Tag Archives: China and Emerging Markets

article 3 months old

The Overnight Report: Taken In Stride

By Greg Peel

The Dow closed down 50 points or 0.3% while the S&P lost 0.2% to 1938 and the Nasdaq fell 0.1%.

Teetering

Tuesday night’s sell-off in copper provided a sufficient trigger to send the jitters through the local market yesterday morning, with China fears at the forefront of sentiment. The big miners, in particular, were clobbered, and just before midday the ASX200 was down 50 points.

As to what happened next was all going to come down to Caixin’s flash estimate of its Chinese manufacturing PMI. The manufacturing sector in China has now been outgrown by the service sector, but Australian raw materials don’t feed into services. And we recall that it was Caixin’s weak August estimate that set this recent correction in train.

August’s confirmed result was 47.3, and economists were forecasting a tick up to 47.5 in September on the support of Beijing’s various stimulus measures. Thus when the number came in at 47.0, all of Asia groaned.

The big miners were clobbered once more, sending the materials sector down 3.0% for the session. Resource partner energy copped a 2.2% sell-off. But most influential in the index’s final fall of 2.1% was a 2.5% carting for the banks.

Yet again the problem for the Australian market is shown up in such volatility for a sector that should be among the less volatile of any stock market. The Big Four are just too big a chunk of ASX200 capitalisation that by default they become a proxy for the Australian economy in general via the stock market. Thus “Sell Australia” means sell the banks.

There is not otherwise a lot of direct connection between Australian banks and Chinese manufacturing. Although we can make a connection via the RBA. If China’s economic slowdown forces the RBA to cut its rate again, that’s not good news for the banks. Banks like rising interest rates and a brighter economic outlook to raise longer date yields and provide greater net interest margins on lending.

Either way, the latest plunge on the local market took the ASX200 to a close of 4998. I have been suggesting for a while now that 5000 is the solid level of support which, if breached on a closing basis, would likely signal another down-leg through the previous intraday low of this correction (4928). So strictly, we’re there.

However…the good news is we did not close on the low of the session. That was 4988, at around quarter to three. In the context of a hundred point drop, a ten point recovery right at the death seems trivial, but what it showed was that the index was trying to get back over 5000. Indeed, three more little points, or maybe five more minutes of trading, and we may have been having a different conversation.

So, does 4998 mean a breach? I suggest it is not a “meaningful” breach, and today will tell. The SPI Overnight closed up 11 points so we may just be in for a reprieve. Despite a slight drop on Wall Street, most northern markets were stronger last night and seemingly less concerned over this latest weak Chinese data point.

Herby Rides Again

The Volkswagen scandal that rocked the car industry and the German and EU economies these past couple of days subsided somewhat last night on news the CEO of VW had fallen on his sword, taking the rap for the emissions fraud he insists he had no knowledge of. VW shares bounced 5% after having lost around a third of their value.

All German carmaker stocks bounced, as fear subsided that perhaps they’re all in on the game. Surely the likes of Merc and BMW can’t also be so mendacious? The relief rally filtered through to the European indices in general, and ECB president Mario Draghi also provided some confidence.

In light of heightened China fears and the subsequent decision by the Fed not to raise rates, Draghi told members of the European parliament last night the ECB stood ready to pump in more QE if deemed necessary, although not at this stage. Ultimately the German and French markets posted small gains, while London rebounded a full 1.6%.

Clearly Europe was not focused on, or at least as worried as Asian markets were yesterday about the weak Chinese PMI. Indeed, a flash estimate of the eurozone’s manufacturing PMI released last night also showed a weaker number, albeit the drop to 53.9 from 54.3 still keeps the sector in comfortable expansion territory.

Oil-Based

Similarly, a flash estimate of a US manufacturing PMI showed an unchanged 53.0. And similarly, Wall Street did not seem too perturbed about the China number, with the indices opening only a little bit lower and doing not much early in the session. It was Yom Kippur, and volumes were thin.

It wasn’t long before the Dow was down over 100 point nonetheless, but this was all to do with another 3.6% drop for WTI crude. Oil fell on the Chinese PMI, so in theory Wall Street did too, indirectly, but the afternoon saw a gradual rebound to a less intimidating close.

Wall Street has nevertheless done nothing but fall since the Fed made its non-decision last week. While it is easy to point to China, and the Fed’s highlighting of the China problem, the bulk of traders speaking on US business television suggest it is not China, but disappointment with the Fed that is reflected in the weakness.

The Fed’s October meeting looms large. Has the US central bank (a) been surprised by the quite visceral backlash to their indecision, and (b) surprised Wall Street did not rally on the news? Would a tweet from the likes of superstar bond trader Bill Gross suggesting “Get off zero now!” be enough to unsettle the FOMC? Or could the members point to yesterday’s Chinese PMI and say “See!”?

That meeting is not due till the end of October, so it’s just as well October’s not a scary month.

And just to top things off, the US government may once again shut down on October first, not due to budget wrangling, but due to deadlock over an abortion bill. How does one resolve such an issue?

Commodities

Base metal traders all but pre-empted the Chinese PMI on Tuesday night and in so doing, cleared out the stop losses and shook out the commodity funds. Thus while copper did fall again last night, it was only by 0.3%. Mario Draghi’s comments would have helped, and they also pushed up the euro and thus sent the US dollar index down 0.1% to 96.21.

Aluminium also dropped a little, but the other metals all rallied up to 1.5%.

Oil prices definitely fell on China fears, but given recent volatility, any little trigger will do. West Texas is down US$1.67 to US$44.69/bbl for the new November delivery front month and Brent, already November, is down US$1.18 to US$47.81//bbl. The recent range remains well and truly intact.

Iron ore fell US30c to US$56.80/t and has also been going nowhere fast of late.

Gold took the lower dollar and ECB QE talk as reason to rise US$5.60 to US$1130.30/oz.

The Australian stock market was not the only victim of China yesterday. The Aussie is down 1.2% to just over US$0.70.

Today

As noted, the SPI Overnight closed up 11 points, which would take us just a little back above 5000 in the index if accurate.

Japan is back on board today after a three day break, so it will be interesting to see how the Nikkei responds to the past three days’ global activity. Japan will also see a flash PMI of its own today.

Germany’s IFO business sentiment survey for September is out tonight, but I assume the survey was conducted before the VW scandal exploded.

Wall Street will see durable goods and new home sales.

Locally, Brickworks ((BKW)) will release its FY15 result today.

Rudi will make his weekly appearance on Sky Business, at noon (Lunch Money) and re-appear between 7-8pm on Switzer TV.
 

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article 3 months old

Shanghai Nearing A Bottom?

CHINA


Bottom Line 22/09/15

Daily Trend: Neutral
Weekly Trend: Down
Monthly Trend: Down
Support Levels: 2808 / 2437 / 2280
Resistance Levels: 3538 / 4185 / 4721 / 5179

Technical Discussion

It wasn't a bad performance by the Shanghai Composite yesterday reversing a 1% loss to close the session out 1.9% higher. It certainly outperformed the other Asian Indices we cover with the Hang Seng down 0.75%. The mainlands small caps Indices clocked up even better results with the Shenzhen Composite locking in a 3.5% rise, and the 'start ups' ChiNext up a very solid 4.7%. That said overall the markets here continue to remain completely unpredictable, with growth concerns continuing to plague investors minds.  

Reasons to remain bearish:
? consistent economic growth downgrades now becoming common place
? interest rate cuts to this point having little effect
? immediate dip has been strong
? price chart now reveals technical damage 

A key outside reversal day was locked in yesterday where weakness throughout the morning session was reversed in the second half of the day with price closing strongly. Some technical traders flag key outside reversal days as technically significant yet from our experience they tend to simply reveal shorter term moves rather than anything more. So yes we may get some upside follow through for a couple of days yet beyond that the market is likely to remain erratic. Overall we continue to see scope for lower via a couple of aspects to the chart.

Firstly wave equality basis this strong bout of weakness comes in at 2379. Secondly Wave-C's do frequently unfold as 5-wave patterns rather than three, so basis this there is still scope for one final swing to the downside from here. The recent move higher off the 2850 lows also doesn't look overly convincing being choppy and weak in nature. And last yet not least is that overhead resistance and the 200 moving average are lining up together within the 3500 - 3700 price zone so this area is likely to be difficult to overcome shorter term. On the flip side if price does swing lower within the proposed 5th and final wave, it will be greeted with some  strong looking Type-A bullish divergence. So we would definitely be looking for buyers to return pretty quickly if further weakness was to transpire over the coming weeks. So weaker first before we see some form of decent recovery continues to look high probability.

Trading Strategy

Chinese markets tend to affect our own markets here in Australia. So it's no real surprise that with the Index dropping from 5178 in June to 2850 in August, our own ASX200 (XJO) has dropped from almost 6000, right down to the recent 4928 lows, with still scope for a little lower. To shine a light though, if price does drop lower from here, such a move by all accounts could well signal the end of this weakness. As such some solid buying opportunities for traders could be just around the corner.   
 

Re-published with permission of the publisher. www.thechartist.com.au All copyright remains with the publisher. The above views expressed are not by association FNArena's (see our disclaimer).

Risk Disclosure Statement

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article 3 months old

The Overnight Report: Of Cars And Copper

By Greg Peel

The Dow closed down 179 points or 1.1% while the S&P lost 1.2% to 1942 and the Nasdaq fell 1.5%.

Hesitant

The ASX200 shot up 59 points out of the blocks yesterday in another bout of what has now become familiar whiplash volatility. It looked like we might be in for another one of our total reversal sessions following the drubbing on Monday, but this time it wasn’t to be so.

The index faded and faded as the day wore on, suggesting the opening rally was more about sellers backing off than buyers arriving in force. Just after 3pm, the index was up a mere 6 points. Then it looks like someone put in a sizeable late sell order, given a close of up 37 seemed to run counter to the mood over most of the day.

That buyer might be feeling a little sheepish this morning.

The ultimate close was a bit of a mixed bag on a sector basis. Yet another pop for the oil prices sent energy up 2.7%, while an unchanged iron ore price was enough to see a 0.3% fall in materials – the only sector to finish in the red. With utilities, the telco and consumer staples also closing up around 1.5% we might suggest yield was the story yesterday, albeit the banks only managed 0.6%.

Recent extreme volatility in bank share prices may well have scared off more conservative investors.

It will all be a different story today nonetheless, with northern markets copping a thumping overnight. I have been suggesting these past few days that weakness on Wall Street post-Fed has been more to do with the derivative expiry and Fed disappointment than it is to do with renewed China fears, given there’s nothing much new about China fears. Well, it looks like commodity traders have had a think about it, thanks to Janet Yellen’s highlighting of the issue, and decided to get out.

Commodities

The benchmark commodity for global economic growth is copper, and last night it fell 3.4% on the LME, having been down as much as 4.5% at the afternoon “close”. At just over US$5000/t copper is near its six-year low, but has not yet fallen back to its August low.

Commentators were scratching their heads as to why commodity prices suddenly decided to give way last night, but realistically we’d have to assume a bit of building angst since the Fed made the historical decision of allowing the rest of the world to dictate US monetary policy. Stop loss breaches and commodity fund selling did the rest (commodity funds much constantly buy and sell to maintain basket weights and in so doing feed volatility somewhat self-destructively).

The likely trigger was a report out from the Asian Development Bank which featured a downgrade to the bank’s 2015 China growth forecast to 6.8% from 7.4%. My only comment here is where on earth did 7.4% come from? Even Beijing’s target is 7.0%. And the rest of the world’s economists had already pencilled in numbers around 6.8% in January.

But that’s markets for you.

Beyond copper, the other base metals all fell around 1.5%.

Iron ore was again unchanged at US$57.10/t, but that hasn’t stopped BHP Billiton ((BHP)) being thumped 5% overnight, Rio Tinto ((RIO)) 3.5%, and London-based Glencore 10%.

West Texas crude is down, but only by US65c to US$45.83/bbl. And Brent is up US27c at US$48.99/bbl.

Commodity price falls have helped the Aussie down 0.6% to US$0.7089, and the Aussie, and commodities, were also under pressure from a 0.4% gain in the US dollar index to 96.32.

Gold is thus down US$8.70 at US$1124.70/oz, and silver fell 3%.

That was all about weakness in the euro, and that is all about cars.

Bugs in the system

What started as an embarrassment has now led to a major mea culpa as the number of vehicles Volkswagen will have to recall due to emissions fraud has risen to 11 million globally.

VW shares fell 15% in Germany last night and traders began to wonder whether the leading carmaker (briefly the biggest company in the world after the fall of Lehman) is alone in its software manipulation. When you think VW, Mercedes Benz, BMW, Audi and Porsche, you realise that auto-making is a significant contributor to Germany’s GDP.

The DAX thus fell 3.8% last night, dragging the rest of Europe and the UK down with it. Auto-makers were a target globally, including Ford, which fell 2.8%.

Thus on a combination of copper and cars, Wall Street was trashed on the open. The Dow was down close to 300 points by lunchtime.

However volume was light, which is in sharp contrast to near-record volumes recorded last Friday, expiry day, when last Wall Street tanked. It was more a case of no buyers than many sellers. Hence the indices did manage to recover some ground in the afternoon.

Bonds nevertheless became a safe haven once more, with the US ten-year yield falling 9 basis points to 2.12%.

It should also be acknowledged that the European car crisis, if we want to call it that, has come on top of ever-building migrant crisis. Last night EU countries agreed to resettle 120,000 Syrian refugees between them, to take the pressure off the landing destinations of Italy and Greece. It is a humanitarian crisis, but it also represents a heavy cost burden for EU countries struggling to reignite growth.

Today

The SPI Overnight closed down 66 points or 1.3%.

If accurate, we’ll be heading toward 5000 again, but we’d need another drop of over 100 points in the ASX200 to breach that level today. It is likely all going to depend on today’s release of Caixin’s flash estimate of its China manufacturing PMI for September, due around midday.

Caixin’s final August result was 47.1, and the forecast for September is 47.6. If this is accurate, then we may see some market relief, although sub-50 still means contraction. But improvement would go some way to suggesting Beijing’s desperate stimulus attempts might just be showing signs of effect.

Realistically, for earlier interest rate cuts and currency devaluations, it’s very early days for a flow-through impact.

Japanese markets will again be closed today, which is probably a blessing for the world’s other major auto-maker.

Locally, Nufarm ((NUF)) will release its FY15 result.

Rudi will appear on Sky Business twice today. First as guest between 5.30-6pm (Market Moves) then later as host on Your Money, Your Call Equities (8-9.30pm).
 

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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 Overnight Report: Not What You Think

By Greg Peel

The Dow closed up 125 points or 0.8% while the S&P gained 0.5% to 1966 and the Nasdaq closed flat.

Jumping at Shadows

There was nothing particularly remarkable about yesterday’s significant sell-off on Bridge Street. The market remains very jittery, and technical analysts continue to suggest the index needs to drop to a new low before the bull market can re-establish, both locally and on Wall Street.

The likely trigger for the panic, which saw the big name sectors of banks, energy and materials hardest hit but selling otherwise market-wide, was an assumption by investors the Fed’s decision not to raise suggests the global economy is in a more parlous state than already assumed, and specifically the Chinese economy. A near 300 point fall in the Dow on Friday night confirms this assumption.

Except that it doesn’t. There is no reason to believe the Fed knows anything more about the state of the Chinese economy than the market does. A global correction in stock indices of around 15% is already an adjustment to the China reality. Under pressure from the likes of the IMF, the Fed is vacillating, and moreover by being worried about market uncertainty, is simply fuelling that uncertainty with its timid indecision.

There are two main reasons Wall Street dropped sharply on Friday night, and China is not one of them. Last night’s rebound confirms to a great extent that Friday’s trade was about disappointment in the Fed and, more influentially, about volatility independently driven by the quadruple witching derivatives expiry.

The good news is that the ASX200 hit a low yesterday at 2pm of down 143 points before recovering 39 points to the close. This still left us with a 2% drop, but a secondary phase of a correction is more likely to begin with a panicked close on the lows of the day. The other good news, technically, is that the ASX200 once again approached the 5000 support level, got as far as 5027, and then retreated once more. We did not see a lower low.

Such volatility is consistent with any market correction. Markets never V-bounce out of major pullbacks, and W-bounces aren’t clear cut either. What tends to happen looks more like WW, representing a volatile period of consolidation. That’s not to say we can’t yet see a lower low, and a close below 5000 would no doubt ensure one. But few disagree a lower low would still provide a bottom of the correction, and not the beginning of a bear market.

Or we may not see a lower low. If 5000 continues to hold, eventually this market is going to come to believe we must have already seen the bottom.

Of course, Wall Street will have a lot to do with it. As will ongoing Chinese data releases (such as this week’s Caixin flash manufacturing PMI release).

Disappointment

Wall Street market commentators appear to have a consensus view in the wake of the Fed’s decision of “we didn’t think they would but we were really hoping they would”.

Last night the Dow opened with a near 200-point rally to late morning, most likely representing Friday’s expiry factor. It didn’t help that last night’s August existing home sales number showed a greater than expected fall of 4.8%, but economists were none too concerned – July marked a post-GFC high in existing home sales.

It was at that point however, that Hillary Clinton entered the game.

A US drug manufacturer had been accused of price gouging on a particular drug. Presidential candidate Clinton tweeted that she intends to attack price gouging in the drug industry and will tonight outline her plans. In response, US biotech stocks were crunched. These high momentum plays are very susceptible to volatility.

So down everything came, until lunchtime. It was then Fed president and FOMC voting member Dennis Lockhart suggested he remained very confident that there will indeed be a Fed rate hike this year. On that note, the Dow rallied back to be up 150 points, before fading slightly at the close.

Can you believe it? A Fedhead calls a rate hike and Wall Street rallies. So diametrically opposite to what would have happened in the first half of this year.

And evidence Wall Street is not as worried about the Chinese economy as Friday night’s drop might suggest.

Biotech stocks nevertheless did not join in the rebound. Hence while the Dow closed up 0.8%, the Nasdaq closed flat on the session. The S&P split the difference with a 0.5% gain.

Commodities

Underpinning last night’s rally in US stock indices was a rally in oil prices. However, one would have to think these monotonous inter-day swings of 3,4,5% are becoming so regular as to become meaningless. Friday’s weekly US rig count showed a drop, so oil prices jumped last night.

West Texas is up US$1.56 or 3.5% at US$46.48/bbl and Brent is up US98c or 2% to US$48.72/bbl. The West Texas October delivery contract is set to expire, so that would also feed the volatility.

Base metal prices were evenly up and down by not too significant amounts last night on the LME, suggesting nothing in particular.

Iron ore was unchanged at US$57.10/t.

The US dollar index is up another 0.8% to 95.92, spurred on by Lockhart’s comments. Thus gold is down US$6.50 to US$1133.40/oz.

And the short-covering rebound in the Aussie appears now to have lost steam. The Aussie is down 0.8% to US$0.7129.

Today

The SPI Overnight closed up 28 points or 0.6%.

A June quarter house price index will be released locally today, and Japan will again be closed.

TPG Telecom ((TPM)) will release its FY15 result today.
 

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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

Uncertainty

It was a wild old ride on Bridge Street on Friday – not very “Friday” at all. The ASX200 was down 50 from the open and then up 50 mid-session, before fading to close up 23. The only sector to finish in the red was energy, with a distinct 1.6% fall.

The volatility mimicked a similar response on Thursday on Wall Street to the Fed’s rate decision, or more accurately lack thereof. Wall Street ultimately closed lower on Thursday night but not with any great conviction, reflecting indecision about whether the Fed’s message was a good one (lower rates for longer supporting asset prices) or a bad one (US economy not strong enough, global growth concerns).

The ASX200 thus also opened lower, helped by weaker oil prices, but it seems the buyers thought “why do we need to go lower?” If it’s all about a slowing China well we’ve already adjusted for that issue. That’s why we’re holding above 5000 and not testing 6000 as we were earlier in the year. And the Aussie has come right back towards a more “fair value” level, offering long-awaited support for the Australian economy.

Which is exactly the way Glenn Stevens saw it as he testified before a parliamentary committee on Friday, which the RBA governor is obliged to do every six months (not quarterly, as I erroneously suggested last week). If Janet Yellen was playing up the China fear in her press conference, Glenn Stevens was playing it down. And between the US and Australia, it is Australia more directly linked to China’s economic performance.

The Australian economy is doing okay, Stevens implied, and we will eventually see the benefits of the weaker currency flowing through.

Frustration

The smart money had stood aside on Thursday night on Wall Street as the headless chooks ran around, and returned on Friday night to decide the response was to sell. While the reasons why it was a sell call are debatable, I think we can now finally put to bed the notion of “bad news is good news” for Wall Street. If that thematic were still the rule, the Dow would have been up 300 points on Friday night.

As it was, the Dow closed down 290 points or 1.7%. The S&P lost 1.6% to 1958 and the Nasdaq fell 1.4%.

The falls followed a lead-in from Europe of a 3% fall in Germany, 2.5% in France and 1.5% in the UK, which followed a 2% fall in Japan. Clearly the world was not enamoured with the Fed’s decision.

Why?

Is it because no rate rise implies the US economy is not strong enough? No. Apparently the FOMC’s decision was a very close run thing and thus the deciding factor was concerns over global growth, meaning China and emerging markets, and market volatility, which in theory is meant to be no concern of the Fed’s. So were markets down because if the Fed is worried about China, perhaps the world should be more worried about China than it previously has been?

There is certainly an argument here, and that’s the way commodity markets saw it on Friday night as well. But there’s also the argument that the volatility the Fed is worried about is just as much to do with Fed uncertainty as it is to do with China. In other words, the Fed has said “we won’t raise while the markets are volatile” yet by not raising it has assured that markets will remain volatile on ongoing uncertainty. Investors are frustrated, and have decided to sell rather than go through another tiresome round of “will they/won’t they?”

From Wall Street’s perspective, Friday night’s move was also clouded by the fact it was quadruple witching derivatives expiry, which can move markets substantially independent of any fundamental influences. Friday saw one of the heaviest volume days for the year on the NYSE, and that’s all about expiries. Thus if the selling was all about quadruple witching, we’ll have to wait to tonight to see what Wall Street really thinks.

The US ten-year yield lost another 9 basis points on Friday to 2.13%, so we’re back below the starting point of selling ahead of what the US bond market clearly assumed would be a rate rise. But there is also another influence on US bonds we should consider.

Someone out there holds more US bonds than anyone else, and is currently spending a lot of money propping up its economy and share market and thus needs some funds. Weakness in US yields has been attributed to the added element of Chinese sales.

Spooked by the 300 point Dow fall, the local SPI futures closed down 76 points on Saturday morning. That would take us back down to 5100, which is still 100 points above what has so far proven impenetrable support at 5000. If Friday was a buy, then today is a buy on the opening drop, assuming nobody’s changed their minds over the weekend.

And a weekend is a long time in markets.

The good news is that the weekend brought Alex Tsipras and his Syriza party re-election in Greece, with only a handful of seats lost. This suggests a vote to suffer the strict austerity regime placed upon Greece by its creditors, even though Syriza was first elected on exactly the opposite ticket.

The main opposition was pro-austerity anyway, so that wasn’t an issue. But with the majority of Greek voters now resigned to their lot, presumably the rumblings of discontent will subside and the word “Grexit” will be consigned to the shelf.

The IMF-EU-ECB will also be heartened that Greece’s ultimate submission has sent a message to any other eurozone anti-austerity groups that “you can’t fight the troika”.

Commodities

Oil was the main focus on Friday night, as West Texas once again plunged 4% or US$1.99 to US$44.92/bbl and Brent fell 3% or US$1.50 to US$47.74/bbl. The falls carried on from the immediate post-Fed response on Thursday night.

But WTI finished the week exactly where it had started. It was bid up all week on an expected Fed rate rise, and sold off when that didn’t happen. Had the Fed raised, it would have removed uncertainty and settled markets but also sent a message that global growth is not a worry. The opposite was true. So oil prices fell back, as did base metal prices.

LME prices had been largely stronger ahead of the Fed meeting, and on Friday night copper and zinc fell 3%, lead and nickel 2%, tin 1.5% and aluminium 0.5%.

The US dollar actually recovered on Friday night all it lost on Thursday night post the Fed’s non-decision. The dollar index rose 0.8% to 95.15. This would not have helped commodity prices.

Iron ore ticked up US30c to US$57.10/t.

And gold rose again, by US$7.70 to US$1139.90/oz. Call that a delayed response to no rate rise.

The Aussie is up 0.2% at US$0.7187, despite the US dollar gain. One wonders how long the short-covering support will last.

As noted, the SPI Overnight closed down 76 points or 1.5%.

The Week Ahead

It won’t just be the week ahead, but the quarter ahead, in which we’ll be debating whether the Fed might raise.

Shoot me now.

Is the Fed still “data-dependent”? And if so, whose data? America’s or China’s? On Wednesday we’ll see Caixin’s flash estimate of Chinese manufacturing PMI for September, and if you recall, it was Caixin’s August estimate that sent the proverbial hurtling into the fan a month ago.

Flashes will also come from the eurozone and US, with Japan a day later. Japan is closed until Thursday.

The US will also see existing home sales tonight, FHFA house prices and the Richmond Fed index tomorrow, new home sales, durable goods and the Chicago Fed national activity index on Thursday, and a flash services PMI estimate, fortnightly consumer confidence and another revision of June quarter GDP on Friday.

A quiet week economically for Australia sees a June quarter house price index tomorrow as the only highlight.

On the local stock front, TPG Telecom ((TPM)) will release its FY15 result tomorrow, Nufarm ((NUF)) on Wednesday and Brickworks ((BKW)) on Thursday.

The ex-div season starts to wind down with only a handful this week, but from now the AGM season starts to ramp up, with Suncorp ((SUN)) among the early birds this week. Telstra ((TLS)) will also begin a series of shareholder meetings across the country today.

Rudi will appear on Sky Business on Wednesday at 5.30pm and on Thursday at noon and again between 7-8pm for the Switzer Report. On Wednesday night, 8-9.30pm, Rudi will host Your Money, Your Call Equities on the same channel.
 

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

Well I would like to have been able to say today ushers in a whole new world but I can't, so it's back to the same old game.

Wall Street has to get through quadruple witching expiry tonight after a volatile period and Greece goes to the polls on Sunday. Wouldn't it be fun to talk about nothing other than Greece and the Fed for the next three months?

On Wednesday Caixin will provide a flash estimate of its China manufacturing PMI for September, offering up some more potential volatility. Japan, the eurozone and the US will also provide estimates.

Japan will be closed from Monday through Wednesday.

The Fed's endless data-dependence will be fuelled by existing and new home sales, house prices, the Richmond Fed regional and Chicago Fed national indices, durable goods, consumer sentiment and the second revision of June quarter GDP.

Australia's week is largely devoid of data.

On the local stock front, there remains a trickle of ex-divs to get through, Telstra ((TLS)) will begin holding shareholder meetings across the country, TPG Telecom ((TPM)), Nufarm ((NUF)) and Brickworks ((BKW)) post FY15 results, and the what will soon be a flood of AGMs kicks off next week, with Suncorp ((SUN)) among the early crowd.
 

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article 3 months old

The Overnight Report: Bond Market Wakes

By Greg Peel

The Dow rose 228 points or 1.4% while the S&P gained 1.3% to 1978 and the Nasdaq added 1.1%.

Welcome Aboard

If Malcolm Turnbull is to restore confidence in the Australian market, as many a commentator has suggested, then he wasn’t exactly off to a flying start yesterday. But not even Malcolm has the power to turn back the tide of volatility still flowing through the local market as a result of global macro uncertainty.

We might again wonder what was going on in the market on Monday, before politics took the spotlight in the afternoon. The ASX200 opened up 60 points and yesterday closed down 78 points. Nothing (outside of politics) had changed in the interim, other than offshore markets had had a chance to respond to the weekend’s Chinese numbers which the Australian market didn’t seem to feel were a problem on Monday morning.

But while falls in the prices of oil, iron ore and base metals on Monday night showed up in falls in excess of 1% for the materials and energy sectors yesterday, every sector bar consumer staples fell at least 1%. This was thus another market sell-off, and simply another day of macro-related volatility. However there was a clear domestic bias to the final result, evoked by the minutes of the September RBA meeting, released yesterday.

While the board gave a nod to the China fears sweeping the globe at the meeting, it suggested the problems had “not impaired the functioning of other financial markets” and that Beijing’s stimulus measures had “not yet had their full effect”. But it was the domestic economic assessment that caused some ripples.

We note that the Shanghai index fell another 3.6% yesterday and was weaker when the ASX closed, adding fuel to the sell-off fire.

Only a month ago, at the August meeting, the RBA suggested: “Domestically, economic activity had generally been more positive over recent months”. But one month later: “Domestically, the national accounts were expected to show that output growth had been weak in the June quarter”. That’s quite a turnaround in a short space of time. June quarter growth was indeed weak, and we recall that the GDP result was released the day after the September RBA meeting.

So back in August, talk of another rate cut had subsided, and some economists were back to suggesting that it won’t be for a while, that the next move in rates will be up. On yesterday’s minutes we’re back to discussing just when the RBA might cut again. The impediment to a rate cut is nonetheless the soaring property market, but that barrier may now be in the process of being dismantled:

“There were indications that the measures implemented by APRA had slowed the growth in lending for investment housing.”

If the door is not yet fully ajar for another rate cut, it’s certainly not slammed shut.

So shouldn’t the stock market applaud the chance of another rate cut? Not if it is implicit of an Australian economy struggling not to slip backwards into contraction. The tenor of RBA rhetoric seemed to switch sharply from quietly confident to concerned from August to September, and there are many, the RBA itself included, who don’t believe another 25 basis points down from 2% would make the slightest bit of difference to business investment intentions.

If businesses aren’t investing for growth when cash is 2%, they’re not likely to suddenly all get up and cheer if it’s 1.75%.

But we needn’t despair. On Wall Street strength the SPI Overnight has closed up 56 points this morning.

Bonds Make A Move

Having hovered around the 2.18% mark for a few sessions lately, the US ten-year yield suddenly jumped 10 basis points to 2.28% last night. Does someone know something? The two-year yield jumped 7 basis points to 0.80% to mark its highest level in four years.

It certainly wasn’t anything to do with strikingly positive signs amongst last night’s US data releases. Industrial production fell 0.4% in August, albeit this was in line with expectations. Retail sales rose by only 0.2% but again that was in line with expectations. Not meeting expectations was the Empire State activity index, which only managed to tick up to minus 14.7 from August’s minus 14.9 when economists had forecast a return to zero.

No great incentive for a rate hike here, but then if the Fed is going to move, these late releases will not be the defining factor.

If the US bond market is suggesting the Fed is going to move, why did the US stock market rally? Shouldn’t a rate hike be “bad” news?

The two great uncertainties on Wall Street, for which there is no consensus view, are whether or not the Fed will hike on Thursday, and whether the US stock market will rise or fall on either outcome. Last night’s rally for US stocks suggests either that the stock market is in diametric disagreement with the bond market about a hike, or a hike will actually be positively received. Volumes were nevertheless light, thus most players are happy just to stand aside until the big announcement.

Which also means most commentators are trying not to read too much into last night’s stock rally and bond sell-off.

Commodities

The selling which gripped the LME on Monday night continued from the open last night before a square-up began, sparking some short-covering. Traders are basically jostling for position ahead of Thursday and only zinc finished lower, down 0.5%, while copper rose 0.7% and nickel rose 1.5%.

Alas, it had appeared only a few sessions ago that iron ore was setting to reclaim the 60-mark but last night saw another US$1.10 fall to US$56.40/t.

West Texas crude nevertheless rebounded, jumping US$1.00 to US$45.15/bbl, but again Brent exhibited dislocation in being barely changed at US$46.63/bbl. The spread is now under two dollars.

The US dollar index followed the lead from the bond market last night in rising 0.4% to 95.61, but commodity prices are not paying too much attention this week. Other than gold, which fell US$3.80 to US$1105.00/oz.

The Aussie is hanging on to its Turnbull adjustment and is steady at US$0.7139.

Today

As noted, the SPI Overnight closed up 56 points or 1.1%.

Tonight’s late mail for the Fed will be the US August CPI numbers, and the eurozone will also see inflation data. US housing sentiment will be in the frame as well.

There is another lump of stocks going ex-div on the local market today.

Rudi will make his usual appearance on Sky Business' Market Moves, 5.30-6pm.
 

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article 3 months old

The Overnight Report: Quietening Down

By Greg Peel

The Dow closed down 62 points or 0.4% while the S&P lost 0.4% to 1953 and the Nasdaq fell 0.3%.

Mal Content

Is it just me, or did that all seem to happen rather quickly?

There is little doubt yesterday’s rather bizarre trading pattern for the ASX200 included an overlay of domestic political uncertainty, although such intraday volatility is typical of a market attempting to consolidate after a correction. Commentary continues to point to “weak” Chinese data delivered over the weekend, but a 60 point opening rally for the Australian index might suggest otherwise.

As “weak” data goes, Sunday’s numbers were on the less disappointing side, given a slight “miss” on industrial production forecasts was offset by a slight “beat” on retail sales. But sixty points did seem a stretch, particularly when there are still those looking to sell out of investments for fear this correction is not necessarily over yet.

Thus we went back down again, and then up again, and then down into the red, briefly, before closing up 24 points, which on a close-to-close basis looks like a quiet day. But by the four o’clock bell, domestic uncertainty was rife.

As has oft been noted, stock markets are ambivalent to the political stripe of government – there is no correlation in Australia of market performance and Coalition or Labor governments – and presumably that stretches to who is actually in charge of the government. What markets fear is uncertainty, and this year constant talk of the prime minister being challenged and the treasurer being replaced has provided plenty of it at a time of global upheaval.

Last night the uncertainty ended. One presumes that unlike the prime minister he replaced, Abbott will not haunt the corridors and manage to muscle his way back in at the eleventh hour. Aside from ending the uncertainty, Turnbull brings to that table some distinct differences that should register as positives with the stock market: economic and business experience, widespread electoral popularity, oratorical eloquence (aiding policy justification) and climate change recognition. The latter might send some ripples through the fossil fuel industry, but when we consider many large energy companies are actually leading the alternate energy drive, up until now with a hostile government, the critics will find themselves a lonely collective.

But enough about politics, what’s done is done, and we still have to get past Thursday’s Fed rate decision, whatever that may be. Although it’s interesting to note the Aussie has done nothing but run up since the spill was announced, despite a steady US dollar.

Follow the Oil

If Bridge Street seemed unfazed about the Chinese data from yesterday’s opening bell, perhaps even seeing “not terrible” as “good”, the same cannot be said for commodity markets overnight. The weak August Chinese industrial production number was cited in the metals and oil exchanges as the reason for downside.

If there is an element of fear driven by the notion Beijing has been throwing everything bar the kitchen sink into stimulus and it has not worked, we should at least note that the sledge hammer of currency devaluation occurred in August and will take time to have an impact, and indeed the earlier interest rate and RRR cuts need, in theory, a good six months of run-time before their impact becomes evident.

The commodity markets are a hotbed of frayed nerves at present, and every little thing looks catastrophic. The oil markets are a case in point, and last night when WTI opened lower, so did Wall Street.

It was Rosh Hashana last night, ensuring trading volumes were light. While the Dow was down a hundred points at one stage before picking up towards the close, it was the least volatile session of intraday activity since August 18. Aside from the Jewish holiday, Wall Street probably would have banged along the flatline if it were not for oil. All anyone can talk about otherwise is the Fed, and no one knows what Thursday will bring.

Commodities

West Texas crude was down over 3% before kicking back up in electronic trading to be down only 1.4% over 24 hours, or US63c, to US$44.15/bbl. Interestingly, Brent did not rebound, and is down 3.2%, or US$1.56, to US$46.59/bbl.

This is interesting because it means the Brent-WTI spread is back at roughly two dollars. For a long time this was considered the “normal” spread and very infrequently would that gap move much one way or the other, except in the last decade, which has seen it blow out to as much as US$27. It’s taken that long to come back again, largely reflecting the gradual easing of storage and transport problems in the US.

Only tin managed to hold up against China-driven selling pressure on the LME last night. Aluminium, copper and lead all fell around 2% and nickel and zinc fell 4%.

Iron ore fell US$1.00 to US$57.50/t.

The falls had nothing to do with the US dollar, which was only a tad higher at 95.26 on its index. Gold, subsequently, is as good as steady at US$1108.80/oz.

The Aussie does pay attention to the US dollar, given it is the denominator of the exchange rate, so the 0.7% gain last night to US$0.7138 all came out of Canberra.

Today

The SPI Overnight closed down 29 points or 0.6%, which, in isolation, is simply a reverse of yesterday’s ASX200 close and a reflection of Wall Street’s and commodity markets’ responses to the China data. So if this is the starting point, we will then have to see whether the Turnbull factor in the currency can be replicated in the stock market.

The minutes of the September RBA meeting are out today, and it will be interesting to read what the board felt about China’s stimulus efforts and Fed speculation.

The Bank of Japan meets today but presumably will do nothing until that other central bank makes a decision, if anything was going to be done anyway.

There are some important US data releases due tonight, including August industrial production and retail sales. However, as I have suggested, it would be a flippant “data-dependent” Fed to wait for such late mail to inform Thursday night’s decision.
 

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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

Friday

Investors would have been relieved by Friday’s trade on Bridge Street which did not see any wild swings either way for a change. It was volatile, but in a tighter range and without much conviction. The ASX200 was down 40 early on and up 20 at lunchtime before meandering to a close of down 24.

For the first time in the week the banks were not a significant feature of index movement. Energy, healthcare and the telco saw falls of over 1% but all other sector movements were benign. Once again it was very “Friday”, ahead of a weekend featuring another round of Chinese data possibly set to scare the world again and ahead of a critical Fed meeting.

Wall Street

Wall Street’s Friday session was not dissimilar, the difference being the Dow opened lower on a weak lead-in from Europe before rallying hesitantly throughout the day to be up 102 points or 0.6% on a late kick. The S&P closed up 0.5% at 1961 and the Nasdaq rose 0.6%.

Once again traders had their focus firmly fixed on the oil price, such that a wobble in WTI mid-session was reflected in a temporary drop back to the flatline for the stock indices.

Oil opened lower from the outset, until the weekly US rig count showed a reduction of ten rigs. This was enough to promote a rebound but just when oil looked like heading into the green, out came a note from Goldman Sachs.

In 2008, Goldman Sachs famously called WTI at US$200/bbl as the US dollar collapsed on emergency Fed rate cuts and geopolitical tensions underpinned. The price ultimately peaked near 157 intraday. Last night’s note from Goldman called oil at US$20/bbl.

It is not the investment bank’s “base case” scenario, and indeed the analysts ascribe only a 50% chance of 20 dollar oil. For a while now we’ve heard many a commentator suggest oil in the thirties is not out of the question but this is the first call in the twenties from a major house.

Goldman’s base case has oil trading at US$38/bbl in one month and US$45 in twelve months. The analysts’ previous forecasts had US$45/bbl in one month and US$60 in twelve. So if we dismiss the 20 call for the moment (no doubt Goldman’s trading desk is short oil) we are still looking at a sizeable downgrade from the major house. It is not a call based on lack of demand, but on oversupply.

To that end, an oil price recovery still requires an awful lot of marginal supply to be shut down, and/or small oil companies going to the wall. The latter scenario interestingly brings us back to the Fed.

Wall Street is concerned that were the Fed to raise this week, collateral damage may be significant in emerging market currencies and in bank loans to small oil companies. There is a significant level of loans in the industry that at the time required oil price hedges in place before banks would hand over the money. Those hedges were typically for twelve months, beyond which hedging starts to become overly expensive.

It is now over a year since oil prices began to plunge, thus hedges have been rolling off. We’re not talking GFC II, but there remains concern a move towards normalisation from the Fed may set off a mini-crisis among regional banks in particular.

We enter the final week with the US bond market still suggesting no September rate hike (the ten-year yield fell 4 basis points to 2.18% on Friday night and has been as high as 2.50% this year when rate rise expectation was most rife) and the Fed futures market giving September less than a 50% probability. Those suggesting the Fed will raise this week are mostly stock market players.

Three more sleeps.

Commodities

Between a US rig count reduction and Goldman’s new price targets, West Texas was down US95c to US$44.78 on Saturday morning. Brent was down US62 to US$48.15/bbl.

Base metal trading was mixed and mostly insignificant. Lead traded a 1% drop with a 1% gain for tin.

Singapore had a holiday on Friday so iron ore is unchanged at US$58.50/t.

The US dollar index fell 0.4% on Friday to 95.18 which helped the Aussie up 0.2% to Saturday morning at US$0.7091.

Gold is relatively steady at US$1107.70/oz.

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

China

Yesterday Beijing provided a data dump of August numbers.

Industrial production grew by 6.1% year on year, up from 6.0% in July but below 6.3% forecasts. Retail sales grew by 10.8%, up from 10.5% and above 10.6% forecasts. Fixed asset investment grew by 6.3% year to date, in line with July and in line with forecasts.

The global proxy for trading China’s economy is the Aussie dollar. On Saturday morning the Aussie was at US$0.7091 as northern hemisphere traders hit the showers and this morning it’s at US$0.7084 as southern hemisphere traders pull on their boots. It’s an insignificant difference, reflecting a set of Chinese data that for once did not materially disappoint on a net basis.

The Week Ahead

It’s a Jewish holiday in the US tonight which takes a lot of Wall Street out of the scene. Wednesday night brings the Fed rate decision and a quarterly press conference from Janet Yellen. One might safely assume global markets will be dead quiet in the run-up but that hasn’t always been the case ahead of critical Fed meetings.

On Wednesday morning the US CPI is released for August, and inflation is the other big factor for Fed policy outside jobs. However, one presumes the fate of the world will not hinge on such late mail, and besides, the Fed prefers the personal consumption and expenditure (PCE) inflation measure as its benchmark.

Other US data releases this week include industrial production, retail sales, business inventories and the Empire State activity index tomorrow night, housing sentiment on Wednesday, housing starts on Thursday and leading economic indicators on Friday.

Friday is also the September quarter quadruple witching expiry of stock market derivatives.

The eurozone will see industrial production, trade, unemployment and inflation data across the week as well as the ZEW sentiment index on Tuesday, just to remind us Europe is still there. The Bank of Japan will hold a policy meeting on Tuesday but is likely to be in wait-mode like the rest of us.

The minutes of the September RBA meeting are due on Tuesday, an RBA Bulletin will be released on Thursday and on Friday, Glenn Stevens will provide a scheduled testimony to a parliamentary committee.

Australian data are thin on the ground this week. In the stock market, Thursday sees the quarterly expiry of ASX futures and index options and on Friday the pre-announced quarterly index promotions & relegations will take effect.

This week brings earnings results from New Hope Coal ((NHC)) today, OrotonGroup ((ORL)) on Thursday and Premier Investments ((PMV)) on Friday.

There are still a few more ex-divs to work through.

Oh, and Greece will hold an election on Sunday. I’m sure it will all go smoothly.

Rudi will appear on Sky Business on Wednesday at 5.30pm and 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

Beijing will release August industrial production, retail sales and fixed asset investment numbers on Sunday. Given the market has established for itself a “put option” of belief bad numbers will only prompt more stimulus from Beijing, we might consider good to be good and bad to be good too. But given elevated market fear, anything might happen on Monday.

As we entered September, it was considered two US economic releases will be of most importance to the Fed ahead of next week’s FOMC meeting. One was jobs, which featured a fall in unemployment into the Fed’s target zone, and other was inflation. Tonight sees the PPI and most importantly, Wednesday sees the CPI data. Mind you, Wednesday night is also when the Fed delivers its decision.

Further US releases during the week include industrial production, retail sales, inventories, housing sentiment and the Empire State activity index before the Fed meeting, and housing starts and leading economic indicators after the meeting. Next Friday is the quadruple witching derivatives expiry.

There’s plenty of data for the eurozone to mull over next week but given Mario Draghi has made his intentions clear, in stark contrast to Janet Yellen, their impact will be limited.

The Bank of Japan will meet on Tuesday and the Kiwi June quarter GDP result is due on Thursday.

The Australian market will also see a major quarterly derivatives expiry, on Thursday, in a week otherwise largely devoid of economic data releases. The minutes of the RBA meeting and an RBA Bulletin provide the highlights.

On the local stock front, the run of ex-divs begins to thin out next week while earnings results from retailers come to the fore.

Bring on the Fed.
 

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