The Overnight Report: Rolling Over

This story features COMMONWEALTH BANK OF AUSTRALIA, and other companies. For more info SHARE ANALYSIS: CBA

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

World Overnight
SPI Overnight	7368.00	– 2.00	– 0.03%
S&P ASX 200	7369.90	– 50.50	– 0.68%
S&P500	4688.67	– 12.23	– 0.26%
Nasdaq Comp	15921.57	– 52.28	– 0.33%
DJIA	35931.05	– 211.17	– 0.58%
S&P500 VIX	17.11	+ 0.74	4.52%
US 10-year yield	1.60	– 0.03	– 1.84%
USD Index	95.79	– 0.11	– 0.11%
FTSE100	7291.20	– 35.77	– 0.49%
DAX30	16251.13	+ 3.27	0.02%

By Greg Peel

Worst by a margin

Since the dawn of time, analysts have called Commonwealth Bank ((CBA)) – Australia’s biggest bank and biggest index weight – overvalued. Investors have forever scoffed, affording CBA a premium simply for its “bigness”. The housing market is a fundamental segment of the Australian economy, and CBA is the leading mortgage machine.

Heading into yesterday, six of the seven FNArena database brokers had Sell or equivalent ratings on CBA.

Yesterday the bank provided a quarterly update in the wake of full-year earnings reports from the other big three. Those reports had provided a warning – low interest rates, fierce mortgage competition and the shift to lower value (to the bank) fixed-rate mortgages were hurting net interest margins – the difference between a bank’s borrowing rate and lending rate, aka most of their profit.

CBA’s closest mortgage rival, Westpac ((WBC)), was the first to reveal such pressure, and fell over -4% on the day. The other two reported similar problems but are not as big in home loans.

Yesterday CBA revealed that it, too, had suffered. Indeed, the bank’s fall in net interest margin was so bad management was too scared to admit the actual number, only to say it was “considerably lower”. Shares in Australia’s biggest company fell -8.1%. On a day when the ASX200 as a whole fell -50 points, CBA was -46 of them.

CBA’s report also dragged down the other three, but worst was ANZ Bank ((ANZ)) on -2%. The financials sector fell -2.7%; next worst was materials (-0.9%).

The other big release on the day was Australian September quarter wage growth. Wages grew 0.6% in the quarter to be up 2.2% year on year, closer to pre-pandemic conditions. Was this good or bad?

Either, judging by market reaction. The Aussie ten-year yield jumped 8 points to 1.84% while the Aussie dollar has dropped -0.5% to US$0.7265 with the US dollar also weaker. The number can be considered solid given lockdowns in the period, but it is way behind numbers seen in the US, UK and even New Zealand.

Yet so, too, was Australia’s CPI in the period, at 3% compared to over 5% in the US. Inflation signs seem a lot more muted downunder. But 3% inflation minus 2.2% wage growth means negative real wage growth. That’s not good news for banks, although yesterday was not the day to assess a response.

Economists expect that having been hindered by lockdowns, wage growth will accelerate in the new year to reach the RBA’s target 3% by the second half. ANZ Bank’s economists then see the first RBA rate hike in early 2023.

Elsewhere on the stock market, and ignoring technology, telcos rose 0.9% after an update from telco infrastructure company Uniti Group ((UWL)) was worth a chart topping 8.3%. Utilities rose 1.2% on a 3% gain for AGL Energy ((AGL)).

The other train wreck of the day, exceeding CBA with an -8.6% drop, was Nufarm ((NUF)) on an earnings miss. This would have taken the market by surprise, as agri-chemical peers reporting this week have blown forecasts away.

Ask not for whom the bell tolls

Amazon announced last night that as of next year, it would no longer accept Visa payments in the UK due to too-high fees. Amidst the rise and rise of BNPL this year, old hands Visa and Mastercard have seen their share prices gradually slipping away.

Visa fell -6.8% to a nine-month low. Last night Goldman Sachs’ CEO, in reference to Wall Street’s 2021 surge, warned greed had replaced fear and in such cases it usually ends in tears. Wall Street responded by selling Goldman Sachs – the highest price stock in the Dow average — down -2.9%.

Together the two stocks represented about 80% of last night’s Dow underperformance.

Target, which is a much more expansive discount department store chain in the US than here, is a good bellwether for whether surging wholesale costs can be passed on into higher retail prices.

They couldn’t, or at least Target wasn’t prepared to take the risk. Margin pressure evident in Target’s earnings result had that stock down -4.7%, and similar falls were posted by yet-to-report department stores like Macy’s and Kohl’s.

The mind-blowing surge in new EV names in the last few sessions, which saw recently IPO’d Rivian climb to a market cap greater than each of Ford, General Motors and Volkswagen, while yet to sell a vehicle, finally came to an end last night as profit-takers moved in. Rivian fell -15% while rival Lucid, which had also briefly pipped GM’s market cap, fell -5%.

Investors switched back into Tesla (+3%) now Elon has stopped selling stock, driving the share price -15% lower this month. Indeed, Big Tech names were the place to be last night and small gains for the biggies made falls across the Nasdaq and S&P500 look not as bad as the underlying tone suggested.

Maybe Goldman’s CEO struck a chord.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz)	1864.70	+ 14.20	0.77%
Silver (oz)	24.99	+ 0.19	0.77%
Copper (lb)	4.32	– 0.08	– 1.92%
Aluminium (lb)	1.19	+ 0.01	1.01%
Lead (lb)	1.05	– 0.02	– 1.91%
Nickel (lb)	8.90	– 0.01	– 0.12%
Zinc (lb)	1.47	+ 0.01	0.69%
West Texas Crude	78.54	– 2.22	– 2.75%
Brent Crude	80.65	– 1.83	– 2.22%
Iron Ore (t)	89.95	– 0.45	– 0.50%

The WTI crude price had pulled back -5% from its high while in that time US gasoline prices at the pump rose 3%, prompting Biden, who officials say is under “extreme pressure” to do something about crippling fuel costs, to write a letter to the regulator asking for an investigation.

Australians know this story all too well. Every such investigation here has led nowhere, given a misunderstanding of crude oil-to-pump price lags, costs associated with selling petrol and significant fuel taxes.

But Biden’s ire only suggests a big release from the US Strategic Oil Reserve is in the offing. Oil prices responded accordingly last night.

The US dollar stopped rising last night. It didn’t do much for base metal prices but gold bounced back from Tuesday night’s fall.

The Aussie is down -0.5% at US$0.7265.

Today

It appears the bad day on the ASX yesterday was enough not to react too stridently to last night’s falls on Wall Street. The SPI Overnight closed down only -2 points.

Aristocrat Leisure ((ALL)) reports earnings today.

There is another long list of AGMs.

James Hardie ((JHX)) goes ex.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
AZJ	Aurizon Holdings	Downgrade to Neutral from Buy	UBS
CAJ	Capitol Health	Upgrade to Buy from Accumulate	Ord Minnett
LOV	Lovisa Holdings	Upgrade to Outperform from Neutral	Macquarie

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

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