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

A weak first quarter in the US might delay the inevitable, but Wall Street is resigned to the fact there will be a rate rise at some point. No use sweating over ever little nuance of Fed language. If the data determine, a rate rise will come and everyone will be prepared.

Next week’s US data releases, after tonight’s CPI, include the Chicago Fed national activity index, existing and new home sales, house prices and durable goods.

The flashers will be out and about on Thursday, with China (HSBC), the eurozone and US offering estimates of April manufacturing PMIs.

Sentiment in Europe will be revealed by both the ZEW investor and IFO business surveys.

The RBA will be very much in focus in Australia next week, and confusion now reigns following this week’s surprise drop in unemployment. The minutes of the last RBA meeting are due and Glenn Stevens will also make a speech. On Wednesday the March quarter CPI data will be released, which will be critical to policy.

It will also be a busy week on the local stock front. Resource sector quarterly production reports continue to roll in and merge with the calendar year AGM season.

Next week the production reports will include those from Oil Search ((OSH)), Rio Tinto ((RIO)) and BHP Billiton ((BHP)). Leighton Holdings ((LEI)) is among those holding AGMs, Australian Pharmaceutical Industries ((API)) will release its interim result and Transfield ((TSE)) and Telstra ((TLS)) will hold investor days.
 

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article 3 months old

China And Reserve Currency Aspirations

- Moving to capital account convertibility
- Applying to the IMF for world currency status
- Risks of inflows/outflows
- Ambitious goal
 

By Greg Peel

It's no secret Beijing's ultimate goal is to make the Chinese renminbi (aka yuan) the world's reserve currency, replacing the US dollar in that role. Considering China's population growth rate, economic growth rate and dominance of world trade, this does not seem like such a wild concept. But it is not something Beijing can achieve overnight.

In trademark fashion, Beijing has been very gradually easing China towards more open financial markets over the past decade – a prerequisite for reserve currency potential. Top of the list of such reforms is obviously the currency itself, which was previously pegged to the US dollar, then pegged in a range to the US dollar, and more recently allowed to "float" in current account transactions.

Current account transactions include export/import and the payment/receipt of dividends and interest to/from foreign corporates or individuals. The next step is to allow full currency convertibility in China's capital account, which represents capital flows into and out of the country for the purpose of investment. A surplus in the capital account implies foreigners are increasing their ownership of Chinese assets. A deficit means China is increasing its ownership of foreign assets.

Beijing has applied to the International Monetary Fund (IMF) to make the renminbi a Special Drawing Rights (SDR) currency. The "fund" that is the IMF is, for example, being currently used as a component of Greece's bail-out. Whereas once the IMF operated in gold and US dollars, the SDR represents a greater diversity of globally significant trading currencies. The IMF's current SDR basket comprises 41.9% US dollars, 37.4% euros, 11.3% British pounds and 9.4% yen. Every five years the IMF rebalances the SDR weightings.

The next rebalance is due this year, and is expected in October. There is little doubt China has now joined this elite group as a global trading force, hence its application for renminbi inclusion. However in order for the IMF to even consider including the renminbi in the next SDR basket, the renminbi must satisfy various criteria, including full currency convertibility.

Which is where capital account convertibility becomes a necessity, alongside current account convertibility. China's recent establishment of the Asia Infrastructure Investment Bank – a variation on the World Bank of sorts and to which Australia has signed up, displeasing the US – indicates Beijing is willing to play a bigger role in the international financial system. Analysts assume Beijing will point to the AIIB as reason for the renminbi's inclusion in the SDR basket.

But it is not just as simple as Beijing suddenly announcing the renminbi will now float freely. Or as the Hawke-Keating government did in Australia in 1983, shutting down fixed foreign exchange markets on the Friday evening and open them again with a fully floating Aussie dollar on the Monday. There remain various hoops Beijing must jump through, with regard the reform of China's financial markets, before the renminbi could realistically be rendered fully convertible.

The People's Bank of China governor has outlined three policy actions that would be required up front: the revision of guidelines on exchange controls, the liberalisation of more Chinese financial markets, such as the bond market, and allowing investors inside and outside of China to make cross-border investments.

Once the capital account becomes fully convertible, Beijing risks a disruptive outflow of capital into foreign investments. Deutsche Bank assumes the government will be cautious in the early stages of liberalisation, having measures in place to control such outflows. But Deutsche also believes removing capital controls may lead to more inflows. Aside from foreigners currently facing restrictions on investment in mainland China, global interest rate differentials would favour such investment inflow. China's current "cash rate" equivalent is 5.35%. Australia's is 2.25%, and Australia is being swamped by offshore investors seeking better than the near-zero yields on offer elsewhere.

The PBoC would need to carefully consider its rate setting mechanism. And the PBoC also currently sets a deposit rate, as well as a lending rate, which it will need to abandon. And Beijing will need to address the issue of the two stock markets – one in Shanghai and one in Hong Kong – that operate for locals and foreigners respectively.

CBA analysts see various obstacles on the path to full renminbi convertibility. In floating the renminbi, Beijing will no longer be able to return to a currency peg against the US dollar, as it has done on occasion in times of crises. Deposit rates will no longer be able to under government control. And a wider issue is that of the Chinese banking system. Despite being well capitalised, non-performing loans continue to accumulate in China's banks and large state-owned banks have not yet fully shifted to operating under market-based principals.

CBA believes the greater risk to the renminbi, once convertible, is to the outflow side of the equation, given the currently weak macroeconomic backdrop and expected policy normalisation (the first Fed rate rise) in the US. The analysts do not see inclusion in the SDR as guaranteeing currency inflows. But certainly Beijing will need to weigh up the possibility of currency inflows, which would serve to appreciate the renminbi. The recently released Chinese trade data for March showed a much bigger than expected plunge in Chinese exports, which many exporters blame on a too-high renminbi exchange rate to QE-supported currencies such as the euro and yen.

CBA believes Beijing is being rather ambitious in assuming the renminbi could be accepted into the SDR basket this year. If rejected, China can apply again next year. Deutsche Bank is ascribing a 40% chance of acceptance this year and a 70% chance in 2016.

"We believe the market may be surprised in the next few years," says Deutsche, "by how fast China moves on renminbi internationalisation and capital account liberalisation".


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article 3 months old

The Overnight Report: The Good Oil

By Greg Peel

The Dow closed up 75 points or 0.4% while the S&P gained 0.5% to 2106 and the Nasdaq added 0.7%.

China Contradiction

China’s annual GDP growth rate slowed to 7.0% in the March quarter from 7.3% in December as expected. It’s China’s slowest rate of growth since the post-Lehman quarter of March 2009. Economists now expect the June quarter reading to come in below the 7% mark, based on the trend evident in yesterday’s data breakdown for the month of March.

Industrial production growth slowed to 5.6% year on year from 6.8% in January-February and missed forecasts of 7.0%. Retail sales growth slowed to 10.2% from 10.7% in Jan-Feb. Fixed asset investment growth slowed to 13.5% in the year to March from 13.9% in the year to February when 13.9% was forecast.

But do you know which sectors outperformed on Bridget Street yesterday? Materials and energy. They were up 0.7% and 1.0% respectively. Meanwhile every other sector was down, with the popular yield plays seemingly sold in a switch into cyclical resources.

Clearly investors are starting to feel a trough may have been seen for critical iron ore and oil prices. Iron ore was back over US$50/t yesterday, and West Texas crude has also returned above US$50/bbl. Analysts do not agree, and as is evident in FNArena’s run of Material Matters stories this week, views on iron ore remain depressed and oil not much better. But the other point is that Beijing has already indicated it is ready to pump more stimulus into the Chinese economy, thus the weaker the data the more likely, and more significant, new stimulus measures become.

Thus weak Chinese data is almost a US-style bad news is good news story.

There was no good news for the local consumer discretionary sector yesterday however, which led the market down with a 1.6% drop. Westpac’s consumer confidence index for April showed a 3.2% decrease further into pessimism territory to 96.2. The boost in confidence enjoyed thanks to the February RBA rate cut has now been wiped out by a lack of RBA follow-up to date and by growing fears over just which hip pocket nerve Joe Hockey is going to pinch in this year’s budget attempt.

Any joy from lower petrol prices has also now faded away, given the oil price has bounced but the Aussie has not.

Bottom Picking

Have we seen the low in the oil price? That is the question everyone is asking and while not everyone is prepared to say definitively, the feeling is this may be the case.

Critical to the balance between a falling US rig count and today’s oil price is the lag time between a rig shutting down and the impact of that lost supply actually flowing through to inventory data. Also critical is the fact most shale oil producers were required to hedge their production in order to be granted the bank loans they needed to fund their production, thus for many there is no rush to shut down rigs. Indeed, many a producer will have been hoping the hedge will hold out until oil prices recover.

But last night’s weekly US crude inventory data showed a smaller than expected increase, suggesting the over-supply issue may indeed be easing. These weekly data are notoriously volatile and forecasters famously never get them right. But if you think the oil price may have bottomed, and you’ve not yet acted on that belief, you’re not going to stand there quibbling about volatility.

Last night West Texas crude jumped US$2.44 or 4.6% to US$56.01/bbl and Brent rose US$1.39 or 2.4% to US$60.32/bbl. When WTI broke through 54 it signalled a major technical breach, no doubt fuelling the fire.

Wall Street Energy

The jump in oil prices and subsequent jump in energy stocks was a driver of strength on US stock markets last night. Tuesday night’s aftermarket earnings beat from Intel (Dow) saw its shares rise 4.3% and provide a boost to the tech sector. In rising 0.7% last night, the Nasdaq is back over 5000.

It should also be noted the Russell 2000 small cap index hit a new all-time high last night.

But it wasn’t all beer and skittles. Bank of America posted an earnings miss which saw its shares fall over 1%. The Empire State activity index has plunged into contraction this month at minus 1.2, down from March’s plus 6.9. US industrial production fell by 0.6% in March compared to 0.4% forecasts, although intentional oil production cutbacks impact on that number.

The Fed Beige Book, released last night, acknowledged the loss of jobs in the energy industry. But it also noted moderate economic growth in eight of twelve Fed districts, despite the headwinds of a strong US dollar, falling oil prices and a lot of snow over the period. One positive area of the economy highlighted by the Fed was housing, and last night the monthly housing market sentiment index showed a rise to 56 from 52 in March, with 50 being neutral.

Fleeting Joy

The largely weak US data has sent the US dollar index down 0.5% to 98.34. The result is a 0.7% jump in the Aussie to US$0.7680, and a US$9.80 rebound for gold to US$1201.80/oz.

The weaker greenback helped base metal to rise last night, but LME traders also played the bad-news-is-good-news game with regard Chinese stimulus expectations. Aluminium jumped 2% and the others were all up by less than 1%, except tin. Uncertainty regarding possible Indonesian exports bans is causing a lot of volatility in the most expensive of base metals at present, and tin was down 3%.

If iron ore producers living on the edge were breathing a sigh of relief yesterday, seeing the spot price jump back over 50, shoulders will sag again today on a US40c fall to US$49.70/t. It’s only a 40c fall, but it means no follow-though on the 50 breach.

Today

We should otherwise be in for a positive session on Bridge Street today if the SPI Overnight is any gauge. It closed up 36 points or 0.6%. No doubt energy stocks will be looking attractive.

The March jobs numbers are out in Australia today, with economists expecting a steady unemployment rate of 6.3%.

On the local stock front, today sees production reports from Fortescue Metals ((FMG)), Iluka Resources ((ILU)) and Whitehaven Coal ((WHC)), while Challenger ((CGF)) will provide a quarterly update and Woodside Petroleum ((WPL)) will hold its AGM.
 

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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: Looking To China

By Greg Peel

The Dow closed up 59 points or 0.3% while the S&P gained 0.2% to 2095 as the Nasdaq lost 0.2%.

Directionless

It was a soggy old day on Bridge Street yesterday, with nobody much wanting to come out and play. As we sit here at the foot of the 6000 peak wondering just what has to happen to get us up there, there is plenty to wait for ahead that is ensuring hesitance.

There is the US earnings season, which from this point will largely determine whether Wall Street can push ahead and provide a lead. And there is the ever present spectre of Fed rate rise speculation. Closer to home, today sees the release of China’s March quarter GDP result.

Finally, there is the upcoming federal budget. There has been a lot of talk about tax, a lot of talk about superannuation, and a lot of talk about the low iron ore price and its impact on the budget deficit. Investors have every right to be concerned about what Tony and Joe might have in store this time, and then whether any of it will get past Jackie Lambie. Tony Abbott will outline a budget “blueprint” in a speech today.

Glued to the screen will be Glenn Stevens, who will be anxious to know just what fiscal nasties the government has planned to make the job of monetary balancing even more difficult. Yesterday’s NAB business confidence survey for March showed a 3 point increase to plus 3, which merely reversed the 3 point decline in February ahead of the RBA’s February rate cut. Another rate cut is “baked in” to market expectations, but confidence will be boosted until that cut is in the bag.

Meanwhile, the IMF yesterday downgraded its 2015 economic growth forecast for Australia to 2.8% from the 2.9% forecast made last October, with weak commodity prices the primary excuse. Typically the IMF’s forecasts run about six months behind everyone else’s.

Mixed Messages

US retail sales rose an impressive 0.9% in March to mark the biggest jump in a year and reversing three straight monthly declines. However Wall Street was disappointed, given economists had forecast a 1.1% increase. Year on year, sales have grown by 1.3%, which is not the sort of number previously expected when oil prices began to tumble.

The fall in oil has led to eight straight months of declines in US wholesale prices but with oil having now stabilised, apparently, the PPI rose 0.2% in March both on the headline and on the core (ex food & energy). But again the number disappointed, given a 0.3% gain was forecast.

On the US earnings front, two big banks were in the frame last night. JP Morgan (Dow) posted a beat for a 1.6% gain while America’s biggest mortgage bank, Wells Fargo, posted its first dip in profits in eighteen quarters and saw its shares sag 0.7%. Johnson & Johnson (Dow) traded flat after posting a solid result undermined by the strong US dollar, while Intel reported a beat after the bell and its shares are up 3% in the aftermarket.

There’s a long earnings season row yet to hoe.

The retail sales result sent the Dow into an early dip in the session but earnings results helped to right the ship once more. Monday night’s trade saw the Dow rally before reversing so Wall Street is continuing to jog up and down on the spot, around 18,000 for the Dow, 2011 for the S&P and 5000 for the Nasdaq, until something new happens.

The retail sales result also sent investors piling into US bonds once more until the ten-year yield bounced off its previous low mark of 1.86%, closing down 3 basis points at 1.90%.

The US dollar index was also impacted, falling 0.7% to 98.78. This means the Aussie has recovered 0.5% to US$0.7626 after its earlier Chinese trade-related tumble. The weaker greenback did not help gold nonetheless, which is down US$6.30 to US$1192.00/oz.

Iran Appeals

The Iranian oil minister has called on OPEC to cut production by 5% when it next meets in June, thereby offsetting the impact of Iranian oil returning to the market assuming sanctions are lifted. As to whether Saudi Arabia is prepared to relent on its stance against excess North American production is another matter, particularly if it is at the behest of its arch enemy, but the Saudis, too, fear a flood of Iranian crude.

North American production is, nevertheless, expected to show a decline in May from April levels as the drop in US rig count finally starts to have an impact. Perhaps if the Saudis saw this as the US doing “the right thing” with regard the global oil market, Iran’s production cut request might just meet with reluctant approval.

Last night West Texas crude rose US$1.53 to US$53.57/bbl and Brent rose US91c to US$58.93/bbl.

Traders squared up last night on the LME ahead of today’s Chinese data releases. Tin recovered 1.5% and aluminium gained 1% while copper lost 0.7%.

And for a second day in a row, spot iron ore has posted a solid gain. Can we call the bottom yet? Analysts do not believe so, but we have retaken the 50 mark with a US$1.30 gain to US$50.10/t.

Today

The SPI Overnight closed up 8 points.

Around midday today we will see the release of China’s March quarter GDP, for which economists are forecasting 7.0% growth, along with industrial production, retail sales and fixed asset investment data for the month of March.

Locally, Westpac will release its April consumer confidence survey.

The ECB meets tonight for an update on QE while industrial production is tonight’s Fed-watch data point in the US, with the Fed Beige Book also due. More bank earnings will also hit the tape.

On the local stock front, Woodside Petroleum ((WPL)) will release its March quarter production report.
 

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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article 3 months old

The Overnight Report: Earnings Jitters

By Greg Peel

The Dow closed down 80 points or 0.5% while the S&P lost 0.5% to 2092 and the Nasdaq fell 0.2%.

China Woes

One might be forgiven for believing the only reason local traders are keen to make the push to the summit of 6000 for the ASX200 is because, a la mountaineering, "it is there". Fundamental reasons for such an expedition are difficult to narrow down at this point.

And so it was that in the first hour of trade yesterday the index jumped up 28 points to hit 5996 before grateful sellers moved in to capitalise. The index then drifted lower until a bombshell was dropped around midday, being China's March trade figures.

Chinese exports fell 14.6% year on year in March and imports fell 12.3%. Both numbers were much worse than expected. Economists are now suggesting the March quarter may be the first in which Chinese GDP growth falls below 7%, which is Beijing's target for 2015. The result will be known on Wednesday.

Unsurprisingly, the materials sector led the market down in the afternoon with a 1.4% fall within what was a small negative close for the index. Yield stocks again were the balancing act.

There was further consternation when Joe Hockey suggested, presumably because having been caught out previously, that the government may use a US$35/t iron ore price assumption in the upcoming "dull and boring" budget. Given spot iron ore is trading over ten dollars above this level, and every dollar is worth millions for government revenues, the presumed flipside for the nation's coffers is to pick up the difference elsewhere through spending cuts and/or tax increases.

Jittery Wall Street

Speaking of Joe Hockey, someone doing a very good impersonation of the Treasurer brought down the gavel on NYSE trading this morning.

Wall Street turned a 50 point positive Dow opening into an 80 point loss by the close last night, as nervousness crept in with regard this week's big bank earnings results. The Industrial Average thus retreated back below 18,000, the S&P fell back below 2100 and the Nasdaq, having opened above the historical 5000 mark, also slipped back.

Evidence of nervousness was provided by last night's move in the VIX volatility index on the S&P500, which jumped 11%. This implies investors were buying option protection ahead of what might happen this week because frankly, no one's quite sure. US companies release earnings results and guidance every quarter, but this quarter has garnered a higher level of anxious anticipation than most of late. With forecasts downgraded to net flat earnings growth, Wall Street is impatient to learn the true impact of the surging greenback, of the apparent slowdown in US economic growth, and of the weather over the quarter.

JP Morgan (Dow) and Wells Fargo kick off proceedings for the banks tonight, while consumer giant Johnson & Johnson (Dow) may through some light on the greenback impact.

Commodity Capers

If the result of weak Chinese trader data was a turnaround from a positive Australian stock market to a flat one, it was nothing compared to the impact on the Aussie. The local currency plunged on Beijing's numbers and is down 1.2% over 24 hours to US$0.7589, with the US dollar index chipping in with a 0.2% gain to 99.49.

Mind you, we're simply back around where we were before a seemingly more dovish Fed sparked a short-covering rally last month, now sitting near the bottom of the recently entrenched trading range.

What the Chinese data did not appear to do was cause any angst in commodity markets. Tin fell 3.5% on the LME last night, but that was related to inventories, while net weakness amongst the other base metals was fairly minimal.

Iron ore, believe it or not, jumped US$1.50 to US$48.80/t.

And it was a rare quiet night on oil markets, with west Texas drifting up US25c to US$52.04/bbl and Brent steady at US$58.02/bbl.

Gold continues to bang around the 1200 level with little in the way of conviction. It fell US$9.00 to US$1198.30/oz.

Today

The SPI Overnight closed down 15 points or 0.3%.

While earnings might be taking centre stage on Wall Street this week, traders will not be ignoring a substantial flow of economic data which bring into to focus the other area of consternation at present – Fed policy. Tonight sees retail sales, business inventories and the PPI.

Locally, NAB will release its monthly business confidence survey today.
 

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

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

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

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article 3 months old

The Monday Report

By Greg Peel

Housing Peak?

The value of Australian new housing loans fell by 1.0% in February, it was revealed on Friday, and the value of investor loans in particular fell by 3.5%. While investor loans are still up 10% year on year, the February stall may just be the first sign that warnings from the RBA and APRA with regard possible mortgage restrictions may finally be having an effect.

If this is the case, then one assumes the RBA no longer has an excuse not to cut the cash rate, perhaps more than once. At least that’s the way the stock market appeared to read it on Friday. It was green on screen for all bar materials in a solid session not inspired by any particular Wall Street lead.

News that China’s CPI was flat in March at an annual 1.4%, and that the PPI improved but only to minus 4.6% annual from February’s minus 4.8%, suggests that Beijing’s incremental easing measures to date have not been enough to reinvigorate growth. Given the PBoC has indicated it has room to move if necessary, these inflation numbers are incentive alone. On Wednesday Beijing will release China’s March quarter GDP result.

Any further stimulus in China is good news for Australia, albeit no one is expecting the PBoC to conjure up a rebound in iron ore prices. But it is notable that the Shanghai stock market has rallied a full 25% in the space of just one month.

General Excitement

The scene was set for a subdued session on Wall Street on Friday might as traders await this week’s significant earnings releases, and indeed there may have been some angst generated by the Richmond Fed president and FOMC member Jeffrey Lacker, who reiterated his case for a June Fed rate hike. But General Electric stole the show.

Major conglomerate and Dow component GE announced on Friday, ahead of its earnings report, that it would be restructuring its business. The company will sell off real estate assets up front and over a two-year period would sell off its GE Capital business, which is effectively one of America’s biggest “banks”. From the proceeds, GE will return some US$90bn to shareholders, including a US$50bn share buyback and US$35bn in increased dividends out to 2018.

It is the second biggest share buyback in history, by a whisker to Apple’s earlier US$56bn foray.

And speaking of Apple, the new kid on the Dow Jones Industrial Average block, a buzz was created on Wall Street on Friday as the door was opened for orders of the new iWatch, and they sold out immediately.

Apple only managed a 0.4% rally on what did not come as any great surprise to the market, but GE shares jumped 10.8%, helping the Dow along to a 98 point or 0.6% gain, and a recapture of the 18,000 mark. The broad market fell into step, and a 0.5% rally in the S&P meant a recapture of the 2100 mark. The Nasdaq rose 0.4%.

And Wall Street is meant to be terribly worried about potentially weak first quarter earnings, the strong greenback, and a possible June Fed rate rise. Funny way of showing fear.

Fundametals

I pointed out last week that LME traders have begun to focus less on who’s pumping up the QE, or who’s going to go the other way and when, and more on actual demand-supply fundamentals. On Friday night the US dollar index rose another 0.3% to 99.34 but this did not prevent rallies across the base metal spectrum as traders looked to exchange data indicating tighter supply.

Copper and tin rose 0.5% and nickel, lead and zinc all rose 1%. Aluminium remained flat.

Iron ore fell US50c to US$47.30/t.

Oil markets also ignored the stronger greenback in pushing West Texas up US$1.04 to US$51.79/bbl and Brent up US$1.16 to US$58.01/bbl. Fears continue to subside with regard Iran and a possible flood of Iranian oil but Friday is also US rig count day, which showed another fall.

Despite the wild volatility, the oils have posted four consecutive weeks of price gains.

It would seem not all gold traders like to see the metal under US$1200 and so on Friday night what appears to have been a short-covering scramble was sparked when gold jumped US$13.50 to US$1207.30/oz. It is easy to justify gold’s downward drift last week given the ever strengthening US dollar and ongoing talk of a June Fed rate rise, but on Friday the dollar was up again and June was touted as preferable to at least FOMC member, yet gold bounced up.

The Aussie dollar has drifted back 0.2% to US$0.7678.

The SPI Overnight closed up 22 points or 0.4% on Saturday morning.

The Week Ahead

The big banks are the major focus as the US earnings season hots up this week, with the likes of JP Morgan (Dow), Wells Fargo, Bank of America, Citigroup and Goldman Sachs (Dow) on the block. Additional Dow reporters include Johnson & Johnson, Intel, American Express and General Electric.

A data-dependent Fed will also have its work cut out this week assessing retail sales, inventories and the PPI tomorrow night and industrial production, housing sentiment and the Empire State activity index on Wednesday. The Fed will also release its Beige Book on Wednesday.

Thursday it’s housing starts and the Philadelphia Fed activity index, and Friday consumer sentiment and the CPI.

All eyes will be on China this week as trade numbers are released today and industrial production, retail sales and fixed asset investment numbers on Wednesday, along with the March quarter GDP result. Economists are forecasting 7.0% annualised growth, down from 7.3% in the December quarter.

Industrial production numbers will also be in focus in Japan and Europe, and the eurozone will also see trade and inflation data.  The ECB will hold a policy meeting on Wednesday to discuss how QE is faring.

Australia will see the NAB business confidence survey results tomorrow and the Westpac consumer confidence survey on Wednesday. Thursday sees the March jobs numbers, and forecasters see the unemployment rate holding steady at 6.3%.

The resource sector quarterly production report season steps up a gear this week with reporters including Woodside Petroleum ((WPL)), Fortescue Metals ((FMG)), Iluka Resources ((ILU)) and Santos ((STO)).

We are also now entering an AGM season for those companies reporting on a calendar year basis. This week sees meetings for ERA ((ERA)), Woodside and Macquarie Atlas ((MQA)).
 

Rudi will not be making any media appearances this week as he is taking a short break in some place called Belgium.

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

The US earnings season begins in earnest next week as the big banks and a raft of Dow stocks line up to provide what Wall Street is expecting will be bad news. Given such low expectations, any good news will no doubt be well received but despite the dooming and glooming, US stock indices have not corrected in response.

Amidst the earnings numbers will be the now ever present spectre of a data-dependent first Fed rate rise which will definitely come in June or definitely in 2016 depending on who you ask.

Next week the Fed will be dependent on inflation numbers, retail sales, industrial production, housing sentiment and starts, consumer sentiment, and the Empire State and Philly Fed activity indices. The Fed will also release its anecdotal Beige Book economic assessment.

Europe will be keeping an eye on trade, industrial production and inflation numbers with the ECB holding a policy meeting midweek, although one assumes there’s little more Mario can throw at it.

The PBoC is reparing to throw more at its economy and next week sees trade, industrial production, retail sales and fixed asset investment numbers.

In Australia, the Easter-delayed jobs numbers are out on Thursday and before that we’ll see the monthly NAB business and Westpac consumer confidence surveys.

On the local stock front, there’ll no doubt be much wailing and gnashing of teeth as resource sector quarterly production and sales reports roll in, including those from Woodside Petroleum ((WPL)), Fortescue Metals ((FMG)), Iluka Resources ((ILU)) and Santos ((STO)).
 

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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

Australia, New Zealand, Singapore, Hong Kong, the UK and Europe are all closed for business tomorrow. US financial markets are closed but banks are open, and US economic data releases continue as scheduled. This means the March jobs numbers will be released tomorrow night to empty exchanges.

Australia, New Zealand, the UK and major European markets are closed on Monday. It’s business as usual in the US. China, by coincidence, is also closed on Monday.

The shortened week next week crams in a lot of economic data releases for Australia. All attention will of course be on the RBA policy decision due on Tuesday, with economists now leaning towards an April rate cut when previously they assumed May.

But next week also sees the service sector PMI, retail sales, ANZ job ads, housing finance and, importantly, the March jobs numbers.

It’s a quiet week in the US data-wise but the minutes of the last Fed meeting, released on Wednesday night, will be closely scrutinised.

The Bank of Japan will hold a policy meeting next week. How long before the BoJ is forced to double-down again on policy as it loses out in the race to the bottom against the ECB? And China for that matter.

China will release inflation data at the end of the week.

The ex-divs have just about fizzled out on the local market but next week sees the beginning of the resource sector’s quarterly production report season. AWE ((AWE)) and ERA ((ERA)) kick us off.
 

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The Overnight Report: Iron Ore Roars Into The Forties

By Greg Peel

The Dow closed down 77 points or 0.4% while the S&P fell 0.4% to 2059 and the Nasdaq fell 0.4%.

Commodity Concerns

Yesterday’s morning session on Bridge Street suggested we might be in for a quiet start to April and June quarter, cementing arguments that a lot of the volatility seen in the last few days of March was as much to do with end-of-quarter shenanigans than anything else. But as the afternoon wore on the ASX200 drifted lower, weighed down by weakness in the resource sectors on the back of falling commodity prices.

For iron ore producers, it won’t get any better today.

Local building approvals slipped 3.2% in January but at 14.3% annualised growth, residential building is still a major driver of an otherwise sluggish economy. And we’re determined to abandon the old quarter acre block dream, given private house approvals are down 1% annually but apartment approvals are up 36.2%.

The strength of that number is encouraging but apartments are a lesser value “trade” for the economy compared to standalone houses, using fewer materials per unit.

More concerning is that house prices in Sydney jumped 3% in March alone, and across the country average prices are up 7.6% year on year. Nice for property owners but a worry for the RBA, and possibly a reason the central bank may hold off next week. But economists don’t believe housing is enough to prevent another cut. Maybe we’ll soon be seeing these macro-prudential controls so long spoken of.

PMI Parade

If housing construction is a bright light for the Australian economy, manufacturing is not. Australia’s manufacturing sector continues to contract despite a lower Aussie, with the manufacturing PMI for March showing a fall to 46.3 from 47.2 in February. I’ve lost track of how many months (years) the sector has now been in steady contraction, but I think it’s since Hills Hoist sales peaked.

The first of the month means manufacturing PMI day across the globe, and there were mixed results. The winners were the eurozone with a rise to 52.2 from 51.0, and the UK with a rise to 57.9 from 56.4. The losers were Australia, Japan (50.3 from 51.6) and the US (51.5 from 52.9).

China cancelled itself out. Beijing’s official result showed a swing into expansion at 50.1 from 49.9, but HSBC’s independent measure showed a swing into contraction to 49.6 from 50.7. Take your pick.

On top of Japan’s weak PMI reading, the March quarter Tankan Survey indicated sentiment among Japanese manufacturers was unchanged over the period, despite the weaker yen.

US Weakness

A survey of US fund managers released last night noted 90% of respondents believe the Fed will raise its cash rate in 2015 and that 85% of those same respondents believe the S&P500 will be higher at the end of the year. This result corroborates what I have been suggesting, that Wall Street has largely factored in a rate rise and just wants to get on with it. There would like be some volatility on the day, but those with a longer term view will not be concerned.

Nor is there a great deal of concern being shown with regard more weak US economic data. Last night featured a weak PMI, a drop in vehicle sales and the disappointing addition of only 189,000 new private sector jobs in March, according to the ADP report – the lowest addition since January 2014. This has curbed expectations for Good Friday’s non-farm payrolls number, but most commentators are quick to blame the first quarter weather, just as they did last year.

And given last year’s experience, they are assuming a rebound in economic growth in the second and third quarters.

The weak numbers did nevertheless mean a weak start to the June quarter for US stocks, with the Dow down 200 points from the opening bell. The buyers came in to trim that to a 77 point close by the closing bell, but a 7 basis point plunge in the US ten-year bond rate to 1.87% suggests not everyone is convinced the data are only weak because of snow.

Similarly, gold was suggesting lower for longer rates last night with a US$20.90 gain to US$1203.80/oz.

The US dollar index fell 0.1% to 98.23.

Ironed Out

Spot iron ore has fallen another US$2.00 or 4%, to a new low of US$49.00/t.

Nickel managed a comeback last night, following its precipitous fall, but the 2.8% rebound was put down to traders taking profits on their shorts and squaring up ahead of the Easter break. Other metal price movements were minimal.

Oil prices also rebounded last night, with West Texas jumping US$2.15 or 4.5% to US$49.68/bbl and Brent rising US$1.54 or 2.8% to US$56.73/bbl.

Weakness in oil prices earlier this week was driven by expectations Iran and the West were about to reach a deal, leading to the lifting of sanctions on Iran and a flood of Iranian oil onto the market. Last night it appeared negotiations had reached a bit of a stand-off, and that a deal was not as close as it had been assumed.

Today

The Aussie seems to have found a pre-RBA level here at US$0.76, with local markets closed until the Tuesday policy meeting.

The SPI Overnight is up an ambitious 23 points despite Wall Street and iron ore price weakness. One might argue that the market cap implications on the ASX200 of lower iron ore miner prices has diminished, assuming the two big players are supported by their dividends.

The trade balance is out today locally and TD Securities will publish its monthly inflation gauge.

Once upon a time, when the ASX actually used to close for lunch, the Thursday before Easter would be a half-day. Not so anymore, officially, but there’ll be tumbleweeds rolling down Bridge Street this afternoon as everyone heads off to their planes, trains and automobiles.

Or the pub.

Have a happy and safe break.

Rudi will appear on Sky Business' Lunch Money, noon-12.45pm.
 

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The Overnight Report: Baby It’s A Wild World

By Greg Peel

The Dow closed up 263 points or 1.5% while the S&P gained 1.2% to 2086 and the Nasdaq rose 1.2%.

Sell Everything

Surprisingly strong one day, abjectly weak the next. Trying to figure out the local market is a difficult task at present but we can note that despite all the volatility, we’re really not going anywhere. Wall Street is doing the same thing, before a backdrop of endless Fed rate rise discussion, and given last night’s performance we’ll no doubt see a bounce-back on Bridge Street today.

Yesterday featured red across all sectors, with only healthcare missing out on a substantial fall. Energy led the market down with a 4% drop, fuelled by Chevron’s announced sale of its Caltex ((CTX)) stake which saw that stock down 9%. But another big plunge in oil prices on Friday night exacerbated energy sector falls with Woodside Petroleum ((WPL)), for example, down 3%.

The materials sector fell 1% on ever weaker iron ore prices, with BHP Billiton ((BHP)), for example, down 2%, but commodities were not the only game on the day. The banks, the telco and utilities were all down over 1%, suggesting those yield stocks that were once again popular on Friday were not so popular yesterday. That includes BHP. And Woodside.

Is it because Joe Hockey is hinting he’s going to readdress superannuation tax concessions? Possibly, but that story will take a while to play out. End of quarter is another consideration, suggesting fund managers were looking to lock in profits after a strong run, but if we’re up today – the final day of the quarter -- we’ll be citing “window dressing” to make fund managers look good on their quarterly returns.

Whatever the cause, it will all change again today.

We note also that as speculation intensifies for another RBA rate cut as early as next week, the Aussie is now back down to where it was before the Fed statement release a fortnight ago sparked a massive short-covering rally. The Aussie is down 1.4% over 24 hours to US$0.7641.

Never Give Up On China

The world has spent six years worrying about a hard landing in China, post the unprecedented stimulus package delivered by the PBoC in late 2008. But while China’s growth has slowed considerably over the period, as its economy has grown and matured, warnings of a crash have become less and less anxious. The government and central bank have continued to tweak policy to keep China ticking along, if no longer at breakneck speed.

Yesterday the PBoC was at it again. Warning that the US dollar could grow “too strong” and prompt capital flows out of China and elsewhere, as monetary easing by central banks across the globe drives up the greenback, the PBoC governor suggested there was “more room” to ease monetary policy in China if the economy remains soft and inflation continues to weaken.

With that, the Shanghai index shot up 2.6%.

The Europeans are also keen on a bit of stimulus from China, and they were also happy to see German consumer confidence leap up to a 14-year high. This fuelled a 1.8% rally in the DAX, and that sentiment then drifted across the Atlantic.

Wall Street Takes Off

Chinese stimulus and German confidence converged with news of a massive M&A deal in the US health sector last night. With quarter-end only a session away, Wall Street was in buying mode. Never mind that the US dollar – that which is being blamed for forecasts of net zero earnings growth in the quarter – jumped 0.7% to 98.01.

And never mind that personal spending grew by a measly 0.1% in the US in February, having fallen in January. Incomes rose a more healthy 0.4%, but most of that was directed into savings, which have hit their highest level since late 2012. The weather was dragged out yet again as an excuse, but the fact remains lower oil prices are not providing the consumer boost in the US everyone has been forecasting.

On a brighter note, US pending home sales rose 3.1% in February to their highest level since mid-2013.

The Dow powered back to regain the 18k mark last night, rallying almost 300 points before fading slightly at the close. As is the case with Bridge Street, Wall Street has been all over the shop without actually going anywhere.

The US bond market didn’t seem much interested though, with the ten-year yield merely ticking up one basis point to 1.96%.

Iron Ore Woes

The oil markets were steady, for once, last night, with West Texas up slightly to US$48.65/bbl and Brent up slightly to US$56.37/bbl from this time yesterday. There’s a lot going on in oil at present, but you could be forgiven for assuming news of pending Chinese stimulus would provide a boost to commodity prices in general. Well, not so.

Aluminium and copper managed half percent gains last night on the LME and zinc rose 1%, but the slide in nickel continues. Nickel is down another 3%, and tin chimed in last night with a 2.7% fall.

Iron ore fell US$1.20 to US$52.90/t, as post-GFC records continue to be broken.

Gold is down US$12.20 to US$1184.90/oz, on the back of the stronger US dollar.

Today

The SPI Overnight closed up 49 points or 0.8%.

It’ll be whiplash stuff today, and no doubt we’ll see those enigmatic yield stocks that were all on the nose yesterday smelling rosy today.

We’ll see local private sector credit data today, which will bring back into focus the “hard place” to the RBA’s weak economy “rock”, being rising housing investment. We’ll also see new home sales numbers.

The eurozone will see a flash estimate of March CPI tonight and no doubt will be expecting some long awaited improvement. The US will see a monthly measure of consumer confidence which may tell a sorry tale.

On the local stock front, Fairfax Media ((FXJ)) will hold a briefing today with regard its Domain property classifieds business.

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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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