Overnight: What Virus?

By Greg Peel

A Day for the Winners…

With Wall Street again relatively flat overnight (S&P500), yesterday was another in which investors could focus almost exclusively on the day’s earnings results. It was still a choppy affair nonetheless, with the ASX200 opening higher but baulking at the 6100 level and falling back to square at midday.

But then it was all systems go. The index peaked at over 60 points higher before profit-taking appeared in the final half hour. The rally appeared to follow the release of the minutes of the August RBA meeting, which basically said nothing new. A recovery for the Australian economy will take longer than previously expected (Melbourne) but from a base not as bad as had been feared.

Looking at moves for individual stocks and sectors, it was all about earnings at the end of the day.

Healthcare was the standout sector, up 4.2% after Cochlear ((COH)) rallied 9.8% on its result. IT gained 2.1%, with online wealth platform Netwealth ((NWL)) rallying 8.5% on its result, network software company Megaport ((MP1)) jumping 10.8% after announcing the launch of a new product (ahead of reporting earnings today), and the highly volatile SaaS company WiseTech Global ((WTC)) gaining 6.8%, because it can. WiseTech also reports today.

The star of the day was resource sector contractor Monadelphous ((MND)), which shot up 18.9% on its result. It’s classed as an industrial, so that sector rose 1.2%.

Other sector gains were less spectacular, and consumer staples (-0.9%) and financials (-0.6%) bucked the trend.

Within staples, investors clearly wanted more out of Coles ((COL)) as it fell -1.2% on its result, but the big drag was Treasury Wine Estates ((TWE)), down -14.3% now the Chinese are finally going to do something about heavily government-subsidised Australian wine exports undermining China’s vast domestic wine industry.

Within the banks, Westpac ((WBC)) provided a quarterly update and confirmed that which no one wanted to hear. Having deferred its dividend on an APRA directive, the bank yesterday announced it will now be scrapped altogether. The stock fell -2.3%.

Along with Treasury Wine, which has already reported (very positively on the day), none of the top five index losers reported earnings yesterday.

UR Westfield ((URW)) and Flight Centre ((FLT)) have been up and down like yo-yos lately, as if one day we’re coming out of the virus and the next day we’re back in again. The former fell -7.7% while the latter fell -5.6%, maybe because Tasmania is going to keep its border closed until December, underscoring intensifying state border battles.

Viva Energy ((VEA)) fell -6.1% having reported on Monday.

The list of companies reporting today is about half again the size of yesterday’s list, and with Wall Street again not doing anything much new last night, despite history being made, today should be another in which earnings results are the primary focus.

The futures closed down -7.

And not one for the Losers…

The volume of shares declining on the NYSE last night outweighed the number advancing. The Dow fell -0.2% and the Russell small cap index fell -1.0%. Seven S&P500 sectors closed to the downside against four to the upside.

The S&P rose 0.2% to a new all-time closing high. How so?

Much has been made of the battle on Wall Street between growth and value, or growth and cyclicals, which growth has won and will continue to do so, despite occasional bursts of rotation. We can simplify it further and just separate virus winners and virus losers.

The S&P500 is now up 5% for the year, as it was on February 19 before the world fell ill. It’s up 55% from the March low in the space of five months – the fastest comeback from a bear market in history.

The Nasdaq, which rose 0.7% last night, is up 25% for the year. Amazon is up 50%. The financials sector remains almost -30% below its February high.

Amazon is the flag waver among the half a dozen Big Tech names that have almost on their own driven the rally back. They are virus winners. But they’re not fly-by-night winners, set to see reality bite once the virus has past. They are structural, sustainable winners.

The banks are the flag wavers for all the virus losers, reflected in the bad loan provisions set aside for the inevitable flood of bankruptcies, foreclosures and delinquencies that the virus will ultimately drive among the likes of restaurants, traditional retail, travel companies and oil producers, and many others.

Perhaps bucking the trend in the Days of Covid is the US housing industry, which one might expect, as is more so the case in Australia, to be a virus loser. New home starts jumped a record 23% in July from June, and 23% from a year ago. Why? Cheap mortgages.

It’s all about the Fed. Indeed, the 55% rally back from the depths for the S&P500 is all about the Fed, and fiscal stimulus. On the latter front, there’s still no progress on a second package, but Wall Street still firmly believes there will be one because there has to be.

The US dollar index fell another -0.6% last night to be down -10% from its prior high, reflecting monetary/fiscal stimulus and a never-to-be-paid-back deficit. US bond yields tried last week to rally as signs of CPI inflation creep in, but have failed.

Gold is back at US$2000/oz. Gold, bonds and Big Tech – everything else is down the gurgler.

Tesla rose 3% last night. It’s up 30% in a week on no new news other than a pending stock split.

Which begs the question: Is this a bubble? What happens now?

Typically, recovering all the losses in a stock market crash triggers a pullback. But never before has the Fed supported the market to such an extent. Commentators say just maybe there will be some consolidation, some rotation, as surely the Nasdaq can’t just keep going up every day.

While also admitting they wouldn’t be surprised if it did.

Commodities

In July, China produced the highest amount of steel on record.

Oil prices are bobbing up and down on weekly US inventory and production data.

The Aussie is a Fed victim, up 0.4% at US$0.7243.

Today

The SPI Overnight closed down -7 points. Results seasons are not a time to take big bets before the open.

The minutes of the last Fed meeting are out tonight.

There are now simply too many reporting companies each day to try and single out highlights.

The Australian share market over the past thirty days…