ASX futures point to flat open, techs knock Nasdaq

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ASX futures point to flat open, techs knock Nasdaq

Australian shares are poised to slip at the open. Tech stocks extended their sell-off in New York, taking Nasdaq lower for a third day. ASX futures were down 2 points at 8.45am AEST. The Australian dollar was flat, holding above US74.00¢.

Shares closed lower on Wall Street, slightly extending their declines into the close. The Nasdaq bore the brunt of the sell-off given its tech-sector tilt.

BlackRock’s Martin Small, head of US iShares, said investors were caught flat-footed by Facebook’s earnings miss and weaker than expected outlook. 

“Momentum price trends play out over months, not days or weeks,” Mr Small said. “And the strength of a company’s balance sheet is proven out over years, not one earnings report.  

The Faangs
The Faangs

BlackRock

“Nevertheless, earnings season provides an opportunity for investors to take stock,” Mr Small also said “It provides another data point around the consistency or inconsistency of a company’s ability to deliver earnings to its shareholders. It provides another look at investor sentiment in a stock, and a company’s forward-looking prospects.”

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With second-quarter reporting season now well past its mid-point, analysts now expect S&P earnings to have increased by 22.6 per cent, up from the 20.7 per cent seen on July 1, Retuers reported. Of the 270 companies that have posted results, 82.6 per cent have beat consensus estimates.

With one full trading left in the month, it appears as if the S&P 500 is on pace to rise for a fourth consecutive month. That is no sign of what lies ahead, according to LPL Financial.

“Maybe it’s the back-to-school blues [most schools begin a new year in late August or early September], but since 1980, there is no month with a worse average return when it is lower than August,” LPL senior market strategist Ryan Detrick said.

Look at the recent history of August: Iraq invaded Kuwait in 1990, 1997 and 1998 both saw big drops in August over the “Asian Contagion” and the implosion of Long-Term Capital Management in 2010 saw a big drop as worries over the global economy spread, 2011 had the US debt downgrade, and 2015 was the China currency issues and a 1000 Dow drop, Mr Detrick said: “Pick a reason why, but August seems to have these big events that cause trouble.”

Bonds yields edged higher overnight ahead of today’s Bank of Japan policy meeting as traders and investors position for a policy tweak.

“The last week or so has seen reports that the BoJ may either review its yield curve control policy or tweak its operation, with the idea to improve the longevity of the stimulus programme and reduce the harm it causes to the profitability of commercial banks,” NAB senior FX strategist Rodrigo Catril said in a morning note.

“It seems that the BoJ would be happier to see long term rates increase but it doesn’t want to see a concurrent appreciation of the yen.  It’s a difficult balancing act and the central bank will need to get its messaging right.

Mr Catril also said fears of higher Japanese government bond yields “means fears of weaker Japanese demand for foreign bonds and this has seen global rates increase recently”.  Those moves extended overnight, he noted, with UK’s 10-year rate up 6bps to 1.34 per cent and Germany’s 10 year rate up 4bps to 0.44 per cent. That backdrop has seen US 10-year Treasuries nudge up 2bps to currently 2.975 per cent, after reaching a fresh July high of 2.99 per cent overnight.

Today’s Agenda

Local data: Building approvals June, Private sector credit June; NZ building permits June, ANZ business confidence July

TD on building approvals: “Building approvals are choppy, and after recent volatility we look for a flat print for June (mkt +0.5%, but wide range -2% to +4%/m). There is still considerable work in the pipeline despite a lack of uptrend in approvals.”

Overseas data: China manufacturing and non-manufacturing PMI June; Japan jobless rate June, Industrial production June, Construction orders June, Bank of Japan policy meeting; Euro Zone core CPI July, Second quarter advance GDP; US Second quarter employment cost index, Personal income June, Personal spending June, PCE core June, S&P house prices May, Chicago PMI July, CB consumer confidence July

TD’s Bank of Japan bet: “Despite some speculation of a change, it is difficult to see the board talking taper and YC “flexibility” when the BoJ conducted a third “unlimited” JGB purchase overnight. We expect no change to policy settings (10yr target 0%, policy balance rate -0.1%) as does the unanimous analyst consensus. USDJPY is holding around 111 awaiting BoJ guidance.

“We also hear from the Fed, BoE, RBI (+25bp expected fthe latter two) as well as on hold decisions from Banxico and Brazil’s COPOM. The USD likely to be choppy albeit in recent ranges overall as summer markets prevail and investors eye Friday’s US employment data.”

Market Highlights

SPI futures down 2 points to 6224 at about 8.45am AEST

AUD flat at 74.07 US cents

On Wall St: Dow -0.6% S&P 500 -0.6% Nasdaq -1.4%

In New York, BHP +1.1% Rio -0.4% Atlassian -3.7%

In Europe: Stoxx 50 -0.4% FTSE flat CAC -0.4% DAX -0.5%

Spot gold -0.1% to $US1223.18 an ounce at 1.45pm New York time

Brent crude +1% to $US75.01 a barrel

US oil +2.1% to $US70.14 a barrel

Iron ore +0.2% to $US67.65 a tonne

LME aluminium +1.1% to $US2094 a tonne

LME copper -0.8% to $US6250 a tonne

2-year yield: US 2.66% Australia 2.07%

5-year yield: US 2.85% Australia 2.27%

10-year yield: US 2.97% Australia 2.67% Germany 0.44%

From Today’s Financial Review

Business battles to be ready for AI wave: Jobs and Innovation Minister Michaelia Cash says Australia can manage the rise of automation and artificial intelligence without a spike in unemployment.

Women more educated, but still doing all the chores: More women than men now hold a university degree but the gender pay gap and share of housework and childcare has barely moved, the latest HILDA survey reveals.

Coalition may dump company tax cuts: The Turnbull government is splintering over its all-or-nothing approach to company tax cuts and may compromise on the issue.

United States

A broad sell-off of technology stocks pushed the three major US stock indexes lower on Monday, with the Nasdaq Composite posting its third consecutive loss of more than 1 percent for the first time in three years just days after hitting a record high.

The technology index tumbled 1.8 per cent as investors looked to other sectors or took profits ahead of the volatile midterm election season.

Shares of Facebook and Netflix slid 2.2 per cent and 5.7 per cent, respectively, pulling their fellow so-called FAANG stocks lower. Other FAANG stocks include Apple, Amazon, and Google parent Alphabet

But technology fell across the board, pushing all three major US stock indexes into negative territory.

The tech-heavy Nasdaq has also seen a sharp uptick in the number of stocks striking 52-week lows. On Monday, 102 Nasdaq-listed stocks fell to their lowest price in a year or more, 65 more than those hitting new highs.

“There’s an enormous amount of money (in tech stocks) and some of that money is rotating out or moving to the sidelines,” said Wayne Kaufman, chief market analyst at Phoenix Financial Services in New York. “People are concerned about the typical midterm election year cycle.”

“And tariff jitters are front and center,” Kaufman added.

Control of both the US House of Representatives and Senate are at stake in the November midterm elections.

Europe

Capital Economics on Tuesday’s EU data rush: “Tuesday brings the usual month-end deluge of European data. We are more optimistic than the consensus about Q2 euro-zone GDP growth, which we see accelerating from Q1’s 0.4% q/q to 0.5%. But even 0.4% would be a good result by past standards and would be unlikely to cause the ECB any real concern. The number of unemployed probably continued to fall in June, but the euro-zone flash inflation release will confirm the message from the German data that core inflation has remained subdued regardless.”

European shares retreated from a six-week high on Monday as industrials and tech stocks slipped and disappointing earnings, including from brewer Heineken, dented investors’ confidence.

The pan-European STOXX 600 fell 0.3 per cent, starting a packed earnings week on the back foot after sealing on Friday its strongest weekly gain in nearly five weeks. Germany’s DAX edged down 0.5 per cent.

A negative open on Wall Street also comforted traders to stick to a risk-off mode until the close.

Shares in Heineken tumbled 6.5 per cent to the bottom of the STOXX after the world’s second largest beer maker reported weaker than expected first-half earnings and cut its full-year margin guidance.

British bookmaker GVC, which owns the Ladbrokes and Coral brands, climbed 5.4 per cent to a record high after announcing it had sealed a joint venture with MGM Resorts to set up an online betting platform in the United States.

Shore Capital analyst Greg Johnson said US sports betting could grow to be a $US20 billion market, and saw a 10 per cent market share as potentially generating value of 270p per share for GVC.

“A tie-up with MGM significantly increases the chances of achieving such a market position with a lower risk profile.”

Deutsche Bank shares also rose 2.9 per cent after the German lender said it had moved a large part of its euro clearing activity to Frankfurt from London.

Asia

Capital Economics on China’s data today: “China’s financial markets started the week fairly calmly, with both the renminbi and the Shanghai Composite broadly stable on Monday. The key data release to watch for on Tuesday is the “official” manufacturing PMI, which pointed to a slight weakening in economic momentum in June. We think that it will have declined further this month. Early measures of activity point to growth having weakened. And recent moves in the prices of industrial metals are also consistent with a softening in activity.”

US pitches alternative to China’s Belt and Road: The Trump administration will help developing Indo-Pacific nations with digital economy, infrastructure and energy projects as it looks to set up a rival to China’s Belt and Road initiative.

Hong Kong’s Hang Seng index closed weaker on Monday, pulled down by a slump in healthcare shares amid an ongoing vaccine scandal, but China’s H-shares index ended flat. The Hang Seng index ended down 71.15 points, or 0.3 per cent, at 28,733.13. The Hang Seng China Enterprises index was nearly unchanged at 11,046.32.

Healthcare firms followed their A-share counterparts lower, with a sub-index of the Hang Seng following healthcare firms ended down 2.3 per cent as an ongoing vaccine scandal drove investors to sell.

The blue-chip CSI300 index fell 0.2 per cent to 3515.08, while the Shanghai Composite Index slipped 0.1 per cent to 2869.05.

Japanese stocks closed lower on Monday as possible changes this week in the Bank of Japan’s monetary policy weighed on sentiment, while quarterly earnings were also in focus.

Japan’s Nikkei share average closed down 0.7 per cent at 22,544.84.

The broader Topix ended 0.4 per cent lower at 1768.15 while the JPX-Nikkei Index 400 dipped 0.5 per cent to 15,620.76.

Investors were cautious ahead of key central bank meetings, including by the BOJ and Federal Reserve.

Currencies

The US dollar slipped against the euro on Monday, as the single currency recovered recent losses while most major currency pairs stuck to narrow trading ranges ahead of economic data and central bank monetary policy meetings this week.

The US dollar index, which measures the greenback against a basket of six currencies, was down 0.4 per cent at 94.27. Among the majors, the greenback slipped the most against the euro, with the common currency 0.5 per cent higher, as it recovered from its worst weekly performance against the greenback in six weeks.

On Monday, German and Spanish inflation remained slightly above the European Central Bank’s price stability target in July, preliminary data showed on Monday, supporting the ECB’s cautious approach of winding down its monetary stimulus only gradually.

Major central bank activity is likely to be on investors’ radar as the Bank of Japan ends a two-day meeting on Tuesday, the Federal Reserve concludes its meeting on Wednesday and the Bank of England is expected to raise interest rates on Thursday, a week which could set the near-term course for currencies.

The Fed is not expected to raise interest rates this week.

The BoJ will consider changes to its massive stimulus program to make it more sustainable, such as allowing greater swings in interest rates and widening its stock-buying selection, Reuters reported last week, citing people familiar with the central bank’s thinking.

“Even if they tell us they are talking about making changes that is likely to be enough for the market to try and take JPY stronger,” Brad Bechtel, managing director, at Jefferies in New York, said in a client note.

Commodities

Copper prices fell on Monday as investors shrugged off a potential strike at the world’s largest copper mine and focused instead on economic data this week expected to show slowing growth in top metals consumer China.

Benchmark copper on the London Metal Exchange (LME) closed down 0.8 per cent at $US6250 a tonne while the most traded contract on the Shanghai Futures Exchange fell 1.4 per cent.

Concerns over the impact of trade tensions on metals demand were still driving the market after helping to push copper down around 15 per cent on the LME since early June, said ING analyst Oliver Nugent.

“You had a couple of stable days last week and then the market started (on Monday) with a wave of profit taking out of China, restoring the downward sentiment,” he said.

Workers at Chile’s Escondida copper mine rejected a final contract offer and began a vote on strike action that will end in the middle of this week. Last year, a 44-day strike at the mine pushed copper prices sharply higher.

Benchmark LME zinc finished down 1.5 per cent at $US2557 a tonne. It has fallen almost 30 per cent since February and is near a one-year low of $US2473.85 hit on July 20.

Zinc was holding just above support at the 50 per cent retracement of its two year rally from 2016 to early 2018 and its 2017 low of $US2427.50.

The premium of cash zinc over the three month contract has surged to $US60.25, the highest since October, suggesting a shortage in nearby supply.

While copper and zinc stocks in LME-registered warehouses were fairly stable in July, stockpiles in Shanghai Futures Exchange storehouses fell, with copper down 25 per cent at 197,068 tonnes and zinc down 50 per cent at 48,135 tonnes.

Underlining concerns of tight supply, one entity held 50-79 per cent of LME copper warrants and one entity controlled 50-79 per cent of LME zinc warrants.

Aluminium ended up 1.1 per cent at $US2094 a tonne.

Australian Sharemarket

Australian shares dropped on Monday under the weight of selling in mid-cap mining stocks following a weak set of numbers from short-seller target and graphite producer Syrah Resources.

The S&P/ASX 200 Index fell 21 points or 0.35 per cent, to 6278.4, after closing at a 10-year high on Friday.

The broader materials sector fell 0.65 per cent on a day where only telecommunications and consumer staples stocks finished in the green.

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with Reuters, Bloomberg, AAP

Comments? Questions? Let us know what you think of Before the Bell: timothy.moore@fairfaxmedia.com.au

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