Overnight: New High

By Greg Peel

Tentative

It’s difficult to tell how much of yesterday’s rally for the ASX200 was due to the weekend’s news or simply investors buying back in for the new year after Friday’s EOFY profit-taking spree. Given the Dow futures were up over 280 points by day’s end, a 0.4% gain for the index seemed quite tentative.

And the right call, it turned out.

All sectors had closed in the red on Friday and almost all closed in the green yesterday. For some reason the consumer sectors missed out.

The best performing sector by percentage was IT, up 2.4%, no doubt in anticipation of a strong session overnight for the Nasdaq, led by US chip stocks. As there are no Australian chip stocks, the connection is hard to understand (Altium being the exception plus a handful of micro caps).

Energy otherwise topped the list (+1.0%), with a trade truce being positive for all commodities, despite no actual deal. The big miners led materials higher (+0.5%) but the move was tempered by gold miners, as the safe haven trade began to quickly unwind.

Healthcare (+0.9%) was another strong contributor, with the banks (+0.2%) not much in the game.

The domestic news of the day was that Australian average house prices declined in May by the smallest quantum since March 2018, falling only -0.2%. More importantly, prices in Sydney and Melbourne actually rose, just. While no one is expecting prices to return to lofty heights anytime in the near future, it increasingly looks like a bottom is forming.

The SPI futures are showing up 21 points this morning after an unconvincing rally on Wall Street overnight. If accurate that would just take the index back above last Thursday’s close ahead of Friday’s sell-off.

Where to now?

The Dow opened up 290 points on what can only be attributed to trade truce enthusiasm, only to fall steadily to 2pm, at which point it was only up 30. A late afternoon rally made the result slightly more respectable.

The S&P500 did manage, nevertheless to hit a new all-time high.

The overall mood can still be considered “risk-on”, given the tempering of the rally had a lot to do with switching back into beaten-down cyclical stocks and out of defensive stocks that have been the driver of the rally in June.

The last time the S&P hit a new high was in April, when it was assumed a US-China trade deal was about to be signed. While the trade truce implies no further tariffs being imposed, for now, the reality is a deal is no closer now than it was back in December when the last “truce” was called. What incentive is there to push higher at this stage?

The Nasdaq enjoyed a 1.1% gain driven, as expected, by the chip-makers, thanks to the “lifting” of the Huawei ban. Specific Huawei suppliers enjoyed rallies of around 6%. But uncertainty remains as to just what they can now supply, given they cannot supply anything that might “threaten national security” – a caveat yet to be qualified.

Given no further trade progress has been made, much of the new all-time high has to be attributed to Fed policy anticipation. Last night’s US, and global, date releases did nothing to quash expectations of a Fed rate cut at the end of this month.

Let’s go around the grounds on June manufacturing PMIs: Australia 49.4; Japan 49.3; UK 48.0; eurozone 47.6, with Germany 45.0; and the US, 51.7.

Only the US managed expansion, but while 51.7 was not actually as bad as feared, it is down from 52.1% in May and marks a two-and-a-half-year low.

Furthermore, US construction spending fell -0.8% in May when economists forecast a 0.3% rise.

This is all fuel for the Fed rate cut fire, but is the Fed ready to go this month now that Trump’s new tariffs are on hold?

It will likely come down to Friday night’s jobs report, the first reading of US June quarter GDP, out just before the Fed meeting, and other data points in between. Some believe the Fed will cut in July no matter what, having realised the December hike was a mistake.

As Wall Street continues to second guess the Fed, in a couple of weeks the June quarter US earnings season will begin, providing another point of reference for stock markets.

Meanwhile, a truce may have been declared but as yet there is no scheduled recommencement of US-China trade negotiations.

Commodities

Apologies, but there appear to be an issue with our LME price feed this morning. Reports suggest copper initially jumped on trade news to a new six-month high, before closing down -0.6% on global PMI data.

Iron ore did nothing of the sort.

OPEC members have agreed to extend their production restrictions for another nine months. They have also agreed to bring Russia into the fold – not as an OPEC member directly but as a “partnership”, officially cementing the “OPEC plus” bloc.

Oil prices thus gained on both trade and OPEC.

Gold was the victim of the “improvement” in geopolitical relations, even as Iran moves to break its nuclear contract with the West.

The US dollar was a clear beneficiary of the truce, having been on a quiet slide these past few weeks. The dollar index shot up 0.7% and sent the Aussie down a full -1% to US$0.67965.

The RBA will be pleased.

Today

The SPI Overnight closed up 21 points or 0.3%.

The RBA meets today. Anticipation is overwhelming for a back-to-back cut.

The Australian share market over the past thirty days…