The Overnight Report: The Ghost Of Crisis Past

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By Greg Peel

The Dow closed down 195 points or 1.1% while the S&P lost 0.9% to 2151 and the Nasdaq fell 0.9%.

Energised

One doesn’t have to look very far to see why the ASX200 was up 1.1% yesterday. On the supposed agreement reached by OPEC to instigate a production freeze/cut, the local energy sector was up 6.3%.

The materials sector chimed in with 2.8%, bearing in mind that aside from stronger base metal prices overnight, BHP Billiton ((BHP)) is an oil crossover.

We then drop a long way down to industrials, which rose 1.2% because that’s where oil sector service companies reside. Beyond that, sector moves where insubstantial. Of yesterday’s Top Ten movers to the upside, positions one through seven were all oil & gas or oil & gas services companies.

Oil & gas producer BHP rose 4.7% yesterday, which is unsurprising, but iron ore rival Rio Tinto ((RIO)) rose 3.7% despite being an oil consumer, not producer. Overnight in London, BHP is up 6.5% and Rio 4.5%.

The potential OPEC freeze is as much symbolic as it is fundamental. It underscores a groundswell of belief that has been building this past month or two, that February 2016 marked the bottom of the commodity price cycle.

Oil has stabilised in the 40s when earlier there were warnings of it heading towards the 20s. Iron ore has stabilised in the 50s when analysts were assuming a fall back through the 40s. The world had all but written off coal as a commodity but thermal coal has rallied back strongly and met coal has gone through the roof. Mine closures are driving nickel higher. Even copper has finally found a bit of strength.

The OPEC deal is, symbolically, almost a sign of confirmation. The early movers have already been switching out of first half 2016 plays – yield stocks, which had become overvalued – and back into cyclical plays. The biggest cyclical play of them all is commodities.

Another sector that has seen money withdrawn in favour of such switching is financials. Today is going to be a different day on Bridge Street.

Too Many Memories

Wall Street was bugling along doing very little last night up until around midday. The European stock markets were closed when Bloomberg reported ten hedge funds had withdrawn their capital positions with the Deutsche Bank prime brokerage. Hedge funds lodge capital with their prime broker, and in many cases a number of brokers, as a slush fund from which trades can be made and/or as collateral against risk positions in derivatives and other instruments.

The withdrawals suggest the hedge funds have reduced, or eliminated, their counterparty risk with Deutsche. The bottom line is, were Deutsche to go under, that capital would never be seen again. The volume and price of Deutsche credit default swaps is also rising, either as an outright trade or as a hedge against collateral held. As soon as “CDS” creeps back into the discussion, minds are jolted back to 2008.

If one were to do a word-count of everything uttered on business television this morning, both in the US and locally, the most used word would be “Lehman”.

Which poses a problem in itself. The world would probably be less concerned over the state of Deutsche’s capital and liquidity positions if 2008 had never happened. But it did, and investors are starting to play it safe lest the September of US election year 2016 starts to look like the September of US election year 2008. And next week it’s October.

Deutsche Bank shares fell 7% on the NYSE last night. Angela Merkel has said it will not provide the bank with any assistance in paying the US$14bn fine owed to the US Department of Justice. However, the German government cannot stand back and watch Deutsche go under. In Germany, Deutsche is Australia’s Big Four all wrapped into one. In the world, Deutsche is the biggest holder of financial derivatives.

Deutsche Bank cannot, nevertheless, be bailed out with taxpayer money under rules introduced by the ECB since the GFC. It can only be “bailed in”, meaning first the shareholders lose their money, then the bondholders lose their money, then depositors lose their money above the government guarantee level. We saw this in Cyprus in 2013.

That is not to say Deutsche is Lehman and 2016 is indeed 2008. Commentators have been quick to point out much is different. But if hedge funds start pulling their capital, it can’t be long before shareholders really start to head for the exits. If that happens, depositors won’t be far behind.

Wall Street did not close on its lows last night but it wasn’t far off. It was all about the banks.

Meanwhile, the US June quarter GDP result was revised to 1.4% growth last night, up from 1.2%. No one much noticed.

Commodities

West Texas crude gained another 1.2% in rising US58c to US$47.74/bbl.

Lead leapt 3.4% on the LME last night while ever volatile nickel fell 2.5%. Zinc rose 1.5% and copper and aluminium rose 0.5%.

Iron ore rose US20c to US$56.10/t.

The US dollar index is up slightly at 95.49 and gold is down slightly at US$1319.90/oz. One might expect a rush into the safe haven of gold if the word “Lehman” is being bandied about, whether justifiably or not, but 2008 reminds us that when stocks are plummeting and margins are being called, investors have to throw their gold overboard.

The Aussie jumped up the night before on the strong oil price and last night came right back down, falling 0.7% to US$0.7634.

Today

The SPI Overnight closed down 34 points or 0.6%.

It will be an interesting day on the local bourse. On the one hand we have building strength in the resource sector, underscored by last night’s big moves up for BHP and Rio, and on the other we have the banks, which are no doubt the thinking behind weakness in the futures this morning.

There’s one helluva long list of local and global economic releases on the calendar today.

In Australia we see private sector credit and new homes sales.

Japan will provide a monthly data dump of inflation, production and unemployment numbers.

Caixin will jump in early with its China manufacturing PMI for September because next week in China is Golden Week. The country will shut down this evening and not reopen until October 10. Beijing will release its official September manufacturing and service sector PMIs tomorrow.

The US will see the Chicago PMI tonight along with consumer sentiment and personal income & spending, including the all-important PCE measure of inflation.

Monday is a public holiday in NSW, the ACT, Queensland and South Australia. The ASX is open, but few banks and brokers will be. There will be no research to speak of. FNArena will thus publish a Monday Report but that will be all we can provide.

On Sunday night summer time begins in relevant states in Australia. This means come Tuesday morning, the NYSE will close at 7am Sydney time.

Rudi will link up with Sky Business this morning, through Skype, to discuss broker calls around 11.05am. Later he will appear in the studio for Your Money, Your Call Fixed Interest, 7-8pm.
 

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