The Monday Report

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

By Greg Peel

Volatility

It was a wild old week for the Australian stock market last week, featuring the two dominating themes of oil and banks coinciding with the end of the quarter. Markets fluctuated on the possibility of an OPEC production freeze on the one hand and cascading capital issues for Deutsche Bank on the other.

Friday ended on a sour note for the ASX200 as gains made on the Thursday, thanks to the OPEC news, were completely reversed by midday on Friday on fears Germany’s largest bank, and one of the world’s largest banks, was in trouble. A withdrawal of capital from the bank by hedge funds sparked fears another Lehman episode was upon us.

The index managed to bottom out around midday and slowly crept back to the close, to end the day down 0.7%. While most sectors finished in the red, the dominating move was in the banks, which closed down 1%.

On Friday night however, that which had bank investors bailing on global nervousness reversed course once more.

Not Lehman

Markets tend to panic first and ask questions later. On Friday night bank analysts in the US were hastily publishing research notes to point out that Deutsche Bank is not Lehman Bros.

Firstly, Lehman was an investment bank and not a commercial, deposit-collecting bank and as such did not have the Fed as an obligatory backstop. The Fed chose to let Lehman go under. Deutsche Bank is an investment and commercial bank and as such is ultimately supported by the ECB.

Secondly, Lehman traded on a tight liquidity position, holding just enough cash to get it through each day. Deutsche Bank’s cash position is, by contrast, not in question given it’s considered substantial. Lehman went down because it couldn’t cover its counterparty obligations – a liquidity issue.

Deutsche’s issue is one of plenty of liquidity but dwindling capital, due to a combination of not having built up an excess capital position post GFC as, for example, US and Australian banks have, being hit on loans to the energy sector when the oil price collapsed, being hit on loans to emerging markets due to both oil and a slowing of the Chinese economy, and in general seeing its share price halved over the course of the year.

When once a US$14bn fine from the US Department of Justice would have been lunch money for Deutsche, pre-GFC, in 2016 the reality is one of being able to pay. There is little doubt that while asset sales and other measures would help, Deutsche would have to go to the market to raise new equity. Given the sentiment surrounding Deutsche at present, such a raising would prove highly dilutive to existing shareholders.

But the obvious question is: is it in the interest of the US government to bring Germany’s largest bank to its knees and potentially trigger another global banking crisis? All for the sake of US$14bn? Of course not.

On Friday night it was rumoured the DoJ was prepared to reduce Deutsche’s fine. Numbers around US$5bn were being suggested. It may only be a rumour but it does make logical sense. Whatever the case, the market bought the story, and subsequently bought Deutsche Bank shares back up 15%.

And as such Wall Street rallied back again on Friday night, recovering Thursday night’s losses, with the banking sector leading the indices down and back up. The Dow closed up 164 points or 0.9%, the S&P rose 0.8% to 2168, and the Nasdaq gained 0.8%.

Commodities

West Texas crude rose US29c to US$48.03/bbl.

Lead jumped 3% on the LME to continue its recent volatility while nickel and zinc added 1% and copper 0.5%.

Iron ore fell US90c to US$55.20/t ahead of the week-long Chinese public holiday.

The US dollar index dipped slightly to 95.42 and gold is down US$4.00 at US$1315.90/oz. The Aussie is up 0.4% at US$0.7664.

And after Friday’s bank-related fall for the ASX200, the SPI Overnight closed up 30 points or 0.5% on Saturday morning, no doubt in anticipation of a reversal.

China

On Friday, Caixin released its independent measure of China’s manufacturing PMI for September which came in at 50.1, up from 50.0 in August.

On Saturday, Beijing released official PMI data for September showing manufacturing stable at 50.4, and services up to 53.7 from 53.5.

The Week Ahead

It’s Golden Week in China and markets will be closed all week.

The rest of the world will release manufacturing PMIs today and services PMIs on Wednesday.

It’s jobs week in the US. The ADP Private sector report is due on Wednesday and non-farm payrolls on Friday. Tonight it's construction spending and vehicle sales, Wednesday factory orders and the trade balance, Thursday chain store sales, and Friday consumer credit.

In Australia we’ll see the manufacturing PMI today, services on Wednesday and construction on Friday. Today also brings house prices and tomorrow it's building approvals and the ANZ job ads series. Wednesday it’s retail sales and Thursday the trade balance.

The RBA will meet tomorrow and leave the cash rate unchanged.

On the local stock front, the ex-divs are now beginning to dwindle. BHP Billiton ((BHP)) will hold an investor briefing on Wednesday and Bank of Queensland ((BOQ)) will report earnings on Thursday.

The public holiday in NSW today is not nation-wide and does not close the ASX. However most broking houses will be on holiday and little to no research will be published. FNArena will return to normal service tomorrow.

Also a reminder that as of tomorrow morning, the NYSE closes at 7am Sydney time.

Rudi will not make any appearances on Sky Business this week due to a well overdue breather. He'll be back next week.

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)

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