Tag Archives: China and Emerging Markets

article 3 months old

The Monday Report (On Tuesday)

By Greg Peel

The US added 217,000 jobs in May, just beating expectations of 210,000. The unemployment rate remained steady at 6.3% as the participation rate ticked up from April. May represents the fourth consecutive month of 200,000 plus jobs being added and the 8.7m jobs created since the end of what America calls the Great Recession is equivalent to the total lost in the GFC.

It has taken six years for the US labour market to recover – the longest period following any recession since the Great Depression.

Wall Street liked the result, and many saw it as further confirmation of an economy back in solid recovery mode following the brief weather setback of the first quarter. The Dow rallied 88 points on the news or 0.5% and the S&P gained 0.5% to 1949, with both continuing to rise into blue sky. The Nasdaq added 0.6%.

The US bond market remained unconvinced, with the ten-year yield rising only one basis point to 2.60%. However it is difficult for US yields to rise in the wake of Thursday night’s ECB rate cut/stimulus package given European yields have all fallen as a result. The spread between US tens and German tens is close to an all-time high, with the bund trading around 1.4%. The Spanish yield is now lower than the US yield, implying Spain can borrow money more cheaply than the US.

Such is the make-believe world the central banks have created for us since 2008.

Gold remained steady following the jobs report, as did the Aussie. Base metals are mostly playing a micro game at present related to inventories and the Chinese clampdown on collateralised loans, as well as the Indonesian export bans. On Friday night aluminium rose 1% while copper and nickel each fell 1%.

Brent crude was as good as steady on Friday night at US$108.76/bbl while West Texas added US26c to US$102.77/bbl.

The SPI Overnight closed up 16 points or 0.3% on Saturday morning.

The buoyant mood continued on Wall Street from the open last night, sending the Dow up 46 points by midday despite no US economic releases of note. There was, at least, the Chinese May trade balance to consider, which showed a sharp rise in China’s trade surplus to above expectation. Yet while a 7% (year on year) increase in exports met forecasts, the 1.6% fall in imports did not match forecasts of a 6% increase, and defies Beijing’s attempts to stimulate China’s domestic economy.

Otherwise it was a typical “Merger Monday” on Wall Street, with various new offers being announced, but after two sessions totalling 186 points late last week to take in the ECB and the jobs number, it was time for some profits to be taken. The Dow got within sight of the psychological 17,000 mark, peaking out at 16,970. By 2pm the average was slightly negative, before a slight recovery to the close. The S&P closed up 0.1% to 1951 and the Nasdaq was flat. After all the panic, the Russell 2000 small cap index is back to positive for the year.

The Dow has now rallied 10,000 points since its GFC nadir, or roughly 140%. (Note that a 50% fall requires a 100% rally to return to square.)

St Louis Fed president and non-voting member James Bullard made an interesting observation last night. Previously unconcerned about inflation, Bullard noted that at 6.3% the US unemployment rate is getting closer to the 5.4% level the Fed considers “full employment”, and at 1.6% inflation is getting closer to the Fed’s 2% target. These are the “twin targets” during any economic cycle, and for 67% of the time since 1990 those levels have been further away from the mark than where they are now. Go back to 1960 and it's 75% of the time. Yet the Fed’s current interest rate is zero.

Bullard is hinting that the Fed is falling behind the curve, and interest rates need to start moving up sooner rather than later. Boston Fed president and non-voting member Eric Rosengren, normally amongst the most dovish of the members, chimed in last night to suggest that a cautious but predictable exit plan from QE might be the best way to avoid any market panic over a rate rise. Rosengren cited Wall Street’s calm acceptance of tapering to support his argument.

The important point to remember here is that tapering is only reducing the speed at which the Fed continues to build its balance sheet, ie to increase QE. Tapering does not decrease QE. So on one side we have one Fed member saying let’s get that rate up now, and on the other we have a suggestion to leave the rate alone and just start unwinding QE, carefully.

Whatever the case, the US ten-year yield is up only another tick to 2.61% and gold remains steady at US$1252.80/oz. The US dollar index has been climbing since the ECB’s policy announcement affected a weaker euro (albeit not before the shorts sparked a profit-taking rally on Thursday night) and is up 0.2% from Friday at 80.62.

The Aussie continues to be a victim, given the stronger greenback is a reflection not of a strong US economy as such but of ECB money printing. The Battler is up 0.2% from Friday at US$0.9352 to provide no reflection of the Australian economy. The Aussie can probably empathise with the Socceroos with regard the disdain with which the rest of the world is about to treat them.

The stronger greenback weighs on metal prices, but only as a dampener to the positives of ECB printing and an apparently strengthening US economy. Last night saw aluminium and zinc post 2% rallies, while nickel continues to stabilise since its big run-up on Indonesian bans and copper is crippled at present by the investigation into fraudulent Chinese collateralisation.

Spot iron ore went up US20c on Friday night and down US20c last night to be unchanged at US$94.30/t, where we left it for the long weekend.

Having hovered uncertainly for the previous two sessions, last night the oils decided it was time to put together ECB stimulus, the good US jobs result, China’s trade surplus and also yesterday’s revision of the Japanese March quarter GDP to 6.7% annual growth from the first estimate of 5.9% (which will crash in the June quarter on the GST increase, but so be it) and went for a run. Brent rose US$1.21 to US$ 109.97/bbl and West Texas rose US$1.78 to US$104.55/bbl.

The SPI Overnight closed up 14 points or 0.3% this morning, so that’s a net 30 points since the ASX was last open.

There’s not much to consider on the US data front this week until Thursday’s retail sales and business inventories releases. Friday sees the PPI and fortnightly consumer sentiment.

China releases its inflation data today and will provide a data dump on Friday of industrial production, retail sales and fixed asset investment numbers.

The RBNZ holds a policy meeting on Thursday and the Bank of Japan on Friday.

It doesn’t really matter what data are released in Europe given Mario Draghi has pledged “more to come” on the stimulus front.

Australia sees ANZ jobs ads today along with the NAB business confidence survey, housing finance and investment lending. Tomorrow it’s the Westpac consumer confidence survey and on Thursday our own jobs report.

The only scheduled corporate event of note this week is an investor briefing from Goodman Group ((GMG)) on Thursday but we remain wary of any unscheduled guidance “confessions” ahead of end of financial year.

Rudi will appear on Sky Business on Wednesday at 5.30pm and on Thursday at noon. If you reside around Wollongong, he'll be presenting later today, at 6pm at the Illawarra Master Builders' Club, 61 Church Street, Wollongong.
 

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

Well there we were thinking that after six years, Fed tapering and rate rise speculation was a signal the GFC is finally all but behind us. But along came European deflation and Mario Draghi with his heavy artillery. The sooner the eurozone is recognised as a pitiful failure, and disbanded, sooner the world will be better off. A rising tide of euro-scepticism in the European parliament offers promise.

But life sails merrily on. Tonight the US jobs number for May is due and will offer implications for aforementioned tapering/rate rise timing.

On Sunday Beijing will release China’s May trade balance.

Next week’s US data releases include inventories, retail sales, the PPI and fortnightly consumer sentiment.

China will release its May inflation numbers on Tuesday and on Friday will provide a data dump of May industrial production, retail sales and fixed asset investment numbers.

The Reserve Bank of New Zealand will hold a policy meeting on Thursday.

Australian markets will be closed on Monday for the Queen’s birthday long weekend and FNArena will subsequently also be closed, although the website will remain fully accessible.

Thereafter, next week’s local data releases include ANZ job ads, NAB business confidence, Westpac consumer confidence, housing finance, investment lending and on Thursday, our own jobs numbers.

It’s getting very quiet on the corporate front as we approach end of financial year with scheduled updates minimal and remaining unscheduled profit “confessions” unknown at this stage. Goodman Group ((GMG)) will provide an update on Thursday.
 

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article 3 months old

The Overnight Report: Funny Money Round Two

By Greg Peel

The Dow rose 98 points or 0.6% while the S&P gained 0.7% to 1940 and the Nasdaq added 0.9%.

A rebound in the iron ore price failed to excite an Australian market suffering ongoing budget blues yesterday morning, with the index falling from the open. The mood did not improve on the release of the April trade data.

Wednesday’s March GDP result, which showed strong growth driven solely by mining exports, aroused fears March may represent a peak ahead of mining revenues falling and nothing rising to take the mantle. When the April trade balance came in at a deficit of $122m, instead of a forecast surplus of $300m, it seemed these fears were already proving founded. Exports fell by 1.4% in the month and imports rose 2.3%.

But the April result was tempered by revisions to the previous two months’ balances. March was revised to a surplus of $902m from a previous $731m and February to $1729m from $1257m. Mining exports will continue to contribute to GDP ahead, say economists. And soon we can add LNG to iron ore and coal as the big contributors.

The release of HSBC’s take on China’s May service sector PMI provided little encouragement, falling to a four-month low of 50.7 from April’s 51.4 and belying the positive official result posted earlier this week by Beijing.

By late morning the ASX 200 turned, wobbled for a while, and ultimately ended with a flatter close of down 7 points. Traders were likely looking to Europe in setting their overnight positions.

Super Mario didn’t disappoint, that is, if you’re a fan of funny money. Last night the ECB cut its cash rate to 0.15% from 0.25% and its deposit rate to minus 0.1% from 0%, implying European banks will have to pay the ECB to park their funds. Several liquidity measures were also announced, including E400bn of “targeted long term refinancing operations” aimed at supporting bank lending to households and businesses and other such technical tricks, but the ECB stopped short of some form of asset purchases, or QE. That’s being kept on standby.

Draghi has said for years he would do “whatever it takes” and the mantra has not changed.

The euro plunged sharply during Draghi’s press conference last night, which is the correct direction when money printing or the equivalent is announced. However traders were short to the gills in the long lead up to last night, so within a heartbeat the euro bounced, and bounced hard, as shorts were rapidly covered. The euro is thus higher than where it was yesterday, and the US dollar index is down 0.4% to 80.34.

Gold also headed in the correct direction but looked a bit half-hearted with a US$9.30 gain to US$1253.00/oz. The US ten-year bond yield lost a couple of bips to 2.58%. The Aussie is a victim, at least in the short term, in rising 0.7% to US$0.9339.

Base metals closed on mixed and small moves with Chinese concerns hanging over any positive implications of euro QE or the lower US dollar. Beijing is investigating the Qingdao company alleged to have collateralised 20t of copper into 4-50t worth of loans. The concern is a further clampdown by the government will see large amounts of metal dumped onto the market.

The spot iron ore price fell US30c to US$94.30/t.

The weaker greenback provided enough impetus for the oils to close in the positive, despite further evidence of building US inventories in the latest weekly data. Brent rose US51c to US$108.82/bbl and West Texas rose US16c to US$102.51/bbl.

The SPI Overnight gained 9 points, again.

The Dow and the S&P are now firmly back in blue sky territory. While the ECB move was widely expected, Draghi does have a track record of talking much and doing little. Not this time. Attention now moves to tonight’s US non-farm payrolls number, over which Wall Street has been slightly concerned since Wednesday night’s private sector jobs number proved disappointing.

Today also sees Australia’s construction PMI and over the weekend, China’s May trade balance will be released.

Enjoy your long weekend’s if you qualify, and note while FNArena will be “closed” on Monday the website will remain fully accessible and overnight prices will be updated.


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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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article 3 months old

The Overnight Report: Waiting For Mario

By Greg Peel

The Dow closed down 21 points or 0.1% while the S&P was flat at 1924 and the Nasdaq fell less than 0.1%.

Everything that was bought on Monday in the Australian stock market to offset the impact of the plunging iron ore price was sold yesterday, with the biggest fall reserved for the consumer discretionary sector, down 1.6%. The market is certainly twitchy, hence a tepid 0.2% increase in retail sales in April when 0.3% was expected proved to be a bit of a trigger.

Year on year, sales are up 5.7%, and the long term consumer spending trend is 6%, so it’s hardly panic stations. So much for shows like Masterchef and My Kitchen Rules reinvigorating the joy of home cooking, spending in cafes and restaurants is up 11.7% year on year – the biggest segmental gain. In April, sales in department stores actually rose 2.9%, which means a customer must have found a shop assistant.

To weightier matters, Australia’s current account deficit (not to be confused with the budget deficit) halved in the March quarter to $5.7bn or 1.4% of GDP, beating expectations of $7bn. International trade forms part of the current account equation, and here exports jumped 5.3% and imports fell 1.0% which affected a doubling of the balance of trade to $15.1bn, worth 1.4 percentage points of GDP.

And that means an RBA rate cut is less likely, if ever it were likely, which didn’t sit well with those hoping the “weak” retail sales numbers might prod the central bank into further action. The data were worth a 20 point fall in the ASX 200, and when the RBA statement came out to confirm no rate change, the index fell another 20 points with the sulks. Never mind that no one from here to Mars actually expected a rate cut, or any suggestion of one.

I said last week the June RBA statement will probably be a carbon copy of the May statement, which itself was almost identical to the April statement and so on, and it was. Except for one line. In May the board noted “The exchange rate remains high by historical standards,” while yesterday the board noted “The exchange rate remains high by historical standards, particularly given the further decline in commodity prices”.

It didn’t work. The Aussie is up 0.2% to US$0.9266, largely reflecting the balance of trade result.

HSBC also released its take on the Chinese manufacturing PMI yesterday, which echoed Beijing’s official reading with a rise but only to 49.4 in May from 48.1 in April, falling short of a 49.7 forecast and still implying contraction (Beijing had 50.8). This would not have helped the local market yesterday either. Yet Beijing’s official service sector PMI rose to 55.5 from 54.8 to a six-month high, and China’s service sector is rapidly growing much larger than its manufacturing sector. As was the case with Beijing’s manufacturing result, new orders were the stand-out contributor in services which bodes well for the Chinese GDP going forward.

None of the above had any effect on Wall Street, which is simply drifting this week around all-time highs ahead of tomorrow night’s ECB policy meeting and Friday night’s US jobs number. Last night the eurozone released its flash CPI reading for May, which showed a fall to 0.5% annual growth from 0.7% in April, missing expectations of 0.6%. While Mario Draghi has shrugged off deflation fears up to now, he has said he may act to reboot the eurozone economy with policy measures this month (ie tomorrow night), which may include any or all of a cash rate cut, a central bank deposit rate cut to negative and some form of QE.

As the world awaits Mario’s crucial decision, just about everything is drifting in the doldrums. Everything, that is, except US bond yields.

Having hit its low for the year last week, the benchmark US ten-year yield has since risen sharply for four consecutive sessions just as the world began to seriously agonise over why it was so low in the first place. Last night saw a 6 basis point gain to 2.59%, with traders likely squaring up ahead of what might be disappointment from Brussels, and/or what might be a good US jobs number. The world is long US Treasuries so it’s probably just a precaution.

Other than that, the US dollar index is down 0.2% to 80.53 and gold is steady at US$1244.70/oz. Base metals were mixed although copper gave back Monday night’s 1% gain and volatile nickel decided to fall 2%. The oils barely troubled the scorer last night.

Spot iron ore rose US40c to US$92.50/t.

Despite the flat close on Wall Street the SPI Overnight closed up 10 points or 0.2%, likely seeing yesterday’s session as a bit of a tanty.

Today is GDP day in Australia. Leading into this week’s raft of March quarter data releases consensus was for a 0.8% quarter on quarter gain for 3.2% growth year on year. After adjusting for the component data, CBA, for one, is now forecasting 1.0% qoq for 3.3% yoy.

We’ll also see further service sector PMI results today and tonight from here and across the globe while the May private sector jobs growth for the US will be released and the Fed will deliver its Beige Book.

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 Overnight Report: Get It Right

By Greg Peel

The Dow closed up 26 points or 0.2% while the S&P gained one point to 1924 as the Nasdaq fell 0.1%.

The Strolling Bones sing Gimme Shelter, but in Australia and around the world those of the same vintage sing loudly Gimme Yield. At the end of the day if a fall in the iron ore price resonates to send the wider Australian stock market lower by default, the result is an opportunity to pick up yield stocks at more attractive levels. Hence the big fall in the iron ore price on Friday night sent the ASX 200 only briefly lower yesterday before the buyers rolled in.

The banks made the difference on the index, along with the telco, while healthcare and consumer staples were also strong and industrials were by no means left behind. Analysts last week were at pains to point out that the big diversified miners have a substantial price buffer in their low-cost iron ore operations and with capital management in the offing, were looking like a bargain in the wake of panic selling.

Meanwhile the mainstream media were having apoplexy yesterday over a 1.9% fall in the monthly average house price – the first fall for twelve months and the biggest fall in five years. You’d think it was the sky that was falling, despite the 11% rise in the average price over the past twelve months, but at some point prices just have to stop rising. Such sensationalism doesn’t do much for consumer confidence.

More concerning were the monthly building approval numbers, with residential falling 5.6% in April. It was all about apartment block approvals, which fell 13.5% to be 17% lower than a year ago, while single house approvals fell only 0.1% to be 16% higher than a year ago. Non-residential (ie office blocks etc) fell 37% to be 53% lower than a year ago, but the CBA economists are confident demand for new office blocks and hotels around Australia’s CBDs will improve in coming months. And the non-res numbers are very lumpy.

In the March quarter data, company profits grew by 3.1% to be 10.9% higher year on year and growth is at its highest level since the December quarter 2010. Wages grew 0.2% to be up 2.9% yoy and growth remains tepid on unemployment concerns. Inventories fell 1.7% having fallen 0.6% in December and exceeded expectations of a 0.4% fall. This is not good news, and worth a negative half a percentage point off GDP forecasts.

On all of the above the Aussie plunged 0.7% to be sitting at US$0.9247 this morning, as traders this week decided the RBA won’t be raising anytime soon. Next week they’ll probably change their minds again. And the ASX 200 closed up a defiant 26 points, with the rise in the Chinese manufacturing PMI released over the weekend providing some offset to iron ore price fears.

There was also some excitement in Australia’s May manufacturing PMI result of 49.2, up from 44.8 in April, and suggesting perhaps a move into expansion soon. But then no one’s yet explained to me why every other nation’s PMIs shift incrementally month on month and Australia’s flies around like a bird trapped in a lounge room. That number could well be 43 in June.

Australia is not the only country having trouble with PMIs, nevertheless. Last night the US Institute of Supply Management, publisher of the US manufacturing PMI, released a May number of 53.2, suggesting an unexpected fall from April’s 54.9 and sending the stock markets south. But the vigilant Wall Street Journal was not convinced and told the ISM, which then admitted an error and re-released a number of 56.0, only to pull that as well and settle finally on a result of 55.8.

It doesn’t do much for confidence in markets and data. The shemozzle would have really done the HFT computers’ heads in. Stock markets ultimately turned north again to close slightly higher (each rise for the Dow and S&P is another record at this stage) but the damage was somewhat more telling in the US bond market, which has clearly become a bit twitchy since all this “why are bond yields so low?” discussion has become ubiquitous. On the first, PMI result, the ten-year yield ticked down a little, but when the correction was made there was some pretty frantic bond selling. A rise of 8 basis points for the ten-year to 2.53% on one little PMI error just goes to show how over-long the bond market is.

The UK continues to post rapid growth numbers in its manufacturing sector, despite a tick down in May to 57.0 from 57.2. A fall in the eurozone PMI to 52.2 from 53.4 only further increases the odds of the ECB taking action on Thursday night.

The contrasting US and European manufacturing numbers affected a 0.3% rise in the US dollar index last night to 80.63. Gold fell US$7.60 to US$1243.70/oz.

Base metal traders were encouraged by the Chinese PMI and also by the US version, which was 56.0 as far as the LME was aware before the close. The holiday in China meant volumes were low, but across-the-board gains including 1.2% for copper were posted.

There will be at least some relief in the local materials sector today with a US30c rebound overnight in the iron ore price to US$92.10/t.

The SPI Overnight closed up 9 points.

Australia’s March quarter trade numbers will be revealed today within the current account release while April retail sales will be closely watched and the RBA will meet and do nothing. Beijing will release the official Chinese service sector PMI and HSBC its China manufacturing PMI.

A flash estimate of the eurozone May CPI will be published tonight which is really the crux of the matter for the ECB. Eurozone unemployment numbers are also due.


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 half percent fall in the ASX 200 on Friday was once again all about the materials sector, which fell 1.3% on the weaker iron ore price. Things are not shaping up well for the local market today on that basis, given Friday saw another drop in the iron ore price, indeed a substantial US$3.90 to US$91.80/t. Friday night’s 8 point fall on the SPI Overnight looks optimistic.

Meanwhile, we did see another rise in China’s official manufacturing PMI over the weekend to 50.8 from 50.4 in April, beating 50.6 expectations. It’s grafting stuff but at least in the right direction, and the May result represents a five-month high. New orders provided the bulk of the increase, which bodes well for China’s economy going forward.

As to whether the PMI can offer any sort of dampener today is yet to be seen, with iron ore now perilously close to its 2012 low of US$86.70/t. A breach of the low would see prices back at 2009 GFC levels.

Wall Street won’t be offering much assistance today, despite both the Dow and S&P trading further into blue sky on Friday night to provide a 2% broad market gain for the infamous month of May. The Dow closed up 18 points or 0.1% having opened down 50 points, while the S&P gained 0.2% to 1923 as the Nasdaq slipped 0.1%.

The weak start on Wall Street was due to disappointing data releases. The Michigan Uni fortnightly consumer sentiment measure showed a fall to 81.9 from 84.1 a month ago. US personal spending fell 0.1% in April having risen 1.0% in March, marking the first decline in 2014. Economists point to the weather, again, noting the big difference from March to April was a drop in spending on heating. The good news is annualised spending is running at 4.3%, up from a low of 2.6% in April 2013.

Personal incomes, on the other hand, rose 0.2% to mark the lowest gain for 2014. Incomes have grown only 2.0% annualised, which has economists concerned over the robustness of any US recovery. The gap between 2.0% income growth and 4.3% spending growth suggests only one thing – Americans are back to reducing their savings and/or using credit. One disturbing observation is that equity draw-downs on houses are back on the rise, indeed quite rapidly, as house prices rise. At least the banks are being more careful this time (so far), not allowing the madness that was equity draw-downs in excess of 100% of house value in the pre-GFC frenzy.

Back then, Americans were drawing on the equity of their house safe in the knowledge house prices would only keep rising, to invest in the stock market which also never looked like going down again. Given very low levels of retail participation in the current bull market, even with the indices at all-time highs, one presumes this is not the case this time around. Yet.

If the money is going anywhere it’s going into US bonds. The ten-year yield was steady on Friday at 2.46% and the US dollar index dropped 0.1% to 80.39. Gold lost US$4.90 to US$1251.30/oz and the Aussie is steady at US$0.9310.

LME traders played it safe on Friday night, taking profits ahead of the Chinese PMI release and today’s public holiday in China. Copper posted the lowest fall at 0.5% but nickel bucked the trend in jumping 2%.

Rising US inventories and mixed US economic data, such as Friday’s consumer spending results, are weighing on oil prices and undermining the geopolitical premiums built therein. As each week passes without any major Russia/West confrontation, that premium is harder to maintain. Brent fell US91c on Friday to US$109.21/bbl and West Texas fell US77c to US$102.83/bbl.

As noted, the SPI Overnight was down 8 points on Saturday morning with China’s PMI pending but the 4% fall in the iron ore price may imply something a little more excessive today, given both BHP Billiton ((BHP)) and Rio Tinto ((RIO)) were down around 4% in London on Friday night.

We are nevertheless facing a crucial and data-filled week, both locally and across the globe.

Manufacturing PMIs are due for Australia, Japan, the eurozone, UK and US today and services PMI for the same group on Wednesday, while HSBC’s PMIs will run a day behind due to today’s holiday in China. Beijing will release its service sector PMI tomorrow. Australia’s construction PMI is due on Friday.

In terms of monthly data, Australia will also see building approvals, house prices and the TD Securities inflation gauge today, retail sales tomorrow, and the trade balance on Thursday. In terms of March quarter data, Australia will see company profits and inventories today, the current account, including balance of trade, tomorrow and on Wednesday the GDP is released. Economists are forecasting a 0.8% quarterly gain, matching the December quarter, taking the annual rate to 3.2% from 2.8%

The RBA will meet tomorrow but little change is expected in the policy statement and no change is expected in the cash rate.

It’s jobs week in the US, with the ADP private sector number out on Wednesday and non-farm payrolls on Friday. The US also sees construction spending tonight, factory orders and vehicle sales on Tuesday, the trade balance and Fed Beige Book on Wednesday and chain store sales on Thursday.

Overriding all data releases and other economic influence this week will be the ECB policy meeting on Thursday night. The central bank is expected to cut its cash rate from 0.5% and either introduce or flag some form of QE ahead after having done nothing but talk about the possibility for many months. Look out if it doesn’t.

The ECB would have noted an alarming fall in German retail sales data released on Friday night, showing a 0.9% drop in April when economists had expected a 0.4% gain. Critical to the ECB decision is eurozone inflation, or lack thereof, and a flash estimate of the May CPI will be released tomorrow night. The first estimate of eurozone March quarter GDP will be revised on Wednesday night, although no change is expected to the initial 0.9% result.

New Zealand is on holiday today.

We’re now basically through the recent result mini-season for Australian corporates as we enter the usually quiet period, disclosure-wise, before end of financial year. There are still a handful of updates scheduled for this month nevertheless, including Challenger ((CGF)) on Wednesday, and there may yet be last minute “confession session” downgrades lurking.

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

Next Week At A Glance

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

By Greg Peel

It’s GDP week in Australia next week as the last of the March quarter data are rolled out ahead of Wednesday’s final result. We’ll see quarterly data for corporate profits and inventories along with the current account, which includes the trade numbers, before the big day.

The RBA will meet on Tuesday and probably publish a statement that looks negligibly different from the May statement.

It’s a PMI week, which begins with the release of the official Chinese manufacturing number on Sunday while HSBC sensibly waits till next week, which is also when the Australian, eurozone, UK and US results are due. All parties will also release service sector PMIs.

It’s also jobs week in the US, providing fodder for the great debate over whether the US is recovering steadily or not. The private sector number is due on Wednesday and non-farm payrolls on Friday. Throughout the week there will be releases for construction spending, factory orders and chain store sales and the Fed will release its latest Beige Book on Wednesday.

Despite a lot of important data being due next week, it will all fade into the background as the world awaits the outcome of the ECB policy meeting on Thursday night. Rate cut? QE? It is unclear what Mario Draghi has planned, but the world is assuming that next week he’ll finally stop talking the talk and start walking the walk.

Outside of March quarter numbers, Australia will next week also see monthly data for building approvals, retail sales and the trade balance.

Local corporate activity slows to a grinding halt next week, at least in official terms. Aside from an investor update from Challenger Group ((CGF)) we will now enter the effective blackout period ahead of end of financial year, notwithstanding any further “confession session” profit warnings that may emerge.


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article 3 months old

The Culprits Behind The Chinese Housing Correction

By Rosealea Yao and Thomas Gatley of GavekalDragonomics

With this year’s correction in the Chinese housing market spreading, the search for the villain of the piece is on. Most market analysts were primed to expect problems in the numerous small, isolated cities that have overbuilt housing and are swimming in excess inventories. Both our own research and much other analysis has shown that smaller cities have serious problems, thanks to an unhappy combination of weak population growth and government-led building booms. Yet the recent correction got its start not in out-of-the-way ghost towns like Yingkou and Tieling, but in large, prosperous coastal cities like Hangzhou. So does this mean that the problems in China’s housing market are different and more severe than many thought? It does not, but to understand why requires a closer look.

We haven’t changed our view that the long-term fundamentals for large coastal cities are solid: these cities are where China’s people are concentrating to take advantage of the economic gains from urbanization. But the structural divide in the housing market—between this small group of large cities with good fundamentals, and a large group of small cities with bad fundamentals—does not necessarily mean that cyclical corrections will be led by small cities. Property developers themselves saw this division very clearly: indeed, as they realized smaller cities were oversupplied, they refocused their efforts on new projects in the big cities on the coast. But by splurging on expensive land in these cities, developers left their finances stretched. And when sales growth slowed in late 2013, developers’ access to informal financing was also drying up. So developers starting cutting prices in some cities to boost sales and cash flow. The price cuts were focused in cities with high prices, because that’s where they had the best chance of boosting sales. Unfortunately, those large, high-profile cities serve as bellwethers for the national market, and as word of falling prices spread, sales and sentiment were hurt across the country. As a result, China is now experiencing a full-fledged housing downturn, one that will likely continue for at least a couple of quarters.

Ironically, the real villains of the property market—the heavily oversupplied small cities—could manage relatively better. While we shouldn’t expect them to avoid the national cycle, they are unlikely to have a deeper correction than the big cities. First, affordability is much less of a problem in smaller cities, and developers’ margins are much thinner. So the potential for price cuts to stimulate sales is more limited, and developers are more reluctant to start cutting. Second, the cycle in bigger cities is always more volatile, because a greater share of property sales are speculative, there is greater reliance on mortgage debt, and developers’ wide margins give them much more price flexibility. So just as in previous housing cycles, the large cities where prices are highest should see the sharpest downturn. We do think this is a cyclical correction rather than a structural collapse, since the fundamental demand for housing in China remains quite large. But since on our estimates China has been at or near peak housing supply for two years now, its future will hold more of these volatile swings around a trend, and will not repeat the steady upward climb of the past decade.

Where are China’s hottest markets?

To dissect the trends in the big cities responsible for this correction, we dig into the detailed monthly housing data that is available for 40 major cities, which together account for about 40% of nationwide sales volume and include many of the so-called Tier 1 and Tier 2 cities. Though these large cities are all better off structurally than more isolated and slower-growing small cities, they are hardly a uniform group. We divide them into three groups based on historic levels of affordability: the most dynamic but also most expensive coastal cities, some less high-profile but also expensive cities, and the remainder of relatively affordable cities (see table below for the members of each group).
 


 

Once this breakdown is done it is easy to see which group has been developers’ darling recently: the most expensive coastal cities. The volume of land sales in this group of cities rose 70% in 2013, well above the 8.8% growth for nationwide land sales. This extreme surge was the result of many developers simultaneously coming to the same conclusion: while smaller cities may once have been attractive because there were fewer government restrictions on housing sales, their prospects were rapidly dimming as excess supply became increasingly obvious. Where better to focus new development than those cities that are clearly the economic hubs of an increasingly urban China—not just the big two of Beijing and Shanghai, but attractive and fast-growing cities like Suzhou, Xiamen and Hangzhou.
 


 

It was this surge of investment into very expensive land that laid the seeds for the woes that would later befall developers. Property developers have faced tight credit conditions for many years now, with the government limiting their access to bank credit in an attempt to tame boom-bust cycles in housing. During the good times this discrimination was not actually a tight constraint: most houses in China are purchased well in advance of their completion, so developers are able to fund their expenses with new customers’ down-payments. This strategy does however leave developers highly vulnerable to a sales slowdown, of the sort which began to unfold in the most expensive cities over the second half of 2013.
 


 

The cooling of sales was not so much because housing in those cities was becoming less attractive but more because a lot of purchases had simply been front-loaded into the early part of the year, as buyers scrambled to finalize transactions in advance of a feared change in tax rules. But whatever the cause of the cooling sales in hot markets, the effect on the finances of developers in those cities was the same: new cash was not coming in fast enough, and their reserves had been depleted by lots of expensive land purchases. Normally developers would meet this kind of shortfall by turning to various “shadow” financing channels, like trust loans or short-term debt (or, for the biggest firms, selling offshore bonds to global investors). But in late 2013 the central bank was pushing up funding costs for this kind of finance, and ordering banks to reduce their exposure. As a result, developers’ need for additional finance was greatest just when their access to it was weakest.
 


 

The only way to get more cash, unpalatable as it might be, was to try to juice sales by slashing prices. Price cuts at some developments in Hangzhou were widely reported in the Chinese press, and in January the city’s official housing price index suddenly went into negative territory after months of steady gains. At the same time, developers scaled sharply back on new construction, a response both to rising inventories and weaker growth prospects, and a measure to reduce expenses. But price cuts spread—the number of cities with falling prices jumped to six in January 2014 from two in December 2013— the problem did not stay contained in the expensive, overheated markets where it started. The big high-profile cities have always led the nationwide property cycle, and this relationship is still holding true. Price cuts in the short term dampen sales, by encouraging fundamental buyers to wait for a better price and signaling to speculative buyers that short-term gains are less likely. April’s data provided clear signs that the slowdown in sales has spread more widely, and that prices are weakening outside the cities where the trouble started. Notably, new housing prices in cities of very different sizes are all softening at roughly the same rate.
 


 

So like most of China’s previous property corrections, the latest one had its origins in big cities. The correction will, like previous ones, be most severe in the big cities, because that’s where prices have the most room to move, and that’s where sentiment and sales are most sensitive. Given some easing in developers’ access to credit, and some supportive government policies— both of which have already begun—it’s not hard to see this correction exhausting itself eventually and buyers returning to the market.

The big question mark is over the small cities and their structural oversupply: will this latest correction prove the trigger for big problems here? There are definitely some reasons to think not: housing is not wildly overpriced in small cities, and developers’ finances could be hurt more than helped by major price cuts. Their incentive is to unload the inventories gradually over time rather than to do a crash sale. But if developers’ finances worsen significantly and smaller ones start to go bankrupt, they could be forced into liquidating inventories. The biggest impact is likely to be not on the price of housing in small cities, but on the pace at which new housing is built: the structural oversupply is already a big incentive for developers to cut back, one that will only be amplified by the correction.
 

Reprinted with permission of the publisher. Content included in this article is not by association the view of FNArena (see our disclaimer).
 

The information contained herein is provided for informational purposes only and should not be regarded as an offer to sell or a solicitation of an offer to buy the securities or products mentioned. This document is a private publication intended for private distribution. The value of all investments and any income generated can decrease as well as increase. Performance numbers shown are records of past performance and as such do not guarantee future performance. No representation is made that any one investor achieved any of the results shown herein. This information is subject to change without notice. The securities and products mentioned may not be eligible for sale in some states or countries, nor suitable for all types of investors. Gavekal Research Limited does not warrant the accuracy, completeness, reliability, fitness for a particular purpose or merchantability of this information, and expressly disclaim liability for errors or omissions in this information and data. Gavekal Research Limited shall have no liability for the use, misuse, or distribution of this information to unauthorized recipients.


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article 3 months old

The Overnight Report: As You Were

By Greg Peel

The Dow closed up 10 points while the S&P gained 0.2% to 1892 and the Nasdaq rose 0.6%. The Russell 2000 remains in the spotlight, last night rising 0.9%.

Well, one dollar up in the iron ore price and we’re up 55 points in the ASX 200. And, consequently, about square for the week. A positive lead from Wall Street helped to start things off, as did iron ore, and HSBC’s flash estimate of China’s May manufacturing PMI showed a solid jump to 49.7 from 48.1 in April when economists had expected a flat result. Then we were off to the races.

Last night iron ore was up another US30c to US$98.80/t, which should consolidate things today. Yesterday the materials sector shot up 1.7%, and energy rebounded 1.3% as investors anticipated a juicy special from Woodside now the company is out of Israel. There’s no way the budget will get through the Senate in its current form, so yesterday was the day to buy back the knocked-down healthcare sector (up 1.8%). It all came together despite Telstra having a quiet day.

Over on Wall Street, summer is in the air. Only five minutes ago we were trying to assess the true impact of snow and ice, and next week we’ll see the first revision of the US first quarter GDP which may actually show a negative. But it’s the Memorial Day holiday on Monday, and the long weekend unofficially signals the beginning of the holiday season. That’s why we “sell in May”.

But not this May. Wall Street was so quiet last night it seemed as if it were a half-day session. Tonight, presumably, only two men and a dog will turn up. The major indices consolidated their gains from Wednesday night but yet again the Russell 2000 took the headlines, jumping 0.9% on a biotech-led surge. Russ could just as easily collapse again tonight, such is the way that index has been trading of late.

The US flash manufacturing PMI, released last night, jumped to 56.2 from 55.4. Sales of existing homes rose in April for the first time in 2014, up 1.4%. The Conference Board leading economic index rose 0.4% in April. Looks like the US economy is fine.

Except that the Chicago Fed national activity index has fallen to minus 0.32 this month from plus 0.34 in April, and after a big drop the week before, last week’s jobless claims showed a solid rebound. So maybe not quite so fine.

And that is the problem in a nutshell. No one knows, least of all the Fed, just what state the US economy is really in. And the Fed has no idea, it has all but admitted, just how it is going to go about getting out of QE. (Which is not “tapering”. Tapering simply means slowing down the buying of bonds. Getting out of those bonds is another story altogether.)

The eurozone’s flash PMI showed an easing to 53.9 from 54.0 in April. This will not prevent Draghi from acting next month although it’s still a healthy number, and enough to make an Aussie manufacturer weep. The first revision of UK’s March quarter GDP showed an unchanged 0.8% gain for a 3.1% annualised growth rate. Jolly good show.

Good Lord, the US dollar index rose 0.2% last night to 80.22. Must have given itself a real shock. Gold remains in hibernation nevertheless, steady at US$1293.70/oz. The US ten-year has ticked up again, last night up 2bps to 2.56%.

The Aussie shot up on the Chinese PMI release, and then drifted lower all through yesterday afternoon and last night to actually be down 0.3% over 24 hours to US$0.9229. It’s a good day when stocks go up and the Aussie goes down.

They loved the Chinese flash on the LME, and sent all metals higher, including a 1.3% gain for aluminium and 1.4% for now volatile nickel. As noted, the spot iron ore price rose US30c to US$98.89/t.

The oils were steady last night. Brent closed at US$110.36/bbl and West Texas at US$103.78/bbl.

The SPI Overnight rose 11 points or 0.2%. The June contract, which expires in a month, is sitting at 5499.

The ASX 200 needs only 21 points and we’re back at 5500. For a minute there 5300 was looking possible. Such is the market.

Avagoodweegend.
 

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article 3 months old

The Overnight Report: Nasdaq, Russell Fight Back – Again

By Greg Peel

The Dow closed up 20 points or 0.1% while the S&P gained 0.4% to 1885 as the Nasdaq rose 0.8%. The Russell 2000 rose 1.0%.

It started in the iron ore stocks yesterday but it soon spread like wildfire across the wider Australian market. Another US$2.20 drop in the iron ore price overnight to US$98.50/t, below the psychological 100 mark, does not bode well for the materials sector again today. Yesterday, however, it was not just about China but about Tony. Rarely do politicians have any meaningful impact on the stock market, but yesterday’s popularity polls suggested a big drop in Australian consumer confidence ahead.

And that translates through the system, from retailers to banks and beyond. While the materials sector led with a 1.9% loss yesterday, consumer discretionary (-1.5%) and banks (-1.1%) were also hit. Banks (and other financials) represent about 40% of the ASX 200.

Not helping yesterday was news from China that eight major cities saw house prices declining in April when only four saw declines in March. Is the Chinese property market rolling over?

Put it altogether and Bridge Street had one of its familiar snowballing sell-offs yesterday, which tend to happen quite regularly when someone says “overvalued”. At this stage the SPI Overnight is pointing to a 20 point rebound today, but the SPI Overnight is not always an accurate predictor.

Over on Wall Street, the Dow opened down 50 points. It was to prove to be, nevertheless, one of the lowest volume trading days of the year. A lot of factors were hanging in the balance by the end of last week. Would the Russia-Ukraine tension escalate or ease? Was the US ten-year bond yield about to break technical support and rush towards 2%? Was the momentum stock and small cap sell-off still only in its early stage? All these factors have Wall Street nervous at present. Traders covered shorts late on Friday, sending the Dow rallying 50 points to its closing level, and apparently re-established them from the bell last night, having moved to the sidelines for the weekend.

There were no data releases to speak of to contemplate early in the session. But right from the opening drop, the Nasdaq started to rally. And the Russell started to rally. The S&P was helped up by the Nasdaq and after a spluttering start, the blue chips began to follow suit.

A firm eye was kept on the ten-year bond yield. It too began to rise, ultimately closing up 2 basis points to 2.53%. It’s not a big reversal, but it is a reversal so far. Then everything fed on itself. It’s not unusual for stock traders to say stocks went up because bond yields went up and for bond traders to say bond yields went up because stocks went up.

Whatever the case, the lack of volume renders last night’s session relatively ineffective as a trend indicator. We may need to wait for Wednesday night’s Fed minutes and Yellen speech and data releases later in the week to gauge what will happen next.

The US dollar index remained steady at 80.03 and gold remained steady at US$1293.00/oz. The Aussie is 0.4% lower at US$0.9328 on the China/iron ore factor, and on yesterday’s stock selling by foreigners, one presumes.

Volumes were also very low over on the LME, similarly providing a vacuum for price rallies. All metals rose around half to one percent except for nickel. Having been thumped about 10% in recent sessions, nickel rebounded again last night by a quiet 6%.

Spot iron ore, as noted, fell US$2.20 to US$98.50/t.

The oils were split between a US43c drop for Brent to US$109.32/bbl and a US60c rise for West Texas to US$102.62/bbl.

The SPI Overnight, as noted, closed up 20 points or 0.4%.

The minutes of the May RBA meeting are due out to today but as they are cum-budget, they lack relevance. Arrium ((ARI)) will report its quarterly iron ore production today – timely – while Transurban ((TCL)) will provide an update.
 

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