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

Tomorrow is the first of the month hence Beijing will release both its July manufacturing and service sector PMIs.

That month is August, and on the local calendar August means corporate result season. We start off slowly next week, with highlights including Suncorp ((SUN)) and Rio Tinto ((RIO)), step up the pace in week two and then cop the avalanche in weeks three and four.

Next week also sees a fair amount of local economic data.

Australia will join with Japan, China (Caixin, replacing HSBC), the eurozone, UK and US in reporting manufacturing PMIs on Monday and service sector PMIs on Wednesday. Australia's construction sector PMI is due on Friday.

Locally we'll also see ANZ job ads, retail sales, trade and unemployment numbers next week. The RBA will meet on Tuesday and remain on hold, and the bank's quarterly Statement on Monetary Policy will be released on Friday.

A data-dependent Fed will next week be looking at personal income & spending, vehicle sales, chain store sales, factory orders, trade, and consumer credit. Most importantly, the Fed will focus on Wednesday's ADP private sector jobs report and Friday's non-farm payrolls report.

 

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article 3 months old

Can China Still Change The World?

By Greg Peel

China’s stock market bubble and bust has sparked ripples of fear through global financial markets this past month, but realistically the world has been worrying about China from soon after the GFC. Prior to the GFC, and the huge stimulus package Beijing was forced to implement before the body of Lehman Bros was even cold, the catch phrase markets associated with China was “stronger for longer”.

China would reshape the global economy, it was assumed, as a trend of urbanisation and industrialisation transformed one of the two most populous countries on the planet into an economic powerhouse. But then we started worrying about a property bubble in China. Then concern turned to the country’s rapidly building debt levels. For a couple of years now the worry has been China’s slowing pace of growth. And most recently, The Chinese stock market’s wild gyrations have generated much angst.

All this time, nevertheless, the much touted “hard landing” expected by many for China’s economy has not eventuated. But the global growth thematic for the next decade or more has always been predicated on China’s ongoing progression from emerging to developed economy. As China’s pace of growth continues to slow, and events like the stock market crash and government intervention appear to set the emergence story back some years, the real concern is that the “stronger for longer” theme so dominant in the mid-noughties may have been a misjudgement.

Not so, says investment advisor AllianceBernstein.

China’s growth continues to slow and the government faces immense challenges in implementing its reform program, acknowledge AB’s analysts, thus there can be little doubt China does pose a short term risk for investors. But just as it would be naïve to ignore that downside risk, it would be equally remiss to focus only on the negatives while ignoring the positives.

They include “China’s extraordinary capacity to marshal its social and economic resources in the pursuit of its policy objectives – and attribute which, since 1978, has enabled the country to lift more than 500 million people out of poverty”.

AB’s recent white paper, Future Shock: How China’s Reforms Are Creating Disruptive Risks (And Opportunities), suggests six globally disruptive changes are likely to result from China’s reform program if it proceeds to plan.

China recently failed to have the renminbi included as an IMF Special Drawing Rights currency, alongside the world’s dominant trading currencies of the US dollar, euro, yen and pound, but was basically told to try again next time. AB believes the renminbi will ultimately become almost important as the greenback as a global trade settlement currency, and equivalent to the Swiss franc as a reserve currency for Asian banks.

Many a sensational headline has been published regarding the Chinese economy’s slide from earlier double-digit growth down to today’s 7%, with the trend still apparently to the downside. But no economy can continue to grow at a double-digit pace ad infinitum. China’s slowing rate of growth reflects a maturing economy and a diminishing risk of the return to the economic bubble-and-busts experienced in the nineties. AB believes growth of 5-6% per year will become “normal” for China, and rather than being deterred, international investors will be drawn to an economy exhibiting greater stability and diversity.

Prior to the recent stock market correction and subsequent government intervention, China was close to being included in global equity indices such as those published by MSCI and FTSE, for example. While July may have been a set-back, AB notes investors will need to make big changes when inclusion does eventuate. China’s share of emerging market indices will increase from around 20% to 30%.

There will be an initial rush of mandated investment in the Chinese market before the volatility subsides and stock selection becomes more important. AB suggests early players will do well from focusing on sector plays such as consumer cyclicals and staples, healthcare and financial services.

Right now the label “Made in China” evokes assumptions of low quality, inferior knock-offs. Those old enough will nevertheless no doubt remember when the label “Made in Japan” was similarly derided back in the sixties and seventies. Today, “Made in Japan” implies an assurance of quality. AB believes China’s manufacturers will soon innovate and move up the value chain such that “Made in China” will eventually carry the same gravitas. Chinese consumers will set trends those in the West – particularly the young – will want to follow.

China’s push to exercise “soft power” on the global stage through institutions such as the Asian Infrastructure Investment Bank will lead to geopolitical realignments, particularly in Eurasia and Eastern Europe, AB believes, and to new investment opportunities in those regions.

In conclusion, AB suggests investors should stop losing sleep over China’s perceived negative risk and start focusing on the positive possibilities. Given the pace of China’s reforms to date, which have outrun most expectations and surprised even the AB analysts themselves on occasion, AB believes China has a better than even chance of turning its aspirations into reality.

The reform process is likely to take another decade or more, and AB does warn that these disruptive changes will need to take place in the next two to three years for investors to be confident that China is indeed on track to complete the reform process.

What is a “disruptive change” exactly? Well think of the brief periods of market volatility Beijing evoked when it clamped down on pollution (shutting down inefficient and dirty processing plants, for example), then on Communist party members’ corrupt indulgences (hitting sales of luxury good imports, including high-end vehicles, for example) and then on shadow banking (flowing through to sharp falls in base metal prices, for example). Each of these reforms caused short term disruption.

But the end result is intended to be a Chinese economy more in line with developed economies, and thus a safer and more robust economy in which to invest.

“We believe that the best way for investors to position themselves ahead of such an event,” says AB, “is to devote more effort to researching the risks and opportunities that China represents”.
 

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article 3 months old

The Overnight Report: September Still Open

By Greg Peel

The Dow closed up 121 points or 0.7% while the S&P gained 0.7% to 2108 and the Nasdaq added 0.4%.

Cyclical

The Shanghai stock index closed up 3.5% yesterday, which is about all anyone cares about right at this moment. The fact the Chinese market didn’t turn tail again meant the Australian market could lock in the commodity price gains enjoyed on Tuesday night.

The materials sector thus led Bridge Street higher yesterday, with a 1.5% increase, but across the index it was a session notable for a return to favour for the cyclical sectors – those sectors more closely aligned to the outlook for the Australian and global economies and less concerned with defensive yield.

We saw a 0.9% gain for industrials, which has been a very quiet sector of late. Consumer discretionary also saw a 0.9% gain and healthcare, which has become more of an industrial than a defensive in recent times, jumped 1.2%. By contrast, the banks were less excitable on a 0.5% gain, ditto the telco on 0.4%, and utilities were flat.

Perhaps most importantly yesterday’s 0.7% gain took the ASX200 firmly back over the 5600 level, which most recently has been somewhat of an inflection level between sub-5500, where the buyers tend to come in, and sur-5700, when the sellers arrive. If the index can push over 5650, and the SPI futures are suggesting so this morning, the technicals are looking good for another run to the highs.

Door Open

A lot may depend, nevertheless, on Fed policy. All year the pundits have been warning that the first Fed rate hike will likely trigger a period of volatility – meaning a sell-off – although stability should return fairly quickly. It may even prompt the long awaited 10% correction in the US, which in turn would impact on the Australian market.

I suggest we’re long past that concept now.

2015 is shaping up to be a carbon copy, in respect of Fed policy, of 2013. In 2013, discussion began over just when the Fed might begin to taper its QE program. This led, initially, to a “taper tantrum” that saw US stocks slammed for a while. Chicken Littles were in abundance, warning the end will come the day the Fed starts tapering.

But as the debate dragged tediously on, everyone got used to the idea. The reality was, of course, that if the Fed decided it was time to start winding back the stimulus then the US economy must be improving. On the day in December when the Fed finally did announce it would start tapering, the Dow rallied 200 points. The Chicken Littles were battered and fried.

Here we are in 2015, and we can simply substitute “rate rise” for “taper”. Early in the year, every hint the Fed might be considering a rate rise, every positive US economic data release, prompted sharp selling. Weak economic data were heartily cheered. If back in April the Fed hinted the door was open for a rate rise in June, the US stock market would have had apoplexy. Last night, when the Fed policy clearly left the door open for a September lift off, the Dow rallied over a hundred points.

What last night’s statement didn’t say, or imply, is “we will not raise in September”. Nor did it say, or specifically imply, “we will”. There was nevertheless one word that caught everyone’s attention. The last few statements have suggested that a rate rise still required improvement in jobs growth. Last night the statement said “some” improvement. Wall Street took that to mean “we’re nearly there”.

So if the August and September non-farm payroll numbers continue the current positive trend, and there is no further weakening in US inflation (low commodity prices are an issue here), a rate rise announcement is a good bet for September 17.

And let us not forget the Fed has been at pains to suggest markets stop worrying about when the first rate rise will be, and take comfort in the fact it will be incremental, and that the pace of the tightening cycle will be very gradual.

Bring it on.

Commodities

The US dollar index is certainly reflecting a “bring it on” attitude this morning. It’s up 0.5% to 97.15.

The jump in the greenback caused pause on the LME last night following Tuesday night’s big gains, with metal prices mostly a little weaker. Copper still managed a 0.4% gain.

If the materials sector was the place to be yesterday on Bridge Street, look out today. Iron ore is up US$3.10 or 6% to US$55.30/t.

West Texas crude also continued its relief rally, rising US$1.12 to US$48.88/bbl, while Brent gained US57c to US$53.63/bbl.

The ol’ rabbit in the headlights – gold – is steady on US$1096.70/oz.

The rise in the greenback has helped the Aussie down 0.6% to US$0.7293.

Today

The SPI Overnight closed up 33 points or 0.6%.

Locally we see June building approvals numbers today, and Glenn Stevens will give a speech in Sydney.

A day after the Fed statement, all eyes will be on the first estimate of US June quarter GDP, due tonight. Economists are expecting 2.5%.

On the local stock front, today sees earnings reports from Energy Resources of Australia ((ERA)), GUD Holdings ((GUD)) and Henderson Group ((HGG)).

Rudi will make his weekly appearance on Sky Business' Lunch Money (noon-12.45pm) and later again on Switzer TV, between 7-8pm.
 

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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)

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article 3 months old

The Overnight Report: Don’t Worry, We Buy

By Greg Peel

The Dow rose 189 points or 1.1% while the S&P gained 1.2% to 2093 and the Nasdaq added 1.0%.

Relief

The ASX200 opened sharply lower yesterday in response to the Chinese market’s late 8.5% plunge on Monday before holding its breath for the 11.30am Sydney time open in Shanghai. The Shanghai index promptly fell another 5%, and the ASX200 dipped further to be down 59 points.

The sudden late sell-off in Shanghai on Monday was apparently triggered by rumours that the state-owned China Securities Finance Corp – the entity charged with buying stocks on behalf of the government in order to head off a stock market crash – had now accomplished its mission and was exiting the market. On the open of trading yesterday, a China Securities Regulatory Commission spokesman declared this not to be true.

The spokesman said the CSFC will “increase its holding” of stocks “at appropriate times” and will continue to play its role of “stabilising the market”. And he also pledged, as regulator, to identify “malicious” stock sales by individuals designed to wreak havoc on the market.

In other words: It’s a free and open market, but if you sell you’ll be taken out and shot.

We cannot criticise the Chinese government for acting as buyer of the last resort in times of dangerous volatility as this is also common practice in mature Western markets. No one has ever met a member of the Fed’s Plunge Protection Team, for example, but everyone knows they’re there. On odd occasions during the 2008 turmoil sudden and inexplicable buying on Wall Street evoked knowing looks of recognition that the PPT was in action.

But whatever the US government did, rightly or wrongly, in 2008, it did not shut down half the stock market, order state-owned companies to buy shares (there aren’t any anyway) on pain of death and kick down the doors of anyone with a sell order.

The question is one of whether the Chinese stock market is in any way representative of the Chinese economy, as stock markets definitively are in capitalist economies, or simply a sideshow casino that the rest of the world can point at and laugh but ignore on the basis of its irrelevance to the rest of the world or even China itself. The latter seems more the case, but for the flow-on impact of debt-backed investment into global commodity markets and the impact on Chinese consumer confidence.

On that note, as the Shanghai index made its way back to be up 1% late in the Bridge Street session yesterday, it was the local energy sector which enjoyed the biggest rebound, up 0.8%. The rest of sectors ultimately traded off small moves up and down by the close. The Shanghai index closed down 1.7% at the death, but the world stopped worrying.

Rebound

European stock markets, which had fallen heavily on Monday night, subsequently bounced back. The German and French indices both gained a percent.

Wall Street opened hesitantly, but soon stepped into steady buying mode to break the worst down-streak since January and send the Dow up 200 points. Leading the charge was, again, the energy sector.

With all that’s been weighing on oil prices recently, the last thing oil producers needed was additional questions raised about the ongoing strength of Chinese demand. A big correction for the US energy sector had prompted “oversold” calls, and so it was the trigger of Chinese stock market stability, and a small rise in oil prices, set off a short-covering scramble. The materials sector also took heart from a rebound in metals prices, and as luck would have it, last night saw some positive US earnings reports following a period of disappointment.

Parcel delivery services are considered a reliable economic bellwether so an earnings beat from UPS saw its shares jump 5%. Ford (Dow) blew auto market analysts away with a stunning June quarter, sending its shares up 2%. Diversified resource sector leader Freeport McMoRan was able to entice an 8% rally just by announcing cost cuts.

The only downer on the day was the Conference Board’s monthly measure of US consumer confidence, which plunged to 90.9 from 101.4 in June when economists had forecast a slight slip to 100.0. However fingers were pointed at lingering Greek and Chinese market concerns during the survey period.

Commodities

Oil prices, as noted, enjoyed a mild recovery last night after their long fall, with West Texas rising US76c to US$47.76/bbl and Brent rising US19c to US$53.06/bbl. But the real action was in the metals.

The US dollar index rose 0.1% last night but that was not going to stand in the way of a short-covering scramble on the LME on technical triggers and Chinese stability. Aluminium rose 1%, copper and lead rose 2%, nickel and zinc rose 3% and tin rose 4%.

Iron ore gained US80c to US$52.20/t.

Gold is steady at US$1095.30/oz.

The Aussie dollar has similarly rebounded, jumping 0.9% to US$0.7340.

Today

The SPI Overnight closed up 27 points or 0.5%.

The Fed will conclude its July meeting tonight and issue a statement which will hold the world’s attention, but likely disappoint due to lack of anything new.

Rudi will make his weekly appearance on Sky Business' Market Moves, 5.30-6pm and later on, from 8pm onwards, he will host Your Money, Your Call Equities.
 

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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: Shanghai Shock

By Greg Peel

The Dow closed down 127 points or 0.7% while the S&P lost 0.6% to 2067 and the Nasdaq fell 1.0%.

Stock Picking

The Australian market opened lower yesterday following the fourth consecutive drop on Wall Street and at 28 points down in the first half hour, it looked as if the SPI futures overnight call of 49 points down was well underway. But clearly there are those who question the extent of Wall Street correlation, given recent weakness has mostly been driven by disappointing US earnings.

What followed was selective bargain hunting that first halted the slide before slowly building momentum to the closing bell. Large cap stocks seem to have been targeted given the banks, materials, healthcare and the telco all enjoyed rallies when industrials, the consumer sectors and energy all missed out.

The banks are enjoying renewed support after a long slide following the decision to reprice investor loan books to counter expected capital and macro-prudential tightening. Having taken a knife to their commodity price forecasts, offset by a weaker Aussie dollar forecast, resource sector analysts have begun to see value in certain materials names following steep share price falls.

But unfortunately these two themes may amount to nought today. The SPI Overnight is again calling a weak session, down 43 points, and this time might be more accurate.

Late Slam

When the bell rang at 4pm on Bridge Street yesterday, the Shanghai stock index had not moved much through its session so far. With the Chinese index having rallied back around 20% from its perilous low marked in the first week of July, thanks to significant government intervention, fear had subsided across the globe and allowed investors to refocus on the fundamentals.

But just as the bell rang on Bridge Street, something untoward was triggered in Shanghai. Two hours later, the Chinese market closed down 8.5% -- its biggest one-day fall since February 2007. That session was known as the “Shanghai Surprise”, and the subsequent risk-off trade in the US revealed to the world that there were these things called “collateral debt obligations”, containing sub-prime mortgages, and apparently when investment banks tried to sell them, they could find no buyers.

The rest, as they say, is history.

The world is once again afraid of the Chinese stock market and worried that yesterday’s late rout is a precursor to a full-blown crash. Given the level of intervention undertaken by the Chinese government and central bank to date to engineer a rebound, stopping just a little short of forcing fund managers to buy at gunpoint, one wonders what Beijing can pull out this time if this really is another selling wave building.

Presumably, they will shut down the market altogether.

There are those who argue that China’s stock market is isolated from the rest of the global financial market given only the Chinese can own China ‘A’ shares. And given only 15% of Chinese own shares, the flow-on into consumer spending is limited. But it’s not that simple.

Firstly there’s the general hit to Chinese confidence, both at the business and consumer level, at a time the economy is struggling to gain traction. But more directly there is the margin lending issue, which sees Chinese buying not just stocks with borrowed money, but commodities as well. When the stock market falls, commodities are the first assets to be offloaded to cover the margin calls.

Five in a Row

This point was not lost on Wall Street last night, as the US indices posted their fifth consecutive session of falls. The benchmark S&P500 is now approaching its 200-day moving average and once again, commentators are suggesting the correction-that-never-comes might be about to arrive.

The mood was not helped by 2.5% drops for both the German and French stock markets, and 1% in London.

Certainly US investor confidence is enjoying no boost from economic data points and corporate earnings releases right now as a counter. Last night’s new durable goods orders numbers for June offered a glimmer of hope, given net orders rose 3.4%, beating 2.7% forecasts and representing the first rise since March, but economists were quick to point out the six months to June saw orders fall 2%.

US weakness is finally coming home to roost for the US dollar. The US ten-year bond yield fell 4 basis points to 2.23% last night on a flight to safety but the safe currencies du jour are apparently the yen and, believe or not, the euro. The US dollar index is down 0.7% at 96.53.

Beyond the data, Wall Street watched as oil prices continued to fall last night, with base metals hot on their heels. The counter to an oversupplied global oil market has always been assumed demand growth from China. Energy stocks led an already nervous market lower.

Commodities

West Texas crude has now fallen for eight sessions in nine, to its lowest level since March. Last night saw a US$1.09 fall to US$47.00/bbl. Brent chimed in with a US$1.77 fall to US$52.87/bbl.

In Australia we might at least be able to look forward to cheaper petrol again, as we did last summer, except that the Aussie was up in the 80s back then and this morning it is down 0.2% to US$0.7272.

Tin continues to play its own game, rising 1% on the LME last night, but copper, lead and zinc all fell more than 1% and nickel fell 3%.

Iron ore actually managed to rise US70c to US$51.40/t, but if the Chinese stock market continues to fall, US$50 can be kissed good bye.

Gold fell US$5.60 to US$1094.70/oz and is another commodity rife for margin call cash-raising.

Today

The SPI Overnight closed down 43 point or 0.8%.

Alacer Gold ((AQG)) will post an earnings report today.

Tonight sees the first estimate of UK June quarter GDP.
 

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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

Cracks in China

The big fall away from the 5700 mark the ASX200 experienced last Wednesday appears to have taken the wind out of the sails of any post-Greece revival for the Australian stock market as we approach the local reporting season. Friday saw another soggy session, weighed down by commodity prices and another weak lead from Wall Street.

The index showed some attempt to rally in the morning on Friday but if ever it were going to stage a comeback, that thought was killed off by the release of the (former HSBC’s) flash estimate of China manufacturing PMI for July. It came in at 48.2, missing forecasts of 49.8.

This is a big “miss” in Chinese data terms and again brings into question the efficacy of Beijing’s 7.0% June quarter GDP result. At the time, economists argued that constituent data did not appear to add up to such result and weakness in July manufacturing implies the China’s manufacturing sector was contracting as the quarter came to a close.

By Friday’s closing bell, Bridge Street booked a mixed bag of data movements and typical end of week lack of conviction. The consumer sectors were the hardest hit, the banks continue to be impacted by capital raising scares, and weak metals prices continue to weigh on materials. Meanwhile the two main defensives – utilities and the telco – managed small gains alongside energy, which is surprising given the fresh slide for oil prices.

Gloom

The shock earnings result from Amazon might have been expected to raise some hopes at the end of a generally sour week for US quarterly earnings reports but it wasn’t to be. Amazon shares rose as much as 19%  intraday but settled back to close 10% higher as weak sentiment weighed on Wall Street.

Still, Amazon is now a bigger company in capitalisation terms than Wal-Mart, which is extraordinary given the company never has booked, and at this stage has no intention of ever booking, a profit. Wal-Mart is America’s biggest employer, Amazon is purely an online business. Old world versus new.

The weak Chinese data provided by Caixin/Markit helped Wall Street lower on Friday, with resource sector stocks continuing their slide on lower commodity prices. The US does not export raw materials in any meaningful way to China, but it does need a strong Chinese economy to support exports of capital goods and consumer products. Poor June quarter results posted by everyone from Caterpillar to Apple last week carried overtones of weaker than expected Chinese demand.

And data from home didn’t help on Friday night. Sales of new single family homes fell 6.8% in June to the slowest pace in seven months, although economists warn this is a volatile estimate subject to significant revision.

With the technicals signalling a warning ahead of Friday’s session, the Dow subsequently fell 163 points or 0.9%. The S&P lost 1.1% to 2079 and the Nasdaq dropped 1.1%. On Thursday night the S&P500 was sitting right on the psychological and well-worn 2100 level, so once it broke there was little to stem the tide.

The S&P closed down 2.2% for the week – the biggest weekly fall since March.

Commodities

Oil is now “officially” in bear market territory. Friday’s night’s US76c drop for West Texas crude to US$48.09/bbl took its fall from the US$61 high seen in June to 22%. The turn in the oil price is yet to elicit a response from US producers, given the rig count rose again last week according to data released on Friday.

Meanwhile, Saudi monthly supply levels continue to grow. No doubt the next bottom for the oil price will come when that rig count turns down once more. Brent fell US87c on Friday night to US$54.64/bbl.

The weak China data caused further groans on the LME last night but after a weak of falls, base metal prices consolidated somewhat. Lead, nickel and zinc were weaker but aluminium and copper posted modest gains, and the wild ride for tin continued with a 3% jump.

Iron ore is managing to hold up above the US$50 level, and on Friday rose US10c to US$50.70/t.

The US dollar index was steady at 97.21 but gold found some sub-1100 buyers on Friday, to drive a US$10.10 gain to US$1100.30/oz.

The Aussie dollar otherwise reflected China concerns, and it is down 0.9% to US$0.7284.

With a trickle of local earnings reports due this week as precursors to the results season proper, the Australian market looks set for a weak start. The SPI Overnight closed down 49 points or 0.9% on Saturday morning.

The Week Ahead

US earnings reports will continue to flow in this week but the focus will also be on monetary policy as the FOMC delivers a policy statement on Wednesday and the first estimate of US June quarter GDP comes out on Thursday. It is the last Fed meeting before September, when many expect the first rate rise. The forecast for the GDP stands at 2.5%.

The US will also see durable goods tonight, monthly consumer confidence, Case-Shiller house prices and the Richmond Fed activity index on Tuesday, and pending home sales on Wednesday. Friday brings the Chicago PMI and Michigan Uni’s fortnightly consumer sentiment gauge.

Germany’s IFO sentiment survey, due tonight, may provide some insight into how the whole Greek drama has impacted while at week’s end, a flash estimate of July eurozone CPI will indicate how the ECB’s money printing is going.

Japan will release retail sales, industrial production, unemployment and inflation data over the course of the week.

The economic focus in Australia comes later in the week when building approvals are released on Thursday and Glenn Stevens makes another speech. Friday sees private sector credit and the June quarter PPI.

But increasingly the focus in Australia will be on the micro as we approach August. There will be a late scramble of resource sector production reports this week, coinciding with a trickle of earnings season curtain-raisers.

Navitas ((NVT)) will report today, while GUD Holdings ((GUD)), Energy Resources of Australia ((ERA)) and ResMed ((RMD)) will report on Thursday.

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. Also on Wednesday, Rudi will host Your Money, Your Call Equities.
 

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

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article 3 months old

The Overnight Report: Earnings Jitters

By Greg Peel

The Dow closed down 68 points or 0.4% while the S&P lost 0.2% to 2114 and the Nasdaq dropped 0.7%.

Thumped

The extent to which the ASX200 plunged from the opening bell yesterday would appear to suggest those players who had retreated to the sidelines in the wake of the Greek resolution, wondering what to do next, decided that the slow drift back up to the 5700 mark over the week was unjustified. The big drop then fed on itself as investors panicked and got out fast.

No sector was spared in the rout, although the leading 3% drop for utilities suggests the market was expecting RBA governor Glenn Stevens to be more open to a further rate cut than he implied in his speech and Q&A in Sydney yesterday.

While reiterating that a decision to cut the cash rate once more remained “on the table”, Stevens rather poured cold water on the possibility in saying “It is not quite good enough simply to say that evidence of continuing softness should necessarily result in further cuts in rates, without considering the longer-term risks involved”.  Those risks include Australia’s surging property market.

There was certainly no impediment to another rate cut provided by yesterday’s inflation data. Australia’s headline CPI rose 0.7% in the June quarter, to an annual rate of 1.5%. Economists had forecast 0.8% for 1.7% annual. Core inflation, ex food & energy, which the RBA pays attention to, rose 0.55% for 2.3% annual to remain at the lower end of the RBA’s 2-3% comfort zone.

No doubt the sudden drop on Wall Street on Tuesday night, thanks to weak earnings reports from the likes of Dow components IBM and United Technologies, was enough to foster caution on Bridge Street yesterday. Wall Street is assuming a decent rebound in the US economy out of another snowbound March quarter and to that end, corporate earnings reports are expected to provide evidence. After the bell on Tuesday night Apple posted a disappointing result and fell 4% in the aftermarket. If Apple is struggling then the world is in trouble, it would seem.

Apple Pie

But on the strength of Apple’s numbers it was clear America’s biggest company is not struggling at all. It’s just that exuberant investors had pushed Apple shares up 13% in 2015 and were looking for an upside earnings surprise that was not forthcoming. Last night’s 4.2% correction is nothing to be particularly worried about.

Apple was not the only tech company to disappoint last night nevertheless. Dow component Mircrosoft also posted a weaker than expected earnings report which saw its shares fall 3.7%.

For the big US multinationals, the ever-rising greenback is a source of concern ahead of the Fed’s inevitable rate rise.

Last night the US dollar index ticked up 0.1% to 97.43. The US bond market continues to err on the side of caution, and is probably waiting to see what happens next in Greece before deciding it’s safe to sell once more. The Greek issue, as we must acknowledge, is not quite over just yet. The US ten-year yield fell 2 basis points last night to 2.32%.

Commodities

Energy stocks were also amongst those driving Wall Street lower last night, thanks to an unexpected rise in US weekly crude inventories. West Texas dropped US$1.64 in its new September delivery front month to US$49.22/bbl, representing the first sub-50 close since April. Brent, which is already trading on September delivery, fell US91c to US$56.00/bbl.

On the LME, the focus was on China. Yesterday a Chinese government ministry suggested China’s industrial sector still faces significant downward pressure and “arduous efforts” are needed to stabilize the economy. That was enough to send base metal prices lower once more, with only aluminium remaining relatively unscathed. Lead fell 1%, copper, nickel and zinc fell 2% and tin fell 3.6%.

Iron ore fell US$1.40 to US$50.70/t.

Gold slipped again, dropping US$7.10 to US$1094.00/oz.

The Aussie dollar is 0.6% lower at US$0.7382.

Today

Following the big adjustment on Bridge Street yesterday, the SPI Overnight is down 2 points.

CIMIC ((CIM)), or the old Leighton Holdings to you and I, will provide a curtain raiser to next month’s earnings season today as it releases its interim result. Fortescue Metals ((FMG)) will feature among those resource sector stocks releasing quarterly production reports today. Macquarie Group ((MQG)) will meet shareholders at the AGM.

Rudi will make his weekly appearance on Sky Business' Lunch Money, noon-12.45pm.
 

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article 3 months old

The Overnight Report: Goodnight Gold

By Greg Peel

The Dow closed up 13 points or 0.1% while the S&P gained 0.1% to 2128 and the Nasdaq rose 0.2%.

Greece

Greece is no longer in default, having paid the money owed to the IMF, and to the ECB, from the emergency bridging loan provided by the EU in the wake of Greece’s acceptance of the creditors’ reform package.

Last night Greek banks reopened but capital controls remain. Having spent three weeks queuing to withdraw E60 per day, from last night Greeks could withdraw E300 per week and from Saturday E420 per week. Major transfers to foreign banks remain banned, thus the costly disruption to Greece’s economy and capacity to trade continues. From last night, Greeks were hit with widespread price hikes thanks to a VAT increase to 23% from 13%.

How’s our 15% GST hike looking?

For the first time in months, representatives of the EU, ECB and IMF are expected in Athens in the coming week to assess the state of the economy. But the fat lady is still yet to sing this time around. On Wednesday night the Greek parliament will need to pass a second wave of required reforms, which will likely prove the make or break session for Alexis Tsipras.

At last week’s vote, only 123 MPs of the coalition’s 162 seat majority voted in favour of the initial reform package, with 120 required to sustain a minority government. Another round of MP defections could see Tsipras out in the cold, forcing his resignation and ultimately a fresh Greek general election.

It was a general election that got us to this point in the first place.

Now What?

Global stock markets have now reached a state of post-trauma calm and are wondering what exactly to do next. The Chinese stock market has stabilised, for now, and a Grexit appears off the table, for now. The Australian market is currently sitting in the doldrums ahead of the storm that is August result season, although a trickle of outlier reports are due from as early as this Thursday.

Yesterday saw another quiet session on Bridge Street, featuring a modest gain for the index. The energy and materials sectors were the poor performers in an otherwise sector-wide rally. The ASX200 is sitting in between its two important levels of 5600 and 5700, and one assumes upcoming earnings reports will be the catalyst to affect a breach of either.

The Aussie has also stalled, at US$0.7370.

European stock markets were mildly higher again last night, but without any major economic data releases or big-name corporate earnings reports to focus on, Wall Street meandered through its session lacking any conviction. The Nasdaq continued its run of new all-time highs, but with only a minor gain last night.

The Dow and the S&P500 are not yet back at all-time highs but they are back at levels over 18,000 and 2100 respectively, thus once again commentators are suggesting full valuation. There are plenty more earnings reports due yet in the US quarterly reporting season to stir the pot, but we may be in for a quiet time until September when the Fed may (hopefully, to get it over and done with) make its move.

Commodities

An impending Fed rate hike and subsequent strength in the US dollar have not been supportive of the US dollar gold price, and nor is a subsidence global risk. Gold held up but did not manage to rally during this latest Greek crisis, and had to weather the storm of Chinese selling to pay for margin calls on stock positions.

If gold was not going to go up then the only possible direction when the storm subsided was down. Gold had already fallen quietly for seven straight sessions before last night, and was looking vulnerable ahead of the release of Chinese gold reserve data. They came in at half of what the market had assumed, and it was goodnight Irene.

Gold is down US$36.50/oz to US$1096.80/oz to mark a five-year low, despite the US dollar index ticking up only 0.1% to 98.06.

For base metals, the end of Greek and Chinese trauma has coincided with the northern summer shutdown period, in which industrial activity slows to a crawl and buying support fades. Nickel was the only base metal to manage a rally last night (2%) while all the other metals drifted lower once more.

A flip-flopping iron ore price is keeping Twiggy awake at night, but last night saw a flip with a US$1.90 gain to US$51.90/t.

Today

The SPI Overnight closed up 10 points or 0.2%.

The minutes of the July RBA meeting are due tonight, but are unlikely to offer anything new given the June quarter CPI is out tomorrow.

Oil Search ((OSH)) and OZ Minerals ((OZL)) are among the quarterly production reporters today, while Macquarie Atlas Roads ((MQA)) will provide a quarterly update.
 

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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

The actual deal to provide Greece with a bailout still has to be nutted out in Brussels and all the eurozone parliaments have to approve the deal on the weekend but further impediments are not anticipated from here. The ECB has now increased its emergency funds to allow Greek banks to reopen next week.

The Chinese stock market appears to have settled down for now.

On Wall Street, expectations of a September rate rise are becoming more and more baked in and no doubt it has reached the point where most market participants would just like to get it done and move on. The focus can then be on the US earnings season, and at the end of the day, earnings are really all that matter.

So far so good on that front, but its early days. Next week's US economic data releases include new and existing home sales, house prices, the Chicago Fed national activity index and the Conference Board's leading economic indicators.

On Friday the flashers will be out and about, and just as well for them they're all in the northern hemisphere. Mighty cold in the south. China (HSBC), Japan, the eurozone and US will all provide estimates of July manufacturing PMIs.

Japanese markets will be closed on Monday.

The minutes of the July RBA meeting will be released on Tuesday but nothing much new is expected, particularly given Wednesday sees the June quarter CPI numbers. These will help inform the RBA's decision for the August meeting.

The countdown is now on locally to the August result season, but before that we still have a load of resource sector quarterly production reports to get through. The biggie next week will be from BHP Billiton ((BHP)). Macquarie Group ((MQG)) will also be in focus when it updates guidance at its AGM.
 

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article 3 months old

The Overnight Report: Calm Erupts

By Greg Peel

The Dow closed up 75 points or 0.4% while the S&P gained 0.5% to 2108 and the Nasdaq added 0.7%.

Step-Jump

The rally on Bridge Street yesterday mimicked the rally on Wall Street on Monday night in simply step-jumping higher on a risk adjustment for Greece. On Wall Street the Dow opened 200 points higher and stayed there all day, and on Bridge Street the ASX200 opened roughly 100 points higher and stayed there all day.

All sectors jumped around 1.5-2.5% for a 1.9% index gain. Materials led the pack with 2.6% as the iron ore price attempts to find a new level post the China stock market scare. Industrials proved the laggard with only a 1.3% gain, suggesting investors are not yet brave enough to plough back into cyclicals (miners notwithstanding), while a 1.7% gain for the banks suggests investors are not too concerned over possible capital raisings, given much of that threat had already been priced in.

The day’s economic news made no difference to the macro risk adjustment, but was positive anyway. After jumping in May, following an RBA rate cut and a business-friendly federal budget, Australian business confidence improved further in June to mark a 21-month high for NAB’s monthly survey. NAB’s confidence index rose 2 points to plus 10, compared to a long-run average of plus 5, while the current conditions index jumped 5 points to plus 11, compared a long-run zero.

NAB was quick to point out, however, that the June survey was conducted just prior to the two weeks of turmoil in markets provided by the Greek saga and the Chinese stock market crash. The July survey may prove more sobering.

The Shanghai index actually fell 1.2% yesterday in a typically volatile session, but the good news is this coincided with the gradual un-suspension of listed stocks. There are now only 27% of stocks still halted, down from around 50% when Beijing threw the kitchen sink at the crashing market. As long as all stocks come back on without another index crunch then we can suggest the Chinese market might return to something more “normal”, although we recall there is a six-month ban on company stakeholders of more than 5% selling shares.

After a 13% four-day rally, a 1.2% fall is neither here nor there.

Yes or No?

European stock markets went quiet yesterday after a couple of sessions of Greece-driven rallies as they await the outcome of tonight’s parliamentary vote in Athens. At this stage the suggestion is parliament will likely pass the new deal, but not before the defection of a number of disgruntled Syriza party members. Tsipras will likely no longer hold a majority, but may yet win the day.

Last night Tsipras appeared on national television to explain to the Greek people that he gave it his best shot but in the end he had no choice but to bow to the creditors, for the sake of the country. His survival will now depend on whether Greece sees their prime minister as a David who put up a valiant fight against Goliath but was inevitably overpowered, or just a typical politician full of bravado and hollow promises who was ultimately shown up as a paper tiger.

Were there to be a forced general election in Greece, we would likely have to go through the whole sad farce all over again.

Homeland

For now, at least, Wall Street is prepared to look past the macro global turmoil of the past two weeks and refocus on domestic issues. Last night’s major economic data release suggests the US economic recovery is really a case of two steps forward and one step back.

Retail sales fell 0.3% in June when economists had forecast a 0.2% rise. Positive results for April and May were also revised down. Ever since the oil price tumbled late last year, economists have been expecting a boost in US consumer spending on the effective “tax cut” lower fuel prices provide. It didn’t happen in the March quarter but that was put down to the weather. But now it seems it’s not happening in the June quarter either.

This suggests the US June quarter GDP result will not indicate as much of a rebound out of the snow-bound March quarter as markets have been assuming. It also puts the spotlight back on the Fed, and potentially shifts the odds back to a December rate rise, rather than September.

The US earnings season shifted into gear last night with an earnings beat from leading investment/commercial bank JP Morgan, and an in-line from America’s largest mortgage provider, Wells Fargo.

The weak retail sales result was taken on the chin, notwithstanding its Fed policy implications, as the US indices continued to drift higher. The Dow has now crossed over the 18,000 mark once more and the S&P500 has comfortably recaptured 2100.

The US ten-year bond yield fell back 3 basis points to 2.40% and the US dollar index is 0.2% lower at 96.64.

The big news on Wall Street, and around the globe, last night was nevertheless the reaching of an agreement between Iran and the group of six nations over Iran’s nuclear policy. Sanctions can now be lifted, and Iranian oil exports can flow once more.

One might have expected US oil stocks, and oil prices, to head southward on the news but the opposite proved true. For several weeks now markets have been anticipating a deal being reached and there has been plenty of time to contemplate, and thus price in, the implications. Last night was basically a “sell the rumour, buy the fact”.

Commodities

To that end, oil prices did initially tumble form the open but quickly reversed. West Texas is up US$1.30 to US$53.31/bbl and Brent is up US72c to US$58.68/bbl. Aside from anything else, it is appreciated that there will be a long lead time between the actual signing of the agreement and the serious resumption of Iranian oil exports – perhaps six months or more.

After much to-ing and fro-ing over Greece and China in previous sessions, last night was a quiet one on the LME. Base metals prices movements were mixed and negligible.

Iron ore fell US50c to US$49.40/t, suggesting recapturing the 50 mark will not be a stroll in the park.

Gold is down US$2.60 to US$1154.90/oz.

Today

The SPI Overnight closed up 18 points or 0.3%

Beijing will release China’s June quarter GDP result today, along with a monthly data dump of June industrial production, retail sales and fixed asset investment numbers. Economists are forecasting 6.8% annual growth for the GDP, down from 7.0% in March.

Last month saw a very soggy Westpac consumer confidence survey result so it will be interesting to see how today’s July survey stacks up. Unlike NAB’s business equivalent, Westpac’s survey was conducted in the midst of the Grecco-Sino turmoil.

The US earnings season rolls on tonight and industrial production numbers will be released, along with the Fed’s Beige Book.

Fed chair Janet Yellen will testify before a House financial committee tonight and Senate committee tomorrow night for a scheduled biannual update.
 

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

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

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

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