The Overnight Report: Much To Consider

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World Overnight
SPI Overnight	7186.00	– 26.00	– 0.36%
S&P ASX 200	7211.20	– 75.40	– 1.03%
S&P500	4132.15	– 26.09	– 0.63%
Nasdaq Comp	12081.39	– 49.74	– 0.41%
DJIA	32990.12	– 222.84	– 0.67%
S&P500 VIX	26.19	– 0.35	– 1.32%
US 10-year yield	2.84	+ 0.10	3.68%
USD Index	101.78	+ 0.42	0.41%
FTSE100	7607.66	+ 7.60	0.10%
DAX30	14388.35	– 187.63	– 1.29%

By Greg Peel

End of Month

It appears yesterday’s turnaround for the ASX200, following the strong rally on Monday, was as much about end-of-month squaring than anything else given a 5% rally for the index from mid-May. A -20 points drop on market-on-close orders supports this assumption.

Otherwise, news around the traps was mixed.

Locally, March quarter company profits came in hotter than expected at a 10.2% increase. It was all about mining profits however, which rose 25% compared to a -1.1% fall in non-mining ex-finance. There was also a complication in a larger than expected rise in inventories, reflecting a need to counter global supply shortages, being priced at end-of-quarter levels rather than purchase price.

A higher inventory valuation feeds into profits.

The current account surplus otherwise fell short of forecasts, coming in at $5.7bn against $13.2bn expectation. A big jump in export prices lifted export value despite lower volumes, while a big jump in imports (reopening after lockdowns) included higher volumes and prices.

The bottom line is economists ticked up their expectations for today’s GDP result, with consensus around 0.7% growth.

China’s May PMIs were mixed. Manufacturing rose to 49.6 from 47.4 as expected while services rose to 47.8 from 41.9, missing a 50.7 forecast and leaving both PMIs in contraction.

Shanghai’s gradual reopening begins today and Beijing has already begun to ease restrictions.

The EU reached an agreement to ban 90% of Russian oil imports by year-end, not including pipeline oil in order to assuage Hungary. There has since been more news on the oil front. Details below.

The mood was clearly a bit solemn at yesterday’s Australian Financial Review Banking Summit, as the financials sector fell -2.0% to post the highest percentage loss and by far the biggest weight on the index as a result. Insurers were harder hit than banks, as once again the weather turns wild.

The drop came despite a 10 point jump in the Aussie ten-year yield to 3.35% on the economic data.

All sectors closed in the red yesterday by varying amounts, with telcos (-1.7%), discretionary (-1.5%) and technology (-1.9%) the worst performers outside financials.

Even energy was weak (-0.5%) despite another rise in oil prices.

Obviously, higher oil prices are good for the energy sector but not so good for everyone else, which would go further to explain the fall in consumer discretionary, for example.

But if yesterday showed shades of book-squaring, there’s no sign of back to business in June with the futures down -26 points this morning on Wall Street weakness.

Back to Volatility

There were some volatile sessions featuring lots of intraday ups and downs on Wall Street prior to the major indices posting 6-7% gains last week. Last night saw a return to those ups and downs.

The session started badly after Fed governor Christopher Waller said he supported 50 point rate hikes for several meetings until inflation comes down closer to the Fed’s 2% target. This is in contrast to Jerome Powell, who has effectively locked in two 50 pointers before pausing for reassessment, maybe moving to only 25 pointers thereafter.

Wall Street’s main concern is the Fed will be too aggressive in hiking rates at the same time it is reducing its balance sheet, leading to a liquidity shock that derails markets. The Dow was down -460 points early and the US ten-year yield shot up, before settling back to a 10 point gain to 2.84%.

Wall Street fought back and spent the afternoon hitting the flatline, falling back, and then hitting it again. Ultimate falls came only at the death, which again likely reflected end-of-month squaring.

The Conference Board’s monthly consumer confidence index has fallen to 106.4 from 108.6 suggesting confidence is waning, but not yet into pessimism territory (100-neutral). This is in contrast to Michigan Uni’s bi-monthly sentiment index which last week was well under 100 to mark its lowest level in ten years.

Oil prices were on the rise in the session on the EU news, before falling back again on news OPEC is considering suspending Russia from OPEC-Plus production negotiations, with the next meeting planned for Thursday night.

The S&P500 energy sector ended up being the worst performer on the day, down -1.7%.

After the bell, enterprise software giant and Dow component Salesforce reported earnings and is up 7.6% in the aftermarket, which may bode well for tonight, all things being equal.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz)	1837.40	– 16.80	– 0.91%
Silver (oz)	21.52	– 0.43	– 1.96%
Copper (lb)	4.28	– 0.02	– 0.51%
Aluminium (lb)	1.36	– 0.04	– 3.00%
Lead (lb)	0.98	+ 0.01	0.52%
Nickel (lb)	12.62	– 0.31	– 2.36%
Zinc (lb)	1.79	+ 0.02	1.30%
West Texas Crude	115.27	– 1.90	– 1.62%
Brent Crude	122.84	+ 1.17	0.96%
Iron Ore (t)	135.02	+ 1.42	1.06%

EU leaders had failed to reach an agreement on Russian oil bans before the open of the ASX yesterday, but said a deal was close. An indeed a deal was close, the EU now agreeing to ban 90% of all imports by year-end, beginning with seaborne imports while allowing concessions on pipeline oil for the likes of Hungary.

The EU has also moved to exclude Russia’s biggest bank – Sberbank – from SWIFT.

Russia shrugged off the EU bans, saying it would find buyers elsewhere, but seaborne exports will be complicated by sanctions on shipping companies and insurance companies and banks, meaning Russia may not find it so easy to get oil to China, India and Turkey, for example.

While a ban was anticipated, oil prices were up again last night until OPEC announced it is considering suspending Russia from production quota setting. OPEC-Plus is due to make another incremental increase in production but one reason the Saudis and others have not increased production by a larger amount, in light of the war, is because Russia has argued against it.

Take Russia out, and big producers Saudi Arabia and the UAE are free to increase production as they see fit, dependent on spare capacity.

This would not only go some way to countering the impact of EU bans, but also an expected bounce-back in demand from China as lockdowns ease.

The result is an increase in the price of Brent oil overnight, but a fall in WTI, to force a substantial spread between the two prices that recently were almost at parity.

Outside oil, the jump in US bond yields hit gold, while the Aussie is off -0.3% at US$0.7179.

Today

The SPI Overnight closed down -26 points or -0.4%.

Australia’s GDP result is out today, along with May house prices.

Wall Street will see May private sector jobs.

Being the first of the month, manufacturing PMIs are due across the globe.

Sezzle ((SZL)) holds its AGM today and Worley ((WOR)) hosts an investor day.

Western Areas ((WSA)) shareholders will vote on the proposed merger with IGO ((IGO)).

United Malt ((UMG)) goes ex.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
ABP	Abacus Property	Upgrade to Hold from Lighten	Ord Minnett
CMW	Cromwell Property	Downgrade to Hold from Buy	Ord Minnett
DXS	Dexus	Downgrade to Hold from Buy	Ord Minnett
MGR	Mirvac Group	Upgrade to Accumulate from Hold	Ord Minnett
MQG	Macquarie Group	Upgrade to Buy from Accumulate	Ord Minnett
PX1	Plexure Group	Upgrade to Buy from Hold	Ord Minnett
SCP	Shopping Centres Australasia Property	Downgrade to Lighten from Hold	Ord Minnett

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

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