The Overnight Report: Oil Fears Return

This story features SUNCORP GROUP LIMITED. For more info SHARE ANALYSIS: SUN

By Greg Peel

Soggy

An unspectacular session on Bridge Street yesterday saw the ASX200 drift away from the 5700 yet again, led by weakness in the materials and energy sectors. Utilities and the telco were also out of favour on the day, but may well be popular tomorrow if recent volatility is any guide.

There were plenty of local data points to consume yesterday, but nothing to rock the boat.

ANZ job ads series showed a fall of 0.3% in July but remains up 9.3% year on year. TD Securities’ inflation gauge showed a 0.2% increase in July for a headline annual rate of 1.6% and a core rate of 1.5%, well below the RBA’s 2-3% target.

Home prices leapt again in July, at least in Sydney and Melbourne, and new home sales rose 0.5% in June. The interesting detail here is that detached house sales rose 1.7% while apartment sales fell 2.9%. June building approval numbers, previously released, showed a big drop in apartment block approvals, thus economists are now warning that after a stellar run, the apartment investment boom may have peaked.

The Australia manufacturing PMI “surged” into expansion at 50.2 in July, up from June’s 44.6, but given this series is the most volatile on the planet, and August could just as easily see a “surge” back again, we’ll call it meaningless.

By contrast, the Caixin measure of China’s manufacturing PMI does not appear to lack credibility, and it fell to 47.8 from 49.4. This implies a greater rate of contraction than Beijing’s official numbers.

Japan’s PMI rose to 51.2 from 50.1. The eurozone saw a slight tick down to 52.4 from 52.5 which included a 30.2 reading from Greece, which is not so much contraction but implosion. The UK rose to 51.9 from 51.4.

Deflation Worries

The US manufacturing PMI fell to 52.7 from 53.5, but that was not what caused the most concern on Wall Street last night. Personal spending rose only 0.2% in June despite a 0.4% rise in incomes, and the personal consumption & expenditure (PCE) measure of inflation – the Fed’s preferred gauge — showed only 1.3% annual compared to the Fed’s 2% target.

And these are June numbers. In July, oil prices began to weaken again, and last night saw another big drop. West Texas crude fell US$1.51 to US$45.30/bbl to mark its lowest level since March, and Brent fell US$2.20 to US$49.65/bbl to breach the psychological 50 barrier.

Weak consumer spending growth combined with falling oil prices create the conundrum facing Wall Street at present. Why have lower fuel prices not encouraged higher spending over 2015? The combination is not only keeping US inflation low but suggesting the potential for a return to disinflation, meaning a lower rate of inflation, at a time the Fed is desperate to lock away its first rate rise.

It’s becoming clear what the US bond market thinks about the September rate rise odds, or even 2015 rate rise odds. The US ten-year yield fell another 5 basis points last night to 2.15%.

The US stock market fell from the open and continued lower through the morning, sending the Dow down almost 200 points by early afternoon. A rebound ensued when the Dow hit the 17,500 mark, but the close was hardly inspiring.

The US dollar index managed to rise nevertheless, by 0.3% to 97.50, but only because the euro fell as the Greek stock market opened for the first time in five weeks. At 20% down on the open it looked ominous, at 30% down mid-session it looked catastrophic, but at 16% down by the close it looked not too bad considering all that has transpired.

There is also the ongoing US earnings season to consider, and with 75% of S&P500 stocks having now reported, the scorecard is not so flash. Some 70% of stocks have beaten on earnings, and net earnings are up 3%, but concern still lies with weak revenue growth. Net revenue has fallen 3% and quite frankly has been falling since the GFC. There are only so many costs that can be cut.

Commodities

The stronger greenback was of no help to commodities, including oil, but just when you thought iron ore might be set to “do an oil” it rose US$2.40 to US$55.30/t last night.

Copper continues to wane, falling another 0.6% last night as all base metals bar lead were again in the negative.  Nickel fell 2.8%.

Gold lost US$9.10 to drop back to US$1086.10/oz on the disinflation play.

The Aussie is 0.3% lower at US$0.7284.

Today

The SPI Overnight closed unchanged, which seems ambitious.

The local focus today will be on June retail sales and trade numbers and, of course, on the RBA statement due this afternoon. While there will be no rate cut, it’s always interesting to read what the board has to say.

On the local stock front, Suncorp ((SUN)) releases its full year earnings result today.
 

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