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Overnight: Are We Fine With Four?

World Overnight
SPI Overnight (Jun) 6022.00 – 5.00 – 0.08%
S&P ASX 200 6023.50 – 30.90 – 0.51%
S&P500 2775.63 – 11.22 – 0.40%
Nasdaq Comp 7695.70 – 8.09 – 0.11%
DJIA 25201.20 – 119.53 – 0.47%
S&P500 VIX 12.94 + 0.60 4.86%
US 10-year yield 2.98 + 0.02 0.68%
USD Index 93.58 – 0.24 – 0.26%
FTSE100 7703.71 – 0.10 – 0.00%
DAX30 12890.58 + 48.28 0.38%

By Greg Peel

Risk Off

The local market experienced a rather sharp turn in sentiment yesterday after having moved very little from before to after the long weekend. With the Trump-Kim summit out of the way, perhaps investors decided it best not to take the chance on this week’s run of central bank meetings.

The standout sector on the day was utilities, up 8.2% thanks to a 21% jump for APA Group ((APA)) following a Chinese takeover offer which provided a boost for all infrastructure stocks. Not sure what FIRB will think of the Chinese owning our major pipelines.

An offer for Gateway Lifestyle Group ((GTY)) saw that stock up 14.8%, lifting similar residential stocks.

Otherwise, industrials and telcos did little but all all other sectors were sold down by similar amounts.

The solid run for the consumer sectors recently sharply reversed, as was the case for energy. Materials continued to pull back and just when we thought perhaps selling in the banks was close to being complete, down they went again.

Outside of the noise it was very much a risk-off session which largely fed off itself through the morning, before a choppy afternoon.

Selling in consumer sectors was blind to yesterday’s Westpac consumer confidence survey result, which showed an increase to 102.1 from 101.8. The run to date in 2018 has been the best since 2014 but only to levels considered “slightly optimistic”. Confidence in the economy is solid, following last week’s GDP result, but views around family finances remain downbeat.

RBA governor Philip Lowe warned yesterday that the current slow pace of wages growth is not compatible with the central bank’s goal of keeping inflation 2.5% and as such is eroding the nation’s “sense of shared prosperity”, which is pretty much exactly what the Westpac survey numbers suggest, and makes much needed productivity enhancing economic reforms more difficult to achieve.

Not sure what to do with that information.

Four in Hand

Ahead of the release of last night’s Fed statement, Wall Street was pricing in a 100% chance of a rate hike and was split down the middle on whether there would be one or two more in 2018. The FOMC did indeed raise its funds rate by 25 basis points to 1.75-2.00%, and it was revealed eight of the fifteen voting members now expect four hikes in total in the year, up from seven at the May meeting.

The odds are now thus tipped in favour of rate hikes in both September and December.

Had this been the news earlier this year, Wall Street would have had a coronary. As it was, the usual computer-driven argie-bargie immediately followed the statement release, but not a straightforward plunge. The US ten-year yield shot up to 3%, and then dipped back again. The US dollar followed the same path.

As the closing bell approached stock market selling picked up pace. But commentators were quick to point out that the response was rather muted considering just how fearful Wall Street was of four rate hikes when the issue was the hot topic a few months ago. Balancing that fear in the interim have been undeniably strong US economic data, particularly low unemployment. The normalisation of rates is fine if such growth can be maintained.

Fed chairman Jerome Powell also noted at the press conference that the FOMC is cognisant of not raising rates too quickly, thus risking a recession.

Powell also announced that as of next January, every Fed meeting will be accompanied by a press conference, not just the quarterly meetings. It is clear Powell wishes to lift the level of communication with the market.

We will now wait to see what transpires tonight, for two reasons. One is that the “real” response to a Fed statement comes in the following session, after investors have had a night to absorb the implications. But the other is that by the time they’ve figured that out, the ECB will also be in focus as Mario Draghi holds a press conference.

Another box has been ticked in this week’s busy calendar, but the big one is tonight.


Spot Metals,Minerals & Energy Futures
Gold (oz) 1298.80 + 3.60 0.28%
Silver (oz) 17.01 + 0.17 1.01%
Copper (lb) 3.29 + 0.02 0.65%
Aluminium (lb) 1.02 – 0.01 – 1.16%
Lead (lb) 1.12 + 0.00 0.34%
Nickel (lb) 7.06 + 0.19 2.81%
Zinc (lb) 1.47 + 0.01 0.60%
West Texas Crude (Jul) 66.62 + 0.60 0.91%
Brent Crude (Aug) 76.54 + 1.01 1.34%
Iron Ore (t) 65.80 – 0.15 – 0.23%

Another week, another “surprise” US inventory result for oil. A greater than expected fall in supplies had WTI up a percent, but it’s been up and down all week.

After a quiet few sessions, base metals were a bit more volatile last night. The weaker US dollar, down -0.3%, provided support for all bar aluminium. Nickel was back to its old self.

The Aussie is little changed at US$0.7576.


The SPI Overnight closed down -5 points, suggesting yesterday’s move for the ASX200 already accounts for Wall Street weakness.

The local jobs numbers for May are out today.

China will release May retail sales, industrial production and fixed asset investment data.

US retail sales are due tonight, from April.

The ECB meeting is the hot ticket item. Is the end of eurozone QE nigh?

Air New Zealand ((AIZ)) and Goodman Group ((GMG)) host investor days today.

Rudi has returned from his on-stage presentations in Queensland, but has further commitments today, hence why he won't appear on Sky Business during his usual weekly time slot today.

The Australian share market over the past thirty days…

AST AUSNET SERVICES Upgrade to Neutral from Sell Citi
CIP CENTURIA INDUSTRIAL REIT Downgrade to Hold from Add Morgans
CTX CALTEX AUSTRALIA Upgrade to Outperform from Neutral Macquarie
    Upgrade to Buy from Hold Ord Minnett
MTS METCASH Upgrade to Buy from Neutral UBS
RIO RIO TINTO Downgrade to Hold from Buy Deutsche Bank

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

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