Tag Archives: China and Emerging Markets

article 3 months old

The Overnight Report: Gregarious Greenback

By Greg Peel

The Dow closed down 28 points or 0.2% while the S&P lost 0.3% to 1972 and the Nasdaq dropped 0.3%.

The Australian market finally managed a rebound yesterday, with banks, the telco and healthcare in particular being snapped up after days of falls. But as to whether we can read much into this anomaly is a case in point given yesterday was the last day of the September quarter and thus no doubt was impacted by position squaring and window dressing. It was not a day for any trend to be identified.

There is a clear clue in the fact Wall Street lost only 0.3% last night but the SPI Overnight is signalling a rather more substantial 0.6% point drop. The final score card for the quarter was a 6% loss for the ASX200, and a 1% loss year to date.

The protest in Hong Kong is ongoing, without fresh incident, as we move into China’s week-long National Day holiday. Something will soon have to give, but commentators suggest violence is not an option for Beijing. The Hang Seng was down another 1.2% yesterday. HSBC also released its Chinese manufacturing PMI for September yesterday which at 50.2 was flat on August but shy of last week’s 50.5 estimate.

Japanese industrial production fell 1.5% in August when economists were expecting a rise of 0.2%, which only serves to underscore the difficulty the government is facing in its implementation of much vaunted Abenomics.

Over in Europe, the flash estimate of eurozone September CPI came in at 0.3% as expected. Core CPI, ex food and energy, read 0.7% when 0.9% was expected. With the ECB’s target of 2% seeming but a pipe dream at present markets are expecting more action from Mario Draghi at this week’s ECB policy meeting, hence the euro took another tumble last night. Others argue nevertheless, that having introduced fresh unconventional monetary measures only last month, the central bank will not be looking to act again so soon.

All of the above is adding fuel to the US dollar fire. The yen and the euro continue lower but nervousness surrounding the Hong Kong protests, which we can add to Ukraine and Middle East issues, is ensuring a flow of funds back to the safe haven of the reserve currency as well. Never mind, also, that a Fed rate rise is on the horizon.

The US dollar index is up another 0.3% to 85.92, and has posted its best monthly performance in two years. Along with the Australian stock market, the Aussie dollar has found some support over the past 24 hours and is up 0.4% to US$0.8754.

Given the volatility of the past several sessions, one might have expected something similar for Wall Street’s last trading session of the quarter last night but indeed the opposite was true. There were ups and downs during the day but it was the first time in over a week the Dow didn’t move triple-digits either close-to-close or intraday. The scorecard for the S&P500 is a 1.6% fall in the month of September but a 0.6% gain for the quarter, marking the seventh consecutive quarterly gain.

Economists were rather shocked with the big fall in the Conference Board’s monthly index of US consumer confidence, which fell to 86.0 from last month’s 93.4 (highest since October 2007) when 92.4 was expected. The suggestion was perhaps the accelerating war in Syria-Iraq was to blame but the Conference Board pointed out the biggest fall among the various components was in jobs market assessment. We recall that the August non-farm payrolls number was surprisingly low. We’ll see September’s number on Friday night.

The Case-Shiller 20-city house price index showed annual growth slowed sharply to 6.7% in July from 8.1% in June to mark the slowest pace since late 2012. Glenn Stevens would kill for these numbers. The Chicago PMI has fallen to 60.5 from 64.3 last month, which is no great disappointment given 60 is still a cracking pace of growth. Economists had forecast a fall to 61.9.

So all up last night’s US data were a mixed bag, and nothing to move mountains. Hence Wall Street meandered its way to a tepid quarter close.

While there’s much above to consider with regard commodity prices, right now the biggest enemy of prices is the surging US dollar. Liquidity has dried up on the LME ahead of the Chinese break and while weak European inflation and stagnant Chinese manufacturing are factors, last night’s across the board selling in base metals was mostly greenback driven. All metals fell around 1% except for nickel, which fell 2%.

Over on the oil markets, the impact of the US dollar was also felt along with a Reuters report suggesting OPEC output hit its highest level in nearly two years in September, as renewed Libyan production met high levels from Saudi Arabia and others. Yet again, supposed OPEC quota restrictions are proving little more than a giggle. Brent crude fell US$2.39 to US$94.81/bbl to close the quarter while West Texas fell US$2.89 to US$91.41/bbl to mark a 13% fall over the September quarter.

Gold fell US$7.90 to US$1208.00/oz last night and special mention must go to silver, which fell 2.8%.

Iron ore fell US20c to US$77.50/t where it will now remain for a week.

As noted, the SPI Overnight fell 0.6% or 33 points. Weaker commodity prices are likely an input here but we can assume yesterday’s action on Bridge Street was less bargain hunting and more book squaring. The game begins afresh today.

And it’s a very busy day. In Australia we’ll see retail sales and house prices and the September manufacturing PMI. It might be a holiday in China but you’ll never interrupt a communist calendar so Beijing will also release its official manufacturing PMI.

The eurozone, UK and US will follow tonight with their PMIs, while the US will also see construction spending, vehicle sales and the ADP private sector jobs number.

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

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article 3 months old

The Overnight Report: Ghosts Of Tiananmen

By Greg Peel

The Dow closed down 41 points or 0.3% while the S&P lost 0.3% to 1977 and the Nasdaq fell 0.1%.

As I suggested yesterday, there is no reason for the Australian stock market to slavish follow the lead of the US stock market under current circumstances and indeed, money exiting Australia is mostly flowing to the US, suggesting complete decoupling. Thus yesterday we saw the ASX200 down 54 points on the opening rotation despite a 167 point rally in the Dow.

In very simple terms, the direction of the Australian market is presently being determined by the direction of the Aussie dollar and that trend remains to the downside. It didn’t stop the bargain hunters trying to give it a red hot go yesterday morning however, and by midday it appeared we might even finish in the black. But stick your head up above the trench right now and you’re likely to get a bullet in the helmet. By the closing bell we were almost back at the lows again, on across the board selling.

Fuelling the current Sell Australia theme yesterday was a 1.9% fall in the Hang Seng index as tear gas was fired on the otherwise peaceful pro-democracy protest in Hong Kong. The number of protesters in the city’s Central district could just about fit into the Sydney Olympic Stadium in a country of 1.3bn, or whatever we’re up to now, but given Hong Kong is China’s westernised financial hub the implications are symbolic.

On the micro level, the Golden Week holiday period begins tomorrow and typically mainlanders descend on Hong Kong for a shopping spree a la Western Christmas. It appears Hong Kong’s high-end retailers will likely be closed for business this year which will have immediate implications for the domestic spending element of China’s GDP. On the macro level, Beijing will not bow to “Western” style democracy (indeed official news services are implying the protests are Western-driven), wishing to prove to the world centralised capitalism is the superior model, but nor would the government risk sending in the tanks, as it did at Tiananmen square in the 1980s, and risk 25 years of social and financial reforms and a subsequent torrential outflow of foreign investment.

So what to do? It’s a tough one, and the Hong Kong elections, over which the students are protesting, are still a whole three years away. So now we can add Hong Kong to the current list of exogenous issues, alongside Ukraine, IS and Ebola.

Which is why the Dow opened down 178 points last night. That was the low, nevertheless, and the US indices spent the rest of the day grafting back to regain the bulk of opening losses. While Australia is directly impacted by any slowdown in China, the implications for Wall Street are mixed. The Hong Kong situation throws up potential disruption to US investment in China but the uncertainty only serves to underscore the America’s current position as the only real option for safe global investment. In a post-GFC world, the irony is exquisite, but for that we can thank the Fed.

To that end it is notable US bonds found renewed buying last night, with the ten-year yield falling 4 basis points to 2.49%. US yields are stuck in a now long-established range, balancing the possibility of a Fed rate rise against problems all over the rest of the world.

The US dollar index was steady at 85.63 last night but the Aussie is down another 0.5% to US$87.18, suggesting more of the same on Bridge Street today.

It was a mixed session on the LME last night but understandable. Global metals trading becomes a bit rudderless when China is not involved so squaring up ahead of the Golden Week holiday saw rallies of up to 1.5% for aluminium, copper, lead and zinc and falls of up to 1% for nickel and tin. Come tomorrow night, the LME will become deathly quiet.

The iron ore price fell US90c to US$77.70/t with a day’s trading left before the shutdown.

Last night’s main US data release was that of personal spending and income. Spending rebounded 0.5% in August after a flat July and the implicit 4.1% annualised pace of growth is stronger than in prior months. Income growth nevertheless continues to lag, at 0.3% in August, providing the Fed with another reason not to panic.

The jump in spending was cited as the reason West Texas crude rose another US94c to US$94.30/bbl last night while Brent gained US19c to US$97.20/bbl.

Gold is relatively steady at US$1215.90/oz, which seems surprising given Golden Week is so-called for a reason and Hong Kong jewellers, who would normally by now be doing a roaring trade, are trapped behind the barricades.

The SPI Overnight closed down 12 points, for what it’s worth.

Japan will provide an August data dump today while HSBC will release its Chinese manufacturing PMI for September a day early ahead of the holiday. Tonight the flash estimate of eurozone CPI will be released, the UK will revise its June quarter GDP and in the US, house price and consumer confidence are due along with the Chicago PMI.

Australia will see private sector credit data today and Sundance Resources ((SDL)) will report full-year earnings.

It is interesting that students in Hong Kong should be protesting over Beijing’s intention to choose the candidates for the 2017 “democratic” election. I seem to recall Australia failed to vote for a Republic early this century due to rejection of the option of a president appointed by parliament.
 

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

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article 3 months old

The Monday Report

By Greg Peel

Friday on Bridge Street played out as expected, given a big fall on Wall Street, weaker commodity prices, a weaker Aussie, and heightened geopolitical risk. Throw in specific issues surrounding Australian banks – possible mortgage restrictions and increased capital requirements – as well as the blow-out on the Federal budget deficit and we’re left with an economy which is struggling to transition away from mining, particularly if the housing rebound is nobbled.

On the other side of the Pacific, economic data are improving, the US dollar is rising and US bond yields are stumbling higher. It all adds up to the interest rate differential between Australia and the US, and other major economies, narrowing, which undermines the value of Australia’s yield plays. It was another Sell Australia day in general on Friday, with the sectors containing the biggest caps the worst hit – financials, materials, healthcare, consumer staples and telcos.

But what, exactly, is going on on Wall Street at the moment? Friday night saw the Dow rebound 167 points or 1.0% while the S&P gained 0.9% to 1982 and the Nasdaq gained 1.0%. The Dow has now clocked five triple-digit moves in a row, the last four in opposite directions each session.

Uncertainty is one thing, given debate about specifically what the Fed’s stance is in the near-term, and the Fed’s data focus suggests the ups and downs of data will be reflected, if not amplified, in the stock market. But we are also approaching quarter-end, which for this round has a weekend and Jewish holiday squeezed in just at the death. We are likely seeing the usual argy-bargy of book-squaring and window dressing.

Friday night’s major data point was the second revision of US June quarter GDP, which came in at 4.6% compared to the previous revision’s 4.2% and the initial estimate of 3.9%. It would appear earlier assumptions the weak March quarter result was very much a function of the weather have proven accurate. The September and December quarters are expected to show an easing back in growth following this rebound but once again if we add it all up, why is there a zero interest rate?

Indeed the US ten-year bond yield rallied 2 basis points on Friday to 2.54%, although this was complicated by the announcement Bill Gross, founder of PIMCO, is jumping ship, just ahead of being pushed. Gross founded what is the world’s biggest bond fund and has always been outspoken in his views but this past year has been a very poor one for a fund which isn’t the biggest in the world for no reason. It seems incongruous that one man could move world markets but then if we look ahead to the day Warren Buffet puts up the Gone Fishin’ sign, we can appreciate Gross’ status in the bond world.

In the other US data release of Friday night, the Michigan Uni consumer sentiment measure held steady at the 84.6 level of a fortnight ago, up from 82.5 in August.

The strong US data were positive for the US dollar, and across the pond traders have begun to set themselves for this week’s ECB policy meeting, sending the euro lower. Draghi has continued to rant about doing whatever it takes and European data have continued to worsen but given the ECB introduced significant unconventional measures at its last meeting, it is unlikely anything more will be forthcoming at this meeting. The central bank will want to see how things play out. The US dollar index rose 0.5% to 85.64.

The Aussie subsequently fell 0.3% to US$0.8765.

Base metal markets were quiet on Friday night, with all metals posting very little movement bar nickel. Nickel fell 2% on increased LME stockpiles. Metal traders are looking ahead to this week when Chinese markets close for a week from Wednesday for the annual National Holiday.

Imagine if Australia Day lasted a week.

Iron ore was unchanged at US$78.60/t.

The US GDP revision possibly explains an US83c jump in West Texas crude to US$93.36/bbl while Brent was steady at US$97.01/bbl.

Gold lost US$3.10 to US$1217.50/oz.

The SPI Overnight closed up 9 points on Saturday morning, which in normal circumstances would be a disappointing response to a 167 point Dow rally. But these are not normal circumstances, and given the ongoing fall in the Aussie and the momentum of last week, we could still finish down again today. The September quarter nevertheless ends tomorrow so we may see volatility either way.

And speaking of economic data, this week is absolutely choc-o-block full of the stuff, globally.

Wednesday is the first of the month, so we’ll see manufacturing PMI results for Australia, Japan, China, the eurozone, UK and US. HSBC will offer its Chinese PMI tomorrow due to the week-long holiday from Wednesday. The manufacturing round will be followed by the service sector PMI round on Friday.

In the US, additional data include personal income & spending and pending home sales tonight, the Chicago PMI, Case-Shiller house price index and Conference Board consumer confidence on Tuesday, and construction spending and the ADP private sector jobs report on Wednesday. Thursday it’s factory orders, ahead of the trade balance and the all-important non-farm payrolls number on Friday. The market is looking for a little over 200,000 new jobs.

Japan will release industrial production, retail sales and employment data tomorrow, while in Europe, the eurozone flash CPI is due tomorrow ahead of Thursday’s ECB meeting. The Bank of England will also meet on Thursday, and express relief that Scotland is still on board.

It’s a big week for data in Australia.

Tomorrow sees private sector credit and tomorrow the manufacturing PMI, Rismark house prices and retail sales. Thursday it’s new home sales, building approvals and the trade balance and Friday the services PMI.

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

Wednesday night’s rally on Wall Street seemed a bit at odds with the prevailing trend given growing Fed rate rise anticipation, weaker commodity prices and growth issues in Europe and China. Last night’s fall included an escalation in geopolitical fears but seems more consistent with current feeling.

Most commentators are expecting an initial drop in US stocks once the timetable for the Fed’s first rate rise becomes clear, before the bull market is re-established from a lower base. As to how much lower will be dependent what level of cash on the sidelines is injected into the market and at what point new investment decides to enter.

The Fed is now supposedly data-focused rather than calendar focused and next week will provide plenty of grist for the data mill, notwithstanding tonight’s third revision of US June quarter GDP and fortnightly consumer sentiment.

Next week sees personal income and spending, pending home sales, the Case-Shiller house price index, monthly consumer confidence, the Chicago PMI, construction spending, factory orders and the trade balance. Wednesday will see the September manufacturing PMI and private sector jobs growth while Friday brings the services PMI and the all-important monthly jobs numbers.

Wednesday is the first of the month so all of Australia, Japan, China, the eurozone and UK will deliver manufacturing PMIs, while Friday sees the equivalent round of services PMIs.

Japan will see a data dump of industrial production, retails sales and jobs data on Tuesday while in the eurozone, the flash estimate of September CPI is due ahead of a monthly ECB policy meeting. The Bank of England will also meet.

Aside from the PMIs, Australia will see retail sales, building approvals and the trade balance.

Sundance Resources ((SDL)) will deliver its full-year result.
 

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article 3 months old

The Overnight Report: Geopolitical Fears Return

By Greg Peel

The Dow fell 264 points or 1.5% while the S&P fell 1.6% to 1965 and the Nasdaq dropped 1.9%.

I suggested yesterday that the Australian market is not currently “coupled” with the US market to the extent it might normally be given the impact of interest rate differentials. There is no doubt US bond yields must rise sooner rather than later, and that which will drive such an increase – stronger US economic data leading to a Fed rate rise – should also drive US stocks higher (perhaps after a bit of an initial adjustment). But rising US bond yields imply less value for offshore investors in Australian yield stocks, many of which are mega-caps on an Australian scale.

In other words we could go down even as Wall Street goes up. Yesterday we saw a very half-hearted rebound from Wednesday’s drop, despite the biggest move up in the Dow in five weeks, possibly because Monday’s rally was scuttled on Tuesday. Uncertainty surrounding the banks is not helping at present, with the RBA encouraging APRA to start curbing housing investment loans (reduces bank earnings) and the Murray Inquiry looking to build in bigger risk buffers (increases bank capital requirements).

Last night the Dow was down 260 points, to be back below 17,000 once more. Normally the ASX200 would be carted as well in response. But the US ten-year bond yield fell 6 basis points to 2.61%, suggesting support for Australian yield stocks. We know there are bargain hunters lurking in the Bridge Street shadows, just looking for the right moment, but it comes down to what, exactly, sent Wall Street tumbling last night after having rallied strongly the night before.

Indeed the SPI Overnight is suggesting a 53 point or 1.0% fall today, but then the SPI has not proven a reliable indicator of late. The Aussie is nevertheless down another cent to US$0.8790, and a weakening Aussie provides ongoing incentive for foreigners to exit.

US new durable goods orders fell 18.2% in August, it was revealed last night. See that number pop up on the screen and you be screaming at your broker to sell. But this fall follows a 22.5% jump in July, and if we strip out the lumpy aircraft order component that provides the volatility, orders rose 0.7% in August and the result was roughly in line with economist expectations.

So we can’t really blame durable goods for Wall Street’s plunge.

Apple’s much vaunted launch of its iPhone6 range has not gone smoothly. The company has been forced to withdraw an update to its iOS8 operating system which was causing iPhone issues such as lost signals. Apple shares fell 3.8% last night, possibly triggering pent up selling in the tech/internet space as evidenced by the 1.9% fall in the Nasdaq, feeding into the 1.6% fall in the S&P500.

But perhaps the real trigger last night was more about geopolitics rearing its ugly head again.

Russian courts have been given the go-ahead to seize foreign assets under a draft law intended as a response to Western sanctions. You freeze us then we’ll freeze you and pretty soon the whole world freezes over. It had gone pretty quiet over Ukraine way this month so it was always a reasonable bet something was in the offing. It was all too quiet.

Arguably the most influential trigger for last night was an announcement from the Iraqi prime minister at the UN assembly that the country’s intelligence force had identified “credible” information about imminent IS plots to launch attacks on the subway systems of New York and Paris. US officials have already been alerted but as yet the plans have not been thwarted, he noted.

Cue Satchmo: And I think to myself, what a wonderful world…

Global markets have to date mostly shrugged off the IS issue, US air strikes and new Coalition of the Willing, given it offers very little direct danger to global finance. But if these sad, bitter, intellectually disadvantaged fanatics start suicide-bombing the world then markets will respond to the threat.

Another political issue of sorts which is building is that of China’s Qingdao port scandal, or the Case of the Missing Copper. It appears Chinese metal traders, who use metal stockpiles as collateral for bank loans, have been using the same stockpiles over and over again to secure multiple loans. This is no small bikkies, as fraudulent loans are said to potentially stretch into the billions.

Copper fell 0.6% last night in a session which saw further general retreats in the base metal space. Zinc fell 0.7%, aluminium, lead and nickel all fell over 1% and tin took a 3.5% hiding.

Aiding the general metal sell-off is the steadily rising US dollar, which last night added another 0.2% on its index to 85.19. In a speech last night, ECB president Mario Draghi reiterated his pledge to use unconventional monetary measures were disinflation to provide an increasing threat, and subsequently sent the euro lower.

Oil prices also fell, with Brent down US10c to US$97.00/bbl but West Texas down US$1.36 to US$91.52/bbl.

Normal programming has been restored in Shanghai, with the iron ore price down another US80c to US$78.60/t.

Gold is up US$3.70 to US$1220.60/oz.

So if we add it all up – geopolitical threats, weak commodity prices, another big fall in the Aussie and a big drop on Wall Street, one would have to assume the bargain hunters will remain in the shadows today and the 53 point fall in the SPI might just prove relatively accurate.

Japan’s August CPI is out today and tonight the third revision of the US June quarter GDP is due, along with consumer sentiment.

Rudi will make an appearance on Your Money, Your Call - Fixed Interest today, Sky Business, 7-8pm.
 

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

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article 3 months old

The Overnight Report: China Good, Europe Not So Good

By Greg Peel

The Dow closed down 116 points or 0.7% while the S&P fell 0.6% to 1982 and the Nasdaq lost 0.4%.

The bargain hunters moved in early yesterday on Bridge Street, recognising that the usual “lead” from Wall Street was in fact a “follow” in this instance after the ASX200 had crumbled on Monday. Buyers possibly also took note of another slight pullback in US bond yields, which last week had looked for all the world like they might be about to take off.

So it was the index turned around in the morning from a soft start. But when the Chinese PMI came out, it was on for young and old.

Never mind that the iron ore price had fallen into the seventies and that Australian yield stocks have very little to do with China. HSBC’s flash estimate of China’s September manufacturing PMI, which came in at 50.5, up from 50.2 in August and against expectations of 50.0, simply provided an excuse for those waiting on the sidelines to start picking up beaten down names at more attractive prices, and yields.

The same cannot be said for the Aussie dollar nevertheless, which is down another 0.4% to US$0.8842 despite a slight slip in the US dollar index to 84.70. The weaker currency suggests it was locals coming in to defend the turf and not foreigners playing short-term trading games.

Unfortunately the Chinese PMI did not provide a lead for the rest of the world. A flash estimate of the eurozone composite PMI (manufacturing plus services) showed a fall to 52.3 from 52.5 in August to mark its lowest level in 2014 to date. The details within the result were even less encouraging, with the new orders component falling for the third consecutive month and the employment component rising only slightly.

Further concern met the country breakdown, which showed that while Germany saw a slight acceleration, France is suffering a deepening decline.

Over in the US, a flash estimate of the September manufacturing PMI came in flat on August at a healthy 57.9. The Richmond Fed manufacturing index rose to 14 this month from 12 in August despite expectations of a fall to 10. The FHFA house price index of houses on Fannie/Freddie mortgages rose 0.1% in July, well below a 0.5% expectation. But prices are up 4.4% year on year and, somewhat unnervingly, are only 6.4% from their peak in July 2007.

There is not enough there to suggest Wall Street sold off because the data were weak, nor sold off because the data were strong and thus imply a Fed rate rise sooner than later. Traders blamed the weak European data for sending the US ten-year bond yield lower once again, by 3 basis points to 2.54%, and thus encouraging stock selling. However given Wall Street was weak on Monday night, further weakness last night appears to be momentum driven. A recovery attempt at the death failed miserably.

The Chinese PMI was well received on the LME, but early relief gave way to a pervading feeling that metal prices want to go lower still. Hence nickel rebound 1% after Monday night’s big fall and zinc finished in the green, but aluminium, copper and lead all slipped into the red by the close.

Iron ore fell another US40c to US$79.40/t.

Gold managed to rebound US$8.70 to US$1233.80/oz.

Over in the oil markets, West Texas jumped US91c to US$91.65/bbl citing the positive Chinese PMI as a driver, while Brent fell US5c to US$96.86 citing the weak European PMI as a driver. The oils seem at present to be trying to find a new level at which to settle.

The bargain hunters might be scratching their heads today on Bridge Street, given the SPI Overnight is down 33 points or 0.6%. False start yesterday?

The German IFO survey of business sentiment is out tonight, which can be a market mover, while new home sales numbers are due in the US. Locally, the RBA will release its Financial Stability Report.

There’s smattering of smaller ex-divs today.

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

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

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

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

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article 3 months old

The Overnight Report: The China Syndrome

By Greg Peel

The Dow fell 107 points or 0.6% while the S&P lost 0.8% to 1994 and the Nasdaq dropped 1.1%.

It didn’t help that the Chinese finance minister chose the G20 gathering to inform that the apparent slowdown in China will not elicit any major stimulus measures from Beijing. As Chinese economic indicators have slipped in recent months, the world has assumed the Chinese government would respond as always with some form of kicker, and last week’s US$80bn liquidity injection was seen as the support act before the main show. But Beijing “won’t make major policy adjustments,” said Lou Jiwei in Cairns.

This is not exactly music to the ears of Australia’s struggling miners. As the iron ore price slipped further below its previous 2012 low last week, the big miners held their ground, assuming a care package from Beijing at any moment. But the news from Cairns on top of another sizeable fall in the iron ore price on Friday broke the dam. Yesterday the ongoing reversal of the Australia carry trade lined up alongside another hit to the miners to create a 1.3% fall. Materials fell 1.8%, the banks 1.5% and the telco 1.1%. There’s your move right there.

The bad news is that iron ore is down another US$1.90 to US$79.80/t.

The ASX200 is now down 5.5% from its post-GFC intraday high posted last month. It took a lot of grafting to get to that point, and it’s rapidly taking no time at all to retreat. I recall an analogy involving stairs and elevators. This “adjustment” is currently feeding on itself, given the Aussie continues to fall. It’s down another 0.5% to US$0.8877 this morning. Only the brave need attempt to play bottom picker at this point. Friday’s bargain hunters would have been feeling bruised last night.

The silver lining, nevertheless, is that all those stocks the average longer term investor would be keen to have in a portfolio, particularly those providing reliable yield, are quickly retreating from levels of perceived overvaluation. And yields, for the new entrant, are rising. The heat is coming out of this market as the world takes the first step back to post-GFC normalisation, that is, the Fed looking towards its first rate rise. For those not loaded up on equities, this pullback can be embraced.

The China factor was not lost on Wall Street. The US is now talking about a likely shake-out for its own iron ore industry, pointing the finger not at China but across the Pacific at those wretched lost-cost Australian miners who are flooding the oceans with excess supply. On US bond markets, the prospect of lower global growth has stymied the sell-off for now, with the US ten-year yield retreating another 2 basis points to 2.57% last night. In the stock market, last week’s confluence of a dovish Fed statement, a No vote in Scotland and Alibaba euphoria has given way to the reality check of indices trading at all-time highs.

Last night’s US economic data releases provided little support either. The Chicago Fed national activity index showed a fall to minus 0.21 in August from plus 0.26 in July. Sales of existing homes fell in August for the first time in five months.

And with summer now a memory on Wall Street, traders are steeling themselves for “that time of year” – the September-October period that is more than often associated with volatility. In 2014 in particular, we have the completion of Fed tapering next month just ahead of the mid-term elections. And what happens if Obama cops a Republican majority in both houses?

A lack of Chinese stimulus was never going to be lost on metals traders. Aluminium managed to hold its ground last night, but copper, tin and zinc all fell 1.5% and high flying nickel came back to earth with a 4% thud.

Ditto the oils, with Brent falling US$1.48 to US$96.91/bbl and West Texas falling US91c to US$90.74/bbl.

Gold is steady at US$1215.10/oz.

The SPI Overnight fell a cautious 8 points, noting that the fall on Wall Street was already accounted for by the fall on Bridge Street yesterday. Yet with iron ore falling sharply yet again, it’s difficult to see any respite for the materials sector today.

There will be a great deal of nervousness on the local bourse this morning as traders await the release of HSBC’s flash Chinese manufacturing PMI. This will be followed up by flashes from the eurozone and US tonight.

The US will also see consumer confidence, the Richmond Fed index and the FHFA house price index.

Japan is closed today.

Locally, Nufarm ((NUF)) and TPG Telecom ((TPM)) will release full-year earnings while Telstra ((TLS)) will hold a shareholders meeting.
 

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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

By sometime this afternoon it should be confirmed Scotland will remain as a member of the UK, or at least that’s what markets are assuming.

Alibaba’s float has settled at a US$68 listing price, as was expected. Tonight the stock will begin trading and potentially all hell will break lose, or not. Alibaba is one for the investment banks and hedge funds and not for the retailers, as being Chinese it will never be included in a US index. The US close will be interesting tonight given a quadruple witching derivatives expiry and an S&P index rebalancing.

Things really hot up on the US economic data front next week, which is even more relevant now the Fed has reinforced the data dependence of its policy decisions. Next week sees new and existing home sales, the FHFA house price index, Richmond Fed index, two consumer confidence surveys, durable goods and, on Friday, another revision of June quarter GDP.

Tuesday is flash day, featuring estimates of September manufacturing PMIs in China (HSBC), the eurozone and US. The German IFO business sentiment survey will also be closely watched in the wake of the latest ECB stimulus and an eerily quiet post-ceasefire Ukraine.

The RBA’s Financial Stability Review will be the highlight of an otherwise quiet economic week in Australia, while on Thursday the expiry of quarterly stock options may bring some volatility.

The late season earnings reports continue next week, with Kathmandu ((KMD)), Nufarm ((NUF)), TPG Telecom ((TPM)) and the now infamous Brickworks ((BKW)) in the frame. There’ll be a further smattering of ex-divs and Telstra ((TLS)) will hold a shareholders meeting on Tuesday.


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article 3 months old

The Overnight Report: Thumbs Up For Janet

By Greg Peel

The Dow rose 109 points or 0.6% while the S&P gained 0.5% to 2011 and the Nasdaq added 0.7%.

The Australian market staged somewhat of a comeback yesterday after seven consecutive days of falls. Bank stocks, most notably, found support. As to whether we can put that down to the Fed statement is a matter of conjecture.

The Australian market began falling when it was rumoured that the Fed would shift to a more hawkish stance with Wednesday night’s statement, removing the “considerable time” guidance with regard first rate rise post the end of tapering. Even when this rumour was challenged, it kept falling. And even when the statement was published with that phrase still in place, the ASX200 fell yesterday morning.

The conundrum with regard the statement is that while the language remained dovish, the FOMC members’ interest rate forecasts became on average more hawkish. On a statement to statement basis, Wall Street took this to be a net shift towards a tightening bias. US stocks rallied on the back of the assumption the first rate rise would still be no earlier than mid next year, while the US dollar surged on the back of the assumption once the first rate hike is made, tightening will move pretty quickly from there.

The jump in the US dollar affected a big fall in the Aussie dollar, and a weaker Aussie encourages foreigners to sell out of Australian stocks. So the same theme was in place yesterday morning, until the afternoon saw some buying. It might have been bargain hunting, but the issue is clouded by the SPI futures and index options expiry yesterday, which may have had some independent impact on the closing level of the ASX200.

Either way, we’ve seen a strong lead-in for Wall Street overnight so we should see a positive bias from the open today. The SPI Overnight sure thinks so, as it’s up 27 points, and the Aussie has rebounded a little, up 0.3% to US$0.8992.

We also had news of more stimulus from China yesterday. Following on from Beijing’s injection of US$80bn of liquidity into China’s five biggest banks earlier this week, which economists suggest is akin to a 50 basis point cash rate cut in anyone else’s terms, the PBoC yesterday cut its 14-day interest rate by 20 basis points to 3.50%. Analysts are now suggesting this is the beginning of further stimulus measures from Beijing, and that a cash rate cut is on the cards as the government attempts to restimulate a flagging Chinese economy and ensure its 7.5% GDP growth target is met.

I noted yesterday that the “smart money” on Wall Street always waits until the day after a Fed meeting to declare its hand, and the decision was obviously one of positive for stocks but at the same time negative for bonds. All of the Dow Industrials, Dow Transports and S&P500 hit new all-time highs last night. The US ten-year bond rate nevertheless added 3 basis points to 2.63%.

Now that the Fed has underlined the data dependence, rather than calendar dependence, of its policy, we can focus once again on US data. On Wednesday night we saw a healthy jump in housing market sentiment but last night it was revealed housing starts fell by a larger than expected 14.4% in August. This number is notoriously volatile, and the August drop follows a surge in July that was the biggest since 2007. Starts are up 8% year on year.

The Philadelphia Fed manufacturing index has fallen this month to 22.5 from 28.0 in July but this is a zero-neutral index, so numbers in the twenties suggest rapid-pace growth. Most importantly, the employment component within the index marked its highest reading since May 2011.

Aside from everything else last night, Wall Street was all hyped up about the pending IPO of Alibaba. Books are closed and the listing price is being calculated as we speak for the biggest offering in US history. Alibaba starts trading tonight, but last night it was assumed some of the buying in Nasdaq stocks represented the reinvestment of cash raised earlier this week to buy Alibaba shares that missed out due to trimmed allocations.

Having leapt on Wednesday night, last night the US dollar index settled back 0.4% to 84.27. The move was nevertheless influenced by a pre-emptive rally in the pound as forex traders bet on the Scottish independence vote coming in as a “No”. The votes are right now being counted, and it will be up to the Asian markets to provide first response. The result is expected around breakfast time in bonny Scotland so around 3pm Sydney time.

Commentators have pointed out the market has set itself for a “No” despite the surveys suggesting it was still too close to call even as the polls opened. If it’s a “Yes”, say goodnight to the pound and the FTSE.

Gold is as good as steady at US$1225.50/oz but last night base metal prices fell again. It was the first chance for the LME to respond to the Fed and the subsequent jump in the US dollar. Copper, nickel and lead are all down 1.0-1.5%.

It was a similar story for the oils, with Brent falling US$1.24 to US$97.73/bbl and West Texas falling US$1.01 to US$93.03/bbl.

Just when fingers were crossed the iron ore price may have bounced off its lows, last night iron ore fell US$1.20 to US$83.00/t.

As noted, the SPI Overnight, now trading as the December contract, rose 27 points or 0.5%.

Wall Street will see somewhat of a perfect storm tonight. The result of the Scottish vote will be in and Alibaba will list on the open. It’s quadruple witching, meaning quarterly stock and index options and futures and futures options all expire. The S&P500 will undergo a quarterly rebalance (promotion/relegation of stocks) at the close. And the iPhone6 will go on sale to all those people who’ve queued up for days and really should get a life.

Och, it’s a braw, bricht moonlicht nicht the nicht Jock.
 

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article 3 months old

The Overnight Report: But On The Other Hand…

By Greg Peel

The Dow closed up 100 points or 0.6% while the S&P gained 0.8% to 1999 and the Nasdaq rebounded 0.8%.

Yesterday’s trade on Bridge Street followed the same theme of the past several sessions – sell Australia. It might all change today, but we have to be cognisant that when the Fed does eventually signal a rate rise is nigh, this is what we are to expect.

The banks, the telco and the big healthcare names were all off again yesterday in a market which saw only one sector manage to scrape to an unchanged close, being materials. A 3.8% bounce in the iron ore price and the best this sector can do is close flat?

The evidence is clear in that BHP and Rio saw gains of around 0.3% while the likes of Atlas Iron and BC Iron saw 3-5% gains. Those holding “Australia”, and exiting, do not own junior miners but they do own BHP and Rio. When you strip away the veil of interest rate differentials and Australia’s attractive yield plays what we are left with is structurally lower commodity prices, reflecting China’s attempts to migrate to a consumer-led economy and away from an export and construction-led economy, and a non-mining economy struggling to re-establish itself.

All of which makes last night’s developments rather interesting.

The “Sell Australia” trade was not sparked by lower commodity prices or by weak Chinese industrial production numbers but by the rumour the Fed was going to remove the “considerable time” phrase in its policy statement which has been acting as guidance towards the first rate rise. Well last night a Wall Street Journal article hit the wires debunking that rumour, suggesting there will be no significant change in language nor evidence of a major policy shift when the statement is published tonight.

Around the same time, news came through from China that Beijing had injected around US$80bn of liquidity into the country’s five biggest banks in order to reverse the apparent slowing in China’s economic growth.

The Chinese news is “knock me down with a feather” stuff, and indeed there would only have been a surprise reaction if Beijing had said it would not be injecting liquidity. The market’s been expecting this since the weekend. The Fed speculation is the real news, and a big reversal of the last several sessions’ trade can be traced directly to 11.20am New York time, when the WSJ article hit the screens. Up until that point Wall Street and all other markets were flat, and then Bam!

Of course when the first rumour came out, not everyone was convinced, and now this contrary assumption is out, not everyone is prepared to count their chickens either. Once again, we’ll simply have to wait until tonight to find out. There was always a chance, given some fairly sharp movements in several assets these past few days (the Aussie being one obvious example), that some squaring up would have been on the cards last night. But the sharpness of some reversals has short-covering written all over it.

Let’s start with the Aussie. It’s up 0.7% to US$0.9089. The US dollar index is down 0.2% to 84.05.

The real impact was felt in commodity markets. Base metals had tanked out on Monday night so last night’s moves were mere reversals, but lead, nickel and tin were up 1% to 1.5% and aluminium, copper and zinc were up 2%. Brent crude was up US$1.17 to US$99.05/bbl for the new November delivery front month while West Texas, still in October, was up US$1.99 to US$94.80/bbl.

Gold typically sits there on day one wondering what the hell’s going on before moving the next day, but in this case the next day is Fed Day. Gold is up a mere US$1.90 to US$1235.40/oz.

The interesting one is the US ten-year bond yield. It had run from under 2.4% to over 2.6% as the whole Fed debate played out, before settling at 2.59% on Tuesday night. Last night, when all other markets were retracing their steps, the ten-year was a big fat “unch”.

The “smart money” that is the bond market tends not to play the headless chook volatility game. Presumably bond players have simply decided wait-and-see is the safest policy. By contrast their stock market hick cousins sent the Dow into new record high territory around 2pm before a little bit of a fade towards the close, but still a triple-digit gain.

The actual US economic data of the session centred on the PPI, which showed a 0.0% increase in August when a 0.1% gain was expected. The annual rate of wholesale inflation fell to 1.8% in August from 2.0% in July, which is not really that which might encourage a rate rise. But it’s all about that falling oil price, and the Fed excludes food & energy in its policy considerations. The core PPI rose 0.1% to also be up 1.8% annually, an increase on July’s 1.6%.

No real clinchers there. The CPI is out tonight.

Moving away from the US, those hoping Tuesday night’s move in the iron ore price signalled the beginning of a desperately needed rebound would be disappointed to know iron ore fell US70c last night to US$84.50/t.

The SPI futures have not been any sort of a useful indicator this past several sessions given the “Sell Australia” trade has been more of an exogenous rather than endogenous influence. But if those sellers decide to take a time-out today, the SPI Overnight’s close of up 27 points or 0.5% might even prove conservative.

Or it might provide the sellers with a better opportunity. This market is not very cut and dried at present. Note that when the Aussie falls, foreign investors are hit on the value of their positions ceteris paribus. Selling Australian assets puts downward pressure on the Aussie, encouraging more selling, which impacts the Aussie, and do-si-do your partner.

In case you weren’t aware, the Fed will deliver its policy statement tonight and Fed chair Janet Yellen will hold a press conference thereafter. US data releases tonight include the CPI and housing market sentiment.

News from the highlands is that the William Wallace supporters are on 52% in the latest poll but between the usual “undecided” cohort and statistical margin for polling error the Scottish vote is still too close to call. The bookies still have the loyalists as favourites.

Premier Investments ((PMV)) will report full-year earnings today.

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

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

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

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