Tag Archives: China and Emerging Markets

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

Chinese currency policy will no doubt continue to reverberate next week but things should settle down a bit as markets digest the ramifications. In a week largely devoid of Australian economic data the release of the minutes of the August RBA meeting would be a highlight, but for the fact the renminbi devaluation renders them effectively outdated.

Of more interest will be the minutes of the last Fed meeting, although once again this week’s PBoC actions will cast doubt on whatever one might glean from the subtleties of Fedspeak with regard a September rate rise.

US data next week include the Empire State and Philly Fed activity indices, housing sentiment, starts and existing home sales, and the CPI.

The eurozone will post its first estimate of June quarter GDP tonight and Japan will follow suit on Monday.

But barring any further left-of-field developments, the focus for the Australian market next week will be on earnings reports, the flow of which shifts into top gear for the next two weeks. There are far too many stocks reporting to highlight any number, so please refer to the FNArena calendar (link above).
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

The Overnight Report: Confusion

By Greg Peel

The Dow closed up 5 points while the S&P lost 0.1% to 2083 and the Nasdaq fell 0.2%.

Not a Devaluation

The PBoC is not deliberately devaluing the renminbi in a desperate attempt to revive China’s export economy, it is merely allowing the market to determine the exchange rate in a step towards floating the currency. At least that’s what the Chinese central bank has declared.

Yesterday the PBoC marked down the renminbi another 1.1% against the US dollar, representing the third “devaluation” in three days for a total 3.5%. Again, the reduction was in response to the market’s perceived level, but the good news this time is that the market did not sell down the renminbi any further, as it had done in each of the previous two days.

The market has been selling on the expectation the PBoC will ultimately “devalue” the renminbi by 10% to adjust for the perceived level of overvaluation of the Chinese currency against the global foreign exchange market. But yesterday the PBoC talked down such speculation, suggesting there is no reason for the currency to depreciate any further given a “strong” economic environment in China, a sustained trade surplus, sound fiscal position and deep foreign exchange reserves, all of which provide “strong support” to the exchange rate.

“Strong” economy? Suffice to say, economists are expecting the renminbi to eventually be devalued by 10%, just not all in one hit. China’s July producer price index, which fell 5.4% year on year to mark its biggest drop since 2009, is the biggest clue. Beijing is trying to head off deflation.

But how does the rest of the world respond? Well at the moment, it appears confusion reigns. After two days of steep falls, European stock markets managed to rally back somewhat last night. On Wednesday night the Dow fell 277 points before closing flat and last night rose 79 points before closing flat.

The Australian market was a rabbit in the headlights on Tuesday, freaked out on Wednesday, and attempted a comeback yesterday only to be slapped back to flat in the final hour of trade.

The problem here is one of disclosure, which is not China’s strong suit. The Fed has now learned to prepare markets for policy changes, to the point where we spend an entire, tedious, tiresome year discussing whether QE3 is coming, a taper is coming, a rate rise is coming…until everyone just wants to get it over and done with. Mario Draghi flagged QE for a good two years before he actually did anything.

The PBoC, on the other hand, feels no need to warn anyone of anything. The result is global market turmoil. One day the PBoC, too, will learn.

Choppy

The ASX200 chopped its way to be up 44 points just after 2pm yesterday as investors absorbed the China story, Wall Street’s impressive turnaround overnight and various local earnings reports. By the closing bell the index was up only 5 points.

The market was not thrilled with Telstra’s ((TLS)) dividend, sending the stock, and thus the telco sector, down 2%. After being trounced on Wednesday the resource sectors made a comeback, with energy rising 1.5% and materials rising 0.7% to be the leaders in the green of what was a very mixed bag of sector moves – not unusual in a result season.

Unfortunately for bargain hunters in energy names, West Texas crude last night traded under US$42/bbl briefly – its lowest level since March 2009 (when QE1 was introduced and the US dollar tanked).

We can again note that the support level for the ASX200 is 5380, which we’ve bounced off once, and yesterday we closed at 5387. The next level is 5100.

Sales Boost?

July US retail sales rose 0.6%. Although just shy of 0.7% forecasts, both the June and May numbers were revised higher, painting a brighter picture for the US consumer sector. At the same time, as noted, oil tanked again, and yet again bargain hunters in Wall Street energy names were forced to cut and run.

There is a growing concern weak energy prices are ultimately going to lead to deflation across the globe, and potentially in the US as well. For almost a year the expectation has been that US consumer spending would rise to provide the offset. This didn’t happen for months, but maybe it’s starting to happen now. But energy is an input into a lot more than just consumer petrol tanks, and thus consumer pockets via lower petrol prices. Hence the deflation concern.

Which brings us back to the Fed, and the aforementioned never ending debate over a September rate rise. Thank God there’s only one more month to go to find out. But at the moment, Wall Street, like Bridge Street, is just not sure what to do.

After its big fall on Wednesday night, last night the US dollar index was only a little higher at 96.39. The ten-year bond yield nevertheless bounced back 6 basis points to 2.19%. The US bond market, forever far less fickle than the stock market, also seems confused at present.

Commodities

With the dollar stable, base metals prices were mostly a little lower last night, with aluminium and nickel down around a percent.

Iron ore rose US40c to US$56.20/t.

West Texas closed down US$1.09 to US$42.24/bbl and Brent lost US61c to US$49.15/bbl.

The gold bugs are excited again, believing that Chinese investors, having been burnt in the property market, burnt in the stock market, and now finding their currency devalued from underneath them, will return to buying gold. But last night gold fell back US$10.90 to US$1114.60/oz.

The Aussie is 0.4% lower at US$0.7358.

Today

The SPI Overnight closed down 8 points.

The eurozone will release its first estimate of June quarter GDP tonight.

On the local earnings front, Automotive Holdings ((AHG)) and James Hardie ((JHX)) are today’s highlights.
 

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

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

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

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided. www.fnarena.com

article 3 months old

The Overnight Report: Reversal

By Greg Peel

Float on By

Perhaps we can blame the IMF, which told Beijing recently, in rejecting China’s application for the renminbi to be included in the fund’s basket of global reserve currencies, that Beijing must first let the renminbi float. A PBoC devaluation is not a float, but the intention is to take a step towards such a goal. Yesterday the PBoC followed up Tuesday’s 1.9% renminbi devaluation with a further 1.6%.

The central bank did so because that’s where the market was indicating the renminbi should be. The Chinese currency is pegged only to the US dollar, and in revaluing the currency over the past several years against the greenback alone, the PBoC has failed to account for large valuation variances against other major currencies, such as the yen and euro. In devaluing, the PBoC is trying to find the right overall level.

The problem yesterday was that the PBoC responded to the market but then the market went again, selling the renminbi down further in what threatened to become a self-feeding spiral. Thus on the close of trade in China (long after the close on Bridge Street) the central bank intervened to stabilise the currency.

This is not a sinister response – every central bank, including the RBA, intervenes on occasion to prevent excessive currency volatility.

But it does show that Beijing is nervous, and highlights that the Chinese government is rather new to this game. The stock market debacle of last month was enough to give them the willies and so yesterday they got a little jumpy again. The issue for the rest of the world is one of just how bad is the Chinese economy right now? While the currency devaluation may have come at the IMF’s behest, there’s no masking the fact this is Beijing’s “shock & awe” stimulus tactic.

But as opposed to Beijing’s massive fiscal stimulus package of 2008, this form of stimulus is linked directly into the global financial market system. There is now great concern what the impact will be on Other Asia, which is so closely tied to the Chinese economy, and to emerging market colleagues such as Brazil, which is already struggling, and to the economies of China’s major export competitors such as Japan and Germany, who now see their respective QE measures – to date showing relative signs of success – undermined.

And what does it mean for Australia?

Delayed Reaction

I can admit now Tuesday’s action on Bridge Street had left me somewhat confused. In the wake of the first renminbi devaluation, why did the materials and energy sectors stubbornly rise 1% on the day, when all other sectors fell, as if the previous night’s jump in metal prices was all that mattered? Was a 1.5% plunge in the Aussie in sympathy really enough to negate the impact?

Looking at yesterday’s action I can only assume Bridge Street did not know how to respond. By yesterday morning, following big overnight falls in commodity prices and on Wall Street, it was clear. The materials and energy sectors both plunged over 3%.

It was a perfect storm. Chinese currency aside, we saw poorly received earnings reports from the likes of Computershare ((CPU)), CSL ((CSL)), Carsales.com ((CAR)) and REA Group ((REA)). And in opening lower from the bell, the ASX200 broke down out of its longstanding trading range. From there we could throw in the technical trade. First stop 5380, next stop 5100.

And where did we stop? 5380.

Bear in mind also that the biggest stock on the market – Commonwealth Bank ((CBA)) – was in a trading halt, having announced a 10% discounted $5bn rights issue.

Rebound

Mario Draghi must be shaking his head in despair. The QE package he introduced earlier in the year had, in the background of the whole Greek farce, been quietly working. Major export economy Germany, along with France and others, had begun to see economic improvement. And now this.

The German and French stock markets dropped over 2% each on Tuesday night, and another 3% plus each last night. When Wall Street opened, mid-session in Europe, the selling flowed across the pond.  In the first hour of trade in New York the Dow was down 277 points on heavy volume. But at the same time, the S&P500 reached the bottom of its 2015 trading range.

The selling suddenly stopped. On lower volume, Wall Street began to turnaround. Whether it be bargain hunting, short covering or both, the indices ran all the way back to square.

One consideration is that the renminbi devaluation may once and for all take September off the table as the Fed’s lift-off date. Maybe 2015 altogether. Although there is still debate. Whatever the case, the US dollar index fell 0.9% last night to 96.31, suggesting a delay is now the pervading expectation.

The US ten-year bond yield had seen its big fall the day before, and last night was only down another point to 2.13%.

The plunge in the greenback is not good news for the Australian economy. Having fallen a cent on the first renminbi devaluation, the Aussie fell another half a cent on yesterday’s second devaluation. If the Aussie could keep roughly in step with the renminbi, then the AUD-RMB trade impact would be negated. But alas, on the fall in the greenback the Aussie is this morning 0.8 of a cent higher than it was 24 hours ago, and about 1.3 cents higher than its nadir following the second devaluation. It is less than half a cent lower than where it was when the first devaluation was announced.

Commodities

Base metal prices fell again from the open on the LME last night, having plunged on Tuesday night, but then the buyers arrived. Aluminium, nickel and tin still closed lower on the day but copper rebounded 0.7%, lead 1.6% and zinc 1.8%.

Volumes were heavy, as at least some traders were prepared to “look through” the immediate impact of the renminbi devaluation to its intended goal – to stimulate China’s flagging export economy. Growth in exports means growth in raw material demand, albeit at a higher implicit price for the Chinese.

The oils also stabilised, with West Texas closing up US12c to US$43.33/bbl and Brent closing up US35c to US$49.76/bbl.

Iron ore ticked down US10c to US$55.80/t.

The US dollar drop finally sparked some life into gold, implicit of the Fed delaying its rate hike. Gold is up US$16.80 to US$1125.50/oz.

Today

The SPI Overnight closed up 24 points or 0.4%, suggesting that at this stage, the 5380 technical support level in the physical might hold.

Reporting highlights today include Crown Resorts ((CWN)), Fairfax Media ((FXJ)), Mirvac Group ((MGR)), Tabcorp ((TAH)) and the biggie, Telstra ((TLS)).
 

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

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

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

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided. www.fnarena.com

article 3 months old

The Overnight Report: Currency Shock

By Greg Peel

The Dow closed down 212 points or 1.2% while the S&P lost 1.0% to 2084 and the Nasdaq fell 1.3%.

China Cracks

What a difference a day makes. Yesterday global stock and commodity markets were all strong on the back of anticipation Beijing would shortly come in with hard hitting stimulus measures, given the weekend’s very weak Chinese trade and inflation data. But no one anticipated what came next.

Yesterday the PBoC devalued the renminbi by 1.9%. It is not the quantum that has spooked global markets – it has not been unusual for the euro, for example, to move by such an amount in a session in recent times – it is the implications that have frightened markets.

For years during the China boom of last decade, China’s trading partners cried foul over significant undervaluation of the renminbi, via the PBoC’s pegged currency policy, providing China with an artificial export advantage. In its attempts to reform its markets, thus to compete equally with Western open market economies, China has been revaluing that peg ever since, eventually wiping out what was once seen as 40% undervaluation.

But Chinese growth has now slowed. Beijing’s attempts to revive growth, through interest rate cuts, RRR cuts and various fiscal measures have, to date, failed. China’s export economy has suffered as all around its major trading partners have resorted to QE, which effectively promotes currency devaluation. China’s interest rates are not at zero but either way, China has no tradeable government bond. QE was never an option.

Instead, Beijing has simply devalued its currency. Given the government was intending to move the renminbi to full-float status as part of its ongoing reforms, such manipulation is a step backwards. But the PBoC pegs its currency every day, and has indicated it will now take direction from the CNY – the currency allowed to be traded outside China. Overnight the CNY has already anticipated another 2%-odd devaluation. The PBoC may well move again this morning. In a sense, China is trying to mimick some sort of “float”.

The ramifications, nevertheless, are worrisome. Firstly, commodity prices tanked overnight. They are US dollar-denominated and China has devalued the renminbi against the dollar, reducing the purchasing power of the renminbi to buy commodities in US dollar terms. The good news for the likes of Australia is that as a result, the Aussie dollar has also been sold down heavily, down 1.5% this morning to US$0.7303. The RMB-AUD effect is thus minimalized, with regard the trading price of iron ore, for example.

The Canadian dollar has seen the same sell-off for the same reason. From the outside looking in, less purchasing power in the renminbi leads to lower commodity demand from China. But from the inside looking out, if the export currency is also lower, equilibrium is maintained.

But the yen is another currency that was hit last night, and Japan is not an exporter of raw materials. It is an exporter of finished goods and thus a major competitor to China. The yen has been sold in anticipation the BoJ will now be forced to respond with more QE. Take it to the nth degree, and what markets really fear is an internecine escalation in the global currency war.

Result Concerns

On the local market yesterday, it was not a good one for earnings results. Cochlear ((COH)) disappointed and fell 7%. Domino’s Pizza ((DMP)) had a wild ride, plunging initially before recovering, while Transurban’s ((TCL)) result was not that well received either.

Yet we started to the upside, before swinging suddenly back to the downside. Leading that charge were the banks. After one day’s recovery from Monday’s big ANZ-inspired plunge, it seems the markets are not yet comfortable with bank valuations. Commonwealth Bank ((CBA)) reports today [and has done so, see below].

Then there’s the matter of the renminbi devaluation. It’s a bit difficult to know just what the impact will be on Australian exports – not only of commodities but also of tourism, education and so forth – given it depends on what the Aussie does. Indeed, the only two sectors to finish in the green yesterday were materials and energy, both up 1%, but possibly due to Monday night’s rally in commodity prices.

The situation was very different last night.

Commodities

Base metals rallied strongly on Monday night in expectation of Chinese stimulus, and collapsed last night when that stimulus turned out to be currency devaluation. Aluminium fell 1.5%, copper, lead and tin fell 2.5-3%, nickel fell over 4% and zinc fell almost 5%.

Iron ore returned to trading following the Singapore holiday, but only fell US40c to US$55.90/t.

Oil did not get off so lightly, with West Texas falling US$1.59 to US$43.21/bbl and Brent falling U82c to US$49.41/bbl.

Gold is not a commodity per se, and is up US$4.60 at US$1108.70/oz on a US dollar index which, on the balance of trading partner currency moves overnight, is flat at 97.17.

Wall Street

The US is the biggest loser. On the one-hand, weaker commodity prices on the back of reduced Chinese purchasing power impact on prices received domestically, given the US does not meaningfully export its commodities. But it does export manufactured goods and services to China, and here the reduced purchasing power effect is evident in the likes of Apple shares, which fell 5% overnight.

All up, the gains seen on Wall Street on Monday night were wiped out last night, when China did not do what anyone was expecting. But the other issue to consider is: what does this mean for Fed policy?

If China has now triggered another round of currency wars, it does not seem a good time for the Fed to be making its first rate hikes. US exporters are already crying foul over the strength of the US dollar. China’s move may well be the left-of-field event which prevents a first hike in September.

Which puts the Fed in a difficult position. Already it has been suggested that were China’s currency devaluation to continue, the US economy might head into recession. If the Fed has not raised rates by now, it has nothing to cut again to prevent such a result. That only leaves one policy alternative – a return to QE – and that’s really not what the Fed, or anybody else in the US markets – really wants.

The US ten-year yield closed down 10 basis points last night at 2.14%, having at one point seen 2.01%.

Today

The SPI Overnight closed down 28 points or 0.5%.

The world will hold its breath for another move from the PBoC.

Adding fuel to the fire will be today’s scheduled Chinese data dump of July industrial production, retail sales and fixed asset investment numbers.

In Australia, we’ll see the June quarter wage price index, which will be closely watched by the RBA, along with Westpac’s monthly consumer confidence survey.

It’s a big day on the earnings front. As we speak, CBA has gone into a voluntary trading halt. The bank has reported its FY15 profit and announced a greater than anticipated $5bn capital raising. The CBA board must be livid ANZ jumped the gun on them.

Today’s reporting highlights also include AGL Energy ((AGL)), Carsales.com ((CAR)), CSL ((CSL)), OZ Minerals ((OZL)), Primary Health Care ((PRY)) and REA Group ((REA)).

Rudi will appear on Sky Business' Market Moves, 5.30-6pm.
 

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

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

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

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided. www.fnarena.com

article 3 months old

The Overnight Report: China Watch

By Greg Peel

The Dow rose 241 points or 1.4% while the S&P gained 1.3% to 2104 and the Nasdaq added 1.2%.

Rebound

A nervous start on Bridge Street yesterday suggested potentially another bad session following Friday’s carnage, as bottom-of-the-range support threatened to give way. Very weak trade and wholesale inflation data from China over the weekend was not good news at this time.

But the weakness proved short-lived, and by lunchtime the ASX200 had recovered enough ground to put it back above the psychological 5500 level. Leading the turnaround was a quarterly update from National Bank ((NAB)).

Interestingly, the other three banks typically report their quarterlies after Commonwealth Bank ((CBA)) has published its earnings report each season, but clearly this season has required a different approach. With NAB having jumped the gun on a capital raising last month, ANZ obviously decided to get in before CBA with its raising last week.

ANZ also provided its quarterly numbers with the raising announcement, and they were not good. The bad debt reduction cycle has finally turned, it seemed, which is something analysts have been warning of for some time. Maybe NAB then decided to bring forward its own quarterly report, ahead of CBA’s result release tomorrow, to right the banking sector ship.

NAB surprised to the upside. Critically, increased bad debts did not feature, as they had for ANZ. The result was a 0.8% rebound for the banking sector following Friday’s 3% rout.

The other driver of yesterday’s local rebound, aside from the worst session in six years on Friday prompting a little bit of bargain hunting on Monday, was the old Wall Street theme of “bad news is good”, applied to China. Fresh stimulus has been expected from Beijing ever since last month’s GDP result release, as monthly Chinese data have continued to disappoint. The weekend’s trade and wholesale inflation numbers were so bad, the only assumption can be that Beijing is set to respond with something substantial.

The Shanghai index led the charge, with a 4.9% rally yesterday. The Australian materials and energy sectors managed small gains.

And Another Rebound

Following seven down-sessions in row for the Dow, the worst run since the 2011 US debt crisis, the US stock market had hit “oversold” territory as far as many were concerned and was rife for a rebound. Such snap-backs often occur without an obvious trigger, but there were a handful of drivers last night.

Firstly, expectations of Chinese stimulus. This led to rebounds in commodity prices, including oil, and thus the US materials and energy sectors were supported. Then there was the announced takeover of aerospace components manufacturer Precision Castparts by Warren Buffet, potentially his largest ever outlay. While Buffett is a long-term investor, his 21% premium provided a vote of confidence against those believing Wall Street to be overvalued.

Then there was Fedspeak.

In another session of “if you’re all going to say something different at the same time why don’t you all just shut up,” Fed vice chairman Stanley Fischer said one thing and Atlanta Fed president  Dennis Lockhart said another. Fischer kicked off by suggesting the Fed won’t move on rates until inflation has returned to more normal levels, closer to the 2% target. Lockhart countered by reiterating his view the US economy is now resilient enough to handle a rate hike and that “the gyrating needle of monthly data” should not be a “decisive factor in the decision making”.

Market reports overnight and this morning suggest Fischer’s comments were the primary driver of last night’s Wall Street rebound, again drawing on the “bad news is good news” theme of a delayed rate hike. I think that’s rubbish.

Firstly, the Dow jumped nearly 200 points from the opening bell and only continued to rise after Lockhart made his counter-comments. Secondly, the US ten-year yield is up 6 basis points to 2.24% -- the wrong way around.

Thirdly, US inflation has not been at 2% since early 2012 and having fallen to near zero in the interim, has taken a long time to grind back to around 1.6% (core) where it is now. With wage growth negligible and commodity prices, particularly oil, remaining under pressure, it would likely be a long time yet before the 2% mark is revisited. The Fed is not prepared to wait that long.

Finally, I believe the “bad news is good news” theme no longer rules after almost a year of rate rise debate. Such responses have not been seen on markets these past couple of months. Wall Street is not just ready for a rate rise, it is impatient to get it over and done with.

And Yet Another Rebound

Coming back to the more pervasive China stimulus theme, short-covering was evident on the LME last night as all base metal prices leapt 2-3%.

Iron ore remains closed.

West Texas crude rose US$1.00 to US$44.80/bbl and Brent rose US$1.64 to US$50.23/bbl.

Gold jumped US$10.30 to US$1104.10/oz, which you could argue represents expectations of a rate hike delay. Or you could argue it speaks to renewed demand from China, or that gold just wanted to get back to 1100, or that gold never seems to know what it’s doing anyway.

The US dollar index did slip a bit, nonetheless, by 0.4% to 97.15.

The Aussie is steady at US$0.7415.

Today

The SPI Overnight closed up 36 points or 0.7%.

NAB will publish its monthly business confidence survey today.

Today’s earnings result highlights include those of Cochlear ((COH)), Domino’s Pizza ((DMP)) and Transurban ((TCL)).
 

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

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

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

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided. www.fnarena.com

article 3 months old

The Monday Report

By Greg Peel

Carnage

I suggested on Friday morning that we might be headed back down to the bottom of the range, although I didn’t suspect that might happen in one session. At 5474, the ASX200 is back at the bottom of its range since June, with 5700 at the top, if we discount one quick foray to 5422 at the height of the Greece/China scare.

The worst day in six years on Bridge Street on Friday can mostly be attributed to ANZ Bank ((ANZ)), which having placed $2.5bn of its $3bn new capital raising with institutions by Friday morning at a 5% discount, saw its shares plunge 7% as soon as the trading halt was lifted.

The response to the ANZ raising is in contrast to the earlier National Bank ((NAB)) raising, which was well received by the market. But NAB’s raising was about spinning off its UK business plus some extra to cover new “too big to fail” capital requirements, while ANZ’s raising simply covers new mortgage requirements and is still not enough to cover TBTF capital. NAB’s raising came in the form of a rights issue, which offers new discounted capital to existing shareholders thus reducing the dilution impact. ANZ made a placement of new capital, maximising dilution for existing shareholders.

The bottom line is the bank index was slammed 3.1% on Friday, and given the Big Four together represent around a quarter of the total ASX200 market cap, that was a big impact on the index alone. But materials also came in for a sudden hammering, down 2.8%, and elsewhere it was just a matter of selling everything. Result season seemed not to matter, other than maybe the market now fears more “misses” than “beats”.

ANZ will not be very popular with Commonwealth Bank ((CBA)), which has been long tipped to announce a capital raising at its result release on Wednesday. CBA’s smaller rival’s pre-emptive strike sunk all boats, thus if CBA does have a raising lined up, it will be at lower price.

September Looms

As far as US jobs reports go, Friday night’s was about as uneventful as they get. The July non-farm payrolls report showed 215,000 new jobs added, smack on expectation, and the unemployment rate was unchanged at 5.3%.

There is nothing here, consensus suggested on Friday night, to stop the Fed raising in September. The data would actually have to be “bad”, rather than simply not “good”, to provide reason for pause, most believe. There’s one more jobs report to go before the September meeting and some various inflation measures, but barring some unexpected turn in fortune, Wall Street is starting to lock in September.

It’s arguably why the Dow has seen its worst run since the 2011 debt ceiling crisis, falling seven sessions in a row. The Dow fell 46 points or 0.3% on Friday night, flattered by an announced stake taken in American Express by an investment company. The S&P fell 0.3% to 2077 and the Nasdaq lost 0.3%.

Looking outside US stocks, one would be forgiven for believing the markets in general are not pricing in a September rate rise. The US dollar index fell 0.3% to 97.56 and the US ten-year bond yield fell 6 basis points to 2.16%. However the dollar index is still up solidly over a month, and the US ten-year yield is not necessarily the best benchmark of Fed funds rate prediction.

While the ten-year yield fell on Friday night, the five year yield rose slightly and the two-year yield rose more substantially. The thirty-year yield fell more than the ten. This implies a flattening of the yield curve, and thus “normalisation” of rates. When the Fed makes its first move it is not essentially “tightening” monetary policy, which occurs when a central bank lifts its rate above the “normal” level to slow an economy down, it is “normalising” policy, suggesting the economy is starting to fare well enough on its own.

The Fed is keen to get the ball rolling, if for no other reason than to build in a level of policy buffer, or “insurance”, against some new disaster. There’s nowhere to go from zero, and the Fed really does not want to have to go back down the whole QE path all over again.

Commodities

There was not much to read from the US jobs numbers for LME traders on Friday night, but a 1.4% drop in Germany’s June industrial production when a 0.3% gain was expected was enough to keep the mood fairly sour. All base metal prices fell somewhat, bar lead which managed a 0.9% gain.

Singapore celebrated 50 years of independence on Friday, closing exchanges and thus iron ore trading. Iron ore is unchanged at US$56.30/t.

Friday is US oil rig count in the US and once again the figure rose. While six rigs is hardly end-of-world stuff, the only support oil prices can hope for at this stage is from US production reduction. West Texas duly fell US$1.00 to US$43.80/bbl, its lowest level since March, and Brent fell US$1.13 to US$48.59/bbl, its lowest level since January.

Gold rose US$4.30 to US$1093.80/oz.

Despite the shellacking in the local stock market, the Aussie rose steadily all Friday night to be up a percent at US$0.7419.

The SPI Overnight closed down 2 points on Saturday morning.

China

China’s July trade data, released over the weekend, were not exactly flash.

Having risen 2.8% in June, exports fell 8.3%. Imports fell 6.1% in June and 8.1% in July (all year-on-year figures). The July inflation data were even more depressing. While the July CPI rose to 1.6% annual from June 1.4%, the PPI, representing wholesale inflation, fell 5.4% compared to 4.8% in June.

That’s the biggest monthly drop in the PPI in six years, following over three years of continuous falls.

But it all just adds to expectation that Beijing will ramp up the stimulus, and increases expectation they won’t muck around this time.

The Week Ahead

The local earnings season ramps up in earnest this week, ahead of hitting full pace next week. There are too many reporters now to highlight on a weekly basis, so please refer to the FNArena Calendar (link below).

Today’s highlights include Ansell ((ANN)), Bendigo & Adelaide Bank ((BEN)) and JB Hi-Fi ((JBH)).

Local data this week include the NAB business confidence survey tomorrow, and the Westpac consumer confidence survey on Wednesday along with the June quarter wage price index.

Following on from the weekend’s data releases, Beijing will publish July industrial production, retail sales and fixed asset investment numbers on Wednesday.

US data highlights will come at the end of the week with retail sales and business inventories on Thursday and industrial production, consumer sentiment and the PPI on Friday.

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

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

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

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided. www.fnarena.com

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

Tonight sees the all-important US jobs report. A good result will reinforce expectations of a September rate rise.

Over the weekend, Beijing will release trade and inflation data for July.

The local reporting season ramps up in earnest next week and we've come to the point where reports are too numerous to list. Highlights next week include Ansell ((ANN)), JB Hi-FI ((JBH)), Cochlear ((COH)), Commonwealth Bank ((CBA)), CSL ((CSL)) and Telstra ((TLS)). For a full list of major names please refer to the FNArena calendar (link above).

Will CBA announce a raising?

Local economic data next week include the NAB business and Westpac consumer confidence surveys and the June quarter wage index, which is a hint the GDP result is due later in the month.

The eurozone will release its first estimate of June quarter GDP next week.

Following on from the weekend's numbers, Beijing will report Chinese industrial production, retail sales and fixed asset investment numbers on Wednesday.

The US will see retail sales, industrial production, business inventories, the PPI and consumer sentiment.
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

The Overnight Report: Mixed Messages

By Greg Peel

The Dow closed down 10 points while the S&P gained 0.3% to 2099 and the Nasdaq rose 0.7%.

Rudderless

Tuesday’s solid local retail sales number provided a boost for the consumer sectors that lasted all of a day, with both retracing those gains yesterday on Bridge Street. Materials bucked an overall soggy trend in rising 1.2% thanks to some welcome relief for metals prices, but metals prices turned around last night so that little rally may also prove short lived, depending on what sort of profit result Rio Tinto posts this morning.

Energy was unsurprisingly the worst performer, down 1.6%, and wouldn’t you know, utilities and the telco fell back again, by the same amount they went up on Tuesday and the same amount they fell on Monday.

If someone can explain to me why these two defensive sectors are among the most volatile on the ASX at present, albeit without actually going anywhere, I’d like to know. Or perhaps the answer is simply a more general one – investors simply do not know what to do right now.

Maybe result season will change that, or maybe we just have to wait for the Fed to make its move to remove that long-hovering cloud of uncertainty.

Each month I criticise the Australian manufacturing PMI as being a statistical joke but that’s probably due to the fact that sector has become so small as to almost be an irrelevance in GDP terms, thus subject to lumpy numbers. Australia’s most dominant sector is services, and here the monthly PMI does appear to be less volatile and thus more reliable. Yesterday saw an encouraging gain to 54.1 for July from 51.2 in June.

Manufacturing is still a significant sector within the Chinese economy but the service sector is the fastest growing, and to that end Caixin’s PMI reading of 53.8, up from 51.8, is similarly encouraging as Beijing tries hard to transition to a domestically-driven economy. Caixin’s number underscores a similar tick-up in Beijing’s official reading.

But neither the Australian nor Chinese PMIs engendered any excitement on Bridge Street yesterday. Elsewhere, Japan fell to 51.2 from 51.8, the eurozone fell to 54.0 from 54.4 and the UK fell to 57.4 from 58.5.

More Fed Confusion

The big PMI move came from the US, which saw its service sector number jump to a rapid-paced 60.3 from 56.0, far exceeding expectations. It is the highest result in a decade.

Offsetting the strong PMI was the ADP private sector jobs number for July, which came in at a tepid 185,000 when 215,000 was expected.

Put the two together and the Dow rallied over a hundred points on the open. The question is, did the Dow rally on the strong PMI or rally on the weak ADP and its implications of maybe stalling a Fed rate rise? Whatever the case, the rally proved short-lived and another Fedhead piped up with his personal view to add further confusion to the mix.

This week has seen both the Atlanta and St Louis Fed presidents and FOMC members backing a September rate rise, but last night Fed governor and voting member Gerome Powell insisted he was undecided, and that he would let the data, particularly jobs, inform his decision. There is more slack in the US labour market, Powell believes, than a 5.1% unemployment rate implies.

So whether the US stock indices went up and down on hawkishness/dovishness it’s hard to say at this late stage in the game. Nor is it particularly important. The US bond market seems to be backing September, given the ten-year rose another 6 basis points to 2.27% last night.

Weighing on the Dow was a somewhat Mickey Mouse result from Walt Disney, for which an 11% rise in profit was clearly not enough to satisfy the market. Disney shares fell 9% which equates to around 70 Dow points. The drop was not about kids’ movies but about Disney’s cable bundling business, which was the source of concern. Every listed cable company copped a thrashing in sympathy last night, while the leader of the new order of streaming – Netflix – was a beneficiary of those divestments.

Me? I loved the Drive-In.

Disney was virtually the sole reason the Dow finished slightly lower last night, and the knock-on held back the S&P500 which otherwise managed a 0.3% gain, and boosted the Nasdaq for a 0.7% gain.

Commodities

Tuesday night’s sudden bout of short-covering proved short-lived on the LME as last night saw a return to weakness in base metal prices. All metals fell over 1% bar copper, down 0.7%, and nickel, relatively flat. LME traders are backing a September Fed rate rise, and as such are concerned about US dollar strength.

Iron ore continued on its meandering path nonetheless, rising US$1.40 to US$56.40/t.

The oils went up a bit on Tuesday night and down a bit last night, with West Texas falling US83c to US$45.12/bbl and Brent falling US64c to US$49.61/bbl.

Gold fell slightly to US$1084.60/oz despite the US dollar index ultimately losing 0.1% to 97.88.

The Aussie has drifted back 0.3% to US$0.7358 following its post-RBA surge.

Today

The SPI Overnight closed up 15 points or 0.3%.

It’s jobs day today locally, with economists predicting a tick up to 6.1% from 6.0%, but as we know, it’s a lottery.

Downer EDI ((DOW)) and Rio Tinto ((RIO)) will report profit results today. ANZ Bank ((ANZ)) shares have gone into a trading halt amidst increasing speculation a capital raising is nigh.

Rudi has returned from the AIA National Conference on the Gold Coast and will make his sole TV appearance for this week between noon-12.45pm on Sky Business' Lunch Money.

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

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

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

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided. www.fnarena.com

article 3 months old

The Overnight Report: Oil Fears Return

By Greg Peel

Soggy

An unspectacular session on Bridge Street yesterday saw the ASX200 drift away from the 5700 yet again, led by weakness in the materials and energy sectors. Utilities and the telco were also out of favour on the day, but may well be popular tomorrow if recent volatility is any guide.

There were plenty of local data points to consume yesterday, but nothing to rock the boat.

ANZ job ads series showed a fall of 0.3% in July but remains up 9.3% year on year. TD Securities’ inflation gauge showed a 0.2% increase in July for a headline annual rate of 1.6% and a core rate of 1.5%, well below the RBA’s 2-3% target.

Home prices leapt again in July, at least in Sydney and Melbourne, and new home sales rose 0.5% in June. The interesting detail here is that detached house sales rose 1.7% while apartment sales fell 2.9%. June building approval numbers, previously released, showed a big drop in apartment block approvals, thus economists are now warning that after a stellar run, the apartment investment boom may have peaked.

The Australia manufacturing PMI “surged” into expansion at 50.2 in July, up from June’s 44.6, but given this series is the most volatile on the planet, and August could just as easily see a “surge” back again, we’ll call it meaningless.

By contrast, the Caixin measure of China’s manufacturing PMI does not appear to lack credibility, and it fell to 47.8 from 49.4. This implies a greater rate of contraction than Beijing’s official numbers.

Japan’s PMI rose to 51.2 from 50.1. The eurozone saw a slight tick down to 52.4 from 52.5 which included a 30.2 reading from Greece, which is not so much contraction but implosion. The UK rose to 51.9 from 51.4.

Deflation Worries

The US manufacturing PMI fell to 52.7 from 53.5, but that was not what caused the most concern on Wall Street last night. Personal spending rose only 0.2% in June despite a 0.4% rise in incomes, and the personal consumption & expenditure (PCE) measure of inflation – the Fed’s preferred gauge -- showed only 1.3% annual compared to the Fed’s 2% target.

And these are June numbers. In July, oil prices began to weaken again, and last night saw another big drop. West Texas crude fell US$1.51 to US$45.30/bbl to mark its lowest level since March, and Brent fell US$2.20 to US$49.65/bbl to breach the psychological 50 barrier.

Weak consumer spending growth combined with falling oil prices create the conundrum facing Wall Street at present. Why have lower fuel prices not encouraged higher spending over 2015? The combination is not only keeping US inflation low but suggesting the potential for a return to disinflation, meaning a lower rate of inflation, at a time the Fed is desperate to lock away its first rate rise.

It’s becoming clear what the US bond market thinks about the September rate rise odds, or even 2015 rate rise odds. The US ten-year yield fell another 5 basis points last night to 2.15%.

The US stock market fell from the open and continued lower through the morning, sending the Dow down almost 200 points by early afternoon. A rebound ensued when the Dow hit the 17,500 mark, but the close was hardly inspiring.

The US dollar index managed to rise nevertheless, by 0.3% to 97.50, but only because the euro fell as the Greek stock market opened for the first time in five weeks. At 20% down on the open it looked ominous, at 30% down mid-session it looked catastrophic, but at 16% down by the close it looked not too bad considering all that has transpired.

There is also the ongoing US earnings season to consider, and with 75% of S&P500 stocks having now reported, the scorecard is not so flash. Some 70% of stocks have beaten on earnings, and net earnings are up 3%, but concern still lies with weak revenue growth. Net revenue has fallen 3% and quite frankly has been falling since the GFC. There are only so many costs that can be cut.

Commodities

The stronger greenback was of no help to commodities, including oil, but just when you thought iron ore might be set to “do an oil” it rose US$2.40 to US$55.30/t last night.

Copper continues to wane, falling another 0.6% last night as all base metals bar lead were again in the negative.  Nickel fell 2.8%.

Gold lost US$9.10 to drop back to US$1086.10/oz on the disinflation play.

The Aussie is 0.3% lower at US$0.7284.

Today

The SPI Overnight closed unchanged, which seems ambitious.

The local focus today will be on June retail sales and trade numbers and, of course, on the RBA statement due this afternoon. While there will be no rate cut, it’s always interesting to read what the board has to say.

On the local stock front, Suncorp ((SUN)) releases its full year earnings result today.
 

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

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

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

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided. www.fnarena.com

article 3 months old

The Monday Report

By Greg Peel

Elusive

5699.2 – that’s the level reached by the ASX200 on Friday in what was possibly an attempt at a bit of window-dressing for the end of the month. The index wobbled its way to a 0.5% gain in the session and spiked suddenly right at the death.

Healthcare led the charge with a 2.3% increase thanks to a well-received profit result from ResMed ((RMD)), which saw its shares rise 6.4%. Utilities (+1.6%) was the other mover of note in a session that saw materials and energy the only two sectors to close in the red and more modest gains from other sectors.

With the SPI Overnight closing down 12 points on Saturday morning, the 5700 level, which has proven the bridge too far since May, may again prove elusive today ahead of a solid raft of economic data releases.

On the topic of data, Beijing released its official PMI numbers on Saturday and there was once again disappointment. The manufacturing PMI ground to a halt at 50.0, down from 50.2 in June and falling short of 50.2 expectations. The weak result has nevertheless fired up expectations of further stimulus. Indeed, some believe this time Beijing will not fiddle about, but come in all guns blazing.

It should be noted, however, that China’s manufacturing sector has been quietly diminishing in recent years as a proportion of output, while the services sector continues to grow. Beijing’s service sector PMI came in at 53.9, up from 53.8.

Wage Angst

These results were not yet known when the Dow opened down 50-odd points from the bell on Friday night, largely due to weak earnings results from Big Oil stalwarts Exxon and Chevron. While it might be a no brainer that lower oil prices were to blame, both still missed expectations and each fell 4-5%.

It didn’t help that they reported on a day when oil prices dropped sharply again, thanks to another increase in the US weekly rig count.

But while the US energy sector may be proving a drag on the US market, the main focus of attention on Friday night was the release of the US June quarter wage cost index. The Labor Department started keeping track back in the eighties and this is the first time since a number as low as 0.2% growth has been recorded in a quarter. Even the snowbound March quarter saw 0.7%, and economists had forecast 0.6% for June.

The US may have been adding new jobs at a solid pace this past year or so but each positive monthly result has been met with concern over a lack of corresponding wage growth. This implies plenty of slack still remains to be taken up in the US labour market, and that there is absolutely no wage-based pressure on inflation. And that implies, many suggest, that the Fed will thus not raise in September.

(Unless they’ve already made that decision, which is my theory.)

The US bond market clearly thinks not, given a 6 basis point fall to 2.20% on Friday night for the ten-year yield. The ten-year has never really shaken off the lower levels it reach at the height of the latest Greek crisis, so it’s a long way from the 2.50% level seen a couple of months ago when Fed hike speculation was at a peak.

The US dollar was also weaker on the back of the wage cost number, falling 0.3% to 97.19 on its index.

The US stock market nevertheless turned around sharply from its early plunge and rallied back to be into the green at lunchtime. If this was also end-of-month window-dressing it didn’t have sufficient oomph, given the indices drifted back down again in the afternoon. The Nasdaq managed to close flat on the day but the Dow closed down 56 points or 0.3% and the S&P lost 0.2% to 2103.

For the S&P500, 2100 is proving a similar stumbling block of late to 5700 locally.

Commodities

As noted, another tick up in the US weekly rig count despite lower prices sent oil south again on Friday night, with West Texas dropping US$1.65 to US$46.81/bbl and Brent falling US$1.47 to US$51.85/bbl.

Nor did the lower greenback provide much help for base metal prices. Nickel managed a 0.5% gain but copper lost 0.7% and aluminium and zinc each saw 1.6% falls.

Iron ore continues to have difficulty overcoming the gravitational pull of the 50 mark, falling back US$1.70 to US$52.90/t.

The weak US wage data and lower greenback were enough to send gold up US$7.00 to US$1095.20/oz, while the greenback also helped the Aussie to a 0.2% gain the US$0.7307.

As noted, the SPI Overnight closed down 12 points or 0.2%.

The Week Ahead

Local economic data come thick and fast this week, beginning today with all of the ANZ job ads number, the TD Securities inflation gauge, the RP Data house price index and HIA new home sales. Today also sees the local July manufacturing PMI, along with equivalent readings from Japan and China (Caixin, replacing HSBC) today and the eurozone, UK and US tonight.

Tomorrow locally sees retail sales and trade numbers and the RBA will meet and leave its rate on hold. Wednesday it’s the services PMI, along with everyone else as above, Thursday it’s the jobs numbers and Friday it’s the construction PMI, housing finance and the RBA quarterly Statement on Monetary Policy.

On top of PMIs, the US sees construction spending, personal income & spending and vehicle sales tonight, factory orders on Tuesday and the trade balance and ADP private sector jobs number on Wednesday. Thursday it’s chain store sales and Friday the all-important non-farm payrolls report.

The Banks of both England and Japan will hold policy meetings this week but nothing untoward is anticipated.

The first earnings reports of the local season have begun to trickle in and the highlights from a handful of reports this week will be Suncorp ((SUN)) tomorrow and Rio Tinto ((RIO)) on Thursday.

FNArena will later in the week launch the August 2015 Reporting Season Monitor, which each day will report on company results and subsequent target price and ratings changes from brokers and build into a comprehensive database by month’s end.

Rudi will appear on Sky Business on Thursday at noon. He will be presenting at the AIA National Conference on the Gold Coast on Tuesday morning. Sun is shining brightly over there...
 

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

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided. www.fnarena.com