The Overnight Report: Fear And Loathing

This story features COMMONWEALTH BANK OF AUSTRALIA, and other companies. For more info SHARE ANALYSIS: CBA

By Greg Peel

The Dow closed down 12 points or 0.1% while the S&P lost 0.1% to 1852 and the Nasdaq fell 0.4%.

Bank Bashing

Commonwealth Bank ((CBA)) will release its first half earnings results today. While subsequent headlines will focus on the bank’s profit number, under particular scrutiny will be its capital ratio. The same will be true when ANZ Bank ((ANZ)) and National Bank ((NAB)) provide quarterly updates next week.

Yesterday the Australian financials index, which is completely dominated in market cap by the Big Four banks, fell 4.1%, representing by far the biggest fall of any sector on the session. There has been nothing occurring locally to spark such a trashing – it’s all about a rolling global fear that has its centre in Europe.

The European banks are undercapitalised in relation to new international rules which will require domestic systemically important banks (D-SIB, better known as “too big to fail”) to hold more substantial levels of tier one capital. The market is questioning just how these banks are going to reach their required capital levels when they are carrying significant loans to the energy sector and to emerging markets (China, Russia) while facing negligible to negative interest rates across the continent, even out to ten years.

European bank stocks have been sold down heavily and this has flowed across the Atlantic to US banks, prompting many a call of “overdone” given US banks are very well capitalised and at the D-SIB end of the range, have only minimal exposure to energy sector lending.

Australian banks have been under pressure for a while now but yesterday the rolling fear reached across the Pacific. While better capitalised than they have been for many years, Australian banks still face the prospect of requiring additional tier one capital above and beyond international requirements given they punch above their weight in a much smaller economy. On top of that, higher risk weightings on mortgage lending in order to prevent a housing bubble (although that job by now seems to be done).

The bottom line is Australian banks are a chance to cut dividends and may yet need to raise further capital in the equity market. But we knew that. We knew that last year, and bank share prices have been adjusting ever since. The question is: If Deutsche Bank is sneezing, does it mean CBA must catch pneumonia?

Energy (-3.1%) was the next worst performer yesterday while underwater investors looked to raise cash from selling the two best performing sectors of late, healthcare (-2.6%) and consumer discretionary (-2.5%). The “outperformers” on the day were yet again, in times of trouble, utilities (-1.1%) and telcos (-1.1%).

Despite all that transpired in January (China, oil), Australian businesses have remained mildly confident. NAB’s business confidence index yesterday showed a result of plus 2, unchanged from December, but below the long-run average of plus 5.

Bargain Hunting

Deutche Bank shares were on another slide last night on the German bourse when the bank announced it would look to buy back bonds on issue, which had been trading at around 80 cents in the dollar. This turned around Deutsche’s share price and had the same effect to some extent on US bank stocks.

If Deutsche has the capital capacity to retire debt, one wonders just what the problem is beyond a lack of earnings opportunity. That’s probably while one commentator described Deutsche as “rock solid” last night, in defiance of market panic.

The Deutsche announcement was one driver of what proved a choppy session on Wall Street, featuring several ups and downs including 145 points down on the open and 100 points up in the last hour. Outside of financials, oil was again a focus.

Oil prices had begun the day to the upside when the International Energy Agency issued a report suggesting global demand would slow in 2016 just as Iran re-enters the market as a major producer. West Texas crude subsequently fell 5%. Late in the session US energy company Anadarko announced it would cut its dividend to very little. Anadarko’s announcement follows that of ConocoPhillips last week, but Wall Street has been preparing itself for dividend cuts in the energy sector so there was little surprise.

Outside of both banks and oil, Wall Street was likely looking to square up last night ahead of Janet Yellen’s testimony to the House Financial Committee tonight. There is much disagreement from economists over the Fed’s rate hike plans, with the forecast number of hikes in 2016 ranging from zero to four. As to whether Yellen will throw any light on the subject remains to be seen.

Commodities

West Texas crude is down US$1.53 or 5.1% at US$28.40/bbl. Brent is down US$2.14 or 6.5% at US$30.78/bbl.

The falls in oil defied a weaker US dollar, which is down 0.5% on its index at 96.12.

The LME continues to suffer thin trading and enhanced volatility in the absence of China and thus there were not a lot of buyers around last night when Goldman Sachs decided to cut its base metal price forecasts. Aluminium and nickel fell 1.5% and copper and zinc fell 2.5%.

Iron ore is unchanged at US$44.70/t.

After a solid run, gold stalled last night despite the weaker greenback. It’s down US$3.40 at US$1189.50/oz.

The Aussie has also defied the greenback, aided by yesterday’s stock market rout. It’s down 0.4% at US$0.7057 but traded under 70 during yesterday’s session.

Today

The SPI Overnight closed up 3 points.

Westpac will release its monthly consumer confidence survey today while all eyes will be on Janet Yellen’s testimony tonight.

Earnings season today features results from CBA, as noted, along with AGL ((AGL)), Boral ((BLD)), Carsales.com ((CAR)), Cimic ((CIM)), Computershare ((CPU)) and OZ Minerals ((OZL)).
 

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available in the FNArena Cockpit.  Click here. (Subscribers can access prices in the Cockpit.)

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author's and not by association FNArena's – see disclaimer on the website)

All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.

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