Overnight: Meanwhile In Europe

By Greg Peel

Banklash

Everything was going swimmingly on the local market yesterday up until mid-afternoon – the ASX200 was up around 25 points on the back of a muted but positive Wall Street reaction to the G20 – then OMG if the RBA didn’t pull a rate cut out of the blue and “bang” there goes -20 points.

It was all about the banks, which closed the session down -1.1%.

The only other sector to finish in the red were telcos (-0.6%) so one wonders if there’s a common theme here. Yield-payers like the banks and Telstra have enjoyed solid rallies ever since the RBA swung into uber-dovish mode, so given Philip Lowe has spent the last month wandering around in an “Another one coming!” T-shirt, we can only assume yesterday was a matter of “Sell the fact”.

Maybe the other fact, that bank analysts have been pointing out since before last month’s cut — lower rates mean lower bank margins, even if they do potentially relieve some mortgage stress and make bank yields look even more attractive – was also in traders’ minds.

There is always a risk, if margins are squeezed further, that banks will have to cut their dividends.

Otherwise, all other sectors closed in the green, led by materials (+1.1%) and energy (+0.5%) on higher iron ore and oil prices, the latter thanks to OPEC extending production cuts. It took the big iron ore miners to drive the gain given big falls in gold and base metal prices overnight.

Among individual stocks, the new world train crash du jour yesterday was satellite company Speedcast International ((SDA)), which burned up on re-entry (-40%) after issuing yet another profit warning.

Relaxing in Darwin after his not particularly difficult decision, the RBA governor suggested:

“There are a number of developments that are providing support to the Australian economy. So we will be closely monitoring how things evolve over coming months. Given the circumstances, the Board is prepared to adjust interest rates again if needed to get us closer to full employment and achieve the inflation target.”

So the T-shirt’s still on. Presumably Lowe has also been on the phone to Albo to say for God sakes let the tax cuts pass. Lowe went on to say:

“The combination of these persistent downside risks and continuing low rates of inflation has led investors around the world to expect interest rate reductions by all the world’s major central banks. In Europe and Japan, official interest rates are already negative but investors are expecting the central banks to go further into negative territory. And in the United States, investors are expecting a substantial reduction in interest rates over the period ahead. This is quite a different world from the one we were facing earlier in the year.

“What all this means for us here in Australia is yet to be determined.”

Indeed.

Winding Down

The NYSE closes early tonight (1.00pm NY) ahead of the Fourth of July public holiday. Ahead of that break, and in the wake of the G20 now being played and won, Wall Street was last night beginning to wind down.

Given July 4 this year is a Thursday, one might normally expect the Friday to be taken as well by most to make a nice long weekend, but Friday brings the very critical non-farm payrolls number for June. Another weak number, on top of the May shock, would have the champagne corks popping. As far as Wall Street is concerned, the Fed would have to cut at the end of the month.

The interesting thing about last night’s trade on Wall Street was a notable reversal of asset price movements the night before. Yes – the major stock indices closed modestly in the green again, meaning another new high for the S&P, but Monday night saw a post-G20 rotation out of defensive stocks and back into cyclicals, while last night that rotation reversed back to where it was.

On Tuesday night the US ten-year yield rose 3 basis points to 2.03% and last night it fell -6 points to 1.97%. Gold has fallen out of bed on a 0.7% pop for the US dollar on Monday night and last night jumped back US$34 with the greenback down less than -0.1%.

What changed?

Well, while Trump confirmed that US-China trade talks have now recommenced by phone, post the G20 truce, the White House also announced a list of another US$4bn worth of imports from Europe upon which tariffs may be imposed, adding to a prior list worth US$21bn.

There may be white flags on the Eastern Front but the Western Front remains battle-ready. The sticking point is a 15-year old unresolved legal dispute between Boeing and Airbus, with the former accusing the latter of been government-subsidised and thus anti-competitive. Trump wants that sorted, or look out.

So clearly the gloss, if there really was any, has quickly come off the G20 outcome. Wall Street is reminded that from here on anything can happen and probably will.

In another reversal of Monday night’s trade, oil prices crashed almost -5% last night having previously risen on the news OPEC+ has extended its production cuts for another nine months. Why last night’s reversal? Last night OPEC+ members cited of expectations of lower global demand as reason for the longer than usual extension.

So US energy stocks were down last night, as were the banks on lower bond yields, while lingering enthusiasm still managed to create net stock index gains ahead of the holiday.

Commodities

Our LME price feed is back in working order, I’m pleased to announce. I can also confirm that Monday night saw some quite sharp falls for all base metals as the greenback surged on weak PMI numbers across the rest of the globe.

Iron ore’s going parabolic.

As you were for gold.

Having been crunched -1% on Monday night on the greenback surge, the Aussie has rebounded 0.4% to US$0.6992 despite the RBA rate cut, which was expected.

Today

The SPI Overnight closed down -11 points or -0.2%.

Today is services PMI day across the globe and Australia will also see building approvals and the trade balance.

The US will see private sector jobs, factory orders and trade numbers before closing early.

Bapcor ((BAP)) and Vocus Group ((VOC)) each host investor days today.

The Australian share market over the past thirty days…