Tag Archives: China and Emerging Markets

article 3 months old

The Monday Report

By Greg Peel

Struggling for support

Last week on Bridge Street was a week in which the ASX200 opened to the downside, before bouncing off 5150 and rallying strongly to 5300. That wasn’t to last, and down we came again, culminating on Friday in an early fall back to 5150.

Energy led the selling on the day, closing down 1.2%, while materials and the telco closed slightly weaker. But a recovery rally from mid-morning saw all other sectors finish in the green. Last week the index found support at the previous breakout level of 5200 but now it appears the number is 5150.

Friday was also a day of squaring up positions ahead of the weekend release of the US jobs report and Chinese trade data.

Job Shock

August was a shock, September was an even bigger shock, but nothing had prepared Wall Street for the shock to come in the October non-farm payrolls result. The difference was it was a shock to the upside. The US added 271,000 jobs in the month, some 100,000 more than consensus forecasts.

That’s the biggest increase in 2015 to date. The US unemployment rate fell to 5.0% from 5.1% in September, its lowest level since April 2008. But the big news was a sudden jump in wage growth to an annual rate of 2.5%. That’s the fastest pace since July 2009.

It is that number which now has Wall Street locking in a December rate hike from the Fed. The Fed appears to be itching for an excuse, and would have been rocked by the criticism it received for not raising in September. There is still the November jobs report to come, and October’s number may yet to subject to revision, but the futures market now has a December hike at a 70% chance.

The US dollar index jumped 1.3% to 99.17 on Friday night, so forex markets are pricing in a rate hike. Ditto the US bond market, where the ten-year yield rose 9 basis points to 2.33%.

As for the US stock market, well, confusion still reigns apparently. Not about whether or not the Fed will raise but about whether that’s a good or bad thing. The Dow closed up 46 points or 0.3% on Friday night and the Nasdaq was up 0.4%, but the broad market S&P was flat at 2099.

We recall that when the Fed did not raise in September, Wall Street fell sharply. Not because the market necessarily wanted to see a rate hike but because it simply wanted to end the uncertainty. Then when we saw two consecutive jobs reports that were shockingly bad, Wall Street decided it was now certain the Fed would not raise, and thus started buying on the basis of ongoing easy policy.

By rights thus, Friday’s jobs number should have had Wall Street selling again. But it didn’t. Why not? Probably because Wall Street would still just like to see this damned rate rise debate over and done with so we can move on. And at the end of the day, a good jobs report is economically positive. Thus there was a level of trade-off, and the best the S&P500 could do was nothing.

China Woes

There’s still not a lot of economic positivity coming out of China.

Yesterday’s October trade data from Beijing showed a 6.9% year on year decline in exports, down from -3.7% in September, and an 18.8% fall in imports – better than September’s -20.4% but still pretty bad. Within Beijing’s initial 7% GDP growth forecast for 2015 was a growth forecast for trade of 6%. Year to date trade is down 8%.

That’s in dollar terms, it must be noted, and so also reflects the big falls in commodity prices. Indeed by volume, imports fell only 2.6% in October. However raw materials were the hardest hit segment within that number, such that by volume, iron ore imports fell 12.3% and coal 21.4%.

The good news, if we can call it that, is that commodity prices really tanked towards the end of 2014. Thus the year on year numbers China will cycle from now should not look quite so bad.

Commodities

The Chinese trade release was yet to come when commodity markets closed for the week on Friday night, so it was all about US jobs and the big jump in the US dollar. In the end, nevertheless, falls were not that dramatic.

Base metal prices have been weak for some time on a slower Chinese economy and the prospect of a Fed rate rise, so the market has been well shorted. Copper fell 0.6% on the LME on Friday and nickel 1%, but the other metals were flat to higher and beaten-down aluminium posted a 1.3% gain.

The story is not dissimilar for the oils, although an US80c fall for West Texas to US$44.43/bbl again puts the benchmark below the long-running 45-50 range. Brent fell US37c to US$47.60/bbl. There was other news to consider for the oil markets nonetheless.

President Obama announced on Friday night the proposed Keystone pipeline from Canada all the way to US refineries on the Gulf would not be built due to environmental concerns. It is a blow to Big Oil’s hopes of creating a major US oil exporting industry. Aside from environmental issues, the question of America’s energy security is a consideration, as is the desire to keep domestic energy prices contained.

Coming back to the US dollar impact on commodity prices on Friday, the big loser was gold. It fell US$17.40 to US$1087.40/oz.

The Aussie dollar was the other big “loser”, falling 1.3% to US$0.7047.

And the iron ore price is down yet again, by US30c to US$47.40/t.

The SPI Overnight closed down 25 points or 0.5% on Saturday morning, ahead of yesterday’s Chinese data release. If the Fed is indeed going to start raising US rates, Australia’s yield plays start to become less attractive to US investors, and the RBA is under less pressure to cut its own rate.

The Week Ahead

China’s October data will continue to roll in this week. Tomorrow sees inflation data and Wednesday sees industrial production, retail sales and fixed asset investment.

It’s a quiet week for US data until Friday, and on Wednesday the Veterans Day holiday sees US banks and the bond market closed while stock and commodity markets remain open, albeit with lower volumes. Friday sees the PPI, retail sales, inventories and fortnightly consumer sentiment.

The eurozone will provide its first estimate of September quarter GDP on Friday.

In Australia, today brings the ANZ job ads series and tomorrow NAB’s business confidence survey along with housing finance data. Wednesday it's Westpac’s consumer confidence survey and on Thursday our own October jobs numbers.

After a brief dip in activity, the local AGM season starts to hot up again this week ahead of a rush towards the end of November.

On top of the AGMs, Incitec Pivot ((IPL)) will release full-year earnings tomorrow followed by DuluxGroup ((DLX)) on Wednesday and Graincorp ((GNC)) on Thursday.

Rudi will appear on Sky Business on Thursday at noon.
 

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

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article 3 months old

Next Week At A Glance

For a more comprehensive preview of next week's events, please refer to "The Monday Report", published each Monday morning. For all economic data release dates, ex-div dates and times and other relevant information, please refer to the FNArena Calendar.


By Greg Peel

US jobs tonight. We could go on and on about it, but we won’t.

Beijing will release China’s October trade numbers on Sunday.

It’s a quiet week for data in the US next week, and the week will be punctuated by Veterans Day on Wednesday. It’s one of those half-holidays which sees US banks and the bond market closed, while stocks and commodities remain open but trading is thin.

Friday will bring US retail sales and inventories numbers along with the PPI and fortnightly consumer sentiment.

Beijing will follow up the weekend’s trade data with inflation numbers on Tuesday and industrial production, retail sales and fixed asset investment numbers on Wednesday.

The eurozone will release its first estimate of September quarter GDP on Friday.

In Australia, next week brings ANZ’s job ads series, NAB business confidence and Westpac’s consumer confidence reports across Monday-Wednesday. Our own jobs numbers are due on Thursday.

The AGMs just keep on coming next week, while Incitec-Pivot ((IPL)), DuluxGroup ((DLX)) and Graincorp ((GNC)) all post earnings results.
 

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article 3 months old

The Overnight Report: A Live Possibility

By Greg Peel

The Dow fell 50 points or 0.3% while the S&P lost 0.4% to 2102 and the Nasdaq closed flat.

Drift Off

The local market behaved yesterday as if it had just had a huge day out at the races and woke up still feeling a little drunk, before the inevitable hangover set in and by the afternoon it was time for a snooze on the couch.

The ASX200 was off to a flyer, well overshooting the small rise anticipated by the overnight futures. But 5300 appears to be the level to trigger selling at the top of this rebound rally, and so it was the index mostly drifted lower as the afternoon wore on and traders just looked forward to getting home for a sleep.

The surprise winner on the day was materials with a 0.9% gain despite iron ore prices now being entrenched under US$50/t, while at present each day seems to be one in which you either buy the telco or sell it and yesterday was a sell-day, with telcos down 1.2%. Other sectors all closed mostly flat.

There was a slight recovery from the drift around midday when Caixin’s take on China’s October service sector PMI showed a rise to a healthy 52.0 from September’s 50.5, implying there may finally be some signs of Beijing’s stimulus measures having an impact. But then the drift began again.

Australia saw a mixed bag of data releases yesterday.

September retail sales saw 0.4% growth, as was forecast, but there was disappointment in a revision of August growth down to 0.4% from a previously reported 0.7%. The annual rate of sales growth in September was 3.7% -- down from 4.5% in August and well below the long run average of 5.2%.

The September trade deficit was lower than expected, with exports rising 3.4% and imports rising 1.7%. Unfortunately the difference came down to higher iron ore prices in the month, and they have since fallen back again. But Queensland LNG is now beginning to contribute to the numbers, with plenty of upside ahead, and the signs are a long awaited recovery in tourism is underway thanks to the currency.

Australia’s service sector PMI fell to 48.9 in October from 52.3 in September, suggesting a flip back into contraction from expansion. Australia’ PMIs are nevertheless notoriously volatile.

All up the data did not really provide a reason to get excited, but the smaller trade deficit is probably another reason for the RBA to hold off for now.

Around the grounds, Japan’s services PMI rose to 52.2 from 51.4, the eurozone rose to 54.1 from 53.7, the UK rose to 54.9 from 53.3, and the US jumped to a surging 59.1 from 56.9.

The global service sector is alive and well, it would seem.

Going Live

The other major US data release of the day was the ADP private sector jobs report for October, which showed the addition of 182,000 jobs. The September ADP number was revised down to 190,000 from 200,000.

The result confirms a belief US jobs growth is now slowing from a more robust pace earlier in the year. Economists are forecasting 177,000 new jobs to be announced in the October non-farm payrolls release tomorrow night, up from 142,000 in September but below the 200,000 plus trend that has prevailed for the bulk of 2015.

The jobs numbers nevertheless took a back seat on Wall Street last night behind Janet Yellen’s testimony before the House Financial Services Committee. In her testimony the Fed chair reiterated that the risk to the US economy posed by slowing growth offshore had now diminished, and hence December will be a “live” meeting as far as a potential rate hike is concerned.

Once again we come down to the rift across Wall Street between those who do believe current US economic growth justifies a rate rise, those who don’t believe a rate rise is justified and thus don’t expect a rise, those who don’t believe it is justified but really hope the Fed just gets it over and done with, and those who do believe it’s justified but assume the Fed will vacillate yet again.

Take your pick. Wall Street’s response last night was to drift lower with a lack of conviction, on smaller volumes than the past two sessions which produced reasonable rallies.

There was a clearer move in the US dollar index nonetheless. Not only was Yellen sounding hawkish last night, Mario Draghi was reiterating his dovishness by defending the ECB’s willingness to extend QE. Both influences mean a lower EURUSD, hence the US dollar index is up 0.8% to 97.92.

Subsequently the Aussie is back down 0.6% to US$0.7152, post the RBA’s on-hold decision.

Commodities

A day after they were up 3.5% on global supply disruptions, oil prices were back down 3% last night on a combination of the stronger greenback and a sixth consecutive rise in weekly US crude inventories. West Texas fell US$1.33 to US$46.49/bbl and Brent fell US$1.79 to US$48.76/bbl.

Only tin managed to rally on the LME in the face of the stronger greenback, up 1%, while lead, nickel and zinc fell 1% and aluminium and copper fell 0.5%.

Iron ore fell another US40c to US$48.30/t.

Gold never stood a chance against the stronger dollar given the current mood, and it fell US$9.40 to US$1107.90/oz.

Today

The SPI Overnight closed down one point.

RBA governor Glenn Stevens will deliver a speech in Melbourne today ahead of tomorrow’s release of the central bank’s quarterly Statement on Monetary Policy.

The Bank of England will hold a policy meeting tonight but nothing exciting is expected.

Commonwealth Bank ((CBA)) will today wrap up the big bank reporting season with its quarterly update and there is once more a handful of AGMs to get through.

National Bank ((NAB)) goes ex today.

Rudi will make his weekly appearance on Sky Business today, Lunch Money, noon-1pm, to return later on Switzer TV, between 7-8pm.
 

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article 3 months old

The Overnight Report: All Is Forgiven

By Greg Peel

The Dow closed up 89 points or 0.5% while the S&P gained 0.3% to 2109 and the Nasdaq rose 0.4%.

Got Your Back

In October, the final paragraph of the RBA’s interest rate decision statement read:

“Further information on economic and financial conditions to be received over the period ahead will inform the Board's ongoing assessment of the outlook and hence whether the current stance of policy will most effectively foster sustainable growth and inflation consistent with the target.”

Yesterday’s equivalent paragraph read:

“At today's meeting the Board judged that the prospects for an improvement in economic conditions had firmed a little over recent months and that leaving the cash rate unchanged was appropriate at this meeting. Members also observed that the outlook for inflation may afford scope for further easing of policy, should that be appropriate to lend support to demand. The Board will continue to assess the outlook, and hence whether the current stance of policy will most effectively foster sustainable growth and inflation consistent with the target.”

The computers initially sold the ASX200 at 2.30pm yesterday, then bought it, and then the humans pushed the index a little higher towards the close. The close was nevertheless not the high of the day, which was achieved on the opening rally.

On a day in which such things are appropriate, the RBA seems to have given the market an each way bet. Economic conditions have “firmed a little”, which is positive, but there is “scope for further easing”, which is comforting too. We can all go long with an embedded put option.

Hence the market did not much respond to the RBA’s lack of rate cut yesterday, which was not expected anyway. The rally occurred from the opening bell, pushing back through the 5200 mark with only a slight stumble. We can perhaps conclude that it was those pesky Mexicans selling the market down on Monday, given in their absence yesterday everything sold down on Monday was bought back, albeit on lighter volume.

The banks led the selling on Monday but they were up 1.6% yesterday, and ditto the telco which rallied back 1.8%. The winner on the day was nonetheless energy, which jumped 2.6% despite oil prices being slightly lower overnight. Energy stocks had rallied around the globe on Monday night, so yesterday Australian names were also well sought after.

We’re now back over the 5200 break-out level and the futures are this morning predicting further gains, so perhaps we can write off Monday’s dour session as an aberration. Oil prices actually shot up last night.

The Chinese president provided further detail of the government’s new five-year plan yesterday, reiterating a goal to achieve no less than an average 6.5% annual growth. The only difference here from what was suggested last week is that the extra decimal point is missing. Last week it was 6.53%.

Xi Jinping also intends to have a fully-floating renminbi by 2020, and will open up more state-dominated sectors to the market, including utilities and telcos. The Chinese will also now be allowed to have two kids instead of one.

Xi did not provide a specific 2016 GDP growth target, but the assumption is that number would be more like the 6.5% general target than 2015’s 7.0%, which at the current rate likely will not be achieved.

High Tide

It’s hard to believe that the S&P500 is now within only 1% of its all-time intraday high, following last night’s positive session. The Dow still needs to push back over the 18k mark.

Last night’s rally was led by energy yet again, this time with the backing of a solid jump in oil prices. Oil rose on news militants were blocking supply in Libya and striking workers were blocking supply in Brazil.

Beyond energy, last night’s slew of US earnings results proved nothing to be excited about and factory orders were revealed to have fallen for the second straight month, by 1.0% in September. Data released in the last hour showed October to have been yet another record month for US auto sales, but Wall Street had already posted its rally by then and indeed drifted off towards the close.

The good news is the small cap index has begun to join in the rally in November, having worried traders all through October by remaining stubbornly weak. The bad news is the rally back to the highs is again evoking talk of an overbought market and stretched PE multiples.

But it’s November, and there follows December, so the mood remains one of “It’s meant to go up, isn’t it?”

Always dangerous of course.

Commodities

West Texas crude is up US$1.68 or 3.6% to US$47.82/bbl while Brent is up US$1.76 or 3.6% to US$50.55/bbl.

Another mixed session on the LME saw aluminium, copper and zinc all up around a percent while nickel and tin fell over a percent. Nickel is now below the psychological US$10,000/t mark once more, having last been this low in August when China growth fears were heightened.

Iron ore fell another US40c to US$48.70/t as its quiet slide continues.

The US dollar index is only 0.3% higher this morning at 97.18 but last night gold took a turn for the worse, having come under pressure this past week. It’s down US$17.30 at US$1117.30/oz.

An RBA rate cut was not widely expected yesterday yet the Aussie still shot up at 2.30pm, reaching well above the 72 level. Greenback strength overnight ensured the net gain over 24 hours is 0.8% to US$0.7194.

Today

The Mexicans are back today with hangovers so we’d best watch out.

It’s service sector PMI day across the globe today, including in Australia. Locally we’ll also see retail sales and trade numbers for September.

Tonight in the US sees the private sector jobs report for October.

The AGMs fire up again locally today after yesterday’s hiatus, while CSR ((CSR)) will report its half-year result.
 

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

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article 3 months old

The Overnight Report: Follow The Stats

By Greg Peel

The Dow rose 165 points or 0.9% while the S&P gained 1.2% to 2104 and the Nasdaq jumped 1.5%.

Breach

A weak lead from Wall Street and disappointing Chinese PMI numbers over the weekend ensured the dour mood prevalent at the end of October carried into the new month on Bridge Street yesterday. The Chinese numbers could have been worse – the manufacturing PMI was flat but still below 50 while the PMI for the larger services sector was weaker but still above 50 – but the market was hoping Beijing’s stimulus efforts might have started to produce results by now.

The mood did not improve when Westpac released its profit result and warned of tough times ahead in Australian banking. The banks led the index lower from the bell and when support was breached at 5200, the selling became more widespread.

Australia’s data releases on the day were not so encouraging either. Our own October manufacturing PMI fell to 50.2 from 52.1, the rate of house price growth cooled in the month, and TD Securities’ core inflation gauge remained flat at 1.7%, providing no additional impetus for the RBA to cut today.

The good news is building approvals grew by a better than expected 2.2% in September, although analysts are expecting that pace to start cooling soon as well.

There was also some good news in the form of Caixin’s independent Chinese manufacturing PMI, released around midday, which showed an increase to 48.3 from 47.2. This is still sub-50 but at least heading in the right direction.

It was around this time the index decided it had been sold down far enough on the day. It was down around 1.4% at lunchtime and there it basically remained through to the close.

By the closing bell the banks had provided the stand-out weakness with a 1.9% fall, backed up by the telco with 1.6%. Other sector falls were less dramatic but no sector finished in the green, confirming market-wide selling on the technical breach.

A day is a long time on the market and we see the SPI Overnight up over 60 points this morning, suggesting we could rally all the way back today.

Going around the grounds on manufacturing PMIs, Japan saw an increase to 52.5 from 51.0 to mark its strongest pace in a year, the eurozone saw a better than expected rise to 52.3 from 52.0, and the UK shot to 55.5 from 51.8 when economists had forecast a decline.

All these regions appear to be benefitting from lower currencies, the offset of which is the US dollar. Thus the only disappointing global PMI result was the US figure of 50.1, down from 50.2, although that was still above a consensus forecast of 50.0.

Merger Monday

Interestingly, the Fed has never raised rates when the manufacturing PMI is this low.

Positive earnings reports and a slew of announced M&A deals provided a positive opening for November on Wall Street, and the major indices rallied steadily throughout the session. The S&P500 is now back above 2100 for the first time since the August break-down and hence back inside the trading range that dominated Wall Street all year up to that point.

The China scare has now been erased.

Investors are no doubt fired up about the current obsession with November-December typically being positive for stocks. Last night’s popular historical statistic was that if October is positive, November-December sees a further rally 78% of the time.

The mood may nevertheless change later in the week when the all-important non-farm payrolls data are released. Just how Wall Street will respond is never quite clear. A strong jobs number would put a December Fed rate rise back in focus.

Commodities

The US dollar index was flat last night at 96.93.

Trading on the LME was again subdued, with nickel rising 1%, zinc falling 1% and all other metals barely troubling the scorer.

After one day’s respite, iron ore is down US40c at US$49.10/t.

The oils were marginally lower, with West Texas falling US30c to US$46.14/bbl and Brent falling US72c to US$48.79/bbl.

Gold fell US$7.10 to US$1134.60/oz. It is interesting to note the US ten-year bond rate is now back at 2.19%, following a 4 basis point gain last night. This is where it began 2015 – a year expected to bring the first Fed rate rise. First it was maybe March but there was too much snow so it became June, then it was September, and now it’s December, maybe. Gold traders don’t seem keen to be caught out.

The Aussie is flat at US$0.7136 ahead of today’s RBA decision. The odds of a rate cut have now slipped according to consensus expectation.

Today

The SPI Overnight closed up 62 points or 1.2%, which if accurate means we would not only erase the best part of yesterday’s fall but also return to above the 5200 mark.

Victoria is closed today, so trading may be a little thinner, and will certainty thin out from lunchtime on. As it’s Cup Day, no local corporate is foolish enough to hold an AGM or release a result today, although there’s plenty more to come in the month.

The RBA will nevertheless release its statement at 2.30pm.

My tips for today: no cut and, given all the M&A going on both locally and abroad, The Offer.
 

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

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

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article 3 months old

The Monday Report

By Greg Peel

Support

While September is historically the weakest month for stock markets, October is the month for crashes. Just not every year. This year saw the ASX200 break above what had been stiff resistance at 5200 early in the month, before falling back to bounce off 5200 again, before rallying to 5350.

Since then it’s been all downhill back towards 5200 again, and indeed on Friday the index opened in the same mood it had closed on Thursday and promptly fell 62 points, but only made it as far as 5204 before bouncing to a less significant fall for the day. The supermarkets, iron ore miners, banks and the telco all saw ongoing selling but on the last trading day of the month, traders moved into industrials and healthcare.

Technically it’s been text book stuff – a break-out of a well-established range, a sharp rally, and fall back to that breakout level which, having previously been resistance, is now support. The market is consolidating, preparing for whatever it wants to do next. If next is a rally into Christmas, technically the signals are favourable.

September private sector credit data were released on Friday, and the good news is that the result of 0.8% growth represents the strongest month since the GFC. The better news is that it was not all about investor mortgages. Lending for housing was flat in September at an annual rate of 7.5% but business lending grew 1.2% to an annual rate of 6.3%.

The bad news is these data are a major setback for those convinced the RBA will cut tomorrow. Forex traders now appear less convinced. The Aussie was up 0.9% to US$0.7136 on Saturday morning.

The big news globally on Friday was no news at all. The Bank of Japan surprised markets by not only announcing no change to its existing QE program, but by not even hinting that an increase might be contemplated. Many assumed the BoJ would simply have no choice but to counter Chinese rates cuts and a QE extension from the ECB at the end of the year if its own program was to remain supportive.

Perhaps the BoJ is banking on a Fed rate hike in December. Either way, the Japanese stock market didn’t seem to mind, as it rose 0.8%

Early Santa?

As noted, October is typically the scariest month of any year, if not actually the weakest on average. Oh the horror, the horror. But despite falls on Wall Street on Friday night, the S&P500 posted a rally in excess of 8% in the month, which, funnily enough, was its best month since October 2011.

On Friday night the Dow closed down 92 points or 0.5% while the S&P lost 0.5% to 2079 and the Nasdaq dropped 0.4%.

The major indices are now back to where they were before the big August sell-off. Except for the small cap Russell 2000 index which has lagged behind. This has worried many a trader who would like to see all the ducks line up in a row, and has them nervous maybe the rally is not sustainable.

And then there is the issue that December is typically the best month of the year, and November right up there too, to provide for a frequently seen Santa Rally. But Santa Rallies typically follow weak September-Octobers. This time we’ve seen a strong October. Have we already seen the Santa Rally?

Before you ask, October 2011 was indeed followed by a rally.

US data releases on Friday included September personal income & spending, which each rose 0.1%. For incomes it was the slowest month of growth since March, and for consumer spending the lowest month of growth since January. The personal consumption and expenditure (PCE) measure of core inflation also rose only 0.1%, to be up 1.3%.

This is the number the Fed wants to see moving towards 2% before it considers a rate hike. You wouldn’t be backing December on these data.

And Michigan Uni’s fortnightly index of consumer sentiment fell to 90.0 from a previous 92.1 when 92.5 was expected. The number corroborates the Conference Board’s monthly confidence index released earlier in the week which also saw an unexpected drop, just as the world’s biggest consumer economy heads into Christmas.

The only good economic news on Friday was that the Chicago PMI rocketed back into expansion at 56.2 from a contractionary 48.7 last month.

But neither the data nor the day’s earnings reports seemed to make much difference to Wall Street as a whole on Friday. The indices bungled along through the session before late selling came in at the close, likely representing profit-taking on the last day of a very strong month.

Commodities

It was another largely dreary session on the LME, where moves were again mixed. Nickel took a 2.7% tumble while copper was 0.3% lower, and aluminium rose 0.7%.

Iron ore rose US50c to US$49.50/t, representing the first gain in about two weeks.

A drop in the weekly US rig count helped the oils quietly continue their rebound. West Texas rose US66c to US$46.44/bbl and Brent rose US91c to US$49.51/bbl.

The US dollar index was 0.3% weaker at 96.97 and gold lost US$2.90 to US$1141.70/oz.

The SPI Overnight closed down 25 points or 0.5% on Saturday morning.

China

Beijing released China’s official October PMIs yesterday. Manufacturing came in at 49.8, unchanged from September. Given all the government has thrown at the economy, it was a disappointing result, representing the third straight month of sub-50 results. Economists had forecast 50.0.

But at least it wasn’t a worse result. The services PMI came in at 53.1, down from 53.4, but at least remained in expansion.

The Week Ahead

The rest of the world will release manufacturing PMIs today, including Australia, Japan, the eurozone, UK and US, along with Caixin’s take on China’s PMI. Then it’s same again on Wednesday for service sector PMIs.

The US will also see construction spending tonight, factory orders and vehicle sales tomorrow, the trade balance and ADP private sector jobs report on Wednesday, and chain store sales and productivity on Thursday. On Friday it’s the big one – non-farm payrolls.

The Bank of England will hold a policy meeting on Thursday. Japan has a public holiday today.

It is a busy week all up for Australian data.

We start with the manufacturing PMI, building approvals, house prices and the TD Securities inflation gauge today. Tomorrow televisions will be switched on in every household and office across the land to watch the RBA not announce a rate cut.

That’s my tip anyway.

Wednesday sees the local services PMI, trade balance and retail sales, Thursday RBA governor Glenn Stevens will make a speech in Melbourne, and Friday the RBA will release its quarterly Statement on Monetary Policy. The construction PMI is also due.

Westpac ((WBC)) will release its full-year result today and Commonwealth Bank ((CBA)) will provide a quarterly update on Thursday. CSR ((CSR)) will release its interim result on Wednesday, and the AGM season rolls on.

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

Next Week At A Glance

For a more comprehensive preview of next week's events, please refer to "The Monday Report", published each Monday morning. For all economic data release dates, ex-div dates and times and other relevant information, please refer to the FNArena Calendar.


By Greg Peel

Summer time ends in the US this weekend so as of Tuesday morning locally, the NYSE will close at 8am Sydney time, as will the SPI Overnight session.

On Sunday Beijing will release official October manufacturing and service sector PMIs ahead of the usual first trading day of the month manufacturing releases from Australia, Japan, the eurozone, UK and US, and Caixin’s independent Chinese number.

Wednesday brings a repeat for service sector PMIs.

Australia will also see building approvals, retail sales and trade numbers next week. Tuesday sees the Rate That Stops A Nation along with some horse race or other, which ushers in the market’s Silly Season. From here on it’s all about Christmas parties, long lunches and, hopefully, a Santa rally.

The RBA will also issue its December quarter Statement on Monetary Policy later in the week.

Japan will be closed on Tuesday for the Melbourne Cup. Or maybe for Culture Day.

US data releases next week include construction spending, factory orders, vehicle and chain store sales, trade and productivity. Wednesday sees the ADP private sector jobs report and Friday the all-important October non-farm payrolls numbers.

On the local stock front, the resource sector’s quarterly production report season is now over but the AGM season rolls on with gusto, albeit the volume will begin to reduce.

Westpac ((WBC)) will report full-year earnings on Monday and Commonwealth Bank ((CBA)) will provide a quarterly update on Thursday. CSR ((CSR)) will release its interim result on Wednesday.
 

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article 3 months old

The Overnight Report: Slow Going

By Greg Peel

The Dow closed down 23 points or 0.1% while the S&P was flat at 2089 and the Nasdaq lost 0.4%.

Down, Down

Yesterday’s session on Bridge Street started with a good deal of promise. The Dow had closed up 200 points and oil prices had surged. Iron ore had fallen below US$50/t, which was not good news, but an oil price rebound suggested some balance between the resource sectors. The futures were suggesting a 40 point rally for the ASX200.

But we closed down 68 points. Indeed, the index only managed to rise around 20 points on the open before the selling began and throughout the session, built upon itself.

The issue was a micro-specific one, namely domestic earnings. The main culprit on the day was Woolies, which delivered a September quarter trading report full of smiles and upbeat banter, and a shocking profit guidance downgrade. Oh how the mighty have fallen. Woolies is still one of Australia’ biggest companies, hence its 10% fall alone had a sizeable impact on the index.

There was no back-slapping going on over at Coles, nonetheless. The market saw the issue not just as an individual problem but a problem for Australia’s under-attack supermarket duopoly. Wesfarmers shares fell 4% and the consumer staples index finished the day down 5.4%.

From the wider retail perspective, the Woolies’ profit warning came only a day after electronics retailer Dick Smith similarly issued a substantial profit warning, which on Thursday had wiped over 30% off Dick’s share price. There is not a lot of pre-Christmas excitement in retail land at the moment.

Then there were the banks. National Bank’s slightly disappointing profit result released on Wednesday had prompted a 2% fall, as investors mulled over the offset of the bank’s life insurance sale. Yesterday ANZ Bank came out with a result that was also slightly disappointing, and its shares fell 2%. Having looked more closely at NAB, investors yesterday sold the bank down another 4%. A delay in the carving off of NAB’s UK business is also disappointing.

The financials index fell 1.0% yesterday, adding to ASX200 weakness. Materials fell 1.5% as one might expect following another big drop in the iron ore price, but energy also fell, by 1.3%, despite a 6% jump in the West Texas crude price overnight.

Then there were the new home sales data. HIA’s numbers showed a 4% drop in new home sales in September, following a 2.3% rise in August. Is this the peak brokers have recently been lining up to warn about? The booming housing market has, to date, been about the only sector of the economy offering a growth offset to the impact of tumbling mining investment and commodity prices.

It was a bit of a mood-shift day, following on from the earlier excitement of global central bank stimulus and the break-up through the top of the previous trading range. Once the selling had begun it just carried on through to the close.

Except in Blackmores. The snake oil pedlar hit $200 briefly yesterday before dumbfounded profit-takers moved in.

Moderately Prosperous

The Chinese economy needs to grow at an average 6.53% over the next five years for the country to remain “moderately prosperous”, the Chinese prime minister declared last night ahead of the wrap-up of the Plenary Session. This suggests Beijing will lower its growth forecast in 2016 from 2015’s 7.0% target, which likely will be missed if the September quarter’s 6.9% year on year result is any guide.

And given the number in question runs to a second decimal point, we might conclude someone has actually crunched some numbers this time – some forward estimates as we would call them – rather than starting with a desired result and working backwards.

The prime minister also threw cold water on any suggestion of a big step-up in monetary policy stimulus, suggesting a move to some form of QE would only flood the economy with too much money. This implies that if we are to see anymore stimulus coming out of China other than incremental interest rate and RRR fiddling and a further move towards a floating currency, it would have come from the fiscal side.

On the subject of QE, the Bank of Japan holds a policy meeting today at which the impact of more ECB QE, Chinese rate cuts and, on the other hand, a possible Fed rate hike in December on Japan’s position in the global export economy will be discussed.

Destocking

The jury is still out on whether Wednesday night’s Fed statement assures a December rate hike or not. Certainly the Fed’s language is suddenly more specific, but I’m yet to see anyone on US business television suggest other than there definitely won’t be a rate hike in December.

Yet it seems the gold market, and the overbought US bond market, are not going to wait to find out. Last night gold fell another US$11.70 to US$1144.60/oz despite the US dollar index pulling back 0.4% to 97.24 after Wednesday night’s jump. The US ten-year yield rose 8 basis points to 2.17% following Wednesday night’s 6bps gain. And yet, last night’s first estimate of US September quarter GDP disappointed.

Having grown at an annual pace of 3.9% in the June quarter, the US economy grew at only 1.5% in the September quarter on first estimates. The main issue was a lack of inventory restocking, which suggests businesses lack confidence in sales growth.

But drilling down showed some positive aspects. Consumer spending rose 3.2%, suggesting cheaper fuel prices are finally starting to have an impact. Business investment in equipment rose 5.3% to more than offset a 4.0% drop plant investment, such as in oil rigs. Home construction spending rose 6.1%. All of these positives were offset by weak inventories.

And we must remember that this first estimate is merely an extrapolation across three months of the numbers crunched so far for the first month of the quarter. That’s why subsequent revisions of the GDP result can often be quite substantial.

One interesting number among the GDP data was the personal consumption expenditure (PCE) measure of inflation for the quarter. It came in at 1.2%, and we recall that (a) the Fed wants to see inflation rising to the 2% target if it is going to raise in December and (b), the Fed prefers the PCE measure over the CPI measure as a guide.

US pending home sales fell 2.3% in September to mark the second monthly drop in a row. This result surprised Wall Street given other home sale data have been positive of late.

All up, one might have expected these weak data releases to prompt selling on Wall Street, particularly after Wednesday night’s 200 point Dow surge. Indeed, the Dow was down almost a hundred points mid-morning, but the afternoon saw the buyers fighting back. Perhaps they see weak data as reason why the Fed will not raise in December.

Commodities

Last night provided the first opportunity for the LME to respond to Wednesday night’s Fed statement, and as might be expected the result was negative. If the Fed starts raising this means a stronger greenback, so all base metals fell 1-2%.

Iron ore fell another US50c to US$49.00/t. I think that’s now twelve days of falls in a row.

The oils came back a tad after Wednesday night’s rally. West Texas is down US17c to US$45.78/bbl and Brent is down US43c to US$48.60/bbl.

The Aussie is 0.3% lower at US$0.7076.

Today

The SPI Overnight closed down 14 points or 0.3%.

Australia’s September quarter PPI is out today, following on from Wednesday’s CPI number which fuelled much Cup Day rate cut expectation.

The BoJ will meet today as noted, and will have September inflation data to contemplate.

The US will see personal income & spending and consumer sentiment data tonight.

On the local stock front, another round of AGMs will wrap up the busiest AGM week of the year while there remains a final handful of quarterly production reports to get through. Macquarie Group ((MQG)) will report interim earnings.

Beijing will release its October manufacturing and services PMIs on Sunday.

And Summer time ends in the US on Sunday morning, so from Tuesday morning the NYSE will close at 8am Sydney time and the SPI Overnight session will also close at 8am.

I could say Happy Halloween but I don’t go in for that Seppo commercial crap. I shall be hiding inside tomorrow night with the lights off as usual when the greedy little sugar freaks come around.

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

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article 3 months old

What Chance Another Asian Financial Crisis?

By Greg Peel

In the mid-1990s, “hot money” flowed abundantly into the “Little Tiger” economies of South East Asia. With Japan in the deflation doldrums and China still then a closed shop, the Little Tigers offered global investors excess returns on the back of rapidly growing economies. However the inflow of capital also affected asset price bubbles, especially in property, which lifted Tiger currencies well above fair value.

The merry-go-round stopped in 1997 when Thailand floated the baht because it no longer had enough reserves to support a US dollar peg. The baht collapsed, the rest of the region quickly followed, and contagion of the Asian Currency Crisis threatened to grip the developed world. Only when the International Monetary Fund stepped in in 1998 was stability restored.

The Global Financial Crisis of 2008 was preceded by developed world property bubbles, most evident in US housing. When it was realised the bubble was being fuelled by unserviceable sub-prime mortgages and related investment instruments, the resultant “credit crunch” resonated around the world and plunged developed economies into recession.

US households immediately responded to the GFC by deleveraging – reducing household debt. Between 2008 and 2013, note Commonwealth Bank’s economists, one trillion dollars was wiped off US household debt. As a result, US consumer spending took a long time to recover despite the Federal Reserve’s attempts to stimulate the US economy through quantitative easing.

As interest rates around the developed world fell to zero, investors went in search of returns elsewhere. They found their opportunity in emerging markets – in the likes of China, Brazil, Russia, Turkey and the aforementioned Little Tigers. The inflow of “hot money” once again spurred on asset bubbles and encouraged the growth of both household and corporate debt in these economies.

Over the multi-year period post-GFC in which US households have deleveraged, ensuring a long, slow US economic recovery, household and corporate debt in emerging markets has expanded from 45% to almost 75% of GDP, CBA notes. Over 2007-14, In Asia ex-Japan, indebtedness in non-financial businesses grew from 10% of GDP in South East Asia to 60%, and to 90% in North Asia. As a consequence, household debt grew by an average 20% in many regional economies over the period.

In late 2013, the Fed announced it was set to start turning off the free money spigot. It was always a risk the Fed’s QE “tapering” program through 2014 would impact on emerging market returns, but the slack was taken up by first the Bank of Japan and the European Central Bank with their own QE programs.

All through 2015, talk has centred around when the Fed might make its first post-GFC rate hike. All through 2015 markets have been worried that such a move would prompt a sharp withdrawal of capital from emerging markets as a tightening of Fed policy allowed for returns to be once again sought domestically. Of course, markets do not wait around to find out. Emerging market currencies have already spent much of 2015 collapsing.

The bearish outlook implied by foreign exchange markets should not be a surprise, suggests CBA, as “the liquidity fuelled leverage binge has reached unsustainable levels at a time when funding cost is likely to rise soon”.

Managing resultant emerging market deleveraging in an orderly fashion represents a key global challenge at this point in time, CBA warns. Even if an actual repeat of the 1997 crisis can be avoided, deleveraging is expected to dampen economic activity for a prolonged period of time. History suggests financial busts associated with a large rise in household debt are followed by an average seven years of household deleveraging.

Last month marked the seventh anniversary of the fall of Lehman. Only this year has US consumer spending begun to show signs of recovery.


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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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