The Overnight Report: Thanks

This story features FISHER & PAYKEL HEALTHCARE CORPORATION LIMITED. For more info SHARE ANALYSIS: FPH

By Greg Peel

Capex

The local market was surprisingly off to the races from the opening bell yesterday despite the futures suggesting a 9 point fall. Perhaps the fact Russia did not declare war on Turkey – it has elected to retaliate economically instead – was enough for the market to decide to reverse the selling of the day before.

The ASX200 was up 60 points by late morning but there it stalled, before drifting slowly away all afternoon to a 17 point gain on the close. While the selling began around the time of the release of the September quarter capex report, that report was not an overall disaster. More likely the market simply settled back after some early exuberance.

Private capital expenditure fell 9.5% in the September quarter when economists had expected a 2.9% fall. The sensationalist headline on the day for the popular press was the 20% capex decline year on year, within which mining spending is down 29.6% and business spending down 9.0%.

The mining story comes as no surprise given persistently low commodity prices, but the business number suggests further downside risk to non-mining spending over FY16, Commonwealth Bank’s economists suggest. There was, nevertheless, some minor good news.

For economists, and the RBA, the key component of the capex data is capex intentions. The September quarter numbers represented the fourth quarter in which those surveyed provided an estimate for FY16. It came in at $120.4bn, which is 4% higher than the last estimate made in the June quarter.

The problem with such estimates is they tend to ebb and flow from quarter to quarter depending on the economic mood and confidence at the time. Nailing down a trend is not easy. CBA’s assessment is that mining capex will fall by 35-40% in FY16, and non-mining by 10%. These numbers are in line with the RBA’s projections. While yesterday’s report will lead to a trimming of September quarter GDP forecasts, there is no reason for the RBA to alter its policy.

And pragmatically, what would another 25 basis point interest rate cut achieve? Commodity prices are the major issue, not borrowing rates. For non-miners, it is clearly a matter of confidence. If a record low 2% cash rate is not a trigger to start investing in one’s business, why would 1.75% be any different? The best thing that can happen to non-mining in the near term is that the benefits of the lower Aussie dollar start to show up in the numbers. This does not happen overnight, but rather can be a lag effect of six to twelve months.

By the close, the resource sectors bore the brunt of any capex disappointment. Energy fell 0.5% and materials 1.3%. Woolies management clearly did not manage to wow them at the company’s AGM, so consumer staples fell 0.6%. Otherwise, the yield stocks that were all sold down on Tuesday were all bought back up again yesterday.

The Aussie is 0.3% lower at US$0.7230.

Commodities

For the record, European stock markets posted gains of around 1% overnight. For eurozone markets, the promise of extended ECB stimulus continues to provide support. For the London market, rallies in metal prices overnight provided a fillip.

It was reported overnight that the China Non-Ferrous Metals Industry Association has suggested to Beijing the government buy 900,000t of aluminium from the market, 300,000t of nickel and 400,000t of zinc. If the government agrees, it will be the first such intervention since 2009.

In a base metals market still susceptible to bursts of short-covering, and in thin trading overnight due to the absence of US interest, tin rose 1.5%, copper, lead, nickel and zinc rose 2% and aluminium rose 4%.

Commentary out of the LME was nevertheless dismissive. While it is all well and good for the Chinese government to take supply out of the market it is still there, just in another location. Such purchases will not resolve the issue of global oversupply.

Meanwhile, iron ore rose US20c to US$43.60/t.

Gold is unchanged at US$1070.60/oz given a flat US dollar index.

Electronic trading sees West Texas crude down US59c at US$42.38/bbl and Brent, which is only electronic, down US72c to US$45.37/bbl.

Today

With the base metal rally about the only thing to go on, the SPI Overnight closed up 16 points or 0.3%.

China will release industrial profits numbers today and Japan will release inflation data.

The NYSE will close at 1pm New York time tonight.

The local AGM season suddenly eases back to a trickle of stragglers as of today. Fisher & Paykal Healthcare ((FPH)) will report half-year earnings.
 

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