The Overnight Report: Ironed Out

This story features JAMES HARDIE INDUSTRIES PLC, and other companies. For more info SHARE ANALYSIS: JHX

By Greg Peel

The Dow closed up 40 points or 0.2% while the S&P gained 0.5% to 2051 as the Nasdaq jumped 0.7% on a new all-time high for Apple.

Chinese property prices fell 2.6% year on year in October, the biggest annual drop since Reuters began keeping score in 2011. The fall belied a range of government support measures, although those measures are targeted at lower cost housing. Beijing has for a while now attempted to curtail China’s property development bubble, and price falls are expected to continue feeding on themselves as property investors back away and property developers are stuck with inventory.

Falling prices are bad news for the global economy in the shorter term, particularly for those economies relying on exports of raw materials which feed housing construction, but not so bad news in the longer term if Beijing can successfully engineer a “soft landing” for the property market rather than a bubble-and-bust “hard landing” so many commentators have feared for years now.

So far, so good.

Not so good for the Australian materials sector, which led the local index down yesterday along with weakness in supermarkets. There was nothing to be gleaned from the minutes of the November RBA meeting, which were again a repetition.

Nor was it much of a surprise when the Japanese prime minister announced a snap election yesterday, as such a move has been rumoured now for a week or more. Japan’s shock GDP contraction in the September quarter has put Abe’s aggressive Abenomics strategy very much in the spotlight, providing fuel for parliamentarians who have resisted the policy to date. The prime minister has now cancelled the planned second sales tax hike next year, which goes some way to indicating policy failure.

Raising the sales tax rate in steps to increase government income is a fiscal drag on Japan’s moribund economy, but the frenzied printing of yen was supposed to provide the stimulus offset, and more. The tax hike sparked a far more dramatic contraction in Japanese spending than had been assumed, to the point the Bank of Japan has been forced to pump in even more stimulus. Abe will now go to the people to seek electoral support for the cancellation of the second tax hike, which presumably would be well received, but also to allow the Japanese to provide a yea or nay on Abenomics in general. That call is not quite so clear.

On the other side of the world, German investors shocked the market last night by suddenly becoming very confident. Germany posted a paltry 0.1% GDP growth rate in the September quarter but economists nevertheless forecast a turnaround in the ZEW investor sentiment index to plus 0.5 this month from minus 3.6 in October, the first negative result in two years. But the number came in at plus 11.5.

The US producer price index for October also surprised last night, rising 0.2% after falling 0.1% in September against expectations of another 0.1% fall. The core PPI, ex food and energy, rose 0.1% when a 0.1% fall was expected. A little bit of inflation is a good thing, because disinflation implies a slowing economy. Too much inflation is a bad thing, as it implies a Fed rate hike is required. So last night’s result was middling.

More comforting was a rebound in the US housing market sentiment index this month, to 58 from 54 in October. October saw a fall from September’s nine-year high level.

Yet when the opening bell rang on Wall Street, silence followed. It looked for all the world like another meandering session in a small range was ahead. Slowly but surely, however, the stock indices began to rise. Shortly after 3pm when the Dow was up 88 points, traders began to wonder whether the average might even mark its first triple-digit move in two weeks. But no, the sellers arrived at the death and the Dow quickly slipped back to up 40.

The funk continues.

Oil traders are becoming increasingly nervous about next week’s OPEC meeting, which will fall on the Thanksgiving holiday. The jury is still out on whether production cuts will or won’t be announced, and a thin electronic market in the absence of US participation could produce significant price volatility on the day. Last night West Texas fell US$1.04 to US$74.46/bbl and Brent fell US62c to US$78.50/bbl.

On the Sunday after Thanksgiving, the Swiss will vote on whether or not they want their central bank to be committed to holding 20% of reserves in gold. This is another source of nervousness around commodity markets, as a “yes” vote may spark a scrambling rally. It has also been noted that a trickle of Russian central bank gold buying has rapidly become a flood, with Russia accounting for 25% of all known central bank gold purchases so far this year (Chinese purchases are a state secret). Last night gold rose US$8.20 to US$1193.80/oz.

A 0.4% fall in the US dollar index to 87.58 also aided gold, while the Aussie is up 0.2% to US$0.8728.

LME traders focused on falling Chinese property prices in sending all base metal prices lower, with copper and nickel both falling 1%.

The materials sector led down the Australian market yesterday, but today may be just a little more painful. Iron ore is down US$3.00 to US$72.10/t to mark a new multi-year low.

An optimistic SPI Overnight is up 8 points.

The Bank of Japan will hold a policy meeting today, but as the government is now “lame duck” presumably no new policy measures will be announced. The minutes of the last Fed meeting are out tonight.

James Hardie ((JHX)) will report its interim profit result today and Orica ((ORI)) its full year amidst another welter of AGMs.

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

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available in the FNArena Cockpit.  Click here. (Subscribers can access prices in the Cockpit.)

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author's and not by association FNArena's – see disclaimer on the website)

All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided. www.fnarena.com

Click to view our Glossary of Financial Terms