Tag Archives: Base Metals and Minerals

article 3 months old

The Monday Report

By Greg Peel

Stimulus One

The Australian market had no qualms about jumping on the global bandwagon on Friday, whipped on by Mario Draghi and his near confirmation the ECB would extend its QE program beyond December. I had been noting last week global markets were struggling to find a reason to go up, and in such circumstances tend to drift down, but Draghi has proved there is pent up buying demand across the globe.

Healthcare was about the only local sector not to surge on Friday, and energy had a quieter day after a good run, but otherwise gains were significant across the board. It was not what one could call a rally, nevertheless, given the ASX200 opened up 80-odd points before peaking at a 110 point gain and drifting slightly to close up 87 points. The step-jump took the index to a close just above 5350.

Technically, a breach of 5420 would reopen the upside to the previous high.

While the rally was all about the ECB, there was a supporting element of the form of the bad news is good news kind on Friday. Caixin’s flash estimate of China’s October manufacturing PMI came in at 47.2, up from 47.0 in September.

Surely fresh Chinese stimulus must be nigh.

Stimulus Two

There was a possibility the PBoC would be prompted into action last weekend, following more weak data and a particularly dour inflation read, but it wasn’t to be. With the government’s new five-year plan set to be outlined at this week’s Plenary Session, it seemed appropriate any stimulus announcements would be made at that time.

But late on Friday, the Chinese central bank announced an interest rate cut – its sixth in twelve months – dropping the one-year lending rate by 25 basis points to 4.35% and the deposit rate by 25bps to 1.50%. As to whether the Caixin measure had tipped the PBoC over the edge, or whether China thought it has better to respond quickly to counter the ECB announcement, the result is the same.

It was off to the races again for offshore markets. London rallied 1.1%, France 2.5% and Germany 2.9%.

European markets were also spurred on by a flash estimate of the eurozone’s October composite PMI, which showed a jump to 54.0 from 53.6 in September.

High Tech

The US estimate also came in at 54.0, up from 53.1, to mark the highest reading in five months. Throw in the Chinese announcement and it was set to be a good day on Wall Street. In the end, it was the tech sector that stood out.

Amazon, now a veteran internet name and survivor of the 2000 tech wreck, has never booked a profit. Until the September quarter just passed. So surprised was Wall Street it sent Amazon shares up 6.2%.

Another survivor, Google, announced a buyback and its shares, now known under the parent company name of Alphabet, jumped 5.6%. And ditto Microsoft (Dow), which posted better than expected earnings and enjoyed a 10% rally.

The rally in tech spilled over into the volatile biotechs, and that recently beaten-down sector went for a run. By the close, the Nasdaq had rallied 2.3%. The Dow put on a 0.9% or 157 point gain, and the S&P split the difference in rising 1.1% to 2075.

Cue Johnny Mathis: It’s beginning to look a lot like Christmas…

Commodities

Base metal prices initially jumped on the Chinese rate cut news but faded later in the LME session when the US dollar started pushing ever higher. The dollar index had jumped 1.4% on Thursday night on the ECB factor and jumped another 0.7% on Friday night on the PBoC factor.

It was too much for some metals, with copper and tin falling 1% and lead and zinc closing flat, while aluminium and nickel managed 1% gains.

The quiet slide for iron ore continued, with another US50c drop to US$50.90/t.

Global stimulus is not being celebrated on oil markets, which are struggling against oversupply. On Friday night West Texas rose US11c to US$45.55/bbl and Brent fell US29c to US$47.94/bbl.

Money printing might be supportive of gold but the USD gold price must battle the USD. Gold was off slightly at US$1164.40/oz.

While currencies all about are rising and falling, the net result continues to be a flat Aussie dollar. It is little changed at US$0.7217.

The SPI Overnight closed up 55 points or 1% on Saturday morning.

The Week Ahead

The Fed has not raised, the PBoC has cut and the ECB is set to extend QE. The Bank of Japan meets on Friday, under some pressure one would presume.

We actually do have the October Fed meeting beforehand, with the statement due on Wednesday night, but no one expects any movement. On Thursday the first estimate of US September quarter GDP will be announced to fuel Fed debate once more.

The US will also see new home sales tonight, Case-Shiller house prices, Conference Board consumer confidence, durable goods and the Richmond Fed activity index on Tuesday, pending home sales on Thursday and the Chicago PMI, Michigan Uni consumer sentiment index and personal income & spending on Friday.

The RBNZ will also hold a policy meeting this week, on Thursday, but discussion will mostly centre around the rugby.

And then there’s the RBA. This week sees the September CPI data released on Wednesday amidst growing expectation of a Cup Day rate cut. Australia also sees new home sales data on Thursday and the PPI on Friday.

It is a very busy week on the local stock front.

This week sees a late rush by resource sector juniors to publish quarterly production reports. It is the biggest week on the calendar this week for AGMs.

National Bank ((NAB)) will release full-year earnings on Wednesday and ANZ Bank ((ANZ)) on Thursday while Macquarie Group ((MQG)) will releases its interim on Friday.

Medibank Private ((MPL)) will hold an investor day tomorrow and Telstra ((TLS)) on Thursday, while Woolworths ((WOW)) will release quarterly sales numbers on Thursday.

Rudi will host Your Money, Your Call on Sky Business this Wednesday. He will also appear on Thursday at noon (Lunch Money) and again on Friday, this time as guest on Your Money, Your Call - Bonds versus Equities.

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: Santa Mario

By Greg Peel

The Dow rose 320 points or 1.9% while the S&P gained 1.7% to 2052 and the Nasdaq rose 1.7%.

Santossed

A weak opening sent the ASX200 back down towards the 5200 support level again yesterday morning but this time the turnaround point was 5217. There began a choppy rally back into the green to close the session up 15 points on the day.

When the dust settled, most sectors had traded off modest up or down moves but one sector stood out, that of energy, up 3.1%. Yesterday debt-burdened LNG major Santos ((STO)) announced it had received a takeover offer from private equity at $6.88 per share. The news sent Santos shares up 16% to close at $6.32.

Analysts have for some time been predicting M&A activity in the energy space and recently we saw Woodside Petroleum take an opportunistic swing at Oil Search. The bid was subsequently rejected and there has been no new news out of Woodside since so the consolidation story faded again, until yesterday. Woodside was only up slightly yesterday but Oil Search jumped over 1% and the Cooper juniors, such as Senex Energy (up 8%), all received significant attention.

Suddenly there was something to focus on in the market yesterday, after a week of meandering and wondering what might happen next. But what has also happened next is Mario Draghi.

QE2

The European Central Bank’s QE program, implemented earlier this year, is set to expire in December. QE1 has managed to stabilise the eurozone economy, but growth remains sluggish and deflation remains a threat. Speculation has grown recently that the ECB would extend its QE program into 2016.

ECB officials recently threw cold water on the notion but last night president Mario Draghi, speaking at a press conference following the ECB policy meeting, all but confirmed QE2 would be announced in December. It is likely the failure of the Fed to act on its first rate rise, and waning expectation of a 2015 lift-off, provided impetus.

The German stock market rallied 2.5% last night and France 2.3%. The mood flowed over into Wall Street, where the indices opened to the upside and continued to rally all day, turbocharged by domestic factors.

McMuffins Rule

After two years of continuous declines, which many assumed heralded a structural shift away from unhealthy fast food, McDonalds (Dow) last night posted an earnings increase and forecast beat for the quarter. It all came down to a rebound in China following a previous food safety scare, and the introduction in the US of all-day breakfast. Oh, and now they spread butter on the McMuffins. You want fat with that? Mickey D shares jumped 8%.

Manufacturer 3M, another Dow component, also posted an earnings beat and saw a 4% gain. Together these two stocks were worth 100 Dow points on the day.

Last night also saw some positive US economic data releases. Existing home sales rose 4.7% in September to the second highest level since 2007. Prices of houses with Fannie/Freddie mortgages rose 0.6% in August. And in defiance of recent weak monthly jobs numbers, the monthly running average of new jobless claims has fallen to a four-decade low.

There were also some less positive releases nonetheless. The Conference Board leading economic index surprised economists by falling 0.2% in September – its first decline in seven months – when a flat result was forecast. The Chicago Fed national activity index remained in contraction in September at minus 0.37, up from minus 0.39 in August.

But that’s okay, because all week Wall Street has been looking for something – anything – to provide a reason to buy. On Wednesday night the market closed on its lows after a late sell-off, and suddenly there was talk of the August lows being retested once more. But Mario and Ronald have saved the day.

The trade-off is nevertheless the US dollar, which last night jumped 1.4% on its index to 96.38 as the euro plunged on QE speculation. Many a US company reporting so far has pointed to the strong greenback as a drag on earnings.

Commodities

Base metal prices initially jumped on the LME last night on expected ECB stimulus, with shorts being caught. But the offset for metal prices is the US dollar, so by the close prices had drifted back again. Copper managed a 0.8% net gain but aluminium lost 2% on its own oversupply issues.

Iron ore fell US50c to US$51.40/t as the decline many an analyst has predicted continues.

The oils similarly traded off the positive of ECB stimulus and the negative of the stronger greenback. West Texas rose US24c to US$45.44/bbl and Brent rose US36c to US$48.23/bbl.

One would expect gold to fall on a 1.4% jump in the greenback but the trade-off here is the EUR gold price and the implications of more money printing in Europe. Gold is steady at US$1166.20/oz.

And a similar explanation can be given for the Aussie, which is steady at US$0.7214. The Aussie is not in the US dollar index, and the euro’s plunge does not have to impact on the AUD-USD exchange rate.

Today

The SPI Overnight closed up 78 points or 1.5%. Happy days are here again. If accurate, that would take us to a new post-correction high.

But it’s flash day today. In particular, Caixin will release its flash estimate of China’s October manufacturing PMI. Mind you, if it’s not too “flash” then the market will likely not panic, expecting Beijing to announce new stimulus measures at its Plenary Session next week.

Japan, the eurozone and US will also flash.

On the local stock front, OZ Minerals ((OZL)) and Santos feature among the quarterly production reports due today while Qantas ((QAN)) features among the AGMs and ResMed ((RMD)) will report quarterly earnings.
 

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article 3 months old

The Overnight Report: All The Wild Horses

By Greg Peel

The Dow closed down 48 points or 0.3% while the S&P lost 0.6% to 2018 as the Nasdaq fell 0.8%.

Late Buying

The lead out of Wall Street on Tuesday night was not such much weak as indifferent, as US earnings reports fail to either inspire or spark fear on a net basis and data releases are now less pressing given downgraded Fed expectations. If markets can’t find any particular reason to go up, they tend to go down until a reason emerges.

Bridge Street thus drifted off from the open yesterday, with a little help from lower commodity prices. BHP Billiton ((BHP)) posted a quarterly report showing strong iron ore volume growth, but met broker expectations. The real test came at lunch time when the ASX200 drifted below the 5200 level – previously strong resistance, now in theory strong support.

The index reached 5195 but when traders came back from the sandwich queue, the technical trade kicked in and the index began to drift back up again, confirming 5200 support. Then just before 3pm someone obviously put in a big buy order, focused on the resources sectors, and we rallied into the green to finish the session up 12 points.

The positive close was all about a 1.3% gain for materials and a 1.2% gain for energy, with no other sector standing out. The banks remained stagnant as investors continue to mull over the impact of the government’s near wholesale adoption of the Murray Inquiry.

Red ones go faster

Wall Street’s session began last night as another dreary drift, offering little conviction. Traders had strolled past a line-up of gleaming sports cars and grand tourers outside the NYSE looking as expensive as they are, ensuring the focus of the day was on the partial float of Ferrari for the simple reason that hey, it’s Ferrari, and there was nothing much else to draw attention.

The IPO was well received for the simple reason that hey, it’s Ferrari. Meanwhile General Motors posted a solid result and enjoyed a rally, as did Boeing (Dow).

There were no major data releases on the day, and otherwise the only talking point was a trashing of pharma company Valeant, after one notable fund manager accused the company of being engaged in fraudulent, Enron-style booking of revenues that really aren’t. Another major fund manager and Valeant shareholder responded by buying another 2 million shares at 40% down on the day, and the company itself issued a categorical denial.

It probably didn’t help the accuser’s case that the fund in question is a well known short-side player. Presumably Citron Research wasn’t in buying as the stock rallied back to close the session flat, as that might look a little dodgy.

But while the Valeant story may prove little more than a distraction the healthcare/biotech market is so on edge at the moment, following threats of increased regulation, that the sectors were sold down anyway, taking the Nasdaq down 0.8%. In the last half hour the Dow was dead flat, before late selling led to a 0.3% drop.

As noted, markets tend to go down if there’s no real reason to go up.

Commodities

There has be no announcement forthcoming from China on any new stimulus measures which might have been expected following a run of weak data, but it’s probably the case Beijing is saving up its firepower for next week’s Plenary Session in which the government will outline its latest five-year plan. Any or all of interest rate and RRR cuts, renminbi devaluation and targeted fiscal stimulus is anticipated.

Until that time it seems LME traders can’t find any reason to buy either, so again we see a market going down for lack of any reason to go up. Aluminium, lead and zinc all fell 2-3% last night and nickel and tin fell 0.5%, with copper only slightly lower.

Iron ore fell another US20c to US$51.90/t.

The oils were weaker again, as WTI rolled into a new December delivery front month. Weekly US crude supplies showed a bigger than expected jump and while hopes that a meeting in Vienna between OPEC members and others, such as Russia and Mexico, might lead to production cuts, it seems that’s not going to be the case.

West Texas fell US$1.12 to US$45.17/bbl and Brent fell US86c to US$47.87/bbl.

With Fed rate rise expectations being pushed out in time, gold had rallied towards the 1200 mark on expectations the US dollar would now give up some of its recent gains. But the greenback has failed to come to the party, mostly because it is only one of the major currencies supported by easy monetary policy. The ECB meets tonight and there is much anticipation with regard extended QE.

Traders appear to be losing patience, as gold fell US$9.60 to US$1166.80/oz last night. The US dollar index is up 0.1% at 95.03.

As commodity prices continue to drift lower, so too does the Aussie. It’s down 0.7% at US$0.7211.

Today

The SPI Overnight is down a rather imposing 36 points or 0.7%, which if accurate would once again take the ASX200 down to test support at 5200.

NAB will release a September quarter summary of its business confidence and conditions survey today, while tonight the ECB meets and the US sees existing home sales, house prices and the Chicago Fed national activity index.

On the local stock front, there are quite a few AGMs being held today alongside production reports releases from the likes of South32 ((S32)), while Wesfarmers ((WES)) will report September quarter sales.

Rudi will appear twice on Sky Business today. First at noon (Lunch Money) then again on Switzer TV, between 7-8pm.
 

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article 3 months old

The Overnight Report: Drifting

By Greg Peel

The Dow closed down 13 points or 0.1% while the S&P lost 0.1% to 2030 and the Nasdaq fell 0.5%.

Resource Rout

When China’s data came out on Monday the local materials sector fell a percent but the energy sector was little moved. On Monday night oil fell a couple of percent and base metal and iron ore prices fell, so yesterday the local materials sector fell 2.1% and energy 3.3%.

It seems like a delayed reaction. Perhaps traders were satisfied on Monday with China’s GDP result actually coming in better than expected at 6.9%, while ignoring weaker than expected industrial production and fixed asset investment numbers for the month of September.

Yesterday’s 0.6% fall for the ASX200 was all about those two sectors. The offset was telcos, up 2.6%, because for some reason a very unloved Telstra on Monday became the go-to stock yesterday. Perhaps those dumping resources switched into Telstra instead.

The banks are usually the counter-sector for resources, but yesterday they had their own issues. The government’s response to the FSI did not have a huge impact – the financials sector only fell 0.8% -- because there were no surprises on important capital ratios or risk weights. The main issue was a ban on excessive credit card surcharges, but we’ve been down this path before with excessive bank fees and late payment fines and the banks have managed to sail through.

There was some weird trade on the open on the ASX yesterday but we’ll ignore that as being a blip, and thereafter the index just quietly faded away all day. Not a lot of conviction. The minutes of the October RBA meeting would not have provided much excitement either.

The rate that stops the nation

Australia’s June quarter GDP growth was weak, the RBA board members noted at the meeting, but in line with expectations, due to “what appeared to be temporary weakness in resource exports” and a further decline in mining investment. But, and this is the big “but”:

“…there had been further evidence of rebalancing from the resources sector towards non-mining activity. This rebalancing was being increasingly supported by the depreciation of the Australian dollar, which had led to a noticeable increase in net service exports over the past year.”

The RBA also gave a nod to unemployment not being as high at this time as was expected earlier in the year, but otherwise the board could not ignore the ever lurking housing bubble, if that’s what it is. The board suggested that “The key domestic sources of risk to financial stability, and stability of the Australian economy more broadly, revolved around developments in local property markets”. Recent APRA tightening was having an impact, it was acknowledged, but clearly the housing market remains one of the central bank’s primary concerns.

Now, bear in mind that this meeting was held before the September US jobs number release kicked Fed rate rise consensus into 2016, and before Westpac led out with a mortgage rate increase. Both provide just a little more room for the RBA to cut its cash rate again. However that aside, the minutes suggest we can scratch a Cup Day rate cut here and now. The words are in front of us: temporary weakness; evidence of rebalancing; supported by Aussie depreciation; notable increase. And, the RBA is still very worried about the housing bubble – the “key domestic source of risk”.

Scratch December too.

Earnings Mix

Australia’s housing concerns currently revolve around apartments, and US housing starts data released last night showed an overall 6.5% jump in September starts thanks to an 18.3% increase in apartment starts. Starts of houses rose only 0.3%. Whole apartment blocks of course make the numbers lumpy.

Thus while it was the first monthly increase in net starts following two months of decreases, there was no great reason to be excited. The focus thus turned back towards earnings season.

Among the Dow components, “old tech” IBM’s fourteenth consecutive quarter of lower revenue sent its shares down 6%, balanced by beats from aerospace company United Technologies (up 4%) and financial conglomerate Travelers (up 2.5%). Harley Davidson blew a gasket and fell 14%.

“New tech” names like Facebook, Google and Amazon all saw some selling last night as traders decided these had become a bit overblown, sending the Nasdaq lower. The Dow balanced itself out and the S&P netted out a slight decline.

Beyond earnings, there’s not a lot of impetus evident.

Commodities

Nor is there much commitment in commodities markets at present. Sluggish trading on the LME last night saw all of aluminium, copper, lead and zinc a little lower while nickel rose 0.5% and tin jumped 2%.

Many an analyst expects iron ore to slide back below 50 and that’s a story in progress. Last night iron ore slipped another US40c to US$52.10/t.

West Texas fell another US51c to US$45.55/bbl while Brent was as good as unchanged at US$48.73/bbl.

The US dollar played no part, its index is flat at 94.90.

The Aussie is 0.2% higher at US$0.7260.

Today

The SPI Overnight closed down 12 points or 0.2%. It would seem this consolidation phase just above the 5200 break-out level is set to continue.

There is very little in the way of data out over the next 24 hours, locally or globally.

BHP Billiton ((BHP)) will report quarterly production numbers today, along with other iron ore juniors. Amcor ((AMC)), Insurance Australia Group ((IAG)), Medibank Private ((MPL)) and Origin Energy ((ORG)) are among those companies holding AGMs today while Macquarie Atlas Roads ((MQA)) will provide a quarterly update.
 

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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

Material Matters: Lithium, Zinc, Lead, Nickel And Oil

-Electric cars underpin lithium demand outlook
-Zinc, lead demand in China subdued
-Nickel supply remains stubborn
-Oil price likely slow to recover
 

By Eva Brocklehurst

Lithium

Demand from electric vehicles is expected to tighten the lithium market further. Citi notes lithium carbonate prices are likely to rise to US$7,000/t by mid 2017 before a string of projects start entering the market and dampen prices. Still, Citi expects prices of US$6,000/t will be maintained for the rest of this decade.

The broker suspects the mass adoption of vehicles such as the Tesla Model S or the Nissan Leaf would be a boon to the lithium market. Citi forecasts electric vehicle production of 1.04m in 2020 and hybrids at 7.6m.

This means the segment would have grown to 30% lithium carbonate equivalent consumption from near zero over 2010 to 2020. The ceramic, glass and polymer industries are the dominant consumers of lithium but also have the weakest growth prospects, although Citi still expects growth of 3.4-3.5%.

Consumer goods are supporting the consumption of lithium, with the rise in the power intensity of mobile phones and the adoption of smart phones. Lithium production is dominated by four major suppliers globally - Tianqi Lithium, Albermarle, SQM and FMC, which have over 90% of the market. ASX-listed Orocobre ((ORE)) is expected to join the group of producers next year.

Zinc & Lead

Reductions in zinc supply from Glencore's mines are expected to lead to large deficits in refined metal in 2016-17, Credit Suisse maintains. The broker now expects steady price rises to US$2150/t in 2016 as surplus metal is absorbed. Price forecasts are lifted by 10% for 2017 to a peak of US$2200/t. That said, the broker remains cautious about forecasting too great a surge in the price, given weak demand prevails.

China dominates the zinc market, comprising half the global demand. Credit Suisse argues that zinc, unlike other base metals, is more closely related to steel through galvanising. Therefore, the broker forecasts no growth in zinc demand in China. One of the many issue that has affected zinc demand is falling vehicle production in China, while the pull back in infrastructure construction is also likely to be negative for zinc.

Deutsche Bank's bull case on zinc has taken a battering over the last three months. The broker acknowledges a strong US dollar and fears over Chinese demand produced a build-up of short positions on the London Metal Exchange. Glencore's mine closures are likely to squeeze out these positions, the broker believes, and produce a deficit in 2016 of around 500,000t. Deutsche Bank expects the zinc price will recover to average US$2,275/t next year.

Lead production is estimated to fall by 100,000t per annum at Glencore's mines. Lead price upgrades are muted, with Credit Suisse expecting US$1800/t out to 2018. The effect of Glencore's curtailments is expected to be far more subdued when it comes to lead as around 50% of supply is recycled metal and production changes have a lesser impact. Lead's significant market - lead acid batteries - has a poor outlook in China, Credit Suisse maintains.

Weakness in construction may restrict demand for back-up power systems while vehicle production is at its lowest for this time of the year since 2012. Growing lead exports from China are expected too, as the country redirects its focus to consumption from manufacturing. China's refined lead output is expected to surge 7.0% in 2016 to meet demand in the rest of the world.

Nickel

The price of nickel has fallen to its lower level since March 2009, with subdued stainless steel demand and product de-stocking as well as a global excess of inventory. Morgan Stanley observes none of these features show any signs of improving before year end.

The broker cites Wood Mackenzie data which suggests around half of the global industry is exposed to losses. Despite this, it appears no substantial mine closures have been reported, with only four mines announcing supply reductions totaling 9,000tpa.

One of the factors behind the stickiness of supply in the past decade is the growth of pressure acid leach operations. Morgan Stanley observes this type of operation is highly capital intensive but can process low grade laterite ore at lower operating costs. Such assets are unlikely to be cut from the market, unless the price of nickel remains at low levels for some time, as the maintenance/re-start costs of these facilities are prohibitively high.

While much of the fall in the price has been blamed on de-stocking at mills in China, a renewed re-stocking could trigger a rebound in the nickel price early next year, the broker suspects.

Oil

Deutsche Bank believes the oil market is in tension between gradually lower expectations for US supply, uncertainty over Iranian volumes and lower forecasts regarding demand growth in 2016. The re-balancing process is expected to be lengthy, with potential for moves to the downside. The broker believes the exploitation of US tight oil reservoirs is the primary driver of the current low price environment, saturating world demand growth on its own count over 2009-11.

Meanwhile, OPEC (Organisation of Petroleum Exporting Countries) is playing pivotal role in the extent and duration of the decline since 2014. Deutsche Bank expects no action from OPEC and the recovery in prices will depend on a relative slower response from non-OPEC supply and global consumer demand.

Morgan Stanley also does not expect any major action from OPEC and a selection of non-OPEC producers after this week's meeting in Vienna. This is a rare gathering but, at best, the broker expects a reaffirmation of a desire for free and equitable guidance in terms of a pricing band will likely be announced. In Morgan Stanley's view such guidance would merely be a statement of the well-known fact - oil exporting nations need more stable and higher prices than the market is currently providing.

Production agreements are inherently ineffective if competing suppliers are growing. Supply cuts simply subsidise other producers that would likely ramp up output as prices recovered. The broker notes Russia and Mexico have repeatedly insisted they cannot cut production because of the age of their fields and limits on technology. This emphasises the problem with the OPEC cartel today, Morgan Stanley contends. It only controls 40% of the oil market.

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article 3 months old

The Overnight Report: Neither Here Nor There

By Greg Peel

The Dow closed up 14 points or 0.1% while the S&P was flat at 2033 and the Nasdaq rose 0.4%.

Fizzer

Absolute edge of the chair, heart in the mouth, hide behind the sofa stuff. No, I’m not referring to China’s GDP result yesterday. While I waited for that announcement I was watching my recording of the Scotland game, having managed to avoid hearing the result. I was transported back to Lansdowne Road, 1991. Back then we went on to win the cup.

The Chinese GDP result, on the other hand, was so benign one might almost be tempted to believe it was scripted. The government is targeting 7.0%, economists had forecast 6.8% in the September quarter, and the result came in at 6.9%. What does one do with that number?

No one knows, it seems. Yesterday the ASX200 rose 20-odd points from the open, as the futures had suggested, before meandering aimlessly through to lunchtime and Beijing’s announcement. When the result was known, the index similarly meandered aimlessly through to the close.

Sector results were mixed, and the only notable moves were a 1.1% fall for materials, for which a lower iron ore price had already provided impetus, and a 2.4% fall for telcos. Suddenly Telstra is looking very unloved.

The 6.9% number is probably the Goldilocks result. It’s not bad enough to send markets into a tailspin but not good enough to prevent Beijing from implementing further stimulus measures. Meanwhile, the accompanying data for the month of September was also mixed.

Chinese retail sales grew 10.9% year on year in September, up from 10.8% in August, beating forecasts of 10.8%. Industrial production grew 5.7%, down from 6.1%, and missing 6.0% forecasts. Fixed asset investment grew 10.3% year to date, down from 10.9%, missing forecasts of 10.8%.

Beijing is attempting to transition the Chinese economy away from reliance on heavy industry production and towards domestic consumption. While the above production and investment numbers are disappointing, the better sales result suggests things are at least moving in the right direction. But of course the likes of BHP are not going to be ecstatic to learn the Chinese are buying more iPhones.

With the results providing no great incentive to buy or sell, we’ll now just have to wait to see what Beijing’s response will be. The numbers similarly sent European and US markets into a torpor last night. And this morning the local index futures have closed unchanged.

Commodities

To find any notable response to the Chinese data we have to go to the commodities markets. Here the response was negative, although not dramatically so. If we suggest that the GDP result was better than expected, then the monthly industrial production and fixed asset investment numbers were likely the cause of commodity market angst.

On the LME, all base metal prices fell roughly one to one and a half percent.

Iron ore fell US10c to US$52.50/t.

West Texas crude fell US$1.16 to US$46.06/bbl and Brent fell US1.69 to US$48.75/bbl. While these are reasonable falls, they only take prices back to the lower end of the ranges they have been trading in for some months now. Indeed, it’s amazing how much our local energy index has been flying around of late when WTI has not broken 45-50 since July.

The US dollar index is up 0.3% at 94.95, which also would not have helped commodities. Gold is down US$6.30 to US$1170.00/oz.

The Aussie initially shot up on what was a forecast-beating Chinese GDP, but fell thereafter and is 0.5% lower at US$0.7246 over 24 hours.

Stagnant

Commodity prices falls had their impact on Wall Street last night, but the major indices balanced out for an overall flat result.

On the earnings front, Morgan Stanley posted the biggest miss of all the major banks and its shares dropped 5%.

On the data front, the US housing sentiment index rose to 64 from 61 in August to mark its highest level in ten years. While Wall Street is encouraged by the news, it is also somewhat perplexed. Housing starts are still growing steadily but at much slower pace now than they were two years ago. Why the jubilation?

While there are plenty of data releases yet to follow this week, the data-watching game has rather now lost its excitement given expectations of a Fed rate rise have waned. It would probably require a huge surge in October jobs to spark up interest once more.

That leaves US earnings results to watch, and there are plenty more of those to come in the next couple of weeks.

Today

As noted, the SPI Overnight is unchanged.

The minutes of the October RBA meeting will be released today. We’ve nevertheless had two significant developments since that meeting was held. Firstly, a second consecutive US jobs shocker took a 2015 Fed rate rise off the table for most. Secondly, Westpac has increased its mortgage rates and the other banks are expected soon to follow. Both developments shift the dial more towards the possibility of an RBA rate cut.

On the subject of banks, this morning the Turnbull government will issue its official response to last year’s Financial Systems Inquiry. News services are a-buzz this morning, breathlessly reporting that Turnbull is “going after the big banks” and warning viewers they may have to pay more for their mortgages.

The reality is, of course, that the banks have already largely adjusted for what the FSI recommended, through capital raisings, risk weight adjustments and mortgage repricing. Tightened APRA regulations have also pre-empted likely new rules. So unless the government decides to legislate to a degree far more onerous than David Murray has recommended, there should be no real surprises.

Cochlear ((COH)) will hold an AGM today. Newcrest Mining ((NCM)) and Oil Search ((OSH)) will post quarterly production reports.
 

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article 3 months old

The Monday Report

By Greg Peel

Poised

The ASX200 shot up on Friday morning on the opening rotation, peaking at 10.30am when that process is completed. A solid rally on Wall Street, driven largely by general acceptance that the Fed will not be raising this year, provided the impetus as the index rose 64 points.

But that was the top for the day, and in true Friday style the index spent the rest of the session drifting back to a less dramatic rise of 38 points. Looming large in investors’ minds heading into the weekend was today’s release of China September quarter GDP, and also the possibility Beijing may pre-empt with a monetary policy announcement this weekend ahead of that release, given last week’s weak data, particularly the inflation result.

No announcement has been forthcoming, so we await the midday release of the number economist consensus has at 6.8%.

There was nothing particularly remarkable about Friday’s trade on Bridge Street. The banks provided most of the upside on a cap basis with a 1.1% gain, with utilities and consumer discretionary backing up. It was an up-day for energy but materials proved the only laggard, closing slightly weaker on another fall in the iron ore price.

The RBA released its six-monthly Financial Stability Review on Friday, which also proved unremarkable. The central bank remains concerned over property markets – seeing risks growing in commercial lending but noting that macro-prudential controls are having their intended effect on housing – and noting that Australia’s banks are facing “heightened, but manageable risk” in a number of sectors.

Confused

The most oft heard word on Wall Street at present is “confused”, with Credit Suisse even putting out a research note suggesting investors are presently more confused than they’ve ever been.

The greatest source of confusion is of course the Fed, and here we find Janet Yellen still beating the 2015 rate rise drum, the rest of the Fedheads offering diametrically opposed opinions, and the market now shifting its highest probability to March next year from January previously. The other issue is China, where monetary policy is also a source of confusion. Will Beijing pull another renminbi devaluation rabbit out of the hat?

Once upon a time stock markets traded on fundamentals. Wall Street closed the week on a positive note on Friday, with the Dow rising 74 points or 0.4%, the S&P up 0.5% to 2033 and the Nasdaq up 0.3%. It was the third straight week of net gains.

None of which has much to do with fundamentals, it would seem, given US economic data have been weak and US corporate earnings reports have not set the world on fire either. There was good news on the data front on Friday, with Michigan Uni’s fortnightly measure of consumer sentiment rising to 92.1 from 87.2 previously, but September industrial production fell 0.2%, as expected. General Electric (Dow) posted an earnings beat which saw its shares rise 3.4%, but the three sector leaders for the week of gains were utilities, healthcare and telecoms. Therein lies the tale – no rate rise.

It was also the quietest week on Wall Street in volatility terms since July. One would be forgiven for not realising there is an earnings season in progress.

Commodities

It was another mixed and largely uneventful night on the LME on Friday night ahead of today’s major Chinese data releases. Copper and zinc fell 1%, lead rose 1% and the others did not much bother the scorer.

Iron ore fell US60c to US$52.60/t to be down 5.2% for the week.

The oils were also down around 5% for the week. Friday night nevertheless saw West Texas rise US36c to US$47.22/bbl and Brent rise US71c to US$50.44/bbl. OPEC announced it would hold a “technical meeting” next week, ahead of its scheduled December meeting where production quotas are typically set. This gave oil markets some hope maybe production cuts are back on the cards, despite OPEC spokespeople strongly suggesting otherwise.

Gold fell US$6.60 to US$1176.30/oz as the US dollar index rose 0.3% to 94.71. Despite last week being the week in which Wall Street decided there would be no 2015 rate rise, the dollar is back where it was when the week began. The balance is largely the euro, given the ECB has been hinting at extended QE and holds a policy meeting this week.

The Aussie dropped 0.7% to Saturday morning, to US$0.7279, probably as traders square up ahead of the Chinese data.

The SPI Overnight closed up 22 points or 0.4%.

The Week Ahead

Beijing will release China’s September quarter GDP number today along with month of September industrial production, retail sales and fixed asset investment numbers. On Friday Caixin will release a flash estimate of October manufacturing PMI.

As we are not trading in fundamentals, the response to China’s GDP will be interesting. Were the result to match or beat Beijing’s 2015 target of 7.0%, the market may start to doubt baked-in expectations of further stimulus being forthcoming at any moment. That would be potentially negative.

Were the result to match consensus expectations of 6.8%, the popular media will have paroxysms and the headlines will scream Weakest Chinese Growth Since The Boxer Revolution or some such, but the response may actually be positive on the same bad-news-is-good-news basis.

Beyond China, the US will see housing sentiment tonight, housing starts tomorrow, house prices on Thursday, along with existing home sales, the Chicago national activity index and the Conference Board leading index, and a flash manufacturing PMI on Friday.

Japan and the eurozone will also flash on Friday.

The ECB will hold a policy meeting on Thursday night. With a 2015 Fed rate rise off the table, at least as far as the market is concerned, will Mario Draghi see extended QE as more pressing?

And ditto, will the RBA now see greater reason to consider a Cup Day rate cut? The minutes of the October meeting are out tomorrow, but that meeting was held before Westpac announced increased mortgage rates that led the market to assume (a) the other banks will quickly follow and (b) this opens the door further for a rate cut, given the impact on the housing market.

The only other local data release of note this week is NAB’s September quarter summary of business confidence.

It’s a busy week on the local stock front nonetheless.

The AGM floodgates begin to open this week, with highlights including Cochlear ((COH)) tomorrow, Amcor ((AMC)), Insurance Australia Group ((IAG)) and Medibank Private ((MPL)) and Origin Energy ((ORG)) on Wednesday and Qantas ((QAN)) on Friday, just to name a few.

On top of the AGMs we have ongoing quarterly production reports, and this week sees Newcrest Mining ((NCM)) and Oil Search ((OSH)) tomorrow, BHP Billiton ((BHP)) on Wednesday, South32 ((S32)) on Thursday and Santos ((STO)) and OZ Minerals ((OZL)) on Friday.

But wait, there’s more. Wesfarmers ((WES)) will release its quarterly sales numbers on Thursday and ResMed ((RMD)) quarterly earnings on Friday.

Could be an eventful week.

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

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: Bull Market Resumes?

By Greg Peel

The Dow closed up 217 points (back above 17,000) or 1.3% while the S&P rose 1.5% to 2023 and the Nasdaq jumped 1.8%.

Flash Boys

Yesterday’s intraday chart of the ASX200 is an interesting one. At 11am the index was up only by single figure points and at 12.30pm it was up by only single figure points. But at 11.38am it was up 40 points. What happened in between? The ABS released the September jobs numbers.

Ahead of the release, the ASX200 suddenly took off, then retreated, then took off again. At 11.30am the ABS announced a 0.1ppt fall in the unemployment rate to 6.2% and the index shot up to its high. But the drop in unemployment was due to a rise in participation, and September saw a net reduction in jobs when economists had expected an increase. Down we came in a hurry, back to where it all began.

At that point the call went out: If you flash boys are finished having your fun then perhaps you’ll now let the grown-ups take over the session.

The index then rallied in a steady trend to a close of up 32 points. The high frequency traders were left to mull over their algorithms.

In Wednesday’s session we saw the release of weak Chinese inflation data, which yet again confirmed fears of a slowing China. Energy – the market’s current plaything – was carted. On Wednesday night oil prices closed little changed. Yesterday the energy sector rallied 1.7%, outstripped only by materials, which saw 1.8%. Next best was consumer discretionary, on 1.1%. Notwithstanding the broad spectrum of businesses that fall under the “industrials” banner, these three sectors have the clearest connections with China.  

Yesterday’s rally, we may assume therefore, which defied a fall on Wall Street, is all about expectations of fresh Chinese monetary stimulus. Maybe as early as this weekend.

And we’re still playing the technical trade. Wednesday closed just under what is now solid support at 5200. This is now a springboard for buyers.

Lower for Longer

As the period 2009-2014 attests, the greatest beneficiary of low, or zero, or even effectively negative (QE) interest rates, are asset prices – property and equities. Not business investment, as is the intention. The S&P500 bottomed out, famously, at 666 intraday at the depth of the GFC and thanks to Fed QE, which finally “tapered” off last year, 2015 saw a high of 2134.

All through 2015 the discussion has been whether or not the first Fed rate rise will cause a major sell-off. Well we had the sell-off, and not the rate rise. And now Wall Street has come to the conclusion that there simply will not be a rate rise in 2015, and maybe not even early in 2016. October is famously “the month for bottoms”, and November-December typically brings us the famed “Santa Rally”. Certainly this has been the case over the past, QE-driven six years.

Last night saw September CPI data released in the US. The headline CPI fell 0.2%, mostly due to another dip in oil prices. The annual headline rate is zero. The core (ex food & energy) CPI rose 0.2% for an annual rate of 1.9%, basically where it’s been sitting for the past few months. Wages grew a paltry 0.1% despite a US unemployment rate of only 5.1%. Annual wage growth is tracking at a modest 2.2%.

In other data, both the Empire State and Philadelphia Fed activity indices saw improvement for the month, but both remain in contraction.

These weak data releases follow on from Wednesday night’s sombre retail sales result, soggy Fed Beige Book and a profit warning from retail leviathan Wal-Mart. On Wednesday night Wall Street sold off on the realisation the US economy is not picking up pace into the December quarter as previously expected. But last night that weakness completely reversed.

On Wednesday night shares in JP Morgan and Bank of America sold off. JPM posted an earnings miss and BofA’s result failed to inspire. Last night Citigroup posted a beat, but only because it didn’t have to fork out any more hefty fines and legal costs relating to the GFC. Goldman Sachs missed. So as one might expect, last night Wall Street piled into the financials sector, and it led the main indices higher.

Sorry? They also piled into heavily beaten-down biotechs, which is why the Nasdaq rallied strongly. It would appear that last night the Santa Rally began. It’s early days of course, but (a) everyone has been expecting a Santa Rally, so might as well get in early and (b), if anything’s going to fuel the Santa Rally, it would be a lower for longer Fed interest rate.

The US financials sector typically leads a bull market. Or looking at it another way, you can’t have a bull market without the financials sector being involved. Last night’s seemingly contrarian activity on Wall Street appears to have signalled the end of will they/won’t they Fed speculation. Perhaps the CPI was the one last piece of the puzzle needed. History shows that zero interest rates are positive for stock markets.

Commodities

And it’s a global phenomenon. The US dollar index bounced back 0.5% last night to 94.43 despite last night’s data hardly being encouraging, but it was more talk in Europe of further ECB stimulus that dragged down the euro and thus pushed up the greenback.

The balance of a higher dollar and stimulus talk left base metal prices mixed on the session in London, with aluminium’s 1% fall the standout amongst otherwise small moves in either direction.

Iron ore dropped US$1.10 to US$53.20/t.

The oils were gain relatively quiet. West Texas rose US23c to US$46.86/bbl and Brent, on the expiry of its November delivery contract, fell US44c to US$48.71/bbl.

Gold fell back US$4.10 to US$1182.90/oz.

The Aussie initially plunged on the local jobs data yesterday but has since rallied back and is actually up 0.4% at US$0.7333 over 24 hours despite the stronger greenback.

Today

The SPI Overnight closed up 40 points or 0.8%.

The RBA will publish a Financial Stability Review today. Tonight sees CPI data in Europe, and the US will see industrial production and consumer sentiment numbers.

Rio Tinto ((RIO)) will release its quarterly production report today.

Over the weekend, all eyes will be on Beijing. The Chinese government seems to favour Sunday policy announcements. If there is no announcement, there will be the potential for this early Santa Rally, if that’s what it is, to derail. We’ve seen at least one big Beijing disappointment sell-off earlier this year. Although Beijing did respond fairly promptly thereafter.
 

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article 3 months old

The Overnight Report: US Gloom Descends

By Greg Peel

The Dow closed down 157 points or 0.9% (to below 17,000) while the S&P lost 0.5% to 1994 and the Nasdaq fell 0.3%.

Beijing phone home

Australia’s energy sector has become particularly fickle of late, flying around on the slightest moves in overnight energy prices. The rally in WTI crude back to almost US$50/bbl last week had the big oil names on the fly as bargain hunters piled in, but this week hopes of a break to the upside for oil prices have evaporated.

Crude oil prices were weaker on Tuesday night so yesterday those big oil names were hammered, sending the energy sector down 3.3%. But this move proved to be very much a standout among the sectors.

The ASX200 fell around 40 points from the open yesterday and despite a couple of blips, was still around that level when Beijing released China’s September inflation data.

China’s headline CPI fell to an annual rate of 1.6% in the month, down from 2.0% in August. The PPI was down 5.9%, unchanged from the August annual rate, to mark the 43rd consecutive negative number and maintain a six-year low.

Of course in this upside-down economic world, this is good news. It is now assumed Beijing will be jolted into acting, and acting swiftly, with further monetary policy stimulus, most likely in the form of interest rate and/or reserve ratio requirement (RRR) cuts.

To that end, the ASX200 recovered through the afternoon to be down only 5 points at the close. Energy remained hammered, but materials fell only 0.4%, while consumer discretionary (+0.9%) and healthcare (+0.8%) provided a balance.

The banks were also very much in the spotlight following Westpac’s ((WBC)) announced capital raising and increase in floating mortgage rates. Westpac shares remained in a trading halt, thus were not factored into yesterday’s 0.2% gain for the financial sector. The points to note about Westpac’s announcements are firstly that the bank is the last of the Big Four to raise new capital, thus there is no further sector implication to consider, and secondly that Westpac’s rate hike will probably prompt its peers into following suit.

RBA?

Analysts were surprised when Westpac didn’t join in the capital raising rush last quarter when ANZ Bank and Commonwealth Bank announced in quick succession, with National Bank having raised previously. Perhaps the volatility at the time, which saw bank shares carted, encouraged the board to delay.

The potentially good news for the wider Australian economy is that in lifting mortgage rates, and assuming all will follow, the banks have relieved the RBA, to some extent, of the need to carefully balance monetary policy for the wider economy against the rampant Sydney-Melbourne housing boom. Across the board 20 basis point mortgage rate hikes leaves the door a lot more open for the central bank to deliver a 25 basis point cash rate cut, perhaps on its oft favoured date of Cup Day.

The housing boom is already showing signs of having topped out, particularly in the apartment segment, following stricter APRA regulations and supply rising ahead of population growth. Mortgage rate increase will go further towards taking the heat out.

Possibly hindering a decision by the RBA to rush into another rate cut, despite the drag of lower commodity prices, is the fact the Aussie has finally come down to a more realistic level, and the impact of that is yet to really be seen in the Australian economy. However, the news coming out of the US last night may offer the RBA sufficient grounds to take the cash rate down to a new historic low.

Retail Rout

US retails sales rose just 0.1% in September, it was revealed last night, following a flat August result. While meeting expectations, the number nevertheless remains disappointing. Take out the balance of strong auto sales and lower fuel prices, and sales were actually flat.

The fall in gasoline prices over the month saw the US PPI fall 0.5%, again in line with expectations. The core PPI, ex food & energy, fell 0.3%.

Just as Wall Street was absorbing these rather dour data, America’s biggest bricks & mortar retailer and employer, Wal-Mart, issued a profit warning which suggested earnings would be flat for the next three years. The company’s decision earlier in the year to raise wages for its enormous employee pool is the issue, along with impacts from the stronger US dollar.

Wal-Mart shares were subsequently slammed 10%, which is why the fall in the Dow last night was much greater than that of the S&P500. However, the Wal-Mart news sparked selling across all US bricks & mortar names, most likely because of selling in the leading related exchange traded fund.

If the above wasn’t enough to ensure a soggy session on Wall Street last night, later in the day the Fed Beige Book was released. The anecdotal assessment noted apparent slowing in three of the twelve Fed districts, with the remaining nine posting only “modest” or “moderate” growth. The report specifically pointed to the impact of the stronger US dollar as being behind this weaker assessment.

All up, last night’s economic news suggests the US economy is not going to grow as strongly in 2015 as had been hoped earlier in the year, particularly after the strong June quarter rebound from the weather-bound March quarter. The US economy is consumer-led, and consumers are not coming to the party.

Fed rate rise in 2015? Forget it. At least, that’s what most commentators are now suggesting, while the Fed itself is appearing to be more and more fractured in its views, frustrating Wall Street and adding to uncertainty. This would explain why last night’s bad news was indeed taken as bad news, when otherwise further confirmation of a 2015 rate rise being off the table could be seen as bullish for the stock market.

The US bond market certainly doesn’t expect a rate rise. Last night the ten-year yield fell 7 basis points to 1.98%. And that US dollar that has been causing all the trouble took a beating last night, with the dollar index falling 0.8% to 93.97.

Commodities

The weaker greenback and heightened expectations of further Chinese stimulus were enough to spark some buying of base metals last night. Tin lead the charge with a 2.6% gain while copper and lead rose 1%, with the others posting smaller gains.

Iron ore nevertheless fell US60c to US$54.30/t.

The oils were almost unchanged last night, which we haven’t seen for a while, no doubt balancing underlying weakness against the impact of the lower US dollar. West Texas is at US46.63/bbl and Brent is at US$49.15/bbl.

The big winner on the night was gold which, on the dollar crunch, rose US$19.00 to US$1187.00/oz.

The loser, we might say in a reverse sense, was the Aussie, which having fallen sharply after the release of the weak Chinese trade data earlier this week has jumped 0.7% to US$7303.

If the US dollar is now set to lose its rate rise expectation premium and force the Aussie higher, the chances of a November RBA cut improve.

Today

On the balance of everything, the SPI Overnight closed down only one point.

It’s jobs day in Australia today, while tonight the US CPI will provide further fuel for the Fed speculation fire.

It’s a busy day on the local stock front today featuring several AGMs, including that of CSL ((CSL)), along with a raft of resource sector production reports. Fortescue Metals ((FMG)), Iluka Resources ((ILU)) and Woodside Petroleum ((WPL)) provide the highlights.

Rudi will make his weekly appearance on Sky Business. Tune in midday-1pm for Lunch Money.
 

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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

Material Matters: Quarterly Resources Previews, Copper And Crude

-Higher Sep Q iron ore exports
-Longwall moves impact coal
-Pressure on energy stocks
-Soft copper demand, supply cuts
-US oil inventories in focus
 

By Eva Brocklehurst

Resources Previews

Alcoa has spearheaded the run of September quarter production reports, with the lack of a distribution from the AWAC joint venture for Alumina Ltd ((AWC)) the main surprise to brokers, although they also noted this is likely to be more an issue of timing.

UBS suspects longwall moves may mean coal production is below expectations for Whitehaven Coal ((WHC)) and South32 (S32)). The broker expects nickel names such as Western Areas ((WSA)), Mincor Resources ((MCR)) and Panoramic Resources ((PAN)) to be focused on preserving cash, having all recently cut high cost production or expenditure.

The broker highlights Independence Group ((IGO)) as potentially providing more detail on the Nova acquisiton and production intensions. OZ Minerals ((OZL)) is forecast to deliver another strong quarter as it integrates its two underground mines. UBS expects further output volatility will be revealed at Newcrest Mining ((NCM)) while another key gold stock, Evolution Mining ((EVN)), has already reported strong quarterly production.

Uranium miner Paladin Energy ((PDN)) has already guided to weak sales in the quarter because of timing, but UBS believes confirmation of this could still surprise the market.

Iron Ore Previews

UBS is looking for a continued lift in iron ore exports in the September quarter which should support Rio Tinto ((RIO)), following the lifting of capacity at Pilbara. Port Hedland statistics show further quarterly growth, which the broker attributes to BHP Billiton ((BHP)) sweating its assets hard while Fortescue Metals ((FMG)) has maintained its 165mtpa run rate.

Goldman Sachs agrees the prime focus will be on Pilbara volumes for Rio Tinto while Fortescue's quarterly report will all be about costs. The company has guided to US$18/t for FY16. Arrium ((ARI)) is expected to update on progress from restructuring and how it intends to achieve a new lower FY16 break-even price of US$47/dmt.

Energy Previews

UBS expects Woodside Petroleum's ((WPL)) LNG price will decline by up to 11% in the September quarter versus June, whereas pricing for Oil Search ((OSH)) and Santos ((STO)) could increase by up to 12%. Woodside should be boosted by a full quarter's output from Pluto LNG, partly offset by lower oil and LNG pricing. Oil Search is expected to sustain marginally lower production with the key variable being PNG LNG.

Lower oil prices and a flattening of the forward curve hit Santos the hardest in the September quarter but its recovery at the start of October was nothing short of spectacular, UBS observes. The broker believes mergers and acquisitions will remain key themes in the sector following Woodside's approach to Oil Search. Executive changes were also a surprising theme in the quarter with moves afoot at Santos, Beach Energy ((BPT)), Drillsearch ((DLS)) and AWE ((AWE)).

UBS suspects Drillsearch and Beach Energy could beat estimates if the Bauer field continues to outperform. The broker's key picks in the sector depend on investor risk appetites. UBS envisages most potential upside in Santos among large caps if it can avoid selling assets. Among the smaller caps the broker prefers Drillsearch for its M&A potential and Cooper oil stocks for upside surprise.

Copper

Deutsche Bank is cautious regarding the outlook for copper over the next two years. There is too much mined supply after the expansions over the last 12-18 months. Demand growth is also anticipated to be lower over the next five years as Chinese infrastructure investment slows.

Still, some of the issues which confronted the market recently should dissipate. The broker expects a pause in the rise of the US dollar and a firmer oil price. The Chinese property market is also expected to recover and there should be some extra spending on the grid. Cuts to copper supply driven by price also continue.

Deutsche Bank anticipates a short-term rally, within the context of a bear market, although a hard landing in China remains a key risk. The recovery in industrial production in that country is yet to convince the broker.

Deutsche Bank expects an average price of US$4,650/t in 2016 for copper with a low of US$4,300/t in the fourth quarter of that year. A modest surplus is expected in 2016, but only on the basis of some assumptions. These are the implementation of price related reductions from Glencore, Freeport McMoRan and Grupo Mexico, a bounce in global demand and continued disruptions to production to the extent of 5.3% of the market.

Crude

The most important development in oil markets is that the US oil-directed rig count has reached a new low for the year, Deutsche Bank maintains. This signals that US crude oil production forecasts for 2016 are likely to be on a downward trend in coming months.

Given the slowdown in activity and difficulty of financing investment in fields, as well as the high probability that any rallies in the December quarter are limited, Deutsche Bank suspect there is unlikely to be a substantial rise in US drilling activity any time soon.

When an increase in activity does come, the broker expects it will be gradual, in contrast to the sharp rebound seen back in 2010. The downside for US production volume, in the broker's opinion, is offset by the risk that OPEC fails to accommodate higher Iranian exports mid 2016.

The situation bears watching, in the view of ANZ Bank analysts. US crude oil stocks are expected to fall below 400m barrels by the end of 2016. The analysts upgrade 2016 estimates for West Texas Intermediate by an average of 10% to reflect a quicker run down in inventories.

The level of US inventories is important for the spread between WTI and Brent, which fluctuated in line with the US stock-to-use ratio for a decade before the GFC and supply disruptions pushed Brent into a premium. The analysts suspect US oil prices this time next year could be much higher than they are now and a tighter inventory scenario could mean Brent trades at parity or at a discount to WTI.

One of the reasons to account for the persistent discount in WTI since 2010 is that US crude does not have an open export outlet. The analysts assume there will be no change to the US export regime in the next year. Excess capacity, namely in Saudi Arabia, has allowed OPEC to more than recover the losses from disrupted parties such as Libya and Iraq. The oil cartel's decision not to cut output in 2014 has meant production has risen to a near-record high in recent months, the analysts contend.

Hence, they argue, the next supply shock is likely to be one that increases the global supply of oil rather than reduces it and, if other OPEC countries do not decrease production to accommodate Iran, this will put downward pressure on Brent.
 

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