The Overnight Report: Fizzling Out

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

The company is included in ALL-ORDS

By Greg Peel

Shooting Star

After a flattish session on Wall Street on Friday night, our futures were showing down a non-committal -4 points on Saturday morning. But yesterday within forty minutes the ASX200 was down -70.

It would seem news that The Star Entertainment Group ((SGR)) was not so squeaky clean after all opened a big hole.

If it walks like a duck and talks like a duck…

Star’s early plunge, leading ultimately to a -22.9% loss on the day, appeared to spook the market, or at least confuse the computers. Star’s market cap is less than half of rival Crown Resorts' ((CWN)) and around a fifth of supplier Aristocrat Leisure ((ALL)), but there were reverberations. Aristocrat fell -1.5% and Crown -3.3% while yet-to-be-tested SkyCity Entertainment ((SKC)) fell -5.4%.

When the computers halted their shenanigans in the opening rotation, the index spent the rest of the day making its way back to a more modest loss but it required resource sector strength to do the heavy lifting. Energy (+1.3%) and materials (+1.2%) posted the only meaningful gains, with staples (+0.2%) and the banks (flat) hanging in there.

The banks were down early but came back on yet another big jump in bond yields. The Aussie ten-year jumped 7 basis points to 1.71%, possibly on the excitement of Freedom Day in Sydney.

Bond yields took their toll on the yield-paying sectors, with property, telcos, utilities and industrials all weak. Healthcare was also out of favour (-1.3%) and the gambling industry sent discretionary down -1.5% on what otherwise should have been a happy day for the retail sector.

Technology fell hardest (-2.7%) on a big fall in Square.

The top five index winners were all miners, led out by Whitehaven Coal ((WHC)). Flooding in China has shut down domestic mines and coal prices have hit record highs. Iron ore miners otherwise featured heavily.

The Chinese came back from holiday and bought iron ore with their ears pinned back on Friday, which it seems set off a bit of a short-squeeze yesterday (+9.5%).

Resource sectors will have to do the heavy lifting again today. A nervous Wall Street had the S&P500 down -0.7% overnight but all commodity prices (ex-precious) have shot the lights out overnight. WTI crude closed above US$80/bbl.

Our futures are down -0.4% this morning.

Earnings Nerves

Wall Street was encouraged that a bottom had been put in last week following the September swoon and October blues but Friday’s jobs report stopped it in its tracks. The report needed more analysis.

Digging down, there are three reasons that stand out as to why Americans are not rushing back to work as expected: (1) given the variation across states of back-to-school policies, many women remain stuck at home to look after the kids; (2) covid has driven increased growth in the number of older workers choosing to retire; and (3) new migrants are not entering the workforce in typical numbers, because there aren’t any.

At least two of those issues could be seen as “transitory”. But labour force issues are only half the problem.

Wall Street tried to kick on from the open last night but slowly sentiment faded, before selling picked up towards the close.

The US September quarter result season kicks off on Wednesday night, starting with the big banks, and picks up pace quickly into the peak that is the third week. Financials aside, it is expected that virtually no company will not have been impacted in the quarter by supply-side delays and soaring freight costs. Earlier out-of-cycle earnings results have driven this home.

Analysts have been madly bringing down their earnings forecasts as a result, but is the market still underestimating the impact? It’s a question that can only be answered when the numbers start to drop, and that has Wall Street nervous.

Playing into the same theme will be Wednesday night’s September CPI numbers and Thursday’s PPI, followed by retail sales on Friday night.

One aside is that retail analysts suggest there may be no discounting going on this year in the usual Thanksgiving spree, given pressure on margins meeting pent-up demand. And warnings continue that if you haven’t ordered your Christmas presents by now, you may not get them in time.

US earnings seasons are lengthy but the bulk of the S&P500 reports this month. While October is historically the most volatile month, if there isn’t a crash on the 29^th then typically the back half is when the seasonally positive run into the end of the year begins. But typically, earnings seasons bring about more beats than misses.

It may still prove to be the case this year, but Wall Street is not confident enough to back that hope at this stage.

Commodities

The largest provincial economy in China's northeast “rust belt” on Monday warned of worsening power shortages despite government efforts to boost coal supply and manage electricity use in a post-pandemic energy crisis hitting multiple countries, Reuters reports.

China is taking steps to try to alleviate tightness in the domestic coal market by pushing local mines to increase output. However, about 60 coal mines in China's largest coal-mining province, Shanxi, have been closed and several railway lines disrupted since Friday after heavy rain caused flooding.

Does anyone know where China might be able to buy some coal?

Supply shortages and production shut-downs in China are reverberating throughout commodities markets.

To that extent prices were not constrained last night by a 0.3% increase in the US dollar index, and nor has the Aussie, which despite the greenback is up 0.5% at US$0.7348. To trace the mismatch you need go to the euro and pound in particular, where energy shortages are ominous heading into the northern winter.

Today

The SPI Overnight closed down -27 points or -0.4%.

The NAB business confidence survey is out today.

Aurizon Holdings ((AZJ)), CSL ((CSL)) and Telstra ((TLS)) hold their AGMs and ASX ((ASX)) provides an update.

The Australian share market over the past thirty days…

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