Overnight: Kicking On

By Greg Peel

Positive Sentiment

The media continues to refer to it as “trade war escalation”, and justifiably so, following confirmation of Trump’s new round of tariffs and China’s immediate retaliation. But markets are playing it in the opposite direction, seeing light at the end of the tunnel.

One only need look at the Aussie dollar. Every time there has been an escalation in the trade war the Aussie has fallen on the risk to the economy that implies. But the currency was up 0.6% post the “escalation” and is up another 0.6% overnight. There is no doubt short-covering involved, but the point is the Aussie is moving in the other direction.

As is the stock market. If the Chinese economy weakens as a result of the trade war, China will need fewer rocks. BHP ((BHP)) was up 2.9% yesterday, driven by stronger commodity prices – copper and oil in particular – which also reflected relief rallies when on face value there is not yet any relief. The materials sector was the best performer with a 2.1% gain.

Energy was up 0.8%, with strength in both resource sectors defying the impact of the stronger currency.

The same was not true for healthcare (-0.8%) which currently is little more than currency-driven. Telcos fell -1.5% after the government confirmed a ban on Chinese involvement in the construction of Australia’s 5G network.

Utilities fell back -0.4% after a good run but otherwise all other sectors had positive sessions. Most notable were the banks, which gained another 0.7% on the “risk on” theme.

At the individual stocks level, four of the top five ASX200 gainers yesterday were miners. The odd one out was Costa Group ((CGC)) which gained 4.9%. Is it because the company sells blueberries and raspberries, but not strawberries? (There was also a broker upgrade on the day, see Broker Call Report yesterday).

It is interesting to note the top five losers’ board included two REITs and a property developer, a day after the US ten-year yield broke through 3.0%.

All month I have been warning of the influence of the number of stocks going ex-dividend, and the initial handicap that implies. The ex-divs are beginning to taper off, but we are now entering the point in the process when those dividends are actually paid to investors.

That cash will need to be reallocated, and here we can particularly focus on large fund managers. The offset of the ex-div initial handicap is all the money that will be fed back into the market.

As a case in point, all of Rio Tinto ((RIO)), Woodside Petroleum ((WPL)) and Alumina Ltd ((AWC)) pay out today. That’s quite a lump.

Banks Awaken

From the time Wall Street dipped back in March when Donald Trump blew reveille on the trade war, to the point we’re at now – almost back to the January highs – the US banks have not participated. It was expecting they would, but with the US yield curve close to flat, and the ten-year yield seemingly unable to rise despite Fed tightening, investors did not see the banks offering any earnings growth.

On Tuesday night the ten-year broke through the 3% barrier to 3.05% and last night rose again to 3.08%. The Fed is a sure bet to hike another 25 basis points next week but this past couple of weeks we’ve seen all of the ECB, Bank of England, and yesterday the Bank of Japan, keep their easy policies unchanged. The divergence between US economic strength and rest-of-world lack of strength is becoming more stark. At some point, US yields had to give way.

So have we finally seen the long awaited US yield breakout? We actually saw 3.12% earlier this year before the ten-year fell all the way back into the 2.8s once more. But last night the US banks finally awoke after months of slumber, leading the Dow and S&P higher as the Nasdaq again took a breather.

Dow outperformance was also supported by those same multinational industrials that were leading the charge on Tuesday night – the Boeings, Caterpillars, 3Ms etc that have a long way back to climb after bearing the brunt of trade war fears.

The S&P500 is now within a mere 0.3% of its January all-time high.

What trade war?

We might also note that Trump had insisted previously that any Chinese retaliation to the new US$200bn tranche would “automatically” trigger the final US267bn tranche. China has retaliated, but there was no announcement from the White House last night.

It is also typical for the Chinese stock market to fall further in any trade war escalation but yesterday the Shanghai Composite rose 1.1%. Given the Japanese market also rose 1.1%, commentators suggest strength was due to another handshake moment between the two Korean leaders amidst promises of denuclearisation. But the South Korean stock market was little moved.

The weekly US crude inventory lottery last night came up with a “surprise” drop, hence WTI is up another 2.4% and well over US$70/bbl. The US energy sector was another to post a strong performance last night.

Elsewhere, traders and commentators were having giggle fits watching the US listed shares of Canadian cannabis company Tilray fly around all afternoon following an agreement between the company and the DEA which allows Tilray to import cannabis from the US. The stock jumped by as much as 90% on the day (1600% above July IPO price) before being halted no less than five times due to excessive volatility. It finally closed up 38%, and then everyone had a bowl of cereal.

The irony of the DEA’s agreement is that US federal law prohibits anyone in the Canadian marijuana business to cross the US border. Ever.

Commodities

Decent kick-ons for copper, zinc and nickel last night on the LME.

Iron ore is doing not very much at present and gold continues to bounce back and forth around the 1200 mark.

A strong night for WTI as noted.

The US dollar index is down -0.1% but the Aussie is, as noted, up 0.6% at US$0.7266.

Today

The SPI Overnight closed down -4 points, apparently not inspired a second time by Wall Street.

But we do need to note that today is the quarterly expiry day of the SPI contract and of SPI and ASX index options. Volatility may pursue.

New Zealand releases its June quarter GDP result today.

Automotive Holdings ((AHG)) and Crown Resorts ((CWN)) are among those stocks going ex today.

Rudi will make his weekly appearance in the Sky News Business studio from midday till 2pm.

The Australian share market over the past thirty days…