Overnight: Don’t Even Think About It

By Greg Peel

Deflated

News that the June quarter brought reintroduced deflation to Australia for the first time in 22 years, and marked the biggest fall in the 72 year history of tracking the CPI, was met largely with a shrug by markets yesterday. We all knew it was coming. The ASX200 did pull back on the release after a solid opening, but then largely shut up shop from late morning.

Free child care and the fall in fuel prices accounted for -1.8% of the net -1.9% headline CPI fall. Add in free pre- and primary school in the three big eastern states and inflation otherwise rose 0.1%. Annual headline inflation fell into the negative at -0.3%, but the RBA’s core measure remains up 1.2% annually after falling just -0.1% in the quarter.

The single consumer item that saw the biggest price increase were cleaning & maintenance products (+6.2%). No surprise.

The Aussie never blinked, and indeed is up yet again overnight as the greenback resumes its slide. The RBA is already at an effective cash rate as low as it is likely to go, thus deflation is not only likely to be temporary, it makes no difference to interest rates.

The banks should by rights be the hardest hit by deflation, but the financials sector rose 0.9% on the day. This was because APRA decided to ease off on its dividend demands and allow banks and insurers to pay up to 50% of profits as dividends through to the end of the year. This is “up” from a previous instruction to either defer or slash dividends, to which the banks complied.

Deflation does nevertheless make reliable yield-payers more valuable, and indeed utilities (+1.2%), staples (+0.4%) industrials (+0.2%) and property (+0.1%) were the only winners on a net down-day.

The market is clearly expecting some big dividend cuts from the oil & gas companies, as energy fell yet another -1.6% even as oil prices remain stable. The iron ore price was weaker overnight, and while the USD gold price keeps on keeping on, so does the Aussie, impacting on all resource exports. Throw in warnings from analysts that some gold miners are getting too frothy, and materials fell -1.7%.

Healthcare (-0.4%) is also battling the currency. The Nasdaq had fallen overnight, so the Ausdaq fell -1.6%.

But guess what? The ASX200 fell yesterday, and on Tuesday. The spell is broken. After peaking at 6148 on June 10, the index fell back through 6000 on June 11. Yesterday it closed at 6006.

For that we can likely thank the Queensland government. The State of Hate series should be fun this year, if there is one.

But it’s not a trend. The futures are up 54 this morning, suggesting yet another bounce off 6000 support.

Among individual stocks yesterday, car dealer AP Eagers ((APE)) stole the show with a 13.3% gain, after confirming expectations of a -23% loss in profit in FY20 at its AGM. Daylight was second.

IGO ((IGO)) bemoaned cost increases when reporting its June quarter numbers and fell -13.2%. St Barbara ((SBM)) didn’t fare much better after its production report was released, and fell -7.6%.

Wall Street took off again last night, accelerating after the Fed press conference.

Bad News Still Good News

The tone of Fed chairman Jay Powell’s post-meeting press conference last night can be summed up by the line “we’re not even thinking about thinking about thinking about a rate rise”. The Fed has clearly become even more dovish than it was at the last meeting, when Powell only said “we’re not even thinking about thinking about a rate rise”.

Otherwise it was a case of the Fed will continue to do what’s necessary, uncertainty reigns, recovery threatened by virus spike, more fiscal policy needed, yada yada yada.

Wall Street saw that it was bad, which meant it was good. But the truth is the major indices opened higher and were tacking gradually north before the afternoon statement release.

Dr Fauci said it is not unreasonable to expect a vaccine to be ready by December. Moderna said its vaccine candidate is working on monkeys.

The Big Tech stocks all rallied, even as viewers tuned into the Congressional grilling of the CEOs of FAAG on antitrust concerns. The truth is the market does not expect any major ramifications, and if there are, it would likely take years to get through the courts.

Moreover, it is suggested that were these megaliths forced to break into smaller parts, the sum of the parts would be worth more than the current whole.

Every sector closed in the green. The Dow underperformed because Boeing fell again.

Chip-maker Advanced Micro Systems rallied 12.5% on its earnings result.

Wall Street remains ever optimistic that a vaccine will be found, but before that, that Congress will reach an agreement on the next fiscal support package, with time running out and the Fed in its ear.

Commodities

Gold remains undeterred, as it might be if the Fed remains dovish.

Iron ore has bounced back, otherwise not much else going on.

Other than the US dollar resuming its slide, as it might do if the Fed remains dovish. It’s down -0.5%, helping the Aussie up 0.4% to US$0.7186.

Today

The SPI Overnight closed up 54 points or 0.9%.

The next point of excitement for Wall Street will be the first estimate of US June quarter GDP, due tonight, with forecasts at around -36%.

The above-mentioned FAAG all report earnings tonight.

Here we’ll see June building approvals data.

Quarterly production reports are out today from Fortescue Metals ((FMG)) and OceanaGold ((OGC)), while IOOF Holdings ((IFL)) provides a quarterly update.

Macquarie Group ((MQG)) holds its AGM.

Genworth Mortgage Insurance Australia ((GMA)) and Cimic ((CIM)) report earnings.

The Australian share market over the past thirty days…