The Monday Report

This story features ANZ GROUP HOLDINGS LIMITED, and other companies. For more info SHARE ANALYSIS: ANZ

By Greg Peel

It would appear a few bargain hunters moved into the local energy space on Friday, sending the energy sector up 1.6%. The buying was offset by a 1.4% fall in materials, on another iron ore price fall, which helped the ASX200 to a tepid close. Bargain hunting may yet prove premature, given Friday night saw Wall Street throw in the towel.

The Dow dropped 315 points or 1.8% to mark its biggest one-day decline since September 2011. The big energy names in the average ensured underperformance, given the S&P fell a more muted 1.3% to 2008 and the Nasdaq fell only 0.9%. It was all about oil, again.

West Texas crude fell US$2.24 to US$57.59/bbl and Brent fell US$1.85 to US$61.81/bbl.

On Friday night the International Energy Agency cut its 2015 global oil demand growth forecast by 230,000bpd to 900,000bpd. The IEA’s downgrade suggests OPEC wasn’t playing games when the bloc cut its 2015 total demand forecast by 300,000 to 28.9mbpd earlier in the week. Wall Street has been in two minds about the plunge in oil prices up to now, looking to increased supply as being a “positive shock” for the global economy rather than an indicator of global economic weakness. But as global demand forecast cuts roll in, the global weakness story suddenly gains more weight.

Which leads to the issue of disinflation or worse, deflation. The US producer price index dropped 0.2% in November, exceeding 0.1% expectations, to hit a nine-month low 1.4% annual growth. The fall in the price of oil was the main contributor. Yet the core PPI (ex food and energy) was flat for the month and up only 1.5% for the year, so the oil factor is not exactly stark.

On the other hand, Michigan Uni’s fortnightly consumer sentiment index surged to 93.8 for the first December survey, up from 88.8 at end-November and smashing forecasts of 89.5. It’s the highest read since January 2007, and clearly cheaper oil has a lot to do with it.

So again the question is asked: Will excess global oil supply and lower prices provide a boost for struggling oil import economies, ensuring reasonable global growth in 2015, or will lower oil prices on the back of weaker demand lead to deflation, lower profits, lower wages, and a recessionary spiral?

Wall Street wasn’t waiting to find out on Friday night. Any thought of trying to dress up the market for a stronger close to 2014 was swamped by those deciding to take profits on their 2014 gains now before there aren’t any gains left to be had. The uncertainty that had crept into the market and then burst to the fore on Friday is evident in the VIX volatility index, which has returned to be over 20 from having been down around 12 when the US indices were marking new all-time highs last month.

The US bond market followed the theme, sending the ten-year yield down 8 basis points to 2.10%. Talk is of the Fed holding off on its first rate rise even if the US economy appears individually strong, given (a) the spill-over from a contracting global economy would act as a drag on the US economy and (b) a Fed rate rise would only serve to exacerbate contraction elsewhere. It should be noted that aside from demand-supply factors, the rising US dollar is also a contributor to lower oil prices.

The US dollar index fell 0.4% on Friday to 88.35, but this was not an incentive to buy the Aussie in the face of commodity price weakness. It’s steady at US$0.8250. Gold lost US$5.80 to US$1222.20/oz.

Once again, base metals offer a different story. Aside from their demand-supply projections being more balanced, lower energy costs reduce the overall cost of production. But the stronger US dollar acts as a drag. Base metal movements were again mixed on Friday night, with copper up 0.6% and nickel up 2.3%.

Iron ore fell US10c to US$68.70/t.

The SPI Overnight closed down 65 points or 1.3%.

This week will be the last full trading week before Christmas, and will feature “quadruple witching” expiries for the both the US and Australian markets. Friday night sees the expiry of US stock options, index options, index futures and futures options, a quarterly event that often leads to enhanced volatility. The ASX breaks up expiry dates into two sessions a week apart, except in December when Christmas gets in the way. Thus Thursday will see our own “quadruple witching”.

When markets are volatile leading into an expiry, the volatility feeds on itself. Big option positions that a week ago looked like closing well in/out of the money suddenly come back into play.

There are a lot of US data releases that need to be ticked off before Christmas, so there’s a lot of cramming in. Tonight sees industrial production, housing sentiment and the Empire State manufacturing index. Tomorrow it’s housing starts and a flash estimate of December manufacturing PMI. Wednesday it’s the CPI, and Thursday leading indicators, the Philadelphia Fed manufacturing index and the flash service sector PMI.

The Fed will hold a policy meeting this week and release a statement on Wednesday night. Janet Yellen will then hold her fourth and last press conference for the year. Oil was not a topic of discussion a quarter ago.

The eurozone will be in the frame from tomorrow night with a flash PMI, trade balance, and the ZEW investor sentiment index. Wednesday it’s the CPI, and Thursday Germany’s IFO business sentiment index.

HSBC will provide its flash estimate of China’s manufacturing PMI tomorrow and Japan will see a similar measure, ahead of the Bank of Japan’s policy meeting on Friday.

New Zealand will release its September quarter GDP result on Thursday.

It’s a quiet week economically in Australia, starting with vehicle sales today. The minutes of the December RBA meeting are out tomorrow, and the RBA will publish its Bulletin on Thursday.

On the local stock front, apart from expiry day on Thursday, we’ll see a handful of late season AGMs this week, the highlights of which will be those of ANZ Bank ((ANZ)) and National Bank ((NAB)) on Thursday.
 

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

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided. www.fnarena.com

Click to view our Glossary of Financial Terms