The Overnight Report: Looking For Inspiration

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By Greg Peel

The Dow closed down 2 points while the S&P lost a point to 2038 and the Nasdaq rose 0.3%.

I noted in this Report yesterday “The ASX200 is sitting just above 5500 but is finding upside a difficult conquest at present”. It is a truth universally acknowledged that if a market struggles and fails to go up, it will most likely go down instead. Markets rarely sit still for any length. And so it was the local market gradually bottled yesterday, posting an orderly one percent decline.

Falls were relatively consistent across sectors with a couple of exceptions. Information technology is only a small sector by market cap so when sector heavyweight Computershare ((CPU)) falls 5% after providing a disappointing outlook at its AGM, it looks bad, as a 3% fall for the sector suggests. A 1% fall for the banks included Macquarie Group going ex-div, which left the 2% fall in materials as the stand-out.

The iron ore price was unchanged from the previous session, but fear is simmering in the sector. Mining analysts have begun to believe that this time there will be no bounce from low prices as we have seen twice in the past couple of years. Those events reflected clear Chinese destocking-restocking cycles, but this time the Chinese are not restocking. With steel demand easing, analysts are now looking at iron ore falling lower still, rendering all bar the two local big boys cash flow negative.

It probably didn’t help yesterday that the Aussie has rebounded somewhat, given a text book world has the currency falling as commodity prices fall to provide an offset against lower US dollar revenues. But both lower commodity prices and the net lower currency have been offered as reasons why Australian consumers remain pessimistic as we head into Christmas.

The falling iron ore price makes front page news, with scary headlines. The falling Aussie should be good for the economy, but not good for those who’ve become used to cheap imported goods and overseas holidays. And it is not lost on consumers that the lower Aussie prevents lower oil prices translating into any great pump price relief, just as the government has increased its tax.

Throw in concerns about unemployment, no doubt exacerbated by the much publicised failure of the ABS to even know what the unemployment rate is, along with negligible wages growth, as was highlighted by yesterday’s September quarter wage index data, and it’s not difficult to understand why the natives are restless. The wage growth index was introduced in 1998, and never has the annual growth rate been lower than the 2.6% marked last quarter. Given inflation is running at the same rate, “real” wage growth in this country is zero at present.

This is exactly the problem the US economy is facing as well, and potentially the sole reason a Fed rate rise will come later rather than sooner if nothing changes.

Westpac’s measure of local consumer confidence actually rose this month, by 1.9%, but an index level of 96.6 implies Australian consumers remain pessimistic (100 neutral). This is not what retailers want to hear heading into the festive spending frenzy, and a lack of confidence was a hot topic at the Myer ((MYR)) AGM yesterday as the retailing anachronism rolled out yet another set of weak sales data and management shared their Christmas fears with shareholders.

Over in Europe last night, it was revealed eurozone industrial production rose 0.6% in September. At least it didn’t go down, despite slightly missing 0.7% forecasts.

I noted on Monday reports of a Russian military convoy rolling into Ukraine, but for some reason only now have European stock markets begun to respond. Last night the German DAX fell 1.7% and the French CAC 1.5%. But meanwhile, Dutch investigators are back at the MH17 crash site, albeit under Ukrainian guard. As to what’s actually going on over there, Lord only knows. Mr Putin has left Beijing en route to Brisbane with the front of his shirt apparently intact, although maybe Abo’s waiting for the home ground advantage.

With the Veterans’ Day holiday now past, Wall Street was able to field a full side last night. European selling spilled over into New York as is so often the case, sending the Dow down 78 points from the opening bell. But as is also so often the case, local buying pushed the indices back up again. Only as far as those same recent record highs, nevertheless. Like Bridge Street, Wall Street is suffering from a lack of real reason to punch higher, which means we may be in for a slip before too long.

Oil prices remain the hot topic. Last night OPEC released its monthly report which noted that the bloc had indeed reduced its production rate in October, by 230,000 barrels per day, but that non-OPEC producers had pushed up their net production rate by 250,000 per day over the same period. As OPEC has been insisting recently, it’s not going to matter whether members officially agree to reduce production quotas or not. This was enough to tip the oils over again, with Brent falling US$1.71 to US$79.96/bbl and West Texas falling US96c to US$76.86/bbl.

Brent has not been under 80 since 2010.

Iron ore has fallen another US$10c to US$75.40/t.

Base metal prices were very steady last night in London with only aluminium and nickel making any sort of move, each up 0.7%.

Speaking of London, last night the Bank of England revised its UK inflation projections downward, further pushing out expectations of the first UK rate rise (which earlier this year was expected any day) and sending the pound to a one-year low. This pushed up the US dollar index by 0.4% to 87.83, but no relief was felt in the Aussie which is 0.1% higher at US$0.8714.

Gold lost US$10.80 to US$1159.20/oz.

The SPI Overnight fell 6 points.

It’s China data-dump day today, with October industrial production, retail sales and fixed asset investment numbers due. Tonight Germany will see a flash estimate of October inflation.

Graincorp ((GNC)) will report FY14 earnings today and there are few AGM’s due to be held, including that of high-flying REA Group ((REA)).

Rudi will appear on Sky Business at noon and again between 7-8pm for the Switzer Report.
 

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