Tag Archives: China and Emerging Markets

article 3 months old

The Monday Report

By Greg Peel

Restored

The wider world may have been worrying about Greece on Friday but clearly there were no concerns on Bridge Street, where an across the board rally restored the ASX200 to the level it had attempted to reach on Wednesday, being just below 5600. Wednesday’s attempt was thwarted by a big sell-off on Thursday, which appears to have been purely related to the expiry of futures and index options.

The index rallied 1.3% on Friday and there was little variation from this average among sector moves, suggesting this was very much a “Buy Australia” trade. This implies a level of foreign participation, which is fitting given it was foreigners who bailed out of the Australian market earlier in the month to send it hurtling down to just below support at 5500. The earlier support level of 5600 will now become resistance as the market looks for some stability.

Immediate stability may well depend on Greece.

Bewitched

In Australia, derivatives expiries are split into two sessions, being futures and futures and ASX index options on the second last Thursday of the month and stock options on the last Thursday of the month. While derivatives expire every month, quarterly contracts are still by far the most popular, thus June is one of four big expiries months and also end of financial year for most, thus offering potentially the greatest level of volatility, as was seen on Thursday.

While June is not EOFY in the US it is still a major expiry month, and on Wall Street all four equity derivative classes expire on the third Friday of the month. Hence the label “quadruple witching”. This occurred on Friday night, and while the US indices were soggy for most of the session, a late selling rush was attributed to expiry.

The Dow closed down 99 points or 0.6%, the S&P lost 0.5% to 2109 and the Nasdaq pulled back 0.3% from Thursday night’s all-time high. Sogginess on Wall Street was attributed to Greece.

The Greek situation is currently a very fluid one, with much development between the close of Wall Street on Friday and this morning. On Friday night the only news was that the ECB had been forced to extend emergency funding to Greek banks as a run on those banks accelerated in earnest. On Friday night it was assumed Greece and its creditors were still at a position of stalemate, with the creditors having now drawn a line in the sand and the Greek government having rejected that line.

It was also known that the EU leaders had brought a meeting previously scheduled for this Friday forward to tonight. With negotiations seemingly at an impasse and money pouring out of Greek banks, the assumption was that this would be a crisis meeting convened not to try to come up with a new deal to offer Greece, but to prepare for the fallout from a Greek default.

To that end, the US ten-year bond yield fell 8 basis points to 2.27% on Friday night.

White Flag?

However yesterday morning, the news was that the Greek prime minister would present a new deal to the creditors tonight. As a result, the eurozone finance ministers have hastily organised to meet again tonight, having met only on Thursday night, the sole purpose being to discuss what Tsipras is now offering. The finance ministers will meet ahead of the meeting of EU leaders.

This morning the news is that the new deal offered by the Greek government is, in Tsipras’ words, “mutually beneficial” to both parties. Tsipras has spent the past couple of weeks calling the creditors’ demands “absurd”, and last week the IMF withdrew from negotiations saying only that it expects its money on June 30. Has Tsipras being playing the game to the eleventh hour in the hope the creditors would buckle, only to find that ultimately it is he who must buckle?

The suggestion is that the new deal offers some ground on the particular sticking points of the creditors’ reform package, including an increase in the pension age and a broader based consumption tax. Maybe if the concessions are sufficient for an EU and eurozone not wishing to see an exit of one of its members, then the day might be saved.

However, this would mean tougher austerity ahead for Greece, and that’s exactly the opposite of the platform upon which the Greek left wing coalition was elected. Yet polls suggest 62% of Greeks want to stay in the euro, so we have a rock and a hard place situation, or a cake and eat it too. Were the creditors to accept Tsipras’ new proposal, the deal will have to be taken to each of the seventeen eurozone parliaments for approval. The questions then are (1), will every parliament provide approval – some leaders have been vocal on the “kick them out” side – and perhaps more importantly (2), will the left wing majority Greek parliament concede to tougher austerity measures and thus a betrayal of their electors?

If not, well, who knows what happens next. The process of parliamentary approval will probably take longer than the week available before the IMF repayment is due, but then if it looks like a deal may have been reached, the IMF can always hold out for a bit.

The ECB may be a creditor and at this stage the only lifeline Greece has ahead of a bank collapse, but the central bank is likely to take direction from what the politicians decide. No doubt the ECB will extend further emergency funds to Greek banks tonight ahead of the various meetings. As for tomorrow night, that remains to be seen. If there is no resolution, presumably currency controls will be put in place in Greece tomorrow night.

Watch this space.

Commodities

While Greece has been drawing the world’s focus, the Chinese stock market has been quietly plunging.

On Friday the Shanghai index fell 6.4%, bringing the fall from its peak a bit over a week ago to 11%. Once upon a time, this would have spooked the hell out of regional markets, including Australia’s. Readers may recall it was the “Shanghai Surprise” of February 2007 that set in train a serious of global sell-offs that also initially surprised, before ultimately leading the world to learn of things called “subprime mortgages” in the US.

But on Friday, all regional stock markets, including Australia’s posted solid gains. Given the Shanghai index has doubled and tripled in such a short space of time, driven by the end of China’s property boom and accommodative policy from Beijing, any correction would need to be rather substantial before global markets are really going to become concerned.

While the correlation is potentially a little spurious, it is interesting to note that in the time the Shanghai index has fallen 11%, the spot iron ore price has fallen 7%. On Friday the iron ore price fell another US20c to US$60.70/t.

Falling stock prices in China introduce a new concern for LME traders, who are already worried about Greece and Fed rate rise timing. On Friday night all base metals bar tin fell 0.5-1.5%, led by copper.

Over in the oil markets, amongst everything else going on in the world the Saudi oil minister suggested on Friday night that if were demand for oil to improve, OPEC would not hesitate in further increasing production. If so, this would rather put a cap on any potential oil price rise from here.

West Texas fell US$1.03 to US$59.46/bbl and Brent fell US$1.37 to US$62.87/bbl.

The US dollar index was relatively steady on Friday night at 94.09 and ditto gold at US$1200.30/oz. The Aussie was down 0.3% on Saturday morning at US$0.7772.

The SPI Overnight closed down 3 points.

The Week Ahead

Greece: see above.

It must be noted that the consensus view amongst fund managers has long been, and still is, that somehow, in some way, the Greek can will get kicked down the road. That’s why unlike years gone by when the potential for a Grexit sent markets spiralling, not a lot of angst has been evident this time around. On that basis, were a resolution to come out of tonight’s negotiations, any relief rally would be minimal given there has been no great sell-off so far.

If Greece does default, well, nobody knows.

Chinese markets are closed today for Dragon Boat Day, as you do.

Tomorrow sees a flash estimate of China’s June manufacturing PMI from HSBC, alongside equivalent flashes from Japan, the eurozone and US.

It’s a busy week of data in the US for the data-dependent Fed, and thus the market, to contemplate. Tonight sees existing home sales and the Chicago Fed national activity index, tomorrow brings new home sales, FHFA house prices, durable goods and the Richmond Fed activity index.

On Wednesday the US March quarter GDP is revised for the last time before the first estimate of June quarter GDP is released next month. Economists are forecasting a revision up to minus 0.2% growth from the previous minus 0.7%. Personal income & spending numbers are out on Thursday and consumer sentiment on Friday.

Australia will see a quarterly house price index out tomorrow in a week largely devoid of fresh data. As noted, stock options expire on Thursday.

On the local stock front, there is a large number of mostly REIT/infra names going ex-div on Friday.

Rudi will appear on Sky Business on Wednesday at 5.30pm and on Thursday at noon and again on Friday, 8-9pm, for Your Money, Your Call - Bonds versus Equities.
 

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

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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

Once we get through tonight's quadruple witching expiry on Wall Street, the focus will all be on Greece, although something may yet occur during tonight's trading.

A report stemming from last night's eurozone ministers' meeting suggests Greek banks may have to shut their doors on Monday. Whether or not this is an accurate assessment, the report itself may yet prove self-fulfilling, such that tonight would see a run on Greece's banks just in case, forcing a shutdown.

EU leaders have brought forward their own meeting scheduled for later next week to Monday, suggesting a crisis meeting.

Watch this space.

Back in the real world, China will be closed on Monday before HSBC releases its flash estimate of China's June manufacturing PMI on Tuesday. Similar flashes will also come from Japan, the eurozone and US.

Germany's IFO business sentiment survey, due on Wednesday, may end up being redundant depending on what happens in the next few days.

Meanwhile, the US will see a lot of data releases next week, including existing and new homes sales, house prices, durable goods, personal income & spending, consumer sentiment and the Chicago and Richmond Fed activity indices.

The US will also see the last revision of March quarter GDP ahead of the first estimate of June quarter GDP next month.

Australia is largely devoid of major economic releases next week. On Thursday, quarterly stock options will expire on the ASX.
 

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article 3 months old

The Overnight Report: IMF Storms Out

By Greg Peel

The Dow closed up 38 points or 0.2% while the S&P gained 0.2% to 2108 and the Nasdaq rose 0.1%.

Bounce

The ducks all lined up in a row for the Australian markets yesterday. After a week-long sell-off which took the ASX200 almost to "official" correction territory, three days of stalling at around 5500, a big rebound on Wall Street overnight, a jump in oil prices and a big jump in the iron ore price, the stage was clearly set.

And so we saw a predictable 1.4% bounce, led by materials (+2.0%) and energy (+2.1%), the banks (+1.8%) and the telco (+1.3%). In other words, all the big boys – the stocks that are always clobbered when the "Sell Australia" button is pressed overseas.

An additional boost was provided by yesterday's May jobs guess & giggle, which suggested a fall in the unemployment rate to 6.0% from 6.1% in April, with April having been revised down from an initial 6.2%. The number beat economist expectations, but rarely does the number match expectations. The fall in unemployment is nevertheless consistent with other related indicators, CBA's economists noted yesterday.

The Aussie dollar spiked on the jobs numbers of course, given the RBA is still forecasting unemployment to rise and thus a falling rate suggests another cash rate cut is less likely. But overnight the US dollar index recovered, hence this morning the Aussie is actually down a tad over 24 hours at US$0.7757.

China

It was probably never going to matter to an Australian market in rebound mode yesterday what the monthly Chinese data dump might bring. As it was, the numbers can be viewed in one of two ways.

Chinese industrial production rose 6.1% year on year in May, up from 5.9% in April and matching forecasts. Retail sales rose 10.1%, up from 10.0% in April and matching forecasts. Given the past couple of months' numbers have surprised to the downside, the fact these numbers met expectations, and suggested slight improvement, can be considered a positive.

The fact that they remain lower than markets, and the Chinese government, would like, is a negative. The May fixed asset investment number also fell to 11.4% growth year to date, down from 12.0% in April, and that's not good news.

Combined with this week's earlier CPI result of 1.2% year on year, down from 1.5% in April, the indication is China's economy continues to struggle. More stimulus ahead? Most likely.

Retail Surprise

As Beijing mulled a lack of domestic consumer enthusiasm, over in the US the story was a different one.

US retail sales rose 1.2% in May to mark the third consecutive rise and to add weight to the rebound from the snowbound March quarter thesis. Economists had forecast 1.5%, but the "miss" was counterbalanced by revisions to the April number, to 0.2% from 0.0%, and the March number, to 1.5% from 1.1%. Perhaps the US consumer is beginning to appreciate lower oil prices after all.

The sales number led Wall Street to kick on from Wednesday night's big gains from the opening bell, but thereafter momentum began to fade. The US dollar index rose 0.5% to 95.02 on the sales number but when one might expect another rise in US bond yields on the same theme, instead the ten-year yield suddenly fell back 10 basis points to 2.38%.

Why? I'll give you one guess.

They shoot horses, don't they?

On Wednesday night, it appeared Greece's creditors were offering at least some form of white flag in offering Athens some breathing space. With the big June 30 IMF repayment obligation looming, the troika offered to hand over a portion of the next tranche of bailout funds if the Greek government would just agree to one of the various reforms insisted upon. That way, Greece could pay the IMF, avoid default, and negotiations could then continue.

But no, Alexis Tspiras will not have bar of it. One of the biggest stumbling blocks is the troika's demand the government raise the retirement age to 63 from 61, and reduce pension payments. Greece's pension payments are the highest in the eurozone, and one can see why Germans are insistent given the German retirement age was recently increased to 67 from 65.

Tsipras has refused point blank, and so in a pique of frustration, last night the IMF walked out on negotiations. Not only did the negotiators leave the building, the IMF recalled the team from Brussels to Washington. The IMF has never walked out of negotiations with anyone before.

The ball is now in Greece's court. Greece cannot afford its payment due on June 30, nor can it afford to pay wages and pensions beyond that point. Greece needs those bailout funds, and even if Tsipras capitulates and the bailout funds are made available, the actual handover has to be approved by all eurozone parliaments. Not only is blanket approval not necessarily a given, there's only a couple of weeks left for parliamentary votes to even be organised.

The clock is ticking. That's why last night European bond yields fell back again, and US bond yields followed suit.

Commodities

The good news is iron ore rose another US30c to US$65.40/t. The bad news is everything else fell last night.

Base metals were particularly hard hit. LME traders are nervous about Greece, and took no solace from China's monthly data, particularly the weak fixed asset investment number. This number plays right into raw material demand. And while rising US retail sales are positive, a rising US dollar is not. Tired of waiting for a decent rebound in base metal prices, last night traders threw in the towel.

Aluminium fell 0.5%, zinc fell 1%, nickel fell 1.5%, copper fell 2.5% and lead and tin fell 3%.

The oils also turned tail last night, with West Texas falling US61c to US$60.55/bbl and Brent falling US49c to US$65.11/bbl.

The International Energy Agency released a report last night in which it increased forecast global demand for oil in 2015, but also noted supply growth will remain strong enough to more than cover any increase.

Gold slipped back US$3.80 to US$1182.00/oz last night on the stronger greenback.

Today

The SPI Overnight closed down 8 points.

After yesterday's big surge, a bit of a pullback would not be unusual today. And it's a Friday, so steaks and red wine beckon. US stocks closed higher and bond yields closed lower, which might otherwise provide impetus for the Australian market, but as the dust settles on yesterday's snap-back rally, there's still a slowing China and default-bound Greece to think about.

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article 3 months old

The Monday Report (On Tuesday)

By Greg Peel

Stall

I suggested on Friday morning that despite a big fall on Wall Street on Thursday night, we might just see the ASX200 close higher on the session after a week of carnage. A fall of 5 points meant I was wrong, but not too far off the mark in principle.

The index appeared to completely stall on Friday, as if battle weary participants had called a ceasefire to bury their dead. Evidence of bargain hunting finally emerged, as the ASX200 flipped back and forward across the flatline for most of the session. The close of down a mere 5 points belied some more distinct moves within sectors.

Healthcare was the most highly sought after sector, rising 1.0%. The buyers liked the consumer sectors and industrials as well, but another 0.6% fall for the banks ensured an offset. Resource sectors were flat.

The situation now for Australian financials is an interesting one. Our banks have been creamed on the rise in US bond yields, given the attractiveness of solid dividend yields has been undermined for foreign investors. Yet as US bond yields rise, US bank share prices are rising with them. The US yield curve is now steepening (longer term rates moving up against shorter term rates) as Wall Street prepares for the Fed to begin "normalising" policy.

"Normal" is the key word here, because in a normal monetary policy world, one absent of any QE, rising rates and steepening yield curves provide banks with a greater earnings opportunity as they borrow short term and lend long term, into mortgages for example. For the past three or more years, Australian bank stocks have not performed as "normal" bank stocks. They have performed as utilities, or even, dare I say, fixed income instruments, as if those wonderful yields are a constant. Now they are returning to reality.

Onward and Upward

If we cite rising US bond yields as the most direct driver of last week's 5% drubbing on Bridge Street, then Friday night's surge of 10 basis points to 2.40% for the benchmark US ten-year yield would suggest a continuation of the theme today. Until, at least, the market is satisfied the interest rate differential shift has been sufficiently priced in.

The US bond market is already in nervous sell-off mode, so all it needed was a reasonable non-farm payrolls result on Friday night and they'd be off again.

Economists had forecast 210,000 jobs to have been added in May in the US, but the number came out as 280,000. The unemployment rate ticked up to 5.5% from 5.4% but only because the participation rate ticked up, suggesting more Americans are feeling confident enough to go back into the market to find a job. Wages also rose in May, at a 2.3% annualised growth rate, meaning increased employment is not about workers conceding to take lower wages just to get a job.

It was a trifecta of good news for the US economy – rising employment, rising participation, rising wages. It is evidence that expectations of a rebound out of the weak, weather-impacted March quarter may well be justified. But it also means the Fed will be getting closer to making the big move.

This is a worry for the stock market but not as much of a worry as it might have been earlier in the year. Earlier in the year, we might have seen the Dow down a couple of hundred points on this strong jobs number, but in the interim Wall Street has come to accept that the Fed will eventually raise, so there's no point in losing sleep over it. Exactly the same scenario played out in 2013 when it was all about the tapering of QE, and then in 2014 Wall Street started hitting new all-time highs.

On Friday night the Dow closed down 56 points or 0.3%, the S&P dipped 0.1% to 2092, and the Nasdaq actually rose 0.1%.

Commodities

The strong jobs number also sent the US dollar index up another 0.9% to 96.35. While not good for commodity prices in isolation, a stronger US economy is indeed good for commodities. Next week sees a raft of Chinese data for May, and the Greek spectre is still floating around, so traders were reluctant on Friday night to get too carried away.

Base metal prices closed mixed on smallish moves, with a 1% fall in lead cancelling out a 1% gain in nickel.

Iron ore rose US30c to US$63.80/t.

Having broken out of its trading range the night before, gold might have been set for a big drop on the solid jobs number but then gold always seem to take a day or two to think about such matters. It fell US$3.80 to US$1172.30/oz.

OPEC held its six-monthly meeting on Friday night and surprised no one by making no cuts to current production quotas. It was when OPEC surprisingly announced no cuts in its previous meeting back in December that oil prices collapsed.

Oil prices initially fell on the OPEC announcement but quickly recovered, likely because they were sold down earlier in the week in anticipation. Gasoline prices also jumped in the US on Friday night to provide added impetus for crude. This year's US summer driving season may yet be a good one. West Texas rose US99c to US$58.97/bbl and Brent rose US$1.15 to US$63.25/bbl.

The US dollar rally sent the Aussie down 0.8% to US$0.76.26 by Saturday morning.

China

Beijing released China's May trade numbers yesterday and again they were indicative of a slowing domestic economy.

Exports fell 2.5% year on year in the month but this figure was better than expected, following falls of 6.4% in April and 15% in March. However imports fell a hefty 17.6% year on year in May when a 10% fall was forecast. It's the seventh consecutive month of falling imports.

The numbers suggest Beijing is struggling to transition from an export economy to a domestic consumption economy and that stimulus measures to date are yet to prove effective. Commentators suggest time is still required for stimulus measures to have their impact. The government's decision to cut import tariffs on some consumer goods should drive a modest import pick-up soon, but clearly further fiscal and monetary policy measures are needed if Beijing is going to hit its target of 7% growth in 2015.

Greece

German chancellor Angela Merkel would like Greece to remain in the eurozone but warned last night that "time is running out". Greece's creditors have offered the country a new lifeline, albeit one previously discussed, which would see Greece given a nine-month extension on the IMF repayments due this month, that Greece likely cannot pay this month, and also given E10.9bn in additional bailout funds which the creditors had set aside as an emergency fund for Greece's banks.

The catch, of course, is that Greece must agree to a set of reforms, which include increasing sales taxes, cutting pensions and making it easier to hire and fire workers. Greek prime minister Alexis Tspiras has labelled these reforms variously "absurd" and "irrational" and was happy to tell the G7 leaders as much in a speech at their meeting in Bavaria.

In response, Tspiras received a visceral bollocking in a speech from European Commission head Jean-Claude Juncker, and the ire of every other leader in the room, including President Obama. Leaders are united in urging Greece to concede to reforms.

Tsipras has since said he is prepared to "make concessions". If his stance up to now is anything to go by, his idea of "concessions" is the creditors capitulating and letting Greece have the money without reforms.

And so it goes on.

Having become more confident last week that a deal was close to being reached, European stock markets turned tail again last night as it appears ever more likely a Grexit is the only outcome. Last night the German DAX fell 1.2% and the French CAC 1.3%. The DAX is now in correction territory.

Down for the Year

The dour mood carried cross the pond and saw the Dow falling steadily to be down 89 points around lunchtime. From there a rally was attempted and all bar around 20 points of the fall was recovered, but late selling sent the average back down again.

The Dow closed down 82 points or 0.5% and has wiped out all previous gains for 2015. The S&P fell 0.7% to 2079 and the Nasdaq dropped 0.9%.

Aside from Greek fears and week Chinese data, Wall Street was last night still coming to terms with Friday night's positive jobs number, and its implications for Fed rate rise timing. Having jumped sharply on Friday night, last night the US ten-year bond yield slipped back 2 basis points to 2.38%.

But the US dollar index, which jumped on Friday night on the jobs result, fell back 1.2% to 95.23 last night. The fall has been linked to an offhand remark made by President Obama to his G7 chums that he thought the dollar was too high.

And hence the Aussie is up 0.9% from Saturday morning at US$0.7696. It's thus basically a tad higher than where it was when local markets closed on Friday.

Commodities

The weak Chinese trade data did not have as much impact on the LME as one might expect, given base metal prices again showed minimal movement. The exception is nickel, which jumped 2%.

Iron ore was steady at US$63.80/t.

Gold was steady at US$1173.70/oz.

The oils were weaker on the weak Chinese data. West Texas fell US71c to US$58.26/bbl and Brent fell US50c to US$62.75/bbl.

The SPI Overnight closed down 24 points or 0.4% last night for a 28 point fall since the market was last open.

The Week Ahead

Greece will no doubt continue to be a source of nervousness and of back and forth news as the week progresses.

China's economy will continue to be in the spotlight this week as inflation numbers are released today and industrial production, retail sales and fixed asset investment numbers on Thursday.

With the strong jobs number still resounding on Wall Street, this week's important data releases begin on Thursday with retail sales and inventories followed by the PPI and consumer sentiment on Friday. More grist for the Fed rate rise mill.

It's a busy shortened week this week locally. Today kicks off with the housing finance, the ANZ job ads numbers and NAB's monthly business confidence survey, the first post-budget. The same is true for Westpac's consumer confidence survey out tomorrow. On Thursday it's the May jobs numbers.

Rudi will appear on Sky Business on Wednesday at 5.30pm and on Thursday at noon. On Wednesday he'll be back as host on Your Money, Your Call, 8-9pm.

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

The US May non-farm payrolls report, arguably the most globally influential piece of monthly data, is out tonight. As is now always the case, assumptions about how Wall Street might respond to whatever the result may be are never straightforward.

Assuming Wall Street is now prepared to accept a 2015 Fed rate rise as “baked in”, the current response trend will likely prevail: a very good result is bad, as it will speed up that rate rise; a very bad result is bad, as it implies the US economy is not rebounding out of the weak March quarter as expected. A bit of a beat or a bit of a miss on forecasts is good, as it is otherwise none of the above.

With global bond markets grabbing all the attention this week, and Status Quo again being exhumed to play the jingle for the ASX200, what the US jobs number looks like will be decisive in determining next week’s market direction.

But China will also be very much back in focus, delivering May trade, inflation, retail sales, industrial production and fixed asset investment numbers over the course of the week.

And there's always Greece.

In the US, data will again become important towards week’s end when retail sales, inventory and consumer sentiment numbers are delivered along with the PPI.

In Australia, most states will be closed for the Queen’s Birthday long weekend on Monday thus the ASX will also be closed, as will FNArena (albeit fully accessible).

Data-wise, we’ll see ANZ job ads and the NAB business and Westpac consumer confidence surveys out next week. On Thursday, it’s our own jobs numbers.

On the local stock front, we’re now into the pre-June 30 blackout period when corporate news is thin on the ground. The exception to this is the so-called Confession Session, when unexpected profit warnings are trotted out. We’ve already seen a few.
 

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article 3 months old

The Overnight Report: Data Deluge

By Greg Peel

The Dow closed up 29 points or 0.2% while the S&P gained 0.2% to 2111 and the Nasdaq rose 0.3%.

Insanity

So tell me: what changed between Friday and Monday as far as Bridge Street is concerned? Greece? Give me a break. That long running saga is just something the media trots out each time it cannot otherwise rationalise market movements. Building approvals? Well that was a slight disappointment but nothing to sell the farm over and besides, all last week we saw worrying Australian data but that didn’t stop the ASX200 being up over 90 points at one stage on Friday.

And then yesterday it was down over 90 points before midday, and most of that fall was in place before the building approvals release. For the record, building approvals fell 4.4% in April, worse than the 2.0% expected. Housing is about the only thing driving the Australian economy at present, and not by enough to overcome contraction elsewhere. But most of that 4.4% represented lump apartment block approvals, and net approvals were up a very healthy 16.3% year on year in April.

The bottom line is, there was very little to justify the rally on Friday, and nothing to justify why the mood might change so spectacularly over the weekend. If you’re a longer term investor you might as well just sit back and laugh while the idiots play their games. Intraday volatility on Bridge Street is off the scale, but the ASX200 has done nothing but range-trade since the beginning of March.

Yesterday’s rebound from the bottom, such that we only closed 40 points down, occurred after the index breached 5700. I suggested the other day it looked like 5700 was the new 5600 in terms of bargain hunter support. But if you believe in the technicals, yesterday’s failure to hold over 5750 means we’re headed south.

And seriously, what would presently justify a major move north?

PMIs

In case you missed it in yesterday’s dust, Australia’s manufacturing PMI rose to 52.3 last month from 48.0 in April. That means expansion. Woohoo!

The lower Aussie has been touted as the fillip, but I’m pretty sure this PMI has not posted two consecutive months over 50 in many years, it’s ridiculously volatile, and let’s face it, manufacturing is rapidly becoming an insignificant contributor to GDP.

Beijing’s manufacturing PMI for China has posted three consecutive months of expansion. This might sound like great news, except that at 50.2, the May number reveals three months of negligible expansion. Besides, at 49.2, HSBC’s own China manufacturing PMI has now posted three consecutive months of contraction.

Japan has managed to sneak back into expansion at 50.9, the UK ticked up very slightly to 52.0, the eurozone saw a more pleasing increase to 52.2 from 50.0, and the US was also pleased with a move up to 52.8 from 51.5.

It would seem the global manufacturing sector is just managing to grow overall. On official numbers we have 52.3, 50.2, 50.9, 52.0, 52.2 and 52.8. Given the vicious currency wars in play around the globe, it’s an interesting suite of numbers.

Wall Street

Wall Street was pleased with a stronger manufacturing sector in May and also pleased with a solid jump in construction spending in April, both of which support the thesis that negative economic growth in the March quarter was all about the weather. But when it came to last night’s personal income & spending data for April, the mood turned a little sour.

Incomes rose 0.4% in April, which is promising against the prevailing weak trend of 0.2%. But consumer spending post 0.0% change. Savings levels increased to 5.6% from 5.2% of income and have now been over 5% for five consecutive months.

Also of interest is the alternative measure of inflation that arises from the personal income & spending numbers. The core personal consumption & expenditure (PCE) measure posted 1.2% annualised growth in April. This compares to inflation as measured by consumer prices, ie the CPI, which showed 1.8% annual core growth in April.

The Fed prefers the PCE to the CPI. Thus if rising inflation is to be a trigger for the first rate rise, it’s a long way off. But on Friday we get jobs numbers, and that’s another trigger.

Wall Street initially rallied on the data last night before thinking better of it, with the Dow turning a peak 95 point gain into only a 29 point gain on the close.

But the US bond market saw it the other way. Spending and inflation aside, the currently volatile bond market decided the positive manufacturing and construction numbers justified expectations of a rebound out of the contractionary March quarter. Hence the ten-year yield rose 10 basis points to 2.19%.

The US dollar index also rose, up 0.6% on its index to 97.45.

China Syndrome

Commodities markets were more focused last night on Chinese data than on US data. On the LME, traders would probably have preferred to see Beijing’s official manufacturing PMI slip into the negative to match HSBC’s interpretation, which would bolster the chances of further stimulus. At 50.2, it’s sort of neither here nor there.

Thus metals prices were mixed on uncertainty, with aluminium up 1% and nickel up 3%, lead and zinc down 1% and copper down slightly.

The iron ore market was closed last night for a holiday, leaving the spot price unchanged at US$61.40/t.

Oil traders could not find any inspiration out of a very busy 24 hours of global data. West Texas was little changed at US$60.21/bbl and Brent fell US51c to US$64.94/bbl.

Gold is down a tad to US$1188.60/oz.

With the RBA meeting today, the Aussie is 0.5% lower over 24 hours at US$0.7608 but no one expects a rate cut today.

Today

The SPI Overnight closed up 15 points or 0.3%.

While there’s very little chance the RBA will cut, the market will still be clearly focused on the statement release this afternoon. Last month’s statement caught the market by surprise by being rather upbeat. All the data in the meantime – particularly last week’s quarterly construction and capex numbers – have been downbeat. What will the board have to say today?

Before that decision, we’ll see the March quarter current account numbers, including the terms of trade. At the end of the day, this is Australia’s driving force.

The eurozone will see a flash reading of May CPI tonight, while factory orders will be the focus on Wall Street.
 

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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 first revision of US March quarter GDP is due tonight. Economists are forecasting a slight improvement on the first estimate of 0.2%, but given that 0.2% was well short of what economists had initially forecast, the market will not be surprised if the revision turns out to be a negative result.

It’s GDP week next week in Australia. Given this week’s disappointing construction and capex component releases, a disappointing GDP would not be a shock here either. Before we get to Wednesday’s ultimate release we’ll see March quarter company profits and inventories and the current account numbers, which include the terms of trade.

And on Tuesday, the RBA will meet. After this week’s data, the Aussie is now pricing in a rate cut and bond yields have fallen, but perhaps it’s too soon to turn so bearish given this month’s slightly more upbeat statement from the central bank.

Next week in Australia also sees monthly building approval, retail sales and trade numbers, as well as the manufacturing, services and construction PMIs.

As Monday is the first of the month it’s manufacturing PMI day across the globe, including China, and same again for services on Wednesday.

Both the ECB and Bank of England will hold policy meetings next week.

The US will see construction spending, personal income & spending, factory orders, vehicle sales, chain store sales, trade and consumer credit numbers, as well as PMIs. The Fed Beige Book will also be released and being the first week of the month, both the private sector and official jobs numbers for May are due.
 

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The Overnight Report: Show Me The Way

By Greg Peel

The Dow closed flat while the S&P rose 0.2% to 2130 and the Nasdaq rose 0.4%.

Get Me In!

Was HSBC’s take on China’s May manufacturing PMI good or bad? One can offer two differing views.

At 49.1, HSBC’s flash estimate is an improvement on the April result of 48.9 (good) but missed forecasts of 49.3 (bad) and represents the third straight month of contraction (bad). Persistent weakness will likely encourage Beijing to implement further monetary easing and other stimulus policies (good) but it would seem measures taken to date are not having much effect (bad).

But did it matter? Not yesterday. We saw the signals for a potential rally yesterday in Wednesday’s trade, in which the bargain hunters had clearly decided it was time to move in on both a fundamental (value, including yield) and technical basis (5600 is a clear support level). This suggested to the wider market a bottom had been seen in this pullback and so yesterday, it was a case of get in quick.

It was green across the screen as all sectors finished positively. Healthcare again led the way with a 2.1% rise while energy (1.8%) was relieved the oil price stopped falling and materials (1.5%) must have simply been happy the government was wavering on the idea of an iron ore inquiry, given the iron ore price continues to ominously slide. The banks (0.6%) and the telco (0.9%) have found fully-franked yield support levels.

The government has now officially dismissed the idea of an iron ore inquiry, incredulous that anyone thought they were considering one in the first place. It was him, it was him, they said, pointing at Nick Xenophon.

Mixed PMIs

Having posted a not so encouraging March quarter GDP this week, Japan would have been happy to see its manufacturing PMI estimate suggest a swing into expansion in May, with a move to 50.6 from 49.9. Not so happy were QE co-conspirators the eurozone, which saw the estimate of composite (manufacturing plus services) PMI slip to 53.4 from 53.9. Germany’s individual manufacturing PMI fell to a three month low of 51.4.

The US also wavered, seeing a fall in the manufacturing number to 53.8 from 54.1, to add yet another reason to feel the Fed will hold off. But if these estimates are accurate, at least we can say the manufacturing industries of Japan, Europe and the US are all expanding, while China’s is contracting.

Directionless

Given the monotonous regularity with which the various US indices seem to hit new all-time highs these days, it’s interesting to note that the last time the big three actually hit a new ATH together on the same day was back in 1999. Last night looked like a strong chance for a trifecta once again, but while the S&P just snuck over the line, a typical late drift-off saw the Dow and Nasdaq retreat.

That the Dow closed about as flat as is possible on the session (+0.34 points) is testament to the apparent directionlessness of Wall Street this past week or so. They can’t find any real reason to buy it but they don’t really want to sell it either.

After a very strong read on US April housing starts earlier in the week, last night April existing home sales disappointed with a 3.3% fall. The year on year trend nevertheless remains positive.

More disappointing was the Philadelphia Fed activity index, which fell to 6.7 from 7.5 in April when forecasts suggested 8.3. The Chicago Fed national activity index saw improvement, but only to a slower pace of contraction at minus 0.15 from minus 0.36.

The Conference Board’s leading index for April forecast 0.7% growth, which seems a bit out of tune with the rest of the data. The Board suggested it means the US economy will rebound out of a sluggish, weather-bound first quarter, yet not dramatically so.

So that’s why Wall Street can’t go anywhere at present. Weak economic data are bad, but that keeps the Fed in its box, so that’s good.

Which makes you wonder why the US ten-year bond yield fell 7 basis points last night to 2.18%. Some bond buying is fair enough if the Fed is going to hold off, but the volatility in this market of late is really blowing away the long-held wisdom of the bond market representing the “smart money” and the stock market being a bunch of trigger-happy cowboys.

After a very strong week, the US dollar index finally eased slightly last night, by 0.3% to 95.35. The Aussie is thus 0.3% higher at US$0.7897.

Broken China

The oil markets apparently took three months of contraction for the Chinese manufacturing PMI to be a positive last night, as it implies further stimulus measures. Never mind that Chinese oil imports have only ever grown consistently even as the economy as a whole has slowed.

West Texas crude jumped US$1.91 to US$60.68/bbl while Brent rose US$1.60 to US$66.45/bbl.

The feeling was similar on the LME but the movements among metal prices were mixed. Copper rallied back 1% and lead jumped 2%, but elsewhere prices were weaker.

The iron ore price continued to drift away, down another US20c to US$57.60/t.

And gold continued to retreat to the sanctuary of a familiar 1200, falling US$3.30 to US$1206.50/oz.

Today

Futures traders expect the local market to go on with it today; the SPI Overnight closed up 19 points or 0.3%.

We’ll find out how German businesses are feeling about the state of play tonight with the release of the IFO survey, while the CPI result in the US will fuel up more Fed discussion.

On the local stock front, PanAust ((PNA)) will hold what will likely be its last AGM as a standalone entity today.
 

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

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

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article 3 months old

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

Central bank policy will be in the frame next week, if it isn’t always, as both the Fed and RBA release the minutes of their recent policy meetings. In the case of the Fed, the market will be looking for rate rise clues but it is most likely “data dependence” will remain the only theme.

To that end, tonight in the US sees industrial production and consumer sentiment numbers along with the Empire State activity index. Next week brings housing sentiment and starts, existing home sales, the CPI, the Philly Fed activity index and Chicago Fed national activity index, and a flash estimate of the May manufacturing PMI.

The minutes are due out on Wednesday night.

Has the RBA pulled stumps on its easing cycle? Perhaps Tuesday’s minutes release will hold some clues. Westpac will also release its monthly consumer confidence survey next week.

For the eurozone, next week’s CPI, trade balance, ZEW investor sentiment and IFO business sentiment surveys will provide further fodder for currently volatile European stock markets.

The eurozone will also flash its PMI as will Japan, but arguably most attention will be focused on China’s estimate from HSBC.

On the local stock front, DuluxGroup ((DLX)) will release its interim result and James Hardie ((JHX)) its quarterly, while the AGMs roll on. “Investor” or “Strategy” days are also popular next week, with Boral ((BLD)), Wesfarmers ((WES)) and Woodside Petroleum ((WPL)) among those feeling the need.


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The Overnight Report: Don’t Mention The Data

By Greg Peel

The Dow closed down 7 points while the S&P was flat at 2098 and the Nasdaq added 0.1%.

Did anyone notice China’s April data dump yesterday was alarmingly weak?

Chinese industrial production rose 5.9% year on year in April, exceeding March’s 5.6% but missing forecasts of 6.0%. Retail sales fell to 10.0% year on year, down from 10.2% and missing expectations of 10.5%. Fixed asset investment plunged to 12.0% year to date from 13.5% in March to mark its lowest level in twenty years.

One might argue that April data are pre the recent PBoC rate cut but that was the third cut in six months, the RRR has also been slashed and other stimulus measures have been implemented by Beijing. Volatile February and March Chinese data can usually be dismissed due to the New Year disruption but by April, things should have settled down again.

No, no one noticed, because everyone was focused on the budget. Causing particular excitement was the proposed small business stimulus package, which saw the consumer discretionary sector jumping 1.2% on expectation retailers will see the biggest spending spree, on everything from laptops to socket sets, since 2009’s Pennies from Kevin. The banks rose 0.8%, probably because small businesses that don’t have $20,000 in the till will be keen to borrow it.

It was interesting that there was no mention of a proposed deposit tax in the budget, but that doesn’t mean it has been ruled out. A deposit tax is still on the table when the Treasurer gets round to addressing the FSI recommendations.

But overall, yesterday saw a level of positivity related to a budget which is not expansionary – the government is allowing a bigger deficit but not actually borrowing at today’s low rates to foster fiscal stimulus – but at least not as dangerously contractionary as the last spin of the wheel. At some point over the last twelve months Joe took a road trip to Damascus.

With regard to getting the budget through the Senate, the sticking point will clearly be the paid parental scheme about-face. But I’m happy to bet this was included as the big “nasty” that the opposition and crossbenchers would jump on. The government will concede ground, Labor and friends will claim victory and pass everything else, and there’ll be a lot of winking around the cabinet room.

Eurosurge

The first estimate of eurozone March quarter GDP came in at 0.4% growth, up from 0.3% in December, to mark the fastest pace of growth in two years. The zone economy grew faster than both those of the UK and the US in the period. The result was driven by a turnaround in fortunes for the economies of France and Italy, back into expansion, such that the four biggest economies among the nineteen in the bloc all posted growth.

Spain, near broke only a few years ago, led the pack with a 0.9% increase. The not so good news, however, is that growth in the biggest economy, Germany, slowed to 0.3% from 0.7%. The world’s third largest exporter should be enjoying the spoils of a lower euro but not according to last night’s numbers. There remains the issue of sanctions imposed on Russia but economists also suggest euro weakness will take time to flow into an improved export performance for the eurozone leader. Germany’s weak performance meant that the eurozone result of 0.4% actually missed 0.5% expectations.

The result in the breakdown that’s otherwise drawn a lot of attention is that of Greece, which saw 0.2% contraction and thus a fall-back into recession. Not surprising? In the September quarter last year, Greece was the eurozone’s fastest growing economy thanks to the weight of bail-out funds been thrown at the Greek economy. The European Commission has now pulled its earlier forecast for Greek 2015 growth of 2.5% right down to only 0.5%, and that assumes Greece gets the next tranche of bail-out funds that is presently stalled due to the Greek government’s stubbornness.

If I were Greece’s creditors, I’d be saying “the bail-out is not working anyway, and costing everyone else a lot of money”.

To put Greece’s March quarter contraction into perspective we might look at Cyprus’ result. A couple of years ago it appeared Cyprus might actually be the first eurozone victim but at 1.6% March quarter growth, the Cypriote economy was the fastest growing of all nineteen members.

Wet Sales

US retail sales were flat month on month in April, much to everyone’s dismay. Admittedly economists were only forecasting 0.1% growth but while fuel prices are now higher than they were a couple of months ago, the're still a lot lower than they were a year ago. Yet a forecast consumer rebound is simply not happening.

Initially Wall Street saw the bad news as good news, sending the Dow up 64 points. Aside from assumptions the Fed will hold off, US bond yields did begin to fall back as one would expect following weak economic data. But having hit a low of 2.16%, down 8 basis points, the ten-year yield immediately rebound to 2.26% to be up 2 basis points on the session. Again the stock markets were spooked, so they pulled back to close as good as flat.

Yesterday I mentioned that everyone was loaded up with corporate debt on top of government debt positions, reducing any great desire to buy more bonds. Another issue, of course, is that as of last October the Fed is no longer standing the market as a buyer (QE). Thus when a bit of selling is sparked, there’s a black hole to sell in to.

The US dollar index moved as might be expected on weak domestic data vis a vis the eurozone GDP result. It fell 1.0% to 93.66.

Bad news for the Aussie, and the RBA, nonetheless. Clearly the forex market is hell bent on playing the Aussie short, thus short-covering scrambles are becoming common place. On top of Joe’s more stimulatory budget and wildly optimistic economic growth forecasts, the big plunge in the greenback has sent the Aussie racing up another 1.7% to US$0.8108.

Data Driven

The big drop in the US dollar would normally be positive for commodity prices but that was not the case last night.

The Australian market paid no attention to yesterday’s Chinese data but commodity markets did. And they also pay attention to the eurozone’s GDP “miss” and to the weak US retail sales number.

Copper was flat but all other base metals fell in price on the LME, including a 2% fall for nickel.

Iron ore fell US30c to US$62.00/t.

West Texas crude fell US$1.14 to US$60.13/bbl and Brent fell US86c to US$66.41/bbl.

The only winner was gold, but then gold is strictly a currency and not a commodity. It dutifully rose US$22.10 to US$1215.10/oz, but still has gone nowhere for months.

Today

Back to earth? The SPI Overnight closed down 19 points or 0.4%.

Westfield Corp ((WFD)) is among those holding AGMs today while AusNet Services ((AST)) and SingTel ((SGT)) will post full-year results today, Graincorp ((GNC)) will deliver a half-year and Paladin Energy ((PDN)) will provide a quarterly update.

Bad news last night for ResMed ((RMD)) fans. The company announced its SERVE_HF heart failure trial has failed to reach primary goals hence the stock fell 15% in New York.

Rudi will be on Switzer TV tonight, Sky Business between 7-8pm, and again hosting Your Money, Your Call Equities, 8-9pm.
 

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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