The Monday Report – 04 October 2021

This story features VIRGIN MONEY UK PLC, and other companies. For more info SHARE ANALYSIS: VUK

The company is included in

World Overnight
SPI Overnight	7180.00	+ 52.00	0.73%
S&P ASX 200	7185.50	– 146.70	– 2.00%
S&P500	4357.04	+ 49.50	1.15%
Nasdaq Comp	14566.70	+ 118.12	0.82%
DJIA	34326.46	+ 482.54	1.43%
S&P500 VIX	21.15	– 1.99	– 8.60%
US 10-year yield	1.47	– 0.06	– 4.19%
USD Index	94.07	– 0.18	– 0.19%
FTSE100	7027.07	– 59.35	– 0.84%
DAX30	15156.44	– 104.25	– 0.68%

By Greg Peel

Much Ado

The ASX200 closed at 7177 on Wednesday and 7185 on Friday. Everything in between was much ado about nothing.

We might note the Dow futures were up solidly during our session on Thursday, only to be proven horribly wrong, and they were down solidly during our Friday session, only to again be proven horribly wrong.

While this may have helped to exacerbate the ups and down on Thursday and Friday, realistically Thursday was all about end-of-quarter window-dressing by fund managers looking to improve on what had been a -4.5% drop in September, and Friday was about righting the ship ready to begin the December quarter proper.

So if we say that on that basis October actually begins today, we note our futures closed up 52 points on Saturday morning.

It is a holiday in NSW, so the market could be either quiet or thin and volatile today, so maybe we even have to wait till Tuesday to commence October proper.

On Thursday the buying was concentrated in the big-cap sectors, with the banks, materials, energy, healthcare and staples all gaining 2% or more. On Friday the reversal was not entirely uniform, with materials falling -1.8%, energy -1.2%, healthcare -1.6% and staples -1.1%. It was left to the banks to even the two-day score by falling -2.8%, having risen 2.0% on Thursday.

The fall was aided by a loser board-topping -7.4% fall for Virgin Money UK ((VUK)) following a weak trading update.

Consumer discretionary also added to the balance on Friday in falling -2.3%, having risen only 1.5% on Thursday. Big sector hitters Aristocrat Leisure ((ALL)) and Domino’s Pizza ((DMP)) saw falls of -4.2% and -6.3%.

That fall flowed through to property, falling -2.3% after having gained 1.4% on Thursday.

The fall in the materials sector was offset to some extent by gold miners, three of which made the top five winners’ board. Barely a day goes by at the moment when gold miners don’t dominate either side of the ledger.

But it’s a new week, a new month and a new quarter, and while October is historically volatile the December quarter is historically positive, although there have been some glaringly negative months of December in recent years.

Going Viral

Wall Street action on Thursday-Friday nights proved a mirror image of that downunder, with investors choosing to trim positions to end the quarter. Given Thursday night finally marked a -5% pullback from the high for the S&P500, it was not unreasonable to assume the first session of the new quarter would see a rally.

But it didn’t start that way. Wall Street stumbled out of the blocks, and the the Dow was down over -50 points in the first hour.

Then two things happened. Firstly, investors opened the month by buying US bonds, ultimately sending the US ten-year yield down -6 basis points to 1.47% following September’s taper-driven spike.

The other was an announcement by Merck that it had produced an anti-viral drug that reduced the likely hospitalisation or death of covid patients by -50%. Being so convinced of its success, Merck has decided to take the drug to the FDA for emergency approval immediately rather than moving on to subsequent trials.

Such a drug would go some way to addressing America’s significant anti-vax movement, but health authorities have insisted the drug should not be considered an alternative to vaccines, which remain a far stronger covid defence. The fact US hospitality/leisure stocks all took off again on the news suggests another arrow in the quiver can only be positive for the reopening trade.

Thus on a combination of lower yields and improved sentiment, within the last hour the Dow was up 650 points. A similar move was seen in the S&P500, with investors deciding that -5% achievement was a green light.

The last hour saw some selling, and indeed last-hour selling has been a bit of a pattern on Wall Street in the past several up-days, while down-days have typically seen closes at or near the day’s low. This signals investors are wary of taking positions home overnight, with all that’s going on at present.

One of the areas of concern is inflation. The US PCE inflation numbers for August, released on Friday night, showed a 0.4% increase at the headline to a thirty-year high 4.3%, up from 4.2% in July, and a core rate unchanged at 3.6%, which was also a thirty-year high.

The reason the PCE numbers fall short of the equivalent CPI numbers, which are running above 5%, is that the PCE measure does not include “shelter”, meaning house prices and subsequent rents, both of which have been surging in 2021 in the US.

And core numbers, which the Fed prefers, do not include energy costs. Crude oil is up 58% year to date and natural gas is up 120%. Nor do core numbers include food prices, which are also rising on supply/labour shortages.

Another concern is the fate of Biden’s massive infrastructure package, which has to be agreed on between Democrats before even attempting to tackle the Senate. With no progress having been made to date, Biden made a rare visit to Capitol Hill after the market closed on Wall Street to meet with Congressional members, hoping to break the stalemate.

He failed. A small left faction of the party is against the make-up of the bill, and all need to be on board to ensure any hope of passage.

“It doesn’t matter when – it doesn’t matter whether it’s in six minutes, six days, or six weeks – we’re going to get it done,” Biden said, as he left the Hill.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz)	1761.00	+ 3.80	0.22%
Silver (oz)	22.53	+ 0.37	1.67%
Copper (lb)	4.13	+ 0.07	1.71%
Aluminium (lb)	1.29	+ 0.00	0.04%
Lead (lb)	0.98	+ 0.02	2.56%
Nickel (lb)	8.28	+ 0.08	1.02%
Zinc (lb)	1.36	+ 0.01	0.41%
West Texas Crude	75.88	+ 0.85	1.13%
Brent Crude	79.13	+ 0.61	0.78%
Iron Ore (t)	117.00	– 1.25	– 1.06%

The base metal sell-off on Thursday night could be attributed to a Chinese manufacturing sector now in contraction, but the bounce-back on Friday night, with China on holiday,  suggests commodity funds may have been in there playing end-of-quarter games as well.

Iron ore has slipped again despite China’s absence.

Oil prices keep on keeping on due to supply shortages, but tonight’s OPEC meeting may alter that situation.

With the US dollar dipping again, the Aussie is up 0.4% at US$0.7260.

The SPI Overnight closed up 52 points or 0.7% on Saturday morning.

The Week Ahead

The market is open today but with NSW on holiday it should be a quiet affair, although possibly volatile on low volume.

China is also closed up to Friday.

The RBA will meet tomorrow with no policy change expected, and it will not be until February the board reassesses tapering. The economy is expected to explode out of the blocks once lockdowns are lifted and for Sydney, that should be only a week away.

Tomorrow will also bring September job ads along with final revisions for August retail sales and trade.

The RBNZ meets on Wednesday.

September services PMIs are due across the globe tomorrow.

The US will see numbers for factory orders and trade this week but more importantly, September jobs numbers. Private sector data on Wednesday and non-farm payrolls on Friday will be the first accounting of the end of covid-bonus unemployment benefits.

The local ex-dividend season is winding down but in its wake comes the AGM season, which begins to wind up from now ahead of an avalanche in the last two weeks of October.

A reminder that as of tomorrow morning, the NYSE closes at 7am Sydney time.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
COH	Cochlear	Upgrade to Neutral from Sell	Citi
EVN	Evolution Mining	Upgrade to Equal-weight from Underweight	Morgan Stanley
JBH	JB Hi-Fi	Upgrade to Buy from Neutral	Citi
ORI	Orica	Upgrade to Add from Hold	Morgans
S32	South32	Downgrade to Hold from Add	Morgans
SFR	Sandfire Resources	Upgrade to Buy from Neutral	Citi
SIQ	Smartgroup Corp	Downgrade to Neutral from Outperform	Credit Suisse
		Downgrade to Hold from Add	Morgans
		Downgrade to Accumulate 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)

All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts on the website and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided. www.fnarena.com

FNArena is proud about its track record and past achievements: Ten Years On

Click to view our Glossary of Financial Terms