Tag Archives: China and Emerging Markets

article 3 months old

The Overnight Report: Carry Trade Carted

By Greg Peel

The Dow closed up 43 points or 0.3% while the S&P lost a point to 1984 and the Nasdaq plunged 1.1%.

Weak Chinese data? Well it might have been weak but it had nothing to do with yesterday’s 1% fall in the ASX200. Aside from healthcare (-0.1%), the materials sector (-0.4%) outperformed every other sector in the market. Hardest hit were the banks (-1.4%) which, notwithstanding ANZ’s Asian interests, have absolutely nothing to do with China.

We are simply witnessing a continuation of the unwinding of the “Australia” carry trade. The yield on the Australian ten-year bond has risen from 3.39% a month ago to a current 3.64%. Australia does not offer a very extensive bond market, but its stock market is world class. Thus the banks, Telstra and even the likes of Woodside have been offering solid yield proxies for investors from around the globe but right now the world is squaring up and booking profits.

The give-away is the Aussie dollar. Months of belligerent stoicism in the face of plunging iron ore, weaker coal and weaker energy prices has suddenly, in a blink, given way to a 3.5% crash in the space of one week. The trigger can be specifically traced to the night US economists announced “the word” from the Fed was that the “considerable time” phrase will be dropped from this week’s FOMC statement. End of story.

As to whether “the word” is accurate is still a matter of debate. There are plenty of commentators in the US who do not believe the Yellen-led Fed is about to become any less dovish than it has been all year, based on scepticism of the US economy looking at all strong enough to support a shift in policy. Scepticism is targeted at labour market “slack”, which is Yellen’s pet benchmark.

We must simply wait until tomorrow night to find out. But since the end of June, the US dollar index has risen 5%. The British pound has fallen 5% despite the fact the UK economy has been well ahead of the US economy in terms of recovery. Only 2% has occurred in September, representing sudden Scotland independence fears. The Aussie dollar has fallen 4% in the same timeframe (and is not in the US dollar index). Yesterday the Aussie traded as low as US$0.8985 before rallying a little last night to US$0.9029, down 0.1% over 24 hours.

Last night’s US data releases were mixed. The Empire State index of manufacturing activity in New York State jumped to 27.5 from 14.7 last month to mark its highest level since late 2009. Economists had expected 16.0. However US industrial production fell 0.1% in August to mark the first fall in six month. Economists had expected a 0.3% rise. Still, industrial production is up 4.1% year on year. We noted yesterday US retail sales are up 5% year on year.

Why the zero interest rate?

Further evidence of Wall Street squaring up ahead of what may be a game-changer tomorrow night was provided last night by a 1.1% fall in the Nasdaq and a 1.2% fall in the Russell 2000 small cap index. Fed stimulus has provided plenty of impetus for high-flying momentum names in the tech space in particular (call it a domestic “carry trade”), so if the game is to change then best to book those profits right now. The big ol’ stodgy blue chips are sitting on mountains of cash and will not be much impacted by a rise in US rates (except perhaps psychologically at first), hence the Dow was actually up last night in contrast. The S&P500 split the difference.

There is also an element at work this week among the US online stocks, being that of preparation for Friday night’s biggest IPO in history -- Chinese online megastore Alibaba. Those wanting exposure to a company that controls 80% of Chinese e-commerce which, at this stage, is embryonic, are selling off their outperformers to raise the funds. It is suggested such cash-raising helped to exacerbate last night’s Nasdaq/Russell routs.

Speaking of China, London metal traders had their first chance to respond to the weekend’s weak Chinese data last night and thus there was blood in the pit, with copper falling 0.5%, lead, tin and zinc falling 1% and aluminium and nickel falling 2%.

But stop the presses! Iron ore soared last night, rising US$3.20 to US$85.20/t. Who likes a nice bottom?

Over in the oil pits, a bottom may also have been found for the time being after lengthy falls. West Texas crude rose US55c to US$92.81/bbl. It was expiry day for the Brent front month contract so we can dismiss its US29c fall to US$96.65/bbl.

Gold also took a breather last night, rising US$5.20 to US$1233.50/oz.

The SPI Overnight closed up 2 points.

The minutes of the RBA’s September meeting are due today but they're a bit dusty, having pre-dated the sudden correction in the Aussie. And if there is a shift in Fed policy tomorrow night, these minutes might as well be binned.

Beyond that we can strap ourselves in for this week’s triple-header – Fed tomorrow night, Scotland on Thursday night and Alibaba on Friday night.

I’ll order the pizzas.
 

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article 3 months old

Next Week At A Glance

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


By Greg Peel

The Fed will meet and deliver its latest policy statement next Wednesday night, and Janet Yellen will hold a quarterly press conference, which is pretty much all we need to know about between now and then. Markets are cautiously anticipating a change in tone, but are not entirely sure.

There are a few things to consider between now and then nevertheless, starting with US retail sales tonight and Chinese retail sales, industrial production and fixed asset investment tomorrow.

It’s a busy data week next week in the US. Before the Fed meeting we’ll see industrial production, the Empire State index, PPI, CPI and housing market sentiment, and afterwards housing starts, the Philly Fed index and leading economic indicators. Friday is a “quadruple witching” expiry for stock markets, which can often lead to volatility.

Russia’s been quiet all this week, so we can’t discount what might suddenly flare up in that department, while the ZEW eurozone investor sentiment index and flash estimate of eurozone August CPI will be closely watched next week.

The minutes of the September RBA meeting are due out next week but will no doubt cause no surprise, while the central bank’s September quarter Bulletin, due on Thursday, might provide some more colour.

It’s stock options expiry day on the ASX on Thursday (see: quadruple witching) and there’s just a mere trickle of ex-divs during the week. We will, however, see earnings results from Premier Investments ((PMV)) and OrotonGroup ((ORL)).

But it’s all down to the Fed and gee, how many times have we been here? At least this time it’s all about tightening, not loosening.
 

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article 3 months old

The Overnight Report: Considerable Debate

By Greg Peel

The Dow closed down 19 points or 0.1% while the S&P closed up 0.1% to 1997 and the Nasdaq rose 0.1%.

The only thing shocking about yesterday’s shock Australian jobs numbers was that anyone was shocked. The 6.1% unemployment rate was unsurprising, given no-one believed 6.4% in July. Indeed, if this were the only supposed surprise we could happily call the July numbers a blip. But there is possibly an issue with the fact the 121,000 jobs added is by far the greatest monthly job addition since the Hydro Electric Scheme started hiring. By a country mile. Economists had pencilled in 15,000. I think there’s really only one conclusion we can draw.

If you want to know how many people are out of work in Australia, don’t bother asking the ABS.

We’ll await the revision. It’s all academic at present anyway, given we appear to be entering into an adjustment phase in Australian financial markets representing anticipation of the first Fed rate rise. The Aussie is down another 0.5% to US$0.9103 today, to mark a 3% fall for the week. From April until this week, the Aussie had been suspended in a 92-94 band.

This is not about commodity prices. The iron ore price started falling months ago and the Aussie held firm. This is about interest rate differentials and the search for yield. Why else would commodity price-related falls in the materials and energy stocks have been accompanied by downward drifts for the banks and telco to boot? And general selling across the big cap names? The usual response to falling commodity prices and thus falling share prices for BHP et al is to switch into the banks and defensives.

The result season was positive in a nominal sense, indicating the first significant earnings growth since the GFC, but only fair in a relative sense, when compared to PE multiples. Valuations are now consolidating. If the Aussie continues to fall it will act as a dampener for the stock market. If the Fed raises rates in the US it will be taking the first step towards “normalising”. This will then help Australia “normalise” as well. The Aussie will fall to where it should be. Commodity prices will be benign rather than super-cycle driven (as China settles into maturity). The Australian economy will balance out between mining and non-mining. Banks will become boring again.

It just won’t happen quickly or smoothly.

Speaking of boring, Wall Street wobbled its way to a tepid close last night. It was a familiar script, with the Dow being down 84 points as Europe closed before grafting back for the rest of the session. It’s been a week largely devoid of significant US data releases, rather the focus has been on Scotland – where the vote now seems to be swinging the other way – and on GWIII, and no one sells on war anymore. No new news on Ukraine-Russia.

The US data flow nevertheless ramps up again tonight, with retail sales and consumer sentiment, before next week brings a flurry of releases. But it’s all about the Fed statement release on Wednesday night, and that’s all about semantics. Will the words “considerable time” be dropped? Let’s discuss that for another six days.

Meanwhile, markets are shifting into position. The US dollar is stronger, up another 0.1% to 84.28 last night. The US ten-year yield is stronger, although steady last night at 2.53%. Gold is weaker, falling another US$8.80 last night to 1240.20/oz. The stock market is poised around S&P 2000, for the simple reason no one’s quite sure if a change in Fed policy is ultimately a “buy” or a “sell”.

The LME has much to contend with. Yesterday’s Chinese inflation release, marking a 2.0% annual CPI in August from 2.2% in July, suggests the Chinese economy is stagnating. But also suggests room for stimulus. A stronger greenback acts as a natural price suppresser. This week’s sell-off triggered negative technical signals and we’re still not sure what the hell is going on with Russia and subsequent sanctions.

Base metal prices started to tumble again last night but late buying tempered the losses. We still saw copper down 0.5%, aluminium and zinc down more than 1% and nickel down 2%.

Iron ore fell another US30c to US$81.90/t. Who wants to call the bottom?

Having fallen steadily through the week, and to under the psychological 100 mark in the case of Brent, the oils saw some bargain hunting last night. Brent was up US17c to US$98.24/bbl but West Texas jumped US$1.42 to US$93.12/bbl.

The SPI Overnight is up 5 points, but hasn’t picked a winner all week.

It’s a soggy day in Sydney today and we may well see a soggy and uncommitted market. Lunch? Thanks, I think I will.

Beijing will get the kids off to sport tomorrow morning, do the shopping, and then release August industrial production, retail sales and fixed asset investment data, which should provide a talking point for Monday.
 

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article 3 months old

A Trader’s Wrap

By Stan Shamu, IG Markets

It has been another mixed day for Asia, with China returning to trade on a downbeat note, while Japan and the ASX 200 have edged higher.

The sharp drop in China’s imports yesterday has sparked fears that activity in the country will remain under pressure for a prolonged period. This has prompted a cautious tone among investors in China with some of the recently outperforming stocks experiencing some profit taking.

US dollar strength remains a standout in the global market space and this has been a key driver of price action for several asset classes. The US dollar index is approaching early 2013 highs, a break of which would see it trade at its highest since 2010. Japan has perhaps been the biggest beneficiary of this, as USD/JPY rallies to levels not seen since September 2008.

USD/JPY has now nudged through the ¥106 barrier and traded to a high of ¥106.17 in Asian trade. With USD/JPY at elevated levels, I feel the Nikkei could be paving its way back to the 16,000 level. The Nikkei is just testing last week’s highs and seems to be enjoying some buying off the dips. When the Nikkei traded through 16,000 back in January, USD/JPY was nowhere near current levels and as a result investors will be hoping to see buying interest in Japanese equities pick up.

Pound sold off on referendum fears

Risk currencies including the euro, pound and Aussie have already lost significant ground against the greenback this week and it seems this trend is set to continue in the near term. Cable has printed a fresh low in a move that was triggered by The Sunday Times YOUGOV poll which showed the ‘yes’ vote for Scotland’s independence from the UK ahead for the first time. The pair didn’t even attempt to close the gap created at yesterday’s open and it seems traders were just happy to ride the momentum lower.

Some leaders have started making promises to Scotland if they vote against independence which just shows the level of panic setting in. The question now is whether the Scottish population will be convinced that plans to give the nation more powers will come to fruition. There have been suggestions that this is a good opportunity for Scotland to gain power and autonomy and still avoid the risks of separation.

Regardless, until a concrete plan emerges and we get more clarity of a shift in momentum in the polls, cable is likely to remain under pressure. Until then, there is a good chance we’ll see cable extend its losses and could even test $1.6000 in the near term.

Local data disappoints

The ASX 200 has managed to gain some ground after having struggled in yesterday’s trade. There have been a couple of disappointing economic readings, including NAB business confidence and conditions along with home loans data. Optimism was fairly high given the RBA recently said it is starting to see some positive signs in in business conditions and household sentiment.

Today’s benign economic readings weighed on the AUD, while equities found it a positive. The banks have all performed well apart from NAB which is being weighed on by its exposure to UK assets with the referendum presenting some uncertainty. However, it’s quite encouraging to see some gains for the materials for a second day and this will go a long way towards restoring some stability. Nickel stocks such as WSA have been a standout as supply concerns continue to play into the hands of nickel.

Weaker open for Europe

Looking ahead to European trade, we are calling the major bourses mildly weaker. In coming weeks there will be a lot of pressure on the ECB to flesh out the measures it recently announced and work on the technicalities of implementing them. The weaker euro has already started benefiting Germany as reflected in a strong trade balance reading and the region really wouldn’t want to see a situation where German data accelerates at a time when stimulus is needed.

Having dropped below $1.2900, there isn’t much support for EUR/USD at the moment and we could see the pair trade down to July 2013 lows at $1.2755 in the near term. On the calendar today we have French trade and government budget balance data. In the UK we have manufacturing production, trade balance, industrial production and a speech by BoE Governor Mark Carney. This will keep the sterling in focus after recent sharp falls.

STAN SHAMU
Market Strategist

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article 3 months old

The Overnight Report: Aussie Tumbles

By Greg Peel

The Dow closed down 25 points or 0.2% while the S&P lost 0.3% to 2001 and the Nasdaq gained 0.1%.

Japan revised its June quarter GDP yesterday to show 7.1% contraction, exceeding the first estimate of 6.8%. It’s the fastest rate of contraction since 2009 and while it specifically reflects the impact of the April sales tax increase, vis a vis a surging March quarter ahead of the tax increase, it’s not exactly the way Abe wants to be heading.

The Bank of Japan put a positive spin on the Japanese economy last week when it left monetary policy unchanged, but the case for further QE is growing.

China reported a record trade surplus for August yesterday of US$49.8bn, beating expectations of US$49.0bn. Exports rose 9.4% year on year, beating forecasts of 8.0%, while imports fell 2.4% against a forecast 1.7% gain.

Beijing will be frustrated that its attempt to shift China’s economic focus to domestic-based rather than export-based is still proving a challenge. Canberra will be concerned imports of iron ore and coal dipped in August. China had been importing significant volumes of iron ore up till last month, with lower prices reflecting increased supply, but the August additional plunge in the iron ore price appears to be demand driven.

The Australian stock market didn’t seem to pay much attention to yesterday’s Asian data, and indeed the big iron ore miners found support while the juniors were again written off for dead. Consumer staples found support yesterday, as did the telco, while the banks were again sold off and energy was hit as well. Ignoring the ex-div effect, a shift to defensiveness is again apparent, as is general pressure on all Australian big caps.

But a funny thing happened towards the end of the session.

I have suggested recent big-cap weakness potentially implies there are foreigners “selling Australia” but that this would otherwise put pressure on the Aussie. The currency has nevertheless remained resilient, supported by ECB-driven euro weakness and, more recently, the potential for Scottish independence, which has sent the pound homeward tae think again.

But yesterday the Aussie started to slide late afternoon Sydney time and it continued to slide all night, to be down a cent this morning at US$0.9281. Chinese data? Japanese weakness? Both? These are after all our biggest trading partners.

So it’s good news for the Aussie, but not really the way we want it to be. The US dollar index did rise 0.6% to 84.29 last night but this more reflects weakness in the euro, yen and pound than it does strength in the greenback.

On Wall Street, the talking point of the session was US consumer credit. It increased by US$26bn in July to mark a record dollar value gain, and the biggest percentage rise in three years. Auto loans are providing the bulk of credit increase, which ties in with the auto buying spree Americans suddenly seem to be on.

Is this good news? Well a little bit of credit is a good thing but a lot is a concern (see: GFC).

Beyond that, Wall Street seems content to simply hug the S&P 2000 mark for the time being ahead of various factors playing out. Tonight sees Apple release a new product, albeit no one knows what yet (could be the iWatch, or iPhone 6, or even a payment system, but the latter is less likely given Apple is paying drones to queue up outside their stores), the IPO of China’s massive Alibaba website is nearing (it will be on the NYSE), and the geopolitical situation remains fluid.

To the last point, the EU officially announced increased sanctions against Russia just this morning which will specifically target the ability of Russia’s gas pipeline companies to raise capital in European markets.

Here we go. You nobble our pipeline companies, we shut off your gas. Just in time for winter.

Energy markets had shifted to after-market trading before this latest sanction news and we saw Brent down US55c to US$100.29/bbl and West Texas down US27c to US$93.15/bbl.

Base metals were quiet last night with the exception of nickel, which has found a second wind of price surge on the back of possible Philipino export bans alongside those of Indonesia. Nickel rose 1.7%.

The iron ore price remained unchanged last night at US$86.30/t, which might almost be cause for celebration.

The SPI Overnight closed down 2 points.

The SPI has looked like a pretty poor indicator these past few sessions but one has to appreciate that the futures price already accounts for dividends and thus, unlike the physical index, is unmoved by ex-divs on the day.

There is another handful of ex-divs to take account of today.

We’ll also see the NAB business confidence survey today along with housing finance data.
 

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article 3 months old

Material Matters: Rhodium, Iron Ore And Thermal Coal

-Rhodium stocks critical by 2016
-Iron ore hits seasonal weakness
-But should rebound by Xmas
-Pollutants drive Chinese coal policy
- Which Aust coal miners are affected?

 

By Eva Brocklehurst

Rhodium, a precious metal, has one of the strongest set of fundamentals in Deutsche Bank's analysis. The precious metals complex has diverged considerably over the past 18 months, with gold and silver trading lower and the other metals proving more resilient. Deutsche Bank estimates platinum, palladium and rhodium production in South Africa will be down 29%, 37% and 26% respectively over 2014, reflecting strike action. Moreover, a permanent reduction in South African capacity is considered probable. The analysts do not believe South African production of these three metals will return to prior levels and the deficits that exist in the market will become larger and more durable than previously was the case.

The fundamentals are strongest for palladium, but a more constructive outlook for rhodium is also appearing. China and US dominate palladium demand, for its use in pollution controls in vehicle engines. The combination of low car penetration and increasing emissions standards means China will become the largest single source of increased demand for PGMs - platinum group metals. Rhodium is the most effective of the group for treating nitrous oxide emissions, but is also benefiting from the gains in palladium prices and will increasingly appeal on a price comparison basis. Rhodium inventories are high at present but Deutsche Bank forecasts these to hit critically low levels by 2016. Moreover, the scale of fund holdings relative to market size and above-ground inventories is relatively low compared with the other platinum group metals, and Deutsche Bank envisages more room for inflows into rhodium exchange traded funds.

Where is the iron ore market pricing at present? The eye of the storm, in UBS' view. Iron ore spot prices have declined for most of 2014 and for the next two months the risk remains to the downside. China's crude steel production rates typically decline around 10% in September-November each year, as the summer peak in steel deployment passes. This is the dominant trade signal, and price corrections have usually occurred in this period. After that, ore trade lifts in November-December from restocking activity, driven by a need for ore ahead off the northern winter when bulk movements become difficult. This pushes prices back up by an average of 5% in November and 7% in December.

Hence UBS expects iron ore prices to recover to over US$100/t CFR in the final quarter of 2014. The analysts estimate that around 25% of iron ore supply is breaking even or loss making at US$86/t. Reductions to supply are noted but UBS expects high-cost supply may be slow to withdraw from the market. The broker remains wary of reading too much into a weak spot price at a time when the trade is at its seasonally weakest time.

China may be considering restrictions on thermal coal imports. Morgan Stanley observes there has been considerable discussion regarding proposed policies that could restrict imports of thermal coal. Media reports speculate that the China National Coal Association has sent a proposal to the government requesting that imports of thermal coal with an ash content over 15% and sulphur content over 0.6% be halted. At this stage, Morgan Stanley suspects the most likely policy decision would be an import tariff of some description. Although Australian product is at the top end of calorific value it also tends to be at the higher end for ash and sulphur. Indonesian exports are unlikely to be affected. The broker hastens to state that it is too early to draw conclusions, but does remain cautious regarding the thermal coal price, forecasting an average US$74/t Newcastle FOB for 2015.

Morgan Stanley has identified up to 39% of Australian exports that could be potentially affected by restrictions on thermal coal imports, although only a portion of this 39% actually ends up going to China. Reviewing those Australian miners under coverage which may be affected, Morgan Stanley notes Whitehaven Coal ((WHC)) does not breach ash and sulphur content thresholds that would be used to restrict imports. Also, less than 10% of its volumes are sold to China so the broker does not anticipate any earnings impact.

BHP Billiton's ((BHP)) Mt Arthur mine has sulphur content greater than the 0.6% threshold and some output from the Illawarra and South African assets is over 15% ash. The broker, in trying to determine what portion of the tonnage goes to China, and suspects some volume may be affected but the earnings impact at the group level is likely to be negligible. Rio Tinto's ((RIO)) Bengalla and HVO mines produce thermal coal with over 15% ash content, and the Kestrel mine has over 0.6% sulphur. Collectively, these mines contribute around 3% of earnings but, as is the case with BHP, as only a portion goes to China the impact is likely to be negligible, in Morgan Stanley's view.
 

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article 3 months old

The Monday Report

By Greg Peel

More selling on the local market on Friday suggests further exiting of Australia by foreign investors, given the big caps were all hit again. The materials sector has its own problems but the banks, the telco and big healthcare names were equally hit. The only sector closing in the green was utilities.

The question for the local market is one of just how hard will Australia’s popular yield stocks be hit if US rates start to rise? Were Wall Street not to react negatively to any hint of a move from the Fed, we might see a period of decoupling from Wall Street as yield differentials narrow.

To that end we note the US ten-year bond yield rose one basis point on Friday night to 2.46%. That might seem insignificant, but the US jobs number did elicit a lot of head scratching.

US August non-farm payrolls came in at 142,000, well short of 225,000 consensus. It is the first month in seven a plus 200k addition has not been made and the lowest increase this year. The prior July and June numbers were also revised down by a net 28,000. The unemployment rate fell to 6.1% from 6.2%, but the participation rate fell to 62.8% from 62.9%, representing a 32-year low.

Initially, the Dow fell 60 points on the news. But then the buyers arrived. There were two points to consider: (a) many economists dismissed the big jobs miss as being anomaly, pointing out that there were on-off events affecting retail and auto jobs in the month and also pointing out that these numbers are forever revised, and sometimes significantly; and (b) there is a lingering element of “bad news is good news” as the weak number implies the Fed is right in remaining more dovish than hawkish in its policy stance.

But that would also suggest bond yields should be lower. They were initially – the ten-year yield fell to 2.41% -- but then the sellers arrived to achieve the 2.46% close. This would tend to suggest the bond market is also dismissing this one jobs number as a blip, and is setting itself ahead of the big sell-off that many think is now in the offing.

The turnaround in stocks had the Dow closing up 67 points or 0.4%, while the S&P rose 0.5% to another new high at 2007 and the Nasdaq added 0.6%.

On the geopolitical front, Western leaders met in Wales to organise a coalition of the willing to step-up the assault on ISIL, and to discuss what further sanctions would be applied to Russia were Putin to maintain his aggression. On Friday night however, Putin and Poroshenko agreed to a ceasefire.

The ceasefire could have been great news for a Monday morning, until news came through over the weekend of at least two more incidents of conflict in Ukraine. So as to what happens next is anyone’s guess. Meanwhile, UK prime minister David Cameron announced he would commit 3500 British troops to a NATO “spearhead” force, ready to be deployed in Ukraine if needed.

Those in the know suggest Putin’s prime motivation is to prevent the West arriving on his doorstep, which would be the case were Ukraine to join NATO, just as the US did not want Russian missiles in Cuba in 1962. A ceasefire may be one thing, but Putin is not going to concede.

The European stock markets were steadier on Friday night following Thursday night’s fresh policy stimulus from the ECB, and the US dollar index also steadied at 83.77. The same can’t be said for the Aussie, unfortunately.  If there is foreign money getting out of the stock market then that should be supported by downside pressure on the currency but given the interest rate differential between Europe and Australia is now even wider, the euro-Aussie carry trade is even more popular. The Aussie was up 0.4% to US$0.9378 on Friday.

Gold rose US$6.60 to US$1268.70/oz.

The prospect of a ceasefire in Ukraine was enough to send the oils lower, with Brent falling US99c to US$100.84/bbl and West Texas falling US$1.09 to US$93.42/bbl. One might also argue the weak US jobs number had an impact but over in London, metals traders followed Wall Street traders in shrugging off the non-farm payrolls. Metal prices consolidated, with small falls the norm expect for copper, which rose 0.5%, and nickel, which is on the move again now the Philippines looks like getting into the export ban act. It rose 1.2%.

Iron ore continued its slide, falling another US70c to US$83.60/t. Over the weekend, a second small Australian iron ore miner called in the administrators.

The SPI Overnight fell 2 points.

The US jobs number will be much discussed for a month until the next one, providing for more confusion on the US interest rate front. Meanwhile, the European economy hangs in the balance of whatever might transpire in Ukraine. And locally, it appears we’ve entered a post result season hangover period in which there’s little in the way of new corporate news to consider, thus time to reflect on stretched valuations. We may wallow ahead of AGM season next month.

Focus this week will be on Australia’s own jobs number “blip” of last month, which saw the unemployment rate unexpectedly jump to 6.4%. Economists are assuming the August result, due on Thursday, will provide a return to a more believable 6.3% or even 6.2%.

Before that we’ll see the ANZ jobs ads series today and NAB business confidence tomorrow, along with housing finance and investment lending data. Wednesday it’s the Westpac consumer confidence survey, with jobs wrapping up the week on Thursday.

China is on holiday today but Chinese data will flow towards the end of the week. Thursday sees inflation, and Friday sees industrial production, retail sales and fixed asset investment.

Japan will revise its disappointing June quarter GDP result today while the US is in for a quiet week data-wise, at least until Friday. Friday brings retail sales, inventories and consumer sentiment.

Just when you thought the results season was over in Australia it’s not, given we’ll be seeing the odd off-season result trickling through over the next couple of months. On Thursday it’s Myer ((MYR)) and Sigma Pharmaceutical ((SIP)).

The ex-divs continue to roll this week and thus will continue to put ceteris paribus downward pressure on the index.

Rudi will appear on Sky Business today at 11.15am, on Wednesday at 5.30pm and on Thursday at noon.
 

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

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article 3 months old

Next Week At A Glance

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


By Greg Peel

US jobs tonight. It’s become increasingly difficult to know just how Wall Street will react to a good/bad number, but there is a chance a good number will send the US dollar and US bond yields higher. As to how this affects stocks, well that’s the big question.

The other big question is that of the possible Ukraine “ceasefire”. Real or imagined?

It’s a quieter week next week for global data although China does come into the frame. It’s a holiday in China on Monday but later in the week we’ll see monthly inflation, industrial production, retail sales and fixed asset investment numbers.

Japan will revise its June quarter GDP on Monday and will be hoping for some improvement.

There’s not much on the calendar in the US next week, with consumer credit and wholesale trade the only points of interest until Friday brings retail sales, business inventories and consumer sentiment.

In Australia we will see ANZ job ads, NAB business confidence and Westpac consumer confidence along with housing finance. Australia’s jobs numbers are out on Thursday, and it will be interesting to see just how much of a “blip” July’s numbers prove to be.

It’s fairly busy on the ex-div front in the local market next week, with Wednesday seeing the bulk.

Let’s hope the Wallabies can redeem themselves in Perth.
 

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article 3 months old

The Overnight Report: Ceasefire Shenanigans

By Greg Peel

The Dow closed up 10 points while the S&P lost 0.1% to 2000 and the Nasdaq fell 0.6%.

Yesterday’s Australian GDP number held no surprises. Following the release of various June quarter constituents this past week, economist consensus had a 0.4% quarter on quarter rise for 3.0% annual growth. Thus 0.5% and 3.1% went down as a “beat”, although they are pretty much in line with earlier consensus.

The drop from 1.1% qoq growth in March to 0.5% in June can clearly be attributed to the mining sector, in regard to both investment (capex) and commodity prices (terms of trade). The non-mining sector showed modest growth, which is encouraging, albeit not yet enough to fully offset the mining decline.

All up, yesterday’s numbers were right on the money with regard RBA expectations, suggesting no change to the current monetary policy stance. Tell that to the forex cowboys, who on Tuesday sold the Aussie off 0.6% on the lower terms of trade and yesterday bought it up 0.8% to US$0.9346 on the supposed GDP “beat”.

Australia’s service sector PMI rose to 49.4 in August from 49.3 in July, but more importantly, China’s official service PMI rose to 54.4 from 54.2 and HSBC’s equivalent leapt to 54.1 from 50.0. Having posted a strong manufacturing number, Japan was disappointed with a services fall to 49.9 from 50.4.

Yesterday’s data had little impact on the ASX200. The index opened lower from the bell, reflecting ex-divs for BHP in particular, along with AMP and a few others, and immediately recovered that adjustment plus a bit more before settling back to the flatline. The GDP and China data made little difference in the end, with markets across the globe now focused on central bank meetings over the next 24 hours, and also the US jobs number on Friday night.

And late in the day news hit the wires of a ceasefire being agreed to in Ukraine. By the time this news hit evening bulletins on the east coast, there was some confusion. Ukraine said there was a ceasefire and Russia said there wasn’t.

It didn’t seem to matter to Europe that there was any confusion. Even a hint of peace is enough. Thus the French CAC rose 1.0% and the German DAX rose 1.3%. The momentum carried over into Wall Street to send the Dow up 84 points from the opening bell, but as trading wound down in Europe, the US indices, as has become the pattern, retreated from late morning.

It was at that point the confusion with regard the ceasefire came to a head. In the wash up, Ukraine said it had negotiated a ceasefire with Russia but Russia said don’t look at us, we’re not firing. In other words, Ukraine has negotiated a ceasefire with the Russian separatists, not the Russians per se, if that’s what they’ve managed to do. Typical Putin spin. Either way, talk is of a proper pow-wow to be held on the weekend at which, the world hopes, the peace pipe can be passed around.

Don’t hold your breath.

In the meantime, Wall Street is indeed holding its breath ahead of today’s Bank of Japan policy meeting and tonight’s ECB policy meeting. The Dow and S&P thus closed flat, with the Nasdaq’s fall entirely reflecting a 4% drop in Apple shares. Apple is reeling from the celebrity nude selfie scandal (and let’s face it, we’re all a bit miffed when all our own nude photos are handed around willy-nilly, so to speak), and one broker put a Sell on the stock ahead of next week’s supposed launch of Apple’s new Dick Tracy watch. Many are sceptical of success.

Returning to service sector PMIs, the eurozone slump continues with a services PMI slide to 52.5 from 53.8, while the UK, which was lamenting lost momentum in its manufacturing sector two days ago, posted a rise to a soaring 60.5 from 59.1.

The US is running a day late this week, so its PMI is out tonight. Meanwhile, last night saw a record 10.5% jump in July factory orders. Factory orders are closely tied to durable goods orders however, so if we recall those big orders for a new Boeing plane and remove them, factory orders ex-transportation fell 0.8%, which was as forecast.

The big talking point of the day was nevertheless August vehicle sales, which at 17.2m seasonally adjusted represents the best result since 2006. Automakers across the board recorded sales increases, and trucks were the prime mover, but there is some concern emerging with regard the rising level of auto financing behind these sales, based on current low interest rates.

There is talk of mounting “sub-prime” auto loans.

The Fed Beige Book was released last night but was a fizzer. The central bank’s anecdotal assessment remains one of “modest to moderate” growth, as it has been for yonks, and none of the 12 regions registered any notable change.

Movements outside of stock markets last night all reflected ceasefire speculation. On Tuesday night oil traders were expecting new sanctions against Russia, which would further cripple Europe, and sold the oils down a couple of dollars each. Last night’s ceasefire talk had Brent rebounding US$2.02 to US$102.36/bbl and West Texas up US$1.85 to US$95.11/bbl, leaving many with whiplash.

Base metal markets responded in complete contrast. No sanctions imply no potential supply shocks, hence all metals were down bar nickel, with copper falling 0.8% and aluminium 1.2%. Nickel, on the other hand, responded to a senate proposal in the Philippines to take a leaf out of Indonesia’s book and ban exports, and jumped 3%.

Gold rebounded only US$4.00 to US$1269.40/oz after Tuesday night’s big fall while the US dollar index slipped back 0.1% to 82.86. The US ten-year bond yield slipped one basis point to 2.41%.

The bad news for the local market today is that the iron ore price has fallen through its 2012 low, emphatically, with a US$1.00 drop to US$85.70/t.

The SPI Overnight closed unch.

Today the Bank of Japan will hold a policy meeting and the suggestion is maybe something new will be announced on the stimulus front, given the Japanese economy’s disappointing dead cat bounce out of its sales tax hike malaise. But the real action will come tonight when the ECB meets.

Or not. The golden rule of ECB meetings is the more the world expects Draghi to do something, the less likely he is to respond. Sure, he flagged QE again at Jackson Hole, but he is the master of talking markets up (or down, in the case of the euro) for as long as he possibly can. My money is on more talk but no action.

Meanwhile we’ll see the July trade balance and retail sales data today locally, as we put the June quarter to bed and start concentrating on September.

In the US, the ADP private sector jobs number is due.
 

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article 3 months old

The Overnight Report: Calm Reigns

By Greg Peel

Wall Street was closed last night. European stock markets were flat.

The ASX200 flew out of the blocks yesterday, ignoring a small fall in the overnight futures, to be up almost 30 points early in the session – an interesting response to growing global tension. It was all about the iron ore price of course, which had posted a US60c gain after days and days of falls, no doubt encouraging some into believing the rout is over. On the last two occasions iron ore has had an eight in front of it, the price has bounced just as hard as it fell.

Doubt set in, nevertheless, on the release of China’s manufacturing numbers. The official PMI fell to 51.1 in August from 51.7 in July. The HSBC number came off worse, falling to 50.2 from 51.7. The air leaked out of the iron ore relief balloon, and we sagged to a flattish close.

Sure enough, iron ore is down US80c overnight to US$87.10/t – a new two year low. As for the PMI data, Beijing’s number of 51.1 actually beat economic forecasts of 51.0, while the HSBC number at 50.2 slipped below last week’s flash estimate of 50.3.

Iron ore, and its partner in crime, coal, were mostly blamed for a surprise 6.9% fall in Australian company profits in the June quarter. This follows a 2.0% rise in the March quarter. Mining profits fell 15.2%. Non-mining fell 2.6%.

Business inventories, on the other hand, rose 0.8% in the June quarter and will provide a nice little boost to an otherwise lacklustre GDP. The problem with inventories, however, is that they can be a two-edged sword. They provide economic support until they can’t be sold.

Today we’ll see the current account, which includes the balance of trade, and tomorrow the GDP is due.

Turning back to PMIs, Australia’s ridiculously volatile manufacturing number came in at 47.3, down from 50.7. July was the first month of expansion in eight, and just a blip, it would seem. Note that this PMI came out in time for the ASX200 to rally to its early highs before the Chinese PMIs spoiled the party, underscoring the fact the market pays scant attention.

More attention is paid to eurozone numbers at present, and that PMI continued on its slide, down to 50.7 from 51.8. Contraction is not far off. The sterling run for the UK also appears now to be over, with its PMI falling to 52.5 from 54.8.

That’s five PMIs and five slowdowns. Just as well Japan saw a rise to 52.2 from 50.5, which must have pleased Tokyo. The US number is out tonight.

The US holiday ensured little activity around global markets last night. A meeting between Russia and the Ukraine, with the EU in attendance, ended in stalemate, would you believe. It’s all Ukraine’s fault, says Putin, as he manoeuvres towards the formation of a separate sovereign state of loyal Russians in eastern Ukraine. That way Putin and his cronies will effectively not have to leave Russia to get to their new holiday mansions on the Crimean coast.

Outside of iron ore, commodities markets were predictably quiet last night. Base metals were mostly lower, by a tad, while West Texas crude was steady and Brent fell US55c to US$102.94/bbl.

Gold was steady at US$1287.00/oz with the US dollar index up a tick to 82.78, and the Aussie down a tick to US$0.9333. In a normal universe the Aussie would have plunged on the Chinese PMI numbers, never mind the iron ore price. Only in a parallel universe would Russia re-invade the world (forcing down bond rates in Europe, which force down rates across the globe, which makes the Australian bond rate a stand-out, which supports the currency).

The SPI Overnight fell 5 points.

Building approvals are out today locally, along with the aforementioned current account. The RBA will pretend to meet but actually hand out last month’s monetary statement.

Wall Street is back tonight with the US manufacturing PMI.
 

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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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