Overnight: Holding For Now

By Greg Peel

More of the Same

Yesterday’s trade on the ASX was largely an encore performance of Wednesday’s trade, with the one exception that volumes picked up to more average levels from light trade earlier in the week, likely because today is the last day of the month.

Once again two sectors stood out as outperformers amidst a sea of red. Telcos were again the only sector to close in the green. On Wednesday it was a mere +0.1%, yesterday it was +1.1%. It seems investors took a while to digest Telstra’s ((TLS)) announced cost-cutting plans.

Financials closed down, but only by -0.1%, similar to the prior day’s -0.2%. The banks are holding their ground following their euphoric post-election rally, likely as investors eye off those fully-franked yields that are now safe from Bill.

Unlike Wednesday, the resource sectors were the hardest hit, spurred on by lower oil and iron ore prices. Energy fell -1.4% and materials -1.7% to be the worst performers on the day. Oil is down another -4.5% overnight.

Aside from perhaps a bit of interest in yield, there is yet to appear any shift towards defensives. Staples, healthcare and utilities all fell, albeit this time utilities only just closed in the green.

Another difference was that on Wednesday, the ASX200 recovered from down -60 odd points to down -40 odd by the close. Yesterday the index pretty much closed on its low.

A -1.1% fall in consumer staples was aided by a -27% fall in fruit & veg producer Costa Group ((CGC)), which posted its third profit warning for FY19. That’s what you have to be prepared for when you invest in the weather. Just ask Nufarm, Graincorp et al.

On the flipside, graphite miner Syrah Resources ((SYR)) jumped 13.5% without saying a word.

I would posit that two factors might explain the rally. Syrah was until last week the most shorted stock on the ASX. Last week shorts were trimmed to 16.0% from 17.2%, which still leaves Syrah in second place, but suggests the shorters are now getting nervous. China’s threat to ban rare earth exports has focused global attention on those metals and minerals required for the new world of EVs, batteries and renewable energy, and is the reason Lynas Corp ((LYC)) has taken off.

Graphite is a battery element, along with lithium. Lithium is beset by global oversupply at present, before demand catches up, but graphite mines are not abundant.

In economic news, building approvals fell another -4.7% in April, having fallen -13.4% in March. The good news is the annual rate of decline eased to -24.2% from -25.4%, which might be a first sign of a bottom approaching, and a big pick-up in non-residential approvals in NSW of 8.8% provides some relief when apartment approvals are down -40% in twelve months.

Private capital expenditure fell -1.7% in the March quarter having risen 1.4% in December. But again there was some good news. Capex expectations for FY19 and FY20 both increased. The falls in March largely reflected construction spending, but non-mining investment saw a healthy pick-up.

We may be in for some end of the week relief given the futures are up 19 points this morning. But being month-end, anything could happen. Oil has been slammed and iron ore is again lower.

Moving Support

China’s vice foreign minister Zhang Hanhui said yesterday Beijing opposes economic friction but is “not afraid of a trade war. This kind of deliberately provoking trade disputes is naked economic terrorism, economic chauvinism, economic bullying”.

We’ll forgive him his English, but we get the point.

Fed vice chairman Richard Clarida said last night, in not so many words, that if things got ugly a rate cut would be considered.

Put the two together and it was a choppy session on Wall Street that ended as a bit of a dead cat bounce. Notably, the S&P500 fell down to its 200-day moving average again at 2776 mid-afternoon and again bounced off that level, to close at 2788.

How long support can hold is critical.

The US Energy Information Agency reported that US crude inventories actually declined last week, for the first time in a month, but not by nearly as much as was expected. Oil traders bottled. A miss on inventories is not in itself enough to send oil prices -4.5% lower but the heightened threat of an extended trade war and slowing global growth is enough to incite capitulation.

Energy led the losers on Wall Street, along with financials, as the US ten-year yield ticked down a point to 2.22%.

It’s month-end on Wall Street tonight as well, and there are some significant data releases to consider as fund managers look to close their books. Today brings China’s PMIs and tonight US PCE inflation.

Commodities

Outside of oil, iron ore continued to drop back last night.

Base metals were mixed but the trend remains weak.

Gold found support again despite a steady greenback, but right now it seems stuck in a 1270-1290 range.

Also stuck is the Aussie, at US$0.6911.

Today

The SPI Overnight closed up 19 points or 0.3%.

China releases official manufacturing and services PMIs today.

Locally we’ll see private sector credit.

In the US, the focus will be on PCE inflation, or lack thereof.

Mesoblast ((MSB)) and Select Harvests ((SHV)) report earnings today while Sundance Energy ((SEA)) holds its AGM.

The Australian share market over the past thirty days…