Daily Market Reports | Dec 03 2014
By Greg Peel
The Dow closed up 105 points or 0.6% while the S&P gained 0.6% to 2066 and the Nasdaq rose 0.4%.
Foreign sellers appeared absent from the local market yesterday, allowing a bounce in oil prices to spark a fight-back from local investors. The bargain hunters moved in and snapped up anything that was sold down, and indeed a 1.9% gain for the energy sector was overshadowed by a 3.0% gain for materials. Iron ore did recover the 70 mark overnight, nonetheless.
2014 was anticipated to be a year in which the Australian economy would be noticeably impacted by the shift from the mining investment phase into the mining production phase. The September balance of trade data have proven that anticipation to be founded.
The market has panicked over the fall in the iron ore price but the big low-cost producers have continued to quietly pump up the volume. A 3% rise in net exports in the quarter included a 7% rise in meat exports, but also a 6% rise in iron ore exports. A 1% fall in net imports included a 30% drop in capital goods and a 5% drop in industrial equipment. Read: mining infrastructure and equipment.
The end result was no less than a 193% increase in Australia’s trade surplus over the June quarter, to $4.59bn. Add the capital account (dividends and interest payments in and out of the country) to the trade balance and we saw a 10% drop in Australia’s current account deficit, to 3% of GDP. That deficit peaked in 2004/05 at 6.5% of GDP. (Do not confuse this with the government’s budget deficit, which represents the balance of government revenues and distributions, or Australia’s net debt, which includes all government, business and household borrowings.)
Australians should also now take the time to cast their eye over their suburban vistas, which at this stage may feature a sea of bungalows and red tiled rooves, and commit that view to memory. October’s building approvals data underscored the growing trend that one presumes has now become the norm. Single home approvals fell 0.3% month on month but are up 12.2% for the year. Net building approvals are only up 2.5% for the year but rose 11.4% in October, because apartment approvals rose 30.4%. Non-residential approvals fell 15.5% in October and are down 38.8% for the year.
We’re not building factories and we’re slowing the pace of single home construction. This decade will be all about blocks of flats. Apartments require far less materials and construction per individual dwelling than a standalone house, but of course you cram a lot more into the same property footprint.
Over in the US, it’s all about vehicle sales at present, and big gas guzzlers at that. November saw the second highest level of new vehicle sales in 2014 and the best November number since 2003. There was a particular surge in the number of Americans who didn’t look back, and bought a Jeep. It is American oil production that is driving down the price of gasoline and Americans are seeing the full price benefit at the pump, unlike net petrol/diesel importer Australia.
Presumably increased Jeep sales will now ensure a flow-through to sales of bigger boats.
Returning to the construction theme, US construction increased 1.1% in October to mark the biggest rise in six months. Economists are now expecting the next revision of US September quarter GDP to see an increase to 4.1% from 3.9%.
And so it was traders decided to buy on Wall Street last night, having been more inclined to sell on Monday night. Monday night saw a rebound in oil prices but last night the oils were back in trend, with West Texas falling US$2.24 to US$67.10/bbl and Brent falling US$2.31 to US$70.62/bbl. This would suggest Monday night saw only a sharp profit-taking rally from those short oil rather than, necessarily, a clear capitulation bottom being established.
The rally on Wall Street, which featured another new high being marked by the Dow (the S&P is still a little shy), suggests the market has begun to weigh up the impact of significantly lower energy prices and decided, for America’s consumer economy, it is a net plus. The solid construction and vehicle sales numbers were also not lost on the bond market, in which the US ten-year yield rose 7 basis points to 2.29%.
As to how this influences the Fed’s rate rise timing remains a point of debate. Taking the US in isolation, the economic boost from lower energy costs should offset lost US oil revenues given the US does not export its energy to any great extent. Those economies reliant on energy imports such as Europe, Japan and China should also get a leg up, but there will likely be some major problems arising amongst oil export nations with regard their reliance on oil revenues as the sole supporter of government budget deficits. Not only does this group include struggling OPEC members like Venezuela, Iran and Nigeria, but even king pin Saudi Arabia. Saudi petrodollars support a very extensive welfare system in what otherwise would be a country of dirt poor Bedouins.
A shift in the global trade dynamic may yet have wide-reaching global economic consequences. And back at home in the US, America’s banks are beginning to worry that their exposure to energy sector debt is rather significant. Were a trickle of defaults from smaller energy players, due to too-low oil prices, to turn into a flood, the banks could be looking at their next financial crisis.
If marginal oil production is to be curtailed in the US, which is exactly what the Saudis are going out on a limb for to try and bring about, then it probably needs to happen sooner rather than later.
There is an options expiry on the LME this week and this is causing a bit of volatility in physical base metal price movements. Aluminium is trading near a strike price and as such is being whipped around, last night falling 2.6%. Elsewhere the metals are now apparently trading in lock-step with oil, last night ignoring the solid US economic data. All metals bar tin were weaker.
Just when you thought it was safe to move back into the Pilbara, iron ore has fallen US90c to US$69.70/t.
The strong US data had a predictable impact on the US dollar index last night, which jumped 0.7% to 88.65. This, and lower commodity prices, helped the Aussie down 0.7% to US$0.8446. Gold has slipped back US$11.00 to be right on the 1200 mark at US$1200.80/oz.
With oil, iron ore and base metal prices down again, a 100 point rally in the Dow is not going to cut it on Bridge Street. The SPI Overnight is up 1 point.
It’s GDP day in Australia today. The forecast is for 3.0% annualised growth in the September quarter.
It’s also service sector PMI day across the globe over the next 24 hours, including Australia’s and the two Chinese measures.
The eurozone will revise its first estimate of September quarter GDP tonight ahead of tomorrow night’s ECB policy meeting, while the November private sector jobs report will be out in the US ahead of Friday night’s non-farm payrolls.
Rudi will appear on Sky Business' Market Moves, 5.30-6pm.
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