The Overnight Report: Buffetted?

By Greg Peel

Cavalry Defeated

Let’s look at the jobs numbers first. I’m sure many, myself included, were taken aback by a mere 6.2% unemployment rate in April, up from 5.2%, when the US, for example, went from 3.2% to 14.7%.

It’s all a bit of a furphy. More telling is the fact -594,300 Australians lost their jobs in April, compared to 700 additional jobs (net) in March. In order to be “unemployed” you must actively be seeking work, which is why retirees, for example, are not counted as unemployed. One must satisfy this requirement to receive the dole, normally, but right now JobSeeker is paying anyone who lost their job, and double the usual amount.

It was a bit pointless to be looking for a job in April, thus the participation rate fell to 63.5% from 66.0% in March, accounting for all those responding that no, I’m not bothering to look. They are not counted as unemployed.

Nor are those on JobKeeper counted, as they may be at home but they are not unemployed. Hours worked fell by -9.2% compared to a 0.9% gain in March. And finally the “underemployment” rate, counting those who have a job but would like more hours, rose to 13.7% from 8.8%.

The RBA expects unemployment to peak out at 10%. As the economy slowly reopens, the participation rate will no doubt surge as workers try to grab whatever they can. But JobSeeker is set to run to September, by which time the government is praying the economy will be sufficiently back on its feet, so it may yet be a while before that “unemployment” headline number does actually get to 10%. It all depends on what Life After Covid actually looks like.

Interestingly, the Aussie plunged on the jobs release to almost breach US64c once more. Don’t know which figures forex traders were looking at, but clearly they looked through the 6.2% headline. The Aussie’s actually now up 0.2% over 24 hours.

The ASX200 opened lower yesterday, in line with a weak session on Wall Street and a -58 point prediction from the futures. It bottomed at down -79 points fifteen minutes in, when once more the cavalry arrived.

But after two days of fightbacks to not make any net ground, the cavalry is battered and bruised. To their credit, they tried again and again throughout the session, managing to claw back 30-odd points each time, including fighting back from an initial drop on the jobs numbers. Alas, they could not hold on. The index headed back to its earlier low at the close, then lost another -20 points on the after-the-bell match-up (which is when unfilled orders are squared off).

One might have assumed today may bring another capitulation session, given it appears the buyers have run out of puff. But Wall Street staged a big turnaround last night, and our futures are up 45 points this morning.

In the wash-up it was another NI session last night, as banks (-2.6%) and healthcare (-2.4%) led the market down, having been primary drivers in the previous day’s fightbacks. Energy (-3.0%) topped the boards even as the WTI price continues to recover. For the banks it was a case of brokers declaring Commonwealth Bank ((CBA)) the best in class post quarterly update, but overvalued. Only one FNArena database broker has a Buy rating.

Must be nigh on twenty years now brokers have called CBA overvalued, and if memory serves, the only time they were ever vindicated was at the beginning of the Royal Commission when CBA’s sins were the first to be aired. Maybe, just maybe, it’s time analysts built an unwavering CBA-is-King premium into their models.

Notwithstanding a -2.8% fall for IT, other sector falls were less dramatic, and our consumer sector indicator showed -0.8% for staples and -1.1% for discretionary suggesting no risk on or off theme. Just NI.

I hadn’t thought of DIY grooming as another stay-at-home trend, and nor had anyone else it seems. Shaver Shop ((SSG)) updated yesterday and shot up 30%.

In the index, embattled Graincorp ((GNC)) — think drought, fire, flood, pestilence – reported better than expected and topped the index leaders’ board with an 11.6% gain. Another stay-at-home winner, Breville Group ((BRG)) – make your own espresso and toasted sandwiches – came out of a halt after raising capital and jumped 6.7%.

Australian Financial Group ((AFG)) came out of its halt post-raising and fell -11.3%.

Graincorp spin-off United Malt Group ((UMG)) has only been out on its own for five minutes and it, too, is looking to raise more capital. Yep, they move out of home and then immediately put their hands out.

How far can you go?

The Dow opened down -460 points last night and closed up 377. No one can quite put a finger on why the turnaround, but there are a few theories.

From the open, the S&P500 was down -5% in this latest pullback. Three times since the rebound rally began the S&P has dropped back -5%, but then swung around again. Thus perhaps technical traders saw number four as a buying opportunity.

The rebound was led almost solely by the banks, which have just not been able to take a trick up to now. One bank in particular dramatically spun around – Wells Fargo. To date, the big US banks have fallen around -40%, but Wells has fallen -60%. That underperformance had only been more stark this past week, and daily volumes have been multiple times higher than average. Until last night.

The theory is one big stakeholder has been dumping its position in Wells in capitulation, and last night it ended. No one’s stuck their hand up, but all fingers have been pointed towards Omaha. Warren Buffett has a big stake in Wells. Or had. Berkshire Hathaway was not taking phone calls last night.

When Wells Fargo suddenly took off all the other banks followed. Then the market followed. The S&P500 closed up 1.2%. The financials sector closed up 2.6%. The banks sub-sector within financials closed up 3.7%. The next best sector, consumer discretionary (Amazon), closed up 1.3%.

The US ten-year bond yield fell -3 basis points to 0.62%. The banks virtually never rally with bonds.

So it’s a fair theory.

Other points to consider were news Disneyland is preparing for a restricted reopening, and the media latched on to an email circulated to McDonald’s employees outlining just what measures stores need to take to ensure safety as they, too, look to reopen their dine-in service. Any news on re-openings is seen as positive.

After the bell, Nike reported all 100% of its stores in China and South Korea are now reopened.

Commodities

Data last night indicated US domestic crude supply has fallen for the first week in sixteen, and total crude production also fell. We recall that the extreme volatility accompanying the expiry of the May WTI contract, way into the negative, was not about demand/supply but simple lack of storage capacity.

Gold appears to have more definitively resumed its uptrend, at least with another burst. I’ll say that, and it will be down tonight.

Apologies, but our iron ore report is MIA this morning.

Today

The SPI Overnight closed up 45 points or 0.9%. What will Friday bring?

China will report April industrial production, retail sales and fixed asset investment numbers today.

The US will report April industrial production and retail sales as well, and a flash estimate of May manufacturing PMI, and the first May consumer sentiment survey from Michigan Uni.

The eurozone March quarter GDP result is due tonight.

UR Westfield ((URW)) holds its AGM.

The Australian share market over the past thirty days…