The Monday Report

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By Greg Peel

US traders returned from their Thanksgiving break on Friday night for a half-day session on Wall Street and followed in the footsteps of the Australian market in selling down anything to do with oil. The Australian energy sector was crushed 7.6% on Friday which made up the bulk of the 1.6% fall in the ASX200. The two big oil names in the Dow, Exxon and Chevron, lost 4-5% on Friday night while ConocoPhillips fell 7% and smaller, shale-based names fell by double-digit percentages. The story was the same in Europe.

Wall Street differed from Bridge Street nonetheless in experiencing a trade-off against the falling oil price. Shares of US airlines, for one, were heavily bought and attention focused on discretionary retail on one of the traditionally busiest shopping days of the year, so-called Black Friday. Early sales reports were very positive so retailer names were bought on the market, supported by expectations of more consumer demand being generated by lower household energy costs.

The balance was enough to send the Dow to a flat close on low volume, ending the month of November. The S&P has a greater energy weighting so it closed down 0.3% to 2067, while the Nasdaq closed up 0.1%. With most of Wall Street taking the Friday holiday to thus enjoy a four-day weekend, we’ll need to wait until tonight to evaluate a more definitive response to the oil price collapse.

But what we do know is the plunge in the oil price on Thursday, following OPEC’s decision not to cut production, triggered heavy selling from US commodity funds on Friday night. One might wonder why a lower oil price would trigger a 3% fall in the copper price on the LME, as any connection seems remote, but the problem lies with popular commodity basket funds. They hold oil as their main component, along with base and bulk minerals and agricultural products. The falling oil price forces commodity funds either to sell outright, across the spectrum of their commodity holdings, or at least to rebalance for the impact of a lower energy weighting by selling the other components in the basket.

Thus a 3% fall in copper was matched by a 2% fall in zinc and falls in excess of 1% for aluminium, lead and nickel on Friday night as oil prices continued to tumble in the wake of Thursday’s rout. West Texas is down another 3.5% or US$2.45 to US$66.59/bbl. Brent fell US$2.44 to US$70.15/bbl.

The US natural gas price fell 6%.

The cost of energy is a major component of headline inflation hence gold, the inflation hedge, which is also included in some commodity funds, fell 1.9% or US$23.10 to US$1166.80/oz. Silver, which acts as both a precious and a base metal, fell 3.8%.

At least iron ore is up US10c to US$69.80/t.

The other good news for Australia, if there is any, is that the Aussie is down another 0.5% to be flirting with the US$0.85 level. Technicians suggest a break of 0.8480 would trigger another leg down for the currency, resetting the trading range to 80-85 from 85-90. While the lower Aussie acts as a dampener to losses on commodity export revenues due to lower USD commodity prices, it also reduces the benefits to the consumer at the petrol pump. Thus while America is excited about the support lower energy costs will provide for its consumer-based economy, in Australia the mood of the consumer is soured by the impact on Australia’s commodity export-based economy and by big falls on the stock market, such as we witnessed on Friday, and if the SPI Overnight is any indication, as we’ll see again today. It closed down 44 points or 0.8% on Saturday morning.

The US dollar index rose 0.4% on Friday night to 88.29, reflecting that perceived net gain for the US economy. The US ten-year bond yield fell 4 basis points to 2.19%, reflecting lower inflation expectations.

The question now is have we seen the “capitulation trade” in oil? Were Thursday and Friday’s sessions please-just-get-me-out trades, such that a bounce should soon follow when the dust settles? That will be the focus of this week’s trading.

Global economic data will also be in focus. OPEC decided against cutting its oil production because it blames the US for a runaway increase in oil supply. But this has also met a slowing of demand for oil as big energy importing economies such as Europe, Japan and China struggle to make headway. Today sees the global round of manufacturing sector PMIs for November, beginning with Australia then moving on to Japan and China, where both the official and the HSBC versions of the PMI will be published. Last week’s flash estimate of HSBC’s PMI had the Chinese manufacturing sector stalled at a neutral 50.0. If today’s final result shows a tip over into contraction, it will not be good for sentiment.

The UK, eurozone and US all follow with their PMIs tonight, and then we do it all again on Wednesday for global service sector PMIs.

The first week of the new month also means jobs week in the US. The ADP private sector jobs number will be posted on Wednesday and the all-important non-farm payrolls on Friday. Tomorrow night sees US construction spending and vehicle sales, Thursday chain store sales and Friday factory orders and the trade balance. The Fed Beige Book will provide an anecdotal assessment of economic performance in the twelve Fed regions on Wednesday.

The eurozone will see a revision of the first estimate of September quarter GDP on Wednesday, ahead of the ECB policy meeting on Thursday. The revision is expected to show an unchanged 0.8% annual growth, but as to what Mr Draghi might pull out of his hat on Thursday, when all about him are upping the stimulus ante, is anyone’s guess.

Australia’s one and only September quarter GDP release is due on Wednesday (although it can be revised at the following quarter’s release). Ahead of that we’ll see more components in the form of September quarter company profits and inventories today and the current account, including the balance of trade, tomorrow. Economists are forecasting GDP growth of 0.7% for the quarter to mark 3.0% annualised, up from June’s 2.7%.

At the monthly level, today brings TD Securities’ inflation gauge, tomorrow is building approvals, and Thursday sees retail sales and the trade balance. Friday rounds out the PMIs for the week with construction.

On the local stock front, the AGM season has now wound down to a mere trickle of stragglers. Metcash ((MTS)) will report its first half profit result today.

On Friday, S&P/ASX will announce which stocks will be promoted into or relegated out of the various indices, including the ASX200, for the quarterly rebalance.

Rudi will appear on Sky Business on Wednesday at 5.30pm and on Thursday at noon. Both appearances will mark the final ones for 2014.
 

For further global economic release dates and local company events please refer to the FNArena Calendar.

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