Overnight: Measured Exuberance

By Greg Peel

Wall Street Roundabout

“Members recognised that the Australian economy was experiencing the biggest economic contraction since the 1930s. A very large number of people had lost their jobs or were working zero hours, household spending had weakened considerably and some investment was being deferred or had been cancelled. Notwithstanding these developments, it was possible that the downturn would be shallower than earlier expected.

“The pace of job losses had slowed towards the end of April. In some of the industries that had been most affected by the restrictions on activity, the number of jobs had stabilised or increased a little. [But], job losses had continued in other industries, which pointed to the possibility of a more persistent reduction in overall demand than had previously been expected.”

This was the good news/bad news story from the minutes of the June RBA meeting, released yesterday, which appears to suggest the economic impact won’t be as deep as feared but the recovery might take longer. Either way, the cash rate will remain at 0.25% for as long as it takes, and unconventional measures will remain in place if and when necessary.

Considering the path of the ASX200 these past few days, it appears no one much cares.

The Australian market was caught out on Monday by the Dow futures falling overnight. We thus traded down, but then Wall Street didn’t. It opened lower on Monday night but rallied to be up on the session. Damn!

So yesterday we had a lot of ground to make up, after Monday’s sell-off, to get back to square one. With that achieved, the Dow futures opened and rallied once more. So we did too.

And indeed, the Dow opened up over 800 points last night, and then fell all the way to the close. What to do? Our futures are up an uncertain 29 points this morning.

The current state of play could not be better exemplified by the fortunes of outdoor advertiser oOh!media ((OML)). Depending which way the wind is blowing, this recovery story stock is either plunging double-digits or rising double-digits on each given day. Yesterday the stock rose 12.2%. On Monday you couldn’t give it away.

Yesterday was pure risk-on, as is evident by consumer discretionary rising 5.1% while staples only rose 2.5%. Every day over the past week or so the US banks and energy sectors have either topped the S&P500 gains or finished at the bottom on down-days. So our sectors are doing the same.

Yesterday energy rose 5.8% and the banks 4.7%. IT chimed in with 5.1%. The defensives, for the most part, rose by smaller but still healthy amounts, except for telcos, which jumped 4.0%.

And just to underscore risk-on, the biggest down-move for an ASX200 stock yesterday was a mere -0.9%, for a gold miner.

As for the biggest gainers, the list of double-digit percentages was as long as your arm. A couple of highlights: the energy sector’s comeback is spilling into associated sectors, with refiner Viva Energy ((VEA)) topping the index with a 15.5% jump. The heavily shorted Super Retail ((SUL)) put away its rights issue and rose 11.0%.

Today? I’d say slow start, at least until the Dow futures open. Then toss the coin.

Hope Springs Eternal

Having read the RBA minutes, Fed chair Jerome Powell pretty much made a similar testimony to Congress last night, and suggested more fiscal stimulus may be needed as the US economy may only make a slow recovery from the pandemic. Now that the Fed is lending money directly to US corporations, it’s not much of an issue on Wall Street.

Trump is set to roll out an infrastructure plan – the same one he’s been talking about since 2016.

US retail sales rose 17.7% in May, when economists had predicted 8.5%. This sent investors scrambling into death-row department stores and last-century brands. The figures have been much the same in Australia. Net out the March-April lockdown falls in sales against the May reopening surge and you get pretty much nowhere, and still down year on year.

But Wall Street will jump on anything.

Particularly any news on the vaccine front, which had all gone a bit quiet lately, Last night Oxford Uni did not announce it had found a vaccine, but it did announce that trials of a common, low-cost and hard to pronounce steroid was having remarkable success in preventing death in severe cases.

WHO is beginning to get very upset at virus-related press releases now overriding established research paper publication protocols.

Wall Street also jumped on this news, just as they had a few months ago when Trump touted hydroxy-thingy.

The jump was all from the opening bell. The Dow opened up around 860 points and proceeded to post another choppy move, ultimately to the downside, to close up 500-odd.

Not everyone is convinced.

Meanwhile, yesterday Beijing ordered all schools to shutter in an effort to contain a new virus outbreak, which already had spread to neighbouring provinces, and said all people will need to be tested for the virus before they are allowed to leave the city. And hospitalisations across the likes of Arizona, Texas, Florida and the Carolinas continue to surge.

Commodities

Oil prices continue to recover, with news on production declines outweighing economic damage concerns. Last night it was reported Iraq, to everyone’s surprise, is complying with the recent OPEC production cuts.

Yet last night also brought a warning from UK oil giant BP that the pandemic will have a lasting economic impact, hurting demand for oil and weighing on energy prices. The company has written down as much as -US$17.5bn of its assets, noting that the crisis may force it to shutter some production.

Elsewhere, metal prices continue to lean to the positive, while gold is now treading water.

The US dollar index rebounded 0.4% last night, so the Aussie’s down -0.5% at US$0.6877.

Today

The SPI Overnight closed up 29 points.

G8 Education ((GEM)) holds its AGM today.

The Australian share market over the past thirty days…