The Overnight Report: Hold Back The Bears

This story features XERO LIMITED, and other companies. For more info SHARE ANALYSIS: XRO

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

By Greg Peel

Nowhere to Hide

Following another weak session on Wall Street the ASX200 again opened down through 7000 yesterday morning but, again, the buyers were ready. The index recovered to 7026 at 11am.

It’s not clear what happened at that point, but from there the index tracked a steady path downward to the close – the first below 7000 since early March. We did see building approvals print an -18.5% fall in March, but only after rising 42% in February (apartment block lumpiness). And the iron ore price, which bounced on Wednesday, turned south once more.

But you know you’re starting to see capitulation selling when oil prices jump 6% and the energy sector closes down -2.3%. Both energy and materials were in the green in the morning, but materials closed down -1.8%. Consumer staples – the safe haven – fell -1.8%.

Communication services, consumer discretionary and real estate all fell around -2%. All sectors closed in the red. The standout among those was technology, down -8.7%.

Xero ((XRO)) reported earnings and fell -11.6%. Altium ((ALU)) reported nothing and fell -16.7%. Megaport ((MP1)) had nothing to say either and fell -9.7%. Block ((SQ2)), which is heavily invested in crypto, fell -17.6%.

CSR ((CSR)) reported on Wednesday to little fanfare but yesterday fell -9.6%. Industrial peer Orica ((ORI)) reported yesterday and jumped 4.7% to be one bright light on a dark day. Next best on the index was AGL Energy ((AGL)), with a mere 1.7% gain.

Another bright light was Commonwealth Bank ((CBA)), which rose 0.6% on its quarterly update and helped keep the financials sector to only a -0.8% fall on the day, second “best” after utilities (-0.6%).

Healthcare’s recent defensive status was hit by a -1.8% drop in CSL ((CSL)) after announcing the Vifor acquisition may take longer to complete. The healthcare sector fell -1.8%.

So, where are we left?

Well the good news, if you call it that, is that the ASX200 is down only -8.5% from its April high (when commodity prices were surging), and the same year to date. Our tech sector may have been taken to the cleaners but on Wall Street the tech impact is far more index-damaging.

It’s not looking good on the commodity price front this morning, with base metals, iron ore and gold all taking a turn for the worse again. But with Wall Street fighting back from another big loss last night, our futures are only down -5 points this morning.

End of the rubber band?

US wholesale inflation showed signs of having peaked last night when the headline PPI came in at only a 0.5% month on month gain for April, having jumped 1.6% in March on surging fuel costs. The annual rate fell to 11.0% from 11.5%.

But economists had forecast 10.7%. The core rate at least fell to 8.8% from 9.2% when 8.9% was expected.

The upshot of this week’s CPI and PPI releases is that yes, it looks like inflation has peaked, but on the incremental falls, when the numbers are cycling last year’s huge leaps, it is going to take a long time for inflation to settle back to more “normal” levels.

The Dow fell -600 points. The Dow, S&P500 and Nasdaq were down around -2% at the lows.

Then two things happened. Jerome Powell was approved by Congress to serve another four-year term as Fed chair. Despite the fact Wall Street has long believed the Fed to be way behind the curve (and still way behind), this was suggested as a positive. Better the devil you know.

The more likely trigger for a last-hour bounce was the fact the S&P500 confirmed a -20% fall from its high. As I noted yesterday, a -5% fall for Apple on Wednesday night brought all the original FANGs to a -20% fall or more (Facebook -50%, Netflix -75%), and another -5% fall last night through that level was rather ominous.

But Apple is seen as the Wall Street bellwether, and when it lost its status as world’s largest company to Saudi Aramco mid-session well something just had to be done. It is not unusual for the S&P500 to find a floor at -20% down, so on both counts the indices came rapidly back from that brink. Apple closed down -2.7%, and remains number one.

What was most notable about last night was that the falls to the lows on the day were yet again attributable to Big Tech – notably Apple, Microsoft and Nvidia – while the absolutely creamed not-yet-profitable stocks found some buyers (most likely short covering).

On that note, leading US BNPL lender Affirm reported earnings after the bell this morning and is currently up 32% in the aftermarket. That is, nonetheless, after a -90% fall from its November high.

Maybe some glimmer for our local Blockheads and Zippers today.

So again we might ask: are we there yet? Well, down -20% for the benchmark index may be the best chance yet, but then we have been looking for bottoms for a while.

The US ten-year yield fell another -10 points to 2.82% last night which is likely less a response to lower PPI numbers and more a case of what I noted yesterday – investors bailing out of stocks and into bonds.

Commodities

There was no specific news to re-trigger big falls in metals and mineral prices last night. Traders suggest the market simply succumbed to volatility in global equities. We note the Hang Seng fell another -2.2% yesterday despite the PBoC “doing a Draghi” in pledging whatever it takes to save the Chinese economy.

Gold had been holding up as a safe haven this week but last night dropped suddenly. This may be another sign of capitulation being reached in equity markets, if underwater investors being margin-called are having to sell anything that has not been hammered.

From the point of view of Aussie gold, and other commodities, another -1.2% drop in the Aussie to US$0.6859 provides some saving grace.

But that holiday in Paris you were considering, and that Lamborghini you were looking to buy?

Today

The SPI Overnight closed down -5 points.

The US will see consumer sentiment data tonight.

Avita Holdings ((AVH)) reports quarterly earnings and West African Resources ((WAF)) holds its AGM.

Janus Henderson ((JGH)) goes ex.

The Australian share market over the past thirty days…

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