Overnight: Defying The Odds

By Greg Peel

Current Affairs

“It is possible that the depth of the downturn will be less than earlier expected. The rate of new infections has declined significantly and some restrictions have been eased earlier than was previously thought likely. And there are signs that hours worked stabilised in early May, after the earlier very sharp decline. There has also been a pick-up in some forms of consumer spending.”

That’s the good news, from yesterday’s RBA statement.

“The outlook, including the nature and speed of the expected recovery, remains highly uncertain and the pandemic is likely to have long-lasting effects on the economy.

“The substantial, coordinated and unprecedented easing of fiscal and monetary policy in Australia is helping the economy through this difficult period. It is likely that this fiscal and monetary support will be required for some time.”

That’s the bad news. However, the governor largely repeated what he had already said last week.

Ahead of today’s March quarter GDP result, yesterday saw numbers for the current account. The current account surplus surged in the quarter, due entirely to the balance of trade. We need only look at the iron ore price to see that exports have held up, while imports took a dive. But this was the March quarter, with only a brief virus impact felt at the death.

Yet economists believe surpluses will continue for now, given both China and Japan are getting back on their feet.

Forecasts for the GDP number basically range from slightly up to slightly down. While the end result is unimportant ahead of June quarter reality, if March is slightly up and September can show a gain, the government can claim yet another year of no economic recession (but only on the narrow definition of two negative quarters in a row).

Meanwhile, the local market played a cautious game yesterday, unable to really get moving until the afternoon. Early on, traders remained stunned by Trump’s remarks in the Rose Garden, wondering where this might all be heading. But some news out of one small tech company helped to fire things up.

BNPL company Zip Co ((Z1P)) announced it is to acquire the remaining shares of US company Quadpay in a scrip swap, funded by a convertible note issue. The deal is forecast to be accretive in both total transactions and revenue. Zip shares jumped 38.7%.

The news floated all boats in the tech space, including rival Afterpay ((APT)), but Zip is not (yet) in the ASX200. Hence the IT sector rose only 1.3% in an otherwise lacklustre session, in which four sectors shouldn’t really have bothered.

Industrials (+1.1%) was the best performer, which about sums things up. Transurban ((TCL)) continues to gain on the reopening theme, up 1.6%, which elsewhere was also reflected in moves for Domain Holdings ((DHG)), up 9.9% and supported by Monday’s house price data, and retail landlords UR Westfield ((URW)) and Scentre Group ((SCG)), up 8.3% and 5.5%.

Rumours someone is sniffing around Boral ((BLD)) had that stock up 6.3%.

Speaking of rumours, Origin Energy ((ORG)) is said to be sizing up telco Amaysim ((AYS)), which rose 12.5%.

At the end of the day, the fact that consumer discretionary was the second best performer (+1.0%), while staples (+0.7%), utilities (+0.6%) and telcos (+0.4%) all posted gains, which was the reverse of Monday, underscores we are still in the No Idea phase.

And the Aussie, bloody hell. It’s up another 1.4% this morning at US$0.6898. A surging current account surplus, significantly lower per capita death toll than the US, protests but not rioting the streets, a leader that looks increasingly more measured, comparatively, by the day…take your pick.

The RBA board did not mention the Aussie yesterday. But Westpac’s chief economist wants the central bank to bring it back down with negative rates.

Carte Blanche

Ask any respected investor in the US why Wall Street continues to grind its way back towards all-time highs despite all that’s going on and you’ll get the same answer every time – the Fed.

The Fed learned a lesson in the GFC: next time, don’t muck about. While Bernanke’s monetary stimulus was ultimately the greatest the world had ever seen, leading to markets enjoying “the Bernanke put”, the response from Jay Powell this time makes Bernanke’s QE look like a change jar. And a change jar that took years to be spent.

In the GFC, the then Congress bickered and manipulated and attempted to exploit requisite fiscal stimulus and thus took months to put anything decisive in place. This Congress has moved swiftly, and is set to move again.

Talk about a put option. To put QE-infinity into perspective, last night Amazon, which is trading at all-time highs, elected not to take advantage and raise equity but instead issued US$10bn in debt. Of that US$10bn, US$1bn of three-year bonds was oversubscribed three times, and settled at an interest rate of 0.4% — the lowest rate in US corporate history. The US three-year Treasury yields 0.2%.

If 0.4% is the best you can do for corporate debt, and the cash rate is zero, where do you put your money?

Last night saw another one of those (typically brief) periods in which Big Tech sat back while “value” and beaten-down cyclicals led the charge. The rally stumbled late morning but continued to pick up momentum to the close. TINA meets FOMO.

Hence Wall Street is looking through riots and rising China tensions, preferring to focus on re-openings and a flatter curve, even as the riots prevent a lot of planned re-openings from going ahead. It has been pointed out that in 1968, when Martin Luther King was shot, Bobby Kennedy was shot, and Russian tanks rolled into Prague, the S&P500 returned 11%.

Health officials are understandably concerned the riots may inadvertently lead to a second wave.

Commodities

Ongoing weakness in the US dollar is supporting commodity prices, as are re-openings.

As is often the case, the gold price plays the two steps forward, one step back game.

At this rate the Aussie will be back at parity by next week.

Today

The SPI Overnight closed up 31 points or 0.5%.

GDP result today, for what it’s worth. We’ll also see April building approvals.

It’s services PMI day across the globe.

The US will see May private sector jobs numbers tonight.

The Australian share market over the past thirty days…