Wall St rally takes a breather, Why Oil Search is a buy: ASX to edge lower

Market Reports

by Melissa Darmawan

The Australian sharemarket is set to edge lower with the SPI futures pointing to a 0.2 per cent fall or a drop of 11 points following Wall St’s mixed retreat from last week’s record highs.

Summer lull, Fed minutes ahead

Investors returned from Independence Day celebrations to change gears and buy into bonds after profit taking from shares linked to the reopening of the economy, known as cyclical stocks.

Last week market participants enjoyed the lead up to their long weekend with the major indexes lifting to new highs amid signs of an economic rebound with a recovering labour market. Inflation worries had eased after the Federal Reserve reaffirmed their stance to keep interest rates low as they look forward to corporate earnings season. The market is currently in a summer lull as economic data and trading volumes are on the light side along with a holiday shortened week.

Investors also are keeping a close eye on the Federal Reserve who are set to release minutes from last month's rate-setting meeting on Wednesday. The minutes could give a hint on how soon the central bank might begin to taper its asset purchases or raise interest rates.

U.S. services sector eases in June

On the data front, growth in the U.S. services sector eased in June compared with the previous month as demand slowed and businesses struggled to find prospects for job openings. The Institute for Supply Management's purchasing managers index for the services sector fell to 60.1 last month from the 64.0 record registered in May. Even though it shows a high pace of growth, it fell short of economists' expectations of 63.3.

Bond yields fell, helps tech, hurts banks

The US 10-year government bond yields fall 0.08 basis points to 1.35 per cent to its lowest level since February which helped technology stocks but hurt banks.

This saw the commodity-heavy Dow Jones shed 0.6 per cent to 34,577, the S&P 500 dipped 0.2 per cent at 4,344 while the technology-focused Nasdaq gained 0.2 per cent at 14,664.

Giant tech names Apple rose 1.5 per cent while Microsoft closed flat after a volatile session to help with the modest gain on the Nasdaq.

Energy declines, consumer discretionary gains

Banks pressured the S&P 500 which saw Financials drop 1.6 per cent. Energy was the worst performer, tumbling 3.2 per cent as oil prices fell while Materials declined 1.4 per cent. Consumer discretionary added 1.1 per cent with Health Care, Industrials and Real Estate as the main winners of the session.

Sentiment also took a dip after the June services purchasing manager’s index results came out. As mentioned above, the index fell to 60.1 per cent fueling demand for the safe-haven dollar.

Didi hails

Elsewhere, ride-hailing company Didi Global dropped 19.6 per cent following a 5 per cent drop on Friday after China announced it would investigate the cybersecurity practices of three ride technology companies including Didi. The government also announced cybersecurity reviews of Full Truck Alliance, the operator of two truck logistics platforms and Kanzhun, an operator of an online recruitment outfit. Full Truck dropped 6.7 per cent and Kanzhun fell 15.9 per cent.
 
Gold gains, oil drops

Gold gained $10.90 to US$1794 an ounce while Silver fell $0.33 to US$26.17 an ounce.

Oil had a volatile session after it surged to its highest level in over six years and reversed gains after OPEC’s meeting. Oil prices pulled back when talks among the OPEC cartel and allied oil producing countries broke-off during a standoff with the United Arab Emirates over production levels. The price fell $1.79 to US$73.37 a barrel, it earlier rose to $76.98, the highest level since November 2014.

UK fiscal watchdog barks

Across the Atlantic, European markets closed lower on mixed news. London FTSE fell 0.9 per cent after the UK government’s public spending watchdog said that the county may not be able to "inflate away" the debt it currently owes because of rising interest rates.

Paris CAC also lost 0.9 per cent while Germany’s Frankfurt dropped 1 per cent after German manufacturing orders tumbled 3.7 per cent month-on-month in May.

On a positive note, Eurozone’s monthly retail sales jumped 4.6 per cent in May month-on-month.

Iron ore futures looks grim, Asian markets closes mixed

In London trade, big miners pressured the index. Rio Tinto fell 2.6 per cent while BHP dropped 2.2 per cent. Iron ore price rose 0.2 per cent, its futures are pointing to a 1.1 per cent fall.

Asian markets closed mixed. Tokyo’s Nikkei added 0.2 per cent, Hong Kong’s Hang Seng fell 0.3 per cent and China’s Shanghai Composite closed 0.1 per cent lower.

ASX 200 – RBA took centre stage

Yesterday, the Australian sharemarket closed 0.7 per cent lower at 7,262 after news the Reserve Bank started to ease policy support. The local bourse fell to its biggest loss in more than two weeks after the RBA stated that they will not extend its three-year yield curve control target. The cash rate remains at a record low 0.1 per cent while they made slight changes to their bond buying program.

Energy was the only sector that advanced, closing 1.5 per cent higher helped by rising oil prices while Utilities closed flat. The worst performer was Communications, down 2 per cent.

Headlines that also took centre stage included Australia’s oldest bank, Westpac (ASX:WBC) set to sell its New Zealand life insurance business for $373 million to Fidelity life assurance company. The Kiwi insurer will sell life insurance products to Westpac New Zealand customers as part of a 15-year deal. Shares closed 0.31 per cent to $25.45.

Mining giants closed mixed. BHP (ASX:BHP) added 0.8 per cent to $48.85, Fortescue (ASX:FMG) fell 1.4 per cent to $23.36 while Rio Tinto (ASX:RIO) shed by 0.6 per cent to $125.41.

Broker moves

Morgan Stanley upgrades Oil Search (ASX:OSH) has a buy with a target price of $4.70. One note that has taken the broker by surprise is the performance of oil and gas equities and its underpeformance. Given the rise in supply demand fundamentals and oil prices, the broker believes that one reason could be due to a surge in ESG concerns.

After upgrading short and medium term oil price forecasts, the broker upgrades the rating to a buy from hold after recent share price weakness. It's considered the most sensitive of the large-caps to changes in the oil price. Shares in Oil Search (ASX:OSH) closed 4.62 per cent higher at $4.08 yesterday.

IPOs

There are two companies scheduled, Askari Metals (ASX:AS2) and Burley Minerals (ASX:BUR).

Ex – Div

Collins Foods Ltd (ASX:CKF) is paying 12.5 cents fully franked.
GrainCorp Limited (ASX:GNC) is paying 8 cents fully franked.
Spark Infrastructure (ASX:SKI) is paying 6.25 cents unfranked.

Currencies

One Australian Dollar at 8:00 AM was buying 74.97 US cents, 54.33 Pence Sterling, 82.93 Yen and 63.43 Euro cents.
 

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