Overnight: The Magnificent Five

By Greg Peel

Shutting Down

“We’re all Victorians,” said Scott Morrison yesterday, echoing JFK’s famous “Ich bin ein Berliner,” which translates to “I am a sausage”.

Draw your own conclusions.

If we’re all Victorians we’d better lock ourselves in. South Australia has now re-closed its border to Victoria (how many horses have already bolted?), Tasmania has closed its border despite the long swim, and the ACT has shut off the portal into NSW. The WA border has remained closed the whole time, and Queensland, which had just reopened its border, must be agonising.

Does it work? The NSW border is already proving porous, with cases identified in Albury and Merimbula, and the same idiot in charge of the Ruby Princess has for some reason been shifted to Jetstar. One fears it’s only a matter of time.

Yesterday’s fall for the ASX200 was not about Wall Street’s retreat overnight. We are now decoupling to some extent from Wall Street due to domestic issues, yesterday opening in a haze of confusion that lasted through to lunchtime before more virus-related headlines sent sentiment scurrying back under the bed.

It was almost a “sell everything” session by the close, with only consumer staples bucking the trend (+0.5%) on renewed hoarding. Materials (-0.5%) was the next “best” performer as gold miners again starred (there’ll be more of that today) but beyond that falls became more uniform.

It’s easy to understand a -2.4% fall for discretionary under the circumstances, and -2.6% for industrials (toll roads and airports), but it’s always curious as to why healthcare should cop it (-2.8%) in a pandemic. CSL ((CSL)) remains the go-to profit-taking source (-3.3%).

In market cap terms, a -1.5% fall for the banks was substantial, after the majors offered to extend mortgage holidays for those in need.

Among individual stocks, gold miners topped the winners’ board while Domain Group ((DHG)) was the worst index performer, down -9.8% as the Melbourne real estate market again clams up.

The Ausdaq fell -1.6% to prove it ain’t no Nasdaq, and this is an important point.

Our futures are up 0.9% this morning. The S&P500 was up 0.8% overnight, when presumably futures traders here assumed Wall Street would continue to pullback last night on the reality of three million US cases. But it didn’t, so we’re supposed to be all enthusiastic again today.

Of that 0.8% gain for the S&P500, 50% can be attributed to three stocks – Apple, Microsoft and Amazon. Of the Dow’s 0.7% gain, 75% can be attributed to Apple and Microsoft.

And our futures are up 50 points.

Feedback Loop

The Dow has been long considered an anachronistic index by professionals on Wall Street, with the cap-weighted S&P500 the preferred indicator. But cap-weighted indices have their own problems.

FAAMG is now 21% of the S&P by cap-weight. That’s five of five hundred stocks making up one fifth. Every time the share prices of that group gain more than the index average on any given day, their cap-weights rise further. Index tracking funds then have to buy more of those stocks to maintain correct weight. This pushes up the share price, which increases market-cap, which…

As long as the momentum is maintained, and FAAMG is now Wall Street’s super-defensive trade in the days of covid (Amazon is up 66% year to date, Wal-Mart is up 5%), the equation will continue to feed on itself. The Nasdaq was up 1.4% last night.

Shades of 2000? Well, back then dotcoms were all a wing and a prayer trade. FAAMG, and N, are now fully legitimate businesses, and virus beneficiaries to boot. But surely, with Amazon trading at 147x earnings, there must one day be a reckoning.

The US reported a record 60,000 new cases on Tuesday, as reported last night, with Tennessee the newest state to break its case-count record. The seven-day average of new cases is greater than the fourteen day average, confirming the trend remains up.

Wall Street is hanging onto the notion that the mortality rate remains comparatively low because the average age of new victims is low, and on evidence the number of patients presenting at ERs is actually starting to retreat slightly. Clutching at straws?

Well not really, because as noted, only a handful of stocks are driving the indices higher, netting out a return to selling in cyclicals in particular, especially airlines. But now that airlines have fallen so far, their market caps are negligible, and thus their influence on the indices.

Wall Street is painting a warped picture.

My God, Tesla even fell last night (-1.7%). Mind you, EV newbie Nikola jumped 34%. Not yet even close to actually producing a vehicle commercially, Nikola’s market cap is now US$19.5bn – about the same as Fiat Chrysler.

Commodities

While it’s hard not to miss another US$15/oz jump for gold, taking it to over US$1800/oz, the reality is recent gains in the copper price have outstripped gold in percentage terms. One of the biggest producers of copper is Chile, and it, too, is now virus-ridden.

Other metals are being dragged along in sympathy.

Analysts continue to suggest a pullback is looming for the iron ore price, but no one’s paying attention in Singapore.

WTI crude for now seems rooted at the US$40/bbl mark.

Three million cases and 132,000 deaths suggest more work will be needed ahead from the Fed and the White House. The US dollar is down -0.5%, so the Aussie is up 0.5% at US$0.6981.

Despite Victoria’s best efforts, we just can’t compete with US numbers.

Today

The SPI Overnight closed up 50 points or 0.9%.

Today we’ll see housing finance data for May, while China will release June inflation numbers.

Charter Hall Retail ((CQR)) holds an EGM.

The Australian share market over the past thirty days…