The Overnight Report: A Chink In The Armour?

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

World Overnight
SPI Overnight	7157.00	– 82.00	– 1.13%
S&P ASX 200	7275.60	– 108.60	– 1.47%
S&P500	4352.63	– 90.48	– 2.04%
Nasdaq Comp	14546.68	– 423.29	– 2.83%
DJIA	34299.99	– 569.38	– 1.63%
S&P500 VIX	23.25	+ 4.49	23.93%
US 10-year yield	1.53	+ 0.05	3.37%
USD Index	93.73	+ 0.32	0.34%
FTSE100	7028.10	– 35.30	– 0.50%
DAX30	15248.56	– 325.32	– 2.09%

By Greg Peel

And so it came to pass

Consistently this year a seemingly out-of-place move in the SPI futures overnight, up or down, has signalled a big buy/sell order hitting the ASX for no specific reason other than, one presumes, a big offshore fund realigning its portfolio.

Yesterday morning a -42 point fall in the futures did not synch with Wall Street overnight nor indeed the prior day’s enthusiasm over light at the end of the lockdown tunnel.

Typically in these instances the smarter investors simply step aside; on down-days looking forward to the opportunity the next day to pick up some positions at lower prices. When the ASX200 dropped from the open, the market simply fed on itself. And it’s notable that these out-of-place sell-offs so often pull up at the down one hundred level.

So typically, I would suggest the index will bounce today as those smarter investors move back in, but this time it’s different. Wall Street has tanked overnight and the SPI futures are down -82 points this morning.

Yesterday’s was not exactly the usual market-wide sell-off nonetheless. The stark outsider was the energy sector, up 4.3%, with a flow-on to utilities, up 0.7%.

Energy is part of the problem and not of the solution – the problem being rising wholesale inflation putting pressure on corporate margins. Best then to back the problem to offset its impact elsewhere.

The banks also stood out in only falling -0.5%, despite having a solid run these past few sessions on rising bond yields. The Aussie ten-year rose another 5 basis points yesterday to 1.46% which, sell orders aside, was a more fundamental effect on stocks.

Every other sector fell at least -1%, four sectors fell over -2% and healthcare was the biggest loser on -3.6%. Materials, technology and property were the other -2%-plus losers.

Among individual stocks, four of the top five index winners were energy names, or five if you count thermal coal miner Whitehaven Coal ((WHC)). The biggest losers were a mixed bag.

But that was yesterday and we move on to today, and note that September has reminded us that it’s still with us until Friday, when we then move into the historically most volatile month of the year.

The focus in the US is now very much shifting towards stagflation – economic growth slowing as inflation rises. Rising inflation is typically a positive sign for an economy, but only if it is demand-side inflation. The current issue in the US, and across the globe right now, is supply-side inflation.

In both the US and Australia, a lot of faith is being put into a rapid rebound out of delta impacts – in Australia’s case out of lockdowns. We saw that last year, so such faith is not unwarranted. But in the meantime, supply shortages and bottlenecks, and soaring freight costs, are painting a different picture.

Okay, I see your point

We recall that at last week’s Fed meeting, nine FOMC members forecast the first rate hike in 2022. US futures markets were, before last night, pricing in the first rate hike in December 2022. The counter has been the Fed chair, who has insisted the inflation spike is transitory.

Transitory does not come with a defined timeline. Economies perennial move through cycles – everything could thus be called transitory.

In a regular testimony to Congress last night, Jay Powell admitted in prepared remarks that the surge in inflation because of supply-chain bottlenecks and other challenges related to the reopening of the economy has been larger and longer-lasting than anticipated. “But they will abate,” he said, “and as they do, inflation is expected to drop backward toward the Fed’s 2% goal.

But Powell acknowledged that there are risks that price pressures are higher than anticipated or more enduring. Hence the Fed would raise interest rates “if sustained higher inflation were to become a serious concern”.

On that note, Wall Street tanked.

The US ten-year yield rose another 5 basis points to 1.53%. When last US bond yields spiked, back in March, the Nasdaq copped the brunt.

In the interim, investors reassessed the Big Tech names, and decided in actual fact the FAAMGs are not so rate sensitive, being reliable cash flow machines and hence more defensive than cyclical. It is the FAAMGs that drove Wall Street to recent new highs, while within the S&P500, a bulk of stocks have actually undergone a correction.

Technology is 40% of the S&P market cap, spread across three sectors, being information technology (Apple, Microsoft), communication services (Facebook, Google) and consumer discretionary (Amazon). As investors shifted out of 2020 winners and cyclicals hit by 2021’s delta wave, they continued to push the FAAMG’s into what most considered overvalued territory.

Until last night.

Last night the technology sector fell -3.0%, communication -2.8% and discretionary -2.0%. The other big losers were utilities (-2.6%) and property (-2.3%) which are genuinely impacted by rising yields.

Financials spent the day trying to hang on, given banks benefit from higher yields, but in the end they, too, gave in (-1.5%).

The only sector to close in the green on the day was, you guessed it, energy, but only by 0.5%. Energy is only 3% of the S&P these days, once having been the biggest sector. The Rockefellers are still pretty well off nonetheless.

Last night’s sell-off did not take the S&P as low as last week’s Evergrande sell-off, and all year Wall Street has typically bounced fairly quickly after such blips (Evergrande being a case in point). With end-of-quarter approaching, will this again be the case?

The futures have now moved the first rate hike expectation forward to November 2022.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz)	1733.80	– 15.90	– 0.91%
Silver (oz)	22.43	– 0.18	– 0.80%
Copper (lb)	4.20	– 0.04	– 0.92%
Aluminium (lb)	1.31	+ 0.00	0.14%
Lead (lb)	0.99	+ 0.01	0.78%
Nickel (lb)	8.38	– 0.18	– 2.06%
Zinc (lb)	1.40	+ 0.00	0.01%
West Texas Crude	75.29	– 0.16	– 0.21%
Brent Crude	78.20	– 1.13	– 1.42%
Iron Ore (t)	112.35	– 6.30	– 5.31%

The US dollar index rose 0.3% to a new 2021 high last night. Rising yields support a stronger dollar, but a -1.2% plunge in sterling last night also helped. The pound responded to Boris calling in the army to deliver fuel to service stations.

A stronger greenback is mathematically bad for commodities, but right now base metals are more beholden to government-forced Chinese power shortages which are stalling downstream production of, for example, stainless steel. Thus nickel, and copper, were hardest hit last night.

Iron ore usually ignores the greenback so last night’s drop was more likely just a technical one after the post-Evergrande snap-back.

Higher yields and stronger dollar equal weakness for gold.

The oils were also due a rest.

The Aussie is down -0.7% at US$0.7237.

Today

The SPI Overnight closed down -82 points or -1.1%. Tomorrow is quarter-end.

Just when we didn’t need it, today is the biannual big ex-dividend day for REITs and other funds. Don’t get a fright when the property sector drops hard from the open.

Although it might be hard to tell.

ASX ((ASX)) and Pilbara Minerals ((PLS)) hold their AGMs today.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
AUB	AUB Group	Downgrade to Accumulate from Buy	Ord Minnett
AX1	Accent Group	Neutral	Citi
CKF	Collins Foods	Upgrade to Outperform from Neutral	Macquarie
FSF	Fonterra Shareholders Fund	Upgrade to Outperform from Underperform	Macquarie
IAG	Insurance Australia	Upgrade to Outperform from Neutral	Macquarie
SFR	Sandfire Resources	Downgrade to Neutral from Outperform	Credit Suisse
VTG	Vita Group	Downgrade to Hold from Buy	Ord Minnett

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

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available on the FNArena website.  Click here. (Subscribers can access prices on the website.)

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author's and not by association FNArena's – see disclaimer on the website)

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