Downgrade to Neutral from Outperform	Macquarie
EVN	Evolution Mining	Upgrade to Neutral from Sell	UBS
IDX	Integral Diagnostics	Downgrade to Neutral from Outperform	Macquarie
IPL	Incitec Pivot	Downgrade to Equal-weight from Overweight	Morgan Stanley
TAH	Tabcorp	Downgrade to Neutral from Outperform	Macquarie
WES	Wesfarmers	Upgrade to Buy from Neutral	UBS

For more detail go to FNArena's Australian Broker Call Report, which is updated each morning, Mon-Fri.

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