Tag Archives: Bonds/Interest Rates

article 3 months old

The Overnight Report: Oil Gets Real

By Greg Peel

The Dow closed up 53 points or 0.3% while the S&P gained 0.4% to 1929 and the Nasdaq rose 0.9%.

Four Horsemen

Typically when we see a one hundred point fall in the ASX200 on a session it is as the result of market-wide fear on a macro level and selling is widespread across the sectors. All the ducks line up, with maybe the defensive sectors not faring quite as badly.

Yesterday’s hundred point fall was very different – it only occurred in four of ten sectors. Six sectors saw negligible moves by comparison.

There was one macro influence – the PBoC again devalued the renminbi. But otherwise the drivers were sector-based at the global level or individual stock-based at the micro level. Wall Street provided a weak lead as the oil price fell back from its artificial expiry day rally and major US bank JP Morgan admitted it was having a dreadful March quarter. We therefore saw the local energy sector down 3.4%, albeit such moves are becoming rather commonplace, both down and up, and we saw the banks down 2.5%. The latter provided the bulk of the 2.1% index drop.

Otherwise, it appeared a lot of BHP Billiton ((BHP)) investors, no doubt including those offshore, took a day to think about whether owning a stock offering little growth and exposure to ongoing commodity price volatility, but now paying only three-quarters of its previous dividend, is worth owning. An 8% shellacking – the worst day for BHP since 2008 -- provided the answer. The materials sectors closed down 3.6%.

And finally, investors in Wesfarmers ((WES)) were hit with the stark reality that when you invest in Coles, you get coal. On the release of the company’s earnings result that stock fell 5%, and the consumer staples sector closed down 3.4%.

Info tech fell 1.8% but is tiny by market cap, and beyond that a 0.4% drop for healthcare was as bad as it got.

It’s another very big day for results season today.

Comeback

The Saudi oil minister’s admission that there’s no sense in seeking OPEC production cuts was still ringing in the ears of oil traders last night as they sent the WTI price down 4% from the open. The US stock markets dutifully followed suit, and in the first half hour the Dow was down 266 points.

But then the weekly US inventory data were released. The week’s crude inventory build proved to be only half of that previously assumed. Importantly, crude production fell over the week. To date crude production has been growing even as the rig count falls as desperate marginal producers try to squeeze out as much cash as possible in a vain hope to stave off the inevitable. And gasoline inventories fell, suggesting there may finally be some sign of demand growth thanks to lower prices.

It was enough to turn the oil price around and send it into the green by the close. Maybe oil futures traders, and Wall Street traders in general, will finally now realise that listening to OPEC and Russian rhetoric is a fool’s errand that is only serving to inflate volatility. If the oil price is ever to rise, the basis for that rise must begin in the US.

On that note, the first ever LNG cargo to leave mainland USA is about to set sail to Brazil. America’s fledgling LNG exporters also have Europe and Asia in the sights.

As oil turned, so did the US stock markets, all the way back to a 50 point gain for the Dow.

Somewhere in the background were a couple of disturbing US economic data releases. Sales of new homes plunged in January to their lowest level since October. A flash estimate of the February service sector PMI suggested a collapse into contraction territory for the first time since the US government shutdown of 2013. The US service sector far outweighs the manufacturing sector.

Of course, we are still in “bad news is good news” mode, so any weak data only serve to stave off the next Fed rate hike.

Commodities

West Texas crude is up US37c at US$32.18/bbl, while Brent is up US$1.21 at US$34.46/bbl.

Inventory data helped aluminium and zinc to 2% gains on the LME last night while the other metals trod water.

Iron ore fell US30c to US$50.20/t.

The US dollar index is steady at 97.48 but gold is up US$5.30 at US$1229.00/oz.

The Aussie is steady at US$0.7210.

Today

The SPI Overnight closed up 31 points or 0.6%.

On the back of yesterday’s weak local December quarter wage growth numbers, today sees all-important private sector capex.

Today’s earnings calendar includes high-flyers Blackmores ((BKL)) and Seek ((SEK)) along with Perpetual ((PPT)), Ramsay Health Care ((RHC)) and South32 ((S32)).

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

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available in the FNArena Cockpit.  Click here. (Subscribers can access prices in the Cockpit.)

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author's and not by association FNArena's - see disclaimer on the website)

All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.

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article 3 months old

The Monday Report

By Greg Peel

Friday

After another volatile week which saw the ASX200 rebound back towards to 5000 mark, Friday’s trade had a very “Friday” feel about it. We opened lower on a weaker Wall Street and oil prices, stalled over lunch, and then fell away further in the afternoon.

The sectors that led the late fall were those which had posted strong gains during the week – energy, materials, financials and consumer discretionary. In other words, it looked a lot like traders squaring up ahead of the weekend. Telstra continued to fall in the wake of a somewhat disappointing earnings report, while other sector moves were mixed up and down.

The Australian market has been largely following the global trend over the month to date but there have been some significant individual stock moves within that trend as well thanks to result season. We are now entering the final week of the month-long season but around half of the major stocks on the market choose the last week to report, so there is plenty of scope for some more alpha fun and games this week.

We will also see the first of the December quarter data releases this week that build us up to the GDP result next week.

Poised

Friday’s trade in New York was interesting in that the oil price fell 3% but the S&P500 closed flat, and ditto the January CPI showed its biggest jump since 2011 but the S&P500 closed flat.

It would appear the US markets are now coming to terms with the fact the oil price is weak and will remain so for the foreseeable future, and that any talk emanating from OPEC with regard production curtailments is just that – talk, being used as a tool to force a bounce back in oil prices just as they appear destined to drop to new lows.

Perhaps fearing their strategy will ultimately reach a “cry wolf” point of ineffectiveness, last week did see an actual figure being out on curtailments, but “only if everyone else does the same” and “we understand that Iran needs to catch up”, which basically means no curtailments.

Wall Street is braced for lower for longer oil prices and braced for the financial fallout that will follow as marginal US producers hit the wall. The big US banks are carrying minimal exposure to energy sector loans so there is no great panic on that front.

The US headline CPI for January came in at 0.0%, it was revealed on Friday night, when economists had expected a 0.1% decline. Low fuel prices and a bout of food deflation are keeping headline inflation in check. But the core (ex food & energy) CPI showed a 0.3% gain – the biggest move since August 2011. Headline CPI is up only 1.4% on an annual basis but core CPI is up 2.2%, which exceeds the Fed’s target rate.

So we’re back to talking March again for the next Fed rate hike. Or are we? Were that the case, we would have expected to see Wall Street sold off heavily on Friday night. But we didn’t. The Dow closed down 21 points or 0.1%, the S&P closed unmoved on 1917 and the Nasdaq rose 0.4%.

The bottom line is the Fed does not pay a lot of attention to inflation as measured by the consumer price index. The FOMC’s preferred measure of inflation is the personal consumption & expenditure (PCE) measure, the January result of which is due this Friday. The PCE has been running behind the CPI and has yet to return to the Fed’s target of 2%.

Meanwhile, the Nasdaq also went some way to balancing out the equation on Wall Street on Friday. The new world tech names and biotech names that clutter up the Nasdaq are the “momentum” stocks of the market, often trading on astronomical PEs or no PE given no E. They are bought up in a scramble when the mood is positive and then amongst the first to be jettisoned when the mood turns sour. As we were crashing earlier in the month, the Nasdaq was “outperforming” to the downside and on the rebound, has been outperforming to the upside.

Having crashed to oversold levels earlier in the month and now posted a rebound representing the fastest move up in years, Wall Street is poised, both technically and fundamentally. What will happen next? Well, there are a lot of US data releases this week and right through next week, when the February jobs number is due.

Commodities

West Texas crude fell US89c to US$29.84/bbl on Friday night and Brent fell US89c to US$33.26/bbl.

It was a positive night on the LME but traders are not reading too much into it, noting volumes remain low. Many Chinese participants create a two week annual holiday around the week-long New Year shutdown so this week is expected to see a return to more normal activity. Aluminium, nickel and zinc all rose 2% on Friday.

Iron ore rose another US50c on Friday to US$47.00/t. Through all the turmoil experienced in the local materials sector recently, an 8% rebound in iron ore has almost gone unnoticed. Probably because no one can quite figure out why.

Gold is very much in the headlines of the popular press at the moment, so be warned. If your cab driver tells you he’s just bought a gold bar, sell! Gold fell US$8.80 on Friday night to US$1236.20/oz.

The fall came despite weakness in the US dollar index, down 0.3% at 96.66.

We have subsequently seen significant weakness in the pound this morning following the weekend’s announcement the British will go to the polls in June to provide an opinion on whether the UK should exit the EU. An exit is not favoured in financial and commercial circles given the myriad trading agreements and relationships that have been established over the past 40 years.

The Aussie continues to consolidate and is sitting at US$0.7147 this morning, while being a percent up against the GBP.

The SPI Overnight closed down one point on Saturday morning.

The Week Ahead

The highlights of this week’s local data will be December quarter readings on wage prices and construction work on Wednesday and private sector capital expenditure on Thursday, ahead of Wednesday week’s GDP result.

The US will see the Chicago Fed national activity index tonight, the Richmond Fed index, the Conference Board’s monthly consumer confidence measure, existing home sales and Case-Shiller house prices tomorrow, and new home sales on Wednesday. Thursday it’s durable goods and FHFA house prices, and Friday brings personal income & spending (including the aforementioned PCE), Michigan Uni fortnightly consumer sentiment, trade numbers, and a second revision of December quarter GDP.

On the latter front, the market is expecting a revision down to 0.5% growth from the previous 0.7% estimate.

The US will also see flash estimates of February manufacturing and services PMIs tonight and Wednesday, and Japan and the eurozone will also provide flash estimates of manufacturing PMIs today.

As noted, the final and most crowded week of the local results season is upon us. Special mention can be made of the much anticipated BHP Billiton ((BHP)) result due tomorrow, but thereafter please refer to the FNArena calendar for listings.

No one will be paying much attention to BHP’s profit result, just its dividend policy.

Rudi will appear on Sky Business on Wednesday between 8-9.30pm to host Your Money, Your Call Equities and on Thursday 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: Take A Breath

By Greg Peel

The Dow closed down 40 points or 0.3% while the S&P lost 0.5% to 1917 as the Nasdaq fell 1.0%.

All is Forgiven

The best day on Bridge Street so far this year had several drivers. Primarily, we opened higher on strength overnight on Wall Street which was a lot to do with strength in the oil price, which also affects our market directly.

Extreme volatility continued in the energy sector yesterday, which finished up 5.3%. In three days energy has been up 4%, down 4%, and up 5%. Not sure where that’s getting us but one thing is certain – there will be no output reduction stemming from OPEC or anyone else by virtue of agreement.

The materials sector just seems to fall into lockstep with energy now as if the oil price is the global indicator. Iron ore took its first dip in a while and base metal prices were mixed overnight but materials was up 3.8%, mostly because investors cannot overcome the mindset of buying the market means buying BHP.

The next driver yesterday was a solid result from wealth manager AMP ((AMP)), the shares of which rose 10%. Buying the market also means buying the banks, but the financials sector has not been anywhere near as volatile as the resource sectors over February. AMP is part of financials and the banks count among major wealth managers so that sector was up 2.3% yesterday and represented a big chunk of the ASX200’s 2.3% gain.

Then we had the January unemployment numbers. We must recall that the minutes of the last RBA meeting, released on Tuesday, included a new statement, “Over the period ahead, new information would enable the Board to assess whether the recent improvement in labour market conditions was continuing,” implying the RBA was not sufficiently convinced the strong jobs numbers to date looked accurate in the face of weak GDP growth.

Well yesterday we saw the unemployment rate tick back up to 6.0%. Such bad news is wonderful news as it supposedly suggests the RBA will now be more inclined to deliver a rate cut.

It’s all just statistical noise of course, and by the ABS’ own admission, the increase represents the make-up of the different sample set surveyed in January as compared to December. Smoothing out the numbers over time, we find the unemployment trend rate fell to 5.8% in January from 5.9%. But don’t tell that to investors who piled into the consumer discretionary sector yesterday (+2.6%), or to traders who sold the Aussie (down 0.3% to US$0.7156).

So we had a strong lead from Wall Street, a big jump in the oil price, some positive earnings results and well-received weak economic data all conspiring yesterday to drive the ASX200 back towards – you guessed it – 5000. We only fell a handful of points short.

Not all earnings results were positive yesterday. A weak report from new kid on the block Estia Health ((EHE)) put the frighteners through the high-flying aged care space and ensured the healthcare sector did not participate in yesterday’s buy-fest.

When I returned from my summer break late in January my first remark was “well here we are, back at 5000”. In that case, we’d had to come down from where we were in December. And now I can say it again. Here we are back at 5000, this time having rallied back from oversold levels. Through all the carnage, we’ve gone nowhere.

Pause

It’s not surprising that after three consecutive up-days in excess of 1%, Wall Street should take a breath last night. Basically the US market went very quiet, outside a bit of micro influence. Dow dinosaurs IBM and Wal-Mart traded profit guidance upgrade/downgrades but largely cancelled each other out.

St Louis Fed president James Bullard suggested it would be “unwise” to further raise rates in the current conditions, but by now Wall Street has baked in an expectation there will not be a March hike.

Oil prices had pushed higher from the open last night but they came back to earth following comments from the Saudi foreign minister, who in the context of supposed attempts to agree to a production level freeze among OPEC and non-OPEC members, insisted that Saudi Arabia had no intention of actually cutting production.

Why the market pays attention to this stuff is anyone’s guess but the comments were enough to bring oil prices back down to where they started the day.

Outside of a solid weekly new jobless claims number last night, US economic data releases were weak. The Philly Fed index posted its sixth consecutive month of contraction and the Conference Board’s leading economic indicators measure came in negative for the second month running, which has not happened for some time.

It’s all good news of course, vis a vis Fed policy.

Commodities

James Bullard’s comment was at least enough to spark the gold bugs into action again. Gold is up US$25.60 at US$1236.20/oz despite the US dollar index being up 0.1% at 96.93.

West Texas crude is up US14c at US$30.73/bbl and Brent is down US18c at US$34.15/bbl.

Base metals were little moved last night but for an inventory-related 2% jump for zinc.

After one session’s dip, iron ore is back in the green with a US70c gain to US$46.50/t.

Today

The SPI Overnight closed down 22 points or 0.4%.

US inflation data is out tonight, to add more fuel to the Fed rate debate fire.

The local earnings season rolls on in earnest with another big day today and more than half of all companies reporting across next week.

Today’s highlights include Fairfax Media ((FXJ)), James Hardie ((JHX)), Medibank Private ((MPL)) and Santos ((STO)).
 

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available in the FNArena Cockpit.  Click here. (Subscribers can access prices in the Cockpit.)

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author's and not by association FNArena's - see disclaimer on the website)

All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.

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article 3 months old

Australian Corporate Bond Price Tables

PDF file attached.

Corporate bonds offer an alternative to equity investment in providing a fixed “coupon”, or interest payment, unlike equities which pay (or not) non-fixed dividend payments, and a maturity date, unlike equities which are open-ended.

Listed corporate bonds can be traded just as listed shares can be traded. Bonds bought at issue and held to maturity do not offer capital appreciation as an equity can, but assuming no default do not offer downside capital risk either. Pricing is based on market perception of default risk, or “credit risk”, throughout the life of the bond.

Bonds do offer capital risk/reward if traded on the secondary market within the bounds of issue and maturity. Coupon rates are fixed but bond prices fluctuate on perceived changes in credit risk and on changes in prevailing market interest rates.

Note that the attached tables offer three “yield” figures for each issue, being “coupon”, “yield” and “running yield”.

If a bond is purchased at $100 face value and a 5% coupon, and face value is returned at maturity, the running yield is 5% and the yield, or “yield to maturity” is 5%.

If a bond is purchased in the secondary market at greater than $100, the running yield, which is the per annum yield for each year the bond is held, is less than 5% because the coupon is paid on face value. The yield to maturity is also less than the coupon as more than $100 is paid to receive $100 back at maturity.

If a bond is purchased in the secondary market at less than $100, the running yield, which is the per annum yield for each year the bond is held, is more than 5% because the coupon is paid on face value. The yield to maturity is also more than the coupon as less than $100 is paid to receive $100 back at maturity.

Note that if a bond is trading on the secondary market at a price greater than face value the implication is the market believes the bond is less risky than at issue, and if at a lesser price it has become more risky. Bonds trading on yields substantially higher than their coupons thus do not offer a bargain per se, just a higher risk/reward investment. In all cases, bond supply and demand balances will also impact on secondary pricing.

Note also that while most coupons are fixed, the attached table also provides prices for capital indexed bonds (CIB) and indexed annuity bonds (IAB).

This service is provided for informative purposes only. It is not, and should not be treated as, a solicitation or recommendation to buy corporate bonds. Investors should always consult their financial adviser before acting on any information gleaned from this service. FNArena does not guarantee the accuracy of information provided. Note that while FNArena publishes this table weekly, prices are fluid and potentially changing throughout each trading day. Hence prices tabled may not reflect actual market prices at the time of reading.

FNArena disclaimer

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article 3 months old

The Overnight Report: Three Day Reprieve

By Greg Peel

The Dow closed up 257 points or 1.6% while the S&P gained 1.7% to 1926 and the Nasdaq jumped 2.2%.

Stock Picking

The ASX200 was all over the shop yesterday, reflecting on the one hand indecision from a macro level as to where to go to next and on the other hand, mixed sector moves based on individual earnings reports.

The index opened down 40 points, was up 16 after lunch and closed down 27. There was very little consistency among sectors, with the consumer sectors, banks and industrials registering minimal change. The big downside move was in energy, which fell 4% having rallied 4% the day before. I’m not sure what Tuesday’s buyers of Woodside Petroleum ((WPL)) were looking for, given a “beat” on profit and, importantly, on dividend, sparked a 7% thumping yesterday.

Materials was down 1.5% in sympathy while healthcare (-1.3%) was also weak despite a 20% pop for one of the most shorted stocks in the market, Primary Health Care ((PRY)).

It was not a session from which one could derive any sense of market direction. It was the biggest day to date in the earnings season in terms of number of reporting companies but today will be one of the biggest all up, before the final and most crowded week of the season.

Triple Crown

The weekend’s energy market news was a supposed agreement between Saudi Arabia, Qatar, Venezuela and Russia to limit monthly oil production to January levels as long as other major oil producers followed suit. I noted that this was a clear finger point at Iran.

Last night’s news was that Qatar and Venezuela got together with Iraq and Iran in the hope of extending the agreement and the great news is that Iran is in full support of the idea. That is, as long as it does not include Iran.

The other OPEC members expressed sympathy for a country trying to emerge from years of sanctions. As to where Iraq stands on the matter is unclear, but I would assume Iraq’s stance would be “We will if Iran will”. So if Iran won’t, then presumably none of Saudi Arabia, Qatar, Venezuela, Russia and Iraq will either, as the deal had a caveat of “as long as the others do too”.

West Texas crude jumped another 5% last night.

No doubt the oil market is still very short, as this sort of news is hardly concrete. Maybe the oil market believes that while such a road is a long and difficult one, moves are being made in the right direction with regard global supply curtailment. But until the US joins in, there will be no real impact. And the US will never join in.

Oil market volatility has been the predominant driver of general market volatility in 2016, and this has worried the Fed. The US economy is not showing the signs of growth the FOMC expected it to show back in December. On that basis, the majority of FOMC members are in favour of waiting for more data indications before making another move on rates, as was evident in the minutes of the January policy meeting, released last night.

This implies no rate rise in March and thus a more dovish stance from the Fed, unless of course US economic data suddenly turn very positive in the next month. While last night’s measure of January industrial production showed a 0.1% gain when a 0.2% decline was expected, one swallow does not a summer make. And housing starts were down a worse than expected 3.8%.

So Fed dovishness, and another short-covering jump in the oil price, sent Wall Street rallying strongly form the third day in a row. It is the first time in 2016 the S&P500 has put together three consecutive up-days, and the first time since 2011 those up-day gains were each in excess of 1%.

The S&P bottomed out at 1810 support, broke through 1880 resistance and ploughed on to 1925 resistance, where it currently sits. Technically, a move through 1950 suggests a sustained rally. But just how much of the rally to date in stocks is also short covering? A lot, it is assumed. There is not a great deal of confidence on Wall Street that this week’s action is anything more than a blip in what is still a fundamentally weak market.

Something is needed beyond OPEC fantasies and Fed caution.

Commodities

West Texas crude is up US$1.50 or 5.2% at US$30.59/bbl and Brent is up US$2.06 or 6.4% at US$34.33/bbl.

Base metal trading remains directionless. LME traders are also looking for a sign. Last night saw copper and nickel up 1%, tin up 2%, but lead down 2%.

The iron ore price has finally taken a dip, down US30c to US$45.80/t.

The US dollar index was steady last night at 96.82 but gold clawed back US$7.50 of this week’s losses to US$1210.60/oz.

It looks like someone piled into the Aussie overnight and sparked some short-covering there as well. It’s up 1.1% at US$0.7182.

Today

The Dow was up a couple of hundred points on Tuesday night and yesterday morning the SPI Overnight was up 6 points. The Dow was up a couple of hundred points last night and this morning the SPI Overnight is up 66 points, or 1.4%.

Australia’s January unemployment numbers are due today. Beijing will release Chinese inflation data.

A very big day in the local earnings season includes reports from AMP ((AMP)), Origin Energy ((ORG)) and Telstra ((TLS)).
 

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available in the FNArena Cockpit.  Click here. (Subscribers can access prices in the Cockpit.)

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author's and not by association FNArena's - see disclaimer on the website)

All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.

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article 3 months old

The Overnight Report: Pull The Other One

By Greg Peel

The Dow closed up 222 points or 1.4% while the S&P gained 1.7% to 1895 and the Nasdaq jumped 2.3%.

Afternoon Delight

The local market appeared not particularly keen to go on with it from the open yesterday following Friday’s rally, with no lead from Wall Street possibly suggesting some caution. A stuttering morning session saw ups and downs before the ASX200 was down around 30 points at midday.

There began a very steady rally through the afternoon, culminating in what was an almost 20 point pop at 3.59pm to close us up 66. These last minute moves are becoming disturbingly frequent.

Sector-wise, the two big movers were again the resource sectors. Materials starred on Monday with energy riding shotgun but yesterday energy led the way with a 4.8% rally, followed by materials with 2.1%. These numbers look pretty big, but we must remember these sectors have fallen a long way this year and now only represent around 10% of market cap.

Which leaves the banks as the biggest market cap sector by a margin. They rallied 1.0% yesterday but had to account for CommBank going ex, while the other big market cap name – Telstra – stalled after two sessions of outage-related selling. Utilities, up only 0.2%, was the other sector not to really join in the fun yesterday afternoon.

Was the afternoon rally a result of the morning’s release of the minutes of the RBA’s February meeting?

Back in December the RBA considered the outlook to be sufficiently balanced to suggest the current cash rate is appropriate, while adding “that the outlook for inflation may afford some scope for a further easing of monetary policy should that be appropriate to lend support to demand”.

February’s minutes concluded with an identical paragraph but for the addition of one new sentence:

“Over the period ahead, new information would enable the Board to assess whether the recent improvement in labour market conditions was continuing and whether recent financial market turbulence presaged weaker global and domestic demand”.

It sounds like the board is beginning to wonder whether last year’s strength in employment can be maintained in 2016 and, in line with major central banks around the world, is worried about the markets. Market turbulence is enough to keep the Fed on hold and to prompt the ECB into reiterating it will do “whatever it takes”, and now it appears the RBA is singing from the same song sheet. If needs be, the RBA will cut again. It’s as simple as that. And that is enough to encourage stock market strength.

But we won’t think about what might have to happen to prompt the RBA into action.

Crying Wolf

The global rally either side of the weekend came full circle last night when Wall Street re-opened for business and kicked on with what began with Thursday’s late market turnaround. That turnaround commenced off the S&P500 technical support level of 1810 and traders suggested resistance would kick in at the technical level of 1880. Last night the S&P went through that level and subsequently pushed higher still.

Most notably, the US stock indices rallied despite a fall in the oil price. The stock market-oil correlation has otherwise been running at 98% this year. Indeed, the US energy sector rallied despite a fall in the oil price.

We recall that it was oil’s turnaround on Thursday which prompted the turnaround in the US stock indices. The WTI price had just hit a new low when, blow me down, the UAE oil minister announced OPEC was ready to talk production cuts. WTI rallied 12% -- not because anyone believed the minister, but because no one wanted to be caught short over the long weekend.

Scepticism turned to surprise last night when there was, indeed, an announcement about an agreement on supply curtailment having been reached between OPEC members Saudi Arabia, Qatar and Venezuela and non-OPEC Russia. Oil opened higher as a result. But then began falling back rather swiftly.

Firstly, the four nations have not agreed to cut production, merely to freeze production levels at January rates. Saudi Arabia, for one, posted record production in January. And what’s more, they will only do so if other major oil producing nations do the same.

This caveat clearly points the finger squarely at Iran. Good luck with that.

So WTI is down 2% on the session but Wall Street is nonplussed. The OPEC-Russia fun and games have worn thin, leaving investors to concentrate on the reality of global oil production cuts ultimately being achieved through sustained lower oil prices and subsequent defaults and bankruptcies amongst marginal US producers.  

This expectation implies the oil price has a definable bottom, and judging by moves in global energy sectors these past couple of sessions (US energy up last night despite lower oil, Australian energy up 4.8% yesterday), many believe that bottom is in.

Commodities

West Texas crude is down US62c at US$29.09/bbl and Brent is down US$1.07 to US$32.27/bbl.

London base metal traders are relieved the Chinese didn’t return from holiday and slam prices, but there is no great sense of optimism on the LME. Oil price moves are also making their presence felt in base metal prices but last night it was a mixed bag, with aluminium and nickel up over a percent and lead and zinc down over a percent.

Iron ore continues to push higher, up another US50c to US$46.10/t.

Goldman Sachs must have been caught short gold because the bank has put out a note to suggest clients should short gold for this recent rally is but a blip. Gold is down US$5.70 at US$1203.10/oz. To be fair to Goldman, they’re not Robinson Crusoe.

The US dollar index is relatively steady at 96.86 but the Aussie is down 0.6% at US$0.7101 thanks to the RBA.

Today

Futures traders are clearly sceptical of the local market putting in a third big rally today. The SPI Overnight closed up a mere 6 points.

Just as the RBA minutes were scrutinised by the market yesterday, tonight’s Fed minutes will be poured over.

And what does happen in the local market today could well come down to what is the biggest day on the earnings calendar to date in terms of volume of reports. And there are bigger days yet to come.

Today’s highlights include Coca-Cola Amatil ((CCL)), Domino’s Pizza ((DMP)), Insurance Australia Group ((IAG)), Lend Lease ((LLC)) and the Healthcare duo Primary ((PRY)) and Sonic ((SHL)). The biggest headline will nevertheless be saved for Woodside Petroleum ((WPL)).
 

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article 3 months old

The Overnight Report: Oversold Scramble

By Greg Peel

Wall Street was closed for a public holiday last night.

Rolling Thunder

Arguably it started in the European banking sector on Friday night. The announcement that Deutsche Bank would buy back its own bonds finally sparked a rebound in European bank stocks and sent European stock markets surging.

That surge continued into Wall Street, where US banks also rebounded in spectacular fashion, aided by an announced purchase of US$25m of shares of JP Morgan by the bank’s CEO.

At the same time, the oil price bounced up 12%. The trigger here was yet another suggestion from OPEC of possible production cuts. No one actually believes the suggestion, but given the long weekend in the US it was better to be safe than sorry. The Dow jumped 300 points.

As to whether market movements would have been less frantic were it not for the US long weekend, it doesn’t much matter. Bank shares across the globe have been hit hard, fuelled by weak profit results out of the European sector and exacerbated by negative rates being imposed on the Japanese sector. Resource stocks have been hit hard by falling oil and metals prices. For the banks in particular, calls of “oversold” have been loud. Not so loud have been the “oversold” calls in the commodities space, but then the carnage has been extreme.

In such circumstances, traders start looking for “the bottom”. And when they do, severe snap-back rallies, exacerbated by short-covering scrambles, often follow.

Yesterday Australia’s materials sector rallied 4.4%, for no particular reason other than it has been sold down a long way. At least the energy sector’s 3.1% jump can be explained by the oil price rebound. The banks managed a 1.6% gain, although in the global contest this was a pretty half-hearted effort. With the exception of telcos (-2.1%), all non-resource sectors rallied around the one percent mark.

Telstra ((TLS)) copped a beating thanks to its record-breaking “free data day”, offered as an apology for last week’s substantial outage.

Bad is Good?

Here’s a headline you will not often read:

Japan’s economy posted an annualised 1.4% contraction in the December quarter, it was announced yesterday. The Nikkei rallied 7%.

The GDP result was actually worse than forecasts of 1.2% contraction. But yesterday it didn’t matter. The Japanese stock market has been hammered since the BoJ moved to negative rates last week, which not only represents an impost on Japanese banks but also failed to provide any initial currency relief due to the crashing US dollar. Yesterday the Japanese stock market simply bounced back. Hard.

Also bouncing back hard was the renminbi.

Here’s another headline you won’t read every day:

Chinese exports fell 6.6% in January when a rise of 3.6% was forecast. Imports fell 14.4% when a rise of 1.8% was forecast. In response, the Chinese currency soared.

The world was already worried that the Chinese stock market might collapse again yesterday, given China has been on holiday in a week when global markets have gone to hell in a hand cart. The Shanghai index did close lower but only slightly, which realistically is just about as positive as a 7% gain for the Nikkei. The week also saw the US dollar tumbling, and hence the response in the renminbi was significant. Significant enough to wipe out the PBoC’s prior devaluation efforts.

Put those Chinese trade numbers in US dollar terms and exports fell 11.2% and imports 18.8%. These are very bad numbers. So bad, it would seem, that the Chinese market assumes the PBoC has no choice but to provide further stimulus.

The Australian stock market hovered for a while on the news out of Japan and China – the country’s two biggest trading partners – after having dipped back from an initial surge. But when nothing untoward happened, the buying resumed once more.

Europe picked up where it left off on Friday night, with major European stock markets rising another 2-3% overnight. There was some help from Mario Draghi who trotted out another one of his familiar “whatever it takes” speeches, but realistically Europe was already rallying well before Draghi spoke.

Commodities

I’ve been warning that the rally in the iron ore price running up to the Chinese New Year break should be treated cautiously, as there was always a possibility it would go straight back down again when China returned. Well, more fool me. Iron ore has jumped 5% or US$2.40 to US$45.60/t.

Never mind that steel prices continue to fall. Iron ore is one of the more beaten-down commodities so last night it bounced back.

As did the other most beaten-down of commodities – nickel, which jumped 6.7% on the LME. Why? Simply because it had been sold down so far, to 2003 levels. Copper rose 1.7% despite the Chinese data recording the first decline in copper imports since October. The other base metals were flat to slightly weaker.

Oil had its day in the sun on Friday, so in the absence of the US last night the oil markets were quiet. West Texas still managed to rise US72c to US$29.71/bbl in electronic trading, while Brent was steady at US$33.34/bbl.

The big moves in commodity prices overnight came in defiance of the US dollar index, which also reversed its recent trend in rising 0.9% to 96.79. Of course, something had to give. Joining the reversal theme, gold has fallen US$29.70 to US$1208.80/oz.

And following very weak Chinese date and a big jump in the greenback, the Aussie is up 0.5% at US$0.7141.

Funny old world.

Today

And that funny old world makes it very hard to be an investor at present. This is not a rational market. In the centre of the irrationality are the central banks, fighting it out to be the most effective in their market interference. Meanwhile, politicians across the globe just sit back and bicker.

The SPI Overnight closed up 27 points or 0.6%. The snap-back is not over yet, it would appear.

We are now deep into the local results season, and from here the micro stories will have to have some impact. Today’s slew of results includes that of CSL ((CSL)), while National Bank ((NAB)) will provide a quarterly update.

Note that Commonwealth Bank ((CBA)) goes ex today.
 

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article 3 months old

The Monday Report

By Greg Peel

Capitulation?

It was a very choppy session on the ASX on Friday, which is not typical of a Friday. The index plunged 60 points from the open but immediately found buyers, who pushed the ASX200 back to the 4800 mark which signals the supposed bear market threshold.

The rebound didn’t hold, and we were down again mid-morning, before another brave assault was mounted and 4800 was again hit at lunchtime.

But it wasn’t to be. The index closed almost back at its lows again in what appeared to be a level of capitulation ahead of the weekend.

The banks (-1.6%) were hardest hit, and the biggest influence on the index, reflecting general bank selling across the globe. There is genuine, if not misplaced, fear that the likes of a Deutsche Bank could go down and send ripples across the global banking world a la 2008.

Given Friday night’s action in the northern hemisphere, it will be interesting to see how the local banks fare today.

The consumer sectors were among the bigger losers on Friday, both down 1.3%, while a coin toss decided Friday was a day to sell, rather than buy utilities. Telcos found some support and energy, for once, played no part.

If there were speculative buyers in energy on Friday, they’ve done well.

Bank on it

It was mid-week when Deutsch Bank threw up the idea of buying back its bonds but it wasn’t till Friday night when the bank’s intentions were truly translated into a market response. There had been a brief interruption in what might have been an earlier bank rebound in Europe when French bank SocGen posted a shocker of a result.

But the European banks all surged back on Friday night to send the relevant stock indices surging as well. The London market is usually the less volatile of the big three but it closed up 3%, with Germany and France both notching 2.5% gains.

It is typical for such a mood to carry across the pond but just to fan the flames, news came through that JP Morgan CEO Jamie Dimon had bought US$25m worth of the bank’s shares with his own money. The Dow component jumped 12% on the session and the US banking sector as a whole enjoyed a spectacular rebound.

Square-Up

Markets are closed in the US tonight for the Presidents’ Day holiday, and typically Wall Street traders are not inclined to want to take vulnerable positions home over a three-day break. The weekend, and tonight, bring with it potential for any sort of market-moving development.

So there was some surprise when traders piled into the US banks on Friday night. There may have been an element of short-covering, but banks aren’t usually popular stocks to short. On the other hand, oil futures are a very popular short trade.

On Thursday night West Texas crude hit a new thirteen-year low and threatened to drop through US$26/bbl. Then lo and behold, an OPEC oil minister chimes in with fresh talk of possible production cuts. It was also at that point, would you believe it, the S&P500 was threatening to breach important technical support at 1810.

Wall Street turned on a dime. Interestingly, the oil price stopped falling but didn’t post much of a rebound, unlike the US stock markets. But while every trader and his dog laughed off the UAE minister’s timing as being more than coincidental, no one wanted to carry heavy oil shorts through the long weekend. Just in case.

So on Friday night, WTI jumped 12%. Traders suggest the bulk of the rally can be put down to short-covering, but there were also some genuine bottom-pickers in there too. The oil price eased back a bit in electronic trade after Wall Street had closed but the move over the session, combined with the rebound in the banks, was enough to send the market as a whole on a flyer.

Wall Street broke a five-day losing streak in style as the Dow bounced 313 points or 2.0%, the S&P jumped 2.0% to 1864 and the Nasdaq rallied 1.7%.

The US ten-year bond yield, which had fallen like a stone all week to be as low as 1.53% at one point, jumped 10 basis points to 1.75%

The US dollar index rebounded 0.5% in the session to 95.96, sparking some profit-taking in high-flying gold. It fell US$9.80 to US$1238.50/oz.

Friday night basically saw a sharp reversal of everything that was going on all week. The question is: How much of that reversal can simply be put down to the fact the US is closed tonight?

Strong endorsements from the Deutsche Bank board and from the JP Morgan CEO corroborate a widespread call that bank selling across the globe has been overdone. No one, on the other hand, is willing to believe the veracity of any OPEC supply reduction talk. But there’s also the technical aspect. A bounce off 1810 for the S&P500 suggests a double-bottom has been established, and that can be a bullish sign.

Commodities

The late easing back in Friday night’s oil price rally meant that in the 24 hours from Friday morning to Saturday morning, West Texas crude gained US$2.16 or 8% to US$28.99/bbl and Brent gained US$2.08 or 7% to US$32.76/bbl.

Base metals had had a tough week but joined in the reversal trade to some extent on Friday night, ahead of the return of China today. Beaten-down nickel managed a 2% rebound while aluminium and copper both rose 1%, with tin and zinc missing out.

The Chinese were buying up iron ore ahead of the New Year break and it would appear the market is worried this will be followed up by selling as Chinese traders return today. Iron ore fell US$1.30 to US$43.20/t.

Gold has been noted above.

Despite wild fluctuations all week in the US dollar index, the Aussie has completely stalled. It is again steady at US$0.7103, reflecting a balance of cross-currency translations and a trade-off between the China connection and solid carry trade yields on offer.

The SPI Overnight closed up 87 points or 1.9%.

The Week Ahead

All eyes will be firmly fixed on the Shanghai stock market when it opens today around lunchtime local time. While the dragons have danced and the fireworks exploded, global markets have tanked.

To add fuel to the fire, Beijing will release China’s January trade numbers today.

Japan will release its December quarter GDP result today.

The US is closed tonight but the week follows up with housing sentiment and the Empire State index tomorrow, housing starts, industrial production and the PPI on Wednesday, leading economic indicators and the Philadelphia Fed index on Thursday, and the CPI on Friday.

Wednesday will also see the release of the minutes of the January Fed meeting.

The minutes of the February RBA meeting will be out tomorrow. Other than vehicle sales today, the only other economic highlight this week will be the jobs numbers on Thursday.

In the meantime, the local corporate reporting season shifts into top gear this week, and the next two weeks will see an avalanche of reports. Today’s highlights include Amcor ((AMC)), Aurizon ((AZJ)), Bendigo & Adelaide Bank ((BEN)) and Newcrest Mining ((NCM)).

There will be no appearances on Sky Business by Rudi this week.
 

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: Oil Talk And No Action

By Greg Peel

The Dow closed down 254 points or 1.6% while the S&P lost 1.2% to 1829 and the Nasdaq fell 0.4%.

Alpha Bravo

It was a stuttering start for the ASX200 yesterday morning. An early attempt to push back over the 4800 level and thus, in theory, escape from bear market territory failed. By midday the index was sitting on the flatline wondering what to do next. But if the macro story was uncertain, there were several micro stories to consider.

And thus by the close, we were up 45 points and back above 4800. Credit goes to positive individual earnings results from the likes of Goodman Group ((GMG)), Mirvac Group ((MGR)) and Suncorp ((SUN)), and in particular Cochlear ((COH)). Cochlear shares jumped 14% to take the stock into the hundred dollar a share club.

The high-flying healthcare sector has copped a lot of selling this week as investors cash in their winners in order to compensate for their losers. But yesterday healthcare was the standout sector with a 2.7% gain, backed up telcos (+2.1%) following a good day for Telstra and some bargain hunting among the banks  and consumer sectors, each up a percent and change.

It was a day in which “alpha” took precedence over “beta” – the former referring to stock-specific or micro risk and share price movement and the latter referring to the the market as a whole, or macro risk and index price movement.

The question now, as we eye off another weak lead-in from Wall Street and Europe, is whether such a positive theme can continue. Realistically the local earnings season has only just begun. Unfortunately from today’s perspective, we had a result from Rio Tinto ((RIO)) aftermarket which has seen those shares down 3% in London, and thereafter today’s reporting calendar is very thin.

CoCo Dependency

SocGen was the latest European bank to report earnings last night, and it wasn’t pretty. SocGen shares fell 12% in France and took all the big European banking names down yet again, ensuring falls of 2% for the UK stock market, 3% for Germany and 4% for France.

Nor did it help that the Swedish central bank elected to take its bank deposit rate further into the negative. Many European central banks, including the ECB, now have negative rates. This is the rate normally paid to banks by the central bank for parking excess capital reserves. Negative rates mean banks have to now pay for the privilege, which is a move intended to force them to go out and lend into the economy.

The economy is not a warm and cosy place at the moment, and if banks do elect to continue to park funds, they will now incur a cost. Meanwhile, there is also concern over CoCos.

Contingent convertibles are hybrid debt instruments that arose post GFC and became particularly popular in Europe. A typical convertible bond converts into equity when the stock price rises to a trigger level. CoCos work the other way, forcing bond holders into equity on some systemic trigger. The idea is to prevent bank defaults by ensuring an injection of capital when needed, also known as a “bail in”.

With many a European bank share price down 20-30% in 2016 on elevated fear, who would like to be converted?

The Oil Game

US banks were hit again from the open last night on a flow-on from Europe. It seems it doesn’t matter how many commentators come out and scream that European bank capital is still leveraged up to 25 times in the post-GFC era when US banks have brought theirs down from as high as 40 to around 10 times, thus ensuring a substantial capital buffer.

It doesn’t seem to matter how many times the “oversold!” call is made.

But on Wall Street it’s not just about the banks, which are down some 18% for the year, it’s about oil, although the energy sector is only down 12%.

At one point last night, West Texas crude was threatening to drop through US$26/bbl, the US ten-year bond rate was down 17 basis points at 1.53%, gold was up US$66 and the Dow was down 400 points. The S&P500 hit 1810, below a major technical support level of 1812. Then an announcement hit the wires.

The UAE oil minister announced he was ready to talk coordinated production cuts.

Yeah, we’ve heard it all before. Every time oil drops to a new low there are vague suggestions from OPEC and or Russia that they are prepared to talk about reducing supply. Then the oil price bounces, and nothing actually happens. The reason the world took notice last night is because up till now, the UAE has been dead against production cuts. So on that basis, oil rebounded.

But not by much. West Texas is still down 3% on the session. The real bounce came in the US stock markets, where the Dow halved its losses in the space of fifteen minutes as traders piled into the Exxons and Chevrons. The S&P shot back up from its support level and the Nasdaq briefly snuck into the green.

The reason the Dow still closed down 250 points, aside from a bad night for Boeing, is that the rebound did not extend to the banks.

And on the subject of possible OPEC production cuts, all agree that nothing will ever be achieved without Saudi Arabia, who has not yet said anything and in fact upped production in January.

Commodities

West Test Texas crude is down US90c at US$26.83/bbl. Brent is down US54c at US$30.68/bbl.

Gold pulled back but is still up US$54.90 at US$1248.30/oz. The US dollar index is down 0.5% at 95.49 and the US ten-year yield has rallied back to be down only 6 basis points at 1.64%.

Yesterday I noted nickel’s fall to under US$8000/t for the first time since 2003. Last night, still in the absence of China, technical and distressed sellers drove nickel down another 4% on the LME. Other metals were mixed, with copper down 0.5% but lead up 2%.

Iron ore is unchanged at US$44.50/t.

The Aussie is relatively steady at US$0.7094.

Today

The SPI Overnight closed down 36 points or 0.8%.

Aside from the aftermarket result from Rio Tinto, there are no big name stocks reporting today to provide another potential alpha offset.

The RBA governor will provide a regular testimony to parliament today. Local housing finance numbers will be released.

The eurozone will provide its first read on December quarter GDP tonight, and the US will see retail sales and consumer sentiment numbers.
 

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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

Australian Corporate Bond Price Tables

PDF file attached.

Corporate bonds offer an alternative to equity investment in providing a fixed “coupon”, or interest payment, unlike equities which pay (or not) non-fixed dividend payments, and a maturity date, unlike equities which are open-ended.

Listed corporate bonds can be traded just as listed shares can be traded. Bonds bought at issue and held to maturity do not offer capital appreciation as an equity can, but assuming no default do not offer downside capital risk either. Pricing is based on market perception of default risk, or “credit risk”, throughout the life of the bond.

Bonds do offer capital risk/reward if traded on the secondary market within the bounds of issue and maturity. Coupon rates are fixed but bond prices fluctuate on perceived changes in credit risk and on changes in prevailing market interest rates.

Note that the attached tables offer three “yield” figures for each issue, being “coupon”, “yield” and “running yield”.

If a bond is purchased at $100 face value and a 5% coupon, and face value is returned at maturity, the running yield is 5% and the yield, or “yield to maturity” is 5%.

If a bond is purchased in the secondary market at greater than $100, the running yield, which is the per annum yield for each year the bond is held, is less than 5% because the coupon is paid on face value. The yield to maturity is also less than the coupon as more than $100 is paid to receive $100 back at maturity.

If a bond is purchased in the secondary market at less than $100, the running yield, which is the per annum yield for each year the bond is held, is more than 5% because the coupon is paid on face value. The yield to maturity is also more than the coupon as less than $100 is paid to receive $100 back at maturity.

Note that if a bond is trading on the secondary market at a price greater than face value the implication is the market believes the bond is less risky than at issue, and if at a lesser price it has become more risky. Bonds trading on yields substantially higher than their coupons thus do not offer a bargain per se, just a higher risk/reward investment. In all cases, bond supply and demand balances will also impact on secondary pricing.

Note also that while most coupons are fixed, the attached table also provides prices for capital indexed bonds (CIB) and indexed annuity bonds (IAB).

This service is provided for informative purposes only. It is not, and should not be treated as, a solicitation or recommendation to buy corporate bonds. Investors should always consult their financial adviser before acting on any information gleaned from this service. FNArena does not guarantee the accuracy of information provided. Note that while FNArena publishes this table weekly, prices are fluid and potentially changing throughout each trading day. Hence prices tabled may not reflect actual market prices at the time of reading.

FNArena disclaimer

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