By Greg Peel

The Dow closed down 8 points while the S&P lost 0.2% to 2048 and the Nasdaq fell 0.1%.

Contrast

What a difference a weekend makes. On Friday local investors steadily pushed the ASX200 up 0.5% to the close in a mostly straight line, with all sectors faring relatively equally. The session smacked of index buying. Yesterday, in stark contrast, was a rock’n’roll affair.

The index opened slightly higher before promptly falling 54 points to late morning. It then rallied to be back in the positive by 2pm before falling away again to the close, down 32 points. For the most part, the sector moves up on Friday were all largely reversed.

The exceptions were telcos, which held their ground, and energy, which dropped 2.0%. Analysts are quite happy with Oil Search’s ((OSH)) complex bid for InterOil but investors sold the stock down 3%. Individual company issues which were absent on Friday were back in force yesterday. Beyond Oil Search, we had a profit warning from Flight Centre ((FLT)), the fourth most shorted stock on the market, which fell 9%, and a profit upgrade from BlueScope Steel ((BSL)), which jumped 7%.

On Friday the focus appeared to be on the potential for ever lower rates from the RBA, despite a reasonable economy, and the benefits that might bring. Yesterday investors appeared concerned about commodity prices once again, as oil fails to push through 50 and iron ore futures took a tumble yesterday afternoon. Spot iron ore fell 5% overnight.

With macro fundamentals a difficult beast to grasp at present, the market seems unsure just what it should be doing. The bounce off the low yesterday before a rally back to square occurred when the index hit the 5300 mark, suggesting technical buying. With Wall Street flat overnight and equally unsure of direction, we may well be stuck in a range now for a while, notwithstanding any left of field developments.

June Looms

Brexit risk is increasingly on everyone’s minds. At this stage the polls favour the “stay” vote winning on June 23 but not by any clear margin. Given the referendum is not compulsory, “stay” supporters are concerned it benefits those with a more nationalist bent who may make a point of voting while the status quo-types may not be so committed. Whatever the case, it is as yet too close to call.

The Fed releases its June policy statement one week earlier. Wall Street generally believes the FOMC would not be inclined to cause potential turmoil with a rate hike if a week later a whole new round of turmoil manifests. If a rate hike is otherwise on the cards, it may come down to what the polls are saying as we get closer to the event.

Either way, Wall Street has swung from not expecting a rate hike until at least December to suddenly having to contemplate a hike as early as next month, with potentially more to follow. Yet not a helluva lot has changed in the interim. Wall Street is confused, and cautious.

Janet Yellen will speak on Friday night. It’s a full week away, but already in last night’s session talk is of the market not wanting to do anything bold until Yellen has her say. Recent Fedspeak has been decidedly hawkish but Yellen has a track record of appearing far more dovish than her voting members, seemingly always being the one to pour cold water on rate hike expectations.

We note also that the June Fed meeting is a quarterly, meaning updated economic forecasts and a press conference with the Chair. Often it is the conference and accompanying Q&A that sends markets off in a new direction, rather than the policy statement itself.

Commodities

West Texas crude rolled over into the July delivery front month last night and in so doing, closed the gap on Brent to a negligible amount. WTI is down US30c at US$48.11/bbl and Brent is down US50c at US$48.37. Hard to believe that spread was once US$27, although prices were a lot higher then.

The US dollar index is again steady at 95.24 and thus having no impact on commodity prices. LME traders remain just as cautious as everyone else and devoid of direction. Last night aluminium rose 1% while lead and zinc fell 1% and nickel fell 2%.

Iron ore fell US$3.00 to US$52.70/t.

Gold is down US$3.70 at US$1248.20/oz.

The Aussie is also steady, at US$0.7224.

Today

The SPI Overnight closed down one point.

As central bankers continue to dominate the markets they were once upon a time silent witnesses to, Glenn Stevens will speak today and take a Q&A.

Technology One ((TNE)) will issue an earnings result.

Rudi will Skype-link with Sky Business to discuss broker calls at 11.15am.
 

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By Greg Peel

The Dow closed down 91 points or 0.5% while the S&P lost 0.45 to 2040 and the Nasdaq fell 0.6%.

Jobs Conundrum

Having held their ground on Wednesday, while other sectors responded to the prospect of a Fed rate hike, yesterday the resources sectors gave way. It was nothing about commodity prices on the day, it was about where commodity prices might end up if the US dollar rises on Fed tightening. The offset of the weaker Aussie made no difference, it would seem.

These sectors have run very hard these past couple of months on the commodity price rebound, so it looks like profits are being taken. Materials fell 2.6% yesterday and energy 2.0%, to provide the bulk of market weakness.

Yield sectors – telcos, utilities and supermarkets – continued to be sold, while the banks, healthcare and consumer discretionary all moved little on the session. Yesterday’s jobs numbers showed an unchanged unemployment rate, and appeared to have no exogenous effect on the market.

The jobs data showed an increase of 10,800 in April, roughly in line with expectations. But the aggregate represents a 20,200 rise in part-time jobs and a 9,300 fall in full-time jobs. This has been the trend in recent months.

The March quarter wage price index, released earlier in the week, revealed the weakest wages growth in decades. Dragging on wages growth is hours worked, which fell 1.1% in April to be down 0.5% year on year – the first negative number since May 2013. The fall in hours worked can be explained by the ongoing rise in part-time work and loss of full-time work.

Overall jobs growth over the past four months has averaged only 6,500, Commonwealth Bank’s economists note, which should be sufficient to send the unemployment rate higher on the balance of population growth. But the unemployment rate, steady at 5.7% in April, has been held down by a falling participation rate – fewer people looking for work.

“Digging below the surface shows that today’s employment report is softer than the headline numbers imply,” says CBA.

We might recall this from the RBA’s April policy statement:

“Over the period ahead, new information should allow the Board to assess the outlook for inflation and whether the improvement in labour market conditions evident last year is continuing.”

The outlook for inflation weakened, hence the RBA cut in May. The May statement suggested “Labour market indicators have been more mixed of late”. The subsequent April data look even more mixed. Cleary yesterday’s jobs number only serves to strengthen the case for another RBA rate cut.

Would the RBA go again as early as June? Unlikely. The Fed meets later in June and presumably the RBA would prefer to wait to see if it can score a rate cut by default if the Fed chooses to hike. Mind you, the Aussie, which is holding steady at US$0.7227, has already priced in a second RBA cut.

More Fedspeak

As long as the US economy continues to perform to the expectations of New York Fed president William Dudley, then “I think a tightening in the summer, the June, July timeframe is a reasonable expectation,” Dudley said last night. The Dow subsequently fell another 200 points.

The Dow managed to claw back a hundred points over the course of the afternoon but the theme remains the same – all of a sudden the Fed rate hike no one was expecting in June is now a possibility. Not a strong possibility, despite Fedhead jawboning – the market is currently pricing in a 26% chance – but a possibility nevertheless.

It is assumed, however, that if the Fed does not end up hiking in June or July, the purpose of recent more hawkish commentary and insistence June is “live” is more about making sure markets prepare for when there is a rate hike, maybe later in the year, and not be caught out by one, prompting undue volatility.

After a string of very poor earnings results from US major chain stores, the tide has turned a little as the earnings season draws to a close. Good results were posted last night by a couple of specialist apparel chains, and Wal-Mart surprised and enjoyed a 9% rally, which went a long way to buffering the Dow.

It is more likely, nonetheless, that this is a response to a result that was not as bad as had been feared following earlier shockers from major chains, which had investors dumping Wal-Mart in the lead-up.

A close of 2040 on the S&P500 last night means a breach of the 2043 level, which is technically significant for the simple reason it is the “flat on year” point. Traders have been suggesting a breach of this level could set in trend to a more pronounced down-move.

Commodities

A report suggesting a solid rise in US oil demand last week helped keep prices supported last night. West Texas crude is up US36c at US$48.24/bbl and Brent is up US32c at US$48.86/bbl.

The US dollar index is slightly higher over the period, up 0.1% at 95.30.

Given the LME was closing just as the Fed minutes were released the night before, last night’s price action is more indicative of a response. Aluminium fell 0.5%, copper, lead and nickel 1% and tin and zinc 1.5%.

Iron ore fell US20c to US$55.70/t.

Gold is down US$3.30 at US$1254.70/oz.

Today

The SPI Overnight closed down 6 points.

The shares of the big miners were weak again in London last night, but it’s a case of who is following who.

Woodside Petroleum ((WPL)) holds its AGM today.

It is Rudi's intention to link up with Sky Business through Skype this morning but election coverage might throw a spanner. If the plan goes ahead he should appear around 11.05am.
 

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By Greg Peel

The Dow closed down 3 points while the S&P closed flat at 2047 and the Nasdaq rose 0.5%.

Will They, Won’t They?

While the Australian market is presently not dutifully following Wall Street around, given a widening disparity between the industries that primarily drive each market, US central bank policy is very much a factor Australian investors need to pay heed to. Interest rates connect the world.

On Monday night the Dow fell close to 200 points following stronger than expected US inflation data and Fedspeak reaffirming that the June Fed meeting is “live” and that a rate hike cannot be ruled out. However the US bond market shrugged off the possibility and remained unmoved, as did the US dollar and gold. Last night was a very different story, but we’ll get to that in a minute.

Yesterday the ASX200 plunged 48 points on the open, came back to almost square at lunchtime. It was a battle, it would seem, between those believing a Fed rate hike is possible and those who don’t. Or perhaps between those who think a Fed rate hike is a problem for the Australian market and those who see any dip as a buying opportunity. Or both.

But to further complicate the matter, the morning saw the release of the Australian March quarter wage index data. At 2.1% annualised, the quarter saw the weakest growth on record for the series. This suggests both low inflation and less consumer spending power. And reinforces the potential for another RBA rate cut.

But if the Fed hikes in June, would the RBA hold off? How will it all balance out?

As confusion reigned, the ASX200 fell again in the afternoon, closing down 39. Sector moves suggested yesterday was all about interest rates, and their flow-on effects.

The resource sectors stood aside, balanced by stronger commodity prices. A stronger US dollar weighs on commodity prices but a weaker Aussie dollar improves earnings, so there is some trade-off either way.

Consumer staples fell 1.2% and discretionary 1.5%. Low wages are not promising for retailers, and a Fed hike might prevent another RBA cut.

The banks fell 0.8%. Low wages are not promising for mortgage demand and if the RBA does not cut, demand will not be boosted. Bank yields are less attractive if US rates rise and/or Australian rates don’t fall.

The telcos fell 0.9% and utilities 0.7%. The yield story is the same here.

Healthcare only fell 0.1%. The sector derives a lot of income from offshore, and thus benefits from a weaker Aussie. Industrials fell 1.1%. This sector offers a mixed bag of winners and losers.

The Aussie has fallen over a cent over 24 hours to US$0.7227. Yesterday’s local wage data encouraged further weakness in the currency, albeit it has already fallen quite a way from its recent highs, but last night’s Fed minutes stuck the knife in.

Backflip

When the FOMC released its policy statement following its meeting in April, the tone was dovish. Wall Street reduced expectations of a June rate cut to near zero. This was reinforced by the April US jobs numbers, which were to the low side.

Last night the minutes of that meeting were released, and suggested the FOMC statement on the day was somewhat misleading. This might explain why Fedheads have recently been out and about talking up the possibility of a June rate hike. The Fed is worried markets are not prepared.

The minutes suggested the FOMC is no longer concerned about the global volatility factor, as markets have now recovered from their panic earlier in the year and settled down again. That just leaves US data. While recent data have not been all that strong, the question is whether they are weak enough to justify near-zero interest rates. On a trend basis, the US labour market remains positive, If the CPI data are anything to go by, inflation is heading the right direction.

These are the Fed’s two mandated policy drivers.

The bottom line is, the minutes basically suggested the Fed is not waiting to be given a reason to hike in June, it is waiting for any reason not to hike. Not only is June very much “live”, Wall Street now sees a June hike as very much a possibility.

Having fallen 180 points on Monday night on this very possibility, last night the Dow had rallied back a hundred points ahead of the 2pm release of the minutes. A two hundred point fall ensued on the release, followed by a one hundred point recovery.

Wall Street finished square. Arguably, June rate hike potential has been priced in the night before. But the night before, the US bond market, currency and gold markets had shrugged off the possibility.

Last night the US ten-year yield jumped 12 basis points to 1.88%. The US dollar index jumped 0.7% to 95.20. Gold fell US$20.80 to US$1258.00/oz. Now all the markets are aligned.

The only possible barrier to a June rate hike, assuming no US economic shocks occur between now and June 15, is the Brexit vote. It doesn’t occur until June 23, and some believe the Fed is more likely to hold off until the July meeting in case a Yes vote sparks fresh global turmoil. Recent polls suggest the No vote appears to be gaining traction, nonetheless.

Commodities

For commodities, it was all about the jump in the US dollar that a Fed rate hike implies. Gold’s move has been noted.

West Texas crude is down US71c at US$47.88/bbl and Brent is down US94c at US$48.54/bbl.

The LME was shutting its doors just as the minutes were released so there may yet be a more pronounced reaction tonight, but all metals closed slightly lower bar aluminium, which rose 0.8%.

Iron ore never pays much attention to outside influences. It’s up US20c at US$55.90.

Today

The SPI Overnight closed down 4 points. While this reflects the flat close on Wall Street, we might also suggest, a la Wall Street, that the local market adjusted yesterday to heightened Fed rate hike possibility.

With regard the Aussie, it might be a whole new ball game this morning when the Australian jobs numbers are released for April. Presumably the market has now become quite short.

Apologies to readers who have been stuffed around by the FNArena calendar suggesting James Hardie ((JHX)) was to report on Tuesday, or on Wednesday. Short of contacting a few hundred companies over the course of a year, we rely on broker calendars, which often clash.

Note also that companies are not legally obliged to advise on a reporting date, or even stick to it if they have.

James Hardie reports today.

Rudi will make his weekly guest appearance on Sky Business today, 12.30-2.30pm and then return for an interview on Switzer TV between 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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By Greg Peel

The Dow closed down 180 points or 1.0% while the S&P fell 0.9% to 2047 and the Nasdaq lost 1.3%.

Up to the Minute

“Members discussed the merits of adjusting policy at this meeting or awaiting further information before acting. On balance, members were persuaded that prospects for sustainable growth in the economy, with inflation returning to target over time, would be improved by easing monetary policy at this meeting.”

This conclusion contained in the minutes of the RBA’s May meeting, released yesterday, caused the Aussie to shoot up from under 73 to around 73.6 in a blink. While economists have been climbing over themselves since the release of the May monthly statement and quarterly SOMP to forecast more and more rate cuts, this paragraph from the minutes suggests May’s cut was not actually a lay-down misere.

Members were persuaded.

They had to be persuaded because “developments over recent months had not led to a material change in the outlook for economic activity or the unemployment rate”. It was just an issue of low inflation. There may have been some lingering concern over further fuelling the housing bubble with a rate cut, but thanks to new restrictions, “potential risks of lowering interest rates therefore were less than they had been a year earlier”.

To sum up, the RBA cut in May because it could, not because it should. It was not an absolute call based on domestic drivers. It was a relative call based on global drivers. Low inflation is being imported. Whether or not we do get another cut in August, and continue down to 1.00% as some economists are now forecasting, will depend, I suggest, entirely on the Fed.

For if the Fed raises in June, or at least some time this year, the ECB, the BoJ, and other central banks around the globe including the RBA, will be handed a rate cut by default. A rate cut that does not require increased debt or a further foray into the parallel universe of negative rates.

The local stock market stumbled slightly late morning yesterday when the RBA minutes first hit the wires, but only briefly, before the index closed on its highs. But there was a very, very scary development in the afternoon. An RBA board member fronted the press and spoke.

Please, please Australia, do not let us go down the much derided Fedspeak path! That way be dragons.

The Aussie has since come back to US$0.7326, up 0.5% over 24 hours. The board member hinted there was room for another cut.

Between the minutes and the RBA-head, we’ve really learned nothing more than we knew from the May statement and SOMP. Thus the ASX200 was able to achieve what it started out to achieve yesterday, posting a rally entirely driven by the oil price. The energy sector closed up 3%.

We then drop down to materials with a 1.9% rally, given BHP crosses sectors, before otherwise noting counter-rallies in the defensives of consumer staples and telcos, each up 1.1%. No other sector much moved, although we should note the banks were strong by default given two major ex-divs.

The ASX200 didn’t quite make it to 5400, and if the SPI Overnight’s 27 point drop is anything to go by, won’t make it there today.

Speaking of Fed rate hikes…

Today we go down

The WTI price kicked on another 1.5% last night, but energy was the only sector on Wall Street to finish in the green.

The US April CPI numbers showed a 0.4% rise at the headline, up from 0.1% in March and representing the biggest jump since January 2013. On that note, the Dow fell 200 points.

June is back on the table.

The potential for a June rate hike was enhanced by, you guessed it, Fedspeak. The Atlanta and San Francisco Fed presidents last night both said the decision hinges on the data. Lockhart of Atlanta went one step further and suggested June “certainly could be a meeting at which action could be taken”.

Let’s look at some realities: (1) The core CPI rose only 0.2%, having risen 0.1% in March; the headline jump was all about the oil price rebound; (2) the Fed prefers the PCE measure of inflation to the CPI; (3) the Fed has been banging the “data dependent” drum for months and months; and (4) Fedheads have to suggest a meeting is “live”, otherwise what’s the point of holding one?

On that last point, we note the Bank of England is seriously considering cutting its meetings back to every two months, rather than every month.

We might also note that despite the supposed enhanced risk of a June rate hike, the US ten-year yield hasn’t moved, nor has the US dollar index, and gold is actually stronger.

The minutes of the Fed’s April meeting are out tonight, so look forward to some further volatility. The last three Wall Street sessions have seen the Dow down 200 (or thereabouts), up 200 and down 200 again.

Commodities

West Texas crude is up US70c at US$48.59/bbl. Brent is up US34c at US$49.48/bbl.

It was a mixed and relatively inconsequential session on the LME, with aluminium down 0.5% and lead down 1.5%, while nickel and tin rose 0.5%.

The US dollar index is flat at 94.55 despite the CPI scare, which would have helped keep a lid on things.

Iron ore jumped US$1.90 to US$55.70/t.

Gold is up US$4.80 at US$1278.80/oz.

Today

The SPI Overnight closed down 29 points or 0.5%.

The local market is not following Wall Street at present. Oil is up again and iron ore is up 3.5%. If we are down 29 points today, it would more likely be as a result of technical consolidation near this 5400 level. Unless Fed rate hike fear sends yield stocks down the gurgler.

As noted, the Fed minutes are out tonight.

Before that, the local March quarter wage price index releases kicks off the countdown to Australia’s GDP result.

A few AGMs will be held today, including those of Coca-Cola Amatil ((CCL)) and Iluka Resources ((ILU)). ResMed ((RMD)) goes ex.

Rudi will be hosting Your Money, Your Call Equities on Sky Business tonight, 8-9.30pm.
 

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By Greg Peel

The Dow closed up 17 points or 1.0% while the S&P gained 1.0% to 2066 and the Nasdaq rose 1.2%.

Healthy

The futures had suggested down 15 points yesterday morning but it didn’t take the ASX200 long to ignore this call and head higher. Much was made of disappointing Chinese data before trading commenced but on a disappointment scale, they weren’t really up there.

The local market is becoming increasingly inured to big moves on Wall Street, particularly since ups and downs of 200 Dow points have become de rigeur. Unless the moves relate specifically to something that impacts on the Australian market, such as oil prices, or it’s all part of general global macro fear/exhilaration, there’s not enough correlation between Bridge Street and Wall Street on any given day to suggest one must always be determined by the other.

The big story on the local market yesterday was the government’s agreement to do something about above-market rents being paid by pathology collection centres, as a trade-off against last year’s cuts to bulk billing incentive payments. Health Cares Primary ((PRY)) and Sonic ((SHL)) both jumped 5% yesterday as a result, sending the healthcare sector up a market-leading 2.0%.

Next best was materials with a 0.8% gain, in the face of the Chinese data, and a 0.6% rise in the banks would have had the biggest index clout. Elsewhere, some renewed support for supermarkets and more buying in telcos offset a fall in energy.

The ASX200 is sitting right in the middle of that 5300-400 range and it has to be said, still gives the impression of wanting to go up. While we’ve had a couple of stumbles on the way, it’s been a while since we’ve had one of those big one percent plus wash-out sessions that were quite frequent earlier in the year.

Hope I’m not speaking too soon, albeit the futures closed up 47 points overnight so we may yet have another shot at 5400 today, assuming the profit-takers don’t get toey.

Tonight’s mass media headlines will suggest there was a rally in stocks “despite selling in the banks”. That’s because both NAB and Macquarie go ex today, so be warned.

Nine Reasons to buy Apple

Celebrated iThing maker Apple is one of those stocks that’s simply too big for its own good. I’m assuming after last night’s 3.7% share price gain Apple is back to being the biggest company in America by market cap, having briefly seceded to the artist formerly known as Google. When you’re that big your every little move shifts market cap weightings exponentially and forces index trackers to react, exacerbating ups and downs. The herd follows blindly.

Apple is a stock everyone though they must own, until it was declared ex-growth, and everyone bailed out again. Never mind the barrow-loads of cash the company continues to generate every day. In the recent sell-off, Apple’s PE ratio fell to a low of nine times. That makes the company look more like an iron miner than what has arguably become more of a consumer staple. This wasn’t lost on Warren Buffet, who last night revealed he’d bought over a billion dollars’ worth of Apple shares.

So there’s the bulk of your 175 point Dow rally overnight. Apple, of course, bears no relevance to the Australian market so we’d need something else to justify a 47 point jump in the SPI overnight.

Enter Goldman Sachs. The investment bank was obviously feeling the pain on its short oil position – Goldman has been bearish oil – so decided to square up and try the long side instead. Last night Goldman issued a note suggesting that on a balance of strong demand and sharp declines in production, the oil market had shifted from “nearing saturation to being in deficit much earlier than we expected”.

Goldman now expects WTI to average US$45 in the June quarter and US$50 in the second half of 2016, up from US$35 and US$45 respectively. WTI subsequently jumped 3.3% last night.

Meanwhile the Empire State activity index dropped to minus 9.0 from plus 9.6 last month, completely confounding forecasts of plus 5.8. While this might be good for those not wanting a Fed rate hike, I seem to recall April rebounding very sharply from a weak March. In other words, activity in the New York Fed region either surges one month and collapses the next in a cycle, or this series is increasingly misleading.

Commodities

West Texas crude is up US$1.51 or 3.3% at US$47.89/bbl. Brent is up US$1.34 or 2.8% at US$49.14/bbl.

LME traders had their first opportunity to respond to the “disappointing” Chinese data last night, and subsequently sold down base metals from the bell. But the selling didn’t last long, and helped by a benign greenback, which is flat over 24 hours, and the jump in oil prices, base metal prices recovered to post a positive session.

Copper and nickel rose 0.5%, aluminium and tin 1%, and lead 2%.

Iron ore rose US30c to US$53.80/t.

With the dollar index steady at 94.58, gold is steady at US$1274.00/oz.

With commodity prices stronger, the Aussie is up 0.3% at US$0.7290.

Today

The SPI Overnight closed up 47 points or 0.9%.

The US will see inflation, housing and industrial production data tonight.

Before that, the RBA will release the minutes of its May meeting and forex cowboys will have their fingers on the trigger in case there’s any hint of a back to back cut.

DuluxGroup ((DLX)) and Ozforex ((OFX)) will release interim earnings today and James Hardie ((JHX)) will release quarterly earnings either today or tomorrow, depending on which broker you believe.

As noted, National Bank ((NAB)) and Macquarie Group ((MQG)) will go ex-dividend today which will appear to take a sizeable chunk out of both the financial sector and the index on the session.

Rudi will Skype-link with Sky Business around 11.15am to discuss broker calls and later tonight he'll participate in a webinar organised by VFSGroup: https://vfsgroup.com.au/seminars/

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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