Overnight: Rotation Reversal

By Greg Peel

Australia played catch-up yesterday as it followed the Wall Street story verse for verse, piling into the “reopening” theme stocks while easing off on healthcare and tech. The local market failed to take notice signs on Monday night that the Wall Street rally may have run too far, and it had, so our futures are down a sobering -86 points this morning.

If you wanted to get on yesterday you couldn’t. The ASX200 opened up 200 points in the first ten minutes, almost hitting 6200, before closing up 146.

Yesterday was all about the banks, end of story. The sector rose 4.8%, as each of the Big Four rose 5-6%. The banks are very much a part of the reopening theme, easing fears of widespread loan losses, but National Bank ((NAB)) helped by announcing a successful 15-year note issue.

And speculation mounts that in the wake of Commonwealth Bank’s ((CBA)) sale of Colonial First State, NAB will similarly be able to offload MLC.

Energy rose 4.7% as oil hit US$40/bbl, but the equivalent market cap impact is far less. Energy rose even as oil prices fell on Monday night, with US$40/bbl considered a general breakeven point for marginal US shale producers, many of whom have stalled production over past months.

Other sectors rose around an average 2%, with consumer discretionary and industrials outperforming the more defensive sectors, and materials, which only managed 1.7% despite a surge in the iron ore price, given a collapse in the Aussie gold price over the holiday break.

That has reversed overnight, with USD gold back up over US$1700/oz and the Aussie finally dropping back -0.8%.

Healthcare and IT were both sold down -1.5% on the rotation, with CSL ((CSL)) down -2.4% after announcing an acquisition, and Xero ((XRO)) falling -6.4% as work-from-home exuberance subsides.

Outside of the index nonetheless, Zip Co ((Z1P)) was at it again, rising 15.8%. And the footy trade continues, with Seven West Media ((SWM)) up 26% ahead of the AFL’s return.

Financials dominated the index top five yesterday, with Virgin Money ((VUK)), Credit Corp ((CCP)) and Challenger ((CGF)) rising 10-16%, with reopening stocks Flight Centre ((FLT)) and Worley ((WOR)) in the middle.

G8 Education ((GEM)) missed out in only rising 8.2%, after informing investors the government’s hasty withdrawal of its free childcare policy and related JobKeeper will not make things any worse.

The top ten losers were dominated by gold stocks.

Confidence unsurprisingly returned for Australian business in May, a bit. NAB’s survey showed conditions up 10 points from April and confidence up a full 25 points. But that still leaves them at -24 and -20, which is none too confident.

And as noted, the futures are down -1.4% this morning, so some of the froth will come off today.

Volte Face

The signs were there on Monday night. On Friday night, all of US equities, bonds, gold, oil and the VIX volatility index traded in “risk on” mode. On Monday night they all traded in “risk off” mode, except equites, which rallied once more to make a total of 1200-odd Dow points since the jobs numbers.

Last night equities woke up and reverted to “risk off”, with the Dow falling -300 points. But when the cyclicals are sold off, growth steps in to fill the void, in the form of Big Tech. The Nasdaq hit 10,000 for the first time last night – twice its 2000 dotcom peak – before easing off, but still closing at a new all-time high.

The S&P500 split the difference, with the technology sector (Apple, Microsoft) and communications (Facebook, Google) closing in the green and consumer discretionary (Amazon) just tipping into the red at the death. Energy and financials were the biggest losers.

One might see where this is heading for the ASX200 today.

When one considers Apple (+3%) and Microsoft (+0.8%) are also Dow stocks, the juxtaposition is even more stark. Boeing led the Dow up in the reopening rally, and last night led it down (-6%) after announcing “negative” new plane orders, meaning order withdrawals, to leave the lowest backlog of planes to be built in seven years.

Airline stocks all fell back around -7-9%.

The speed of US reopening and the subsequent reopening rally has taken many by surprise, who point to an economy that will still take a long time to recover and unemployment that will remain, despite the May jobs numbers, in double digits for the foreseeable future.

The difference is the Fed, making Wall Street’s 45% comeback more of a liquidity rally than a fundamental one.

While last night was quite an about-face after an exuberant six sessions of gains (Dow), Big Tech has never actually been sold, it has just stood back the odd session to let the others have a go. Hence new highs for the Nasdaq.

Tonight the Fed will release its policy statement.

Commodities

There was also some slippage in metal prices last night, while gold refuses to lay down for long.

The oils stood still.

The big story is the Aussie, blowing off the top over US70c and falling -0.8% even as the greenback continued its downward trend.

Today

The SPI Overnight closed down -86 points or -1.4%.

This month’s Westpac consumer confidence survey is out today along with housing finance numbers for April.

China and the US deliver inflation numbers, and the Fed concludes its meeting.

Stockland ((SGP)) and Smartgroup Corp ((SIQ)) hold AGMs and Worley hosts an investor day.

The Australian share market over the past thirty days…