Tag Archives: Base Metals and Minerals

article 3 months old

Prepare For The BHP Billiton Dividend Cut

-Urgent need to reduce dividend pay-out
-Escalating debt levels
-Issues will resolve but take time
 

By Eva Brocklehurst

BHP Billiton ((BHP)) production was largely in line with expectations in the December quarter, albeit the Samarco disaster during the quarter had not yet been factored into broker estimates. However, the issue of most concern is not production but the sustainability of the company's dividend policy.

The company alluded to its balance sheet in the report, reiterating an intention to protect it, which most brokers believe comes down to reductions in capital expenditure in the face of widely prevailing commodity price weakness... and, likely, a lower dividend payment to shareholders.

Macquarie suggests a re-basing of the progressive dividend will occur this year and most probably by 50% at the full year result in August. Citi is more blunt, suspecting an interim loss might be reported in February, with a reduction in the interim dividend to US30c. In FY15 BHP paid out $1.24 per share in dividends. Both Macquarie and Credit Suisse forecast FY16 dividends will be reduced by half to 62c per share.

Production was stronger than most expected in copper and metallurgical (coking) coal, offset by weaker volumes in iron ore and thermal (energy) coal. Guidance has been maintained for FY16 production across all commodities in the company's portfolio, with the exception of iron ore, which has been affected by the closure of the Samarco mine in Brazil after the dam wall failure. Macquarie considers iron ore production guidance is a stretch.

Morgan Stanley suspects the company will also have to catch up in the second half on the 3mt shortfall derived from a train derailment and power outage in the first half, or otherwise miss its renewed guidance in that segment. There is a slight change in the mix of oil production, the broker observes. Conventional oil capex has been maintained at US$1.6bn and oil exploration spending unchanged at US$600m. New full year guidance for US onshore production, on the back of a reduction to five rigs from seven, will be provided at the first half results in February.

Three were only two positives in the report, in Deutsche Bank's view – an increase in copper production and better-than-expected performance form the higher margin conventional oil assets, although conventional oil production still declined 5.0% quarter on quarter. The broker observes the company has a number of growth options but almost all projects require a large increase in spot prices to deliver attractive returns. Deutsche Bank acknowledges the commentary regarding protecting the balance sheet, which may signal a change in capital allocation will be forthcoming at the February results.

The company will recognise further provisions and write-downs in the range of US$300-450m in the upcoming first half results. Including these, as well as the production result, means Macquarie's underlying earnings forecasts fall 43% for FY16 to around US$902m. The broker expects BHP to report lower earnings than its competitor and peer Rio Tinto ((RIO)) for the first half.

Macquarie highlights the fact that BHP comfortably generated more earnings than Rio Tinto for each six months period over the past few years but in the second half of FY15 Rio Tinto's result was stronger. This is expected to continue to be the case for at least the next two years with BHP not expected to take back the lead until FY18. This means cash flow is superior at Rio Tinto, which also has lower debt. The gap in gearing between the two is expected to become significant, with Macquarie forecasting BHP's to peak around 30% while Rio Tinto's remains in the low 20% region.

JP Morgan highlights the urgent need to re-base the dividend, with a credit ratings downgrade a distinct possibility given the growing debt. The broker believes it will take time for the company to emerge from the mire, noting costs related to the Samarco incident are yet to be quantified. The company is expected to resolve the problems but, in the meantime, the stock is not expected to trade at full value.

UBS acknowledges the half year has been tough for the company, with its major commodities at multi-year lows making cash flow tight. Operating cash flow is expected to cover interest and capex but this broker also believes a cut to the FY16 dividend is warranted, also expecting a 50% reduction.

FNArena's database has five Buy ratings, two Hold and one Sell (JP Morgan). The consensus target is $19.98, signalling 38.2% upside to the last share price. This compares with $20.16 ahead of the report. Targets range from $13.00 (JP Morgan) to $29.30 (Morgans, yet to update on the December production report).

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article 3 months old

Material Matters: Energy, 2016 Commodity Outlook, Metals And Steel

-Oil supply, capex cuts to feature
-Oil market re-balancing late 2016?
-Little demand growth for commodities
-Supply deficits but no price inflation
-Domestic housing, AUD supports steel
 

By Eva Brocklehurst

Energy

The market is concentrating on the future direction of the oil price as it breaches US$30/bbl for the first time in 12 years and UBS addresses the impact on the oil sector. Most companies, other than AWE Ltd ((AWE)), are expected to report declining quarter on quarter December revenue.

The broker suspects the quarterlies will concentrate on guidance for the upcoming results as well as cost reduction initiatives. Santos ((STO)) is expected to suffer a material impairment, while impairments for Woodside ((WPL)) and Oil Search ((OSH)) are likely to be restricted to mature assets.

All are expected to announce cost savings. The broker's key pick for investors willing to look through near-term weakness is Woodside and Santos in large cap stocks and AWE and Karoon Gas ((KAR)) among small caps.

A number of factors are weighing on the oil prices, including global oversupply, the expected increase in Iranian volumes and concerns over Chinese economic growth. Furthermore, UBS notes a lack of material supply decline in US shale, despite lower drilling rates. The broker expects the market will re-balance by late 2016 with a lack of investment in new oil supplies.

Deutsche Bank does not envisage a near-term re-balancing but expects 2016 US onshore supply will decline and, along with robust demand growth, support a second half rebound. Nevertheless, incremental Iranian export volumes are a headwind. The broker does not expect further non-OPEC supply declines until 2017, when oil markets should tighten.

While expecting low oil prices will not be sustainable for long the broker believes spot LNG will come under further pressure as new supply intensifies the oversupply situation in Asia. Key Asian LNG buyers have over contracted out to 2020. Balance sheet resilience is the key issue for oil stocks and the broker expects substantial cuts in capex to persist this year.

Commodities

Macquarie analysts are at the point where they suspect conditions will get worse before they get better. Assuming some macro economic stability in the second half oil could be the first to benefit while US gas could also make gains.

Among the metals, zinc and palladium offer the best hope of raw material constraint, in the broker's view. In contrast Macquarie recommends avoiding exposure to steel, aluminium, thermal coal, potash and nitrogen markets.

Something has to give, and the broker believes that something is supply. Despite barriers to exit, the supply response is starting, because of a lack of growth and sustaining capital. The broker cautions that supply reductions historically have only managed to stabilise cycles and demand growth is needed for more sustained recovery. With industrial production barely growing the year ahead offers little in that regard, Macquarie warns.

Metals

Ranking the demand for metals, Macquarie envisages in 2016 only cobalt and aluminium have demand growth above 2.5%. Cobalt benefits from its exposure to the lithium-ion rechargeable battery sector while aluminium has not had a sustained demand problem because its intensity of use is increasing in packaging and construction.

At the other end of the spectrum are tin, thermal coal, iron ore, steel and platinum. Of these, the broker suspects steel is now in a muti-year downtrend and could be at risk of matching the 3.5% decline seen over 2015. This means iron ore and metallurgical coal demand is likely to follow. Thermal coal's seaborne trade is expected to fall further in coming years and the broker believes the challenge is in displacing existing supply, which takes time, and during which margins are likely to be weak.

Platinum, meanwhile, is suffering from an “anti-diesel” effect, the broker observes. The majority of metals and bulks are expected to sustain significantly lower growth rates over 2016. The exception is gold, given the strong negative demand growth seen in 2014 from fund selling which has dragged down the five-year average.

Only aluminium is expected to be in surplus this year but Macquarie cautions, while deficits are expected and important for a market that is re-balancing, they alone do not convert to price inflation until excess inventories are drawn down.

Steel

Australian steel products are benefiting from earlier delivery of cost reductions and growth in domestic demand as well as a lower currency, Deutsche Bank maintains. These benefits should offset weaker steel spreads and deliver better underlying earnings for the half year reports.

The broker expects BlueScope ((BSL)) to benefit form the continued strength in the Australian housing market and the acquisition of the remainder of North Star, retaining a Buy rating. Deutsche Bank notes the company's coated products business in China is performing well.

Despite recent negative impacts from declines in scrap prices the broker also believes Sims Metal ((SGM)) is well positioned to benefit from upside in the US economic recovery. The company's recent downgrade to forecasts is considered largely the result of a competitive central region in the US and management has shown some evidence of delivering on planned improvements.

Meanwhile, Arrium ((ARI)) is not considered in breach of covenants at this stage but the broker is cautious, given the current volatility in the iron ore price.

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article 3 months old

The Overnight Report: Merry Christmas

By Greg Peel

The Dow closed up 165 points or 1.0% while the S&P rose 0.9% to 2038 and the Nasdaq gained 0.7%.

Getting Square

Today marks the last full session for the ASX ahead of a half-day tomorrow and a four-day break over Christmas. Monday is a public holiday to account for Boxing Day. For local traders, this abbreviated week is all about squaring up positions in order to relax over the break, and for many it is a year-end exercise, given tumbleweeds will roll down Bridge Street in the abbreviated week before New Year.

On Monday we saw the ASX200 tumble then recover, ultimately defying a big drop on Wall Street, and yesterday we saw the index leap 50 points on the open, thanks to a Wall Street rally, before falling back to flat over session. A look at yesterday’s sector move s suggests everything being bought/sold on Monday was sold/bought yesterday as the square up process plays out.

Forex traders appear to be in the same mindset, given the Aussie rallied solidly throughout yesterday’s local session to be up 0.6% over 24 hours at US$0.7232. The US dollar is only slightly weaker so what we likely saw was short covering ahead of the holiday.

Two flat closes on two days suggests we’re unlikely to see anything much else today or tomorrow.

Low Volume

Wall Street has managed to put together a couple of sessions of rally but no one is suggesting relief that the Santa rally has finally arrived. Low volumes imply a lack of buying conviction and thus, again, squaring up ahead of the holiday rather than setting new positions. In contrast to Australia nonetheless, where we’re looking forward to a lazy, hazy summer break, it’s pretty much back to business as usual next Monday night for Wall Street.

The final revision of US September quarter GDP, released last night, showed a slight tick down to 2.0% from the previous 2.1% estimate. Consensus suggested 1.9%, so it’s a mild win, but also very old news by now. I say “final” but in fact the number can be revised again on the release of the first estimate of December quarter GDP.

On a year to date basis, the US economy grew by 2.2% over the first nine months of 2015. The December quarter is not expected to bring any great acceleration in growth, suggesting annual growth will come in under 3% for the tenth straight year. That’s the slowest stretch ever recorded since WWII.

But hey, the Fed’s already made its move, and a no other time since WWII has the US cash rate been at zero. So while one might question why the Fed would choose to commence a tightening cycle in such a dour growth environment, the other side of the coin is that even 2% growth suggests a zero rate is too low.

We are expecting to spend most of next year debating just when the next Fed rate rise will come, but we might also consider that in moving from 0-25 to 25-50 basis points, the Fed has also given itself somewhere from which to cut if necessary.

But let’s not worry about that ahead of Christmas.

Commodities

A funny thing happened in oil markets last night.

Oil markets mark an official closing price late in the afternoon New York time but continue to trade electronically around the clock. FNArena takes a snapshot of prices each morning well after the official close to provide a more up to date reading. On this morning’s snapshot, West Texas crude was up a tad at US$36.20/bbl and Brent was unchanged at US$36.18/bbl.

Spot the anomaly?

For the first time since 2010, WTI is trading above Brent, and this was also the case at the official close last night. The reversal of what was once a significant premium to Brent from WTI represents anticipation of the longstanding US crude export ban being lifted. It’s not yet official but it is assumed only a rubber stamp is needed from here.

It’s been noted that WTI had fallen to a seven-year low this month but more notably, Brent has fallen to an eleven-year low. When US oil hits the oceans, Brent will no longer lay claim to being the global benchmark export price.

The London Metals Exchange was apparently a bit of a ghost town last night as many traders have already headed home for Christmas. This week has seen to-ing and fro-ing of base metal prices on low volumes that has not leant itself much to fundamentals. Last night saw more fro-ing than to-ing, with nickel down 2%, copper, lead and zinc down 1% and aluminium down 0.5%. But we can’t read too much into this week’s moves.

It might just be a slightly merrier Christmas for iron ore miners. Iron ore traders are unlikely to be squaring up ahead of a Christmas most of them don’t celebrate but following a long, slow demise for the iron ore price these past months, there was always a chance of a rebound once prices reached oversold level. This morning the iron price starts with a 4, which is at least psychologically heartening. It’s up US80c at US$40.20/t.

The US dollar index is down 0.2% at 98.21 but gold is down US$6.50 at US$1072.20/oz.

Today

The SPI Overnight closed up 24 points or 0.5%.

Wall Street will see a late rush of pre-holiday data releases tonight, including new home sales, durable goods, personal income & spending and consumer sentiment.

Tomorrow the ASX will close at 2.10pm Sydney time and tomorrow night the NYSE will close at 1pm New York time.

Well, that’s it from me for 2015. Merry Christmas and Happy New Year to all and I hope you have a relaxing break, as I intend to do.

The shutters will come down this afternoon on FNArena’s regular daily service and roll up again on January 14. The website will remain fully accessible over that period. I’ll be back with the Overnight Report later in January.

Have a good one.
 

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: Santa Where Are You?

By Greg Peel

The Dow closed up 123 points or 0.7% while the S&P rose 0.8% to 2021 and the Nasdaq gained 0.9%.

Divergence

One would be hard pressed to find too many examples of when the Dow falls 350 points overnight and the Australian market closes flat on the session. Indeed, the thirty odd points the ASX200 did fall by yesterday, by midday, was proceeded by an early attempt to rally almost from the opening bell. A second attempt in the afternoon succeeded.

The divergence in US and Australian stock market sentiment now apparent can be largely attributed to a divergence in central bank policy. In Australia, the RBA is currently comfortable with its interest rate setting but has left the door open for more cuts, and most economists anticipate one or two more next year. Meanwhile, the Fed is now in a tightening cycle. The implicit stronger US dollar is weighing on US forecasts while the reverse is true downunder.

The negative impact of a higher US rate is a tighter carry trade gap, meaning Australian yield stocks are less attractive to US investors. We note that yesterday the losers on the session included telcos and utilities, while otherwise ongoing fallout from the MYEFO healthcare scare saw that sector as the worst performer, down 0.9%.

But a rally in iron ore saw materials up 0.5% and some consolidation in oil saw energy as the best performer, up 1.0%. In the US, ongoing oil price weakness will lead to inevitable defaults and bankruptcies amongst smaller oil producers, which is why high yield debt is under pressure. Australian oil producers don’t issue junk bonds as a rule (witness Santos’ recent equity raising) thus locally we don’t have the same problem. One wonders just how much more value can be stripped off local Big Oil.

That is not to say Australia can have its own little Santa Rally while Wall Street falls in a heap, if that is to be the case. But 2016 is shaping up as year in which Wall Street movements are noted, but not blindly replicated.

Is Santa Not Real?

Wall Street has begun to concede that history does not necessarily have to repeat itself every year. Just because it’s Christmas it does not mean a Santa Rally is thus a given. The first Fed rate hike in a decade clearly does not happen every year, for one, and concern over the energy sector is not going away anytime soon.

There was an attempt to rally early in the session last night, on the assumption Friday night’s big fall was as much about quadruple witching volatility as it was about actual negative sentiment. But when WTI crude fell to below US$34/bbl early on, that negative sentiment took over once more.

It was expiry day for the January delivery WTI contract so we can’t read too much into the final day’s move. If we look to the new February front month, it closed slightly lower but at least has a 35 in front of it. The big talking point on the day was, however, the Brent-WTI spread.

If we go back a few years, that spread was as much as US$27/bbl, back when oil was heading up towards triple digits. The reason was that there was an oversupply of WTI and not enough storage, or sufficient pipeline infrastructure to move crude out of Flushing Oklahoma. US oil could not, by law, be exported, thus there was no relief valve.

The US government is now in the process of lifting America’s longstanding oil export ban, which was put in place when the country was totally reliant on imports from the Middle East. That is no longer the case, and given the extent of US oversupply it is no longer worth arguing America needs to preserve its energy security.

The result is that last night the Brent-WTI spread reached as low as a mere US44c. With WTI soon to compete with Brent on the high seas, the two oils have become closer to interchangeable.

The only US economic data release of the day was the Chicago Fed national activity index for November, which showed a fall to minus 0.30 from minus 0.17 in October.

There is nevertheless a minor avalanche of US data due over the next two sessions before the Christmas Eve half-day. As to whether Wall Street can get excited about it all now the Fed has made its move is another matter. Traders suggest that most US fund managers closed up shop on Friday, not to return until the new year.

The Dow was up 150 points early in the session last night, fell back to the flatline, and staged a late comeback to be up triple digits at the close. But not convincingly.

Commodities

West Texas crude fell US32c to US$35.74/bbl on the new February delivery month. Brent, already on February delivery, fell US51c to US$36.18/bbl.

A group of major Chinese copper smelters has agreed to enact production cuts next year, providing some hope as LME traders begin squaring up for 2015. Copper rose 1.5% last night, and all base metals were stronger largely on a book-squaring basis. Lead was up 2.5% and nickel and zinc rose 1%.

Iron ore rose US10c to US$39.40/t.

The US dollar index was down again, overcoming potential weakness in euro following the weekend’s inconclusive Spanish general election result. The ruling centre right party failed to secure a majority, so weeks of negotiation with minor parties will now begin.

Oh goody, maybe Greece 2015 can now become Spain 2016.

European stock markets fell last night on the lack of result, particularly Spain’s, while the 0.3% fall in the US dollar index to 98.38 helped gold to another US$13.20 gain to US$1078.70/oz.

The Aussie is up slightly at US$0.7187.

Today

The SPI Overnight closed up 20 points or 0.4%.

Tonight in the US sees the final revision of US September quarter GDP, along with house prices and the Richmond Fed activity index.
 

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 Monday Report

By Greg Peel

Too Soon, Again?

After a day of rallying ahead of the Fed rate decision, and a subsequent day of rallying after the Fed rate decision, a 250 point fall in the Dow on Thursday night spooked investors on Bridge Street who were likely convinced the Santa Rally had finally begun. False alarm! they cried. And they proceeded to offer the ASX200 down 76 points on the opening rotation.

Both Wall Street and Bridge Street had experienced a somewhat euphoric couple of sessions centred around the end of uncertainty resulting from the Fed’s long-awaited rate hike. Many had assumed the end of uncertainty would translate into a resumption of the longer term stock market rally. But when the champagne ran out and the band started packing up, reality set in that at least in the short term, the market would have to return to a consideration of those things called…um…oh yeah, fundamentals.

One of the more prominent fundamentals is the oil price. But the Fed has not gone away, as Wall Street now has to weigh up the likely pace of the Fed’s ongoing tightening cycle. Consensus had four subsequent rate hikes in 2016. The Fed’s “dots” suggested three. Suddenly US bank stocks, noting that banks are beneficiaries of higher interest rates, looked a little bit overvalued in anticipation.

And more generally, implicit strength in the US dollar is set to weigh further on the earnings of US multinationals.

None of which (other than the oil price) is likely to have a specifically negative impact on the Australian stock market. If anything, a stronger greenback means a weaker Aussie, and that’s positive, and a slower pace of Fed tightening means a slower pace of US investors bailing out of the longstanding carry trade (buying Aussie stocks for yield).

So when the ASX200 opened 76 points lower on Friday, in came the buyers. Outside of tiny info tech, the only sectors the ultimately end the session in the red were, predictably, energy and materials.

The question for today is: Can the ASX200 again defy another huge fall on Wall Street, as was the case on Friday night?

Toil and Trouble?

It is unclear just how much of Wall Street’s plunge on Friday night, which on the back of Thursday night’s fall represented the biggest two-day drop since August, is directly attributable to a “quadruple witching” expiry of equity futures and options that came so soon after the historic Fed rate rise.

The Dow fell 367 points or 2.1% while the S&P lost 1.8% to 2005 and the Nasdaq fell 1.6%.

It is not untypical to see a degree of volatility on “quad witch” days given the S&P500 tends to gravitate towards the most commonly held option strike price as market-makers race to cover their exposures. We may surmise that on Friday the target was S&P 2000. But behind that smoke screen there were clearly other issues at play.

The worst performing sector on the S&P was the banks, which harks back to the “slower pace of tightening” argument above. The best, or rather least-worst, performing sector was utilities. Again we see a slower pace of tightening at play. The oil price was down again, albeit by less than a percent this time, but bottom pickers in oil stocks appear to have retreated, bruised, to the sidelines.

Of more concern with regard to oil is the ever widening spread between investment grade corporate bonds and non-investment grade (junk) bonds which can be directly linked to fear of oil companies defaulting on their debt. The US ten-year Treasury yield fell another 4 basis points on Friday night to 2.20%.

There was also some concern surrounding a surprise announcement on Friday from the Bank of Japan.

Setting Sun?

Given Japan officially fell into recession in the September quarter, markets had been expecting the BoJ to announce increased QE. But no, all is on track, the central bank insisted. Then the ECB extended its own QE program early this month, so on a tit for tat basis the market again began to expect a response from the BoJ when it met on Friday.

The expectation was that the BoJ would increase the level of bond purchases within its QE program. But it didn’t. Instead, it extended the maturity of the bonds it would target. And it would increase the amount of equity EFTs it has been buying to “invest in physical and human capital”, which is code for “support the stock market”.

Again, the BoJ announced these adjustments with a familiar air of optimism for the Japanese economy. But the brave face is starting to become a little bit worn. If there’s no problem, why tweak QE? And if there is a problem, why not increase the level of bond purchases? Has the BoJ reached its limit of QE fire power?

On that fear, the Nikkei fell 1.9% on Friday, when typically extended QE would spark a rally. The surprise and concern was not lost on Wall Street, again making it difficult to decipher exactly what it was, other than a range of issues, that sent Wall Street into a tail spin on Friday night.

The US dollar subsequently fell against the yen, leading the dollar index down 0.6% to 98.68.

Commodities

The dollar’s decline could not stop West Texas crude falling another US26c to US$34.66/bbl and Brent falling US30c to US$36.69/bbl.

The dollar did help out base metals, although volumes have now become thin on the LME as the market winds down ahead of Christmas. News broke on Friday that nine major Chinese copper smelters would meet on Saturday to discuss stockpiling a level of production rather than dumping it onto an oversupplied market, and as a result copper jumped 2.7%. There were sympathetic moves in aluminium and zinc, up 2%, and lead rebounded 3.6% having been heavily sold down earlier in the week on excess inventory numbers. Nickel and tin sat put.

Iron ore rose US80c to US$39.30/t.

It was a rollercoaster ride for gold last week, as markets struggled to figure out whether a combination of Fed rate rise and gradual subsequent rises was bullish or bearish for the US dollar. On the dollar’s fall on Friday night, gold rallied back US$14.00 to US$1065.50/oz.

The Aussie dollar is also up on the greenback’s fall, by 0.8% to US$0.7178.

The SPI Overnight closed down 40 points or 0.8%.

The Week Ahead

Historically, two of the best two weeks of the year for Wall Street are the last two weeks of December. Yes, it’s called a Santa Rally. But the reality is the vast bulk US corporations, including fund managers and stockbrokers, account on a calendar year basis. Thus December 31 represents not only the end of the quarter but the end of the fiscal year and with that comes the potential for an elevated level of “window dressing”.

This is important for the purposes of lifting apparent fund manager performance as marked at the end of the year, but also important for employee bonuses, which are paid based on calendar year success, or lack thereof.

In other words, don’t yet write off Santa, as long as those dreaded fundamentals don’t get in the way.  And consider that most of Australia’s major investment banks are foreign, and also operate on a calendar year basis, and otherwise it’s still an end of quarter approaching. Being the December quarter, for most of the market the year actually ends this week – before Christmas and the summer break.

All Western markets are closed on Christmas Day, Friday.

The US will cram a lot of data releases into the first three days of this week. Tonight sees Chicago Fed national activity index, tomorrow the Richmond Fed manufacturing index, existing home sales, FHFA house prices and a final revision of the September quarter GDP. The market is forecasting a pullback to 1.9% from the last estimate of 2.1%.

On Wednesday it’s durable goods, new home sales, personal income and spending and the fortnightly Michigan Uni consumer sentiment measure.

The NYSE will close at 1pm on Thursday.

Japan will be closed on Wednesday.

There are no Australian data releases of note this week. The ASX will close at 2.10pm on Thursday.

FNArena will cease its regular daily service after Wednesday. Service will recommence on January 14. The website will nevertheless be accessible over that period.
 

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

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article 3 months old

The Overnight Report: Ahead Of The Fed

By Greg Peel

The Dow closed up 156 points or 0.9% while the S&P rose 1.1% to 2043 and the Nasdaq added 0.9%.

My Goodness

MYEFO dominated market sentiment late yesterday on Bridge Street. We could say that Scott and Arnie managed to turn a 41 point rally for the ASX200 into a 19 point fall but this is not quite the case.

In general terms, the budget update was a gloomy one, no matter what spin the pollies tried to put on it. Bigger deficits for a longer period is the headline, but hardly a surprise given commodity price falls and hardly the end of the world when global interest rates are at historic lows. Many of the spending cuts used in the numbers have already been rejected by the Senate, suggesting the government is simply preparing us for an election sooner rather than later.

Specific hits were taken yesterday by healthcare stocks Primary and Sonic on announced pathology subsidy cuts, while the various aged care stocks traded up and down moves on anticipated cuts in that sector. All up MYEFO managed to turn what was a flat market late in the session into a weak close.

It was earlier in the day that the market dismissed the opening 40 point rally. The index shot up from the bell led by the resources sectors, thanks to overnight rallies for both oil and iron ore. But by the end of the day it was these two sectors that registered the biggest falls. Energy closed down 0.6% and materials 1.0%.

There may well have been some influence from Macquarie’s resource sector capitulation. The broker has long been warning that its metal price forecasts were well above spot, and were spot prices substituted in the equation, big valuation cuts would follow. Macquarie was hoping spot prices would rise to meet its forecasts but the opposite has proven true, and thus the broker has slashed target prices and downgraded the ratings of no less than eleven miners within its coverage, many to an equivalent Sell from Buy.

We also had the RBA minutes out yesterday but they proved to be of the broken record variety and had little influence on the stock market. While many an economist is still predicting one to two rate cuts next year, the RBA is certainly showing no signs of planning such a move.

The Aussie dollar is down 0.7% over 24 hours at US$0.7190, but that move occurred overnight on a rally in the US dollar.  

Here we go

US data releases last night included the November CPI, which surprised no one by coming in flat for the month on the influence of falling oil prices. The December result is shaping up to be weak as well given not only crude oil but natgas prices have tumbled, driven down by unseasonably warm El Nino weather in the US and a subsequent lack of demand for heating.

The important number is the core CPI, ex food & energy, which rose 0.2% for an annual rate of 2%. There’s the Fed’s target level right there, although the Fed does prefer the PCE inflation measure over the CPI. It’s all academic anyway, given a rate rise tonight is baked in.

It is typical for Wall Street to rally ahead of a Fed meeting, and we’ve seen two lead-up sessions of rallies. In both cases, however, the primary driver has been a rise in oil prices.

On Monday night oil hit a new low before turning tail and rallying strongly to a positive close. Last night the market went on with it, although prices have since drifted back a bit since the official close. WTI is up 2.7%. From the low on Monday night to the high last night, WTI rallied 10%.

“Is the bottom in?” I hear you ask. Could be, or it could just be another short-covering snap-back.

Exxon and Chevron have led the Dow higher these past two sessions but the Dow was up 250 points at its peak last night, when WTI was also at its peak. The way oil prices are driving Wall Street at present one wonders whether the Fed has much of a role to play.

Currency markets were preparing for a rate rise last night nonetheless, sending the US dollar index up 0.6% to 98.25. Having fallen as low as 2.14% on high-yield bond sell-off fears, the US ten-year Treasury yield is back up at 2.27% and ready.

Discussion on Wall Street now is not of the familiar will they/won’t they variety, but of the how will markets respond variety. The removal of uncertainty should be a big positive for Wall Street, but might we see a “sell the fact” response instead?

Well, this time tomorrow we’ll know. Although, as I have often pointed out, the smart money tends not to join in as the headless chooks run around in the last two hours after the 2pm statement release. It waits until the following day, which is often when the market’s response can by truly gauged.

Commodities

Metals markets are nevertheless jittery, despite all and sundry assuming a rate rise is a given. Traders exited LME positions last night ahead of the announcement and on strength in the greenback. Copper and nickel fell over 2% and zinc close to 3%, while lead fell over 1% and aluminium and tin fell 0.5% each.

Iron ore was unchanged at US$37.50/t.

West Texas crude is up US98c at US$37.27/bbl and Brent is up US44c at US$38.35/bbl.

Gold is off a tad at US$1061.60/oz.

Today

The SPI Overnight is up 57 points or 1.2%. Quite a bold move ahead of the Fed meeting.

And nothing else matters much today, or tonight, at least until that decision is released.

If you’re keen, that will be at 6am Sydney time.
 

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article 3 months old

The Overnight Report: High Yield Horrors

By Greg Peel

The Dow closed up 103 points or 0.6% while the S&P gained 0.5% to 2021 and the Nasdaq rose 0.4%.

Economy Blues

The new Treasurer will deliver the government’s mid-year economic and fiscal outlook (MYEFO) today and unless you’ve been hiding under a rock you’d know that the budget projections of six months ago are set to be substantially reeled in due to the collapse in iron ore and energy prices. The impact of this focus on the Australian economy is to scare the market into realising it’s not just a resource sector story.

It was predictable yesterday that the 100 point fall in the ASX200 would be led down by energy (-3.3%) and materials (-2.2%) but a 2.4% fall for the banks is indicative of a market concerned about the widespread economic implications of a bigger budget deficit and the response the government may be forced to implement. All sectors finished in the red to varying degrees.

There was also no doubt an element yesterday of finally giving up on any possibility of a much talked about Santa Rally. That’s the problem with something everyone takes for granted as being a given. No rally? Then we must sell.

There was likely also an element of fear with regard recent developments on Wall Street. Falls in commodity prices are cut and dried, but the freezing of redemptions of US high-yield bond funds brings back eerie memories of the freezing of redemptions of many a straightforward equity fund back in 2008. Just how onerous is this issue?

Creeping Doubt

The problem for the US high-yield market at present is that the ebbing tide of oil-related junk bond values is dropping the value of other junk bonds that have no connection to oil and indeed are not in any sort of trouble. This is brings us to one of the fundamental problems of exchange traded funds.

ETFs have become a very popular way to trade baskets of securities as the grunt work of portfolio creation is the responsibility of the fund sponsor, allowing the investor to buy one single security that’s traded on the market just like a stock. Within the most popular high-yield bond ETFs traded on Wall Street are plenty of junior oil company bonds, and given a lot of these companies are set to go to the wall the natural response is to sell.

But one has to sell the whole ETF, when oil-related bonds may make up only, say, 12% of the portfolio, as is the case with at least one of the most popular. This suggests the possibility of a snowballing across sectors. The good news, however, is that when one redeems a bond ETF, one does not receive cash but those actual bonds that make up the ETF. There is thus an incentive for bolder traders to buy the ETFs being sold by panic sellers and pick out the good stuff that has been sold down implicitly below individual trading values. If the subsequent arbitrage profit exceeds the loss on the oil-related bonds that can’t be sold then the trader comes out a winner.

And that is why EFT managers were quick to point out last night that while there is indeed a rout going on in high-yield EFTs at present, managers re not having to break up the ETFs and sell the bonds to any great extent because there are plenty of buyers for the ETF at fire sale levels. There is thus an orderliness, and hence no reason to panic, which is very much different to the sub-prime sell-off of 2007 in which no one wanted to buy.

Markets do, however, tend to panic first and then think it through later.

Thus we saw a 300 point fall in the Dow on Friday night and early in last night’s session, the Dow was down another 127. At that point the S&P500 had crossed the psychological 2000 level. But critical to the stock sell-off was further initial selling in WTI crude, which traded under US$35/bbl.

And every time we see a big oil sell-off we see the buyers come in in the belief this time simply must be the bottom. They haven’t been right yet, but they will be right one day. WTI rallied back to close above 36, and the Dow came back to the flat line. The average was still flat within the final hour before the buyers poured in on the death.

This would tend to suggest Wall Street has concluded there will still be a Fed rate rise on Wednesday. The speed of the high-yield sell-off these past few sessions has led to some creeping doubt about whether such a development might be the one thing that would change the Fed’s mind, and lead to a decision to hold off.

What the FOMC members have to decide is whether a decision not to raise would send such a negative message that the volatility that would follow would be far more extensive that what we are currently seeing in one corner of the market.

Commodities

West Texas crude is up US81c at US$36.29/bbl having hit a low of US$34.53/bbl. Brent is steady at US$37.91.

Hallelujah! Iron ore rose US50c to US$37.50/t. Pass the bubbly.

The LME appears now to have gone quiet ahead of the Fed meeting. All base metals finished in the green but only by small amounts.

The US dollar index is steady at 97.66 but gold is down US$12.60 to US$1064.70/oz. The market is likely squaring up ahead of the Fed.

And it seemed one currency that might be safe to hide in is the Aussie. Last night saw a rally which has taken the Aussie up 0.8% since Saturday morning to US$0.7243.

Today

The SPI Overnight closed down one point.

Yesterday the ASX200 closed on its low at 4928. Closing on a low is always a worrying sign but the index did just manage to stop short of technical support at 4925. That will be a critical level for today unless we do follow Wall Street with a rebound.

As noted, Scott Morrison will deliver MYEFO today. The minutes of the December RBA meeting will be released and we’ll see house price and vehicle sale numbers.

Of interest in the US tonight will be the monthly CPI release, but no one is expecting the result to impact on the Fed decision at the eleventh hour.

Mesoblast ((MSB)) will provide a quarterly update today.
 

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(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 Monday Report

By Greg Peel

No Bottom Yet

The benign close on Bridge Street on Friday is not much worth analysing, given all that has transpired in the meantime. Suffice to say industrials and telcos posted 1% falls and the resource sectors lost 0.6%, but the banks were slightly positive and a bit of green elsewhere resulted in a close of down 8 points for the ASX200.

Of more significance is the reality that a bottom is clearly not yet nigh for crude oil prices, despite what appeared to be some bottom-picking activity last week. West Texas crude fell US$1.25 or 3.4% on Friday night to US$35.48/bbl, representing a seven-year low. Brent fell US$1.84 or 4.6% to US$37.90/bbl.

Renewed selling was triggered by a report from the International Energy Agency which downplayed any expectation for a recovery in oil prices in 2016. The IEA is pessimistic about any easing in global oversupply ahead of a ramp-up of Iranian production once sanctions are lifted. The Agency was particularly critical of OPEC, blaming the bloc’s “freewheeling” supply policy.

OPEC’s total output in November was 900,000 barrels per day more than the estimated demand rate for OPEC crude in 2016.

The oil price fall proved another kick in the teeth for Wall Street, which is struggling to put together any sort of traditional late-year rally. The US stock indices posted their biggest one day falls since August, led down by the energy sector. The Dow closed down 309 points or 1.8% while the S&P lost 1.9% to 2012 and the Nasdaq fell 2.2%.

But it was not just the price of oil, per se, which spooked Wall Street.

I have warned in this Report recently of the flow-on risk into the US financial sector of junior shale oil producer defaults and bankruptcies due to persistent low oil prices. Many an oil producer has funded costs through high-yield junk bond issues and the potential for default is putting a lot of pressure on the junk bond market.

So much pressure that the high-yield Third Avenue Focused Credit Fund announced on Friday night a freeze on investor redemptions. Third Avenue is concerned the rush to redeem would lead to a fire sale of the fund’s assets at destructive prices. The freeze will allow Third Avenue to liquidate the fund in an orderly fashion. It hopes.  

The last time frozen redemptions were front page news on Wall Street was in 2008. And it is not going to help junk bond markets that the Fed is expected to make its first rate hike this week.

Despite that expectation, the US ten-year Treasury yield fell 10 basis points on Friday night to 2.14% as investors rushed to withdraw their investments in high-risk, high-yield instruments and  transfer into safe haven government bonds. Heightened fear was also apparent in the VIX volatility index, which jumped 27% to 24.6, taking it into nervousness territory.

Trade War

And it was not just the price of oil, or junk bond issues, that spooked Wall Street on Friday night.

In the wake of the inclusion of the Chinese renminbi in the IMF’s basket of global reserve currencies, the PBoC announced on Friday it was planning to loosen the currency’s peg against the US dollar and instead switch to a peg to a basket of global currencies – potentially 12 to 13 in total. The central bank is yet to provide details on currency weightings, or just how the switch will come into effect.

But it was not lost on markets on Friday night that the move amounts to a further devaluation of the renminbi. The fear is that in trying to revive its flagging export sector, China is orchestrating a trade war. The peg announcement on Friday follows an announcement from Beijing earlier in the week that export taxes on steel, pig iron and other products would be reduced, potentially leading to further dumping of cheap steel on global markets.

What Beijing should really be doing is addressing China’s steel production overcapacity, and indeed overcapacity in the refining of a range of metals. But to do so too aggressively would bring about the sort of social backlash Beijing forever fears, given the implicit loss of jobs. Capacity reduction will thus be a very long process, one presumes.

The whole point of the ECB’s beefed up QE policy is to lower the euro to ensure Europe’s export-led economy can recover. Japanese QE has a similar goal. With the PBoC now becoming aggressive in its own currency devaluation attempts, one wonders just where the “race to the bottom” and subsequent trade war potential can end.

And all the while, the Fed is set to raise.

The impact of the PboC announcement on Friday was evident in moves on European stock markets on Friday night. A 2.2% fall in London is understandable given the weighting of energy stocks in the FTSE, and renewed oil price weakness. But oil weakness is good for energy-importing European countries, yet the German stock market fell 2.4% on Friday night and France 1.8%.

But on the other side of the coin, the world in general is desperate to see the Chinese economy stabilise. Beijing might be ready to fight a battle in export markets, but for other export economies, China is critical as a customer. This means everything from US iPhones to German heavy machinery, French wine and Australian iron ore.

In this front there was actually good news over the weekend. Beijing provided China’s November “data dump” on Saturday.

Industrial production rose to 6.2% year on year growth, beating forecasts of 5.7%. Retail sales posted the strongest reading of 2015 with a gain of 11.2%. And at 10.2%, year to date fixed asset investment also proved to be better than expected.

The numbers suggest Beijing’s many and various stimulus efforts over the year may finally be starting to gain some traction. This is good news, but in the context of all else that’s happening in China, and of falling oil prices, the impact will no doubt still be lost as markets enter the new week.

Other Commodities

Iron ore fell another US50c to US$37.00/t on Friday night.

The US dollar index fell 0.4% to 97.57 (the renminbi is not in the index basket) which should have provided some support for commodities, but clearly not for oil or iron ore. But there were at least some positive moves for base metals prices in London.

US-based Freeport-McMoRan is now among those global resource sector companies announcing planned production curtailments. While Beijing may be moving very slowly on addressing overcapacity in China, Chinese metal smelters are themselves taking a more active stance in addressing their own oversupply issues. There is thus a glimmer of optimism returning to beaten-down base metal markets.

On Friday night copper jumped 1.9% and nickel 1.7%, while lead rose 1.1% and zinc 0.8%. Only tin and aluminium remained subdued.

Gold was US$5.00 higher at US$1077.30/oz.

The Aussie dollar fell a full 1.4% to be at US$0.7188 on Saturday morning, thanks to oil and iron ore prices, but has rebounded somewhat this morning to US$0.7203 thanks to the positive Chinese data released over the weekend.

The SPI Overnight nevertheless closed down 73 points or 1.5% on Saturday morning.

The Week Ahead

It’s the big one on Wednesday night. You may have heard about it. The Fed will hold a policy meeting and provide quarterly forecast updates, and Janet Yellen will hold a quarterly press conference.

It is not expected that any US data release ahead of that meeting will affect the Fed’s decision. This week’s releases include the CPI, housing sentiment and the Empire State activity index on Tuesday, housing starts and industrial production along with the Fed statement on Wednesday, and leading economic indicators and the Philadelphia Fed activity index on Thursday.

Friday is the quarterly quadruple witching derivatives expiry in the US, which itself often provides for heightened volatility, and being so soon after the Fed decision one presumes this may well be the case.

Japan and the eurozone will release trade and industrial production data this week and both the ZEW and IFO surveys will be closely watched in Europe.

New Zealand will release its September quarter GDP result on Thursday.

Australian data releases are thin on the ground this week, other than house prices and vehicle sales tomorrow. Tomorrow also sees the release of the minutes of the RBA’s December meeting and the government will deliver the mid-year budget update. An RBA Bulletin will be released on Thursday.

On the local stock front there is a trickle of AGMs this week including those of both ANZ Bank ((ANZ)) and National Australia Bank ((NAB)) on Thursday.

The ASX sees its own form of “quadruple witching” expiry on Thursday, and on Friday the recently announced changes to S&P/ASX index constituents come into effect.

Rudi is now off on his annual break and thus will not be making any media appearances until the new year.


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article 3 months old

Material Matters: China, Aluminium, Steel, Commodity Signals And Australian Energy Stocks

-China's emphasis turns to living standards
-Aluminium supply reductions are happening
-Steel set for long period of oversupply
-US rates, dollar key signal for recovery
-MS stacks up Oz energy stocks
 

By Eva Brocklehurst

China

After touring major cities in China, UBS suspects a normalisation in commodity demand is even further away. Expectations for a sequential acceleration in infrastructure build up do not align with the insights the broker gained on the ground. Emphasis has shifted to quality of growth and living standards.

This presents a challenging outlook for commodity demand, the broker maintains. UBS prefers copper for its exposure to electrification, uranium longer term as nuclear building accelerates and aluminium as the light metal continues to capture market share. The outlook for Chinese coal demand appears grim.

Aluminium

Quiet may have settled on China's aluminium industry, with no news of any joint reductions to production at smelters but Macquarie believes otherwise. The broker suspects cuts are continuing but this is being done in an asset-by-asset manner and remains low profile.

Macquarie identifies 1.48m in production cuts from the smelters since mid October. The fast drop in aluminium prices from mid October has hurt those smelters at the higher end of the cost curve. The broker notes the divergence in smelter profitability could make the industry more difficult to assess in terms of co-ordinated production reductions compared with other metals.

The broker believes the decline in visible inventory has helped improve the market balance. Aluminium outperformed other base metals in November after the fall in October. Still, much of this related to a shift in fund selling into other funds, Macquarie suspects. The broker still expects a further cut to power tariffs in China. Power industry reform has the potential to lower costs for aluminium smelters and lead  to lower domestic prices in China.

Steel

Painful adjustments continue in the steel industry and Macquarie doubts a quick cure is nigh. Utilisation rates are set to remain below 80% in the foreseeable future. The broker suspects sustained price upside will require a number of events taking place, all of which appear improbable.

As a result, the broker downgrades steel price forecasts by 10-15% through to 2020. Despite prices being at a level which not only discourages new supply but also causes substantial capacity to exit the market, the unique factors in the steel equation mean the broker does not envisage demand will grow enough at any point. This means the volume of supply adjustment needs to be significantly larger.

Commodity Signals

Morgans believes the implications of the substantial re-structure announcement from the world's fourth largest miner, Anglo American, are dire, noting the intention to suspend dividends and close, mothball and sell any cash-negative asset.

The market remains fearful, the broker notes, regarding measures other miners may take to shore up their balance sheets. The signals required to build back confidence in commodity prices include specific near-term lifting in US interest rates and a topping out of US dollar strength in 2016 as well as an abatement in volatility and a relief rally in oil.

Positive signals already under way include reductions in capex and capacity. Key supply remains uneconomic for seaborne coal and large segments of global nickel and aluminium, the broker believes. The strain on marginal producers in LNG and iron ore is also increasing. The broker observes further production cuts are needed to bring these markets back to balance.

Australian Energy

Morgan Stanley expects an oil price recovery will occur towards the end of 2016. While not necessarily forecasting such, the broker highlights a sensitive point in the oil price at US$40/bbl and reviews what this would mean for Australian energy stocks if it held out for the next two years.

Obviously, it would significantly reduce earnings and dividends for the companies involved. Woodside Petroleum ((WPL)) would be loss making under this oil price and no dividends would be paid, in the broker's calculation, but the company would be cash-flow positive in FY17 once current spending on Wheatstone is completed.

Oil Search ((OSH)) would be slightly negative in cash flow, assuming such an oil price, amid due debt repayments but the broker observes it does have US$1.6bn in liquidity which could be used to manage a prolonged downturn. Dividends would be negligible.

Santos ((STO)) has a small number of debt maturities in 2016, with its major one being in 2017. At US$40/bbl there would be no earnings or dividends, in Morgan Stanley's estimates.

Origin Energy ((ORG)) which has a defensive income stream from power and energy retailing, but believes it can service its 20c dividend from these activities without cash flow from APLNG. After paying APLNG debt and interest, Morgan Stanley calculates the break-even on cash flow for Origin is US$38-42/bbl.
 

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article 3 months old

The Overnight Report: Respite

By Greg Peel

The Dow closed up 82 points or 0.5% while the S&P gained 0.2% to 2052 and the Nasdaq added 0.4%.

Good News is Bad News

Economists were bracing themselves yesterday for a weak local jobs report. Not because they believe Australia’s economy is in trouble and unemployment is mounting – indeed, quite the opposite – but simply because when last month’s report suggested 56,100 new jobs were added, they all fell about in hysterics.

As if!

While suspicion has been mounting for some time that the ABS dart board had well and truly fallen off its hook, economists were at least prepared to be polite last month and suggest the October result probably was a case of statistical noise. The series is volatile, they acknowledged, and hence the November numbers would probably see a correction back to a more realistic result, while maintaining an underlying positive trend.

Yesterday’s number suggested 71,400 new jobs added.

This time there were just looks of exasperation. Struggling to remain polite, CBA’s economists summed up the mood in saying “There will be many doubters”. Still, various other employment indicators have been quite positive, CBA admits, such as the ANZ job ads series, and the underlying trend is a more believable 25,000 new jobs per month.

The November result, fantasy or not, was not well received by the stock market yesterday. In a week dominated by ever-falling commodity prices, for once it was not the resource sectors that led the index down. Energy fell 0.4% but materials was up 0.7%, while the banks fell 1.5%, the telco 1.1% and utilities 0.8%. If the October jobs report suggested the possibility the RBA would not be cutting its cash rate any further, the November report has killed off any thought of another cut altogether. As the Fed prepares to raise, goodbye yield.

The ASX200 was down around 40 points in the morning yesterday on further commodity price and Wall Street weakness, and when the jobs number came out, fell another 40. That took us, for about the umpteenth time this year, back down through 5000. Then the technical trade came into play, and late buyers pushed the index back to a more respectable loss of 42 points on the day, well clear of the 5000 mark.

Forex traders have given up all hope of another RBA cut, as is evident in a 0.9% rally in the Aussie to US$0.7291 despite the US dollar index being up 0.6% at 97.93, but they could well change their minds again tomorrow.

Love That Bottom

WTI crude fell again last night, by another 1.7%, and now Brent has joined the sub-40 club. Crude prices themselves have thus yet not quite bottomed but Wall Street clearly believes a bottom is in sight. For the second session in a row, energy stocks were most sought after. The S&P energy sector rose 1.2% last night following Wednesday night’s 1.3% gain, and after four down-days in a row, Wall Street finally managed a rally all round.

Despite those four down-days, Wall Street’s bounce off the September lows has meant the 50-day moving average on the S&P500 is now very close to crossing over the 200-day, which is called a “Golden Cross” and signals peace, love, harmony and bullishness for all evermore thereafter.

It’s all a complete load of crap of course, but some people do like to hold onto to these little fantasies. Don’t they Santa?

The Golden Cross will be triggered, it is assumed, next week when the Fed announces a rate hike and Wall Street takes off. Tonight sees the release of PPI and retail sales data, and next week sees CPI and housing sentiment ahead of the Fed meeting, but the market is convinced the Fed has already made its decision. As to being convinced the market will then rally is another matter, because everyone is assuming that will be the case.

Indeed, the Dow was actually up 200 points around 3pm before fading quickly away at the close.

Commodities

West Texas crude is down US64c to US$36.73/bbl and Brent is down US64c to US$39.74/bbl.

The pickers were out in the local materials sector yesterday, it would seem by the aforementioned 0.7% rally against the general index trend. But iron ore is down another US80c overnight to US$37.50/t.

Aluminium producer China Hongqiao yesterday announced the immediate curtailment of 250,000t of production, but still couldn’t manage to ignite the aluminium price on the LME, which closed flat. All base metals closed flat except for nickel which fell 1.5%. It seems in the run-up to year-end, nothing is going to excite world weary metals traders at the moment. We can only hope China Hongqiao’s capitulation is a sign of more to come from China.

The rally in the US dollar helped gold down US$4.50 to US$1072.30/oz.

Today

Despite a rally on Wall Street, the SPI Overnight closed down 11 points or 0.2%.

US November retail sales data will be the hot topic of conversation tonight, given the numbers will account for the Thanksgiving weekend shopping spree. The PPI and consumer sentiment numbers are also due.

Tomorrow brings China’s data dump for November, featuring industrial production, retail sales and fixed asset investment numbers.

Westpac ((WBC)) will hold its AGM today.
 

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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