Overnight: All Is Forgiven

By Greg Peel

Beginning Descent

The ASX200 fell -100 points in the first ten minutes yesterday in line with a big drop on Wall Street, but immediately courageous buyers stepped in. After an hour the index was down only -50. Then Alan Joyce piped up.

The news that Qantas ((QAN)) will lay off 6000 workers, cancel its dividend and raise $1.9bn in capital hit the market like a slap in the face. Shares in Qantas and the travel industry were already under pressure from the rising case-count in Victoria threatening the return to domestic travel, and the rising case-count across the globe implying a return to international travel remains a very long way off.

Qantas will continue stand down another 15,000 workers, mostly involved in international flights. Presumably they are currently being Job-Kept, so what happens after September is unclear. The reduction in costs for Qantas from not having to fly (particularly fuel) means the company expects to at least break even in FY20.

It is a clear reminder to investors this virus thing is not over yet.

Qantas shares are now in a trading halt but Flight Centre ((FLT)) fell -11.0% yesterday to be the worst index performer, while Webjet ((WEB)) lost -8.6% and Corporate Travel Management ((CTD)) -8.0%.

It was otherwise a “sell everything” session with all sectors closing in the red by -2-3%, with a couple of exceptions.

Energy lost a stand-out -4.4% on the implications of possible re-lockdowns. Healthcare fell only -0.2%, helped by an announced acquisition from CSL ((CSL)). Staples fell only -0.8% on renewed toilet paper fights in the aisles, or at least flour punch-ups.

We might put this down as “defensive” but then telcos fell -2.2% and utilities -2.8%. The Qantas news reminds us that if JobKeeper fails to retain jobs as was its goal, we may be set for a big spike in unemployment beyond what is already the case, and the incapacity to pay phone and electricity bills.

And what happens after September? Josh must be having nightmares.

There was some positive news on the day nonetheless, from outside the ASX200. Footwear retailer Accent Group ((AX1)) provided a solid update and jumped 9.7%. Online art marketplace Redbubble ((RBL)) also updated and leapt 25.5%. Marley Spoon ((MMM)), provider of meals to your home, rose 11.3%.

Of course, these little panics sometimes only last a day, particularly in the US. Wall Street rebounded last night and our futures are up 70 points this morning.

That said, the Dow futures have already began to fall this morning (at least as I write) in the wake of the results of the Fed’s US bank stress tests.

Ups and Downs

Bank stress tests, basically capital adequacy tests, were introduced after the dark days of the GFC. The fear was the Fed would this time go down the path of Europe in banning bank dividends, or follow APRA and demand dividends be slashed or deferred. In the end the news was not too bad.

Banks must cap dividends via a formula based on recent income. The formula sets third-quarter dividends at a level equal to average net income over the past four quarters. This means the banks cannot increase dividends, but also that some banks may have to cut dividends. Share buybacks have been banned, but the majors had already suspended their buybacks anyway.

Is this good news or bad? Well, as I say the Dow futures are quietly falling. But while the after-market news may not be so positive, the day-session saw the banks shine.

The news during the session was of an easing of some Volker Rule regulations (also a fallout from the GFC), such that banks can now invest in private equity companies and hedge funds and, in simple terms, do not have to hold as much against derivative positions. It’s fairly complex, but suffice to say seen as quite a fillip for the sector.

The Dow was down -240 from the open last night before this news hit. It returned to the flat line and stayed there all day until the last hour, when it rallied 300 points.

All S&P500 sectors closed in the green bar one (utilities). A 2.7% gain for financials stood out. Next best was energy on 1.9%.

Meanwhile, the case-count continues to climb. Anecdotal evidence suggests most of the new cases are younger Americans, which at least impliess a lower mortality rate, but also suggests the kids need to stay away from the oldies.

Florida and Texas have now postponed planned phase three re-openings. Nevada has made the wearing of masks mandatory. The re-opening of Disneyland in California is also now postponed.

Disneyland employs a vast amount of workers. The US “JobKeeper” expires end July.

New jobless claims registered above one million last week for the fourteenth week in a row.

On the other hand, US durable goods orders rose 15.8% in July.

In government news, the Senate last night passed a bill that would sanction Chinese officials and businesses that violate Hong Kong’s independence. The bipartisan bill now goes to the House, where a companion bill has been introduced.

Commodities

That durable goods number, which includes vehicles, was behind a 2.5% rebound in oil prices.

Metal prices seem a bit stuck in the headlights, with iron ore indeed unchanged.

The Aussie is up 0.3% at US$0.6892.

Today

The SPI Overnight closed up 70 points or 1.2%.

Tonight the US will see May personal income & spending and PCE inflation, along with the fortnightly consumer sentiment measure.

The Australian share market over the past thirty days…