Tag Archives: Base Metals and Minerals

article 3 months old

Material Matters: Coal, Iron Ore, Nickel And Aluminium

Price outlook for coal; iron ore consumption; China's steelmaking restructure; impact of Philippines nickel supply cuts; aluminium demand; Canaccord Genuity upgrades Galaxy Resources.

-Coking coal price to be well supported in next couple of months
-Heightened thermal coal price not expected to last
-Short-term iron ore prices unlikely to fall back
-Re-stocking the next driver of the nickel price?
-Aluminium supply likely to be forced offline again
 

By Eva Brocklehurst

Metallurgical (Coking) Coal

Spot prices for hard coking coal are approaching US$110/t, Macquarie observes, and a point where the entire seaborne market is cash positive. The broker notes this is unusual in a market where demand growth is negative and there has been no meaningful cost inflation, highlighting the importance of China in price setting.

The broker expects prices to remain well supported over the next couple of months, given Chinese inventories are low and mills are looking to increase purchases. The fourth quarter is expected to be more of a challenge. Macquarie suspects the Chinese government will find it difficult to control output levels as margins improve.

The broker also suspects, on a relative basis, that coking coal is less vulnerable compared with thermal coal, as it is more dependent on Shanxi province where production restrictions have been best enforced, and because there is less flexible supply in the seaborne market.

Thermal Coal

Credit Suisse notes China has implemented a 276 work day reform ahead of the demand for power for air conditioning. Domestic coal became so tight that traders turned to Australia for cargoes and the Newcastle price rose steeply in July, with global benchmarks following suit.

The broker does not expect the US$67/t price to last. Already China’s independent power producers are cancelling coal tenders as demand is expected to drop by 8-12% after the summer and output is gradually increasing.

The broker’s analysts believe the new normalised cost for thermal coal in China will be RMB400/t. This is the estimated sweet spot where both coal mines and the independent power producers make margin. Credit Suisse increases thermal coal price forecasts to US$55/t for 6,000 calorie coal from the December quarter to 2019, the equivalent in price parity terms to RMB400/t.

Iron Ore

Since July 2015 the correlation between iron ore and Chinese steel prices has increased to over 63% from 11%, ANZ analysts observe. China has announced it will reduce its steel production capacity by 100-140m tonnes but to date there has not been much evidence the closures are accelerating. Steel production has remained at elevated levels for most of the year.

Still, this may start to ramp up with Baosteel and Wuhan Iron & Steel, the two largest steel producers, recently announcing plans to restructure. The analysts maintain the eventual large scale closure of steelmaking capacity in China is ultimately bearish for iron ore. Yet selective stimulus measures, including support for the housing market, have gone a way toward supporting steel demand.

The analysts are now forecasting steel consumption in China will only fall 0.5% in 2016 against forecasts for a fall of 4.9% at the start of the year. The potential for upside to this forecast is increasing, should infrastructure spending be boosted. Hence, the likelihood of iron ore prices falling back to US$50/t in the short term is rapidly diminishing, the analysts maintain.

Nickel

To date eight out of 27 nickel mines have been told to suspend operations in the Philippines since the nationwide audit began in July. UBS observes these are generally smaller mines and accounted for 10% of the Philippines contained nickel production in 2015 and 2% of global supply.

The Philippines supply contracts are from July to January each year so the broker suspects the real impact may not be felt until early 2017 when exports fail to ramp up as normal. The broker envisages the nickel price, which averaged US$4.78/lb in the past month, is not yet on a sustainable footing, with 20-30% of mines still losing cash, albeit less than a month ago.

Meanwhile, stainless steel production looks to be lifting again after two years of flat output. The broker believes re-stocking could be the next driver of upside to the nickel price.

Credit Suisse contends there is the real threat that nickel ore could be cut off in the Philippines. The new environment minister has stated that open pit mining wreaks havoc on the islands and the mining law must be revised. A ban on open pits would end nickel laterite mining in the Philippines, the broker maintains.

Other producers of nickel laterite ore are Indonesia and New Caledonia. Indonesia banned raw material exports in 2014 and New Caledonia has always favoured domestic ferronickel producers over exports. Credit Suisse finds it difficult to imagine, if Philippines supply ceases, that another nickel ore supplier will step into the breach for China’s nickel pig iron producers.

Aluminium

2016 may reveal the first primary aluminium deficit in a decade, Macquarie asserts. The broker suggests this may disguise the fact that a stronger China is pushing less aluminium into the global market while outside of China demand is weaker than expected and struggling to absorb inventories.

Macquarie suspects there will be a resurgence in Chinese output, given the expansion of capacity being witnessed in Shandong, Xinjiang and Inner Mongolia. Output ex China is also running at record levels and the broker calculates almost all smelters are making money.

As a result, Macquarie expects the price will return to a level at the end of 2016 and into 2017 where supply is once more forced to come offline. Production growth in China still drives the market and the broker acknowledges surprises can dramatically change the market balance.

Any expectations of raw material constraint have dissipated, the broker adds. Despite a temporary ban in Malaysia, bauxite is readily available from Guinea and the Chinese domestic market.

Galaxy Resources

Galaxy Resources ((GXY)) has completed the acquisition of General Mining, with the focus now turning to the ramp-up of production at Mt Cattlin. Canaccord Genuity expects other catalysts to be forthcoming soon, including the Sal de Vida definitive feasibility study.

Galaxy remains one of the broker’s preferred lithium exposures. The broker's valuation is revised on the back of increased share numbers resulting from the General Mining acquisition, consolidated ownership of Mt Cattlin and James Bay and the revised production ramp up at Mt Cattlin.

Canaccord Genuity upgrades to Buy from Speculative Buy and raise the target to 65c from 60c.
 

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article 3 months old

The Overnight Report: Another Record

By Greg Peel

The Dow closed up 59 points or 0.3% while the S&P gained 0.3% to 2190 and the Nasdaq added 0.6%.

Earnings Driven

In the August earnings season of 2015, the ASX200 fell 8.6% across the month. In the February season before that, the index rose 6.1%. In February this year, the index netted a 2.5% fall but that included a big commodity price-based drop and bounce mid-month. In each case, macro factors impacted on the market’s beta – its movement as a whole.

In this August season, the market as a whole is going nowhere much, as international markets also largely stall. What this means, unlike recent prior seasons, is that earnings results can be clearly reflected in stock price movements on alpha, or individual, stock risk without the overriding macro, or beta movement. Yesterday was a clear example.

The index did little, recovering from a slight dip in the morning to post a slight gain on the close. But under the surface sector moves were more notable, thanks to individual stock moves in those sectors. In short: the beats and misses.

Ansell ((ANN)) was the big winner on the day, rising 18% after posting a “less bad” result and announcing it might toss off its condom business. Short positions had been building in Ansell ahead of the season, and for reasons which continue to confound, JB Hi-FI ((JBH)) has always been popular with the shorters. Yet virtually every season the electronics retailer beats, and yesterday was another win which saw JB shares up 10%.

Packaging company Orora ((ORA)) has been a popular defensive plodder for investor portfolios this year but it still managed a 10% gain on the day. On the other side of the ledger, coal hauler Aurizon missed and suffered a 6% fall, and while Newcrest’s ((NCM)) numbers were not so bad, gold stocks have been bought up in a frenzy this year to stretched valuations. Its shares fell 4%.

Adding to the mix was National Bank ((NAB)), which provided a reasonable quarterly update that had its shares up 1%.

So we don’t need to look far to understand why the big sector movers yesterday were healthcare, up 0.5%, consumer discretionary, up 0.8% and the banks up 0.6%, with materials down 1.5%, and industrials little changed on the balance. We also saw some support returning for two sectors lately sold off to provide rotation funding – telcos and utilities.

On the assumption there are no left of field impacts on global markets for the next two weeks, and that’s always a big assumption to make, the season will continue in the same vein. The difference from here on in is the number of companies reporting each day will grow larger and larger, making it more of a task to unscramble the movements.

Hi, Hi, Hi

A second triple-high for all of the Dow, S&P and Nasdaq within two sessions of the first in sixteen years is a bit like winning the silver, but still more exciting than following Australia’s Olympic campaign. The way things are going these records will become routine, as there seems no reason for Wall Street to go down in any meaningful way at present.

And that’s a fact traders, investors and commentators reluctantly admit. You’d think they’d be thrilled, but they know it’s all just smoke and mirrors. Stock markets have turned into bond markets, offering more investment yield than long term government debt, because central banks across the globe have orchestrated such an investment environment.

It is not how it’s meant to be.

In the meantime, there’s no point in “fighting the tape”. The VIX volatility index suggests a high level of complacency, and that has traders worried. But with central bank safety nets in place, what’s there to worry about? Perhaps the time to worry will be when global economic growth starts to fade away completely, and central banks realise there is no more they can do.

Tech stocks continue to be a significant leader on Wall Street, and here we’re talking both old and new. Developments in areas like the cloud and Big Data, electric cars and the Internet of Things are 21st century growth stories changing the landscape. Meanwhile, 20th century pioneers like Microsoft, Apple and IBM are also in the game as they reinvent themselves.

Oil is a very old story on Wall Street but no less fresh today. The oil price rose another 2% last night, providing extra impetus to hit those new highs. Apparently the Russians are now in the game, reporting to Saudi newspaper they are prepared to talk production cuts. Still no one believes it, but still no one wants to be caught the day there really is a wolf.

Last night’s US data highlight was the housing market sentiment index, which rose to a comfortable 60 (50 neutral) to beat expectations. Housing is as significant and underlying economic driver in the US as it is in Australia at present.

All up it was another summer-quiet session on Wall Street, and another grinding gain. In two weeks we enter September, historically the worst month for stock market performance, followed by October, historically the scariest.

Commodities

West Texas crude is up US$1.02 to US$45.71/bbl.

After some big falls on Friday night, base metals staged a comeback of sorts last night. Nickel rebounded 2.5% and zinc 1%, while aluminium rose 1% and lead 1.5%. Copper stood still.

Iron ore fell US20c to US$60.00/t.

Gold rose US$2.90 to US$1338.60/oz.

Currency was not in play last night, with the US dollar index largely flat at 95.61. Yet the Aussie is up 0.3% at US$0.7674.

Today

The SPI Overnight closed up 8 points.

The minutes of the August RBA meeting will be released today.

In the eurozone, the ZEW survey will provide an indication of investor sentiment a month after the Brexit result.

The Fed will be talked about again on Wall Street tonight as US numbers for CPI, industrial production and housing starts are released.

On the local stock front, the number of earnings reports will grow today. The highlight is BHP Billiton ((BHP)) but that report is not actually due until 6pm to tie in with London investors.

During the session downunder, Challenger ((CGF)), Domino’s Pizza ((DMP)), G8 Education ((GEM)) Mirvac ((MGR)), and Scentre Group ((SCG)) are among the crowd today.

Rudi will Skype-link up with Sky Business today to chat about broker calls, at around 11.15am.
 

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)

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article 3 months old

The Monday Report

By Greg Peel

Shanghai-ed

The triple treat high on Wall Street on Thursday night and stronger oil price ensured the ASX200 was off to a solid start on Friday morning. The opening rotation had the index up over 40 points to almost reach 5550.

There was always a risk Friday would bring some selling ahead of the weekend break given a largely steady week of trading but as it was, the index suffered a sudden drop late morning.

I have been noting so far this month that the local market has not seemed to pay any attention to Chinese data releases, which have all been to the weak side. Whether this be due to comfort in the knowledge Beijing will simply step up the stimulus pace or whether there have just been other overriding factors to consider, such as local earnings, is unclear. But it would seem that on Friday, all that changed.

Chinese industrial production rose 6.0% year on year in July when 6.1% was expected, down from June’s 6.2%. Retail sales grew 10.2% when 10.5% was expected, down from 10.6%. And fixed asset investment grew 8.1% in the year to July, down from 9.0% to June and missing 8.8% expectation.

The market has been assuming that at some point, Chinese data would begin to reflect the monetary and fiscal stimulus policies the PBoC and government have in place. Clearly there’s no sign yet. Breaking down that fixed asset number we see private sector investment grew 2.1% to July, down from 2.8% to June, and government investment grew 21.8%, down from 23.5%.

Private sector investment growth is negligible, and even government spending has waned. What will Beijing do?

The two sectors most directly linked to the Chinese economy – energy and materials – still managed to post the biggest sector gains on Friday, as the index bottomed out at the flatline and kicked again late afternoon to close 22 points higher. Energy rose 1.7% on the oil price pop and materials rose 1.3% despite little support from metals prices.

Elsewhere, consumer discretionary was again a winner, along with healthcare, while the telcos came under further pressure and selling in utilities – the proceeds of which still appear to be rotating into the more cyclical sectors -- continued.

Other than the release of minutes from policy meetings, there’s not a lot of central bank action to move markets this week ahead of next week’s infamous Jackson Hole gathering hosted by the Fed. There’s a fair bit of US data to get through, but for the local market it will be all about earnings results. The season steps up to full pace as the week progresses.

Not 1999

It looked more like a typical Friday session in summer for Wall Street on Friday night. Having hit the triple-high in all three major indices for the first time since December 1999, it was always a chance a breather would ensue.

The Dow closed down 37 points or 0.2% while the S&P lost 0.1% to 2184 and the Nasdaq gained 0.1% to another new all-time high.

There was, inevitably, much comparison being made on Wall Street on Friday with what transpired the last time the triple-high was achieved. Triple-highs had been achieved over a hundred times ahead of 1999, but because what followed was the Tech Wreck, and the complete routing of the Nasdaq, it’s taken this long to happen again.

Should we be worried that the biggest drop in stock markets prior to the GFC might repeat based on this triple high phenomenon? Well, consider that back then the concept of “online” was still a mystery to most people and tech stocks were trading on a Tomorrowland basis – don’t ask, just get on, as this thing is BIG.

The IPOs came fresh and fast from start-up dotcoms that had no more to offer than an idea, and given actual earnings were but a pipe dream at that stage, average PE ratios were off the scale and largely meaningless. Today’s Wall Street PEs are reasonable in historical terms. Back then the Fed funds rate was 5% and today it’s 0.5%. Back then there were more dotcom offerings than you could poke a stick at. Most disappeared the following year. Those that survived have gone on to be household names – such as the likes of Amazon and eBay for example.

So there is no basis to be worried about any sort of repeat performance, unless of course something altogether different transpires that no one ever saw coming.

Back in the real world, Wall Street was shocked by the July retail sales number released on Friday night. After three months of solid growth, including a 0.8% jump in June, economists had been predicting a bit of an easing in the pace of growth, to 0.4%. So the flat result was a surprise.

Month on month numbers are typically volatile, and at an underlying annual growth rate of 2.3%, retail sales are helping to support the US economy without knocking it out of the park. Hence we see a GDP growth rate around a mere 1%. But of course, just as commentators had been pointing to improving US data, including retail sales, as reason the Fed may yet hike this year, now that’s all out the window once more.

The US ten-year yield fell 6 basis points to 1.51% on Friday and the US dollar index fell 0.2% to 95.68.

The US stock indices held their ground. It may have been a weak result for July retail sales, but last week featured a lot of surprisingly good (or less-bad) results from longstanding US retail names and on Friday JC Penney joined that group, enjoying a 6% share price jump on its quarterly earnings result.

The oil price also jumped another 3%, despite data showing the US oil rig count climbed for the seventh week in a row. The shorts continue to jump out of oil as the Saudis talk their now hackneyed talk once more of possible production freezes. No one believes a freeze will transpire but no one’s prepared to take the risk were it to be true.

Commodities

West Texas crude rose US$1.24 or 2.9% to US$44.69/bbl.

Over in London, it appears metals traders were very much focused on the weak Chinese data. Throw in the weak US retail sales number, and nickel fell 4%, copper 2% and zinc 1.5%.

Iron ore rose US60c to US$60.20/t.

Gold is slightly lower at US1335.70/oz.

The Chinese numbers also had a notable impact on the Aussie, which is 0.7% lower at US$0.7650.

The SPI Overnight closed down 11 points or 0.2% on Saturday morning.

The Week Ahead

Earnings, earnings and more earnings to hit the local market this week – too many to offer weekly highlights. Among today’s reporters are Ansell ((ANN)), JB Hi-Fi ((JBH)) and Newcrest Mining ((NCM)), while National Bank ((NAB)) will provide a quarterly update.

Local data this week include tomorrow’s minutes of the August RBA meeting, which gave us a cut, and the June quarter wage price index on Wednesday.

US data this week include the housing sentiment index and Empire State activity index tonight, CPI, housing starts and industrial production tomorrow, the minutes of the Fed meeting on Wednesday and the Philly Fed activity index on Thursday.

Tomorrow night also sees the monthly ZEW investor sentiment index for the eurozone, which presumably will provide some indication of what Europe thinks about a Brexit.

Rudi will appear on Sky Business on Tuesday, via Skype-link, to discuss broker calls at 11.15am and repeat it all again on Friday, at around 11.05am.
 

For further global economic release dates and local company events please refer to the FNArena Calendar.

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article 3 months old

Weekly Broker Wrap: Lithium, Amazon, Strategy And Cash Rates

Supply surge in lithium; disruption from Amazon; more difficult period ahead for equities; RBA cash rate outlook.

-Supply expansion likely to meet the significant demand for lithium in China 
-Potential for Amazon to make inroads in electronics and media sales in Oz
-More difficult period for equities ahead but can accommodate some rise in bond yields
-Case for further official rate cuts mounts as risks seen increasing going into 2018


By Eva Brocklehurst

Lithium

A supply wave is building in lithium. The supply of lithium from existing brine producers is accelerating and Australia’s two new hard rock mines at Mt Marion and Mt Cattlin are about to begin production, targeting immediate expansions. Macquarie expects Australian production of spodumene will double over the next 12 months.

Yet, the broker suspects incumbent producers may become more motivated to keep new supply out of the market. Higher production from the two new mines means demand will be satisfied out to 2021, the broker suspects, but the turning point for lithium pricing could arrive earlier than previously expected. Even in the context of China’s rapid growth in electric vehicles it appears unlikely the required growth will materialise quickly enough to absorb the supply.

Significant conversion capacity is being built in China and this is expected to be the main driver of demand. Yet the low barriers to entry for hard rock mines and ability of existing producers to ramp up suggests to Macquarie that supply will always be able to meet demand or even outstrip it.

Orocobre ((ORE)) remains the broker’s preferred pick in the lithium sector as it is already in production and has been able to realise current off-contract pricing. The broker envisages the Mineral Resources ((MIN)) and Neometals ((NMT)) joint venture at Mt Marion is the largest and lowest risk addition to hard rock supply.

The broker is also positive about the Galaxy Resources ((GXY)) Mt Cattlin mine, but believes the stock is factoring in a premium to long-term price forecasts. In light of the expansion plans for Mt Cattlin and Mt Marion Macquarie finds the outlook for Pilbara Minerals ((PLS)) and Altura Mining ((AJM)) more challenging.

Amazon

Amazon has disrupted a number of retail markets around the world and, given its product overlap, the Australian retailer most likely to be affected in Citi’s view is JB Hi-Fi ((JBH)), where earnings are estimated to potentially fall 23%.

Amazon already has a large digital presence in Australia with the only limiting factor in expansion being logistics, but Citi maintains that the recent investment in the US, with its regionally-based fulfilment centres, should provide solutions for the vast distances experienced in Australia.

The broker estimates Amazon could reach $3.5-4.0bn in sales in Australia. Its biggest categories are electronics and media. That said, the same penetration enjoyed in the US is not considered likely given the strong presence of eBay in Australia. Amazon Fresh could also find it more difficult in Australia because capital city population density is low.

Still, Amazon could capture up to 7% of the electronics market based on its success in the US and UK and Citi maintains retailers such as JB Hi-Fi and Harvey Norman ((HVN)) would have to deal with a loss of sales and risk to overall margins, given Amazon’s pricing.

Equity Strategy

Credit Suisse’s indicators suggest bond yields should start to rise and equity markets could enter a more difficult period in the second half of 2017. At that point investors could be confronted by sharply accelerating US wages growth and China unable to roll over loans without printing money, with the market having discounted by that stage much more in the way of fiscal easing.

The broker anticipates a sell-off in equity markets in the second half of 2017, noting equity risk premium is too high and while there may be a sell-off in credit, the broker struggles to envisage it being meaningful. Most of the fall so far in bond yields has been offset by a rise in the equity risk premium and cost of equity. This now ensures an environment where many fixed income assets and parts of real estate appear expensive.

The broker believes central banks will err on the side of caution and risk an overshooting of inflation rather than risk a recession. This in turn remains supportive for equities.

The broker notes US equity mutual fund selling has been extreme with the corporate sector the only buyer, resulting in low equity weightings by institutions. Of note too, Credit Suisse observes, most bull markets end on a clear over-valuation of the sector and a bubble in growth stocks, of which neither has been witnessed so far.

The risk for the near term is that bond yields rise more than expected, given net long positions in bonds are extreme and the financial and economic proxies for cyclicality are improving. The broker believes equity valuations can accommodate a 50-75 basis point rise in bond yields.

Cash Rate Forecasts

National Australia Bank economists expect underlying inflation to remain below the Reserve Bank’s 2-3% target band until mid 2018. Factors suppressing inflation are expected to persist, being strong retail competition, low wages growth and low commodity prices. The RBA forecasts CPI inflation of 1.5-2.5% out to 2018.

The economists observe the RBA is less worried than they previously thought about using up some of its remaining monetary policy ammunition and the case for further reductions in the cash rate appears to be mounting. Despite the central bank’s focus on downside risks in the near term, it has maintained its expectations for economic growth to lift well above trend by 2018.

The economists envisage a firm economy in the near term, supported by an improvement in the non-mining sector and increased hard commodity production but believe the risks going into 2018 are becoming increasingly apparent as LNG exports flatten from a high level and the dwelling construction cycle turns lower.

Consequently, these forecasts are factoring headwinds for GDP growth forecasts and the spread between the economists’ outlook and that of the RBA is widening, to around 1.5 percentage points by late 2018.

The economists expect the RBA will include two more 25 basis points reductions to the cash rate in May and August 2017 to a new low of 1%, to stabilise the unemployment rate at just over 5.5% and prevent economic growth from dropping below the NAB forecast of 2.6% in 2018.
 

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article 3 months old

The Overnight Report: Oil Reversal

By Greg Peel

The Dow closed up 117 points or 0.6% while the S&P rose 0.5% to 2185 and the Nasdaq gained 0.5%.

Phone Home

We don’t have to look far to see why the ASX200 closed down 35 points yesterday. The big movers to the downside were telcos and banks.

Telstra ((TLS)) posted a disappointing result and an undercooked dividend increase, sending its shares down 1.6% and the telco sector down 1.3%. Westpac provided a soft quarterly update which renewed the pressure on all bank stocks, sending that index down 1.2%.

Energy was weaker on the fall in the oil price but that will likely reverse with interest today. Materials were also weaker but that includes Rio Tinto going ex.

Elsewhere we saw another 1.1% fall for utilities matched out by a 1.2% gain in consumer discretionary – the rotation trade out of expensive yield and into growth. We must remember that the discretionary sector covers a wide range of companies, not just traditional shop-front retailers. There’s pizza, there’s car parts, there’s classifieds, hotels and vitamin tablets, to name a few.

We also recall that investors shifted into banks early in the week on a good result from Bendelaide and a positive update from ANZ, assuming all boats would float. We’ve since seen a so-so result from CBA and a soft update from Westpac, thus the market has shifted back out again.

We can also note from a technical perspective that while the index traded as low as 5483 yesterday, it closed a little above 5500. We like round numbers. If we can see 5600 reached in the near term the technicals remain bullish. This morning the futures are suggesting we should recover yesterday’s losses but next week will be telling as the earnings season significantly steps up the pace.

Triple Header

All of the Dow, S&P and Nasdaq closed at new all-time highs last night. It has taken until 2016 for the Nasdaq to regain its prior all-time high posted in 2000, just ahead of the tech-wreck. Therefore while it has been common in recent years to see the Dow and S&P both hit new highs in a session, last night was the first time since 1999 all three major indices achieved the feat simultaneously.

There were two major drivers for last night’s strength on Wall Street. The first was a big move up in the consumer discretionary sector, which has distinct importance in America’s consumer-driven economy.

Department store Macy’s posted an earnings beat which took the market by surprise, but the main reason the stock jumped 17% in the session was the announcement Macy’s would close 100 stores across the country. Finally, investors concluded, the old world retailers are realising floor space is but a cost-drag in the online world. Rival Kohls also posted an earnings beat, and its shares jumped 18%.

The other major driver was the oil price, which having fallen on Wednesday night on announced record Saudi production, rebounded over 4% as the shorts scrambled to cover. As to whether such cover is necessary is nevertheless debatable.

I noted yesterday, “OPEC will be meeting shortly for the usual charade of talking production cuts, but it is unlikely Saudi Arabia will do anything other than stay the course”. Well whaddya know, last night the Saudis indicated that in the unofficial OPEC production meeting set for September (the next official one would be December), Saudi Arabia would be open to discussions about production freezes.

They must all fall about over in Riyadh every time they pull this stunt and the oil price stages a Pavlovian surge. OPEC will meet, Iran, if it attends, will say “we’re not freezing” and thus the Saudis will say “well we’re not freezing either”. Then everyone will go home.

But on the Nymex, it would seem it’s safer to be square than caught out.

While such a sharp reversal for oil was interesting last night, it was also interesting to see the US dollar index jump back up 0.4% to 95.93, having fallen on Wednesday night, and the US ten-year yield jump back up 6 basis points to 1.57%, having fallen on Wednesday night. Unusually, stocks are leading bonds on Wall Street at present, traders have noted.

Commodities

West Texas crude is up US$1.92 or 4.6% at US$43.45/bbl.

It was a mixed bag in London, with aluminium, copper and lead all rising 0.5% while zinc fell 0.5% and nickel fell 1%.

Iron ore fell US$1.10 to US$59.60/t.

On dollar strength, gold is down US$7.50 at US$1338.30/oz.

The Aussie is a tad lower and sitting smack on US$0.77.

Today

The SPI Overnight closed up 33 points or 0.6%.

Following the strong department store numbers overnight, Wall Street will be looking tonight to see whether this is matched in July retail sales figures.

Ahead of that release we see a data dump from China today, featuring July retail sales, industrial production and fixed asset investment numbers.

James Hardie ((JHX)) is among those reporting earnings today while Suncorp ((SUN)) will go ex.
 

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.

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article 3 months old

The Overnight Report: Oil Pressure

By Greg Peel

The Dow closed down 37 points or 0.2% while the S&P lost 0.3% to 2175 and the Nasdaq fell 0.4%.

More Alpha

Once again no lead from offshore, so once again the opportunity for the local market to focus solely on earnings results yesterday. The biggie was of course Commonwealth Bank ((CBA)).

CBA was always at risk of a sell-off on any result that was not a clear beat given bank stocks had been bought up in prior sessions thanks to positive numbers out of Bendigo & Adelaide and ANZ. As it was, CBA’s result was solid enough but the shares copped a 1.3% drop. The bank sector as a whole nevertheless fell only 0.2%.

The big sector mover on the day was little info tech, which rose 3.7% thanks to a good result from its dominant component Computershare ((CPU)). Its shares jumped 9%. And it was clear the market was ready to buy up healthcare favourite Cochlear ((COH)) on any dip in price. Having initially dropped on its result the day before, Cochlear rose 7.6% and the healthcare sector gained 1.4%.

These two sectors balanced out falls across the board otherwise, although the index did manage to turn around from an ominous 30 point loss late morning to post a fairly benign close.

With Australia’s economic transition currently hinged very much on the housing market, yesterday’s June housing finance numbers were a positive influence. Total lending rose 2.3% in the month, reflecting the impact of the May RBA rate cut. The balance retained the prevailing trend nonetheless – loans to owner occupiers rose and are higher over a year and loans to investors rose but are 13% lower over a year.

Glenn Stevens was likely comfortable with the figures, but was probably polishing his nine iron as the data hit the screen. The outgoing RBA governor took the opportunity of his final public speech yesterday to drop the usual vague central bank rhetoric and tell it like it is.

The more central banks throw stimulus at an economy, the less effective each incremental action becomes, Stevens said (I’m paraphrasing). Don’t think the Australian economy can simply be supported by further rate cuts. It is time (indeed it’s long been time) for the government to play its fiscal part.

The government, or any Australian government, is terrified of increasing the budget deficit, so Glenn is of course talking to a brick wall. Borrowing rates have never been so low in history. But heaven forbid, Australia might lose its AAA rating were it to borrow further to provide economic stimulus. And we can’t afford to do that, because then it would cost more to borrow. The confounded logic of this argument I find exquisite.

Defiant Saudis

Venezuela – an OPEC member currently on its economic knees – has called for oil production cuts. Saudi Arabia, the world’s biggest producer, posted record production in July. OPEC will be meeting shortly for the usual charade of talking production cuts, but it is unlikely Saudi Arabia will do anything other than stay the course.

Weekly US oil inventories also came in higher than expected last night so the WTI crude price is down 2.9%. The US energy sector was a leader on the downside last night. The other downside leader was financials.

Prior to the release of the weak US June quarter GDP number, a regular auction of US Treasuries saw surprisingly little demand. The market, globally, had decided a Fed rate hike was not too far off. Last night’s auction of US ten-years, on the other hand, saw a stampede of demand, mostly from offshore, being central banks, sovereign wealth funds and and big pension funds.

The world has now decided there won’t be a Fed rate hike anytime soon. US markets knew that already, but it didn’t stop the US ten-year yield falling 4 basis points to 1.51 and the US dollar index dropping 0.5% to 95.60. No rate hikes means no joy for US banks, so they were sold off.

Otherwise Wall Street remained resilient once more. Discretionary retailers were in the frame on the earnings front last night, but results were both good and bad among them.

Prior to the strong US jobs number for July, the S&P500 had been stuck in a range of 2165-75 for an historical length of time. The jobs number sparked a step-jump before Wall Street stalled once more. Last night’s selling took the S&P back to 2175, which now becomes the bottom of the range.

Commodities

West Texas crude is down US$1.22 at US$41.53/bbl, defying the support otherwise offered by the drop in the greenback, suggesting the fall could have been even more significant.

The dollar drop provided some support for base metal prices in London but while all moves were positive, none exceeded 1%.

Iron ore fell US70c to US$60.70/t.

A half percent drop in the dollar is positive for gold, which rose US$5.20 to US$1345.80/oz.

The dollar fall was matched by a 0.5% rise in the Aussie to US$0.7709.

Today

The SPI Overnight closed down 5 points.

The RBNZ this morning again cut its cash rate, by 25bps to 2.00%. No surprises there.

Another benign offering from offshore suggests another day of concentrating on earnings results in the local market today, with the exception of the weaker oil price and the impact that will have on the local energy sector.

Today’s reporters include Telstra ((TLS)) and Goodman Group ((GMG)) among some smaller names. James Hardie ((JHX)) will hold its AGM.

And note Rio Tinto ((RIO)) goes ex-dividend today, which will impact the materials sector’s apparent move.

Rudi will be interviewed on Switzer TV between 7-8pm tonight, on Sky Business.
 

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article 3 months old

Large Surplus Looms For Aluminium

While the prices of many base metal are pushing higher, aluminium remains in the doldrums and ANZ analysts suggest a large surplus is looming.

-Aluminium production picks up strongly as earlier capacity closures are nullified
-Prices unlikely to rise above US$1,700/t on a sustainable basis
-Record levels of Chinese aluminium exports flagged


By Eva Brocklehurst

While the prices of other base metals are being pushed higher, aluminium is underperforming. ANZ Bank analysts suggest the benefit is ebbing from capacity closures heralded at the start of the year and production has picked up strongly in recent weeks.

A quickening pace of capacity re-starts in China is expected in the second half and there is also the ramp-up of production capacity in India and Malaysia to consider.  Hence, the analysts suspect the market may be pushed further into surplus.

Aluminium prices are expected to underperform the rest of the base metals sector in the second half of 2016. The analysts maintain an end-of-year target of US$1,660/t and do not envisage prices staying above US$1,700/t on a sustainable basis until 2018.

The improvement in the base metals sector has been led by nickel, supported by strict new environment laws which have forced the closure of several mines in the Philippines. Moreover, better economic data in China has improved investor sentiment. The analysts note that the industrial sector has recovered and production expanded by 6.2% in the year to June, above consensus forecasts for 5.9% growth.

A slightly weaker US dollar has also underpinned base metal prices recently, as expectations for a rate hike in the US have diminished. Nonetheless, aluminium has been the laggard in the complex. The analysts blame the build up in smelting capacity in China over the past five years which has pushed up the surplus.

Record levels of Chinese aluminium exports have occurred and, over the past three years, exports of primary aluminium and products increased 35% to around 400,000 tonnes per month.

China announced the curtailment of around 4.5mt of capacity earlier this year but recent data suggests the closures of late 2015 have been reversed. The analysts calculate nearly 200,000 tonnes of capacity re-started in the June quarter with a further 400,000t due in the September quarter.

Furthermore, the economic backdrop to this surge in production remains clouded, the analysts maintain, in that recent data suggests China’s growth momentum is fading and the property sector appears to have peaked. This suggests that tightening measures by policy makers are having an impact.

Meanwhile, International Aluminium Institute data signals production in North America continues to contract sharply. June output fell 11% to its lowest monthly level since March 1983. Smelter closures in the US have reached 1mtpa of capacity since mid 2015.

The analysts also maintain that the fall in inventories on the London Metal Exchange is not reflecting the weakness in the market, with the change to warehousing regulations playing a big part in the fall. All up, the accelerated Chinese production and exports should lead to greater availability of the metal globally and combine with a build up in inventory in Asian warehouses as Indian producers ramp up.
 

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article 3 months old

The Overnight Report: Going Nowhere

By Greg Peel

Alpha

It seemed like a quiet session in the local market yesterday as the index grafted slowly to a small gain following no real lead from offshore and minimal change in commodity prices. As calm descends on offshore markets, the local market is able to focus more specifically on earnings season.

The result is a lot going on under the surface of the index move, within sectors and individual stocks – the latter known as “alpha” movement which is not related to the market as a whole. Here there were some noteworthy moves yesterday.

Following on from Bendigo & Adelaide Bank’s ((BEN)) well-received profit result on Monday, yesterday ANZ Bank ((ANZ)) provided a quarterly update that was also well-received, mostly as it appears the bank may not be forced to raise new capital. Again all the banks were sought after, to provide a 1% gain for the financials sector and the bulk of index upside.

I have highlighted an apparent theme lately of rotating out of expensive defensives and into cheaper cyclicals, but perhaps this theme is a more simple one of rotating out of anything expensive into anything cheap. As market commentators have observed, results in line with expectation are evoking selling in a stock while even not so good results are encouraging buying as long as that stock was considered cheap beforehand.

The banks are a case in point – neither Bendelaide’s nor ANZ’s reports were anything to be too excited about, but buying has followed. Fund manager IOOF Holdings ((IFL)) copped a 7% trashing for a benign result, while market darlings in utilities and healthcare – Transurban ((TCL)) and Cochlear ((COH)), also saw selling following their results.

Sector moves were therefore a bit of a mish-mash yesterday. The result season is very much in its infancy, so really the games have only just begun. Woe betide any expensive stock that posts a miss.

And returning to the “China? Who Cares?” theme, yesterday we saw the Chinese headline CPI come in at a 1.8% annual rate for July, representing the third straight month of easing inflation. The PPI fell 1.7% to continue its unbroken four-year deflation trajectory, although the pace of deflation appears now to be slowing.

While slowing Chinese inflation should be bad news from an economic perspective, the fact it provides scope for further PBoC action is the countering good news.

Unproductive

Last night saw the release of June quarter productivity numbers in the US. Productivity (GDP per man hours worked) fell 0.5% when a 0.3% gain was expected.

This represents not only a big surprise, but the third straight quarter of productivity reductions. The only times a three-quarter decline has been booked in recent decades were in recessions. There are plenty of economists who have been warning for a while that the US is at risk of falling into recession.

The very weak June quarter GDP result gave weight to such an argument, and now this productivity number has provided a red flag. It is anticipated the relatively strong run of jobs numbers is soon to come to an end.

But does Wall Street care? Clearly not. If jobs numbers start to fade and/or the US falls into recession, there will be no Fed rate hike. And perhaps, if the situation warrants, QE will be reintroduced. The downside, therefore, is limited. And the need for yield is further underscored.

Markets that can’t seem to go up will typically go down instead. However this is not the case on Wall Street at the moment. Rather, the market has gone up and everyone’s happy for now, leaving volumes to drop away during the holiday period. It is not advisable to sell into a market when no one’s around.  A market rising on low volatility is considered bullish, despite being boring.

Commodities

There was not much going on in commodity markets last night either.

Base metal price moves were again mixed and minimal.

Iron ore is unchanged at US$61.40/t.

West Texas crude is down US10c to US$42.75/bbl.

The US dollar index is down 0.3% at 96.10 and gold is up US$5.60 at US$1340.60/oz.

The Aussie is up 0.2% at US$0.7668.

Today

The SPI Overnight closed up 10 points or 0.2%.

Westpac will release its monthly consumer confidence survey today while June housing finance numbers are also due. RBA governor Glenn Stevens will be making a speech today.

The biggest stock on the market will release its earnings result today, being Commonwealth Bank ((CBA)). The banks have seen some buying these past couple of days so CBA will not want to disappoint.

AGL Energy ((AGL)), Fairfax Media ((FXJ)) and OZ Minerals ((OZL)) are among others reporting today.
 

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article 3 months old

The Overnight Report: And Pause

By Greg Peel

The Dow closed down 14 points or 0.1% while the S&P fell 0.1% to 2180 and the Nasdaq lost 0.2%.

Step-Jump

It was actually a very dull day on the local bourse yesterday. The index opened up 40-odd points and that was the end of that. Among the sectors, yesterday’s 40 point rally for the ASX200 looked very similar to Friday’s 20 point gain. Again we saw cyclicals in favour and defensives not so.

Energy was again the winner on the day with a 1.5% gain despite only a slight tick up in the oil price, while materials traded off a big jump in the iron ore price against a big drop in the gold price to rise 0.7%. Telcos were again sold off and utilities slightly, while consumer staples managed only a minimal gain as consumer discretionary jumped a further 0.9%.

The most notable sector on the day was financials, which as I have oft suggested straddle the line between defensive (yield) and cyclical (economic growth). A 1.1% jump was largely due to a surprisingly good result from Bendigo & Adelaide Bank ((BEN)) despite a further squeeze on margins. Bendelaide rose 4% and provided impetus for gains amongst the Big Four as well.

ANZ Bank ((ANZ)) will provide a trading update today and Commonwealth Bank ((CBA)) will publish its profit result tomorrow.

We can put the rally on the day down to the solid US jobs number, and its implications for an improving US economy. But does China’s economy not matter to us anymore? Yesterday Beijing published weak trade data for July and the Australian market shrugged.

Imports to China fell 4.4% year on year in July when a 3% fall was forecast, marking 21 consecutive months of declines. Exports from China fell 12.5% when a 7% fall was forecast, marking twelve months of declines in thirteen.

The data suggest China’s economy continues to slow. Once upon a time the Australian market would have reacted poorly to such numbers, but now we seem to take it in our stride. Why? Well, central banks again. Weaker data simply reinforce the assumption the PBoC and the Chinese government will up the ante on monetary and fiscal stimulus.

At 5537, the ASX200 is still 50 points shy of the end-July high which was followed by a sudden plunge at the start of August when, among other things, the oil price looked to have broken down. Another 2% jump for oil overnight suggests that was just a mirage, and the futures are suggesting further gains for the index today.

Summer Returns

Having recovered from the Brexit scare, Wall Street proceeded to spend a long period in the doldrums just under fresh highs as it traded sideways for a couple of weeks. While the extent of the tight range broke records, traders were not too surprised given it is the height of summer in the US and participation is at a low ebb.

We then saw the brief oil scare followed by Friday night’s rally on strong jobs numbers. Having set new highs, last night Wall Street went back to the beach.

With the earnings season now tailing off and another month’s job numbers in the bag, Wall Street is bereft of further impetus. Traders continue to point to a historically long period without any decent sized pullback which suggests, given new highs, that one must soon be nigh, but this is now a long held assumption with so far no result.

Traders thus concede it is the TINA factor preventing meaningful downside. Yes, stocks might be on the expensive side, particularly where yield is the attraction, but in the unprecedented low interest rate world there is no alternative investment and historical comparisons of PE have to be rethought.

So the general feeling is the market will probably finish the year higher than it is now. We have to get through the historically volatile months of September and October nonetheless, and maybe, just maybe, that’s when the pullback will finally materialise. But there is still plenty of cash on the sidelines, and traders are only praying for a pullback so they can pick up favoured stocks at more attractive prices.

Another constant talking point is the VIX volatility index, the one month benchmark measure for which is sitting at the very low end of its range. This suggests complacency via a lack of demand for put option protection. The contrarian trade is to sell when the market reaches its greatest level of complacency. The VIX is currently at 11.5 and a level of 10.5 is considered the trigger point for this play.

Commodities

If they were yawning on Wall Street they were seriously nodding off on the LME last night. Base metal price movements were all positive but minimal.

There was more excitement on the Nymex as West Texas crude rose US88c to US$42.85/bbl.

Iron ore rose US70c to US$61.40/t.

The US dollar index ticked up 0.1% to 96.34 and gold is steady, after Friday’s night’s drop, at US$1335.00/oz.

Forex was another market to ignore weak Chinese data yesterday given the Aussie is up another 0.5% at US$0.7654. Glenn must be looking forward to passing the baton on that little “complication”.

Today

The SPI Overnight closed up 11 points or 0.2%.

China will release July inflation data today and locally, NAB’s monthly business confidence survey is due – the first to really have taken in the new gridlock parliament.

ANZ will provide an update today as noted and on the earnings front, we have reports due today from Cochlear ((COH)), Carsales.com ((CAR)), REA Group ((REA)), IOOF Holdings ((IFL)) and Transurban ((TCL)) among others.
 

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article 3 months old

The Monday Report

By Greg Peel

Rotation

5500 has become the new barrier for the ASX200 as the local market continues to show signs of wanting to push higher. On Friday, a steady morning rally took the index up 37 points to 5512 but a drift-back in the afternoon meant a close of only up 21, at 5497.

There was, of course, Friday night’s US jobs report to consider and it was a Friday, so no doubt there was some typical squaring up ahead of the weekend.

Looking at the sector moves however, Friday’s action screamed rotation. The best performing sectors were energy, up 1.1% on a small move up in the oil price, Materials, up 1.7% despite lower metals prices, and consumer discretionary, up 0.7% having been sold down over the week.

The only sectors to post losses were utilities, telcos and consumer staples, while all other sectors posted small gains. This sector spread screams rotation, from defensives to cyclicals. This is not the first time we’ve seen such action in the local market lately and often the defensives come roaring back, but at elevated levels, we may be reaching the point where reliable yield is just too expensive.

If cyclicals are now going to take the baton, they’ll still need some incentive to do so. Results season will provide some individual direction.

Good is Good

The US added 255,000 jobs in July, seasonally adjusted, smashing expectations of 180,000. The unemployment rate was unchanged at 4.9% despite an increase in the participation rate, suggesting those coming back to look for work found it. Wages increased by a healthy 0.3%.

It was the jobs report of an economy in good shape. But in the upside-down world in which we currently reside, tipping what Wall Street’s response to the report might be is not straightforward. Stocks could have risen on the good news is good news assumption or fallen on the good news is bad news assumption of a Fed rate rise being back on the cards. Either response was going to be explainable.

As it was, Wall Street liked it. The Dow closed up 191 points or 0.1%, the S&P rose 0.9% to a new all-time high 2182 and the Nasdaq also reached a new all-time high in gaining 1.1%.

Perhaps the reason why Wall Street chose “good news is good news” over “good news is bad news” is evident in the move in the Fed funds futures, which is cited as representing the chance of a Fed rate rise. The chance of a September hike moved up to a mere 18% from 9%, while December rose to 46% from 32%.

Great jobs report or not, virtually no one is expecting a September rate rise. And even December is yet to reach a 50/50 bet. Aside from all other data, there will be another jobs report before the September meeting. The general belief is that the US economy is beginning to look healthier – certainly healthy enough to justify a rate rise – but that the Fed will simply remain too timid to do so.

There is also the matter of what other central banks are up to. The BoE just delivered a substantial easing. The BoJ disappointed but eased further nevertheless. The RBA cut its rate. China is pursuing various measures. Around the globe, major economies are in easing mode. That, by default, is as good as a Fed rate rise.

And there’s the matter of the US dollar. It jumped 0.5% on Friday night to take its index to 96.24. A rising dollar will dampen the still “modest” US recovery. The Fed should not, by rights, pay attention to exchange rates but in the increasingly “globalised” world, of course it does.

The chance of a September rate rise may still be low but other markets were making adjustments on Friday night. Aside from the stronger greenback, the US ten-year bond yield rose 8 basis points to 1.58% and gold fell US$25.00 to US$1335.40/oz.

With the US results season now in its tail end, and everyone happy that was another not-as-bad-as-feared quarter, attention will now once again shift to central banks and economic data.

Commodities

A strong US jobs number also creates a push-pull for commodity prices. Gold aside, given its not a commodity per se, a healthy US economy is good for commodities but the stronger greenback offsets.

On Friday night we saw West Texas crude up US16c to US$41.97/bbl.

Nickel and zinc rose 0.5% and aluminium 1.5% while copper fell 1% and lead 0.5%.

Iron ore jumped US$2.00 to US$60.70/t.

Alas, despite the stronger greenback, the Aussie is only 0.1% weaker at US$0.7618.

The Week Ahead

The SPI Overnight closed up 31 points or 0.6%.

China will be back in the frame this week. Today sees July trade numbers, Tuesday inflation and Friday the monthly dump of industrial production, retail sales and fixed asset investment data.

On the central bank rounds, it’s over to the RBNZ to cut its rate on Thursday, as is expected.

It’s a quiet week for data in the US until week’s end. Tuesday sees June quarter productivity ahead of Friday’s retail sales, inventories, PPI and consumer sentiment.

In Australia we’ll see ANZ job ads today, NAB business confidence on Tuesday and Westpac consumer confidence on Wednesday. Wednesday also brings the critical monthly housing finance numbers.

The local results season steps up a gear this week.

Highlights will come from among the banks, with Bendigo & Adelaide ((BEN)) reporting today and Commonwealth Bank ((CBA)) on Wednesday, with ANZ Bank ((ANZ) offering a quarterly update tomorrow.

Classifieds will also feature, thanks to reports from Carsales.com ((CAR)) and REA Group ((REA)) tomorrow and Fairfax Media ((FXJ)) on Wednesday.

Other results of interest among the many this week include Transurban ((TCL)) and Cochlear ((COH)) tomorrow, OZ Minerals ((OZL)) and AGL Energy ((AGL)) on Wednesday and Goodman Group ((GMG)) and Telstra ((TLS)) on Thursday.

Rudi is attending and presenting at the AIA National Conference this week and will appear on Sky Business on Thursday between 7-8pm for the Switzer Report and again on Friday, through Skype-link, at around 11.05am to discuss broker calls.
 

For further global economic release dates and local company events please refer to the FNArena Calendar.

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