ASX to slide, Dow drops toward close

Australian shares are poised to open lower. Wall Street fluctuated through the session before the Dow and S&P 500 were hit by a late selling wave. The local currency slid below US64¢.

ASX futures were down down 57 points or 1.1% to 5339 near 6.15am AEST. The currency slid 0.5%.

Wall Street struggled through its session and ended mixed with the Dow and S&P 500 in negative territory and Nasdaq holding modest gains.

Sentiment was dented early with ADP reporting that private employers in the US laid off a record 20.236 million workers in April.

The outlook is hardly reassuring, according to Pantheon Macroeconomics:

“ADP does not make its full data available, so they may have adjusted their model this month to take account of the sudden stop in the economy, or perhaps the data they collected from firms which use their payroll processing services were so bad that they overwhelmed the rest of the model.

“Either way, this report just confirms what everyone already knows, namely, that job losses in April were on an unprecedented scale.

“We expect a 20M drop in Friday’s official number. In May, we think payrolls will drop by a further 12M. In June, though, we expect the rebound to begin in the wake of the re-opening now underway in about half the country.”

Today’s agenda

Local: AiG performance of services April, Trade balance March

Overseas data: China Caixin services PMI APril, Trade balance April; German industrial production March, UK GfK consumer sentiment April final, Bank of England policy meeting; US consumer credit March

Market highlights

ASX futures down 57 points or 1.1% to 5339 near 6.15am AEST

  • AUD -0.5% to 63.98 US cents
  • On Wall St: Dow -0.9% S&P 500 -0.7% Nasdaq +0.5%
  • In Europe: Stoxx 50 -1.1% FTSE +0.1% CAC -1.1% DAX -1.2%
  • Spot gold -0.9% to $US1690.41 an ounce at 3.21pm New York time
  • Brent crude -3.5% to $US29.90 a barrel
  • US oil -1.7% to $US24.15 a barrel
  • Iron ore +0.4% to $US84.35 a tonne
  • Dalian iron ore +0.5% to 614 yuan
  • LME aluminium -0.3% to $US1480 a tonne
  • LME copper +0.9% to $US5203.50 a tonne
  • 2-year yield: US 0.18% Australia 0.21%
  • 5-year yield: US 0.37% Australia 0.39%
  • 10-year yield: US 0.70% Australia 0.91% Germany -0.51%
  • US prices as of 3.25pm New York time

From today’s Financial Review

CBA could take biggest hit of the big four banks: Should the bank announce a provision of $3 billion or more next week, expected losses from the crisis will exceed the levels seen at the bank during the peak of the GFC.

The AFR View: COVID-19 has not killed Australia’s support for free trade: Australia’s backing of the new global trade umpire disrupts many of the conventional narratives about what the nation’s exit from the COVID-19 crisis might look like.

Unis could fly in foreign students: Recovery tsar Neville Power says the tertiary sector could work with the government to fly foreign students in under strict quarantine conditions to reboot the $35 billion export industry.

United States

Buy when the Fed is buying won’t work anymore: Many investors believe the bear market starting in late February. Jim Bianco isn’t one of them.

LPL Financial equity strategist Jeff Buchbinder said he’s revising downward his forecasts for growth and earnings as more data is published. LPL now expects a full year contraction in the US of between 2% and 4%.

“We also lowered our 2020 earnings forecasts given what we’ve learned from corporate America during earnings season,” Mr Buchbinder wrote. “Consensus estimates have been reduced by 25% since March 1 and may have to come down further.

“While we continue to expect a strong second-half rebound, a later start to the recovery and a bigger hit to the economy than we had anticipated translates into our reduced earnings forecast, which reflects a decline slightly larger than the typical decline in recessions of about 20%.

“Our S&P 500 fair-value target and interest-rate forecasts are under review but remain unchanged for now,” the LPL strategist also said.

Europe

European shares ended slightly lower on Wednesday as a chilling GDP forecast undercut optimism about a swift economic recovery, even as several countries began easing coronavirus-related curbs.

The pan-European STOXX 600 index ended down 0.4%, having stuck to a tight range as the European Commission forecast the euro zone economy would contract by a record 7.7% this year.

Adding to pressure were concerns over future asset purchase programmes by the European Central Bank after a ruling by Germany’s highest court on Tuesday gave the ECB three months to justify its stimulus schemes.

“We suspect that trust in the ECB’s ability to forcefully fight the current crisis and to keep euro zone sovereign debt sustainable over the coming years might have suffered,” Reinhard Cluse, chief European economist at UBS wrote in a note.

“We also see a risk that the ECB’s Pandemic Emergency Purchase Programme (PEPP) might be challenged in the German Constitutional Court.”

Energy stocks were the worst performers of the day, ending 3% lower after marking their biggest one-day gain in more than a month on Tuesday.

Swedish oil firm Lundin Energy led sector losses after Norwegian rival Equinor offered to sell its 4.88% stake in the firm.

British department store group Debenhams said it will shut down five of its stores in Hammerson leading to potentially 1,400 job cuts, as it failed to agree rent terms with the mall operator.

Retail property owners and tenants have been working together to defer rent payments and find other solutions that allow shops, businesses and landlords to ride out the coronavirus shutdown.

“We can confirm that despite our best efforts, we have been unable to agree terms with Hammerson on our five stores in its shopping centres, and so they will not be reopening”, Debenhams said in a statement.

Asia

Hong Kong shares ended higher on Wednesday, as investors saw China’s yuan fixing offering some relief, amid a resurgence in Sino-US trade tensions.

At the close of trade, the Hang Seng index was up 268.82 points, or 1.13%, at 24,137.48. The Hang Seng China Enterprises index rose 1.13% to 9807.76.

The sub-index of the Hang Seng tracking energy shares rose 2.1%, while the IT sector rose 2.09%, the financial sector ended 0.84% higher and the property sector rose 0.95%.

China’s main Shanghai Composite index closed up 0.63% at 2,878.14 points on the first trading day since Thursday, erasing earlier losses on new stimulus hopes, while the blue-chip CSI300 index ended up 0.61%.

Business activity in Hong Kong shrank further in April, a private sector survey showed on Wednesday, as the conronavirus pandemic weighed heavily on demand, output and business confidence.

Currencies

Appen grateful for Australian dollar tailwind: The winners from a weaker Australian dollar are becoming clearer, with the currency acting as a force for good in the March panic.

Inflation targeting has passed its use-by date: Aberdeen Standard Investments’ Jeremy Lawson says it’s time for revolutionary central bank thinking, and that helicopter money is the right policy for the disinflationary shock caused by the COVID-19 pandemic.

TD Securities on the US Treasury refunding plans: “Treasury announced a larger increase to 10y and 30y auction sizes, and a much larger inaugural 20y auction size than our or TBAC’s expectations. The 10y was increased by $US5bn to $US32bn and the 30y by $US3bn to $US22bn. While TBAC recommended a $US14bn size for the new 20y issue, Treasury decided to announce a larger $US20bn size.”

What TD expects in the rates market: “For now, we believe that the market is likely to set up for the auctions next week, resulting in more bear steepening and swap spread tightening. At some point, a rise in rates could impact market functioning issues and force the Fed to be more aggressive in its duration buying. However, we don’t think that we are at that point right now.

“Ultimately we expect rates to be driven by the pace of economic reopening, which we expect to be slow. A slower than expected rebound can make the 10y retest the lows in yields. However, the tug of war between issuance and Fed demand is likely to dominate, keeping long-end volatility elevated.”

Commodities

Copper prices rose for a third day and zinc hit a seven-week peak as investors welcomed more easing of coronavirus lockdowns and a pause in China-US tensions.

Benchmark three-month copper on the London Metal Exchange (LME) was up 0.9% to $US5203.50 a tonne at 1600 GMT, its highest since April 30.

Copper, used as a gauge of global economic health, has gained 19% on the LME since March 19, when the contract hit a 45-month low.

Ole Hansen, head of commodity strategy at Saxo Bank in Copenhagen cautioned, however, that copper would struggle at last week’s high just under $US5300.

“Commodities are supply and demand driven so with these headwinds the upside remains limited. As we’re facing global recession and billions of unemployed, economic activity is just not going to be strong enough to support a substantial recovery from these levels.”

Aluminium slipped 0.3% to $US1480 a tonne.

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