Tag Archives: China and Emerging Markets

article 3 months old

The Monday Report

By Greg Peel

Local Strength

The iron ore price was down again but the materials sector closed flat on Friday, while oil was up strongly and the energy sector went backwards. It was the right call, given oil tanked again on Friday night. Beyond that, every sector finished in the green in a surprisingly strong Friday session, led by a 2.7% gain for utilities.

Yield was yet again being sought – it doesn’t take much of a dip before the yield buyers come rushing back – and even consumer discretionary saw a strong session.

The cause is probably being aided by the steady drift-back in the Aussie dollar, following the Fed related spike up to 79. The Aussie was weaker again on Friday night, and was down a full percent to US$0.7752 on Saturday morning.

Oil Tanks

The situation in Yemen, said Goldman Sachs in a note on Friday, is not a major threat to global oil supply. On the other hand, Goldman also reinforced that which the oil market had been “fearing” all week – positive progress on Western negotiations with Iran – could potentially see a new flood of Iranian production onto the market soon.

Meanwhile, the US rig count fell for the sixteenth consecutive week last week. However, the reduction of 21 rigs, compared to 56 the week before, suggests the rate of rig reduction is now slowing and that subsequent curtailing of production is now reaching a plateau.

Put all of the above together, and West Texas crude fell US$2.85 or 5.6% to US$48.39/bbl on Friday night, and Brent fell US$3.05 or 5.2% to US$56.05/bbl.

Yellen Qualifies

It was a choppy but flat session on Wall Street on Friday, with the indices bouncing around in small ranges. The Dow closed up 34 points or 0.2%, while the S&P gained 0.2% to 2061 and the Nasdaq added 0.6%.

The oil price tumble kept a lid on the major indices but anticipation of a speech given by Janet Yellen in the last half hour of trade ensured little overall movement. Takeover talks boosted the Nasdaq. The session’s economic data releases held little surprise – the US December quarter GDP was revised down to 2.2% growth from 2.6% as expected, compared to 5% in the September quarter, and fortnightly consumer sentiment came in at a slightly better 93.0 when 92.5 was expected, albeit still a four-month low.

Yellen released a transcript of her speech ahead of her delivery, thus markets had a brief chance to respond before the closing bells. The important revelations were that the Fed would hold off on raising rates were inflation to weaken further, but on the other hand would not need core inflation to rise to 2% to trigger the first rate rise. On that basis Yellen suggested that rate rise is likely later this year, but the first rise would not be a signal for a run of consecutive hikes.

After raising once, the Fed would then proceed very cautiously with regard any subsequent hikes.

This was not exactly new news from the Fed, given Wall Street has long expected a rate rise in the second half of 2015, and has not been assuming a series of hikes thereafter. But it helps to hear the chair reinforce those salient points. With the weekend beckoning and the March quarter winding down, Wall Street closed on a small positive.

The surprise came from bond markets, with saw renewed buying ahead of Yellen’s speech. The ten-year yield fell back 6 basis points to 1.95% having jumped up in the previous two sessions.

Metal Weakness

The US dollar index was steady on Friday night at 97.35, so it cannot be blamed for any commodity price movements on the night. News that Chinese industrial profits fell 4.2% year-on-year over January-February was not encouraging. Profits fell more in December – 8% yoy – but it’s the first time in three years the pre-New Year period has seen a profit decline.

Last year’s star metal, nickel, continues to fall in price and was down another 2.5% on Friday night. Traders have been left scratching their heads, but the suggestion is weakness in Chinese steel demand is flowing through to nickel via the stainless steel market. Copper fell back 1.5% and lead was also down, with aluminium steady and tin rising 1%.

Iron ore fell US70c to US$54.10/t to mark another new post-GFC low.

Gold fell US$6.50 to US$1197.10/oz.

Throw in the big falls in oil, along with everything else being down, and it’s not hard to see why the Aussie’s back at 77.

The SPI Overnight closed down 39 points or 0.7% on Saturday morning.

The Week Ahead

It’s a short week this week for all major markets outside of mainland China and Japan. The US sees a convoluted Good Friday holiday for which markets are closed but banks remain open, and economic data releases continue as scheduled. This means the all-important US jobs number for March will be released to empty exchanges.

Wall Street will have a chance to respond on Monday nonetheless, while all other major Western markets remain closed. Tomorrow is end of quarter, and in Australia the Easter weekend signals the beginning of school holidays. Thus once the March quarter is wrapped up, things will probably go a bit quiet.

The US will release pending home sales and personal income & spending tonight, the Case-Shiller house price index, Chicago PMI and Conference Board consumer confidence on Tuesday, and construction spending, vehicle sales and the ADP private sector jobs report on Wednesday.

Wednesday is the first of the month, and that means the release of manufacturing PMIs from across the globe. Beijing has now taken to releasing its manufacturing and service sector PMIs together on the same day. HSBC will release its service sector PMI for China on Good Friday, as will Japan and the US. The others will wait until the following week.

Thursday in the US sees factory orders and the trade balance ahead of the jobs report on Friday.

The eurozone will see a flash estimate of March CPI on Tuesday, along with jobs numbers, while Japan will release its quarterly Tankan Survey of economic performance on Wednesday.

It’s a busy week data-wise in Australia ahead of the break, beginning tomorrow with private sector credit and new home sales. Wednesday it’s building approvals, house prices and the manufacturing PMI, and Thursday sees the trade balance, housing affordability and the TD Securities inflation gauge.

The ex-divs slow to a remaining trickle this week locally as the first of the AGMs are held in the wake of the February reporting season. They will build in number in April.

Fairfax Media ((FXJ)) will hold a briefing regarding its Domain business tomorrow.

Rudi will appear on Sky Business on Wednesday at 5.30pm and on Thursday at noon.
 

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

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article 3 months old

Next Week At A Glance

For a more comprehensive preview of next week's events, please refer to "The Monday Report", published each Monday morning. For all economic data release dates, ex-div dates and times and other relevant information, please refer to the FNArena Calendar.


By Greg Peel

Next week is a short week in markets, with all major centres outside Asia observing Good Friday. It's a convoluted holiday in the US however, where financial markets will be closed but banks will be open, and economic data releases will carry on as usual. It's the first week of the new month, so this means the US non-farm payrolls report will be released on Good Friday.

Given the US does not take an Easter Monday break, US markets will still have a first opportunity for response ahead of other Western markets.

Before we get there we'll see the last revision of US December quarter GDP tonight, just as the March quarter comes to a close. With US data trending down in the March quarter, outside jobs, and corporate earnings being revised down on the stronger greenback, December is now very old news.

Next week's US data releases include personal income & spending, pending homes sales, house prices, consumer confidence, the Chicago PMI, construction spending, vehicle sales, the private sector jobs number and the trade balance, ahead of Friday's official jobs number.

The March quarter closes on Tuesday and Wednesday brings the usual first of the month round of manufacturing PMIs from across the globe. Japan, China and the US will provide service sector PMIs on Friday.

The eurozone will see an estimate of March CPI next week – the first with a backdrop of ECB QE but it's probably a little early to see an influence – along with employment data.

Australia will see private sector credit, building approvals and the trade balance, along with the manufacturing PMI.

The recent steady stream of local ex-dividends will slow to a mere trickle next week.
 

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article 3 months old

The Overnight Report: Show Me The Way

By Greg Peel

The Dow closed down 104 points or 0.6% while the S&P lost 0.6% to 2091 and the Nasdaq fell 0.3%.

Looking For Direction

A choppy session on Bridge Street in a smallish range was indicative yesterday of a market lacking any obvious catalyst at this point, and waiting to see what happens next. The 6000 level on the ASX200 will unlikely be conquered on the back of further gains for overpriced yield plays, which leaves the underperforming resource sector as maybe the only near term driver.

The pullback in the greenback has brought rebounds in base metal and energy prices but not so iron ore (as of yesterday), while a subsequent return to strength for the Aussie is tempering any gains and disappointing other sectors in the market. Those sectors will be hoping, however, the Aussie rebound will hurry up the RBA.

The mood in the resource sector was not helped yesterday by a disappointing PMI estimate out of China. Just when it appeared China’s manufacturing sector may have turned the corner back into expansion in February, HSBC’s March flash estimate indicates a fall back into contraction at a surprise 49.2, down from 50.7.

Mind you, we’re still experiencing the usual Chinese New Year reverberations.

Bad & Good News

Lack of direction on Bridge Street is reflecting a similar theme on Wall Street as investors continue to mull over the implications of last week’s shift in Fed policy. With all three major US indices trading near all-time highs, investors are similarly wondering what it will take to push on further.

Presumably Wall Street will not rally strongly from here on weak US data, despite the “bad news is good news” and vice versa theme currently back in play. Forecasts for the timing of the first Fed rate rise now range from here to eternity but were the Fed to hold off until next year given a tepid US economy, is that cause enough for stocks to rally?

Last night US stocks fell, because good news is bad news.

US inflation rose in February for the first time since October, with the headline CPI posting a 0.2% gain thanks to a rebound in energy and food costs. This was as expected, albeit a similar 0.2% gain for core inflation (ex food & energy) beat 0.1% expectations. The headline CPI is flat year on year, while the core is up 1.7%.

New home sales hit their highest level in seven years in February, increasing by 7.8%. Markit’s flash estimate of the March manufacturing PMI indicated a rise to 55.3 from 55.1 in February when economists were forecasting 54.6.

The downer was a fall in the Richmond Fed activity index to minus 8 from plus 3, but all up Wall Street saw data last night that were more likely to bring forward a rate rise rather than delay it.

You wouldn’t know that from the US bond market however, which saw the ten-year yield fall 4 basis points to 1.88%.

Earnings Await

Whatever the data, the proof of the US economic pudding will be in the earnings. Next week sees the US March quarter corporate earnings season begin and expectations are not upbeat. Forecasts have the S&P500 stocks returning net flat earnings growth, largely due to the impact of the strong US dollar on large cap multinationals.

There has been a lot of whinging going on from the multinational sector of late, as one by one the big boys downgrade their expectations and blame the surging greenback. It’s not hard to see why Wall Street fears a rate rise, particularly at a time everyone else is easing monetary policy.

On that note, an estimate of the eurozone composite PMI (manufacturing plus services) last night indicated a three-year high 51.9, up from 51.0 and beating expectations. Europe is beginning to see the benefits of money printing. The UK has been printing money since the GFC but last year looked ready to beat the Fed to the first rate rise, given economic strength. That has since waned, and last night the UK CPI for February came in at zero, for the first time ever.

Commodities

The US dollar index stabilised last night, rising 0.2% to 97.17. The Aussie is steady at US$0.7876, and gold is largely steady at US$1193.10/oz.

The balance of a weak PMI out of China but solid numbers in the US and Europe had base metal markets undecided last night. Nickel fell 2% but the others were mixed on negligible moves.

The oils were similarly quieter last night, with West Texas little changed at US$47.39/bbl and Brent down US64c to US$55.13/bbl.

One swallow does not a summer make, but iron ore is up US$1.40 to US$55.60/t.

Today

The SPI Overnight closed down 10 points or 0.2%.

US durable goods is the data point to watch tonight, while Germany’s IFO business sentiment index will also be scrutinised.

Before that, the RBA releases its six-monthly Financial Stability Review today. It’s a document that usually doesn’t spark too much in the way of market response but with the banks trading at premiums to valuation, any mention of bank capital requirements and/or macro-prudential controls might have an impact.

Nufarm ((NUF)) releases its interim result today.

Rudi will appear on Sky Business's Market Moves, 5.30-6.00pm.
 

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article 3 months old

The Monday Report

By Greg Peel

Rock and Roll

I suggested on Friday morning that the pullback on Wall Street on Thursday night, following Wednesday night’s post-Fed surge, need not be repeated in the Australian market. If the Fed is back to being dovish again, and the first rate rise is no longer assured in 2015, then Australia’s high-yielding stocks are attractive both offshore and locally – the latter enhanced by an expected rate cut ahead from the RBA. And indeed, the ASX200 closed up 23 points.

Not even the energy and materials sectors, both of which faced further falls in relevant commodity prices, could finish in the red on Friday given the big miners and big oil & gas companies pay, or are about to pay, attractive dividends. The question now is: just how expensive can Australia’s yield stocks get? They were expensive during the February reporting season, according to the analyst fraternity, and here we are with the index back near its post-GFC high.

It appears there’s more upside, nevertheless, with Wall Street swinging back into the positive again on Friday night. The last couple of hours of trading post the Fed statement release on Wednesday night saw US stocks and bonds surge and the US dollar tank, then Thursday saw everything reverse almost back to the starting point. After another night to sleep on it, it appears Wall Street decided it was right the first time around. On Friday the Dow closed up 168 points or 0.9%, the S&P gained 0.9% to 2108, and the Nasdaq added 0.7% to 5026, to be just under its all-time 2000 closing high of 5048.

The US ten-year bond yield fell 5 basis points 1.93%, and the US dollar index fell 1.5% to 97.83.

So on that note, the Local SPI Overnight closed up 28 points, or another 0.5%, on Saturday morning. The bad news, however, is that the weaker greenback has sent the Aussie up again, by 1.9% to US$0.7777. But we can only assume a more dovish Fed will force a more dovish RBA.

The good news is that the weaker greenback has also provided a boost for commodity prices.

Copper Surge

Copper is one metal that has suffered from the Chinese economic slowdown yet remains very sensitive to disruptions in global supply. Last week saw workers at Freeport’s Grasberg mine in Indonesia going on strike and blocking access to the mine. Throw in the drop in the dollar on Friday night and short-covering, and copper jumped 3.4%.

The move was matched by lead, which rose 3.9%, while nickel added 2.8% and aluminium, tin and zinc were all up around 1%.

Iron ore rose US50c to US$55.00/t.

Gold gained US$12.10 to US$1183.40/oz.

Another announced decline in the US rig count added to the US dollar influence in sending West Texas crude up US$1.76 or 4% to US$45.72/bbl, while Brent rose US76c or 1.4% to US$55.11/bbl.

Where to Now?

The Fed’s statement, released last week, appears to suggest a significant shift in policy from the world’s most influential central bank. But realistically, a rate rise would have been the “shift” that capped off the end of QE last October, so really we’re just back in stimulus land once more. Is it a long dream or a long nightmare? Across the globe, countries are attempting to devalue their currencies and boost their economies through monetary easing and in the case of Japan, the eurozone and UK, through QE. The more they move to counteract each other, the less effective that easing is.

Let’s call the whole thing off? Maybe they should all get together and agree to equally write off each other’s debts.

Meanwhile, Fed policy has drawn attention away from our old friend Greece, which is still negotiating with its EU creditors to arrive at an acceptable bail-out deal. The EU is standing firm, and according to some commentators, is at the point of no longer fighting desperately to prevent a Grexit. Either as an alternative or as a bargaining chip, Greece has turned to Russia. The Greek prime minister, who we must remember leads a far left political party, has brought forward his meeting with Vladimir Putin.

Imagine Germany’s response were Russia, amidst the ongoing battle in Ukraine, suddenly to “annexe” Greece via debt commitments. It might have a tiny economy but Greece sits at the crossroads of Europe and the East, and to that end has been strategically important from antiquity right through to World War II. It would seem Mr Tsipras has a bit of leverage on his side.

The Week Ahead

The Fed has thrown away the Thesaurus and from now on will let the numbers do the talking. And just when everyone assumed the strong US February jobs numbers were enough to assure a Fed rate rise, Janet Yellen has downplayed those as well. Wage growth has not been kicking any goals, despite consistently solid new hirings. Only when wage inflation is apparent will the Fed consider a rate rise to be necessary.

Interestingly, the March jobs numbers will be released next week on the first Friday of the month as usual. But that’s Good Friday, and US markets are closed. Wall Street will have a whole weekend to think about it on a chocolate high, before responding on Monday. The rest of us have to wait until Tuesday.

Before then, this week brings the Chicago Fed national activity index and existing home sales tonight, and the Richmond Fed activity index, new home sales, FHFA house prices and the CPI tomorrow, along with a flash estimate of the March manufacturing PMI. Wednesday it’s durable goods, Thursday an estimate of the services PMI, and Friday the fortnightly consumer sentiment measure. The final revision of December quarter GDP will also be released on Friday, and the market is forecasting an increase to 2.4% from the previous 2.2%.

Japan, the eurozone and China, via HSBC, will also be flashing PMIs this week, with all the manufacturing numbers due tomorrow. Japan will also deliver monthly industrial production, retail sales and jobs numbers on Friday, while Germany’s influential IFO business sentiment survey is out on Wednesday.

Australia’s week is devoid of major economic releases, but on Wednesday the RBA will release its biannual Financial Stability Review. This might prove significant for the banks, given the yet to be ratified FSI recommendations and ongoing talk of possible macro-prudential controls for the mortgage market.

Thursday is expiry day for quarterly stock options on the ASX, and we’ll see another round of ex-dividends across the week. Their impact is nevertheless beginning to peter out.

But we will see a burst of off-season earnings results this week, including those from Kathmandu ((KMD)), TPG Telecom ((TPM)), Nufarm ((NUF)) and Bank of Queensland ((BOQ)).

Rudi will appear on Sky Business on Wednesday at 5.30pm and on Thursday at noon and again between 7-8pm for the Switzer Report. On Friday, Rudi will participate on Your Money, Your Call. Bonds versus Equities, 8-9pm.
 

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

We knew that the Fed was focused on US data previously in making its policy decisions but clearly the FOMC decided it was time to address the market's obsession with words, eg "patient", and timeframes and just let the numbers speak for themselves. Presumably we will now see Wall Street rise and fall on data releases, but perhaps not respond so dramatically to jobs numbers alone.

Next week's US releases include the Chicago Fed index and Richmond Fed index, new and existing home sales, house prices, durable goods, the CPI, flash estimates of manufacturing and services PMIs, and consumer sentiment. The week will wrap up with the final revision of December quarter GDP, which is increasingly old news.

The eurozone and Japan will also be in on the flashing, while Germany's IFO business sentiment survey will be closely watched and Japan will provide industrial production, retail sales, jobs and inflation data at week's end.

The most anticipated flash will be that of HSBC's China manufacturing PMI.

It's a week largely devoid of data but the RBA's Financial Stability Review may revisit the issues of bank capital and macro-prudential controls.

ASX quarterly stock options will expire on Thursday, there'll be several more stocks going ex-dividend over the week and Kathmandu ((KMD)), TPG Telecom ((TPM)), Nufarm ((NUF)) and Bank of Queensland ((BOQ)) all provide earnings results.
 

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article 3 months old

The Overnight Report: New Low For Oil

By Greg Peel

The Dow rose 228 points or 1.3% while the S&P rose 1.4% to 2081 and the Nasdaq added 1.2%.

Bounce Back

Bridge Street tumbled on the open on Friday morning, initially adjusting to a slew of ex-dividends but going on with it on the back of a weak session on Wall Street. At 43 points down, it looked like it could be an ugly day for the ASX200. The energy sector copped a beating on another big fall in the oil price.

But the buyers appeared once more to force a recovery to only 16 points down by the close. Energy remained the hardest hit sector at 2% down but elsewhere the picture was inconsistent. Utilities and the telco were down 1%, suggesting ongoing concerns over valuations, but consumer discretionary was also down 1% amongst a mixed bag of sector moves.

There was potentially some impetus to buy following the wrap-up of China's People's Congress on the weekend at which the premier assured there were "plenty of tools in the toolbox" to turn around China's flagging economy. Yet the materials sector remained weak on a 0.8% fall.

Europe Surging

While Wall Street bemoans the impact of an ever rising US dollar, European markets continue to enjoy the benefits of the reason for the greenback's rise – the collapsing euro. The German stock index rose 2.2% last night to breach 12,000 for the first time and provided impetus for Wall Street to follow suit. The volatility continues in New York where the Dow has returned to the pattern seen earlier in the year, being triple digit moves in both directions day by day.

The uncertainty behind such volatility is clearly linked to the Fed, which will release its latest policy statement on Wednesday night. Will the word "patient" be dropped, or not? And what does it either mean or matter? No one is entirely sure. What is certain is that US economic data releases continue to disappoint outside of the monthly jobs numbers. Last night saw January industrial production up a weaker than expected 0.1%, while the Empire State activity index fell to 6.90 from 7.78 when an increase was forecast.

The oil price also continues to be a bone of contention.

New low for WTI

West Texas crude traded to a new six-year low last night before recovering slightly to US$43.82/bbl, down US$1.18 or 2.6%. Brent fell US$1.38 or 2.5% to US$53.17/bbl.

The plunge was contributed to ongoing concern over the International Energy Agency's warning last week that prices cannot rebound while the supply glut continues to work through the system.

Metals

LME traders are eagerly anticipating the outcome of the Fed meeting but in the meantime base metals prices are shuffling up and down without really going anywhere. Last night copper was steady, while tin gained 1% as nickel and lead each fell 1%.

Iron ore was unchanged at US$58.10/t.

Gold is down US$3.90 to US$1154.70/oz.

A mix of commodity price movements suggests little impact from a 0.5% fall in the US dollar index to 99.70. The Aussie is steady at US$0.7643.

Today

The SPI Overnight closed up 46 points or 0.8%.

The minutes of the March RBA meeting will be released today and the market will be looking for clues as to when the central bank may cut again.

The Bank of Japan will hold a policy meeting today. Will it be forced to counter the ECB's QE program?

The eurozone sees inflation and unemployment data tonight along with the ZEW investor sentiment survey.
 

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

Uncertainty

Up 50 points one day, down 30 the next, as was the case with the ASX200 on Friday. The banks looked good on Thursday but not so much the next day. Friday’s selling was evenly spread across sectors nonetheless, and the session very much had a “Friday” feel about it, but it’s not often Wall Street rallies 1.5% and we respond with a 0.6% fall.

The bounce in the Aussie back over 77 may have had something to do with it, but if we weigh up the week the only conclusion one can draw is one of uncertainty. Will the Fed raise its interest rate this year, and soon? Or not? Will the RBA cut its interest rate next month, or in May, or not? In a market totally dominated by yield investment, with the resource sectors quietly fading into the sunset, these are important questions.

To which no one knows the answer, least of all the central banks themselves at this point.

Storage Wars

The news is not getting any better for the resource sectors either.

When the West Texas crude price bounced back out of the forties and into the fifties, there were plenty of traders prepared to call the bottom. But experienced commentators wouldn’t have it, warning that it mattered not how fast US oil companies could shut down rigs, an actual reduction in supply would take months to achieve. It is more likely, they said, that the oil price will go lower still before a bottom could be called.

Which is exactly what the International Energy Agency was pointing out on Friday night. “Behind the facade of stability, the rebalancing triggered by the price collapse has yet to run its course, and it might be overly optimistic to expect it to proceed smoothly,” an IEA report suggested.

The oversupply issue in North America has reached the point where storage has all but run out. If there’s nowhere to store the stuff, there is no option but to sell straight away. At whatever price. This reality saw the WTI price falling US$2.05 to US$45.00/bbl on Friday night, and Brent chimed in with a US$2.67 fall to US$54.55/bbl. Both falls represented around 4.5%.

Experienced commentators are now reiterating their calls that the oil price will probably fall into the thirties before a bottom is seen.

Wall Street had begun to become a little complacent this past month as the US oil price seemed to at least stabilise around 50. Attention focused on monetary policy instead, hence the big rally on Thursday night driven by the weak retail sales data. But oil companies represent a sizeable market cap of the S&P500, and the expected offset of increased consumer spending, thanks to lower fuel costs, has failed to materialise. US retail sales have declined three months in a row and Michigan Uni’s latest fortnightly consumer sentiment index, released on Friday, showed a fall to 91.2, down from 95.4 at the end of February, in contrast to consensus forecasts of a tick up to 95.5.

Currency Crisis

The US producer price index fell 0.5% in February on the headline rate, and on the core rate, ex food & energy. Economists had expected a 0.3% rise on the headline and a 0.1% rise on the core. The surprise drop has been blamed on the surging US dollar, which is pushing down import prices. While that might be beneficial, the opposite is being suffered by US exporters.

The Yanks are beginning to understand why Australia was frustrated by Fed QE for all those years. On Friday night the US dollar index hit the ton for the first time since 2003. The 0.9% rise to 100.18 was effectively the “wrong way”, based on weak US inflation and consumer sentiment data, but the euro’s fall into the 1.04s was the driving factor.

So having rallied strongly on Thursday night, on Friday night the Dow fell 145 points or 0.8%, the S&P500 fell 0.6% to 2053 and the Nasdaq lost 0.4%. The Nasdaq’s don’t-blink-or-you’ll-miss-it return to 5000 seems but a dream at 4871.

What does the Fed think about it all? We’ll find out on Wednesday night when the latest FOMC statement is released and Janet Yellen holds a press conference.

Metals Steady

The latest jump in the greenback would have done little to help oil’s cause, but the aforementioned Fed meeting kept base metal traders mostly on the sidelines on Friday night. A surprise jump in inventories saw lead fall 2.4%, but all other metals were a little stronger.

Iron ore rose US20c to US$58.10/t.

Gold rose US$5.60 to US$1158.60/oz.

The century mark for the dollar index killed off the brief short covering rally in the Aussie. It’s down 0.9% to US$0.7638.

The SPI Overnight fell 11 points or 0.2%.

The Week Ahead

There is a Fed statement due on Wednesday night. That’s pretty much all that matters this week.

There is, however, a raft of monthly US data due. Monday sees industrial production, housing sentiment and the Empire State manufacturing index. Tuesday it’s housing starts, and Thursday sees the Philadelphia Fed manufacturing index and the Conference Board leading economic indicators. Friday brings the quadruple witching derivatives expiry for US stock markets.

The Bank of Japan will meet on Tuesday and discuss what to do about the fact the ECB has upped the QE ante. The eurozone will see pre-QE unemployment, trade and inflation data next week but also the first ZEW investor sentiment index result since ECB bond purchases began and the euro collapsed.

New Zealand’s December quarter GDP result is due on Thursday.

Aside from vehicle sales data today, Australia’s economic week is all about the RBA. The minutes of the March policy meeting are due tomorrow, an RBA bulletin will be released on Thursday and Glenn Stevens will make a speech on Friday.

This week sees fewer stocks going ex-dividend than we saw last week but still quite a few, particularly today. Today’s exes include CSL ((CSL)) and Leighton Holdings ((LEI)), while Woolworths ((WOW)) is the biggie on Wednesday. Sigma Pharmaceutical ((SIP)) will release its full-year result on Thursday and Myer ))MYR)) will release its interim.

Thursday will also see the expiry of March SPI futures and index options.

Rudi will appear on Sky Business on Wednesday at 5.30pm and later that night, from 8-9pm, he will host another edition of Your Money, Your Call. He will re-appear on Thursday at noon.
 

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

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article 3 months old

The Overnight Report: Patiently Waiting

By Greg Peel

The Dow closed down 25 points or 0.2% while the S&P lost 0.2% to 2040 and the Nasdaq dropped 0.2%.

Volatility

BHP went ex yesterday, which explains the bulk of yesterday’s 2.6% fall for the materials sector and indeed the 0.5% fall for the ASX200. But irrespective of this adjustment, Bridge Street went on a rollercoaster ride yesterday, down 76 points from the open on Wall Street weakness, down only 20 points at lunchtime as the bargain hunters moved swiftly, and down 31 points on the close.

The bargain hunters sought yield, as is evident from a 0.7% gain for utilities and a 0.3% gain for the telco. The consumer sectors were nevertheless down again in the wake of Westpac’s consumer confidence survey, which confirmed the gloom evident in Tuesday’s NAB business confidence survey.

Despite lower petrol prices and an RBA rate cut, consumer confidence has fallen 1.2% this month to be unchanged over a year. Fears of growing unemployment and uncertainty over the federal budget were the major contributing factors.

Housing finance dipped in January, supporting analyst views that some heat might finally be coming out of a previously red hot market. The value of all loans fell 1.0% in the month to be up 7.1% year on year, and the value of investor loans – the driving force – fell 0.1% but are 22.1% higher. These are January numbers, pre-rate cut, so perhaps not an up to date guide, but any cooling in the property market will perhaps have the stock market wondering whether another RBA rate cut really is a given.

Perhaps today’s unemployment numbers hold the key.

China Slows

Halfway through yesterday’s local session, Chinese data for January-February were released. Industrial production growth slowed to 6.8% over the first two months, which is the slowest rate of growth since the GFC and the slowest rate otherwise since data began being kept in 1995.

Retail sales growth slowed to 10.9% over the period from December’s 11.9%, and fixed asset investment slowed to 13.9% from 15.7%. The Jan-Feb data are combined given the New Year holiday and once again, we have to acknowledge the disruption to the data that holiday causes every year. But there’s no hidden silver lining in this cloud. China’s economy is slowing.

Economic growth, analysts note, appears to be markedly weaker than the improved February PMI data, released last week, might indicate.

Greenback Surges

The US dollar index surged again last night, up 1.1% to 99.68 as the slide in the euro accelerated. The euro is now in the US$1.05s and no one sees any reprieve before parity, and likely beyond. Meanwhile, talk continues that the Fed will remove the word “patient” from its FOMC statement next week. While across the market commentators are laughing despite themselves at how everyone is so hung up on semantics, it matters.

Having fallen sharply on Tuesday night, last night Wall Street chopped around without any conviction either way. The market did nevertheless open stronger and close weaker. The countdown is now on to that statement release, due a week from now, and the accompanying quarterly press conference with Fed chair Janet Yellen, her first for the year.

Thus Wall Street may clam up until then, barring any left of field developments, but meanwhile the Germans are saying if it worked for the US, presumably it will work for us too. As the euro keeps falling the German stock index keeps rising. The DAX was up 2.7% last night and is up over 20% in 2015. The same thing occurred in Japan in 2013-14 until fiscal policy changes killed off the excitement.

Any pending fiscal policy changes in Europe would likely be more accommodative rather than restrictive, or shall we say, less “austere”.

Commodity Pressure

The surging US dollar continues to damage commodity prices. All base metal prices were down again in London last night between 0.5-2.0%, with copper down 0.6%.

Tuesday’s bounce proved short-lived for iron ore, which is down US80c to US$57.70/t.

Gold is down US$7.10 to US$1154.70/oz.

Last night’s weekly US crude inventory data showed yet another build to record levels, sending West Texas down US32c to US$48.33/bbl. Greater attention is now being given to the supply balance between WTI and Brent crude, that latter of which is not in oversupply and is more susceptible to geopolitical disruptions. Brent thus rose US$1.32 to US$57.88/bbl last night to re-establish a more realistic spread.

The good news, if there is any, is that all those commentators calling fair value for the Aussie at 75 when we were up over parity are now seeing their chickens come home. A fall over the past 24 hours of 0.4% has taken us to US$0.7598.

Today

The SPI Overnight closed up 5 points.

February unemployment data are out today in Australia. They will be considered critical for the RBA’s next policy decision.

In the US, retail sales data will be tonight’s highlight.
 

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: Dollar Demons

By Greg Peel

The Dow fell 332 points or 1.9% while the S&P dropped 1.7% to 2044 and the Nasdaq lost 1.7%.

Turnaround

There was a distinct change of tone on Bridge Street yesterday. Whereas the past month or so has seen buyers always fronting up on any dip, looking specifically for any perceived bargains in yield stocks, yesterday saw the sellers kill off a come-back rally. The ASX200 was up 35 points at midday, only to close flat.

Worrying markets at that time was a surprise jump in China’s CPI, suggesting the PBoC may not have the scope assumed to provide for further stimulus. Headline inflation jumped to an annualised 1.4% in February from January’s 0.8%. However economists were quick to point out that the jump was mostly to do with food prices, which typically see price rises ahead of the New Year holiday, before swinging back the other way thereafter.

Moreover, China’s PPI hit minus 4.8% in February, down from minus 4.3%. Wholesale disinflation is entrenched.

Lack of Confidence

But the real killer of yesterday’s recovery rally on Bridge Street was NAB’s February business confidence survey. Confidence was expected to rebound from its low level thanks to the RBA’s rate cut, but this has not been the case. Confidence fell to zero on NAB’s index from plus 3 in January to mark its lowest level since the federal election.

A lack of confidence in the resource sector is understandable and has a lot to do with the weak number. However the retail sector also expressed its concern, and that sector should have been a clear beneficiary of the rate cut. In general terms, instability in Canberra is weighing on business confidence, and inhibiting the transition towards non-mining capex growth.

I have said it before in this Report – ultimately stock markets care not who’s in power, but investment does need to be underpinned by policy certainty.

The sector breakdown of yesterday’s flat index close told the story. The materials and energy sectors were down on lower commodity prices but consumer discretionary was the worst performer, with consumer staples also in the red.

Earnings Fears

US markets are now in a conundrum. Wall Street had come to accept that while one could argue all day over the specific timing, a Fed rate rise was inevitable eventually. But that’s okay, because it means the US economy is recovering. The Dow and S&P hit new all-time highs and the Nasdaq regained 5000. The US dollar was creeping up in anticipation, but a strong dollar means a strong America.

Unless that dollar is too strong. The ECB’s introduction of shock and awe QE has sent the euro spiralling, and subsequently the US dollar index soaring. Last night that index rose another 1% to 98.62. In late 2014 analysts were predicting 8.0% net earnings growth for the S&P500 in 2015. That figure has now been slashed to 0.8%, and may yet turn negative, as the offshore earnings of US-based global enterprises are whittled away by the ever rising greenback.

Thus when the latest US jobs numbers were much stronger than expected, Wall Street got the jitters. A rate rise may be inevitable but not right now please. Rumour has it the Fed is set to remove the word “patient” from the next FOMC statement, in theory starting the countdown clock for the policy shift. But the dollar is no longer rising on simple rate rise anticipation. It is rising because currencies around the globe are falling.

Bond Strength

A rise in the Fed funds rate should by rights mean a rise in US bond yields, and indeed we did see the ten-year yield spike on last week’s jobs numbers. But whereas last Friday night’s sell-off in stocks was accompanied by a sell-off in bonds, last night’s stock market rout was matched by bond buying. The US ten-year yield fell 7 basis points to 2.13%.

To understand why, one need look no further than the German ten-year, which has fallen to 0.28% (the German five-year is at minus 0.16%), or the French at 0.52%, or the Netherlands at 0.28%. The yields on Italian, Spanish and Portuguese bonds are much lower than the US. Whose economy would you rather back?

It has been suggested that there may not even be enough eurozone bond issuance to meet the intended size of Mario Draghi’s bond buying program, particularly given he won’t buy anything at below the ECB deposit rate of minus 0.2%.

Commodities Carted

Supply-side issues may have provided some sudden strength in copper prices on Monday night but last night all commodity prices were forced to bow to the strength of the greenback. All base metals prices fell 1-2%.

Spot iron ore always marches to its own drummer. It rose US50c to US$58.50/t, which might offer some relief.

West Texas crude dropped US$1.35 to US$48.65/bbl and Brent dropped US$1.96 to US$56.56.

Gold lost US$4.70 to US$1161.70/oz, having suffered its big plunge last Friday night.

Today

The good news is the Aussie’s down a percent to US$0.7625 on US dollar strength. The bad news is the SPI Overnight is down 47 points, or 0.8%, on Wall Street weakness. However, the lower global bond yields fall, the more attractive are Australian yield stocks.

The ASX200 will open with a notable handicap today in the form of BHP Billiton ((BHP)) going ex, along with a few others. Although we probably won’t notice at all.

Westpac’s consumer confidence survey is due out today and if we saw the consumer sectors plunge on disappointing business confidence, it may not be pretty if the more direct consumer survey echoes the same sentiment. We’ll also see housing finance numbers today, to bring the focus back on another RBA rate cut, or not.

China will provide February industrial production, retail sales and fixed asset investment data today.

Rudi will make his weekly appearance on Market Moves, Sky Business, 5.30-6pm and later present to members of the Chatswood chapter of the Australian Investors' Association (AIA), in Chatswood (starts at 7.30pm at Chatswood Club, Help Street).


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: Correction Debate Returns

By Greg Peel

The Dow rose 138 points or 0.8% while the S&P gained 0.4% to 2079 and the Nasdaq added 0.3%.

Local Carnage

Bridge Street endured a fairly predictable down-day yesterday, triggered by Friday night’s better than expected US jobs number. The headline on the nightly news was of iron ore stocks leading the market down but this was a mere side show to the real event. The materials sector did indeed fall 1.7% on a new low for iron ore prices, and energy dropped 1.6% on another fall in the oil price, but these were not the big moves.

The big moves were in utilities, down 3.0%, and the telco, down 2.2%. The banks chimed in with a 1.1% fall but industrials also saw a 1.7% drop. The hardest hit industrials were those falling into the same category as all of the above – the yield payers. And we can throw in the REITs, and indeed we can throw in the two big miners and the LNG producers as well.

Yesterday’s drop was not about commodity prices, it was about interest rate differentials. We will likely see another rate cut in Australia but Friday night’s US jobs number suggests we may soon see the first US rate rise. The universal theme of the reporting season just past was overvaluation of yield stocks. A three to one ratio of ratings downgrades to upgrades from brokers is testament. If US rates begin to rise, yield stocks both in the US and elsewhere are less valuable.

Not that the end is nigh and the sky is about to fall. Yesterday was more of a slap on the face to wake the market up from its blind chase for yield. One interest rate rise in the US is not going to kill the goose, given low global interest rates will provide support to the yield story for a long time yet. But there is a point at which prices become just too rich.

Euro Bond Crash

And on the subject of low global interest rates, the ECB began buying eurozone sovereign bonds last night as part of its new QE program and despite yields having fallen a long way, they tumbled a lot further last night. The German ten-year fell 9 basis points to 0.312% and shorter maturities are all in the negative.

Yields across all of the larger eurozone economies were hit, while those of the peripheral basket cases were less impacted. The euro is now trading at a 12-year low at US$1.08, and the assumption is that parity is not far off. European funds will flow out of the continent in search of yield elsewhere, including Australia and the US. The US ten-year yield last night fell back 4 basis points to 2.20%.

Happy Birthday Rally

Renewed buying in the US bond market following Friday night’s big sell-off was matched by a turnaround in US stock markets following Friday night’s jobs-related plunge. While not a specific impetus for the bounce-back, much attention was paid last night to the fact it was the sixth anniversary of the post-GFC rally, with the Dow and S&P500 having hit their closing price nadirs on March 9, 2009.

The rally is now entering its seventh year, encouraging technicians to point out that while six-year bull markets have occurred before, seven-year runs are rare. And the anniversary also reminded Wall Street that we have still not seen a 10% correction since late 2011, and that’s also very rare. We spent an awful lot of time arguing this point a year ago, until the argument quietly fizzled out. While a US market PE of 17x is not a blow-out, it is on the expensive side of history, and that is encouraging the punters to talk correction once more.

Friday night’s response to Fed rate rise fears may have offered a precursor, but they were back in buying stocks again last night. Those debunking the historical arguments over too-long rallies and overdue corrections point out never before in history had the market been supported by QE. This time it’s different. And while the Fed may shortly lift it cash rate for the first time since the GFC, rates will still be historically very low.

Whatever the case may be, it is clear the market is just starting to get a little jittery.

Metal Bounce

Iron ore is down another US20c to US$58.00/t. While 20c is not much, the fact the iron ore price now has a 5 in front of it has the mining community rather concerned. Junior players are trading under water. It seems like a lifetime ago analysts were warning a break of US$120/t would be damaging, but it’s only been a year.

Base metals, on the other hand, staged a bounce last night. The US dollar index was steady at 97.64 but news from Chilean copper miner Antofagasta that it was forced to shut down production due to protesters – locals criticising the mines excessive water consumption – was enough to send the copper price up 2%. This supply-side disruption comes hot on the heels of BHP Billiton’s announced problems at Olympic Dam.

The copper bounce floated all base metal boats last night, albeit only mildly. Lead and zinc each gained 1%. Gold is steady at US$1166.40/oz.

China’s trade numbers, released on the weekend, showed a strong increase in crude imports which provided support for West Texas prices last night, even as ECB bond buying hit Brent. WTI is up US40c to US$50.00/bbl, even though the US does not export oil to China, yet, while Brent fell US$1.27 to US$58.52/bbl.

Today

A little stability may return to Bridge Street today given Wall Street did not go on with the selling last night. The SPI Overnight is up 12 points or 0.2%. Perhaps the bargain hunters will be lurking, particularly given yesterday saw half the country on holiday.

The NAB business confidence survey will be out today and one might predict that political instability will weigh on the numbers. China will release February inflation data today, and probably boost hopes of further PBoC easing measures.
 

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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