Overnight: Ninety Percent There?

By Greg Peel

Not Winning

There still seems to be no lack of buyers in the local market at these lofty heights, despite immediate macro risks ahead. Yesterday morning the futures had suggested -36 for the ASX200 and initially the index fell -21, yet by late morning it was back to square.

But the buyers aren’t winning, and the end result was another afternoon of selling to a close of down -17.

Telcos were the worst performer (-1.2%) as Telstra ((TLS)) fell after announcing a rationalisation of its mobile and fixed line plans in an attempt to counter competition and the disruption of the NBN rollout. Clearly this equates to cheaper prices for customers, so the stock fell -1.0%.

Telstra has nevertheless had a very strong comeback run as the index has risen to fresh highs.

The banks again saw some profit-taking (-0.5%) after also having had a good run on yield attraction.

And the same can be said for utilities (-0.9%), which have also been enjoying the “bond party”, as Macquarie has dubbed it, in which all yield stocks have been sought after on falling bond yields.

It appears there is some profit-taking going on in these sectors ahead of year-end on Friday, and the promise of a new year thereafter in which the world may have immediately changed, or not.

Healthcare and industrials provided some balance with small rallies while consumer sectors were also sold down.

The resource sectors had the day off.

There was nothing of particular note among individual index stocks yesterday but if we move outside the ASX200, we find a case of “another one bites dust”.

Website solutions company Arq Group ((ARQ)), formerly known as Melbourne IT, had been a high-flyer up to a year ago when the gloss started to come off. Yesterday the company issued a profit warning and the stock dropped -38% from the open and stayed there.

Arq is just another in a long line of smaller but once popular names for which even the slightest stumble has meant crucifixion.

Today brings a quarterly stock option expiry, which is not as influential as the index derivative expiry (last week), but may still have some impact, albeit concentration of positions is likely below current “at the money”.

More importantly, today brings the biannual yield-payers ex-fest. There are 36 ASX-listed stocks going ex-dividend today and they are almost all high-yielders such as REITs and infra funds, developers and other bond proxies, be they large cap or small.

Among their number are Transurban ((TCL)), Sydney Airport ((SYD)), Mirvac ((MGR)), Stockland ((SGP)), Shopping Centres Australasia ((SCP)), Charter Hall Retail ((CQR))…the list goes on and on.

So we need to discount that handicap from the open today.

Rotation

Last night US Treasury Secretary Steve Mnuchin commented that earlier in the year the US and China had been “90%” of the way towards signing a trade deal and that he thinks “there’s a path to complete this”.

The sticking point back in April was the demand from Beijing that after agreeing to a Washington’s deal, all tariffs would immediately be lifted.  Washington refused, insisting tariffs will only be lifted once there was clear evidence Beijing was complying with the deal. China backed off, Trump implemented his tariff increase in May and followed up with the Huawei ban, which he insisted was a separate issue.

Negotiations ended. Stocks markets crumbled.

While there has never been any sign of change on either side since then, other than Trump and Xi are going to meet on Saturday, Wall Street has come all the way back to its April highs.

Mnuchin’s comments provided some hope last night, reflected in the Dow being up a hundred points early on, but that enthusiasm faded. What was more notable was evidence of sector rotation.

The talk of day was of chip-maker Micron, which surged 13% after having released its earnings result the evening before. Micron is a bellwether for all China-facing and thus tariff-impacted businesses, and had been a major supplier of chips to Huawei. Not only did the company’s result blow away some fears of how bad the tariff impact might be, Micron admitted it had found a way around the Huawei ban without breaking US law.

On that news, all peer stocks had solid sessions, making the tech sector a leader on the day.

Energy stocks were another leader, on another surge in oil prices, this time driven by a “shock” drawdown in US weekly inventories when week after week they’ve being going the other way.

The banks were also strong on the day after the US ten-year bond yield jumped up 5 basis points to 2.05%.

China-facing stocks in general received a boost, both from Mnuchin’s comments and Micron’s result. And in order to fund these purchases, investors sold defensives – REITs, utilities, healthcare and staples – all sectors which have led Wall Street higher these past couple of months.

So defensives were sold in favour of cyclicals, bonds were sold and gold was also sold, down -US$14/oz after a very strong rally this month.

So what do we read from such rotation? A sudden burst of risk-on enthusiasm on trade deal hopes? A squaring up of positions ahead of the G20? A squaring up of positions ahead of quarter-end? Or all of the above?

I think I’d choose (d).

In economic news, US durable goods orders fell -1.3% in May when -1.0% was expected. However, a lot of that is to do with orders being pulled for Boeing 737 Max jets, and in fact ex-transport, orders rose 0.3% to break a three-month run of declines.

Commodities

Metal markets went back to being mixed last night other than gold.

Australian gold miners will no doubt cop some selling today after a solid run, on the double-whammy of lower gold price and stronger Aussie. It’s up 0.4% at US$0.6985.

Energy stocks should go the other way.

Today

The SPI Overnight closed down -15 points or -0.2%.

China releases industrial profits data today.

The US will again revise its March quarter GDP result.

Individual stock options on the ASX expire today, as noted, and don’t forget the dividend spree.

The Australian share market over the past thirty days…