Tag Archives: China and Emerging Markets

article 3 months old

The Monday Report

By Greg Peel

It was a flatline Friday on Bridge Street to end the week, and end the official earnings result season. With the US set for a long weekend and the situation escalating in Ukraine, it was not a time to take risk positions, more a time to have a rest.

As at Thursday’s results, just over 250 major companies had reported and on FNArena’s more comprehensive measure, 77 had beaten expectations and 65 had missed, for a relatively even result. The ASX200 didn’t go anywhere much last week, which, macro influences aside, reflects what might be described as an “okay” season that mostly justified current PEs but provided no great incentive to see them expanded.

This assessment is supported by broker reactions to those results. The simple average of consensus target prices those stocks reporting has risen 2.15%, but FNArena database brokers have applied a total of 86 ratings downgrades to 47 upgrades. The bulk of these recommendation changes have been related to valuation. Common justification includes “good result but price a bit stretched” for downgrades and “weak result but perhaps the worst is over” for upgrades.

Japan provided a round of July data on Friday and offered no cause for excitement. The government has been hoping for a rebound out of the sales tax increase blues of the June quarter, but as yet the signs are not encouraging. Industrial production rose 0.2% in July having fallen 3.4% in June, missing forecasts of a 1.2% rebound. Retail sales did manage to post their first rise since the tax was imposed in April, but at 0.5% it was nothing to write home about.

In Europe, the eurozone flash estimate of August CPI came in at 0.3% growth, down from 0.4% in June and in line with the gradual downward trend. Mario Draghi has reiterated his QE-if-needed call, but markets do not expect any policy changes this week when the ECB meets, given Draghi has also maintained that the impact of his negative deposit rate policy is yet to flow through to the data.

It was a predictably quiet session on Wall Street on Friday night ahead of the Labor Day long weekend, albeit a positive one. The Dow rose 18 points or 0.1% while the S&P gained 0.3% to another new high at 2003, and the Nasdaq added 0.4%.

It was an unusual Friday session in recent context, given the apparent escalation in tensions between Russia and Ukraine. A month or so ago Wall Street typically sold off on a Friday if geopolitical tension was heightened, as traders did not want to risk being stuck for two days if the situation worsened. It doesn’t get much worse than possible war, yet Wall Street is increasingly comfortable to ignore such influences. There is a concern, nevertheless, that when the rest of the market starts returning from the beach this week, new highs and increased risk may be sufficient triggers for profit-taking.

Then we could start arguing about corrections again. In the meantime, Russia, the Ukraine and EU are meeting again tonight to supposedly discuss a ceasefire. Putin is telling the West he supports peace, and it’s all the Ukrainians fault, while at the same time reminding his own countrymen and women that if anyone wants to mess with Russia, Russia got nukes.

It’s one reason markets appear to have become somewhat inured. One minute it gets very scary and the next minute nothing happens.

The positive session on Friday can be mostly attributed to US data releases. Fortnightly consumer sentiment came in at 82.5, up from 81.8 at the end of July and beating estimates of 80.0. The Chicago Business Barometer, or Chicago PMI, soared to 64.3 from 52.6 in July, smashing expectations of 57.0. But given the fall to 52.6 in July was the biggest since October 2008, one might consider this datum to be a rather volatile indicator.

The not so good news was that consumer spending fell 0.1% in July, the first fall since January, and incomes rose only 0.2%, the lowest monthly gain for the year. Incomes have risen 4.3% year on year, well below the 35 year average of 6%. Savings increased in July to balance out spending, suggesting Americans remain once bitten twice shy, six year down the track.

The combination of US data, weak Japanese numbers and the weak eurozone inflation estimate fuelled further gains for the US dollar on Friday night. The dollar index rose 0.3% to 82.73. The good news is the Aussie fell 0.2% to US$0.9338, but the bad news is that yen and euro weakness will dampen any impact on the Aussie of a stronger greenback. We need the greenback to be strong by itself.

If there was any notable response to escalating tensions on Friday it was in the oil markets. The EU has told Putin he has a week to withdraw his troops or further sanctions will be applied. Energy markets are the most vulnerable to sanctions, so on Friday Brent rose US67c to US$103.19/bbl and West Texas rose US$1.25 to US$95.83/bbl.

Base metals are more susceptible to weaker European economic growth implied by sanctions than sanctions themselves, but there is a level of balance. Hence metal prices were again little moved on Friday night. Activity should begin to increase from now, nevertheless, as the northern summer comes to an end.

There may be some respite for the local iron ore sector today. Iron ore actually rose for once, up 60c to US$87.90/t.

Gold was steady at US$1287.00/oz.

The SPI Overnight fell 2 points.

The local results season may now be over but this week sees an avalanche of economic data in its place.

We see the manufacturing, services and construction PMIs on Monday, Wednesday and Friday respectively. Today also sees the monthly RP Data/Rismark house price index and TD Securities inflation gauge, and June quarter company profits and inventories.

Tomorrow it’s monthly building approvals and the June quarter current account, and the RBA will meet and change nothing. Wednesday it’s the June quarter GDP. Consensus is for a pullback to 0.4% quarterly growth after March’s 1.1%, bringing annualised growth down to 3.0% from 3.5%, mostly thanks to the budget, one presumes. RBA governor Glenn Stevens will deliver a speech on Wednesday.

Thursday it’s the monthly trade balance and retains sales.

The US is closed tonight so its PMI data will flow a day later. Tuesday also sees construction spending while Wednesday brings factory orders, vehicle sales and the Fed Beige Book. The ADP private sector jobs number shifts to Thursday, along with chain store sales and the trade balance, while Friday brings non-farm payrolls.

Japan, China, the eurozone and UK will also provide PMI numbers this week, beginning today, while the ECB and Bank of England will both hold policy meetings on Thursday.

On the local stock front, results now give way to a rash of ex-divs. Stocks going ex will mathematically prove a drag on the index, although ex dates are fairly evenly spread across September.

On Friday the pending quarterly promotion and relegation will be announced for the S&P/ASX indices.

Rudi will appear on Sky Business today at 11.15am and then no more until next Monday as he will be traveling to Brisbane to share his thoughts post reporting season with local investors (see Weekly Insights email for more details).
 

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

The good news is next week sees an end to the local results season. Exhausted analysts, brokers and FNArena reporters can all finally have a rest. The bad news is we’ll go into next week with the shadow of the Russian Bear hanging over us.

By next week we may have more sanctions being applied against Russia, as Putin moves more troops into the Ukraine and tries to tell us all is cool. The EU is meeting this weekend and Angela Merkel has already flagged a step-up, knowing full well her own country will suffer equally from any trade restrictions.

The potential impact on the global economy will be a point of discussion as a raft of global economic data is rolled out next week. Monday it’s manufacturing PMIs from Australia, Japan, China, the eurozone and UK, and Wednesday sees the equivalent round of service sector PMIs.

It’s the Labor Day long weekend in the US so no markets on Monday, shifting the US PMIs to Tuesday and Thursday. Labor Day signals the end of the US summer holidays and volumes on exchanges should start to pick up again thereafter. Just time, we might note, for the historically most nervous two months of the trading year – September and October.

It’s also jobs week in the US, beginning with the private sector report on Wednesday followed by non-farm payrolls on Friday. Throughout the shortened week the US will see construction spending, factory orders, vehicle sales, chain store sales, the trade balance and the Fed Beige Book.

Tonight brings a flash estimate of the eurozone’s August CPI and next Thursday the ECB will meet, in the wake of Draghi’s Jackson Hole QE teaser and possible trade sanction impositions.

It’s a big week for Australia on the economic front as well.

Monday sees June quarter company profits and inventories, Tuesday the current account, and Wednesday the GDP. July building approvals and retail sales data are also due, along with the PMIs. The RBA will meet on Tuesday but not change its policy.

While result season will be a memory by next week, the ex-divs start to flow more steadily. Ex-div dates are nevertheless spread fairly evenly across the month, but will mathematically impact on indices.
 

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article 3 months old

The Overnight Report: Wall Street Back On A High

By Greg Peel

The Dow closed up 60 points or 0.4% to 17,039 (back over 17k again) while the S&P gained 0.3% to 1992 (new high) and the Nasdaq added 0.1%.

The ASX200 took off like a rocket at the open yesterday, jumping 43 points in a blink. We had a positive lead from Wall Street but this almost looked like fat finger stuff, sending the index smashing through both the previous post-GFC closing and intraday highs. The sellers soon jumped on it, and we slipped back all day to a tepid close. At 5638 we nevertheless still closed above the previous closing high.

HSBC caused a scare by suggesting its China manufacturing PMI for August would come in at 50.3, down from 51.7 in July and missing forecasts of 51.5. But China is not much in the spotlight at present.

With Ukraine, Iraq and Gaza all seemingly forgotten stories now and the US interest rate debate failing to discourage Wall Street, the local market has been able to concentrate on local results releases. Problem is, the peak days of yesterday and Wednesday provided such an avalanche it’s hard for the market to keep up with it all. Investors, brokers, analysts and FNArena reporters have all been overwhelmed.

The individual stories will likely thus play out a bit longer but so far we can call the season pleasing, without being exciting. Up to Wednesday, 115 stocks under FNArena database broker coverage had reported, 33 beat, 30 missed and the balance was in line with expectations. This count may vary from other assessments as FNArena does not take headline profit results as the blind indicator but rather drills down to look at underlying results (net of one-offs and accounting tricks), forward guidance and other stock-specific measures before declaring a beat/miss.

The fact around half of results have been “in line” highlights (a) that the quantum of beats/misses has been low in all but a handful of cases, which leads to (b) more and more companies pre-release headline numbers, thus getting any volatility out of the way before the “official” release.

While the peak of the US quarterly earnings season is well behind us now, there is still a trickle of results coming through from companies with tardy accountants. Tech dinosaur Hewlett Packard proved the PC is not yet dead despite the world’s addiction to tablets, and posted a 5% gain. The HP result boosted PC chip maker Intel (Dow).

Bank of America was this week fined US$17bn for the mortgage security indiscretions of Countrywide and Merrill Lynch, both of which the bank was ordered to acquire by the Fed/Treasury in 2008. With that out of the way, BofA jumped 4% last night, boosting JP Morgan (Dow) and all other financial stocks. Financial stocks have been laggards in 2014 and given they represent 17% of the S&P500 market cap, it’s difficult to have a meaningful rally without the banks joining in.

Wall Street is now becoming excited about the banks, and thus the market, but never mind that last night the S&P500 hit a new all-time high for something like the 28th time this year.

Some pretty positive US economic data releases were also behind last night’s rally.

Sales of existing homes rose 2.4% in July, against expectations of a decline, to mark the fastest sales rate this year. Sale prices were up 4.9% year on year. The Philly Fed manufacturing index has jumped to 28.0 this month from 23.9 last month, confounding forecasts of 18.0, to mark its highest level in over three years. A flash estimate of the August manufacturing PMI suggested a jump to 58.0 from 55.8 in July, which would be the highest reading in four years. And the Conference Board leading economic index rose 0.9% in July, after consecutive 0.6% gains in June and May.

And the Fed cash rate is at zero. Again we say, what’s wrong with this picture?

Despite the positive data, the US ten-year yield slipped back 2 basis points last night to 2.40%. This probably suggests caution ahead of tonight’s speech from Yellen, and indeed the stock indices saw some squaring up at the close as well. Gold traders are getting the jitters nonetheless, sending gold down US$15.70 to US$1276.00/oz.

The US dollar index has been on the tear this week but it also saw a square-up, falling 0.1% to 82.15, which means the Aussie is up 0.1% to US$0.9302.

I noted yesterday that the LME closed on Wednesday night ahead of the release of the Fed minutes, having surged on what proved to be misguided expectations of dovishness. The minutes were actually more hawkish than dovish, hence base metal prices saw a little bit of a pullback last night although copper held its ground.

Spot iron ore continues to slip, falling another US40c last night to US$91.90/t. At this rate the iron ore price will soon have an eight in front of it again, setting off the alarm bells for Australia’s pure-play miners.

Just as well we’re at new highs.

Futures traders are unperturbed, sending the SPI Overnight up 10 points.

So stand by for the Yellen & Draghi double act tonight at Jackson Hole, and in the meantime Iluka Resources ((ILU)), Mermaid Marine ((MRM)), Sims Metal Management ((SGM)) and Santos ((STO)) will be among the local reporters today.

Then we can all get some sleep.
 

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

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

Is Putin fair dinkum in hinting at a resolution for the Ukraine? Can Iraq be sorted under a new government? These are just two of the questions that likely won’t be answered next week but will certainly provide fodder for debate. Watch the German stock market tonight to gauge the European opinion of Putin’s trustworthiness. If they’re confident, the DAX should fly.

This will all prove a distant backdrop for Australia next week, as we enter the horror stretch of a fortnight loaded with result releases – ‘undreds of ‘em. We’re now at the stage it becomes pointless to select highlights. Please refer to the FNArena calendar (link above).

To date results have leant to the net positive side, but realistically we’ve only just scraped the surface so far.

Economic data releases roll on nonetheless but it’s a quiet one in Australia next week, as is typical during the height of results season. The following week sees the first of the June quarter numbers and once the result season is over, the GDP comes out.

Data releases in the US next week include housing market sentiment, housing starts, existing home sales, the CPI, the Philly Fed index and the minutes of the last Fed meeting.

Beyond that, attention will be focused on Thursday for a global round of flash August manufacturing PMI estimates, for Japan, China, the eurozone and US.

And geopolitical issues will no doubt draw the spotlight.
 

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article 3 months old

The Overnight Report: Weakness All Around

By Greg Peel

The Dow rose 91 points or 0.6% while the S&P gained 0.7% to 1946 and the Nasdaq added 1.0%.

Japan’s GDP contracted by 6.8% in the June quarter. In isolation, one might expect Prime Minister Abe would throw up his hands, pull out his sword and do the honourable thing. But in context, this post sales tax hike result follows the March quarter’s pre tax hike result of 6.1% growth. And the consensus forecast was for a 7.1% contraction.

Over six months, Japan’s GDP fell by an average 0.35%. This is still not a pleasing result when the Bank of Japan is throwing everything bar the kitchen sink at the Japanese economy. History suggests there is always a period of disruption post a sales tax increase (witness Australia’s introduction of the GST) before everyone gets used to the idea and life goes back to normal. But the BoJ may just be polishing the kitchen sink ahead of its next meeting.

China’s industrial production grew by 9.0% year on year in July, down from 9.2% in June. Retail sales grew by 12.2%, down from 12.4%. Fixed asset investment grew by 17.0% over the year to July, down from 17.3% over the year to June. Of the three numbers, fixed asset investment was the one that fell short of expectation. FIA for the 12 months to July marked only 13.7% growth, the lowest level since 2001.

We recall that last weekend’s July CPI result showed 2.3% inflation for China, well below Beijing’s 3.5% annual target. Hence there is plenty of scope for Beijing to inject further fiscal/monetary “mini” stimulus to ensure the 2014 GDP result lands on the 7.5% target, just as it did for the first six months.

On the home front, consumer sentiment is up 3.8% this month to 98.5 on Westpac’s index. As was the case with yesterday’s business equivalent, one can point to the removal of the carbon tax and expectations of a much watered down budget for the bounce. But the neutral level for this index is 100, and sentiment has been negative for the past five months, by varying degrees.

More concerning was a 0.6% rise in the June quarter wage price index, to mark 2.6% year on year growth. That’s the lowest rate since 1997, when the index was introduced. If we consider headline inflation is running at 3.0%, real wages are going backwards.

None of the above had much effect on the Australian market yesterday, given none of the above caused any shock. The Japanese and Hong Kong stock markets were both up for the session. If we take out the impact of the Rio Tinto ((RIO)) dividend and the less than surprising sell-off for priced-for-perfection Commonwealth Bank ((CBA)), the ASX 200 went nowhere.

The ASX200 continues to cling on to its Linus blanket, aka 5500.

Moving to Europe, eurozone industrial production fell 0.3% in June. This was a disappointing result given May also saw contraction, and economists had forecast a 0.3% rebound. For the June quarter, production fell 0.4%. Perhaps some solace can be found in the fact the euro remained elevated in June, before plunging in July after the ECB cut rates. Solace may also be found in the expectation Draghi will surely have to act again soon, but clearly Europe is becoming a big drag on global economic growth forecasts.

And by July, the impact of sanctions against Russia will hit the numbers. It is estimated sanctions to date will wipe 0.3 percentage points off Germany’s GDP. Germany’s June quarter GDP is due tonight (along with net eurozone GDP) and a contraction of 0.1% has been touted.

Wall Street, too, can take solace in knowing the central bank is there to act if necessary, or in the case of the US, not act. For an economy driven predominantly by domestic consumer spending, July’s retail sales growth result of flat on June, missing forecasts of 0.2% growth, was a disappointment. July marked the weakest growth in six months, and is not the way economists foresaw the start to the September quarter.

Department store Macy’s posted a shocker of a June quarter result last night, which sent its shares down 5.5%. At the other end of the scale, Walmart reports tonight and the company has been preparing the market for a result that won’t be pretty.

All of this adds up to one simple conclusion: the first Fed rate rise will now be later rather than sooner. Perhaps second half 2015 instead of first half, assuming such disappointment persists. And that means a stronger for longer, funny-money-fuelled stock market. Hence the rally in the US indices last night, which found the way left clear by no new news from the geopolitical hotspots.

To emphasise the point, the US ten-year bond yield fell 3 basis points last night to 2.41%. The US dollar index ticked up 0.1% to 81.61, but only because the euro fell more emphatically.

Australian economic data are sending mixed messages at present, serving to underscore the uncertain and wobbly transition from mining capex dependence. Record low wage growth implies absolutely no immediate inflation threat whatsoever, just as the RBA has been assuming, and thus no threat of a rate rise anytime in the foreseeable future. Rate cut? One day we say no, next day we say yes, and in between the RBA has been right all along: ”On present indications, the most prudent course is likely to be a period of stability in interest rates.”

The Australian economy nevertheless is beholden to this country’s greatest enemy – the Fed. That record low wage growth result released yesterday should have seen the Aussie down over 24 hours, but instead it’s up 0.4% to US$0.9304. The longer the Fed holds off on a rate rise, the longer the screws are being turned downunder. The sooner this country abandons the currency of our enemy as a reserve and starts dealing directly in the currencies of our trading partners, the better.

Gold rose US$2.30 last night to US$1311.20/oz. Base metals had a weak session, driven by the confluence of weak data out of all of Japan, China, Europe and the US. Recent movers lead and zinc fell 2%, while aluminium, copper and nickel fell 1%. Iron ore’s fresh tumble continues, with an US80c fall to US$93.20/t.

Last night oil traders decided the recent crude sell-off, specifically for Brent, has been overdone. Thus despite this week’s bearish demand-supply data and forecasts, Brent bounced back US$1.09 to US$104.11/bbl last night. West Texas was up a tad to US$97.33/bbl.

The SPI Overnight closed 25 points or 0.5%. No doubt we’ll blindly keep following Wall Street until the market realises the best thing that could happen locally is a big short-term correction for Wall Street, driven by a Fed rate rise, or the anticipation thereof.

The eurozone June quarter GDP is out tonight.

On the local stock front, Dexus ((DXS)), Fairfax Media ((FXJ)), Goodman Group ((GMG)) and Telstra ((TLS)) are among those companies reporting today. We might also see a result out of Crown Resorts ((CWN)), but ask three different brokers and you’ll get three different dates. If not today, then tomorrow, maybe.

Rudi will appear on Sky Business at noon.
 

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

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

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

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article 3 months old

The Monday Report

By Greg Peel

With Dow down 75 points on Thursday night and the SPI down 23 points, a weak session for the local market was always expected on Friday. I had suggested Friday becomes a day for selling if traders are worried about what may develop over the weekend, but what we saw on Friday was pretty much a market capitulating on the expectation that this time a more extensive correction was in play.

It didn’t help that Japan-watchers noticed the Nikkei falling 3%, but the data closer to home were also influential. China reported its biggest ever monthly trade surplus in July – news that might seem positive on face value until one looks at the breakdown of a 15% rise in exports, double expectation, against a 1.6% fall in imports, missing expectations of a 3% rise. For Australia, the import side of the China equation is all-important.

But it’s all about commodity prices. Iron ore volumes over the seven months to July rose 18%, but the iron ore price fell 15%. China is the greatest importer of iron ore but not so of coal, given domestic reserves, so coal imports fell 2.2% to July while the met coal price fell 15%.

Weaker commodity prices have been very much a focus for the RBA, which issued a revised forecast of 2.50% 2014 GDP growth in its quarterly Statement on Monetary Policy published Friday, down from 2.75% previously. The central bank’s inflation target has been lowered to 2.25% from 2.50%, with the removal of the carbon tax a major contributor.

The RBA is still crossing its fingers for a drop in the Aussie dollar, which continues to hijack hopes of a smooth economic transition away from mining. Other than in residential construction, this transition continues to struggle. Mining is also hampered by the stubborn Aussie, given falls in commodity prices are typically a catalyst for a fall in the currency, thus providing the dollar-value trade offset. But not so when a Fed-influenced US dollar refuses to rise.

And just to add insult to injury on Friday, the US was dragged back into Iraq and proceeded to conduct air strikes against ISIL. The precursor to Gulf War III? Not likely, but Friday was not a day to think too hard. It was a day to run away, and run away they did, to the tune of 1.3% down for the ASX200.

Overnight trade in the S&P500 futures suggested Wall Street was preparing to follow suit on Friday night, as the index breached 1900 amidst the global sell-off. However the lead was not ratified from the opening bell and the broad index held cautiously above the 1900 psychological level. June quarter productivity data were then released.

US productivity in the snowbound March quarter had fallen 4.5%, to mark the biggest fall since 1981, so economists were hoping for a 1.7% turnaround. The result of 2.5% was thus pleasing, encouraging some buying. But it was news from Russia around lunchtime that suddenly turned Wall Street’s fortunes. According to a tweet from a Russian newsagency, “military exercises” on the Ukraine border were now completed and Putin was pulling back the troops.

It was not exactly a conclusive signal of end to Russia-West tensions, sanctions and retaliation, but it was enough to spark a late scramble of buying and likely short-covering. The Dow closed up 185 points or 1.1%, the S&P rose 1.2% to 1931, and the Nasdaq gained 0.8%.

European stock markets had closed before the news came through from Russia, leaving the German DAX hanging perilously at 9009 after another 0.3% fall. It will be all eyes on the DAX tonight as Europe gets a chance to respond.

While there may have been some relief for the stock market, the bond market isn’t yet convinced. The US ten-year yield drifted another basis point down to 2.41% on Friday, while a US$2.50 fall in gold to US$1309.10/oz hardly signals the end of the safe haven trade either. The US dollar index fell 0.1% to 81.40 and the Aussie is steady at US$0.9275.

The oils have been long drifting back from their geopolitical premium highs despite the escalation of tensions, and on Friday were torn between news of air strikes in Iraq, which should be bullish for prices, and the news from Russia, which should be bearish. As it was, Brent crude fell US99c to US$104.76/bbl and West Texas was steady at US$97.54/bbl.

Lead and zinc had rallied 1% on Thursday night so they fell back by the same amount on Friday, as did nickel, while the other metals were steady. Iron ore fell US30c to US$95.70/t.

What a difference a day makes. The SPI Overnight closed up 37 points or 0.7%.

So whereto from here? That’s a tough one. We’ve heard no more out of Russia over the weekend that might confirm a change of heart from Putin, while air strikes in Iraq have taken the spotlight and spawned many questions as to just how far the US may have to go. We thus have a rather uncertain geopolitical backdrop hanging over this week’s trading – a week which sees the Australian earnings season step up a gear.

There is also plenty to consider on the global economic front.

Japan will report its June quarter GDP on Wednesday and the eurozone will follow suit on Thursday, with the UK providing a revision on Friday. With Europe hanging in the balance, we’ll also see eurozone investor sentiment, industrial production and inflation data out this week.

China will provide a data dump on Wednesday of July industrial production, retail sales and fixed asset investment numbers.

The US will release retail sales and business inventory data on Wednesday. The latter is currently in focus given the June quarter GDP rebound from the March quarter contraction was a lot to do with rebuilding inventories. If restocking turns to destocking, the September quarter GDP may well disappoint.

On Friday the US sees industrial production, the PPI, fortnightly consumer sentiment and the Empire State manufacturing index.

In Australia, a June quarter house price index is out tomorrow along with the NAB business confidence survey, and Wednesday brings the June quarter wage cost  index and the Westpac consumer confidence survey. Attention will be more firmly focused on corporate earnings results.

Releases are becoming too  numerous to list but highlights this week include JB Hi-Fi ((JBH)) today, GPT ((GPT)) and UGL ((UGL)) tomorrow, Commonwealth Bank ((CBA)), CSL ((CSL)), OZ Minerals ((OZL)) and Suncorp ((SUN)) on Wednesday, Crown Resorts ((CWN)), Fairfax Media ((FXJ)) and Telstra ((TLS)) on Thursday, and ANZ Bank’s quarterly update on Friday.

Rudi will appear on Sky Business today at 11.20am, on Wednesday at 5.30pm, on Thursday at noon and on Friday on Your Money, Your Call - Bonds vs Equities, from 7-8pm.
 

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

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided. www.fnarena.com

article 3 months old

Next Week At A Glance

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


By Greg Peel

We are definitely now in correction mode but the question remains as to just how far any pullback can run. This will depend on the balance of pent up buying, indicated by historically high levels of cash being held in portfolios, and the implications of any further escalation in Eastern Europe, ie if Russia does actually invade Ukraine. What happens then is unclear.

Somewhere in between lies the US interest rate hike debate, but right now Europe is holding centre stage. Never mind that China reports trade and inflation data today and tomorrow.

Next week in the US will be light on economic data early on and will also see the quarterly earnings season winding down to a mere trickle of latecomers. Retail sales and business inventories will be the highlight midweek before Friday’s industrial production, consumer sentiment and PPI data and the Empire State manufacturing index.

Attention will be focused on Thursday’s release of eurozone June quarter GDP, as well as investor sentiment, inflation and industrial production data during the week.

Japan will release its June quarter GDP on Wednesday and China will provide a monthly dump of industrial production, retail sales and fixed asset investment data.

Economic highlights in Australia next week will be the NAB business and Westpac consumer confidence numbers and the June quarter wage price index.

The Australian result season steps up a gear next week with a plethora of reports, now too numerous to list. Highlights will include JB Hi-Fi ((JBH)), Commonwealth Bank ((CBA)), CSL ((CSL)), Suncorp ((SUN)) and Telstra ((TLS)) while ANZ Bank ((ANZ)) will provide a quarterly update.


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article 3 months old

The Overnight Report: Correction Resumes

By Greg Peel

The Dow closed down 139 points or 0.8% while the S&P fell 1.0% to 1920 and the Nasdaq lost 0.9%.

Happy Birthday 2.5%. It is one year since the last RBA rate cut. And judging by yesterday’s RBA statement, there is no change on the horizon.

The statement was virtually word-for-word a repeat of the July statement, and indeed it’s been difficult to spot any variation over the past few months. However there was one line inserted that wasn’t there last month:

“Recent data showed an increase in inflation, with both headline and underlying measures affected by the decline in the exchange rate last year.”

Then came the “But”, which took us back to the previous statement’s observation that:

“…growth in wages has declined noticeably and is expected to remain relatively modest over the period ahead, which should keep inflation consistent with the target even with lower levels of the exchange rate.”

So the RBA is staying put while the two camps of economists – next move down, led by Goldman Sachs, and next move up, led by several banks – argue the toss. We can only now wait for June quarter data due next month, after the corporate result season.

It was another soggy day on Bridge Street yesterday despite a late rebound on Wall Street, and despite Cochlear ((COH)) showing what can happen when you’re the most shorted stock on the ASX, by a margin, and you post a positive earnings result. Cochlear shares jumped 10%.

Not helping the cause was HSBC’s read on China’s July service sector PMI which came in at a neutral 50.0, down from 53.1 in June. This is the lowest reading since HSBC started this index in 2005, and representative of the flow-through to related services of the Chinese property market slowdown. Meanwhile, the Australian equivalent measured 49.3, up from 47.6, which is an improvement but represents yet another month of contraction.

It may have been sensible for the local market not to become excited by an apparent turnaround on Wall Street, given the US indices gave up those late Tuesday night gains from the opening bell last night. The early dip belied a solid US service sector PMI, which hit its highest level since 2008 at 58.7, up from 56.0, and a stand-out June factory orders number, which showed a 1.1% increase when consensus was for 0.6%.

The problem here is the old good news is bad news theme, vis a vis the timing of the first Fed rate hike. The good news meant stocks sagged and the US ten-year bond yield jumped about five basis points to be up over 2.52%. Wall Street rolled through the morning uncertain as to whether more rate-related selling was going to hit. But then all of a sudden it didn’t matter.

At 1.30pm news hit the wires that the Polish foreign minister had declared Russia was about to invade Ukraine. Putin has further increased the number of troops amassed on the border, which now number 45,000. The troop movements are in direct defiance of the US/EU sanctions designed to force Russia to do just the opposite.

Further news suggested Putin was about to ban Western airlines from flying in Russian airspace, and just to rub America’s nose in it, a particular brand of Kentucky bourbon whiskey was deemed not to meet Russian “quality controls”. This follows on from a similar “quality” ban on McDonalds. Presumably apple pie is next.

The Dow plunged to be down 200 on the news. It proved the low point of the session, with those buyers ever vigilant on the sidelines moving in to pick up some bargains, but the closing level of down 139 does little to convince there’s not more selling to come in this traditionally weak, summer holiday-thin month of August.

While I have suggested more than once that corrections don’t occur because they are expected, and that the trigger for a correction is never one that can be specifically identified ahead of time, what we’re currently seeing is a confluence of factors. Fed rate rise fear has clearly heightened, but the ten-year bond yield ultimately fell back last night to 2.48%. The 2014 low is 2.44%. This implies a “flight to safety”.

Ukraine is providing the flight to safety impetus – not directly, but indirectly via the impact of the sanctions and tit-for-tats on the European economies. And the Portuguese bank failure is another Euro-factor that was not on the radar a month ago. We thought Europe was sufficiently covered by the ECB.

But were a true “flight to safety” in play, we would normally see gold rallying. It was steady at US$1288.60/oz last night as the US dollar index rose 0.2% to 81.51.

So that’s confusing as well. And never mind that the eurozone service sector PMI came in at a three-year high 54.2, up from 52.8. And for the record, the UK is surging on 59.1, up from 75.7.

So what exactly is causing the weakness? Well, I think that’s the point. The catch phrase now is “no one’s looking for reasons, just excuses”. If you’re not entirely sure why a pullback is in train, it’s best not to argue. Just get on. But once again I suggest that it won’t be too long before the dam of pent up buying demand breaks at lower levels.

Oil is another asset class that has observers confused. Geopolitical tensions suggest oil should be bought, but still it keeps giving back any premium built in a while back. Last night Brent fell US62c to US$104.81/bbl and West Texas fell US77c to US$97.64/bbl. Dow heavyweights Exxon and Chevron have been weak for a while now, and last night their falls of around 2% each accounted for 45 Dow points alone.

Having shot up in a thin market on Tuesday night, base metals shot down in a thin market last night. Aluminium, copper, lead and zinc all fell around 1%.

Iron ore rose US10c to US$95.50/t.

The Aussie is down 0.3% to US$0.9306 in the wake of the RBA statement and a stronger greenback.

The SPI Overnight closed down 31 points or 0.6%.

Rudi will appear on Sky Business 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 Monday Report

By Greg Peel

The Australian market was always going to cop a shellacking on Friday and the ASX200 failed to disappoint with a 1.4% fall. The sell-off was evenly spread across sectors, albeit healthcare (down 2.6%) was particularly trashed while utilities (down 0.7%) held a bit of ground. It was a healthy shake-out following a kick up above the 5600 just prior, and has achieved nothing more dramatic than to take us back into the middle of the familiar 5500-5600 range.

Data releases on the day were never going to make a difference. Australia’s manufacturing sector surprised with a rise in the July PMI to 50.7 from 49.0 in June, marking the first expansion in eight months. China’s official manufacturing PMI came in at 51.7, up from 51.0, and HSBC matched with a rise to 51.7 from 50.7. China’s service sector PMI was released yesterday, and showed a fall to 54.2 from 55.0, but still indicating reasonable expansion.

Sticking with the manufacturing PMI theme, the eurozone was steady at 51.8, the UK has begun to slow from its frenetic pace in the first half and marked 55.4, down from 57.2, while US showed growth to a rapid-paced 57.1 from 55.3.

The eurozone was very much in the frame on Friday night. The PMI was flat, Thursday night’s flash CPI estimate suggested a four-year low 0.4% annual rate of inflation when 0.5% was expected, increased sanctions against Russia are impacting directly on European companies, particularly German companies, and Portugal’s Banco Espirito Santo, which made news a couple of weeks ago when it defaulted on a debt payment, is hanging in the balance after its shares fell 40% and over 70% for the week.

The pending demise of BES gives rise to several questions. The bank is big in Portugal but not large by general Western standards, but does the ECB let it go to the wall or bail it out using eurozone taxpayer money? Is BES indicative of poor asset quality across other eurozone banks, and are the regular ECB stress tests inadequate? We seem to have gone back in time about four years.

The BES and Russian sanctions in particular have been hitting the German stock market, which fell another 2% on Friday to be down 4.5% for the week. Wall Street also copped the back-end of European weakness as the indices tumbled from the opening bell, sending the Dow down 125 points by mid-morning, before regaining ground after the European close.

Aside from the better than expected PMI release in the morning, the US non-farm payrolls report showed 209,000 jobs added in July. While this was shy of 230,000 expectation, it was still the sixth consecutive month of plus 200k hiring and implies an average of 230k jobs per month for the seven months to July, which is the fastest rate since the US economy initially bounced out of the GFC depths in 2009, powered by QE1. The unemployment rate ticked up to 6.2% from 6.1% but that was because the participation rate increased, which is a positive sign.

JP Morgan called it a “Goldilocks” result, given it was not as low as to undermine hope in the US recovery and not as strong as to spark further sudden rate rise fears.

In other data releases, Michigan Uni’s fortnightly gauge of consumer sentiment fell to 81.8 from 82.5 two weeks prior but was in line with estimates. Personal spending rose 0.4% in June, as it did in May, and personal income also rose 0.4% as it did in May. Earlier in the year income growth continued to lag spending growth.

On the corporate earnings front, it was a better night on Friday and featured strong results from LinkedIn, which jumped 12%, and old stager Proctor & Gamble (Dow), which rose 3%. Janet Yellen’s short social media trade continues to take a beating.

The Dow managed to recover most of the ground it lost earlier by 2pm, but the rebound began to fail as the selling returned towards the weekend close. The Dow closed down 69 points or 0.4%, the S&P lost 0.3% to 1925, and the Nasdaq fell 0.4%. It was the worst week for US stocks since April.

US earnings have become somewhat of a background note to Fed policy speculation on Wall Street. Running at around 10% June quarter growth, earnings have presented a positive theme. But nervousness with regard the possibility of an extended sell-off in stocks is keeping a lid on US bond yields, which might otherwise be rising as rate rise expectations build. The US ten-year yield rose from the open on Friday but when stocks started to be sold again, it fell back 5 basis points to a familiar 2.51%.

Having fallen on Thursday night, gold recovered that ground on Friday night with an US$11.60 rise to US$1293.50/oz. While the US jobs number was not weak enough to ease rate rise expectations, developments in Europe potentially provided enough impetus to retreat to gold or perhaps even stock market correction fears have sent some punters to safety. The VIX volatility index, having wallowed as low as 10 not too long ago, is now up at 17.

The US dollar index fell back 0.2% on Friday to 81.31, hence the Aussie is back up 0.2% to US$0.9312.

Base metals were mostly a little weaker on Friday albeit nickel fell 1.5%. Iron ore fell US40c to US$95.20/t.

All the talk of Russian sanctions and a possible impact on Europe’s energy supply has focused attention on supplies of Brent crude, which turn out to be quite ample. Brent fell US95c to US$104.63//bbl on Friday while West Texas held steady at US$97.62/bbl. Brent was down 3.3% for the week and 5.6% for the month of July.

The SPI Overnight fell 26 points or 0.5%.

We move into this week with Europe now causing concern, US rate rise speculation remaining rife and earnings continuing to dominate. The US quarterly season marches on this week and the Australian six-month season begins to build.

US data is a little thin this week with the service sector PMI tomorrow, the trade balance on Wednesday and chain stores sales on Thursday being the highlights. On Friday June quarter productivity is released, which the Fed will watch very closely.

Service sector PMIs are also due out tomorrow in Australia, China (HSBC), the eurozone and UK.

Central banks will be in the frame this week. The RBA meets tomorrow, the Bank of England and ECB on Thursday and the Bank of Japan on Friday. The RBA will do nothing and the BoE will probably do nothing, while the BoJ might have something to say but that remains to be seen. The real focus will be on the ECB and Mario Draghi’s press conference, at which implications of low inflation and weak GDP growth meeting extra pressure from Russian sanctions and a potential Banco Espirito Santo failure will all be hot topics.

China will report inflation and trade data on Friday.

It’s a busy week economically in Australia, beginning today with retail sales, ANZ job ads and the TD Securities inflation gauge. Tomorrow it’s the services PMI and trade balance, and the RBA meeting. On Thursday we see the construction PMI and the July jobs numbers and Friday brings housing finance and investment lending, and the RBA’s September quarter Statement on Monetary Policy.

On the local stock front, earnings result highlights this week include those from Cochlear ((COH)), Downer EDI ((DOW)) and Transurban ((TCL)) tomorrow, Rio Tinto ((RIO)) and Tabcorp ((TAH)) on Thursday and Newscorp ((NCM)) and REA Group ((REA)) on Friday.

Rudi will appear on Sky Business today at 11.15am, 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

The Overnight Report: Calm Before The Storm

By Greg Peel

The Dow closed up 22 points or 0.1% while the S&P was flat at 1987 and the Nasdaq lost 0.1%.

Yesterday on Bridge Street saw a replication of Friday’s trade in which the ASX200 was down by 20-odd points early but recovered towards the close. Local stocks ignored the nervous fall on Wall Street and looked to Asia, where indices had a solid session. In focus at present is the Chinese stock market, which after years of wallowing appears to have broken up.

If Chinese investors can once again become interested in their own stock market, the pressure will ease on the property market and thus on debt. Watch this space. In terms of the ASX200, the push to 5600 will come down to the earnings season trend, barring any unforeseen developments in the US this week.

Earnings were not as much in focus on Wall Street last night as M&A, on another typical Merger Monday, while the major data release of the session caused concern. Pending home sales fell for the first time in four months, down 1.1% against expectations of a 0.5% gain. Pending sales are down 7.3% year on year.

A choppy housing market brings into question the strength of the US recovery. Interest rates are low and unemployment is falling, which should provide the basis for housing market improvement. The finger has again been pointed at bank lending restrictions which, in typical fashion, were too loose before the GFC and are arguably too strict now. Bankers have never heard of Goldilocks. Janet Yellen has singled out housing as an important factor in Fed policy, and recent data only serve to underscore the likelihood of the Fed remaining looser for longer. But not all FOMC members agree with this policy.

Dallas Fed president Richard Fisher is a known hawk among the relatively dovish FOMC and is not backward in coming forward with his views. Commentators were still surprised last night when an op-ed piece was published in the Wall Street Journal written by Fisher, entitled “The Danger of Too Loose, Too Long”, in which he outlined his concern that the Fed may be suddenly caught out by the US economy and have to move swiftly and detrimentally. His opinion comes as no shock, but the fact a voting member would openly, albeit indirectly, criticise the boss on the eve of a policy meeting is pretty much unheard of.

Usually Fisher and others wait until after the official Fed statement is released before commenting on their own contribution to the meeting and their own opinions. The minutes, once released, do note “dissenters”. But Fisher’s pre-emptive move only adds to the build-up of this particularly decisive economic week in the US which sees Wednesday night’s meeting follow the release of the first estimate of June quarter GDP, and precede Friday’s jobs numbers.

The significance of this week is enough to keep Wall Street on the sidelines for the moment. The Dow opened down 80 points on the weak pending home sales numbers early in the session last night but grafted back during the day to a flattish close. Tonight will likely see another quiet session ahead of Wednesday’s revelations and that will probably be the case on Bridge Street as well.

After a bit of a pre-weekend shift to safety on Friday night, with the Russian spectre overhanging, positions were somewhat reversed last night. The US ten-year bond yield ticked back 2 basis points to 2.49% and gold fell US$3.60 to US$1304.70/oz with the US dollar index steady at 81.00. The Aussie is up 0.1% to US$0.9405.

Nickel continues to consolidate after its stellar run despite many an analyst suggesting the metal has a lot further to go under the shadow of the Indonesian export ban. It was down 2% last night, while copper was steady, aluminium rebounded 0.8% and other metals put on around 1%. Iron ore was steady at US$94.30/t.

The oils remain a bit betwixt and between at the moment, not sure whether to take note of the peak now having been passed in the US summer driving season against lingering concerns over Russia-West tensions and Middle East mayhem. Last night Brent fell US68c to US$107.55/bbl and West Texas fell US40c to US$101.56/bbl.

The SPI Overnight closed down 7 points.

Japan will see retail sales and jobs numbers today as Abe’s inflate-or-die economic policy continues to struggle. House price and consumer confidence data are due in the US.

On the local stock front, quarterly production reports are due from Beach Energy ((BPT)), Evolution Mining ((EVN)) and Perseus Mining ((PRU)) while Alacer Gold ((AQG)) will release its interim profit result.
 

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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