The Overnight Report: There Goes The Neighbourhood

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By Greg Peel

The Dow fell 106 points or 0.6% while the S&P lost 0.7% to 2060 and the Nasdaq dropped 0.8%.

Better the devil you know. That appeared to be the psychology behind a big rally for the banks yesterday, in the wake of the release of the FSI. While Murray’s recommendations contained nothing which shocked analysts in severity terms, the levels of additional capital banks would be required to hold were at the higher end of the anticipated scale. But the FSI has been hanging as a dark cloud over the banking sector for months now, so clearer skies prevailed yesterday when the report finally hit the table.

And, of course, the government does not have to adopt any of it. Here comes the politics. The Treasurer has until March to respond, and one presumes Mr Turnbull will be looking for a bit of tweaking. What? Not by March he won’t be.

Index healthcare giant CSL ((CSL)) continues to be in favour in the wake of last week’s R&D update, as its shares rose 2.8% yesterday and carried that sector to 2.2% gain. Notably, neither the materials nor energy sectors contributed to the 0.7% rally in the ASX200 yesterday, as well they might not have. As 2014 winds down, we are likely seeing fund managers shift their portfolios to resource-lite for 2015.

Yesterday’s Chinese trade data provided a shock. Exports rose only 4.7% year on year in November when 8% was expected, down from 11.6% in October. Imports fell 6.7% when a 3% rise was expected, after rising 4.6% in October. Analysts are now pointing to a too-strong renminbi, which has been dragged along in its loose peg to the US dollar as the yen and euro have plunged on further QE implementation.

November’s surprise rate cut from the PBoC should nevertheless help to address China’s growing currency issue, as will the further rates cuts analysts universally expect will follow in 2015.

Japan revised its September quarter GDP result yesterday, adding further to global economic concerns. Japan’s growth contracted 1.9% in the quarter according to the revision, not 1.6% as first estimated. Japan goes to the polls this weekend, in the snap election Prime Minister Abe called as an effective referendum on Abenomics. He is hoping his indefinite deferral of the next sales tax hike, which the BoJ wants to address Japan’s massive public debt, will win him sufficient brownie points. Otherwise, Abenomics will go down as a brief experiment that failed.

If Bridge Street was off to a flier yesterday, FSI report notwithstanding, because 321,000 Americans found jobs, then some traders might wish to reflect on just who Australia’s two biggest trading partners are. If a strong US economy is going to have any meaningful impact on a transitioning Australian economy, it will require the Aussie to fall much further as a result. Weak Asian data has the Aussie down another 0.3% to US$0.8298 this morning, despite the US dollar index also falling 0.3% to 89.07, but Glenn would likely tell you that’s still about ten cents too high.

Germany’s industrial production data for October also disappointed last night. While a gain of 0.2% was at least not a fall, 0.4% was forecast in the wake of what had been an encouraging 1.1% result in September. Of the world’s four largest (individual) economies, number one is looking okay but two through four are really struggling.

Which gives weight to the argument the ongoing collapse in global oil prices is not just about the supply-side. Sure – North American overproduction and the refusal of the Saudis to be the mugs who have to bite the production bullet are the primary drivers, but economic weakness in China, Japan and Germany is clearly adding demand-side fuel to that fire. There was no new news with regard oil supply last night, yet West Texas crude fell US$2.59 to US$63.13/bbl. It briefly traded under 63 last night, where it has not been since 2009. Brent fell US$2.45 to US$66.27/bbl.

The story in base metal markets is more one of anticipated undersupply ahead, rather than oversupply, given export bans and declining grades at legacy mines. But counter that with a weakening global economy ex-US, and base metals are stuck in the doldrums as traders begin to square up for year-end. Last night’s price moves were mixed, albeit aluminium fell 0.9% and copper fell 0.6%.

Iron ore fell US$1.20 to US$69.70/t.

Slowing growth in China, Japan and Europe only serves to underscore expectations of further stimulus measures in all three economies, hence gold rose US$13.50 last night to US$1205.30/oz.

The US ten-year bond yield rose 5 basis points on Friday night on the excitement (or rate rise expectations) of the strong US jobs report, and fell back 5 basis points last night to 2.26% on recollection the Fed has cited global economy concerns in recent statements justifying caution, even though the rest of the world is not the Fed’s purview.

Which leads us back to the Great Debate as to whether lower energy costs are net positive or negative for the global economy. Or negative in the short term (Exxon and Chevron led the Dow’s fall last night) but positive longer term for struggling energy import economies (China, Japan, Europe) and the US consumer. Or positive in the short term for global sentiment but negative in longer term as the likes of energy exporters Russia, Brazil, Nigeria, and Venezuela potentially hit the wall, while US banks take a hit on rolling defaults on high-yield energy company loans.

This Debate is largely what’s leading to indecisive ups and downs in global markets of late, and no real signs of a reliable Santa Rally.

The SPI Overnight closed down 35 points or 0.7%.

NAB will release its November business confidence survey locally today, the first to take account of significant acceleration in the oil price plunge.
 

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