The Overnight Report: Dummy Spit

This story features BHP GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: BHP

The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

Broken Hill

Following the sudden drop on Wall Street, yesterday morning the futures had suggested a -34 drop for the ASX200 and indeed, in the first five minutes the index was down -40 points. An hour later, it was up 17.

The session was complicated by a -7.1% fall for BHP Group ((BHP)), which in the wash-up was worth -33 index points, so take that out and the index implicitly rose 24 points on the day.

BHP’s fall had nothing to do with its profit result – that was a cracker – and nothing to do with the dividend – that was better than expected – nor anything much to do with the petroleum merger – that had already been priced in. It was all to do with dual-listing arbitrage.

It’s all very complex, but suffice to say BHP Oz has always traded at a premium to BHP UK, and also to the BHP Group ADR listed in the US, which is directly fungible with BHP Oz (and not an additional listing per se). Now that the dual listing is being “collapsed”, which basically means BHP Oz buys out BHP UK, that three-way arbitrage (complicated by exchange rates) has to close.

And traders did not muck around. Such volatility was anticipated as soon as BHP made the announcement in yesterday’s aftermarket. The dust will settle, but unlike a stock plunging after going ex-dividend, which is zero-sum, BHP Oz has indeed de-rated.

The materials sector thus fell -3.0%, and Rio Tinto ((RIO)), which is also dual-listed, dropped -2.3% just in case. And the iron ore price has plunged again, down -4%.

While the index did peak out around 11am following the announcement of another step-jump in NSW cases, again it does not appear the market has the delta blues. The index simply drifted off a bit following responses to the day’s earnings results.

Monday and Tuesday commenced a pattern of earnings beats being modestly rewarded and earnings misses being trashed. Yesterday the tide turned, as gains for the winners on the day exceeded losses for the losers.

Pro Medicus ((PME)), which can be highly volatile, topped the leaders’ board with a 15.7% gain, followed by Domino’s Pizza ((DMP)) on 7.1%. Domain Group ((DHG)) kicked on 6.1% on analyst assessments following its Tuesday result, and ditto Beach Energy ((BPT)), which spun around to jump back 4.8%.

On the losers’ board, not counting BHP, Sims, which reported on Tuesday, fell -5.8%. Reporting yesterday, Bapcor ((BAP)) dropped -4.8% and Netwealth ((NWL)) -4.8%.

Among the sectors, energy fell -0.5% as Woodside Petroleum ((WPL)) dropped another -2.1% on a BHP Petroleum merger shareholders are none too thrilled about. Healthcare fell -0.4% despite the Aussie breaking down through US73c (See CSL). Consumer discretionary closed flat.

All other sectors closed well into the green, led, in percentage terms, by property (+1.9%) – Vicinity Centres ((VCX)) rose 1.9% on earnings; SCA Property’s ((SCP)) result on Tuesday was also good for another 1.9% and all big retail REITs followed suit – and led in index points terms by the banks (+0.7%), coming back from Commonwealth Bank’s ((CBA)) ex-div on Tuesday.

But while it appeared the tone had changed yesterday regarding earnings results, alas Wall Street has taken another tumble and our futures are down -49 points this morning.

Today’s list of reporting stocks is one of the longest in the season.

Anticipating the Fall

For months now, and more so in light of three months of runaway US consumer and wholesale inflation growth, a majority on Wall Street has defied Jerome Powell’s rhetoric and decided the Fed will need to start tapering QE in “the fall” (ie from September). Indeed, many have screamed out for tapering to begin, incensed that “emergency” funding should still be required when the US economy has bounced faster and harder than previously assumed.

One must presume, thus, that the majority on Wall Street had already set their portfolios and strategies in preparation for such an outcome.

Last night, Wall Street did nothing until 2.30pm – the time the minutes of the last Fed meeting were due for release. Those minutes suggested “most” FOMC members believed it was appropriate to begin reducing the size of monthly bond purchases this year, given the benchmark of “substantial further progress” was close to being met.

Wall Street tanked. Selling accelerated into the close, marking a rare, in 2021, two-day pullback. Where was the dip-buying cavalry this time?

Probably standing on the sidelines letting the panic play out. Aside from looking forward to Fed tapering, many have also been looking forward to the first decent pullback on Wall Street this year, following ever new highs, to more realistic valuations.

Then they’ll buy.

It should be noted that the Fed meeting pre-dated the strong July jobs number, and the record July PPI result. But also the weak recent consumer sentiment and retail sales numbers.

The Fed has two things to watch – inflation and jobs. Inflation needs to be over 2% and My God is it over 2%, but Powell is still sticking to his “transitory” mantra. Few, nonetheless believe “transitory” implies a drop back to 2% from 5% any time in the foreseeable future.

As for jobs, well despite a strong July number, the reckoning will come when additional JobSeeker-style unemployment benefits end in September, presumably sparking at least some of those recipients to dive into a severely under-supplied jobs market.

Next week is Jackson Hole. Will Powell use that forum to provide an update? Or, as most assume, will the next Fed meeting in late September be T-Day?

Commodities

Delta concerns, and subsequent global growth fears, and some technical levels being breached, continue to weigh on base metal prices.

As Beijing clamps down on steel production, data yesterday revealed a build-up of iron ore inventories at Chinese ports.

By the way, if you were wondering why Beijing was so quick to jump in and recognise the Taliban, it’s because Afghanistan is rich in lithium.

For oil see base metals.

For a -0.3% drop in the Aussie to US$0.7232, see commodities in general.

Today

As noted, a very big day for earnings reports.

We’ll also see our July jobs numbers today.

A reporting calendar and summaries of analyst responses to the day’s results are available on the FNArena Corporate Results Monitor.

https://www.fnarena.com/index.php/reporting_season/

The Australian share market over the past thirty days…

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

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