Tag Archives: China and Emerging Markets

article 3 months old

The Monday Report

By Greg Peel

The ASX200 finished last week with yet another soggy session, marking five days of consecutive falls and a net 2.9% drop for the index. A 1.9% bounce for the energy sector on Friday, driven by higher oil prices, was the only bright light amongst otherwise generalised selling. But the good news is the new week is set to begin on a brighter note.

There were no major economic announcements across the globe on Friday, so it was up to the central banks to take up the slack. And so they did.

First out of the blocks was the People’s Bank of China, which surprised markets late on Friday by announcing its first interest rate cut in two years. The central bank’s benchmark one-year loan rate has dropped 40 basis points to 5.6%, and its deposit rate has dropped 25bps to 2.75%. Greater flexibility has been provided, however, for Chinese banks to compete with higher deposit rates.

The Chinese government and the PBoC had appeared up to now calmly sanguine about China’s slowing economy, believing its targeted stimulus parcels intended to encourage bank lending to the right sectors and not the overly speculative sectors were sufficient to maintain the government’s GDP growth goal. Indeed at one point the government suggested it wouldn’t mind too much if 2014 growth came in a little below the 7.5% target. But the September quarter saw 7.3%, and last week’s flash reading of HSBC’s November manufacturing PMI showed 50 – on the cusp of contraction. Ultimately the PBoC has bowed to political and market pressure to get a bit more serious about stimulus.

Mario Draghi is serious about stimulus, although he usually prefers to talk about it rather than act on it. But Friday night finally did see some ECB action, as the eurozone central bank announced it had begun to purchase asset-backed securities as part of its goal to boost its balance sheet and encourage European banks to lend. “We will do what we must to raise inflation and inflation expectations as fast as possible,” said Draghi as he announced the commencement of purchases, “as our price stability mandate requires”. Inflation expectations “have been declining to levels I would deem excessively low”.

Draghi is sending a signal more stimulus is coming, commentators believe. If current ECB measures prove inadequate, and inflation expectations fail to recover, the central bank will act to expand its QE program. Draghi would love to be able to buy eurozone sovereign bonds but to date Germany has resisted. However, the eurozone’s primary economy has become its main drag in past months, weighed down by the impact of sanctions against Russia. At some point one feels the Bundesbank must relent.

The ECB announcement sent the euro plunging once more and the US dollar index thus rising, by 0.7% to 88.30. The Aussie was not a beneficiary of the strong greenback in this case, itself rising 0.8% to US$0.8670 on the back of the Chinese rate cut. The Chinese rate cut also dragged down the US ten-year bond yield by 2 basis points to 2.32%.

And both central bank announcements served to finally snap Wall Street out of its stupor. The major US indices have been stumbling along the all-time high level now for over a couple of weeks, breaking low volatility records along the way. Hesitation at the high is usually a sign the market is set to fall back, but Wall Street has simply refused to do so. Thus finally we have a break, and it’s to the upside. The Dow closed up 91 points on Friday night, or 0.5%, while the S&P gained 0.5% to 2063. Both indices hit fresh blue sky. The Nasdaq rose 0.2%.

Commodity prices enjoyed the announced stimulus measures, with all base metal prices rising 0.5-1.5% in London. Brent crude managed to recover the 80 mark, rising US$1.23 to US$80.54/bbl, while West Texas gained US$1.00 to US$76.60/bbl.

Gold likes a bit of central bank money printing, and it has recovered the 1200 mark with a US$5.70 gain to US$1201.00/oz.

Alas, the odd one out is iron ore, which despite the Chinese rate cut now has a 6 in front of it, as feared, falling US20c to US$69.80/t on Friday.

The Australian futures market is nevertheless undeterred, sending the SPI Overnight 52 points or 1.0% higher on Saturday morning.

It would seem the local market was of the impression Wall Street might be set to break to the downside as well, but now the local market will have to scramble.

Fresh central bank action from both China and Europe may just impact on Thursday’s OPEC production meeting, and in particular a recovery in the Brent price to US$80. At this stage it remains a 50-50 bet as to whether OPEC will announce production quota cuts in order to boost oil prices (which members never stick to anyway) or continue production at current levels with a view to squeezing out marginal US shale production. OPEC is usually happy with a Brent price of 80-85.

The OPEC meeting will be the big event this week and it just happens to coincide with Thanksgiving in the US, for which all US markets are closed. Nymex trading nevertheless continues electronically, along with Brent trading, so there may just be a deal of volatility for oil prices towards the end of the week.

Thanksgiving provides for a disruptive week in the US, in which everyone tries to make home ahead of everyone else for the family gathering. Market participation will decline towards midweek until the NYSE becomes a ghost town by Wednesday afternoon. The exchange reopens on Friday but only for a half-day session, with a handful of skeletons in attendance.

There are plenty of US data releases crammed in ahead of Thursday, nonetheless. Tonight sees the Chicago Fed national activity index and a flash estimate of the November services PMI, tomorrow brings the Case-Shiller and FHFA house price indices, the Richmond Fed manufacturing index, the Conference Board consumer confidence index and the first revision of September quarter GDP. Economists are expecting an unchanged 3.0%.

On Wednesday its durable goods orders, new and pending home sales, personal income and spending and the Michigan Uni fortnightly consumer sentiment index. Thursday markets are closed and then Friday brings the Chicago PMI.

Germany’s influential IFO business sentiment survey is due tonight before the first revision of Germany’s September quarter GDP on Tuesday. A flash estimate of Germany’s CPI will be released on Thursday, with Mario Draghi closely watching, and the eurozone equivalent is due on Friday.

Japan is closed today but on Friday will deliver monthly industrial production, retail sales and unemployment data.

In Australia we begin the countdown this week towards next week’s September quarter GDP release. Quarterly construction work done is out on Wednesday and private sector capital expenditure on Thursday. Monthly new home sales numbers are out on Thursday and private sector credit on Friday.

ALS Ltd ((ALQ)) will report its interim profit result today and Aristocrat Leisure ((ALL)) its full-year tomorrow. There remains a scattering of corporate AGMs to get through this week, with highlights including Harvey Norman ((HVN)) and a battered and bruised Woolworths ((WOW)).

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.
 

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

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article 3 months old

China Landing: Not Hard, Not Soft, But Long

- China landing not hard but longwinded
- Ongoing structural reforms vital
- Commodity industry defaults necessary
- Property market should muddle through


By Greg Peel

The initial saviour of the global economy after the fall of Lehman is 2008 was an unprecedented stimulus package implemented by the Chinese government and central bank. Bail-outs were instigated in the US but it wasn’t until the US Federal Reserve introduced quantitative easing in early 2009 that the US economy began to stabilise. That experiment, to date deemed successful, has now ended.

So explosive was Chinese economic growth as a result of stimulus, nevertheless, that economists soon became concerned a bubble was being created that must eventually burst, particularly with regard Chinese property development. The Chinese economy was headed for a “hard landing”, they shouted from the rooftops, and every year since such those shouts have been echoed.

Beijing quickly shifted its policy stance from an initial shock and awe fiscal package towards more nuanced monetary policy manipulation, coupled with the beginnings of a long, slow process of structural reforms. Specifically targeted was the property bubble. If successful, the government would manage to bring the Chinese economy into a “soft landing”, it was suggested. The hard-soft argument has raged ever since.

Six years on, China has posted its lowest rate of economic growth since the initial 2008 shock, at 7.3%. Arguably, Beijing has successfully brought the Chinese economy in for a soft landing, but the problem is that “landing” is ongoing. China’s slowing economy remains a consistent source of global market angst. The government continues to provide targeted parcels of stimulus, but many in the market, and within China itself, assume another full-blown stimulus package will soon be forthcoming if China’s GDP growth continues to slide.

A team of analysts from asset manager AllianceBernstein recently visited China, travelling to seven cities in four provinces, including Beijing and Shanghai. The purpose of the trip was to gain some sense of how important cyclical sectors of the Chinese economy were performing, including those of banking, basic industries, industrial machinery and property, against a difficult policy backdrop in which the Chinese government is treading a fine line between the need to implement structural reforms while also assuring economic growth remains sufficiently buoyant to avoid inflaming social tensions.

In particular, the AB analysts wanted to test the proposition that targeted stimulatory measures had helped put a base under the economy.

The analysts returned believing those investors assuming Beijing’s current policy tweaking is simply a prelude to another shock and awe nationwide stimulus package similar to that implemented in 2008 are wide of the mark. They see neither a hard nor a soft landing for the Chinese economy but rather a long one, lasting two or three years. During this period commodity-related companies will need to make painful adjustments, and some companies will default and/or collapse.

There are clearly inventory overhangs in the steel, iron ore and coal industries, AB attests. It is difficult to make generalisations about China’s property market given the industry is regionally, rather than nationally, based, but the analysts believe the challenges therein to be broadly manageable. Basic industries linked to property, such as cement production, should fare reasonably well.

It is important to note Beijing has the policy flexibility to make a long landing work. This assumes the Chinese premier sticks to his structural reform agenda. Were the government to abandon its targeted approach and revert to a broad stimulus package, AB’s view on the country would turn negative. The analysts retain their conviction at present, nonetheless, strengthened by last month’s announcement of the establishment of a new anti-corruption body.

There are signs China’s banks actually increased their property exposures in the first half of the year, despite falling property prices and ongoing property development risk. The banks AB spoke to did nevertheless note they were cautious about lending to developers and had tightened their lending practices, preferring to concentrate on specific lending such as to residential loans.

The bigger banks are reducing exposure to industries suffering from overcapacity. It is the first time AB has heard of Chinese banks not rolling over their loans to weak steel mills, which should force a speed-up in the pace of defaults and greater industry consolidation. This would prove positive in the medium term, although smaller banks are likely not reducing their own exposure to such industries as this would create cash flow and balance sheet problems.

With regard China’s infamous “shadow banking” sector, there has been little in the way of reduced exposure from the banks. Indeed one bank has increased its exposure to shadow banking, believing Beijing intends to regulate the sector rather than curtail it.

Despite the massive infrastructure program commenced in 2008, China is still deficient in cargo and passenger capacity across its railways and subways. Infrastructure will thus remain a high growth sector, albeit AB notes profit margins for state-owned enterprises need to improve and notes there are risks around slow payment by local governments. This is nothing new, nonetheless, and banks are confident payments will eventually be forthcoming, but the default of a local government would be a serious issue.

China’s coal industry is problematic, given its high cost base. Shutting down mines is uneconomic unless the shutdowns are permanent, so the alternative is to sell coal at a loss. It is thus a challenge for the sector to cut capacity. Cement producers noted a sluggish property market and slower than expected infrastructure growth as leading to a flat market, but they did not consider oversupply to be severe.

With regard the key property sector, those involved are broadly positive about the industry and believe a short term structural downturn will give way to medium to longer term growth, driven by the country’s ongoing urbanisation. Increasing exposure to property as a means of increasing profitability is nevertheless fraught with high execution risk, AB warns, although the analysts do agree ongoing urbanisation is a reason the sector is unlikely to collapse.

The market simply needs time to absorb the surplus of buildings, market participants believe, and a correction of 18-24 months is anticipated. Sales are expected to remain flat in 2015 but construction is expected to begin rebounding from the low base reached in 2014.

One concern the AB analysts had from across the economy in general was a desire for companies to grow in scale for the simple purpose of rendering them “too big to fail” in the government’s eyes, thus ensuring a bail-out if necessary. This is a dangerous attitude and perhaps Beijing needs to let one or two high-profile corporations to go to the wall to signal the government will not tolerate poorly managed businesses, AB suggests.

All in all, AB expects the prospect of a long-landing scenario for China to begin playing out over the next 12-18 months. The analysts anticipate defaults in stressed commodity-related industries such as steel, where China’s banks are reducing their exposure. The banks themselves should remain in reasonable shape given the flexibility provided by the government’s targeted liquidity measures.

Infrastructure spending should accelerate from next year once the initial shock of the anti-corruption campaign subsides, while the property sector will muddle through its challenges.

All of the above is nevertheless predicated, AB warns, on the Chinese government continuing with its reform agenda and restrained targeted support for economic growth. The analysts believe continuation is highly likely.
 

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article 3 months old

The Overnight Report: Slow As She Goes

By Greg Peel

The Dow closed up 33 points or 0.2% while the S&P fell 0.2% to 2048 as the Nasdaq fell 0.6%.

It was a game of two halves on Bridge Street yesterday. An initial drop from the opening bell for the ASX200 was led by the materials sector once more, with the focus on iron ore, while the supermarket rout also continues. Apparently no one’s doing their regular “big shop” at Colesworth anymore, preferring to pick up boxes of bargains from the Germans or the Yanks.

The index then traded flat for most of the session until 3pm, when a new wave of selling hit. Materials closed the day the biggest loser down 2.4%, closely followed by consumer staples on 2.1%. But whereas we’ve seen some distinct counterbalancing into defensives from local investors this week, yesterday we saw healthcare, utilities and the telco all down as well. Sell Australia.

The materials sector found no support in the release of HSBC’s flash estimate of China’s November manufacturing PMI, which fell to 50.0 from October’s final 50.4. China’s manufacturing sector has stalled.

Japan’s equivalent measure fell to 52.1 from 52.4, but Mr Abe would be happy with anything in the positive (50 plus) at this stage. Meanwhile, Europe’s woes continue. The eurozone composite PMI (manufacturing plus services) fell to 51.4 from October’s 52.1, to mark a sixteen-month low. Economists had expected a rise to 52.3. Germany was the biggest contributor to the slide, with its individual PMI falling to a sixteen-month low 52.1. Germany’s manufacturing component followed China to a 50.0 stall.

Nor was there much joy in the US, where the manufacturing PMI is estimated to have fallen to 54.7 from 55.9 to mark a third consecutive decline when economists had expected a rise to 56.2.

The US also posted flat month on month inflation growth in October, with the CPI remaining steady at a 1.7% annual rate. The lack of inflation is clearly attributable to lower energy prices, which not only impact the component of petrol at the pump, for example, but filters through to other components such as airline fares for a double whammy effect.

While Australia’s energy stocks may have been carted of late on the falling oil price, note that the US domestic price of natural gas has jumped 25% in November. There is a seasonal effect of course, and we’ve just seen pictures of the US north east under several feet of snow, and this is a US domestic price and not a benchmark (yet) for global LNG pricing, but the price surge is worth noting nonetheless.

US existing home sales rose to their highest rate in over a year in October, increasing by 1.5%. And the Philadelphia Fed manufacturing index, which seems to have become very volatile of late (along with the neighbouring Empire State index), jumped to a twenty-year high 40.8 from 20.7 in October when economists had forecast a fall to 18.5. It was not a good day for economists around the world yesterday. And let us not forget, the Philly Fed is a zero neutral index.

Coming back to oil, one would normally expect across the globe easing in the pace of manufacturing to be a negative for energy, but oil prices have fallen a long way. Someone decided to square up last night ahead of the OPEC meeting, and the market duly followed. West Texas is up US$1.03 to US$75.60/bbl, Brent is up US$1.07 to US$79.31/bbl, and the OPEC meeting is not until Thursday.

Staring down the abyss, iron ore was unchanged at US$70.00/t.

Nor did base metals much respond to weaker global PMIs, and they remain basically range-bound at this juncture. Copper slipped a bit, aluminium rose a bit, while nickel and tin made reasonable gains.

The US dollar index also slipped a bit last night, down 0.2% to 87.60, thus despite the flat US CPI result gold rose US$13.30 to US$1195.30/oz. The Sell Australia trade has helped the Aussie down a further 0.2% to US$0.8595.

After the rout in the physical yesterday, the SPI Overnight closed up 12 points or 0.2%.

There are no global economic data releases of any note over the next 24 hours, which is unusual. There are quite a few AGMs on the local calendar again today nonetheless, including Lend Lease ((LLC)) and Myer ((MYR)).
 

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article 3 months old

The Overnight Report: Ironed Out

By Greg Peel

The Dow closed up 40 points or 0.2% while the S&P gained 0.5% to 2051 as the Nasdaq jumped 0.7% on a new all-time high for Apple.

Chinese property prices fell 2.6% year on year in October, the biggest annual drop since Reuters began keeping score in 2011. The fall belied a range of government support measures, although those measures are targeted at lower cost housing. Beijing has for a while now attempted to curtail China’s property development bubble, and price falls are expected to continue feeding on themselves as property investors back away and property developers are stuck with inventory.

Falling prices are bad news for the global economy in the shorter term, particularly for those economies relying on exports of raw materials which feed housing construction, but not so bad news in the longer term if Beijing can successfully engineer a “soft landing” for the property market rather than a bubble-and-bust “hard landing” so many commentators have feared for years now.

So far, so good.

Not so good for the Australian materials sector, which led the local index down yesterday along with weakness in supermarkets. There was nothing to be gleaned from the minutes of the November RBA meeting, which were again a repetition.

Nor was it much of a surprise when the Japanese prime minister announced a snap election yesterday, as such a move has been rumoured now for a week or more. Japan’s shock GDP contraction in the September quarter has put Abe’s aggressive Abenomics strategy very much in the spotlight, providing fuel for parliamentarians who have resisted the policy to date. The prime minister has now cancelled the planned second sales tax hike next year, which goes some way to indicating policy failure.

Raising the sales tax rate in steps to increase government income is a fiscal drag on Japan’s moribund economy, but the frenzied printing of yen was supposed to provide the stimulus offset, and more. The tax hike sparked a far more dramatic contraction in Japanese spending than had been assumed, to the point the Bank of Japan has been forced to pump in even more stimulus. Abe will now go to the people to seek electoral support for the cancellation of the second tax hike, which presumably would be well received, but also to allow the Japanese to provide a yea or nay on Abenomics in general. That call is not quite so clear.

On the other side of the world, German investors shocked the market last night by suddenly becoming very confident. Germany posted a paltry 0.1% GDP growth rate in the September quarter but economists nevertheless forecast a turnaround in the ZEW investor sentiment index to plus 0.5 this month from minus 3.6 in October, the first negative result in two years. But the number came in at plus 11.5.

The US producer price index for October also surprised last night, rising 0.2% after falling 0.1% in September against expectations of another 0.1% fall. The core PPI, ex food and energy, rose 0.1% when a 0.1% fall was expected. A little bit of inflation is a good thing, because disinflation implies a slowing economy. Too much inflation is a bad thing, as it implies a Fed rate hike is required. So last night’s result was middling.

More comforting was a rebound in the US housing market sentiment index this month, to 58 from 54 in October. October saw a fall from September’s nine-year high level.

Yet when the opening bell rang on Wall Street, silence followed. It looked for all the world like another meandering session in a small range was ahead. Slowly but surely, however, the stock indices began to rise. Shortly after 3pm when the Dow was up 88 points, traders began to wonder whether the average might even mark its first triple-digit move in two weeks. But no, the sellers arrived at the death and the Dow quickly slipped back to up 40.

The funk continues.

Oil traders are becoming increasingly nervous about next week’s OPEC meeting, which will fall on the Thanksgiving holiday. The jury is still out on whether production cuts will or won’t be announced, and a thin electronic market in the absence of US participation could produce significant price volatility on the day. Last night West Texas fell US$1.04 to US$74.46/bbl and Brent fell US62c to US$78.50/bbl.

On the Sunday after Thanksgiving, the Swiss will vote on whether or not they want their central bank to be committed to holding 20% of reserves in gold. This is another source of nervousness around commodity markets, as a “yes” vote may spark a scrambling rally. It has also been noted that a trickle of Russian central bank gold buying has rapidly become a flood, with Russia accounting for 25% of all known central bank gold purchases so far this year (Chinese purchases are a state secret). Last night gold rose US$8.20 to US$1193.80/oz.

A 0.4% fall in the US dollar index to 87.58 also aided gold, while the Aussie is up 0.2% to US$0.8728.

LME traders focused on falling Chinese property prices in sending all base metal prices lower, with copper and nickel both falling 1%.

The materials sector led down the Australian market yesterday, but today may be just a little more painful. Iron ore is down US$3.00 to US$72.10/t to mark a new multi-year low.

An optimistic SPI Overnight is up 8 points.

The Bank of Japan will hold a policy meeting today, but as the government is now “lame duck” presumably no new policy measures will be announced. The minutes of the last Fed meeting are out tonight.

James Hardie ((JHX)) will report its interim profit result today and Orica ((ORI)) its full year amidst another welter of AGMs.

Rudi will appear on Sky Business this evening at 5.30pm.
 

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article 3 months old

China Trade And Currency Implications

By Greg Peel for FNArena and Michael Lombardi, MBA, for Profit Confidential

Australia Set To Cut Out The Greenback

By Greg Peel

In recent months the Aussie dollar has retreated from its longstanding highs, including an extended period above parity. In forex circles, “Aussie dollar” means AUDUSD. The lengthy period of post-GFC strength has been blamed for all but killing off Australia’s manufacturing industry and routing the retail industry, just in time for mining investment to peak. The Aussie’s overvaluation has been a direct result of the US Federal Reserve policies of zero interest rates and quantitative easing, ensuring weakness in the greenback and a demand for US carry trading into higher yielding offshore assets.

In 2013 the US was Australia’s fourth major trading partner, at a mere 4.9% of the total. South Korea was third at 7.2%, Japan second at 16.6% and all were blown away by China at 26.2%. Yet trading with all four partners was conducted in US dollars. Why? Because the greenback is recognised as the world’s reserve currency.

There are no rules to suggest Australia must trade with China in US dollars. A “reserve currency” is simply one deemed to be safe by respective trading partners. Yet Australia has continued to suffer the impact of an artificially weakened reserve currency despite fifty percent of trade being switched at the other end into renminbi (yuan), yen or won, having been switched at this end out of Aussie. Those days, however, are numbered.

There has been much talk of Australia’s newly signed Free Trade Agreement with China and its implications, including winners and losers among industry sectors. Not attracting as much attention is the announced plan for the state-owned Bank of China to open a Sydney-based renminbi clearing hub, allowing direct renminbi-Aussie trading between China and Australia, in either direction. And, as a result, cutting the greenback loose.

For a long time the renminbi was pegged to the US dollar, in which case a Chinese currency hub would have made no difference. But slowly Beijing has been loosening its tie to the reserve currency by expanding the allowable exchange rate range in a form of “dirty float”. It is the government’s intention to move to a fully free-floating renminbi once China’s ongoing financial reforms have established a sufficient level of market robustness.

At present, only 4% of China’s global trade is settled in renminbi and only 1% involves an Australian counterpart. The shift to direct renminbi trading will not make a notable difference overnight, but as liquidity slowly builds and the Chinese currency moves further away from its US dollar “peg”, transaction costs will fall and currency spreads will narrow. There will be no more expensive transfers into and out of greenbacks at either end.

What are the implications for our strong relationship with the US? Washington would certainly not be amused, but the Fed has shown scant regard for any other country’s economy in its blind attempt to ensure the US economy is supported by relentless printing of the so-called reserve currency.

Implications for the US dollar itself are more nuanced, given Australia is not the only country to have decided it’s time to cut the greenback loose. Profit Confidential’s Michael Lombardi examines the wider, global picture…

What Canada-China’s Yuan Trade Deal Means For US Dollar

By Michael Lombardi, MBA

As the chart below illustrates, since July of this year, the U.S. dollar has been rallying against other major world currencies.

I, for one, do not expect to see the rally in the U.S. dollar sustained. I believe the U.S. dollar is currently rallying, because other parts in the global economy are doing worse than the U.S. While the U.S. dollar may rise in the short-term, because our central bank stopped printing new paper money and other countries are still printing their currency, in the long run, I see the fundamentals of the greenback tormented.
 


Let me explain…

Since the Great Recession, some countries started moving away from the U.S. dollar as their reserve currency—and that movement is accelerating.

In recent days, Canada signed an agreement with China where both countries ditched the greenback when it comes to their trade. Going forward, the respective countries will trade with each other in their local currencies—in Canadian dollars and Chinese yuan. This trade deal made Canada the first country in North America to deal trade in yuan. (Source: The Canadian Press, November 8, 2014.)

In the past, when countries around the world would issue bonds, they were often denominated in U.S. dollars. The reason for this was simple: the U.S. dollar was liquid and recognizable throughout the world. This is changing, too.

For the first time, the United Kingdom has issued yuan-dominated bonds. The country issued bonds worth three billion yuan. This is certainly not a big figure (equal to about USD $490 million), but the move is significant, as the U.K. tests the waters for non-U.S. dollar-denominated bonds. (Source: BusinessWeek, October 14, 2014.) As more countries follow the path of Canada, China, and the U.K. and initiate trade or sell bonds in currencies other than the U.S. dollar, this will put pressure on the value of the U.S. dollar.

Please let me be clear: the U.S. dollar will not lose its reserve currency status overnight. It will be a long process. But I believe it will happen for the following reasons: 1) China is getting closer and closer to uprooting the U.S. as the world’s biggest economy; 2) China has most of the gold; 3) the Federal Reserve will be quick to come out with QE4 if the U.S. economy (or stock market) starts to tank; and 4) the U.S. national debt will continue to rise at an accelerated rate.

If we have learned one thing about money from history it is that a paper reserve currency doesn’t remain a reserve currency forever. The U.S. dollar has had its turn as the reserve currency of the world.
 

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With Profit Confidential you are receiving the news with the opinions, commentaries and interpretations of seasoned financial analysts and economists. We analyze the actions of the stock market, precious metals, interest rates, real estate and other investments so we can tell you what we believe today’s financial news will mean for you tomorrow!

© 2013 Copyright Profit Confidential - All Rights Reserved
 


Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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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

It will be of no surprise to markets were Europe to fall into mild recession. Tonight sees the release of the first estimate of eurozone GDP, which may well show negative growth. The eurozone’s October CPI will also be confirmed, while in the US, retail sales, inventory and consumer sentiment data are due.

Japan will follow up with its September quarter GDP release on Monday, ahead Wednesday’s Bank of Japan policy meeting. The BoJ has already caught markets off guard with a stimulus increase, so nothing shocking is expected.

Japan will also join China (HSBC), the eurozone and US in offering flash estimates of November manufacturing PMIs next week, while both Japan and the eurozone will post trade data.

The eurozone will also see its monthly ZEW investor sentiment survey.

It’s a busy week for data in the US. Releases include industrial production, housing sentiment, housing starts and existing home sales, inflation, the Empire State and Philly Fed manufacturing indices, and the minutes of the last Fed meeting.

The minutes of the RBA’s November meeting are due on Tuesday while ANZ’s job ad series will be posted on Thursday.

On the local stock front, next week is another cram-packed with corporate AGMs including the likes of BHP Billiton ((BHP)) and Wesfarmers ((WES)). James Hardie ((JHX)) will report its interim result and Orica ((ORI)) its full-year.
 

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article 3 months old

The Overnight Report: Oil Shock

By Greg Peel

The Dow closed up 40 points or 0.2% while the S&P gained one point to 2039 and the Nasdaq rose 0.1%.

The ASX200 meandered lower yesterday as investors shifted into a more defensive stance. The energy sector posted the biggest fall with some contribution from the banks, while healthcare, utilities and the telco held firm. The price of oil continues to be the talking point of the moment and that will again be the case in today’s session.

China’s monthly data-dump did little to buoy the mood. Chinese industrial production grew by 7.7% year on year in October, down from 8.0% in September and falling short of 8.0% forecasts. Fixed asset investment fell to 15.9%, its lowest level since January, while retail sales growth ticked down to 11.5% from 11.6%.

The lower oil price was mostly blamed for a 0.3% fall in Germany’s October CPI, down from 0.0% in September.

Just what is OPEC, and the Saudis in particular, going to do about the price of oil? No one is at all sure. Last night the Saudi oil minister spoke of wanting to have a stable oil market and not wanting to engage in any price war, but what does that mean? OPEC is not keen, it would appear, to cut production in the face of tumbling prices, as it has always done in the past. Last night it was revealed per-day US oil production has reached its highest level in 28 years, so one can hardly blame the Saudis for believing production cut responsibility, this time, lies elsewhere.

Last night West Texas crude fell US$2.52 to a four-year low of US$74.34/bbl. Brent fell US$2.04 to US$77.92/bbl. It is beginning to look like a capitulation trade, given last night’s weekly US inventory numbers were lower than expected, which would normally push prices up. Deutsche Bank has suggested that at US$60/bbl, marginal US shale oil production will be forced to start shutting down. The Saudis are potentially prepared to weather the pain of such a price if it does have the effect of taking the heat out of US production growth, therefore ultimately leading to some price stability.

On the other side of the equation, US commentators are very excited about the prospect of structurally lower oil prices boosting the spending power of the US consumer. It’s not simply a case of relief at the pump, but of a comprehensive flow-through to lower transport and production costs and thus a lower price for goods. With Christmas approaching, economic bulls are licking their lips.

Wall Street is uncertain. It’s hard to shake off a longstanding assumption that oil prices are a global economic bellwether, and lower oil prices mean a slowing economy. Yet while data out of China and the eurozone confirm slow growth, falling oil prices have little to do with falling demand and a lot to do with rapidly rising supply. This is not the sort of “supply shock” America is used to.

The US stock indices also meandered last night before posting a mildly positive close. While the relative market cap of the US energy sector is diminishing each day, it is still acting as a drag on index performance.

The story is somewhat different in metal markets, where demand is a more of an issue than supply. While LME traders largely took last night’s Chinese and European data on the chin, base metal prices were uniformly weak across the board, falling 1.0-1.5%. The stronger US dollar is another headwind for dollar-denominated commodity prices, but last night the US dollar index drifted 0.1% to 87.17.

There was nevertheless some mild relief for nervous iron ore producers last night. Iron ore rose US10c to US$75.50/t.

Gold was steady at US$1157.70/oz. The Aussie was also steady, at US$0.8717, while the US bond market appears to have decided 2.35% is about the right level for the ten-year yield for now.

The SPI Overnight closed up 4 points.

The world is looking ahead to the annual OPEC meeting in two weeks’ time. But tonight brings the first estimate of eurozone September quarter GDP, while US retail sales, inventories and consumer sentiment will be in focus.

There is a handful of local companies holding AGMs today, including Lend Lease ((LLC)) and News Corp ((NWS)).
 

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article 3 months old

The Overnight Report: Markets Rethink US Jobs Report

By Greg Peel

The Dow closed up 39 points or 0.2% while the S&P gained 0.3% to 2038 and the Nasdaq added 0.4%. The Dow and S&P have again made new highs.

Materials and energy were the only sectors to post rallies on the local market yesterday, however the net ASX200 fall of 25 points is mostly attributable to Westpac going ex-div.  If we assume that Friday’s strong rally, which included a big kick towards the close, represented a big buying order we can still consider ourselves to be in the gravitational pull of the 5500 technical level, looking for firm direction.

Yesterday’s home loan data provided little in the way of surprise, and more grist for the macro-prudential mill. The value of loans to owner-occupiers rose by 1.4% in September, to be 6.7% higher year on year. The value of loans to investors rose 3.7% to be 23.7% higher. Total lending is up 13% year on year.

Loans to investors now exceed what used to always be the biggest loan segment – loans to owner-occupiers trading up, note the economists at CBA. The third group, first home buyers, has reduced in size significantly over the past two years. Bear in mind that 30% of all home purchases are for cash. The good news, at least, is that growth in loans for new construction is up 11.7% year on year. This is a positive for the economy and for housing supply, being currently the only way to balance the demand-side surge until the RBA sees fit to raise rates.

Or endorses APRA implementation of macro-prudential controls in the form of increased capital requirements for bank mortgage books, which would raise bank lending rates.

Beijing announced yesterday China’s official CPI remained steady at a five-year low 1.6% annual. The yin and yang of this low rate is a balance between indications of slower economic growth but plenty of room for monetary stimulus.

It was a quiet start to the week on Wall Street. There are no data releases of any importance until Friday and tomorrow night is the Memorial Day holiday. Banks and the bond market are closed for the holiday and while stock and commodity markets remain open, participation is typically low. Bond traders have turned it into a four day weekend.

The weekend gave the market more time to mull over Friday night’s US jobs report. The reaction on Friday was initially a sell on the “miss” but eventually a buy on a wider assessment, at least for the stock market. Big jumps in gold and US bonds (lower yield) and a fall in the US dollar implied those markets were more inclined to take the “miss” on face value and assume the Fed would not be in any rush to impose the first rate rise.

In a quieter session last night, the stock market reconfirmed its assessment of what was arguably a Goldilocks jobs report that was not too strong, as might hurry up the Fed, but not too weak, as might bring into question the economic recovery. It would appear the other markets decided that indeed, those stock guys might be right for once. Last night gold fell back US$21.00 to US$1148.80/oz, basically wiping out Friday night’s gain, and the ten-year yield rose 5 basis points to 2.36%, ditto. The US dollar index is up 0.3% to 87.82.

The case for gold is an interesting one at present. Beyond the influence of central bank money printing shenanigans, at the end of this month the people of Switzerland will vote in a referendum to decide whether the Swiss central bank should hold 20% of its reserves in the form of gold. Only in Switzerland could a question of monetary policy be put to the electorate, underscoring the place gold holds in the Swiss psyche. The RBA was certainly in no hurry to defer to the Australian populous when, under instruction from the Fed, it sold half the nation’s gold reserves back in the late nineties.

It is no surprise the Swiss National Bank is a major holder of gold, but it has sold a lot of its bullion into the gold rally of the past decade so as to not overweight its reserve portfolio with a single, arguably outdated, asset. But were the vote to be a “yes” in the referendum, the SNB would have to start buying once more, significantly. No major economy holds anything like 20% gold. (See Switzerland And Significant Gold Price Upside; October 24)

Another commodity to reverse Friday night’s move last night was oil, with West Texas falling US$1.08 to US$77.37/bbl and Brent falling US71c to US$82.26/bbl. The falls were largely due to a reiteration from the OPEC secretary general that the bloc would not be cutting production in order to boost prices, when it meets next month. Abdullah al-Badri told oil markets not to panic, and that the situation would “eventually resolve itself”.

Base metals were again playing ups and downs last night, with aluminium slipping again, copper losing some ground and nickel falling 1%, while lead and zinc crept higher.

Spot iron ore was unchanged at US$75.50/t. I might take this chance to point out that FNArena always tracks spot prices and not futures prices where applicable, which is particularly the case for gold, copper and iron ore. If you see a report suggesting the iron ore price went up when FNArena said it went down, that report is quoting the futures price. (Note that oil prices are futures prices given there is no one “oil” spot price.)

The Aussie has come back 0.2% to US$0.8615 on the US dollar turnaround.

The SPI Overnight closed up 13 points or 0.2%.

Japan releases trade data today while locally we see the monthly NAB business confidence survey and a quarterly index of house prices. Incitec Pivot ((IPL)) will release its FY14 result.

A quiet night is likely for Wall Street tonight, barring anything left of field, as armistice remembrance rolls across the globe.
 

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)

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article 3 months old

The Monday Report

By Greg Peel

After a couple of sessions of indecision, Bridge Street headed firmly north on Friday following new highs on Wall Street. It was a Buy Australia trade, featuring strength across most sectors and particularly those in which the big caps lie. Materials actually led the charge, despite a new five-year low in the iron ore price, while energy, healthcare, the telco and the banks (net of ex-divs) chimed in.

The Aussie was up 0.8% at US$0.8636 on Saturday morning, on a combination of strength during Friday’s session and a kicker from a lower US dollar on Friday night.

The US dollar index lost 0.5% to 87.59 on a weaker than expected US jobs number. The October non-farm payrolls report noted 214,000 new jobs added, missing forecasts of 243,000.

The Dow initially fell 63 points on the release, before traders took the time to actually look through the report and decide it was pretty positive after all. For starters, the two previous months’ results were revised up by a net 31,000 jobs, which takes care of the October shortfall. The unemployment rate fell to 5.8% from 5.9% in September even as the participation rate edged up to 62.8% from 62.7%. The US has now added 200,000-plus jobs for nine consecutive months, a feat not achieved since 1994. Mind you, this has to be taken in the context of 20 years of additional population growth.

Had the number fallen short of 200k, Wall Street may have realistically seen a decent fall. Had it well exceeded the 243k forecast, Wall Street may also have headed for the hills over fear of a fast-tracked Fed rate rise. So the report, in its entirety, was a bit of a Goldilocks. There was one cloud inside the silver lining however, with wages growing by an anaemic 0.1% in October for a 2.0% annual rate.

This lack of wages growth reflects that which keeps Fed chair Janet Yellen in a more dovish mode than might otherwise be expected. Yellen continues to point to excess slack in the US labour market, which clearly needs to be filled before any pressure on wages emerges, providing for healthy inflation and the need for tighter monetary policy.

By late morning Wall Street was back at the flatline, before stumbling through the afternoon session to finish with mild gains. The Dow closed up 19 points or 0.1% while the S&P was less than one point higher at 2031 and the Nasdaq lost 0.1%. The Dow and S&P marked new, albeit incremental, all-time highs.

While US jobs numbers always take centre stage, it should be noted that Germany posted some more positive numbers, for once, prior to the open on Wall Street. After a shocker in August, German industrial production rose 1.4% in October. Unfortunately this was still short of 2.0% forecasts but better news was to come from Germany’s trade data, which showed sharp improvement to a 5.5% increase in exports and a 5.4% increase in imports.

The combination of slightly better data in Europe and the jobs “miss’ in the US was responsible for the US dollar retreat, while the US ten-year bond yield also lost a full 6 basis points to 2.31% after spending all of last week grafting higher.

The miss also provided relief for the gold bulls, with gold seeing a sharp short-covering rally of US$25.70 to US$1169.80/oz after a tough week.

Just when it looked like tensions between Russia and Ukraine were easing, unconfirmed reports hit the wires on Friday night that a military convoy of Russian tanks, cannon and troops had crossed the broker. We’ve heard nothing since, but West Texas crude decided to rise US44c to US$78.45/bbl in response while Brent managed only US17c to 82.97/bbl.

It was all ups and downs on the LME on Friday night without any major moves. Copper was up 0.8% while aluminium was down 0.7%.

Iron ore fell a further US10c to US$75.50/t.

The SPI Overnight closed down 3 points on Saturday morning.

After posting more encouraging trade numbers in September, China once more disappointed on Saturday with a weaker set of October trade numbers. Exports fell to 11.6% year on year growth, down from 15.3% in September, and imports fell to 4.6%, down from 7.0%.

The PBoC has indicated that while it will continue to pump liquidity into China’s economy in targeted parcels, no significant stimulus package is being considered. Beijing’s 2014 GDP growth target of 7.5% appears under threat following the September quarter’s 7.3% annualised growth and a lack of notable rebound thereafter, but Chinese authorities are seemingly unconcerned.

Chinese inflation numbers are due out today, and Thursday sees a data dump of October industrial production, retail sales and fixed asset investment numbers.

Japanese data releases this week include consumer confidence and the trade balance tomorrow and industrial production on Thursday.

It should be a quiet start to the week in the US with Wall Street sitting at new highs. There is little in the way of US data to consider until week’s end, when retail sales, business inventories and consumer sentiment numbers are released, and Tuesday is Memorial Day, equivalent to Armistice Day here. It’s one of half-holidays in the US for which banks and the bond market are closed while stock and commodity markets remain open, but are typically quiet.

Europe will see eurozone industrial production on Wednesday, a flash estimate of German CPI for October posted on Thursday followed by the equivalent eurozone number on Friday, along with the first estimate of eurozone September quarter GDP. Economists are forecasting 0.6% growth, down from 0.7% in June.

Glenn Stevens will be on the edge of his seat as Australian housing finance and investment lending data are released today. Tomorrow sees the monthly NAB business confidence survey along with a September quarter house price index, while Wednesday brings the Westpac consumer confidence survey along with September quarter wage growth.

Incitec Pivot ((IPL)) will release FY14 earnings on Tuesday followed by DuluxGroup ((DLX)) on Wednesday and Graincorp ((GNC)) on Thursday. Stockland ((SGP)) will hold an investor day on Wednesday and Paladin Energy ((PDN)) will provide a late season quarterly production report. There will once again be a swathe of corporate AGMs held across the week.

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.
 

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

US jobs report out tonight, with Wall Street trading at new highs, the US dollar soaring and US bond yields creeping up quietly from low levels. Some German data out tonight will also be closely watched.

Tomorrow Beijing will release China’s October trade figures.

On Monday its Chinese inflation numbers, then on Thursday we see the monthly data dump of industrial production, retails sales and fixed asset investment numbers.

The ECB again reiterated its intention to do whatever it takes this week, while doing nothing, and next week sees eurozone industrial production, a flash estimate of CPI and on Friday, September quarter GDP.

The week begins quietly in the US on the economic data front, and Tuesday is Memorial Day meaning banks and the bond market are closed while stock and commodity markets remain open. Friday sees retail sales, inventories and consumer sentiment.

Data in Australia next week includes housing finance and investment lending, a September quarter house price index and wage price index, NAB business and Westpac consumer confidence.

The AGM season rolls relentlessly on for the local market next week while earnings reports will be delivered by Incitec Pivot ((IPL)), DuluxGroup ((DLX)), and Graincorp ((GNC)). Stockland ((SGP)) will hold an investor day while Paladin Energy ((PDN)) drags the chain with a late season quarterly production report.
 

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