Overnight: Wave Theory

By Greg Peel

The Lord Giveth…

What a difference a day makes.

With Wall Street closing flat on Monday night, in broad market terms, and the futures showing down -19 points, it appeared the local market may have been set to pull back a little after running up hard on Monday on risk-on sentiment. But as it turned out, the sellers were fully locked and loaded before the open.

The threat from China to slap an 80% tariff on Australian barley imports had upset agricultural stocks but had been largely ignored by a wider market more focused on a reopening of the economy sooner than expected. But when Beijing announced an actual ban on beef imports from four Australian abattoirs, suddenly it was real.

The prime minister has dismissed the ban as being unrelated to a push for an inquiry into the virus source, and indeed the beef industry has confirmed Beijing has been investigating labelling issues for a year now. But the timing is a tad too coincidental. China buys 25% of Australian beef, and the four abattoirs in question supply 35% of exports to China.

The Treasurer warned parliament yesterday, between coughing fits, that the economic impact would be devastating were Australians to flout social distancing as the economy reopens and thus spark a second wave. While not exactly a revelation, the address was pre-released to the media yesterday to make the morning papers before the Treasurer spoke. And it appears a second wave might emanate from Canberra.

NAB’s business survey for April showed a fall to -34 for the conditions index from -22 in March and 1 in February. This despite the launch of JobKeeper. Again, not so much of a shock as it was April when the lockdowns were fully implemented, but with JobKeeper payments not hitting until this month, businesses were clearly struggling.

The good news is business confidence rebounded to -46 from -65 in March (February -2), but the bad news is that is still a number twice as large as seen in the GFC.

So put it all together and the ASX200 spun on a dime yesterday, falling -87 points to midday to more than wipe out Monday’s gains. An afternoon clawback reduced that to -58, but Monday’s risk-on saw an abrupt about-face to risk-off.

To draw upon our consumer sector indicator once more, staples rose -0.3% as discretionary fell -1.0%. Healthcare rode a second wave, up 1.5%, to be the only other sector to close in the green.

Financials, materials, energy, industrials and utilities – everything that led the market up on Monday – led the market down. In consumer discretionary, Myer ((MYR)) rose 8.6% on Monday and fell -17.5% yesterday.

Iron ore exports next on the list? Very unlikely, but materials fell -1.9% even as building materials company CSR ((CSR)) jumped 10.0% on an earnings report that included a suspended buyback and an abandoned dividend.

And now Wall Street has rolled over. Even FAAMG. The bulk of the selling last night occurred in the last hour and our futures are down -68 points this morning.

Big one out the back

The US headline CPI fell -0.8% in April, as expected, but take out food & energy and the core CPI fell -0.4% compared to -0.2% expectations, to mark the biggest monthly drop since measurements began being taken in 1957.

It was first seen in South Korea, which up to that point had been a model of virus containment, and then another model country – Germany – began reopening and noted a small spike in cases. Last night it was revealed that after a month without one new case, Wuhan reported six over the weekend.

Wuhan is now moving to test all 11 million of its residents.

Dr Fauci told a US Senate committee last night the US faces “needless suffering and death” if the economy is reopened too quickly. The New York governor suggested “the virus is deceiving us,” as he highlighted the disturbing new twist of symptoms appearing in small children.

House Democrats have put up a bill for a second wave of fiscal relief worth US$3trn. The Republican Senate has declared it DOA. The Republican Senate is planning its own bill, which will include sanctions on China (albeit couched as a response to Beijing’s treatment of Uighurs).

Meanwhile, states across the country continue to roll out their reopening plans. This includes California, although LA County has warned lockdowns may remain in place for another two months, by which point, one assumes, everyone would have shot each other out of isolation meltdown.

Speaking on television last night, the CEO of embattled Boeing aired his expectation that at least one US airline would go under.

Wall Street was taking all in its stride up to midday, before a slight wobble in the early afternoon. At 3pm the wheels fell off, with selling accelerating into the close. Momentum traders, would no doubt have been riding six straight days of gains for the Nasdaq, must have reversed course in a hurry. The Nasdaq was still outperforming right up to the death when it rapidly played catch-up.

Hence the Nasdaq and S&P both fell -2.05%, with the Dow not far behind on -1.9%.

Commodities

The Chinese are racing to buy iron ore ahead of tariffs on Australian imports.

Saudi Arabia has announced an additional one million barrel per day production cut in June on top of a -9.7mbpd  production cut by OPEC-Plus. This supply curtailment, and a reopening US economy, has WTI crude pushing further ahead on the assumption of reduced pressure on US storage facilities. Meanwhile, Brent is falling, rapidly closing the spread, despite there not being a storage issue (due to a cash settlement option for futures contracts).

The Aussie is down -0.3% at US$0.64974.

Today

The SPI Overnight closed down -68 points or -1.3%.

The weekly Roy Morgan report has been tracking a rebound in Australian consumer confidence. Today’s Westpac survey for May will provide month on month data.

We’ll also see the March quarter wage price index, good for wrapping your fish’n’chips.

The UK’s March quarter GDP is out tonight.

Commonwealth Bank ((CBA)) provides a quarterly update today.

EclipX Group ((ECX)) reports earnings, Stockland ((SGP)) also provides a quarterly report and GPT Group ((GPT)) and Sigma Healthcare ((SIG)) hold AGMs.

ResMed ((RMD)) goes ex.

The Australian share market over the past thirty days…