Overnight: On The Shoulders Of Giants

By Greg Peel

Full Steam Ahead

The Australian government is eager to get the economy back up and running, even if it is on a frustratingly gradual basis. It’s not just about our success in flattening the curve, it’s the dire economic warnings and cost of the lockdowns to date. Health risk on the one hand, but perhaps greater impact on Australian lives if the economy is shut down for too long. Not to mention the cost to the taxpayer of welfare support.

It’s a fine balance, given it is as good as inevitable an easing of restrictions will lead to a new increase in cases. That’s where public discipline, extensive testing and the app come in. At this stage it’s not looking like the government will get the app numbers it hoped for.

If the stock market is concerned about a second wave, it’s not apparent in current trading. For a second session running the ASX200 surged on the reopening theme.

Our simple gauge of consumer discretionary versus consumer staples provided clear evidence again yesterday. Up 1.6% for the former and up 0.2% for the latter. The top five winners again included Webjet ((WEB)), up 19.5%, and AP Eagers ((APE)) up 10.8%, and even Southern Cross Media ((SXL)) shot up 18.5% as recommencement dates are now being touted for all of league, AFL and rugby.

Myer ((MYR)) rose 8.6%, Kathmandu ((KMD)) 15.4%, and Bubs Australia ((BUB)) 9.3%.

The energy sector rose 2.0%. It’s not just about daily oil price fluctuations, but about the resumption of transport (globally). Locally this means cars back on the road and planes back in the sky (at least domestically), thus industrial rose a chart-topping 2.4%.

Consumer staples was the main laggard in a day when every sector rose, and defensive peers healthcare (+0.7%) and telcos (+0.9%) also underperformed. Utilities nevertheless rose 1.5%. Electricity demand to return.

As fast as the market recovers, so too does the share count rise. Mesoblast ((MSB)) has gone to the market for new capital, cashing in on a 200% surge in share price since March. Incitec Pivot ((IPL)) reports full year earnings today, but it, too is now in a trading halt having announced a raising. Elmo Software ((ELO)) is at it too. It’s a living thing.

Remember when buybacks were all the rage?

On the downside yesterday, Graincorp ((GNC)) was the worst index performer with a -4.2% fall, in response to China’s threat to slap an 80% tariff on our barley. Easily fixed – just refuse to sell them any iron ore.

The Treasurer would have otherwise brought down the FY21 budget tonight, but that’s understandably been postponed to October. Instead he will deliver an economic update, sure to be laced with doom and gloom, as an incentive to get things moving again.

Premiers in the cross-hairs.

There is also much talk of taking the opportunity to enact sweeping economic reforms. Be afraid. Yesterday Saudi Arabia slashed spending and tripled its GST.

The Disconnect

Last night the Nasdaq posted its sixth straight session of gains. On Friday night the Nasdaq was merely part of the pack, but last night it returned to being market leader, up 0.8%. And the only market leader, given the S&P was flat and the Dow fell -0.5%.

The Nasdaq’s gain is all about five stocks – the Big Tech mega-caps FAAMG. N peaked out in mid-April. And given all five are in the S&P, and both Apple and Microsoft are in the Dow, a broad market index ex those five would look interesting.

The Nasdaq is now up 1% for 2020. The Russell Small cap index is down -20%. The S&P financials sector is down -40%. Typically banks lead the market out of recession, as was the case in 2009. Not this time. Unlimited Fed stimulus and lockdown-induced loan losses have the banks trapped.

Currently US states are rushing to reopen their economies. The US curve has plateaued, but not plunged. This morning the president was banging on about how America now has the greatest testing capacity on earth. It might now be true, but the virus impact began in February.

Congress was swift in passing a massive fiscal relief package. Most of those eligible are still waiting. The banks tasked with distributing the money are struggling to cope with the backlog. The risk is businesses will go under and more jobs will be lost simply because relief arrived too late.

The Treasury Secretary last night ensured new spending bills will be coming and he’d be unfazed in spending US$3trn. It will take a couple of weeks though, to get the new measures sorted. After that, it still has to get out to the huddled masses.

“The main risk to our view: The decisive policy response is not delivered in a successful and timely fashion, causing lasting damage to the economy,” the world’s largest fund manager, BlackRock, said last night.

Reopening the economy will save some businesses, but not all. Reopening the economy will also reignite the virus spread risk. A second wave would be devastating. Just as it was in 1918-1919.

Commodities

The US dollar index shot up 0.5% last night. Base metal prices held fast nonetheless on hopes US-China tensions won’t escalate.

The dollar, and another 4 basis point rise in the US ten-year yield to 0.72%, pressured gold.

The Aussie swapped the greenback with a -0.5% pullback to US$0.6493.

Today

The SPI Overnight closed down -19 points.

The NAB business confidence survey for April is out today. Maybe some improvement?

Housing finance numbers for March are also due.

China and the US report CPI numbers.

Amcor ((AMC)), AusNet Services ((AST)), and CSR ((CSR)) report earnings.

The Australian share market over the past thirty days…