Overnight: On Hold

By Greg Peel

Mind the Dip

From the open yesterday it looked like the ASX200 might spend the day going nowhere, which would have been understandable after Monday’s reality check and tonight’s important Fed testimony. But mid-morning the index suddenly swooned, and by lunchtime was down -30 points.

We might look to NAB’s business survey for June. While respondents decided current conditions looked a little more rosy than they did in May, with the conditions index ticking up to 3.4 from 1.2, that figure remains below the long-run average. Confidence – looking ahead – crashed.

Confidence had been very weak (0.2) back in April when it looked like a Labor government was inevitable but shot up in May (7.3) following the shock election result. Last month it fell back to 2.2 – not quite as dire as April but far from encouraging nonetheless.

I don’t usually pay much attention to weekly data releases as they can be volatile, preferring monthly data. But yesterday’s ANZ/Roy Morgan survey showed a -1.1% fall in consumer confidence last week.

If anything the results suggest the RBA is on the right path, and confidence is something the board keeps its eye on. Another cut remains justifiable.

Which is maybe why yesterday afternoon the buyers returned, or maybe there’s just too much cash sitting underemployed that missed the last rally towards new highs. Yield payers such as utilities and banks still closed lower on the day, albeit telcos (+0.4%) gained.

News on the bank front was that APRA will require the majors to lift their total capital by 3% of risk-weighted assets by 2024. While this does imply the banks will need more capital, and does nothing to alleviate pressure on Westpac’s elevated dividend payout ratio, the 3% number is less than the 4-5% APRA touted last year. APRA has suggested the new requirement will only have a 5 basis point impact on funding costs.

And they have three and a half years to get there.

So whether a -0.3% fall for financials yesterday was due to APRA, or actually could have been worse, is unclear.

What was clear was a 2% jump for Coles ((COL)) after that company announced an alliance with Microsoft to revamp operations through the use of AI. Meanwhile, grocery shoppers are tending to shy away from anything artificial. Consumer staples led the sectors on the day with a 0.9% gain.

Materials (+0.2%) made a small comeback on the iron ore price bounce.

The iron ore price has bounced back even further overnight, up 4% to an “as you were” position before the Chinese government threatened to scrutinise the recent rally.

The Aussie is down a full -0.7%, falling steadily yesterday after the confidence survey releases.

Are these two factors why the futures are showing up 36 this morning on a flat Wall Street? Seems ambitious. But then, that’s what we did last Friday ahead of the US jobs report.

Jay-Walking

Biannual testimonies from the Fed Chair to Congress have occasionally proved market-moving in the past, but not often, particularly in the days of Yellen. Yellen, an economist, typically spoke in generalities while Powell, from the financial markets, is seen as being less obtuse. Tonight’s testimony is the most highly anticipated this writer can ever recall, right up there with policy statement releases.

Given the president has consistently railed against Fed policy, insisting the Dow would be a few thousand points higher if rates were cut to zero (well, duh), one might assume Republican committee members will not be backward in coming forward tonight. “Are you going to cut the rate or not Mr Chair?”

The challenge for Powell will be to remain unequivocal, given he knows just what sort of market response will follow if he sounds emphatic in either direction. My tip is he will stick to “data-dependent”, although stranger things have happened. Philip Lowe, for example has proven to be a lot less coy than his predecessor.

Meanwhile, back at the trade war, US-China talks are set to recommence this week after a two-month stand-off. Washington is pushing hard for more Chinese purchases of US agricultural products, but Beijing is resisting.

India has now implemented tariffs on US imports in response to the US removing India from the steel/aluminium tariff exemption list.

Japan is now imposing restrictions on imports of Korean electronic components. Korea is planning countermeasures.

And according to Trump, the UK ambassador to the US is “whacky”.

Good to see progress being made all round.

Commodities

Falls in base metal prices have been attributed to the recommencement of US-China trade talks. Be very afraid.

Clearly no impact on iron ore.

The -0.7% fall in the Aussie to US$0.6928 when the US dollar index rose only 0.1% is telling.

Today

The SPI Overnight closed up 36 points or 0.6%. The S&P500 closed up 0.1%.

Westpac’s monthly consumer confidence survey due today should provide a more trend-specific reading.

China will release June inflation data.

Not only does the Fed chair front Congress tonight, the minutes of the June Fed meeting are also due.

The Australian share market over the past thirty days…