The Overnight Report: Reasons To Be Cheerful

Bonds. Australian Bonds.

After having rallied 5% from its Monday low to its Wednesday high, the Australian market was due some profit-taking yesterday. The futures had suggested down -18 points for the ASX200 at the open.

But when the market opened as predicted, it just kept on going. A valiant effort to rebound early in the afternoon failed.

While profit-taking may have led out the session, it was the Australian bond market that suddenly grabbed attention. The ten-year yield ultimately jumped 7 basis points to 1.22%. It’s a far cry from the pandemic low of 0.61%. This despite the RBA announcing only this week it will extend its QE program for another six months, with no fear of inflation.

When bond yields rise the value of dividends is diminished. Thus it was of no surprise yesterday that the hardest hit stocks were REITs and other bond proxies. Worst performing sector was property (-2.4%) followed closely by utilities (-2.0%).

Can-do-no-wrong logistics REIT Goodman Group ((GMG)) fell -2.2%. Westfield landlord Scentre Group ((SCG)) fell -3.2% and developer Mirvac Group ((MGR)) fell -3.6%.

The fall in utilities was exacerbated by a profit warning from AGL Energy ((AGL)), which dropped -3.6%, which happened to coincide with a profit warning from rival Origin Energy ((ORG)), which is in the energy sector due to its upstream business. Origin fell -6.9% to be the worst index performer on the day.

Both cited weaker electricity prices. I’m sure you’ll join me in sending them both sympathy cards. Australia’s take-up of rooftop solar is the fastest in the world by a margin. Funny that.

The industrials sector fell -1.6%, led by sector heavyweights and popular bond proxies Transurban ((TCL)) and Sydney Airport ((SYD)), which fell -2.2% and -3.7% respectively.

But no sector was spared. All closed in the red.

The banks fell -0.4%, which seems like a good effort given banks are dividend champions, but higher yields improve net interest margins, so it’s a trade-off. Materials fell -0.5%, because these days the iron ore club pays higher yields than anyone else.

CSR ((CSR)) was the best index performer with a 3.4% gain, after Macquarie talked up the local building industry and upgraded CSR to Outperform.

Outside the index, Pinnacle Investment Management ((PNI)) leapt 10.2% on its earnings result, except its report came out on Wednesday. Only when brokers issued glowing appraisals did the market pay attention.

Food home delivery service Marley Spoon ((MMM)) rose 8.5%, because everyone loves a lockdown.

But for all wailing and gnashing of teeth yesterday over bond yields, the futures are up 69 points this morning on another Wall Street rally.

So go figure.

Reddit in the news

The so-called Reddit stocks fell again last night, led out by poster boy GameStop, down -42%. Lawmakers and regulators are set to discuss the whole saga in coming days.

The end of the short squeeze has provided Wall Street with reason enough to return to prior, all-time highs, with the S&P500 achieving just that last night.

Financials continue to lead the rally back, in lockstep with rising US bond yields, for reasons aforementioned. The US ten-year last night rose another point to 1.14%. There seems to be a difference of opinion between central banks and the market as to the trajectory of inflation in a massively monetarily and fiscally stimulated world.

Also finding a new lease of life is the energy sector, as oil prices have now broken out of their recent range and continue to push higher. Not so good for US airlines, who are bemoaning much lower demand than was hoped for by now.

There was also positive economic news, following on from Wednesday night’s surprisingly positive private sector jobs number. Last week’s new jobless claims fell by -33,000 to 779,000 when economists had forecast 835,000. This follows a blip last month when the week topped 900,000.

It also leads to optimism over tonight’s non-farm payrolls number.

In stimulus news, President Biden has said he is not going to compromise on his US$1400 hand-out plan within the US$1.9trn package but he is open to reducing the number of recipients. Originally the US$1400 was to go to everyone but a means test of eligibility would be more equitable and reduce that US$1.9trn figure, maybe going some way to appease Republicans.

This can only be good news.

Meanwhile the US earnings season rolls on and continues to provide forecast-beating results.

Add it all up and Wall Street is feeling a bit chuffed.

Commodities

You can’t keep a good iron ore price down.

As the US economy shows signs of improvement, and there is hope of more improvement ahead now the adults are in charge, the US dollar continues to rally back. The Aussie is down -0.3% at US$0.7600.

Today

The SPI Overnight closed up 69 points or 1.0%.

The ABS will update its earlier December retail sales numbers today while jobs numbers will draw focus in the US.

REA Group ((REA)) and majority owner News Corp ((NWS)) report earnings. FNArena’s Corporate Results Monitor is updated daily throughout this month:

https://www.fnarena.com/index.php/reporting_season/

The Australian share market over the past thirty days…