The Overnight Report: Buy The Fact

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

Picked the Wrong Day

Yesterday was always going to start badly on the ASX irrespective of geopolitics – not mathematically but in terms of sentiment. BHP Group’s ((BHP)) dividend was in the end worth some -40 index points, and there were also big numbers coming out of Woodside Petroleum ((WPL)) and Whitehaven Coal ((WHC)), plus a handful of other stocks went ex-div as well.

It’s zero-sum, but doesn’t look good on a day which started with an invasion being imminent, and ended with it underway.

It was also not a good day to post an earnings miss. It was not a great day to post a beat either, if companies were looking for some share price relief.

Suffice to say not one of the top five index winners on the day posted earnings on the day. The podium was made up of Cimic Group ((CIM)), after its majority shareholder bid for the remainder of the stock and sent the share price up 33%, and four gold miners, as gold was about the only shining light on the day.

By contrast, the index losers board was topped by earnings reporters Life360 ((360)), which fell -28.8%, Appen ((APX)), -28.7%, and Clinuvel Pharmaceuticals ((CUV)), -17.3%.

Step outside the index and we find more reporters. City Chic Collective ((CCX)) fell -30.9%, Midway ((MWY)) -24.0%, and Nitro Software ((NTO)) -14.6%.

So big were the numbers that poorly received results elsewhere in the index were lost in the wash. Qantas ((QAN)) fell -5.1% and Flight Centre ((FLT)) -10.1%.

As I said, it was not a good day to post a miss, and beats went through to the keeper. Except one. Hats off to Lovisa Holdings ((LOV)). To rally 11.8% on result in yesterday’s market was an astonishing achievement.

Interesting that anything “tech”, either in the sector itself or existing in cyberspace, was again jettisoned yesterday, as has been the case all week. The tech sector plunged -6.4%. Lovisa is a bricks & mortar retailer.

Excluding ex-dividend impacts, the hardest hit sector yesterday in terms of market cap destruction was financials, which had been so looking forward to RBA rate rises. As to whether the invasion of Ukraine is a game-changer for the RBA is unclear, but Lowe is currently less hawkish than Powell in his thinking. Our ten-year bond yield fell -4 points to 2.16%.

The good news, as we look ahead to today, is while there is still another sizeable round of earnings reports due, the numbers are nothing like yesterday’s. There is another long list of ex-divs, but no BHPs. Newcrest Mining ((NCM)) will have the biggest impact.

The other good news is Wall Street has bounced. As the ASX was heading to the close yesterday, US index futures were tanking. Last night’s turnaround has our futures up 85 this morning.

Relief at the Pump

As the closing bell rang on the ASX yesterday, the Nasdaq was on its way to a fall of -3.5%, as indicated by the futures ahead of the opening bell on Wall Street. At the closing bell in Times Square, it was up 3.3%.

Actuaries are aghast at such a multiple standard deviation swing.

The Nasdaq bottomed at the -20% correction level, just as it had done in last month’s Fed-scare. The Dow hit a low of down -700 early in its session, with both it and the S&P500 passing the -10% correction mark, but closed up 92.

The initial buy-the-fact trade was kindled by the Nasdaq bottom, but initially the bounce was timid. The kicker came in the afternoon, when President Biden again took to the podium to announce the next round of sanctions.

More Russian bank assets will be frozen, more oligarchs have been targeted and Russia remains unable to access Western capital markets. What was nonetheless important was what was not announced. For now, at least, there will be no sanctions on Russian energy exports and Russia will not be expelled from the global SWIFT payment system.

The reason is simple: cut off Russian oil and gas exports and you cripple Europe. And if the energy still flowed but Russia was kicked out of SWIFT, there’d be no way to pay for it.

Furthermore, there is a fear if Russia was kicked out of SWIFT it would simply hook up with China to create an alternative payment system.

After weeks of tumbling on an “imminent” invasion, at some point the impact of that invasion had to already be priced into Wall Street. Recent history suggests the turning point comes when the war actually begins. This was the case in both Gulf War I and II. Once Biden effectively gave Wall Street the green light, the panic was to the upside. The buy-the-fact trade was on.

As for the extraordinary Nasdaq turnaround, the added extra is that a war and sanctions will represent a new issue the Fed has to consider. One particular consideration is that of oil prices. Brent traded at US$105/bbl last night and WTI at US$100/bbl before it Biden assured no energy export bans. But oil prices are not going right back down to whence they came.

Oil is inflation, which the Fed needs to target. Russia is also a major global exporter of palladium, platinum, wheat and fertiliser. Ukraine is Europe’s main source of corn. Russia is also big in aluminium and nickel.

More inflation.

Can the Fed rush to raise rates to fight inflation in the full knowledge it will be kicking an economy while it’s down?

Behind the Nasdaq rebound was also an assumption there’s no way the Fed could go 50 basis points in March.

Is the bottom now in on Wall Street? You’ll have to ask Mr Schrodinger.

Commodities

Talk about your turnarounds. Gold traded up to US$1975/oz last night.

You wouldn’t know the oils had been up to the ton.

We can see the impact on aluminium and nickel.

The US dollar played safe haven, rising 0.8%, so the Aussie is down -0.9% at US$0.7165.

Today

The SPI Overnight closed up 85 points or 1.2%.

The US will see January PCE inflation tonight, along with durable goods and consumer sentiment.

As noted, the results season peak was yesterday and the numbers are not as daunting today. There’s one more smallish round on Monday before the season comes to a close.

The number of stocks going ex today is nevertheless the largest to date.

For upcoming earnings result dates, and a summary of results to date, please refer to the FNArena Corporate Results Monitor.

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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