Tag Archives: China and Emerging Markets

article 3 months old

The Summer Break 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 ASX200 closed on December 31, 2013, at 5352. Yesterday it closed at 5442 having risen 103 points on the day, suggesting a year in which the index has achieved nothing more than to tread water, before dividends. However it was not really a year in which “the index” featured.

BHP Billiton closed at $37.99 last year for example, and $29.84 yesterday, suggesting a 21% fall (notwithstanding there’s one more week to go). CSL on the other hand closed at $68.96 last year, and $88.33 yesterday, for a 22% gain. Fortescue Metals has lost 87% over the year to now and Santos has lost 45%, while Amcor is up 26% (notwithstanding Orora spin-off) and Ramsay Healthcare is up 30%.

We’re not talking your little speccy stocks here, that fly around with abandon. These are big names. Many a global stock analysts has suggested, as 2014 winds down, that 2015 will be the year of “alpha”. Alpha represents stock-specific risk and thus movement, while “beta” represents the market’s risk and movement. While there’s no reason to suggest those analysts have it wrong, clearly 2014 was very much a year of alpha as well. That the ASX200, the “beta”, gave us pretty much a big zero in 2014 is misleading in “alpha” terms.

But as I noted above, it was a zero year before dividends. And there were plenty of those to be had. Telstra always leads the pack, along with the banks, but 2014 was a year when even Woodside Petroleum was offering bank-like distributions (offsetting a bit of capital loss) alongside your usual utilities, REITs and a few of your more individual high-yielders such as an Ardent Leisure.

The lesson from 2014 is perhaps that if your financial advisor tells you there are stocks that must be held in any Australian portfolio, if for no other reason than they are big names, be sure to question the argument behind those specific recommendations. This is not 2006.

To wind up 2014, we have two full and one shortened session ahead of Christmas Day, with the ASX closing at 2.10pm on Christmas Eve. The exchange then reopens on Monday for another two full and one shortened session, again closing at 2.10pm on New Year’s Eve and closing for New Year’s Day. The Kiwis have the right idea, also closing the NZSE on Friday the second, but the ASX will open its doors. It remains to be seen if anyone will turn up.

The following Monday, January 5, it’s back to business as usual for the Australian market, expect that 90% of participants will be on the beach. But beginning the Friday before and rolling through this week we’ll see the usual round of global PMIs. In the US it’s the usual “jobs week”, featuring the ADP private sector number and official non-farm payrolls.

There are a few interesting data releases out for the eurozone in the week beginning January 5, including the PMIs, inflation, unemployment, and German factory orders and industrial production.

It’s a relatively busy week in Australia as well, featuring the PMIs, ANZ job ads, the trade balance, building approvals and retail sales. The following week will feature housing finance and unemployment.

This is the last day for 2014 of FNArena’s full service. There will be no news or Broker Call as we take a bit of a rest. Service will resume on Wednesday, January 14.

FNArena would like to thank all our subscribers, readers and contributors for another – well let’s call it interesting – year. Wishing all a very Merry Christmas, and Happy Holidays to whom this does not apply, and Happy New Year. Enjoy your summer breaks and well see you again soon in 2015.

Behave yourselves.
 

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Beijing Will Call The Shots In Resource Sector Battle Royal

Michael Komesaroff is principal of Urandaline Investments (www.urandaline.com.au), a consultancy specializing in China’s capital-intensive industries

In October the world’s fourth largest mining company, Glencore, launched an audacious merger bid for the world’s second biggest miner, Rio Tinto. The approach was rebuffed, and United Kingdom takeover rules—both companies have London listings—forbid Glencore from making any further overtures for the following six months. Yet few in the mining business believe that is the end of the story. Glencore’s chief executive officer Ivan Glasenberg has long had his eye on Rio Tinto. Come April, industry analysts expect him to be back with a new proposal.

However, any battle over Rio Tinto will be about far more than Glasenberg’s deal-making prowess. It will shape the global mining industry in the post-commodity-boom world. And the outcome will be determined in large part by Beijing, whose anti-monopoly regulators have shown themselves both willing and able to use their growing international clout to further China’s global resource strategies by forcing the sale of prize assets like copper mines to Chinese state-owned companies. That means a successful Glencore bid for Rio Tinto will almost certainly end in the dismemberment of the Anglo-Australian giant that has dominated the global mining scene for over a century, with Chinese state-owned resource companies cherry-picking many of the company’s choicest businesses.

Catastrophic business decisions

Beijing has a stake in the fate of Rio Tinto not only as the miner’s main customer but also as its biggest investor. In 2008 state-owned behemoth Aluminum Corporation of China, or Chinalco, paid £60 a share for 9.8% of Rio Tinto, becoming the company’s largest shareholder. Since then Chinalco has seen the value of its investment severely eroded following a series of catastrophic business decisions by Rio’s senior management. The problems date back to 2007, shortly before Chinalco bought in, when Rio Tinto outbid other competitors by US$10bn to acquire the Canadian aluminum giant Alcan Inc. for US$38bn. This remains the world’s largest all cash mining deal but the acquisition has not gone smoothly.

Rio Tinto badly underestimated the competition from the unrestrained expansion of Chinese aluminum producers, which have flooded the market with their metal, depressing aluminum prices and forcing Rio Tinto’s management to write down two-thirds of its original investment. The Alcan purchase was not Rio’s only disastrous acquisition. In 2011 the company paid US$3.7bn for a coal mine in Mozambique which was subsequently written down and sold for a mere US$50mn. Following the write-offs, in 2013 Rio Tinto edged out its chief executive, Tom Albanese, along with a clutch of other executives responsible for the valuedestroying acquisition program, replacing them with a new line-up headed by Sam Walsh. The new management team was charged with refocusing the company by cutting costs, disposing of underperforming assets and restoring the capital discipline that had previously been Rio Tinto’s hallmark.

Walsh, who had come from the company’s iron ore division was seen by the market as the right man to cut the bloated overheads that had accumulated over the past decade. But while he has reduced costs, Walsh has been less successful in disposing of unwanted assets. Attempts to sell an iron ore mine in Canada, a range of aluminum assets, and diamond mines in Canada, Zimbabwe and Australia have failed and the assets remain on the company’s books as a drag on earnings.

Iron dependency

The underperformance of Rio Tinto’s recently acquired assets has left it more dependent than ever on its core iron ore business, which makes up some 70% of the company’s value. With production of 260m metric tons per year and rising, Rio Tinto is the largest single supplier of iron ore to the seaborne market, accounting for around 20% of the trade.



That dependence means Rio Tinto has been brutally exposed to this year’s collapse in iron ore prices, which have fallen more than 45% to their lowest level since early 2009. The slump has been propelled in large measure by the actions of the major producers, including Rio Tinto itself, which have flooded the market with low cost ore as a deliberate strategy to force higher cost competitors, particularly those in China, to shutter their operations. The big miners defend their strategy on the grounds that their costs are much lower than those of the smaller competitors they hope to drive out of business.

However, Rio Tinto’s approach of pursuing volume at the expense of price has carried a heavy cost for the miner. On one hand the 23% fall in Rio Tinto’s share price this year (28% in US dollar terms) has opened the company up to criticism from Glencore and prompted institutional investors to question whether Walsh and his colleagues have any plans beyond their current policy of slashing costs. On the other hand the slide in Rio Tinto’s shares to less than half the price paid by Chinalco seven years ago has exacerbated tensions with the company’s Chinese shareholders, possibly leaving Beijing more receptive to a proposed breakup of the mining giant.



Heightened tensions

Chinalco’s stake in Rio Tinto has long been a contentious issue within China’s bureaucracy. Apart from the steady loss in value of their investment, two particular issues grate with the Chinese. Firstly, despite being Rio Tinto’s largest shareholder they have never been invited to join the company’s board, which many in Beijing regard as an anti-Chinese slight. The second matter that irks the Chinese is that in 2009 Rio Tinto abrogated a US$19.5bn deal that would have seen Chinalco double its stake in Rio Tinto and in the process gain two seats on the company’s board as well as joint venture status in several key mines, including Rio Tinto’s flagship iron ore mines in Western Australia. At the time Rio Tinto was struggling under a mountain of debt acquired as a result of its disastrous 2007 tilt at Alcan, and the Chinese saw themselves as the company’s saviors.

Chinese officials also have misgivings about Sam Walsh, Rio Tinto’s CEO. They regard him as aloof, more at home in London than Beijing and less sympathetic to Chinese concerns than his predecessor Tom Albanese. Walsh also suffers in the eyes of Beijing because he was head of Rio Tinto’s iron ore division at a time the Chinese naively believe they were exploited by a cartel of western producers which colluded to drive up the price of iron ore to the disadvantage of Chinese steel mills. That Rio Tinto’s Chinese iron ore negotiator, Stern Hu, was sentenced to ten years in jail for bribery and theft of state secrets under Walsh’s leadership of the ore business does nothing extra for the new CEO’s reputation in Beijing.

Troubled history

While Chinese officials may not be fond of Walsh’s Rio Tinto, they also harbor reservations about Glencore. These date back to 1997 when one of China's largest zinc producers lost US$130mn selling zinc short in a rising market. At the time officials blamed Glencore for encouraging naive managers to speculate beyond their means and capability, and warned other Chinese non-ferrous metal producers about the risks of dealing with the trading company. While the official attitude has softened over time, many senior executives in China's metals industry recall the incident and remain wary of doing business with Glencore. It is likely their doubts have been compounded by Glencore's trading culture, which seeks to maximize revenue.

As the world’s largest buyer of most minerals and metals, China naturally prefers Rio Tinto's production approach, which tends to maximize volume, leading to lower prices than the Glencore model. But although they have reservations about Glencore, both Chinalco and its political masters could look favorably on a renewed Glencore bid for Rio. Indeed, it is likely Glencore’s Glasenberg has already smoothed the way. It was widely reported that Glasenberg spoke to Xiong Weiping, then Chinalco’s President, before approaching Rio Tinto in October.

It is not known what they discussed, but around the time of the reported meeting Chinalco established a committee of senior executives to examine the company’s strategic options, which suggests that discussions may have included Chinalco’s possible involvement in a Rio Tinto takeover.

Deficient portfolio

For Glencore, the advantages of a deal are clear. In recent years it has built an impressive range of commodity businesses through acquisition, and now bills itself as the only genuinely diversified natural resource company in terms of business activities, commodities and geography. Copper accounts for a little over 20% of Glencore’s value, with energy—coal and oil—making up a similar proportion, while the company also has strong positions in zinc and nickel. However, the big gap in Glencore’s portfolio is iron ore, a deficiency that explains the company’s interest in Rio Tinto.



Regulatory scrutiny

Any tie-up between Glencore and Rio Tinto will certainly come under close scrutiny from regulators, especially those in China where the authorities have shown that they are more than willing to use their antimonopoly powers to benefit their national champions. Earlier this year Glencore was forced to sell the Las Bambas mine in Peru, one of the world’s largest copper projects, to the Chinese-controlled and Hong Kong listed MMG for US$7 billion in order to secure the approval of China’s Ministry of Commerce for Glencore’s acquisition of Xstrata.

Copper would again attract regulatory attention in any Glencore deal for Rio Tinto. Combined, the two companies would be the world’s largest producer, commanding over 2mn tons per year of copper production—equivalent to 18% of global supply—and just pipping Chile’s state-owned producer Codelco which has an annual production of just under 2mn tons. But whereas Codelco’s production is confined to Chile, a combined Glencore-Rio Tinto would have greater geographic spread with mines in more than seven countries, including in Chile, where Rio Tinto holds a 30% stake in the Escondida mine, which at 1mn tons a year is the world’s largest copper mine.

Strategic priority

Apart from the magnitude of the combined entity’s current copper production, the regulators would also be concerned with the potential of several large development projects to expand each company’s copper output. Rio Tinto has a 33.5% stake in Mongolia’s Oyu Tolgoi, the world’s largest copper project, which is slated to produce 450,000 tons of copper per year before the end of the decade. A large share in both the world’s largest existing copper mine and its biggest copper development project is hardly likely to go unnoticed, especially in China where copper is near the top of the list of commodities nominated as a strategic priority.

Regulators will also look closely at the combined companies’ presence in the thermal coal market. With access to nearly 70mn tons per year of production in Australia, South Africa and Colombia, Glencore is the world’s largest trader in the seaborne market. Regulators may well decide that the addition of Rio Tinto’s 28mn tons of Australian production would put Glencore in an unacceptably dominant position, controlling over 10% of the world’s seaborne trade in thermal coal.

Divestments would be likely in the aluminum business too, where it is probable the combination of Glencore’s trading volumes in primary aluminum—Glencore has an 8.75% stake in Russia’s United Company RUSAL, the world’s largest producer of aluminium, and markets 40% of its output—with Rio Tinto’s production of 3.6mn tons per year would exceed regulators’ tolerance levels.

As a result, securing approval for a deal could take as long as a year, with the divestment of assets to appease regulators likely to be a complicated and protracted process, especially where Rio Tinto is locked into joint ventures which give its partners pre-emptive rights to acquire the company’s interests should it withdraw from the project.

Yet forced divestments are unlikely to faze Glencore’s Glasenberg whose main objective remains the acquisition of Rio Tinto’s vast and high quality Australian iron ore assets. Retaining as many of Rio Tinto’s other operations as possible would be desirable, but Glasenberg is pragmatic enough to accept divestments as a small price to pay for ownership of the world’s best iron ore assets. In any case, Glencore is likely to find willing buyers among China’s state-owned companies. Chinalco, for example, may value a stake in Rio Tinto’s low cost aluminum smelters, which benefit from supplies of cheap non-polluting hydropower. And as with any divestments, the proceeds would help fund the cash that Glencore would have to pay Rio Tinto’s shareholders.

Inefficiency and corruption

Whether China’s political masters will be quite as enthusiastic about picking up Rio Tinto’s assets as the managers of their state-owned enterprises is less immediately obvious. China’s state resource companies are plagued by inefficiency and tainted by corruption scandals. Chinalco’s new head, Ge Honglin, was appointed last month with a brief to improve the company’s disastrous bottom line—its listed subsidiary lost RMB4.12bn in the first half of the year—and has hinted that employee numbers will be heavily reduced.

Meanwhile at least two of Chinalco’s senior managers are being probed by the Central Commission for Discipline Inspection for “serious violations of discipline and law”. Sun Zhaoxue was vice-chairman of Chalco, Chinalco’s Hong Kong listed subsidiary and Li Dongguang was a vice-president responsible for Chalco’s international trading unit. The detention of such senior executives may prompt the authorities to clip Chinalco’s wings and concentrate major strategic decisions at a higher level.

Moreover, several of China’s recent high profile resource investments, such as Citic Pacific’s stake in Australia’s Sino Iron project, have proved to be financial disasters, prompting Beijing to be more judicious in their overseas acquisitions. However, this does not mean China has abandoned its long-held plan to acquire shareholdings in world class mineral assets. MMG’s recent purchase of Las Bambas and Baosteel’s acquisition of Australian iron ore hopeful Aquila Resources suggest the Chinese are pragmatic buyers who will make selective investments in commodities like copper and iron ore which they see as strategic resources.

That pragmatism will be to the fore in any deal for Rio Tinto. As the world’s largest consumer of iron ore, China deems the future of Rio Tinto to be of national importance. An approach to Chinalco by a potential suitor for Rio Tinto would certainly be reported to the National Development Reform Council, which would need to approve the involvement of a state entity, or the purchase of any assets divested by the miner’s new owner. That approval may well be forthcoming. Xiao Yaqing, who as president of Chinalco first proposed a shareholding in Rio Tinto to the NDRC back in 2008, is now an influential deputy director at the State Council. It is highly likely that he would be keen for Chinalco to participate in any takeover of Rio Tinto as a vindication of his original strategy. Similarly, Chinalco’s recently replaced President, Xiong Weiping, is now chairman of the board of supervisors at the State-owned Assets Supervision and Administration Commission.

Although not as powerful as the NDRC, SASAC would also be consulted if any state enterprise were to participate in a takeover of Rio Tinto. Like his predecessor Xiao, it is probable Xiong would back the involvement of his former company. Such high-ranking Chinese support could prove invaluable to Glencore.

Since the global financial crisis, western banks have been reluctant to lend to mining companies. And Glencore, with a relatively small market capitalization of US$58bn compared with Rio Tinto’s US$78bn, and with a higher debt ratio, could struggle to fund a deal through conventional channels. However, if Glencore and Chinalco can agree on a takeover of Rio Tinto and a subsequent division of the spoils, Beijing may be prepared to support the transaction financially via China’s state-owned banks.

Calling the shots

Securing a successful deal for Rio Tinto will still be difficult. But dealmaking is a skill that Glencore has in abundance. Even Glasenberg’s critics acknowledge that he has yet to over-pay for any of his acquisitions. Furthermore, the cost savings achieved by Glencore following its 2013 acquisition of Xstrata demonstrate that Glasenberg’s team is adept at stripping costs out of even the most tightly run operations. With the end of the commodity boom, international mining companies will need to adapt to a slower growth environment where capital is tighter, and where marketing skills which maximize revenue are more important than production skills that target maximum volume. This is an environment which is more familiar to Glencore than to Sam Walsh and his team at Rio Tinto, and it is an environment in which Beijing and its state-owned enterprises are increasingly calling the shots.

 

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The Overnight Report: Back In The USSR

By Greg Peel

The Dow closed down 111 points or 0.7% while the S&P lost 0.9% to 1972 as the Nasdaq fell 1.2%.

“Despite the depreciation of the exchange rate, the Australian dollar remained above most estimates of its fundamental value, particularly given the significant declines in key commodity prices over recent months. Members agreed that further exchange rate depreciation was likely to be needed to achieve balanced growth in the economy.”

So said the RBA minutes, released yesterday. The RBA also suggested that housing was being supported by consumption but would be tempered by rising unemployment, which would weigh on consumptions and sentiment. Throw in recent moves by APRA/ASIC to put a lid on housing investment loans, and one might suggest the scene is set for a rate cut next year. Certainly the RBA does not believe a rate rise from the Fed is an issue, noting this will be largely balanced by easier monetary policy in Europe and Japan.

Monetary policy is also an issue in China, where yesterday HSBC’s flash estimate of December manufacturing PMI came in at 49.5, down from 50.0 in November, and marking the first drop into contraction in seven months.

Before the Chinese PMI was released, oil prices had fallen sharply once more, copper had suddenly plunged 2% and iron ore had ticked lower. The last couple of sessions on Bridge Street have seen bargain hunters moving into resources, particularly energy, but yesterday those sectors bottled again. Energy fell 2.1% and materials 1.9% to account for the bulk of the ASX200’s 0.7% fall.

The problem for the Australian economy is that we’re not getting the corresponding fall in the Aussie that once upon a time would have been a given – frustrating not just the RBA. Not only is Australia seeing a collapse in its terms of trade, the US dollar is meant to be strengthening on the back of Fed rate hike expectations. But it’s not. As each day goes by, those rate hike expectations are being questioned, given the global backdrop.

The Russian central bank’s midnight announcement of a cash rate increase to 17% from 10.5%, implemented to defend the collapsing ruble, has highlighted the potential negative global impacts of a much lower oil price. No doubt when Putin invaded Ukraine, he didn’t have 50 dollar oil in mind. The combination of Western sanctions and the collapsing oil price have sent the ruble and the Russian stock market spiralling, forcing the Russian central bank to call on its extensive reserves of petrodollars to try and stabilise the Russian economy.

Is this 1998 all over again, when Russia defaulted on its sovereign debt?

The fear in Europe is that Russia will go a step further and implement currency controls. Last night the Russian Economic Minister assured there was no such plan in discussion. Having fallen sharply for two sessions in a row, last night European stock markets bounced hard on this news, with the UK, German and French markets all closing up over 2%. It was a rock and roll ride nonetheless, with most of the gains coming late in the session.

This meant a weak open for Wall Street, which saw the Dow down 100 points from the bell. Oil prices also opened lower but began to turn around. There followed a parabolic rally on Wall Street, which saw the Dow up 247 points before midday. And yet the Dow still finished down over 100. On December 5 the Dow hit 17,991 and all talk was of a push through 18,000. Last night the Dow closed at 17,068 and now all talk is of a drop through 17,000.

I suggested on Monday that there could be some volatility this week. Not only do we have the conflicting forces of a desire to take profits (and lock in tax losses) on the one hand, and a desire to window-dress returns on the other, the sudden drop for Wall Street over this past week is causing havoc with regard Friday night’s quadruple witching expiry. Option positions that were not worth thinking about a week ago are now very much in play, and the sort of whipsawing we’re seeing suggests there are a lot of market makers short options at these levels. And there are three more sessions to go.

Economic data don’t seem to be drawing much attention right at the moment but here goes. Following on from China’s flash PMI of 49.5, Japan saw a rise to 52.1 from 52.0, the eurozone saw a rise to 50.8 from 50.1, and the US saw a fall to 53.7 from 54.8.

The eurozone’s ZEW investor sentiment index rose to 11.0 from 4.1 last month, the eurozone’s October trade surplus rose more than expected, and US housing starts fell 1.6% in November but held above the million mark for the third consecutive month.

Drawing more attention was the West Texas crude price, which is up US51c to US$55.96/bbl. Brent is nevertheless down US67c to US$59.86/bbl.

It was not a good night on the LME. Economic fears for emerging markets, which includes Russia and still includes China and its now contracting PMI, sparked commodity fund liquidations and technical seeling which saw lead, nickel and tin all down over 2% and aluminium and zinc down around 1%. Copper, which fell 2% on Monday night, posted a 0.4% drop.

Iron ore fell US50c to US$68.10/t.

The Fed will release its latest policy statement and hold a press conference tonight. There is much speculation the words “considerable time period” will finally be omitted with regard the first rate hike, as we move ever closer to the expected timeframe, but by the same token, commentators are increasingly suggesting the Fed may not even move in 2015 at all if the global slowdown continues. The US bond market is certainly leaning that way, with the ten-year yield down 5 basis points last night to 2.07%.

The US dollar index fell 0.4% to 88.11, gold is down US$12.00 to US$1194.10/oz, and the Aussie is down 0.2% to US$0.8207.

The SPI Overnight was up 16 points at 7am Sydney time but closed down 17 points, or 0.3%, at 8am.

Tonight’s Fed statement, and press conference, will focus global attention.
 

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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 last full trading week before Christmas will likely be a busy one. Aside from the volatility we’re already currently experiencing in markets, the potential for more swings and roundabouts will be provided by futures and options expiry days both locally and in the US, and by end of quarter (and for many fund managers, end of financial year) window-dressing.

As many a fund manager/trader is paid their annual bonus based on a calendar year, there will be a bias to the upside as participants try to push the market back to offset recent falls, nevertheless all in the context of whatever the world is set to throw up at us next week. Options market-makers with short positions around strike prices will forced to buy and sell back and forward. Anything could happen, and just might.

We will also see a lot of global economic data crammed into this week and the first two days of next week before Christmas breaks begin.

The US will see housing sentiment and housing starts, industrial production, inflation, flash estimates of December manufacturing and service sector PMIs, leading economic indicators, and the Empire State and Philadelphia Fed manufacturing indices. On Wednesday night the Fed will release its last policy statement for the year and Janet Yellen will hold her last press conference for the year. Friday will see the quarterly “quadruple witching” futures and options expiry.

Japan will release its December quarter Tankan Survey next week and publish trade data before the Bank of Japan meets at week’s end.

Japan will also participate in a round of flash estimates of December manufacturing PMIs which includes China, the eurozone and US. The eurozone will also confirm its monthly inflation number and trade balance and the ZEW investor sentiment and German IFO business sentiment indicators are both due.

New Zealand will release its September quarter GDP result.

It’s a quiet week economically in Australia, featuring the release of the RBA minutes on Tuesday and the latest RBA Bulletin on Thursday.

On the local stock front, there’ll be a late spurt of AGMs, with the highlight being the double-whammy of National Bank ((NAB)) and ANZ Bank ((ANZ)) on Thursday. Thursday also sees the aforementioned futures and options expiry. Because of Christmas, the December quarter expiry lumps all of stock and index options and futures and futures options on the one day when they’re usually split across two weeks. It’s our own “quadruple witching”.

On Friday the S&P/ASX indices will rebalance at the close of trade, meaning selected stocks will be included in and others relegated from the various indices, including the ASX200.

Please note, FNArena will close full service for Christmas after December 23 and reopen on January 14. The website will nevertheless remain fully accessible.
 

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The Overnight Report: Contagion

By Greg Peel

The Dow closed down 268 points or 1.5% while the S&P lost 1.6% to 2026 and the Nasdaq fell 1.7%.

When Westpac and the Melbourne Institute conducted their December consumer confidence survey at the beginning of the month, the weak GDP result had just come out. Mass media was dooming and glooming and highlighting the fall in commodity prices and the fall in the Aussie. Consumers see a lower currency as a negative with regard their spending power. The stock market had just copped a big sell-off, and there remained total uncertainty over Hockey’s budget.

Little wonder confidence fell 5.7% to its lowest level in three years, to be down 13.3% year on year. At 91.1, the index has been in the pessimistic zone (<100) for ten months now. Within the survey, unemployment expectations rose by 4.5%.

When the dust settled on Bridge yesterday afternoon it was the consumer staples sector that was worst hit, down 1.6%, with consumer discretionary down only 0.3%. At 11am the ASX200 had been down 60 points and set for another rout, but that’s when the buyers emerged, looking for bargains in the beaten-down energy and materials sectors. Financials continued their slide (0.6%) in the wake of tighter investment loan scrutiny announced by APRA/ASIC, while healthcare dropped 2.1% on the government’s latest GP policy roll of the dice.

By day’s end, a 0.5% fall for the index was not too bad.  During the session Beijing released China’s November inflation numbers, and they can be interpreted in one of two ways, which harks back to the days of “bad news is good news” on Wall Street when more QE was anticipated.

China’s CPI fell to an annualised 1.4% growth from 1.6% in October, below expectations of a steady 1.6%. China’s PPI saw 2.7% contraction, down from 2.2% in October, marking the 33rd consecutive month of contraction linked mostly to the cooling of China’s property market.

The numbers imply China is slowing at a faster rate than assumed. At the CPI level we have to consider, nonetheless, that lower energy prices are playing a part. Food prices have also been on the decline, and food is the biggest cost in the average Chinese household budget. But the flipside is that these weak numbers give Beijing not only the incentive, but the scope to ease monetary policy more aggressively. All economists assume further Chinese interest rate cuts in 2015. And it must not be forgotten that China is the world’s biggest importer of oil.

Last night OPEC issued its latest global oil demand forecasts, cutting its earlier 2015 number by 280,000bpd to a level last seen in 2004 (just as the China story was warming up). The bloc insisted it was not going to cut production as a result. This was enough to set the oil markets off again, with West Texas falling US$2.83 or 4.4% to US$60.93/bbl and Brent falling US$2.48 or 3.7% to US$64.26/bbl. WTI did trade very briefly at a number under 60 last night before stabilising, but traders warn a breach of 60 opens a technical chasm.

Call me a sceptic, but does anyone audit OPEC’s demand numbers? The point of OPEC not cutting production in the face of plunging prices is to turn the screws on excess North American shale production, and one might assume lower demand forecasts would be an effective way of adding to the fear. OPEC forecasts a 1.13mbpd global oil production surplus next year. However it must be said that lower demand expectations out of Europe and Asia are not surprising.

The little game the Saudis are playing is nevertheless not without its dangers.

For starters, most OPEC members run oil-backed budget deficits which are based on forecast longer term oil prices, including Saudi Arabia itself. Venezuela, for example, is probably technically insolvent at spot oil. Russia is in financial trouble. And what’s more, the world’s biggest oil producers also manage the world’s big sovereign wealth funds (Canada included), which invest petrodollars around the globe to ensure reliable income sources.

Any commentator will tell you lower energy prices are a boon for the US (outside the energy sector itself), and for major oil importing economies such as Europe, China and Japan. So if low oil prices are so good, why did the Dow tank 268 points last night? Two reasons are worth considering.

Firstly, sovereign wealth funds are having to liquidate assets as their funding source collapses in value. Secondly, and closer to home for Wall Street, US banks are being sold off in the anticipation of rolling loan defaults ahead from smaller energy sector players, including contractors. In the case of the former, this is evidential. In the latter case, there is contention.

Most high-yield loans to energy sector companies in the US have been approved on the basis of hedged oil production out to one or two years, it is noted.  Thus immediate defaults are not anticipated. Oil prices would have to stay this low for a lot longer before we saw any crisis, and presumably the time in between would allow space for work-outs and other refinancing options.

But there is little doubt the “contagion” story is currently gripping global markets. This is the initial response. When oil prices stabilise, and right now that point is not in sight, markets will be able to reflect on the benefits of a new low cost global economy, whether that point is fifty dollar oil or seventy dollar oil. Santa is clearly holding back right now, with two weeks to go before Christmas, probably wishing his sleigh ran on diesel and not costly reindeer feed.

The issue for Australia’s economy is more problematic. Australian consumers produce only about a quarter of GDP, with the other three quarters driven by exports of iron ore et al. Between 2015-20, LNG is supposed to grow to challenge iron ore as our biggest export. The prices of both have plunged. The US is 75/25 consumer, and Beijing is desperately trying to lift China’s ratio.

After a few sessions of mixed moves, base metals all lined up last night to fall as one. Copper lost 0.8%, and zinc fared worst with a 2% drop.

Iron ore fell US50c to US$68.90/t.

Unfortunately we did not see the Aussie respond as it should to even lower commodity prices last night, given the US dollar index dropped 0.5% to 88.36. The Aussie remains steady at US$0.8307. Gold is also steady at US$1229.80/oz, but the rout in equities is sending investors back into US bonds yet again. The ten-year yield fell another 5 basis points to 2.17% last night.

The December 1 low for the ASX200, marked after the first big energy sector sell-off following the OPEC meeting, is 5207. We may see that today. The SPI Overnight is down 58 points or 1.1%.

Jobs numbers today. The ABS will probably insist they’ve got it right now but no one will be confident. Any shocks either way will probably be dismissed by all except the mass media.

US retail sales numbers for November are out tonight, which include the critical Thanksgiving sales period.
 

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article 3 months old

The Overnight Report: Who Killed Santa?

By Greg Peel

The Dow closed down 51 points or 0.3% while the S&P lost 0.2% to 2055 and the Nasdaq managed a rally of 0.4%.

Well, one really does now have to wonder just what Bridge Street was up to on Monday. Or indeed exactly why the ASX200 spent all last week rallying from its oil price-induced lows. What will strong employment growth in the US do for us? Speed up the Fed rate rise and thus close the carry trade gap, making Australian stocks less attractive to foreign investors. Were the FSI recommendations far less onerous than feared? No, it’s just that we now know what they are.

Resource sectors aside, the buyers barrelled in once more to the Australian market and seemingly ignored weak Chinese trade data and a weaker than first thought Japanese GDP. Global economic weakness was nevertheless not lost on a more focused Wall Street, which subsequently sold the Dow off 100 points on Monday night. Global economic weakness was not lost on oil markets, which sold off again heavily to new lows, or the iron ore market, which sold down through the US$70/t level once more. And so, surprise-surprise, Bridge Street bottled yesterday.

The resource sectors, which didn’t even move on Monday, led the charge. Energy fell 4.8% and materials fell 3.1%. Every other sector was dragged down in the turbulence, as once again Australia did not seem like the best place to be. The Aussie dropped another half cent during the session to under 82.50.

And in another case of surprise-surprise, NAB’s November business confidence survey – the first to include the really big plunge in oil prices, as I noted yesterday morning – was a shocker. The conditions index fell to 5 from 13 and the confidence index fell to 1 from 5. It was enough for NAB’s economists to join the growing chorus of those now expecting the RBA to have to cut again next year. Falling commodity prices and a consumer confidence hangover from the federal budget disaster underscore the call.

Realistically Bridge Street played catch-up yesterday, as global economic weakness fears rolled around the globe. Japan fell 0.7%, Hong Kong fell 2.3% and Shanghai fell 5.4% (mind you, it’s been on a tear of late). The selling rolled into Europe, where London fell 2.1%, Germany fell 2.2% and France fell 2.6%.

That selling then carried back around to Wall Street, to send the Dow down 223 points before 11am. It was at that point someone said “Hang on, didn’t we start all this” and then the buyers stepped in. Fundamental to the decision to buy was a rebound in oil prices last night of one percent – not substantial, but a rebound nonetheless. West Texas crude rose US63c to US$63.76/bbl and Brent rose US47c to US$66.74/bbl.

Yet global concerns continue to reverberate. Having established a buffer with a cut to the PBoC’s cash rate last month, Beijing moved ahead with further reforms yesterday by banning the use of low-grade corporate debt as collateral to borrow cash. The Lord giveth, etc. That was the main reason the Shanghai index tanked.

And remember Greece? Well it’s deja vu all over again as the Greek prime minister made the shock announcement yesterday that if his choice of presidential candidate does not win approval in parliament, he will call a snap general election. On current polling it is an election he would most likely lose to the leftist Syriza party – a fierce opponent of Greece’s EU bail-out obligations. Suffice to say, the Greek stock market fell 13% last night, and the rest of the world was left shaking its head. Oh no, not again.

The US ten-year bond yield fell 4 basis points to 2.22% last night. One might have expected the US dollar to rise further on a safe haven basis, but traders have called the euro short-term oversold and the greenback short-term overbought. The dollar index fell 0.4% to 88.76, which gave gold the breathing space to jump US$27.30 to US$1232.60 on general global concern. The fall in the greenback also arrested yesterday’s fall in the Aussie, which is back where it was 24 hours ago at US$0.8296.

There was also much Fed discussion going on last night. Rumours have surfaced, again, that next week’s Fed policy statement will not include the words “considerable period” with respect to how long interest rates will remain low. This caused some angst last night, but it’s hardly new. Talk is that “considerable period” will be replaced with “a need to be patient”, which likely refers to what’s going on in the rest of the world, but then one wonders exactly what the difference is.

Base metal prices were again mixed last night, as LME traders continue to run hither and thither in a haze of not knowing quite what to do, it would seem. Copper bounced 1% last night amidst smaller rises for other metals but falls for nickel and lead.

Iron ore fell US30c to US$69.40/t.

Given yesterday’s 1.7% rout for the ASX200, it’s no shock a turnaround from the depths on Wall Street last night is enough to see the SPI Overnight up 7 points.

Well, Australian businesses have lost their confidence, so what does the Australian consumer think about it all as we head into Christmas? We’ll find out today when Westpac releases its survey results. Housing finance numbers are also due.

China will release its November inflation data today, which can be a two-edged sword. A low number underscores the slowing Chinese economy story, but also reinforces scope for further PBoC rate cuts.

Where are you Santa?
 

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article 3 months old

The Overnight Report: There Goes The Neighbourhood

By Greg Peel

The Dow fell 106 points or 0.6% while the S&P lost 0.7% to 2060 and the Nasdaq dropped 0.8%.

Better the devil you know. That appeared to be the psychology behind a big rally for the banks yesterday, in the wake of the release of the FSI. While Murray’s recommendations contained nothing which shocked analysts in severity terms, the levels of additional capital banks would be required to hold were at the higher end of the anticipated scale. But the FSI has been hanging as a dark cloud over the banking sector for months now, so clearer skies prevailed yesterday when the report finally hit the table.

And, of course, the government does not have to adopt any of it. Here comes the politics. The Treasurer has until March to respond, and one presumes Mr Turnbull will be looking for a bit of tweaking. What? Not by March he won’t be.

Index healthcare giant CSL ((CSL)) continues to be in favour in the wake of last week’s R&D update, as its shares rose 2.8% yesterday and carried that sector to 2.2% gain. Notably, neither the materials nor energy sectors contributed to the 0.7% rally in the ASX200 yesterday, as well they might not have. As 2014 winds down, we are likely seeing fund managers shift their portfolios to resource-lite for 2015.

Yesterday’s Chinese trade data provided a shock. Exports rose only 4.7% year on year in November when 8% was expected, down from 11.6% in October. Imports fell 6.7% when a 3% rise was expected, after rising 4.6% in October. Analysts are now pointing to a too-strong renminbi, which has been dragged along in its loose peg to the US dollar as the yen and euro have plunged on further QE implementation.

November’s surprise rate cut from the PBoC should nevertheless help to address China’s growing currency issue, as will the further rates cuts analysts universally expect will follow in 2015.

Japan revised its September quarter GDP result yesterday, adding further to global economic concerns. Japan’s growth contracted 1.9% in the quarter according to the revision, not 1.6% as first estimated. Japan goes to the polls this weekend, in the snap election Prime Minister Abe called as an effective referendum on Abenomics. He is hoping his indefinite deferral of the next sales tax hike, which the BoJ wants to address Japan’s massive public debt, will win him sufficient brownie points. Otherwise, Abenomics will go down as a brief experiment that failed.

If Bridge Street was off to a flier yesterday, FSI report notwithstanding, because 321,000 Americans found jobs, then some traders might wish to reflect on just who Australia’s two biggest trading partners are. If a strong US economy is going to have any meaningful impact on a transitioning Australian economy, it will require the Aussie to fall much further as a result. Weak Asian data has the Aussie down another 0.3% to US$0.8298 this morning, despite the US dollar index also falling 0.3% to 89.07, but Glenn would likely tell you that’s still about ten cents too high.

Germany’s industrial production data for October also disappointed last night. While a gain of 0.2% was at least not a fall, 0.4% was forecast in the wake of what had been an encouraging 1.1% result in September. Of the world’s four largest (individual) economies, number one is looking okay but two through four are really struggling.

Which gives weight to the argument the ongoing collapse in global oil prices is not just about the supply-side. Sure – North American overproduction and the refusal of the Saudis to be the mugs who have to bite the production bullet are the primary drivers, but economic weakness in China, Japan and Germany is clearly adding demand-side fuel to that fire. There was no new news with regard oil supply last night, yet West Texas crude fell US$2.59 to US$63.13/bbl. It briefly traded under 63 last night, where it has not been since 2009. Brent fell US$2.45 to US$66.27/bbl.

The story in base metal markets is more one of anticipated undersupply ahead, rather than oversupply, given export bans and declining grades at legacy mines. But counter that with a weakening global economy ex-US, and base metals are stuck in the doldrums as traders begin to square up for year-end. Last night’s price moves were mixed, albeit aluminium fell 0.9% and copper fell 0.6%.

Iron ore fell US$1.20 to US$69.70/t.

Slowing growth in China, Japan and Europe only serves to underscore expectations of further stimulus measures in all three economies, hence gold rose US$13.50 last night to US$1205.30/oz.

The US ten-year bond yield rose 5 basis points on Friday night on the excitement (or rate rise expectations) of the strong US jobs report, and fell back 5 basis points last night to 2.26% on recollection the Fed has cited global economy concerns in recent statements justifying caution, even though the rest of the world is not the Fed’s purview.

Which leads us back to the Great Debate as to whether lower energy costs are net positive or negative for the global economy. Or negative in the short term (Exxon and Chevron led the Dow’s fall last night) but positive longer term for struggling energy import economies (China, Japan, Europe) and the US consumer. Or positive in the short term for global sentiment but negative in longer term as the likes of energy exporters Russia, Brazil, Nigeria, and Venezuela potentially hit the wall, while US banks take a hit on rolling defaults on high-yield energy company loans.

This Debate is largely what’s leading to indecisive ups and downs in global markets of late, and no real signs of a reliable Santa Rally.

The SPI Overnight closed down 35 points or 0.7%.

NAB will release its November business confidence survey locally today, the first to take account of significant acceleration in the oil price plunge.
 

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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

As we head towards Christmas, the new topic of discussion is as to just what net impact significantly lower oil prices will have on the global economy, and individual economies. The rule of thumb is that exporters will suffer and importers will benefit, but it’s not quite so cut and dried. The US is now pretty much neither.

The oil discussion has for once drawn some of the attention away from the monthly US jobs numbers, and one gets the feeling tonight’s number would have to be a significant beat or miss to actually move the stock market dial much. Close enough will be good enough, as long as it’s at least around 200,000.

Australia seems hell-bent on a Santa Rally, despite lower commodity prices, in the belief the RBA will soon be forced to join the global easing game. We must also consider that the holidays are approaching, many fund managers run on calendar year-ends, and subsequently pay bonuses based on December books-close. It always helps to push things along a little.

It’s a relatively quiet week on the global economic data front next week. China will be in focus nonetheless, with monthly inflation, trade, industrial production, retail sales and fixed asset investment numbers all due over the course of the week.

In the US the focus will be on November retail sales data, which will include the critical Thanksgiving sales period.

In Australia we’ll see the ANZ job ads series and the NAB business and Westpac consumer confidence surveys, all of which will provide some clues to just how Christmas trading might fare downunder.

As we await the handing down of the Financial Systems Inquiry findings, Westpac ((WBC)) will hold its AGM on Friday.
 

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article 3 months old

The Overnight Report: A Little Bit Of Stability

By Greg Peel

The Dow closed up 33 points or 0.2% while the S&P gained 0.4% to 2074 and the Nasdaq added 0.2%.

While economist consensus rarely lands right on the money for a data release as complex as the GDP, with its many moving parts, rarely do economists “miss” by such a wide margin. Expectations were for 0.7% growth for Australia’s GDP in the September quarter from the June quarter to mark 3.1% annualised growth, which is “on trend”. Instead we saw paltry 0.3% growth to leave us growing at a below trend level of 2.7%. The RBA’s implicit 0.5% estimate was also off the mark.

While Australia’s terms of trade (export value minus import value) have fallen on the back of lower commodity prices and, during the quarter in question, a still-high Aussie, economists knew that. This was not where the “miss” lay. The real surprise was a larger than expected fall in business investment, CBA’s economists declare, which detracted 0.4 percentage points from the GDP. This fall belied the indicators provided by the construction work done and capex numbers released earlier in the week.

Elsewhere, household consumption was moderate (up 0.1ppt) and dwelling investment, government spending and inventories were all negative (down 0.1ppt). Despite lower prices, net exports still provided the driving force (up 0.8ppt).

The conclusion is that there is now even more pressure on Australia’s non-mining economy to contribute to the game, given commodity prices have plunged lower since September. But the CBA economists are not too concerned. They point more recent data suggesting an entrenched upturn in residential construction (which is more than soaking up jobs lost in mining construction), rising momentum in consumer spending and better than expected plans for non-mining capex spend as indicating improvement ahead.

Will the RBA now cut its rate on the back of the weaker than expected GDP? Currency traders are certainly leaning that way, given the Aussie is down 0.5% to US$0.8406 on the back of the GDP result. But this becomes self-fulfilling of course, given a lower Aussie is a proxy for a rate cut. The RBA will not meet again until February, so there’s a fair bit of data to absorb in the interim, including Christmas spending. There are also macro-prudential control measures to be introduced shortly, one presumes.

As to why the ASX200 was up 50 points yesterday ahead of the GDP number, and despite across the board overnight falls in commodity prices, it is a mystery to me. Because the Dow was up 100? I’d love to know the connection between the US and Australian economies as we head into 2015. The GDP result took the wind out of the sails for a while until buying was restored on the assumption the RBA must now cut its rate, so we still finished on a very positive note, featuring gains in all sectors.

A day ago consensus was for the first change in the RBA rate in 2015 to be a hike.

Australia’s service sector PMI managed to improve in November, but the increase to 43.8 from 43.6 implies only a slight slowing in an otherwise rapid clip of what is now basically a six-year contraction. If one considers just how small Australia’s manufacturing sector is now, one might appreciate just how important the service sector is to Australia’s non-mining economy.

According to Beijing, China’s service sector PMI ticked up to 53.9 from 53.8 in November, while according to HSBC, it ticked up to 53.0 from 52.9.

Japan celebrated a return to expansion at 50.6, up from 48.7, while the eurozone slowed to 51.1 from 52.1. The UK enjoyed a cracking 58.6, up from 56.2, while the US topped that with a rise to 59.6 from 57.1.

US private sector jobs growth slowed to 208,000 in November, down from 233,000 in October and missing forecasts of 223,000. But Wall Street is happy with anything over 200k. The non-farm payrolls number is out tomorrow night.

The Fed’s Beige Book suggested the usual “modest to moderate” growth in eleven of the twelve Fed districts, but it did highlight improvements in consumer spending and hiring and a general optimism overall.

Wall Street was not particularly inspired early in the session last night nonetheless, and only managed a half-hearted rally towards the close. Yet the Dow did hit a new high again and this time the S&P500 also joined in. One impetus last night was a slight bounce in the oil price.

West Texas gained US21c to US$67.31/bbl, which in the context is hardly something to write home about, but at least it was not another plunge. Brent fell US75c to US$69.87/bbl.

It was a mixed bag on the LME last night, with a 1.5% rise in nickel offsetting a 1.2% fall in copper, with other metals doing not much.

Spot iron ore fell US20c to US$69.50/t.

Gold looks set to hang around the 1200 mark now until the next move is clear. Last night it gained US$9.30 to US$1210.10/oz despite the US dollar index rising 0.3% to 88.93.

The SPI Overnight closed up 12 points or 0.2%.

The GDP is now behind us, although look out for the next Westpac consumer confidence number. October also seems fairly distant now, but today we see October retail sales numbers and the trade balance. Can we kick off the December quarter with a bit of improvement?

And what might Mario Draghi do tonight when the ECB holds a policy meeting? It must be remembered that the likes of Europe, Japan, China and India will be looking at plunging energy prices with uncontained excitement.

Rudi will make his final appearance for 2014 on Sky Business' Lunch Money today, between noon-12.45pm.
 

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article 3 months old

The Overnight Report: Oil Bounces

By Greg Peel

The Dow closed down 51 points or 0.3% while the S&P lost 0.5% to 2057 and the Nasdaq dropped 1.2%.

While Friday’s oil-related rout on Bridge Street was very much concentrated in the energy sector, yesterday saw a general Sell Australia trade as foreigner investors piled in to ditch their downunder exposures. The impetus to sell can largely be traced back to the Aussie, which right now has been forgotten as a carry trade or high-yield currency and focused upon entirely in its former guise as a commodity currency.

Lower commodity prices mean lower GDP growth for Australia, and thus a lower Aussie. Whenever the Aussie falls, foreign investors lose on their Australian investments. As they sell, they have to also sell Aussie, and thus is created a negative feedback loop which results in the sort of rolling wash-out we saw yesterday. The ASX200 did not open down 2%, it fell steadily all day to the close.

The energy sector was again the biggest loser, falling 6.4% after falling 7.4% on Friday. Materials took a beating with a 4.9% fall, selling in supermarkets continues unabated, and the banks chimed in with a 1% loss. The Aussie, at its nadir, traded at around 84.20.

It was not a session in which anyone was going to pay much attention to economic data. Particularly September quarter data that is up to five months old. But Australian corporate profits rose 0.5% in the quarter, belying expectations of a 1.3% fall, albeit the June quarter’s 6.9% loss was revised to a 7.5% loss. Profits are nevertheless up 3.3% for the year. Inventories rose a better than expected 0.7%.

House price growth slowed in the month of November, falling 0.3% to an annual growth rate of 8.5%. Australia’s manufacturing PMI surprised with its first shift into expansion since July, rising to 50.1 from 49.4 in October. This number is nonetheless notoriously volatile.

China’s manufacturing data may have drawn more attention, and did little to buoy the mood. Beijing’s PMI fell to its lowest level since March at 50.3, down from 50.8 in October. HSBC’s equivalent matched its week-ago estimate at 50.0, down from 50.4, just avoiding the psychological impact of a plunge into contraction.

Japan saw a fall to 52.0 from 52.4, and the eurozone posted 50.1, down from 50.4 (Germany 49.5). Among the better performing economies, the UK marked a rise to 53.5 from 53.3 and while the US slowed to 58.7 from 59.0, that’s still a cracking pace.

PMI results may have been noted last night across the globe but the centre of attention was once again the oil price. I suggested yesterday that the plunge in oil late last week looked a lot like a capitulation trade, in which the bloodied longs throw in the towel and just sell at any price. This appears to have been the case, given for no other apparent reason oil prices bounced hard last night. West Texas rose US$2.75 or 4% to US$69.74/bbl and Brent rose US$2.78 or 4% to US$72.93/bbl.

The bounce was enough to turn Wall Street around from an opening fall in which the Dow was down 100 points. Wall Street was closed last Thursday when OPEC dropped its bombshell and very sparsely manned on Friday for the half-day session, resulting in little movement in the indices. With everyone back on Monday it was decided the weak oil price is initially not a good thing, and this was backed up by soft results from the Black Friday retail wrap-up.

Black Friday had begun with a flurry as usual and thus it appeared to those few on Wall Street the offset to cheaper oil was in play. But by day’s end the sales numbers were actually down on the year before, which contributed to Wall Street’s opening drop last night. No one is that much surprised nevertheless, nor concerned, given Black Friday has become a bit of an anachronism. Some stores now open on Thanksgiving itself and others start offering discounts in the days before, diluting the impact of the traditional Black Friday session.

The US indices did not remain at their depths for too long, as all eyes were turned to oil prices. The indices grafted back, recognising the balances at play. The rise in the oil price turned around the big energy and energy-support sectors but transportation stocks, including airlines, fell back hard. Late in the session it appeared the Dow may even close flat but a few late selling orders ensured a softer close, with the S&P down half a percent and the Nasdaq and Russell small-cap losing over a percent each.

The link from oil to other commodities through commodity basket fund trading, which I outlined yesterday, was apparent again last night. On the LME, copper bounced back 1.6% and the other base metals all posted gains around 1%, except a steady tin.

Another story was being played out altogether in the gold pit. The gold price is linked to the oil price via inflation implications but there have been all sorts of other things going on in the world.

The Swiss voted “no” in the referendum which would otherwise have forced the Swiss National Bank to hold 20% of its reserves in gold, and thus imply a need to buy rather a lot of gold. Expectation was for a “no” result, so the gold price did not much respond. But last night credit ratings agency Moody’s dropped its sovereign rating for Japan to A1 from Aa3, with a weaker Japanese economy making gold look like a safe haven for Japanese investors. And yesterday India eased its gold import restrictions, which have been put in place to support the rupee.

The US dollar also fell 0.4% to 87.97 last night, so all the ducks lined up to be positive for the gold price, including the rebound in oil. Gold has subsequently shot up US$45.00 or 4% to US$1211.80/oz. Silver has bounced 6%.

As noted earlier, the Aussie looked like it might even break 84 last night as foreign sellers jettisoned Australian assets, but the subsequent turnaround in oil and the fall in the greenback have bolstered the local currency once more, sending it back to its starting point. This morning the Aussie is steady over 24 hours at US$0.8508.

It would have been nice to keep the Aussie down as the offset against lower commodity prices, although the trend appears biased that way. Meanwhile, more good news for the local market came in the form of an US80c rise in the iron ore price last night to US$70.60/t.

The SPI Overnight rose a tentative 16 points or 0.3%. Will we see a solid rebound for the local energy sector today?

Australia’s September quarter current account is out today, which includes the balance of trade. This will be a trade off, given a quarter of falling iron ore prices was offset by rising Chinese import volumes, and a lower Aussie provided a helping hand.

October building approvals data is also due today and around 2.30pm, Glenn Stevens will call his PA and tell her just to send out last month’s policy statement. Cross out “November” and write “December”.
 

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