Overnight : One Way Street

By Greg Peel

It’s Only Words

From last Tuesday’s close to yesterday’s close, the ASX200 fell -29 points. Pretty dull old market. Unless you happened to be paying attention during the day. Yesterday’s close of up 9 points represented the third single-digit move in a row, but yesterday’s trading was the most volatile of three very volatile sessions.

Yesterday the index opened up 55 points and was hanging in there an hour later when chief US trade advisor Peter Navarro said on Fox News the US-China trade deal was “over”. The Dow futures fell -500 points in a heartbeat. The ASX200 fell -95 points.

Then came a tweet from one Mr Trump:

The China Trade Deal is fully intact. Hopefully they will continue to live up to the terms of the Agreement!

The Dow immediately recovered almost all of the plunge. The ASX200 did likewise, but then faded to the close.

Peter Navarro has not been seen since.

The previous two sessions on the ASX saw flat closes on the netting out of some rather sharp individual sector moves. Yesterday was different – by the close sector moves were relatively benign. The only sector to move by more than 1% was consumer discretionary (+1.2%). It was a day for individual stock stories.

Nickel miner Western Areas ((WSA)) was the best performing stock in the index, up 16.0% following news that the company had received highly encouraging results from the first diamond drill hole at its Sahara prospect.

Cromwell Property ((CMW)) rose 8.0% after receiving a bid from an asset manager for another chunk of stock on top of what it already owns.

AMP ((AMP)) got the green light from the regulator to sell its Life business, and jumped 7.9%.

Lynas Corp ((LYC)) rose 6.0%. Who is right? Navarro or Trump? (Navarro did give a follow-up interview stating his comment was in relation to “trust” between the two countries, not the agreement itself).

On the red side of the equation, Challenger ((CGF)) fell -9.8% after returning to the boards post capital raising. Thanks for playing.

The outperformance of the discretionary sector owed much to a trading update from Harvey Norman ((HVN)), which highlighted a preliminary FY20 profit result (eleven months) up 20%. The stock rose 4.3%, and floated similar boats.

Outside the index, FlexiGroup ((FXL)) rose 9.0% after its trading update.

So it was all happening, but not taking the market anywhere. Wall Street ultimately ignored the trade confusion last night and closed higher once more, although fading at the close. Our futures are up 9 points this morning.

Might be another flat one.

How Far Can This Go?

Familiar picture: Nasdaq up 0.7% (new high), S&P up 0.4%, Dow up 0.5%.

The outperformers in the S&P500 were consumer discretionary (Amazon), communication services (Facebook, Google) and technology (Apple, Microsoft). The outperformer in the Dow was Apple. Apple is up 15% in June and 63% from the March low.

Anyone else worth mentioning? No.

Economic data releases last night were nonetheless encouraging. A flash estimate of US June manufacturing PMI suggested a rise to 49.6 from 39.8 in May. The services estimate was 46.7 up from 36.9. Eurozone numbers told a similar tale.

US new home sales rose 16.6% in May. Let’s just say mortgages are cheap.

The Treasury Secretary last night said he anticipates the next trillion of fiscal support will be passed by Congress in July. He also weighed into the trade spat, stressing he expects China will hold up its end of the phase one deal.

Also adding fuel to the Wall Street fire is an ongoing decline in the US dollar index, after the greenback had earlier shot up as a safe haven in the March crash. We can again thank the Fed, as well as Congress.

What can stop FAANMG? It’s hard to find anyone who calls these names glaringly overvalued in the context, and they haven’t been going “parabolic”, rather grafting steadily higher day by day.

And in so doing, their cap weightings in the S&P500, let alone the Nasdaq keep growing, and they are major inclusions in every index-style ETF. The US banking sector went into the virus as 16% of the S&P, and is now down to 10%. No prizes for guessing where that weighting went.

The Dow is much derided as an anachronistic price average, but the problem with cap-weighted indices is they are self-feeding. If a stock’s weighting in an index increases, index funds have to buy more. It’s a positive feedback loop for share prices.

Can it end?

The disturbing part is that the ASX200 tends to follow the S&P500 around like a puppy, yet is of a completely different species.

Commodities

Another mixed bag for metals while iron ore is hanging in there.

Gold marches on.

Oil appears to want to take a breather at US$40/bbl.

The Aussie is up 0.3% at US$0.6930. The RBA might have to start selling.

Today

The SPI Overnight closed up 9 points.

The RBNZ holds a policy meeting this morning.

CSR ((CSR)) holds its AGM.

The Australian share market over the past thirty days…