Overnight: Fade Away

By Greg Peel

It’s a bit of a slab, but stick with me:

“The Bank will do what is necessary to achieve the 3-year yield target, with the target expected to remain in place until progress is being made towards the goals for full employment and inflation. Since this target was introduced, the Bank has bought around $36 billion of government bonds in secondary markets, including bonds issued by the states and territories. The Bank will continue to promote the smooth functioning of these important markets. If conditions continue to improve, though, it is likely that smaller and less frequent purchases of government bonds will be required.

Given the substantial liquidity that is already in the system and the commencement of the Term Funding Facility, the daily open market operations are likely to be on a smaller scale in the near term. Operations at longer terms will continue, but the frequency of these operations will be adjusted as necessary according to market conditions.

The Australian financial system is resilient. It is well capitalised and in a strong liquidity position, with these financial buffers available to be drawn down if required to support the economy.

The Board wishes the best to all Australians as our country deals with this very difficult situation.”

Basically the RBA is saying it has fired the big bazooka, and while further sorties will be launched if necessary, credit markets have stabilised. This should be good news.

But we’ve had the big snap-back rally, culminating on Monday with a Buy Everything session on glimmers of hope on the curve-flattening front, and yesterday saw a strong open on a 1600 point Dow move that all came to nought by the close. The ASX200 hit its peak ten minutes in.

Monday saw relatively uniform moves up among sectors. Yesterday was a mess. Yesterday saw the resource sectors hanging in there and IT getting a boost, while other cyclicals faded and defensives were largely rotated out of. Staples, healthcare, telcos and utilities were the worst performers, accompanied by the banks.

Mid-March brought us the “sell first, ask questions later” phase, and since then we’ve been looking in a mirror. With a couple stumbles it’s been “buy now, ask questions later”, lest the greatest investment opportunity of a lifetime is foregone. Yesterday was all about rotation, as investors begin to sift between sectors and stocks to decide what is worth keeping at the price and what isn’t.

We still have to actually get through the recession.

To that end, we note the ABS issued February trade data yesterday, which were not relevant. What was relevant is these is the last trade data the ABS will issue until further notice.

Highlighting individual stock moves on the day is also becoming largely irrelevant, as share prices are flying around at the moment like moths in a bottle and often it’s the same names on different sides of the ledger each day.

We might make note that Flight Centre ((FLT)) successfully put away its capital raising and jumped 12% after a long trading halt. Oil Search ((OSH)) is looking to place US$700m, and offering a -23% discount.

Tyro Payments ((TYR)) reported a -23% drop in transaction volume, and jumped 20%. Polynovo ((PNV)) reported a 166% sales increase year on year in March, and rose 16%. Computershare ((CPU)) downgraded guidance, and rose 8%. The downgrade is not important. What is important is that guidance was actually offered.

Iress ((IRE)) withdrew its guidance. The list grows ever longer.

Signs of rally exhaustion, with a similar scene playing out on Wall Street overnight.

Jumping the Gun

Dow down only -29 points? Reminds of the good ol’ days… a couple of months ago. But the Dow was up over 900 at its peak, kicking on from Monday night’s historical 7%, flattened curve-driven rally.

Yesterday China reported no deaths for the first time since January. Spain and Italy continue to show signs of improvement, while last night Austria and Denmark both put a timeframe on ending their lockdowns. Monday night’s rally on Wall Street was sparked by two days of flat numbers in the state of New York. Last night the NYC mayor revealed Monday saw a spike to a new record number of deaths, suggesting there could be a “lag” in the state’s data.

That news took the wind out of Wall Street’s sails.

On Monday the president met with oil industry CEOs to discuss, the market was hoping, production cuts that would appease OPEC/Russia and put a floor under oil prices. Rather, they all agreed to cut expenses and lay off workers. Trump suggested the “free market” would determine the need for production cuts. WTI fell -7% last night.

Meanwhile, back in the “free market”, Trump announced last night the US$350bn pledged by the government for small business support would be increased due to overwhelming demand.

After sliding back from the day’s peak, the US stock market entered into an extremely choppy final hour, with the Dow bouncing up and down between flat and up 500 points, before finally giving up at the death. Another sign of exhaustion setting in.

Of course all could change in a heartbeat depending on the news flow, but after bouncing back 20%, Wall Street, too, looks to have decided that is enough for now.

Commodities

Another interesting fact about oil is that while the US produces enough to meet its own needs, it’s still a major importer. A primary reason for this is a law going back to time immemorial that only US-registered ships are permitted to transport US oil from port to port, including, say, from Louisiana to New York.

Ships registered in the likes of Panama and Liberia, as most of them are, are much cheaper, and thus it’s cheaper to import oil to non-producing regions rather than buy local. It has been suggested that perhaps it’s time this law was reviewed.

Oil aside, we see another largely positive day for base metals after weeks of downdraught, and iron ore continuing to do not much.

The Aussie did much yesterday nonetheless, shooting up another 1.5% on the RBA’s revelation it had started backing off the stimulus.

Today

The SPI Overnight closed down -52 points or -1%.

Local housing finance data for February are out today. Don’t know whether we’ll see March numbers.

The minutes of the last Fed meeting are due tonight.

Bank of Queensland ((BOQ)) reports earnings today.

The Australian share market over the past thirty days…