Tag Archives: Base Metals and Minerals

article 3 months old

Material Matters: China, Base Metals, Tin, Mineral Sands And Resource Equities

-Base metal outlook marginally better than steel
-Supply cuts making little dent in prices
-Yet fundamentals difficult to ignore
-Refined tin production down sharply
-Supply driving mineral sands deterioration
-Can Oz resources hitch ride on EM rally?


By Eva Brocklehurst

China

After visiting Beijing and Shanghai, Macquarie observes the main concern among metal specialists is sluggish demand. Steel continues to suffer from a lack of production discipline and few players in the market that the broker met expect government stimulus will materially change circumstances.

Some believe there may be a cyclical upturn in demand among end-users in the next six months but confidence is low. Others looking at the macro outlook point out a worsening in structural problems.

Base metals appear to have a better outlook than steel, but the broker notes further production cuts are still needed. Zinc and nickel look in better shape to Macquarie, as producers have been willing to contemplate production cuts.

The outlook for copper is generally bearish, with the market expected to remain in surplus next year as a result of continued deceleration in Chinese demand and an increase in global supply. Meanwhile, the general view on aluminium is negative, as investors appear to have lost confidence in the cost curve as price support.

Base Metals

In terms of base metals, 2015 marks the fourth consecutive year of price declines and Macquarie notes, since 1970, annual average prices have never fallen for more than five years in a row. So, while 2016 is likely to be challenging, the broker suspects the bottom of the cycle may be approaching.

What will happen next? Supply cuts driving a rebound may be wishful thinking, Macquarie suspects. This is because in prior recoveries it has been demand that has led the way while supply has simply reacted. Without a structural growth driver in terms of demand, mining commodities might have to wait for a global economic recovery.

ANZ analysts are also noting that despite supply reductions, base metals are struggling. Zinc has found some support recently with news of reductions in supply but the market has discounted similar news in aluminium.

The analysts expect the global aluminium market will remain in surplus, despite the closure of Alcoa's North American smelting and Chalco's smelters in China. What has been overlooked is increased capacity in China, with the analysts noting growth of 5mtpa over the last year and a further 4mtpa to added next year.

In zinc, closures have included Glencore's recent reductions, and the cessation of Century, Lisheen and two Nystar mines. Ten zinc smelters in China have now announced curtailments, representing around 7.0% of China's refined zinc production. The analysts observe the market has tightened and in 2016 the zinc market is forecasts to be in deficit of 200,000 tonnes.

Nonetheless, the analysts observe any benefit of supply reduction announcements appears to be fleeting. The market remains focused on the slowdown in manufacturing activity in China. The main positive, the analysts concede, is that the markets are setting a base whereby, if the macro outlook does improve, a rally could eventuate. Also, they suspect it will become increasingly difficult to ignore the fundamentals for too much longer.

Tin

While expecting all metals will be under the pump, Macquarie observes tin has been the worst performer among base metals this year. Prices are not trading as far into the cost curve as for other base metals, but headwinds remain and deflation pressure in the industry continues. Support comes in the form of refined tin production being down almost 8.0% year on year.

Chinese, Indonesian and Peruvian mine production have all fallen significantly, with a partial offset coming from Myanmar to China, which Macquarie notes is hard to estimate. Secondary tin supply, the main source being electronics and accounting for just under 20% of total metal production, is also described as under pressure.

When compared with other base metal markets the tin industry appears more healthy, Macquarie acknowledges, given over 50% of aluminium and nickel production is negative in terms of cash flow. On further analysis, when looking at how deep into the cost curve tin prices need to trade for downside support to be found, the broker becomes more negative.

Mineral Sands

Credit Suisse has extended its current forecasts for depressed pricing in mineral sands to the end of the decade. For zircon, the analysts do not expect any major increase in demand despite the disappearance of the supply overhang held by Tronox and Rio Tinto ((RIO)). The analysts do not expect a repeat of the industrial output boom in China, or the housing bubble, so further demand growth is expected to be modest.

Titanium dioxide looks most grim as feedstocks are being sold into a profitless pigment market, Credit Suisse observes, much like the 1990's. While the boom of 2011-12 is fading into memory, the analysts believe this is not the time for new mines beyond those ones ramping up, as prices are far below what is required to stimulate new supply. Moreover, those attempting to ramp up are facing challenges and the broker does not rule out insolvencies in the industry.

Supply and not demand is driving the deterioration in price, Credit Suisse contends. The broker's sources suggest Chinese exports have taken market share in low-end applications and driven oversupply.

Ilmenite prices are hardest hit, as this is the main feedstock for China and China's pigment industry is in a distressed state because of slow construction and soft industrial production. The broker does not expect China to cease exporting pigments. Western pigment capacity has been curtailed and Credit Suisse suspects it may need to stay that way until the market grows to absorb capacity.

Resource Stocks

Analyst sentiment towards the miners has hit a five-year low, Deutsche Bank observes. At first blush this may suggest a contrarian opportunity but the broker notes the knotty problem is earnings have fallen even more than share prices. A better performance in the share price will require earnings to improve, yet demand has been soft.

While demand is improving slightly, Deutsche Bank observes supply remains robust as lower costs have allowed production to keep growing in key areas. The broker senses the difficulty is that while cash flows are strong and dividends attractive, for these to increase over time there has to be some earnings growth.

Deutsche Bank mulls the question as to whether, given emerging market equities appear oversold, a rally could ensue with the stabilising of Chinese data. If that were to happen, could Australian resources hitch a ride? Again, a problem. Australian resource stocks do not share the same cheap valuations.

Moreover, there is potential for capital to drain away further as the US Federal Reserve hikes rates and the US dollar strengthens. This is offset to some extent in that Asian central banks are in an easing cycle. Further afield, the broker affords some hope in that development can accelerate quickly when countries get the balance right.

Deutsche Bank remains underweight on resources but is more positive about energy and, at the stock level, favours Oil Search ((OSH)), Santos ((STO)), Rio Tinto and South32 ((S32)).
 

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article 3 months old

The Monday Report

By Greg Peel

Mixed

With no Wall Street on Thursday night, Friday was never going to be a big session on Bridge Street. However strong gains for oil and base metals prices overnight, and a slight tick up for iron ore, ensured a solid start. The ASX200 was up 48 points from the open.

But if you’d blinked you would have missed it, as the index came right back down again before meandering to an insignificant close. While energy was able to lead the way with a 1.1% gain, materials slumped to a 0.4% fall. A pall still hangs over BHP Billiton and its dividend, and news over the weekend is that the Brazilian government is suing BHP and Vale for over $7bn for the dam disaster.

Elsewhere most sectors closed flat with the exception of utilities, down 1.8%. The market has voiced its disapproval of Spark Infrastructure’s involvement in the Transgrid consortium.

China

Bridge Street was winding to a close when the Shanghai stock market suddenly plunged on Friday evening to close down 5.5% for the session.

Neither the Chinese nor Australian stock markets showed much of a response earlier when Chinese industrial profits showed a 4.6% year on year fall in October, down from a 0.1% fall in September. Markets are currently taking Chinese economic weakness in their stride. The trigger for the Shanghai sell-off – the biggest since the August crash – was news the Chinese government is investigating several major brokerages for insider trading.

The news represents a widening of the investigation begun in August, growing to include the country’s largest brokerage firm Citic Securities. At the same time, China’s market regulator announced on Friday that Citic, a state-owned enterprise, had overstated the value of its derivatives portfolio by no less than one trillion renminbi, or around US$157bn.

If China’s stock market begins another sell-off, it will not be helpful for Santa. However, given the level of government intervention which finally halted the slide in August, one wonders just how far Chinese investors are game to sell down the market.

Meanwhile, the IMF is today expected to announce the addition of the Chinese renminbi into its basket of special drawing rights currencies, representing global reserve currencies. The addition follows Beijing’s clumsily handled “floating” of the renminbi a couple of months ago, which amounted to a significant devaluation and caused further global market angst. The renminbi will join the US dollar, euro, pound and yen.

Not So Black

It was a half-day session on Wall Street on Friday night, squeezed in between the Thanksgiving holiday and the weekend. Only the skeletons were in attendance. No surprise that activity was minimal and the indices closed flat. The Dow fell 14 points or 0.1%, the S&P was little changed at 2090 and the Nasdaq rose 0.2%.

For those who did draw the short straw, the focus was on the annual Black Friday sales fest. As the day progressed it soon became apparent America’s answer to Australia’s Boxing Day sales was proving to be a fizzer. Department store shares were sold down as a result.

But it was only a fizzer in terms of foot traffic in the big US bricks & mortar establishments. Online sales actually jumped 15% from last year, despite the fact the online equivalent is meant to occur tonight – Cyber Monday. The reality is the whole Black Friday/Cyber Monday thing has become an anachronism, and very blurred around the edges. Suffice to say in future the days after Thanksgiving will remain America’s biggest shopping days, just not under old-fashioned labels.

The only reason the Dow did not close flat was a 3% fall in Disney shares, thanks to news the company’s iconic ESPN sports network has lost three million subscribers in a year. The loss represents another example of “cord cutting” in the US – the shift away from cable television to online streaming services such as Netflix. In the case of sport, the major US sporting leagues are quietly shifting to their own live streaming services, thus drawing both content and viewers away from the likes of ESPN. The news in Australia last week is that the NRL will now jump on the streaming bandwagon, following in the footsteps of the AFL.

Bricks & mortar retailing and fixed-time television. Vale.

Commodities

The fall in the Shanghai stock market on Friday pushed the yen lower, given Japan’s trade dependency with China. This pushed the US dollar higher, to the point the index was able to raise its bat and salute the crowd. It’s up 0.2% at 100.09.

The combination of the stronger greenback and the potential of another Chinese stock market crunch was not what volatile metal markets want to contemplate, not to mention the 4.6% fall in Chinese industrial profits, within which the biggest falls were posted by China’s resource sector. Thus after a wild week, base metals prices finished Friday night with another round of steep falls.

Copper and lead fell over 1%, and aluminium, nickel and zinc all fell 3.5%. Tin was again the only non-mover.

Over the weekend, China’s nine biggest copper smelting companies met and agreed to cut production in 2016 by 200,000t or 5%. We shall await the LME response tonight.

Iron ore fell US10c on Friday night to US$43.50/t.

Gold fell US$14.00 to US$1056.60/oz as the dollar index reached the ton.

On the stronger greenback, the oils were weaker again. The geopolitical premium added last week following Turkey-Russia tensions has now waned as escalation fears have subsided. West Texas is down US54c to US$41.84/bbl and Brent is down US51c to US$44.86/bbl.

Lower commodity prices and strength in the greenback saw the Aussie down 0.5% on Saturday morning at US$0.7194, ahead of tomorrow’s RBA meeting and Wednesday’s GDP result.

The SPI Overnight closed down one point.

The Week Ahead

Wall Street will be quickly awoken out of its long weekend slumber this week with a raft of data releases, culminating on Friday with the all-important jobs report.

Tonight sees the Chicago PMI and pending home sales, Tuesday it’s construction spending and vehicle sales, Wednesday private sector jobs, Thursday factory orders and chain store sales, and Friday brings trade data along with non-farm payrolls. Tuesday also sees the manufacturing PMI and Thursday the services PMI, while the Fed’s Beige Book will be released on Wednesday and Janet Yellen will make a speech.

Tuesday is manufacturing PMI day across the globe, including in Australia, but China’s calendar now has both Beijing and Caixin publishing both their manufacturing and service sector PMIs on the first day of the month. The rest of the world will release service sector PMIs on Thursday.

The ECB will hold a policy meeting on Thursday, at which a QE extension is expected to be announced.

OPEC will meet on Friday but despite a lot of talk about oil price stability, is not expected to alter current production quotas.

It’s a busy week for Australian data, culminating in Wednesday’ September quarter GDP result.

Quarterly data releases beforehand include company profits and inventories today, and the current account, including the terms of trade numbers, tomorrow. There is also a raft of monthly data due out this week, including private sector credit and the TD Securities inflation gauge today, building approvals tomorrow, the trade balance on Thursday and retail sales on Friday.

The RBA will meet tomorrow and leave its rate unchanged, and Glenn Stevens will speak in Perth on Wednesday.

On the local stock front, the AGM season is now all but over outside of a trickle of stragglers meeting in December. Collins Foods ((CKF)) will report its half-year result on Wednesday.

On Friday, quarterly changes to the S&P/ASX stock indices will be announced, pending implementation on December 18.

Rudi will appear on Sky Business on Thursday at noon and again between 7-8pm for the Switzer Report.
 

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article 3 months old

The Overnight Report: Thanks

By Greg Peel

Capex

The local market was surprisingly off to the races from the opening bell yesterday despite the futures suggesting a 9 point fall. Perhaps the fact Russia did not declare war on Turkey – it has elected to retaliate economically instead – was enough for the market to decide to reverse the selling of the day before.

The ASX200 was up 60 points by late morning but there it stalled, before drifting slowly away all afternoon to a 17 point gain on the close. While the selling began around the time of the release of the September quarter capex report, that report was not an overall disaster. More likely the market simply settled back after some early exuberance.

Private capital expenditure fell 9.5% in the September quarter when economists had expected a 2.9% fall. The sensationalist headline on the day for the popular press was the 20% capex decline year on year, within which mining spending is down 29.6% and business spending down 9.0%.

The mining story comes as no surprise given persistently low commodity prices, but the business number suggests further downside risk to non-mining spending over FY16, Commonwealth Bank’s economists suggest. There was, nevertheless, some minor good news.

For economists, and the RBA, the key component of the capex data is capex intentions. The September quarter numbers represented the fourth quarter in which those surveyed provided an estimate for FY16. It came in at $120.4bn, which is 4% higher than the last estimate made in the June quarter.

The problem with such estimates is they tend to ebb and flow from quarter to quarter depending on the economic mood and confidence at the time. Nailing down a trend is not easy. CBA’s assessment is that mining capex will fall by 35-40% in FY16, and non-mining by 10%. These numbers are in line with the RBA’s projections. While yesterday’s report will lead to a trimming of September quarter GDP forecasts, there is no reason for the RBA to alter its policy.

And pragmatically, what would another 25 basis point interest rate cut achieve? Commodity prices are the major issue, not borrowing rates. For non-miners, it is clearly a matter of confidence. If a record low 2% cash rate is not a trigger to start investing in one’s business, why would 1.75% be any different? The best thing that can happen to non-mining in the near term is that the benefits of the lower Aussie dollar start to show up in the numbers. This does not happen overnight, but rather can be a lag effect of six to twelve months.

By the close, the resource sectors bore the brunt of any capex disappointment. Energy fell 0.5% and materials 1.3%. Woolies management clearly did not manage to wow them at the company’s AGM, so consumer staples fell 0.6%. Otherwise, the yield stocks that were all sold down on Tuesday were all bought back up again yesterday.

The Aussie is 0.3% lower at US$0.7230.

Commodities

For the record, European stock markets posted gains of around 1% overnight. For eurozone markets, the promise of extended ECB stimulus continues to provide support. For the London market, rallies in metal prices overnight provided a fillip.

It was reported overnight that the China Non-Ferrous Metals Industry Association has suggested to Beijing the government buy 900,000t of aluminium from the market, 300,000t of nickel and 400,000t of zinc. If the government agrees, it will be the first such intervention since 2009.

In a base metals market still susceptible to bursts of short-covering, and in thin trading overnight due to the absence of US interest, tin rose 1.5%, copper, lead, nickel and zinc rose 2% and aluminium rose 4%.

Commentary out of the LME was nevertheless dismissive. While it is all well and good for the Chinese government to take supply out of the market it is still there, just in another location. Such purchases will not resolve the issue of global oversupply.

Meanwhile, iron ore rose US20c to US$43.60/t.

Gold is unchanged at US$1070.60/oz given a flat US dollar index.

Electronic trading sees West Texas crude down US59c at US$42.38/bbl and Brent, which is only electronic, down US72c to US$45.37/bbl.

Today

With the base metal rally about the only thing to go on, the SPI Overnight closed up 16 points or 0.3%.

China will release industrial profits numbers today and Japan will release inflation data.

The NYSE will close at 1pm New York time tonight.

The local AGM season suddenly eases back to a trickle of stragglers as of today. Fisher & Paykal Healthcare ((FPH)) will report half-year earnings.
 

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article 3 months old

South32 Facing Difficult Choices

-Questions over future of three assets
-Still generating cash, lowering debt
-Few near-term catalysts
 

By Eva Brocklehurst

South32 ((S32)) is facing up to realities. Brokers attending the company's recent briefing obtained this impression, noting the CEO expects two more years of weak commodities with the possibility the market may deteriorate further before it improves.

The choice is stark. With no immediate bounce in prices the company needs to make its best assets work as best they can, while making hard decisions on those that are loss making.

Brokers highlights the exposure to good assets such as Worsley aluminium, Groote Eylandt Mining Co (GEMCO) manganese and Cannington silver/lead/zinc, as well as a strong balance sheet.

The upside, too, is that the company is generating cash and lowering its debt. Two thirds of the 30% reduction in functional positions in Australia is complete. Procurement savings are yet to flow through and asset reviews are being undertaken to establish the value of growth options.

Several brokers are also optimistic there is upside to cost savings. JP Morgan expects the target of $350m per annum is likely to be increased at the next financial results.

The main issues at Cannington and GEMCO are around mine life. The company envisages options for extending the life of Cannington, noting closing the Townsville office has made savings and provided more flexibility. South 32 is progressing its negotiations at GEMCO and believes access to the portion of the deposit that lies in the southern leases could double the life of operations.

Meanwhile, resource-to-reserve upgrades remain on the cards at Worsley, and the company highlights the significant potential at this asset, something it believes the market is discounting. The aluminium business in South Africa, brokers observe, is at least not loss making while its power availability issues are improving.

The main problems lie with Illawarra coal, South African manganese and Cerro Matoso nickel. All three areas need a plan by year end to return to profitability, brokers note.

At Illawarra coal the company is looking at a change in operations to ensure its survival. Cerro Matoso personnel are being reduced by around 26% and bringing on the mine at Esmeralda is considered key to viability as this should lift the nickel grade. South African manganese mining has been halted until a strategic review is completed and three of the four alloy furnaces are on care & maintenance.

South32 is cheap and unloved in Credit Suisse's view, not priced for an eventual recovery in commodity prices. The broker observes the company's priorities are unchanged. In order they are – invest in the businesses, protect the credit rating, pay out 40% of earnings in dividends and, then, look to a buy-back.

In the current environment the broker highlights a meaningful buy-back is not possible. Minor adjustments to Credit Suisse's modelling involve suspension of mining South African manganese which is offset by drawing down inventory and the suspension of the three alloy smelters.

There are limited near-term catalysts and buy-backs are unlikely, UBS, too, asserts. Instead management is intent on maintaining a safe balance sheet, the broker notes. Moreover, progressing the life extension at Cannington could drain cash in coming years.

UBS contends the main risks are in the product mix as aluminium, manganese ore and coal are all depressed, and in the regional mix, with 45% of revenue generated in South Africa. While attracted to the strong balance sheet, well-funded assets and the minimal capex commitment in the near term, the broker remains concerned that the self help and any FX support will not be enough to offset weak commodity prices.

Costs of closure for problem assets is most severe for South African manganese. UBS highlights an estimated figure of US$160m. Management has signalled that de-classification of the manganese slag is a possibility. The most likely scenario, in the broker's view, is placing the assets on care & maintenance rather than closure. There is also the possibility of selling Metalloys.

At Cerro Matoso management has highlighted a risk of losing access to the CMSA resource if it were to close the mine and care & maintenance may be a preferable option.

Macquarie suspects the closure of loss-making assets is possible by early next year. At spot prices the broker estimates Illawarra coal is losing around US$50m per annum. With three longwall moves scheduled for the remainder of FY16, Macquarie believes the company has a key opportunity to make a major reduction in its cost base.

Macquarie also notes that Colombian legislation makes closing Cerro Matoso difficult but in the absence of a material recovery in nickel prices, a temporary closure next year appears inevitable. Most of the South Africa manganese smelter business has been off line since August and the broker expects the Metalloys smelter will be closed permanently as part of the review, with mining of the Mamatwan open pit likely to resume next year after suspension following a fatality on November 2.

FNArena's database has five Buy ratings and two Hold. The consensus target is $1.74, signalling 44% upside to the last share price. Targets range from $1.45 (UBS) to $2.00 (JP Morgan).
 

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article 3 months old

The Overnight Report: Needn’t Have Bothered

By Greg Peel

The Dow closed up one point while the S&P was flat at 2088 and the Nasdaq rose 0.2%.

Unease

The big jump in base metal prices on Tuesday night was not enough to counter a new ten-year low for the iron ore price, resulting in the local materials sector falling 0.5% yesterday. By contrast, a jump in oil prices ensured a 0.9% gain for energy.

Outside of tiny info tech, energy was the only sector to finish in the green yesterday. Bridge Street was struck with an uneasy feeling following Turkey’s shooting down of a Russian warplane. It is nevertheless interesting to note which sectors were sold down.

They were the defensives, which seems at odds in times of geopolitical fear. The telcos were down 1.1%, utilities 0.9% and the banks 0.9%, to mark the biggest sector falls on the day. The only explanation here is that in the recent rally, these stocks had been the most sought after.

Yesterday saw numbers for September quarter construction work done, which didn’t offer much in the way of surprise. The volume of construction work fell -3.6% in the quarter, in line with an annual run-rate of -3.7% decline. Consensus forecasts were for a fall of -2.0% but the trade-off was an upward revision to the June quarter numbers, to 2.1% growth from a previous 1.6%.

Segmentally, engineering fell -7.3% as the ramp-down of mining investment continues. The can was again carried by residential construction, up 2.0%, while non-residential remains in the doldrums with a -1.9% fall. All up, private sector construction fell -4.2%, offset by a 0.3% gain in public sector construction.

That will be the number to watch in 2016, or more particularly in 2017. There is no end in sight yet for the decline in “mining” construction, given the number of LNG projects still being built or tweaked. Engineering will thus continue to decline. Analysts are now forecasting a cooling in the housing market in 2016 and thus a drop-off in residential construction. Assuming there’s no boom in office block or factory construction on the cards, what will save the economy?

State and federal governments have extensive infrastructure plans on the table, which will begin to really kick in in 2017. Thus we will be looking for that public sector construction number to take the baton from residential.

The overall negative construction result will detract from next week’s GDP result. The more important factor for GDP is nevertheless today’s September quarter private capex numbers.

Meanwhile, yesterday’s numbers provided no reason to expect any change in RBA policy. The Aussie is relatively steady overnight at US$0.7255.

Dependent

Is the Fed data-dependent or is it not? Many feel the FOMC will hike next month regardless.

Last night’s flurry of US data releases included new durable goods orders, which showed a return to growth following two months of declines, rising 3.0%. Economists had forecast 2.1%. As ever, lumpy aircraft orders impacted on the numbers, and if transport is excluded orders rose by a more modest 0.5%.

Personal consumption rose a mere 0.1% in October, as it did in September, missing forecasts of 0.3%. Incomes rose 0.4%, up from 0.2% in September, in line with expectation. The Fed’s preferred measure of inflation – the core personal consumption expenditure (PCE) index, rose 1.3% year on year, as it did in September, missing 1.4% forecasts. This is the number the Fed supposedly wants to see at 2% before being comfortable about a rate rise.

That ain’t gonna happen before the next meeting, but the Fed believes the PCE will eventually move up to 2% growth, and thus last night’s numbers will not prevent a hike.

On Tuesday night we saw a shock result for the Conference Board’s monthly consumer confidence index. Last night Michigan Uni published its fortnightly survey, showing a fall to 91.3 from 93.1 a fortnight ago.

This week also saw an estimate for the November manufacturing PMI that suggested a 14-month low. The previous two months have also seen a slowdown in the service sector PMI, but last night’s flash estimate for November suggested a strong jump to 56.5 from 54.8 in October, beating estimates.

So a mixed bag there, and nothing that would cause the FOMC to about-face, assuming it is still data-dependent as stated.

And none of it was going to cause any excitement on the day before Thanksgiving, as tumbleweeds rolled through the NYSE after lunchtime. On very low volume, the US indices posted their tightest daily trading ranges in 2015. In other words, nothing happened.

Commodities

The same can pretty much be said for the oil markets last night. West Texas is little changed at US$42.97/bbl and Brent is little changed at US$46.09/bbl.

Things were a bit more active in London nonetheless. After a big short-covering rally, the likes of which we saw on Tuesday night, it is inevitable that the sellers will return. They duly did for copper, which closed down 1.8%, and for zinc, down 0.6%, but aluminium and lead held their ground.

Nickel was the star performer on Tuesday night with a 7% gain, and actually added another 1.3% last night, the reason being that Chinese nickel producers have agreed to meet on Friday to discuss production cuts. And I noted yesterday that tin was the “wood duck”, which sat oblivious in the pond when all its fellow metals took off. Well last night tin cottoned on and jumped 2.4%.

Iron ore closed unchanged at US$43.40/t, which for many junior miners could be considered a “win” at the moment.

A 0.2% rise in the US dollar index to 99.76 helped gold down US$4.20 to US$1070.60/oz.

Today

The SPI Overnight closed down 9 points.

As noted, today’s local data release is that of September quarter private sector capex, which is critical for both the ultimate GDP result and to RBA policy.

US markets are closed tonight for Thanksgiving.

On the local stock front, there’s another burst of AGMs today with the highlight no doubt being that of Woolworths ((WOW)), who’d better put on some pretty flash tea and bikkies.

ALS Ltd ((ALQ)) will release its half-year result.

Rudi will make his weekly appearance on Sky Business at noon (Lunch Money) and return from 6.30-7pm to be interviewed on his soon to be released book. Not to be missed!
 

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: Turkey Sparks Commodity Snap-Back

By Greg Peel

The Dow closed up 19 points or 0.1% while the S&P rose 0.1% to 2089 and the Nasdaq closed flat.

Profit-Taking

Big falls in metal prices on Monday night did have the feel of a capitulation trade of sorts, with copper heading back to 2009 levels and nickel all the way to 2002 levels. Metals traders have been getting shorter and shorter, setting the market up for a potential short-covering scramble on some small trigger.

Which is exactly what happened last night, although it’s all very well to justify with hindsight. But as far as yesterday’s trade on the local market was concerned, the materials sector was always going to lead the index lower, which it did from the opening bell.

The ASX200 opened down 45 points, but the buyers were waiting. By 11.30am the index was down only 10 points and it looked for all the world like a sixth consecutive day of gains might be booked despite last week’s very sharp rally. It wasn’t to be nevertheless, and by afternoon the profit-takers won out. All sectors finished in the red, led by materials (-1.8%) but aided and abetted by the consumer sectors which responded to the weak weekly consumer confidence numbers.

Under normal circumstances one would suggest such a profit-taking session after a strong run of up-days is text book stuff, and unsurprising ahead of what on Wall Street effectively becomes a four and half day weekend, beginning from lunchtime tonight in New York. But the shooting down of a Russian fighter by Turkey overnight has changed the mood.

The Putin Factor

The lack of any particular fear-based response from financial markets to last week’s Paris attacks confirmed the assumption that markets no longer panic at such times, given history shows initial fear-based sell-offs are invariably followed by sharp rallies. We have also this year seen an unwinding of any geopolitical premium in oil prices, given the Middle East story is just one that rolls on and on without end. But when it comes to Russia, things are a little different.

Commentary out of US markets last night concurred that the shooting down of a fighter plane would not otherwise cause high level market angst but when it’s one of Vladimir Putin’s planes, there is some concern. Putin is seen as being volatile and unpredictable. Thus for oil markets, it was a day to buy, helping to support US stock indices.

US economic data releases on the day were mixed. The first revision of US September quarter GDP took growth up to 2.1% from an initial 1.5% estimate when 1.9% had been forecast. There is nothing here to derail a December Fed rate hike.

But consumer confidence, as measured monthly by the Conference Board, came as somewhat of a shock. Economists had expected the index to reach 100 in November – the crossover point into optimism – from October’s 99.1. Instead, the index plunged to 90.4.

This is not the news US retailers want to hear heading into this week’s “Black Friday” sales, the biggest shopping day on the US calendar for bricks & mortar outlets, and “Cyber Monday”, ditto for online.

The US dollar index, which had rallied strongly the last two sessions, fell 0.2% to 99.58. US stocks initially opened lower but struggled back to a relatively flat close, helped by the resource sectors.

Commodities

As noted, oil prices rose last night on the geopolitical factor. West Texas is up US$1.06 or 2.5% at US$42.94/bbl and Brent is up US$1.21 or 2.7% at US$46.20/bbl. But the big moves were in base metals.

The US dollar was lower, providing an excuse. US economic data were mixed, but an overall beat on GDP provided some incentive. The overriding factor nevertheless is that LME traders had gotten themselves very short. The fighter plane news was just the trigger required for a mad short-covering scramble, one in which those who are not short just stand aside.

Aluminium closed up 1.5%. Lead up 2.2%. Zinc jumped back 3.2% and copper 3.5%. And nickel, the most beaten-down of all, leapt 7%. Tin was the only wood duck, unchanged on the day.

Such snap-back rallies are part and parcel of trading in volatile commodities markets and by no means suggest any sudden change of fortune ahead for miners. They can, nonetheless, provide an indication of what low level of price represents an “oversold” market. Analysts have been looking for metals prices to bottom out, but they have just kept falling. Maybe now we have found some sort of line in the sand.

Unfortunately we can’t say the same yet for iron ore. There is not a lot of correlation between Russian warplanes and Chinese steel production. Iron ore is down another US80c at US$43.40/t.

Gold used to be the go-to safe haven at such times but that is no longer the case. Gold did rally US$7.40 to US$1074.80/oz but it’s hardly panic stuff and can be justified by the weaker greenback.

The Aussie is up 0.8% to US$0.7246. Part of that move represents the lower greenback, but the bulk came as a result of RBA governor Glenn Steven’s speech last night to a business economists forecasting conference dinner – inevitably a riotous affair. Stevens was asked whether the RBA’s decision not to cut on Cup Day was because the economy is picking up or because another cut would hurt retiree incomes. “You are making the case to stay still,” said Stevens. “It is an idea I happen to agree with”.

Today

The SPI Overnight closed up 23 points or 0.4%.

The countdown to Australia’s GDP result next week begins in earnest today with September quarter construction work done data.

Tonight in the US sees a barrage of morning data releases, including durable goods, new home sales, FHFA house prices, personal income & spending and a flash estimate of November services PMI. Then by lunchtime it’s planes, trains and automobiles, as Wall Street rapidly deserts ahead of Thanksgiving. The NYSE remains open but it is a half-day in anyone’s books.

There’s yet another welter of AGMs today locally as the season finally begins to draw to a close. Aristocrat Leisure ((ALL)) will release its full-year result.
 

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article 3 months old

The Overnight Report: Adrift

By Greg Peel

The Dow closed down 31 points or 0.2% while the S&P lost 0.1% to 2086 and the Nasdaq closed flat.

Two Markets

The pain continued for the local resources sectors yesterday and on last night’s performance things are not going to look a lot rosier today. For one brief moment last week it looked as if the US dollar might be set for a correction on the basis the currency was pricing in a too rapid Fed tightening cycle. But further dovish rhetoric from the ECB in particular has ensured that in the race to the bottom for currencies, the greenback is the loser.

Yesterday saw the local materials sector fall 1.0% and energy 0.4%, leaving these two the only sectors to finish down on the day. Elsewhere the buying was relatively even across all sectors with the exception of an out of the box performance from consumer staples, up 2.0%. Media suggestions about private equity interest for Big W explain most of the move. Plus perhaps bargain hunters are looking for something positive to come out of Woolies’ AGM on Thursday.

Yield remains popular, with utilities and the telco posting solid 0.8% gains.

As we approach the Silly Season proper, it appears Bridge Street is waiting now for something to happen. The December Fed meeting is still a good three weeks away and it would appear that meeting will be critical to whether or not Santa wants to show his hand this year, just as was the case two years ago when we went through exactly the same soap opera over the issue of Fed tapering.

There’s little point in looking for a clear lead from Wall Street this week as all and sundry look ahead to the Thanksgiving break.

Hitting the Ton

The US dollar index traded at 100 for a heartbeat last night before settling back again to be up 0.2% from Saturday morning at 99.80. The index spent a brief time over 100 earlier this year when a June Fed rate rise was supposedly a given but before that, we have to go back to 2002 to see the index trading for any time over the ton. Then Alan Greenspan started cutting the Fed cash rate in order to ultimately create the GFC.

The bottom line is that while talk now may be of just how slowly the pace of the upcoming Fed tightening cycle might be, the market is still only pricing in a 70% chance of a rate hike in December. This is at odds, so to speak, with commentary both here and in the US within which it’s hard to find anyone not assuming a December hike.

Fedspeak nevertheless remains mixed and as unhelpful -- some might say destructive -- as ever. Last night San Francisco Fed president Evan Williams reiterated the case for a December hike while Fed governor Daniel Tarullo declared he is not keen to go ahead given inflation is not rising towards the Fed target as expected. On Friday night Fed vice chair Stanley Fischer suggested inflation would reach the target soon.

Shoot me now.

Either way the US dollar continues to rise, suggesting the market is still moving towards greater December hike expectations.

The US stock market has otherwise gone quiet, with volumes very much to the low side last night. After last week’s big recovery it’s now a matter of what to do next, and again that Fed meeting is the focus. Might as well just take a three week break for Thanksgiving.

There is a lot of data to consume in the early part of the week nonetheless. Last night saw a 3.4% fall in October existing home sales, as expected, while the Chicago Fed national activity index remained in contraction on a rise to minus 0.04 from minus 0.29 and a flash estimate of the November manufacturing PMI suggested a drop to 52.6 from 54.1 in October, which would represent the lowest reading in two years.

Bring on the rate rise!

The US materials sector had a hard time of it last night but elsewhere Wall Street is being buoyed by further share buyback announcements. A proposed merger between global pharma giants Pfizer and Allergan took centre stage, although both stocks were sold down and the deal sparked much criticism as a bold-faced attempt for Pfizer to relocate its HQ in Dublin and thus drop its tax rate to 18% from 25%.

Through all of this, the past week has seen the US ten-year yield cemented at 2.25%, rising and falling only a point or two over the past several sessions. It seems the bond market has settled at a point suggesting a coin-toss on the December Fed meeting.

Commodities

A report from the International Copper Study Group published last night noted a 70,000t global surplus of the metal in the first eight months of 2015. Copper duly fell 2%, to levels last seen in 2009. Copper has nothing on nickel when it comes to oversupply however. Last night nickel crashed 5% and continues to trade at 2002 pre-China boom levels.

Dour sentiment and the stronger US dollar ensured all base metals were down last night by at least one percent.

Iron ore fell US80c to US$44.20/t.

I suggest that resource sector investors should brace themselves for another round of broker downgrades to base metal price forecasts. While analysts have rejigged to the downside on several occasions this year, forecast prices, used to provide stock valuations, remain well above spot prices by those analysts’ own admission. Some now make a point of noting large variations in their valuations of mining stocks were spot prices to be used.

The oils had a bit of a pop last night when the Saudis suggested they would work with OPEC members to return oil markets to some level of stability. While this might imply Saudi Arabia is finally ready to concede to production cuts, we’ve seen this movie before. Plenty of talk but no action, as OPEC members continue to borrow to overcome their budget shortfalls.

West Texas is up US34c to US$41.91/bbl and Brent is up US53c to US$44.99/bbl.

As the US dollar continues to climb back, gold continues to fall. It’s down US$9.20 to US$1067.40/oz.

Today

The SPI Overnight closed down 18 points or 0.3%.

RBA governor Glenn Stevens will make a speech tonight and thereafter Wall Street will see house price and consumer confidence data and the Richmond Fed index. A revision of the first estimate of September quarter GDP will also be published, with economists expecting a rise to 1.9% from an initial 1.5% reading.

Locally there are several AGMs planned for today and TechnologyOne ((TNE)) will release its FY15 result.
 

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article 3 months old

The Monday Report

By Greg Peel

Resilient

There was every reason to expect profits to be taken on the local bourse on Friday following a very sharp and solid rally for the index over the week, but it was not to be. While there was no great enthusiasm from the buyers early in the session, potential sellers were also thin on the ground.

By day’s end the index posted a mild gain to cap a consistent up-week, led by the banks, which posted a 0.6% gain to offset oil price-inspired weakness in energy (-1.1%). Materials (+0.2%) held up despite another slide in the iron ore price, struggling to fall further from the BHP-driven lows already posted.

Nor does there seem to be a lot of concern at this stage that the Aussie dollar has staged a bit of a comeback. The market had assumed that were the Fed to go ahead with its first rate rise in December, the Aussie must surely fall into the sixties and stay there this time. But that rate rise is now priced in and attention has turned to expectations of a very slow tightening cycle from the US central bank thereafter.

This realisation has sparked selling the US dollar, although downside for the greenback is limited when there is a race to the bottom among other currencies, particularly the euro. Having fallen sharply on Thursday night, Friday night saw the US dollar index bounce back again by 0.7% to 99.63. By rights the Aussie should counter with a fall, but it was up another 0.6% on Saturday morning at US$0.7237.

Clearly the shorts are still being cleared out.

As You Were

The Dow was up as many as 180 points during Wall Street’s session on Friday but the afternoon did bring in the sellers, likely taking the profits Bridge Street seemed content to leave alone after a strong week. In fact it was the best week on Wall Street in almost a year.

But the week before was one of the worst, so over two weeks Wall Street has gone nowhere.

It makes more sense that traders should take profits ahead of this week given Thursday is Thanksgiving in the US, which closes all markets and ensures half-day sessions on either side of the holiday. For many it would simply be a holiday week.

At the closing bell on Friday the Dow was up 91 points or 0.5% while the S&P had gained 0.4% to 2089 and the Nasdaq had risen 0.6%.

Leading the charge on Friday was teen fashion, with apparel retailer Abercrombie & Fitch stunning the market with its earnings result and enjoying a 25% share price hike in response, while Nike announced a 14% increase in dividend and share buy-back to ensure its position as best performer in the Dow over 2015 to date.

The 0.7% rise in the US dollar index came about primarily because of a tale of two central banks. On Friday night ECB president Mario Draghi reaffirmed his commitment to extensive stimulus measures to combat low inflation. Meanwhile, St Louis Fed president James Bullard suggested the US rate of inflation will soon rise to the Fed’s 2% target, further cementing expectations of a December hike.

Commodities

A stronger US dollar is as always, a drag on commodity prices. But right now the currency conversion is not the biggest issue. On Friday night nickel fell over 3% in London to its lowest level since 2003.

That’s lower than the 2008 GFC sell-off. Yet not so long ago nickel was the darling of the base metals thanks to Indonesian export bans. It just goes to show what oversupply will do. Meanwhile, news that a group of Chinese zinc smelters had agreed to lower production next year helped zinc to a 1.5% gain. Similar curtailments have previously been announced by the likes of Glencore and others.

Copper and aluminium would be best served by curtailments as well. They were both down 1% on Friday night.

Iron ore fell US10c to US$45.00/t.

The oils were mixed on small moves, complicated by the rollover of West Texas into the new January delivery front month. The two majors are now aligned on delivery, and a fall for WTI of US15c to US$41.57/bbl was offset by a US21c rise in Brent to US$44.46/bbl.

Gold had jumped ten dollars the night before on a fall in the greenback, so it was back down US$5.30 on Friday night to US$1076.60/oz.

The SPI Overnight closed down 5 points on Saturday morning.

The Week Ahead

As noted, it’s Thanksgiving in the US on Thursday, closing all US markets. The NYSE will close at 1pm on Wednesday and on Friday. From Wednesday lunchtime, Wall Street will quickly be emptied.

There are nevertheless a lot of data releases crammed into the first three days of the week.

Tonight sees existing home sales, the Chicago Fed national activity index and a flash estimate of November manufacturing PMI. The eurozone will also flash tonight, while Japan will wait to tomorrow given a public holiday today. Caixin no longer provides a China flash.

Tuesday in the US sees Case-Shiller house prices, monthly consumer confidence, the Richmond Fed activity index and the first revision of the September quarter GDP result. Economists are expecting an upgrade to a 1.9% annual rate from the initial estimate of 1.5%.

Wednesday brings durable goods, FHFA house prices, new home sales, personal income & spending, fortnightly consumer sentiment and a flash estimate of the services PMI.  And that’s it for the week.

Locally, RBA governor Glenn Stevens will make a speech tomorrow night while attention turns to September quarter data in the lead-up to next week’s GDP result. Wednesday sees construction work done and Thursday private sector capex.

This week brings the last big rush of corporate AGMs before December meetings slow to a trickle. This week’s highlight will no doubt be Woolworths ((WOW)) on Thursday.

TechnologyOne ((TNE)) posts its FY15 result tomorrow and Fisher & Paykal Healthcare ((FPH)) posts its interim on Friday.

Rudi will appear twice on Sky Business on Thursday. First at noon and again from 6.30-7pm.
 

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: Softly Softly

By Greg Peel

The Dow closed down 4 points while the S&P lost 0.1% to 2081 and the Nasdaq closed flat.

Buy Australia

If the Fed decides to hesitate yet again in December it would be very ugly for global markets. Less than one month out from the next meeting, the world is baking in a Fed rate rise. But why is this a positive development?

It’s not about a strong US economy, as the US economy is far from strong. Keating would call it a rate rise the Fed has to have, just to have somewhere to cut from were it to become necessary down the track, and also to restore credibility in a central bank that has seem to have lost its rudder. And the “just get it over with” mantra from the markets is very robust.

Once it’s over with, attention then turns to the next Fed rate rise. While the minutes of the October meeting may have been hawkish in the sense a majority of FOMC members are now in the December hike camp, it was also more dovish on the wider picture as the Fed is even more emphatic that the tightening cycle to come will probably be the slowest ever seen in history.

That’s why the US dollar index is down 0.7%, to 98.97, over the past 24 hours. Forex markets have been pricing in a tightening cycle far more aggressive than the Fed is intending. And while a US rate hike means Australian stocks are less attractive to US investors on a narrower yield spread, a slower than expected subsequent tightening cycle means that first 25 basis points is neither here nor there. So if rates remain lower for longer and the US dollar is set for a correction, what do you buy?

How about a high-yield stock market in a safe jurisdiction offering the potential for a currency rebound on the back of a greenback correction.

Yesterday’s 2.1% jump for the ASX200 was indiscriminate. Every sector was up on relatively equal terms. Forget commodity prices, yesterday simply saw index buying – Buy Australia.

The Aussie dollar rose steadily at the same time, suggesting those buying stocks were acquiring the necessary local currency first. The Aussie’s rally continued through last night as the US dollar fell, taking the Battler up a full 1.3% over 24 hours to US$0.7196.

The ASX200 is up 5% in a mere three sessions. If you make 10% in a year on your portfolio you have a happy Christmas. Being Friday today, and given Wall Street was flat overnight, we’ll probably see some profits locked in. But was that a bloke in a red suit I saw down in Bridge Street watching the ticker yesterday?

Sun Rising

It was a session downunder in which no one was ever really going to care what the Bank of Japan did or didn’t do, except maybe the forex cowboys. The BoJ did nothing and surprised no one, given the market has now given away the idea of any tit-for-tat QE expansion from a central bank already expanded up to its eyeballs.

Having downgraded its economic growth and inflation expectations at its October meeting, and having since seen Japan fall into “technical” recession, the BoJ declared yesterday that the outlook for Japan in the December quarter is actually very rosy. Or cherry blossomy perhaps.

Never mind that Japan’s October trade data was very weak. Either way, the yen rallied last night as traders came to the conclusion there is simply not going to be any further easing in Japan. The rally played into the US dollar’s pullback.

Ill Health

US healthcare sector stocks were slammed last night on Wall Street. It is not an issue investors in Australian healthcare stocks – and there are many of those – should be concerned about, as the trigger is very much US-centric.

Major insurer and Dow component United Health last night suggested it might pull out of Obamacare. Now, I don’t pretend to fully understand Obamacare because US public health policy is so far removed from that we thank Gough for every day in Australia it might as well be on another planet. But I do understand that from the outset of the introduction of a policy which is as close to “universal health” as America is ever likely to get, it was assumed health insurers would greatly benefit on their bottom lines. But last night United Health issued a profit warning, and blamed the downgrade on lower than expected Obamacare-related earnings.

Hence last night the premium built into to the US healthcare sector started to unravel in a hurry, making the sector by far the worst performer on the day. The energy sector also had another weak session as the WTI price again traded below 40, albeit it has snuck back above that level once more. Otherwise, almost all other S&P500 sectors finished in the green last night to balance out for a flat overall result.

The best performer was utilities. In the face of an upcoming rate rise? Yes, because subsequent rate rises will be a long time coming.

There was actually a positive US data release last night as well, which, outside jobs, have been few and far between of late. After two months in negative territory the Philadelphia Fed activity index swung back into the positive (expansion) at plus 1.9 points.

Commodities

The weekly US inventory report released last night showed yet another big build in crude, and also a big build in natural gas in storage. West Texas dipped below the 40 mark once more but once more recovered, albeit expiry day for the December contract will have come into play. WTI is trading at US$40.49/bbl, down US40c, while Brent is steady at US$44.25/bbl.

The US natural gas price fell 3% to US$2.28/mmbtu.

Typically a 0.7% drop in the US dollar would be positive for metals prices, but keen buyers are thin on the ground in London at present. Base metals closed mixed on minimal moves last night.

After a brief respite iron ore continued its slide again, down US70c to US$45.10/t.

Gold is far more closely linked to currency moves, hence it’s up US$10.00 to US$1081.90/oz.

Today

The SPI overnight closed up 4 points.

This looks ambitious on a Friday after a 5% rally with some mixed commodity price moves overnight, but then the index does seem to be in a bit of a mood.

There are, unusually, no major economic data releases at home or abroad today.

There are still more AGMs to plough through locally nonetheless.

Rudi will appear on Sky Business Your Money, Your Call - Bonds tonight, 7-8pm.
 

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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: Bring On December

By Greg Peel

The Dow rose 247 points or 1.4% while the S&P gained 1.6% to 2083 and the Nasdaq added 1.8%.

Put Options

The futures were right on the money in calling the local index down 37 points yesterday morning, based no doubt on falls in commodity prices overnight, as that’s pretty much where we were at from the bell. We then staggered through the morning but from midday, the buyers returned.

It would appear that yield is what they were after. The push towards a positive close was led by the banks, telco and utilities, all with gains of around 0.7-0.9%. Materials was the drag with a 1.5% drop following big falls in iron ore and base metal prices but energy managed to sneak into the green despite a pullback for oil prices.

The yield case was likely revisited following the last morning release of Australia’s September quarter wage price index. It rose 0.6% for the quarter to leave annual growth unchanged at 2.3% -- the lowest rate since data began being kept.

The numbers came in as economists had forecast and supported the RBA’s view that spare capacity in the labour market will continue to hold back wage growth and thus inflation for a while yet, even as the unemployment rate falls. While “lowest in history” seems significant, never in history have we seen the RBA’s cash rate so low or rates as low as they are across the globe, including zero in the US. Inflation is running at 1.5% locally, thus real wage growth remains positive at 0.8%.

The implication from the data is that while the minutes of the November RBA meeting, released this week, provided a cautiously upbeat assessment of the progress of Australia’s economic transition, thus ruling out a December rate cut, the board noted that the low inflation environment continued to provide “scope” for a rate cut if deemed necessary.

Were we to have another rate cut it would act as counter to a Fed rate hike for foreign investors, thus maintaining the value of local yield stocks. With the index buying we’ve seen this week, particularly on Tuesday, it is also likely foreign investors are eyeing off an Aussie near 70c now when not so long ago it was over the dollar. The Aussie is reflecting weakness in commodity prices and if one assumes commodity prices can’t fall by too much more, and that the Aussie will likely only fall into the high sixties from here at worst, then now is a good time to invest in Australia from offshore.

So locally, as I suggested yesterday, investors have a “put option” in the form of “scope” for the RBA to cut if it has to, while investing in the “moderate economic expansion” the RBA currently perceives. Foreign investors have a put option in the form of a currency that is at the lower end of its historic range.

No Choice

“Most participants” believed that conditions for beginning to raise interest rates “could well be met by the time of the next meeting”.

So said the minutes of the October Fed meeting, at which, it appears, the number of FOMC members now happy to go next month has shifted into majority. And since that meeting was held, the runaway October jobs numbers were released.

But for a lot of observers around the globe it’s now a case of the Fed hiking in December not because US economic data are positive, but because the central bank has come under enormous criticism for its hesitation and lack of decisiveness. The Fed should have pulled the trigger 18 months ago, many suggest. At least in June. And why not in September? Now it looks like they have simply backed themselves into a corner and have no choice but to get this rate rise out of the way.

Previously the Fed was worried a rate rise might spark volatility in markets. Now they are likely worried the opposite would be true. Yet aside from jobs, recent US data have been weak at best. As one commentator put it, if the cash rate was 3% and not zero, a very good case could be made right now for a rate cut. But the Fed can’t cut, because the rate is zero, It has missed the opportunity to provide itself with the sort of leverage the RBA is currently enjoying. Therefore December is likely to bring a rate hike simply for the sake of having a rate hike.

It is never quite clear which way Wall Street is going to run on the cut/no cut argument, given the response seems to vary. But a 250-point Dow rally last night with no other real incentive (the day’s economic data release was an 11% drop in housing starts) suggests Wall Street is looking forward to getting it all over and done with.

There was little response in forex and bond markets nonetheless. The US dollar index is steady at 99.62 and the US ten-year yield rose a point last night to 2.27%. Both markets have already moved to a position which suggests a December rate hike is now baked in. It is the stock market that remains fickle.

Commodities

The Fed minutes had not been released when the LME closed last night, so that response will have to wait till tonight. But weak US housing starts were matched by data yesterday showing an easing of house price growth in China, and talk at an industry gathering in Shanghai was of copper prices remaining weak for at least another two years.

Copper was down 1.5% last night, as was zinc, and nickel fell 1%.

Iron ore was thankfully unchanged at US$45.80/t following Tuesday night’s big fall.

West Texas crude had another look at the 39 mark last night, briefly, before recovering to be up US16c at US$40.89/bbl. Brent is up US75c at US$44.32/bbl on the new January delivery contract.

As the greenback is steady, so too is gold at US$1071.90/oz.

The Aussie is off 0.2% at US$0.7107.

Today

The SPI Overnight is up 58 points or 1.1%. Did someone mention Santa?

The Bank of Japan will hold a policy meeting today.The BoJ seems to be accomplished in changing monetary policy just when no one was expecting it to and then not changing policy when everyone expects it will. Markets had thought there was a chance the BoJ would extend QE to counter the ECB and Chinese stimulus at both of the past two meetings, with no result. Thus no one is now expecting any change today, but in the wake of Japan’s “recession” GDP result, who knows?

On the local market the AGM bandwagon rolls – today’s highlight being BHP Billiton ((BHP)) -- while James Hardie ((JHX)) released its interim result (profit warning) and Stockland ((SGP)) hosts an investor day.

Rudi will make his weekly appearance on Sky Business's Lunch Money, noon-1pm, and then again between 7-8pm on Switzer TV.
 

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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