The Overnight Report: Falling Oil Weighing On The World

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By Greg Peel

The Dow closed up 17 points or 0.1% while the S&P lost 0.3% to 2012 and the Nasdaq fell 0.3%.

Fourth. Dang. And in a world of ongoing negotiations over free trade agreements, a protectionist gets up.

The rate that stops a nation was a non-event during yesterday’s entertainment, as expected, with no change to the RBA’s cash rate or statement.

The September trade balance provided a surprise, nonetheless. Australia’s trade deficit blew out to $2.26bn from August’s $1.01bn, itself revised up from a previous $787m reported. The blow-out was a result of a 1% rise in exports being swamped by a 6% rise in imports. The tepid exports result was largely due to lower iron ore and coal prices, despite volumes of both rising in the month.

Australia enjoyed trade surpluses all through 2013 and the first quarter of 2014, but falling commodity prices have since turned the ship around. CBA’s economists are nevertheless among those confident the falling Aussie will eventually provide the offset to send the trade balance back into surplus once more.

September retail sales provided a positive surprise, growing by a solid 1.2% to mark an annual growth rate of 5.7%. That’s almost back to the halcyon days pre-GFC. Cafes, as per usual, were a contributor as were household goods, which is consistent with Australia’s crazy property market. Department stores saw 1.3% growth, which is in stark contrast to falls over many past months.

All up we saw a typically quiet Cup Day session, meandering to a slightly higher close. The materials and energy sectors held up alright despite falls overnight for iron ore and oil prices, but consumer staples was again the drag as Woolies took another beating.

Overnight the European Commission cut its 2014 GDP growth forecast for the eurozone to 0.8% from 1.2% previously. The German stock market fell 0.9% and the French fell 1.5%. There was some comfort in a 0.2% rise for the zone’s September producer price index when 0.0% was expected. But in annualised terms, the PPI is down 1.4% having been down 1.5% a month ago.

Oil prices remain firmly in the global spotlight and last night was no exception. It was assumed in energy markets that were West Texas crude to break the 80 mark, selling would accelerate. This has proven true, although last night it was revealed Saudi Arabia has further cut its oil export price to the US in a move clearly intended to squeeze out marginal shale oil production, and that is hardly supportive. West Texas fell US$1.18 last night to US$77.22/bbl and Brent fell US$1.68 to US$82.76/bbl.

While one might struggle to see any connection between Saudi oil discounting and base metals, the reality is commodity fund trading is big business, and oil is the predominant component of commodity baskets. Thus if commodity fund managers sell, they sell everything, hence lower oil prices flow through to lower base metal prices. Last night aluminium, copper, lead and zinc were all down around one percent while tin lost 2% and nickel lost 3%.

Selling in US energy stocks acted as a drag on Wall Street last night, representing half the loss for the S&P500. The Dow was down 88 points mid-morning but recovered to close back around earlier all-time highs. US factory orders fell 0.6% in September, as expected. As I write, the polls are still open for the US mid-term elections.

Tonight in the US sees the ADP private sector jobs report as a lead-in to Friday’s non-farm payrolls. Tomorrow night the ECB holds a policy meeting and the world will wait with baited breath for any news of “real” QE, that is a sovereign bond buying program, and any sign of Germany relenting in its opposition as its economy heads down the gurgler. Now that the BoJ has made a surprise move in stepping up its QE, the pressure is on.

Wall Street is expected to remain fairly stable ahead of the ECB and the US jobs numbers this week, particularly given the correction is now effectively over.

The US dollar index fell back 0.3% to 87.02 last night. The strong retail sales result helped the Aussie to recover 0.6% to US$0.8741 following its big fall on Monday night. Gold is steady at US$1168.50/oz.

Iron ore fell yet again, down US70c to US$77.10/t.

The SPI Overnight fell 6 points.

Today sees Australia’s service sector PMI for October along with China’s (HSBC) and tonight sees PMIs for the eurozone, UK and US. The private sector jobs report is also due in the US.

Commonwealth Bank ((CBA)) will provide its quarterly update to round out the bank reporting season today while CSR ((CSR)) will publish its FY14 result and a handful of companies will hold AGMs.

Rudi will appear on Sky Business this evening at 5.30pm.

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