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The Overnight Report: Calm Reigns

Daily Market Reports | Sep 02 2014

By Greg Peel

Wall Street was closed last night. European stock markets were flat.

The ASX200 flew out of the blocks yesterday, ignoring a small fall in the overnight futures, to be up almost 30 points early in the session – an interesting response to growing global tension. It was all about the iron ore price of course, which had posted a US60c gain after days and days of falls, no doubt encouraging some into believing the rout is over. On the last two occasions iron ore has had an eight in front of it, the price has bounced just as hard as it fell.

Doubt set in, nevertheless, on the release of China’s manufacturing numbers. The official PMI fell to 51.1 in August from 51.7 in July. The HSBC number came off worse, falling to 50.2 from 51.7. The air leaked out of the iron ore relief balloon, and we sagged to a flattish close.

Sure enough, iron ore is down US80c overnight to US$87.10/t – a new two year low. As for the PMI data, Beijing’s number of 51.1 actually beat economic forecasts of 51.0, while the HSBC number at 50.2 slipped below last week’s flash estimate of 50.3.

Iron ore, and its partner in crime, coal, were mostly blamed for a surprise 6.9% fall in Australian company profits in the June quarter. This follows a 2.0% rise in the March quarter. Mining profits fell 15.2%. Non-mining fell 2.6%.

Business inventories, on the other hand, rose 0.8% in the June quarter and will provide a nice little boost to an otherwise lacklustre GDP. The problem with inventories, however, is that they can be a two-edged sword. They provide economic support until they can’t be sold.

Today we’ll see the current account, which includes the balance of trade, and tomorrow the GDP is due.

Turning back to PMIs, Australia’s ridiculously volatile manufacturing number came in at 47.3, down from 50.7. July was the first month of expansion in eight, and just a blip, it would seem. Note that this PMI came out in time for the ASX200 to rally to its early highs before the Chinese PMIs spoiled the party, underscoring the fact the market pays scant attention.

More attention is paid to eurozone numbers at present, and that PMI continued on its slide, down to 50.7 from 51.8. Contraction is not far off. The sterling run for the UK also appears now to be over, with its PMI falling to 52.5 from 54.8.

That’s five PMIs and five slowdowns. Just as well Japan saw a rise to 52.2 from 50.5, which must have pleased Tokyo. The US number is out tonight.

The US holiday ensured little activity around global markets last night. A meeting between Russia and the Ukraine, with the EU in attendance, ended in stalemate, would you believe. It’s all Ukraine’s fault, says Putin, as he manoeuvres towards the formation of a separate sovereign state of loyal Russians in eastern Ukraine. That way Putin and his cronies will effectively not have to leave Russia to get to their new holiday mansions on the Crimean coast.

Outside of iron ore, commodities markets were predictably quiet last night. Base metals were mostly lower, by a tad, while West Texas crude was steady and Brent fell US55c to US$102.94/bbl.

Gold was steady at US$1287.00/oz with the US dollar index up a tick to 82.78, and the Aussie down a tick to US$0.9333. In a normal universe the Aussie would have plunged on the Chinese PMI numbers, never mind the iron ore price. Only in a parallel universe would Russia re-invade the world (forcing down bond rates in Europe, which force down rates across the globe, which makes the Australian bond rate a stand-out, which supports the currency).

The SPI Overnight fell 5 points.

Building approvals are out today locally, along with the aforementioned current account. The RBA will pretend to meet but actually hand out last month’s monetary statement.

Wall Street is back tonight with the US manufacturing PMI.
 

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