Overnight: Out Of My Way

By Greg Peel

Recession!

Yeah like we didn’t know that was coming, for the past three months. It was only in the last couple of weeks of the March quarter that the country went into lockdown. Before that, all we had to worry about was drought, bushfires and floods. The rains extinguished the bushfires, and (hopefully) ended the drought. The June quarter is all about the virus.

The -0.3% contraction in Australia’s GDP confirms a “technical” recession, knowing what June will be like. Slightly better than a -0.4% consensus forecast, but on the money for 1.4% annual growth, down from 2.2% in December. A big fall in consumer spending was the main culprit, with weakness in housing and business investment contributing. Trade held up, but only because of a big fall in imports. The only “saviour” was government spending.

The shadow treasurer has wasted no time in pointing the finger of blame at the government. It’s comforting to know that in these times of upheaval, some things never change.

The local stock market is nevertheless in its usual time machine, pricing in the September quarter and beyond, having already priced in the months of May and June, as restrictions continue to ease. The ASX200 hit another ton yesterday, and it was all about risk-on.

All of which was driven, presumably, by those who had refused to believe it was already time to go risk-on again, and have been missing out.

The banks were back leading the charge, up 3.5%, winning the sector race in percentage terms and by a solid margin in index point terms. Once again healthcare (-0.1%) provided the funds, although barely so.

Every other sector closed in the green by varying degrees. Utilities (+0.6%) and telcos (+1.0%) lagged, while materials (+0.6%) was held back by weakness in gold miners, all of which reflect defensives taking more of a back seat. The virus has gone some way to upsetting prior defensive labels. REITs rallied 3.1% (within the financials sector).

Consumer staples also rose 1.3%, just behind discretionary on 1.6%. Energy (+3.0%) was another big risk-on winner.

A fire has been lit under fintech companies, leading this week to a step-jump re-rating. Zip Co ((Z1P)) rallied yet another 22% yesterday, to be up 68% this month and 440% from its March bottom. The IT sector gained 2.4%.

FOMO writ large.

Zip Co was pipped yesterday in the index only by wind farmer Infigen Energy ((IFN)), which jumped 36.4% on a takeover bid. Meanwhile, retail landlord UR Westfield ((URW)) had still been falling even as peers rallied on re-openings in May, due to its debt level. Apparently that’s no longer an issue, with the stock gaining another 10.4% yesterday. Mind you, it’s still down -58% for the year.

Every top five index loser yesterday was a gold miner. Stand by for more of the same today.

News this morning is that the government is “reviewing” JobKeeper. Presumably this means a possible extension beyond September, with a lazy $60bn sitting around, which can only be a positive for the market.

The futures are up another 73 points this morning, which would take the ASX200 back through 6000, a level first breached last November.

Just the Job

The US private sector lost -2.2 million jobs in May. Economists had forecast -8.6 million, following the loss of -19.6 million in April. This implies the easing of restrictions is leading to a return-to-work much faster than forecasters had assumed.

Wall Street was already in FOMO mode, and last night this number simply added to the F. Once again the Nasdaq took more of a back seat to a faster than expected recovery for the most virus-impacted cyclicals. Boeing led the Dow to a 2.0% gain to the Nasdaq’s 0.8%, with the S&P500 splitting the difference.

That said, the Nasdaq is now only 1.4% shy of its all-time high. The Nasdaq 100, which is a smaller concentration than the Nasdaq Composite, or “Nasdaq”, is only 0.2% shy. Within the 100, FAAMNG has an even larger market cap weighting.

Yet there is some consternation around the divergence between the ADP private sector jobs numbers and official non-farm payrolls. Economists are still forecasting a loss of -7.3 million jobs in May following net -21 million losses over March and April. I’d wager there is some confusion over how PPP recipients (JobKeeper) are counted. Do they have a job or not?

Lies, damned lies etc. It’s not important. But tomorrow night’s official jobs numbers could possibly take some of the wind out of the sails.

Last night the Dow recovered to above its 200-day moving average, while the S&P breached the technically significant 3100 mark. These will either prove to be exhaustion levels, or springboards towards all-time highs. Too far, too fast? Many of those who called Wall Street way overvalued in May might now be rethinking.

The swing factor is data showing literally trillions of cash still on the sidelines, particularly in the retail investor cohort. These are the investors that likely listened closely to the bearish hedge fund billionaires, and by now are panicking to get on.

What’s the famous quote?

Bull markets are born on pessimism, grow on scepticism, mature on optimism, and die on euphoria.

Commodities

Helping to fuel Wall Street’s comeback is ongoing weakness in the US dollar, last night down another -0.4%.

This helps to underpin commodity prices, although not much was happening last night. (Unfortunately we’re still waiting for an iron ore price update this morning).

Also aiding sentiment last night was an 8 basis point jump in the US ten-year bond yield to 0.76%, which has counteracted dollar weakness and sent gold tumbling -US$25.

The Aussie dollar, on the other hand, laughs in the face of recession. It’s up another 0.4% at US$0.6924.

Today

The SPI Overnight closed up 73 points or 1.2%.

We’ll see some telling numbers today – April retail sales and trade.

The ECB meets tonight.

The Australian share market over the past thirty days…