The Overnight Report: Breather

This story features MEDIBANK PRIVATE LIMITED. For more info SHARE ANALYSIS: MPL

By Greg Peel

The Dow closed down 23 points or 0.1% while the S&P lost 0.2% to 2071 and the Nasdaq was flat.

Ineffective?

Yesterday morning the futures were calling the ASX200 up 55 points which, if accurate, would have put the index above 5400 for the first time since August. Anticipation centred around the market’s response to Friday night’s Chinese rate cuts.

But those rate cuts had themselves been long anticipated so when the ASX200 opened up 33 points from the bell yesterday and immediately struggled, it became clear 5400 is a bridge too far just yet. There was most likely an element of “sell the fact” from shorter term traders after a strong rebound from near 4900 to near 5400.

However, there is also consternation around the latest Chinese stimulus package in that its potential effectiveness has been questioned. The PBoC lowered its official deposit and lending rates by 25 basis points but also “liberalised” deposit rates for the first time, meaning Chinese banks can now offer whatever rate they like to lure capital. If deposit competition heats up among China’s banks, the trade-off is a lack of capacity to lower lending rates less net interest margins become too compressed.

In other words, in Australia-speak we would say the banks may not “pass on” the central bank rate cut.

The other element is that of the 50 basis point cut to China’s bank reserve ratio requirement (RRR), allowing banks to free up more balance sheet capital for lending. China’s net debt has already climbed alarmingly since the first big stimulus package of late 2008 and another cut to the RRR only fuels that fire. Moreover, economists suggest that the amount of capital that has flowed out of China recently due to the economic slowdown will not be completely offset by the capital release permitted by the RRR cut.

So all up it’s possible the PBoC has delivered the stimulus you have when you’re not having any stimulus. There was not a great deal of excitement on the Shanghai exchange yesterday, with the Chinese index closing only 0.5% higher. It did not help the mood that yesterday the Chinese premier acknowledged that the government’s 7.0% growth forecast for 2015 is not a hard target and indeed may not be met.

The only real stand-out on the Australian market yesterday was a 1% fall for telcos. Otherwise most sectors closed flattish.

For Australia the next major event will be the release of September quarter CPI data on Wednesday, which may or may not provide further fodder for the argument among economists a Cup Day rate cut is worth backing next week.

Then on Wednesday night, the Fed delivers its latest monetary policy statement.

Gas Leak

Not that anyone expects a rate rise, and not that there’s any great expectation of a shift in the Fed’s rhetoric. The world remains in the dark. But an approaching Fed meeting typically gives cause for Wall Street to quieten down for a couple of days, and that seems to be what happened last night following two days of solid gains.

The US indices meandered their way to a dull close. The big jumps on Thursday and Friday have meant the S&P500 is close to recovering all of the big August plunge. For months the index wandered along a straight line with 2100 at its centre before Wall Street woke up to the China scare. It is now back at 2071, thanks to help from the ECB and PBoC, and we’re likely back at a “where to now” point. The US earnings season, still ongoing, will no doubt have some say. There is much anticipation ahead of reports from Apple and Twitter tonight.

There were nevertheless two main talking points of the day.

The first was an 11.5% plunge in US new home sales in September. While this looks alarming, Wall Street is not ready to panic given this data series is highly volatile and carries a margin of error of 11.3%. The fall in new home sales is also offset by a big rise in existing home sales in the month, balancing out home sales in general.

Interestingly, there is a trend emerging in the US that younger home buyers are eschewing their parents’ dream of a house in the suburbs in preference for an apartment in the city. They are also more likely to rent than borrow and buy. The concern now, as new home sale numbers ease, that too many apartment blocks have been built.

Sound familiar?

The other talking point last night was the natural gas price. The price of US natgas as measured by the Henry Hub futures contract had barely moved all year, hanging around US$2.50/mmbtu for months, until recently. Indeed, but for a couple of runs higher in the interim natgas has not really changed in price since the oil price first collapsed in 2008.

But in the last few days the price had begun to slide, and last night it fell 9% to US$2.08. The story is the same as it is for oil – too much gas is being supplied vis a vis demand, with a warm autumn in the US not helping. This is a US domestic price and natgas is a closed shop commodity in the US. But the government has been quietly moving towards allowing export of US gas, in the form of LNG.

Which is not good news for Australia’s upsized LNG export industry, albeit this is an issue well known for some time. At least Australia’s major LNG projects are coming on line years ahead of US projects now underway. There remains the question of to what extent the US might become an exporter of energy. The Obama government has been reticent, the Republicans, unsurprisingly, are all for it. A change of government next year would be material.

The Republicans are all for it because they are free market supporters and, let’s face it, count among their number the country’s oil barons (See: Bush family). The Democrats are reticent because for so many years the US was beholden to energy supply from its enemies, and now it isn’t. Cheap energy also provides the US economy with a competitive advantage over the energy importer economies of China, Japan and Europe. Why hand away that advantage in exchange for a small margin on energy export?

Watch this space.

In the short term, US gas producing companies had a tough time on the stock market last night.

Commodities

Natgas was the talking point but West Texas crude is also now back on the slide, having threatened to break up through US$50/bbl only a couple of weeks ago. If the Chinese premier is suggesting his 7% growth target is unlikely to be met than China’s economy is probably in a worse state than official Chinese data portray. WTI fell US78c to US$43.79/bbl last night having previously slipped through the low end of the established range at US$45/bbl.

Brent fell US62c to US$47.32/bbl.

Oversupply continues to be a global issue for aluminium, which last night fell 1.4% on the LME. Copper was the only base metal to hold relatively steady as the others drifted lower.

Iron ore fell another US10c to US$50.80/t.

Gold is relatively steady at US$1163.20/oz.

After two solid sessions of gains, the US dollar index has fallen back 0.3% to 96.83. The Aussie didn’t move an inch during that rally, given the offset on the cross-rates and most particularly the euro. But on last night’s US dollar fall, the Aussie is up 0.4% at US$0.7246.

Today

The SPI Overnight closed up 3 points.

China will report industrial profits for September today. The UK will provide a first estimate of September quarter GDP tonight.

The US will see a raft of data tonight including durable goods, consumer confidence and house prices.

Locally, the AGM calendar is rather stretched today, and another load of resource sector production reports are also due. Medibank Private ((MPL)) will hold an investor day.
 

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