Tag Archives: China and Emerging Markets

article 3 months old

The Monday Report

By Greg Peel

The Australian market recovered on Friday from excess volatility relating to the index and futures expiry on Thursday, taking a positive lead from Wall Street and returning prices to previous levels. On Friday night it was Wall Street’s turn to endure expiry volatility, as “quadruple witching” – the expiry of stock and index options, futures and futures options – made its presence felt.

Wall Street opened strongly on Friday morning, taking the Dow up 125 points before midday and leading the S&P 500 to a new intraday high over 1883. The high coincided with a move lower in US bond yields, a dip in the US dollar and a turnaround rise in gold, all of which suggest markets have recovered from the initial shock of Janet Yellen’s “six months” call. The assumption is the Fed chair will likely back down somewhat and qualify the timing of the first interest rate hike at subsequent opportunities.

But the afternoon brought a different picture on stock markets as expiry pressures were exerted. The Dow finished the session down 28 points or 0.2% and the S&P lost 0.3% to close at 1866. The Nasdaq had a tough day, falling 1.1%.

After its strong move up in the wake of Yellen’s press conference, the US dollar index slipped back 0.2% to 80.10 on Friday. The US ten-year bond yield fell 3 basis points to 2.75% and gold rallied US$6.90 to US$1334.90/oz. The Aussie is up 0.5% to US$0.9084.

Commodities markets took note of the fall in the greenback but are also casting a wary eye to Ukraine, the future of which remains uncertain. Further sanctions have been applied by the West and Russia has moved more troops to the border. Putin says no more is going to happen but the rest of the world is ready to expect just about anything.

Base metal prices were mixed on Friday, with copper rising 0.4%, aluminium and nickel rising 1% and tin falling 1%. Spot iron ore was steady at US$110.70/t.

The oils were stronger, supported by a lingering concern over possible Russian retaliation against sanctions in the form of cutting off energy exports to Europe. Brent crude rose US70c to US$106.97/bbl and West Texas rose US65c to US$99.55/bbl.

The SPI Overnight fell 21 points or 0.4%.

Figuring out what Putin might do next is about as simple as finding a Malaysian jet in the Southern Ocean. The world can only watch and hope that whatever is about to happen will not impact on global markets. Meanwhile, the focus returns to US data and the Chinese credit crackdown.

Beijing’s widening of the renminbi trading band last week has resulted only in the currency devaluing sharply, which it is presumed Beijing is trying to achieve. The stronger the renminbi the less competitive Chinese exports become at a time Japan, a very direct competitor, is trying to weaken its own currency (without much success of late). The US is also frustrated with the growing imbalance.

Today sees the release of HSBC’s flash estimate of China’s March manufacturing PMI which could well set the tone for the week. The eurozone and US will also provide flash readings tonight.

It’s a busy week for US data and Wall Street will be looking for further signs of weather impact and a recovery there-from. Tonight sees the Chicago Fed national activity index and tomorrow brings both the Case-Shiller and FHFA house price indices, new home sales, the Richmond Fed manufacturing index and the Conference Board consumer confidence measure.

On Wednesday it's durable goods and a flash measure of the US service sector PMI, while Thursday sees pending home sales and another revision of the December quarter GDP. The market is looking for an upward revision to 2.7% growth from the earlier 2.4% estimate, which was itself a revision from the initial 3.2% call. On Friday it's personal income and spending and the Michigan Uni consumer sentiment measure.

Germany will release its influential IFO business sentiment survey on Tuesday and on Friday Japan will release inflation, retail sales and employment data before the UK also provides a revision of December quarter GDP.

It’s a quiet week economically in Australia, other than a lot of chatter from RBA officials.

It’s busier in the stock market as the late reporters continue to trickle in. Today sees an earnings result from Kathmandu ((KMD)), tomorrow it’s TPG Telecom ((TPM)), Wednesday Nufarm ((NUF)) and Thursday Beadell Resources ((BDR)) and Sigma Pharmaceutical ((SIP)).

Thursday sees the expiry of individual stock options on the ASX.

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

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

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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

Once we get through tonight’s “quadruple witching” expiry in the US, next week will see a return to focus on economic data as Wall Street now looks ahead to when the Fed’s rate cycle may finally turn. We are already beginning to see signs of improvement in the most recent data, offsetting the hit taken in many series as a result of the crippling weather in January and February. Wall Street will be looking for signs the “weather excuse” was justified.

And there will be plenty of data points to thus consider next week. We’ll see a flash reading for both the manufacturing and service sector PMIs, two house price indices, new and pending home sales, the Richmond Fed manufacturing index, durable goods, personal income and spending, two measures of consumer confidence and, finally, another revision of the December quarter GDP result.

Monday is also flash day for the Chinese (HSBC) and eurozone manufacturing PMIs.

It’s a quiet week economically in Australia. On the stock market we’ll see the quarterly expiry of stock options on Thursday while off-season earnings results will be delivered by Kathmandu ((KMD)), Nufarm ((NUF)) and Sigma Pharmaceutical ((SIP)).

It must not go unnoticed that the situation with regard Russia’s annexation of Crimea appears to have heated up outside the region itself, with the diplomatic barbs and tit-for-tat sanctions increasing in intensity. But inside the region the vast majority of Crimeans seem very happy to now be Russian again, while Ukraine has backed off and conceded the loss. Assuming Putin is not intending to annexe anymore of the Ukraine or anywhere else for that matter (the Lithuanians have become anxious), then presumably the issue will be left simply to perfunctory diplomatic scolding and global financial markets can get on with life.

Presumably.
 

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article 3 months old

Profitable Dirty Harry Moment To Buy BHP And Rio

By Peter Switzer, Switzer Super Report

Investors are in a Dirty Harry moment when it comes to stocks right now. We don’t know how serious the Ukraine drama, starring Vladimir Putin, will get. And we have to gamble on the China syndrome, where economic data seems to be melting down, taking iron ore and our top miners’ share prices with it. But the growth slowdown could be exaggerated because of the Lunar New Year holiday.

So, are we looking at another buying opportunity? And that’s where my Harry Callaghan question comes in, which goes like: “You've got to ask yourself one question — "Do I feel lucky?”

The Vlad question is too tricky, but I do take the view that not even Putin would want a war that would KO his economy, send share prices tumbling and short circuit the Eurozone – an important customer – just when it is getting on its economic feet following the GFC.

So, let’s go to China.

The China question

Economists from the Japanese finance company, Nomura, have marked the first quarter growth down from 7.5% to 7.3%, which is not huge given the likely holiday effect. Bank of America-Merrill Lynch cut it from 8% to 7.3%, which is bigger but is still in the 7% band and showing the impact of the long holiday period more significantly. Their annual downgrade has gone from 7.6% to 7.2%, which does not look like the kind of catastrophe for iron ore prices that was bandied about last week.

The price falls talked about were to $US80 a tonne but they are now around $US111. Last year we saw some $US140 prices but the average was more like $US133. This year it was closer to $US122 and so the recent drop is not huge.

That’s where the Dirty Harry/luck question comes in and you might test your luck by presuming that the price goes lower before it rebounds.

The big miners

So, what are BHP Billiton ((BHP)) and Rio Tinto ((RIO)) saying about their futures – do they feel lucky?

The heads of the companies' iron ore divisions – Jimmy Wilson of BHP and Andrew Harding of Rio – reiterated their belief that China’s demand for iron ore will make one billion tonnes by at least 2025, which they argue will keep demand high for at least a decade!

I loved Wilson’s take, which is compatible with the priorities of SMSF wealth builders. He said, Buffett-like, that “we shouldn't let today's price influence our long-term thinking.''

He thinks credit problems in China have hit some data reads and traders have taken the opportunity to make a bit of money.

On the iron ore price he said: ''I do think it will come down, but then also come back up.''

But it’s not just biased company men who have a more positive view on iron ore, with UBS analyst Tom Price tipping iron ore prices would be around $US126 a tonne on average in 2014.

The major miners breakeven prices are a long way from the current spot price, with Rio at $US43, BHP at $US45 and Fortescue Metals ((FMG)) at $US72 a tonne. Atlas Iron ((AGO)) is $US82 and that’s why this stock’s share price is sensitive to China data and forecasts of $US80 were not good for the company.

Switch to services

I made this point on Saturday and it is worth repeating that the services sector in China is expanding and the construction sector is in the service sector. Even if China goes from being an infrastructure-investing economy to one investing in local goods and services, it will have to construct stuff and modernisation, when you think of it, means steel and glass.

Both Rio and BHP are reasonable dividend-paying stocks nowadays but they do offer capital gain opportunities as China grows bigger as an economy.

One final point. Morgan’s chief economist says the smarties of the trading world are ignoring the fact that as China slows down, the biggest economy in the world – the USA – is now growing at a faster rate than most economists expected. So any China slowdown will be more than offset by a US economy on the comeback trail.

If you don’t have enough BHP and Rio, there could be price dips ahead linked to China, Putin and smart-Alec short-term traders. You, like me, might have enough of these stocks bought at lower prices but for someone who is building a portfolio to fund retirement into the future and who is not long these quality companies, a buying opportunity is here and could get even better.

So, when you ask yourself: “Do I feel lucky?” well the answer should be yes! Some of you will time it better than others but I do smell a good buy for SMSF’ers is in the offing.


Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.

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Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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article 3 months old

The Monday Report

By Greg Peel

The world is now waiting to see just what will happen in the Black Sea region following last night’s referendum in Crimea. Polls suggest the local population has voted 95% in favour of exiting Ukraine and joining Russia, the Ukrainian government has branded the vote illegal, the West has sided with Ukraine and Russian forces are amassed along the border.

The uncertainty of what happens next was a driving factor in Friday’s rout in Bridge Street, which included a reversal of Thursday’s trade in which the ASX 200 rather strangely rallied on the local employment data and ignored both Ukrainian tensions and the weak Chinese data for February. A big sell-off on Thursday night on Wall Street settled that score, and so we tumbled 1.5% on Friday.

Having already adjusted for the risks, Wall Street was less panicked but still weak on Friday night. The Dow fell 43 points or 0.3% while the S&P lost 0.3% to 1841 and the Nasdaq dropped 0.7%. Ukrainian uncertainty was blamed for the weakness.

The VIX volatility index on the S&P 500, known as Wall Street’s fear index, rose another 10% on Friday to 17.8 – still not into nervous territory (below 20 is considered benign) but rising nevertheless. Gold rallied another US$9.70 to US$1382.70/oz and is once again playing the part of a safe haven against geopolitical risk. The other safe haven, US Treasuries, had a quieter session. The ten-year yield is steady at 2.64%.

Ukraine notwithstanding, Americans are also becoming gradually less confident about the US economy as was again evident on Friday in the fortnightly Michigan Uni measure of consumer sentiment. It fell to 79.9 from February’s final reading of 81.6 when economist had expected a rise to 82.0.

A report from the International Energy Agency suggested Iraqi oil production rose to a level in February not seen since 1979. With North American oil production also significant, the news put pressure on oil prices on Friday night but the counter of the spectre of oil sanctions forming some part of a West/Russia stand-off meant Brent crude rose US$1.24 to US$108.27/bbl and West Texas rose US80c to US$98.89/bbl.

Base metals mostly settled into watch and wait mode on Friday albeit after solid falls last week, copper managed to scratch back 1% and lead rose 1.2%. After staging a snap-back late last week, spot iron ore fell US$1.40 to US$110.10/t.

The Aussie is off 0.3% from Friday to 0.8998 and the SPI Overnight fell 18 points or 0.3%.

China took a further step towards financial market reform over the weekend by expanding the trading band for the renminbi twofold. Beijing maintains control over the currency by only allowing a tight trading range rather than a free float, but as of today that range expands to 2% from 1%. In 2012 the band was expanded to 1% from 0.5%.

The move comes in the wake of longstanding criticism from China’s trading partners that the renminbi is artificially undervalued, thus providing China with an advantage in export markets. Beijing has recently engineered devaluation of the renminbi in order to force out speculators ahead of this weekend’s announcement. By allowing appreciation within the expended band, Beijing has taken another step towards an ultimate free float of the Chinese currency, in line with the developed world.

Weaker Chinese data in the past week and Beijing’s clear intentions to push through reforms have led to broker downgrades of China 2014 GDP forecasts, with BA-Merrill Lynch in particular moving on Friday to cut its expectation to 7.3% growth from a previous 8.0%.

The Chinese story and the situation in the Ukraine have drawn focus away from this week’s Fed meeting, which will feature the first press conference for Janet Yellen. While no change to policy is expected at this stage, the market will nevertheless be keen to hear just what the Fed’s take is on the weather argument or if the central bank does actually see a slowing in the US economic recovery, which might ultimately translate to a slowing in the pace of Fed tapering.

US data flow this week sees industrial production, housing market sentiment and the Empire State manufacturing index tonight, followed by the CPI and housing starts on Tuesday. Wednesday it’s the Fed meeting and Thursday it’s the Conference Board leading index, existing home sales and the Philadelphia Fed manufacturing index. Friday is “quadruple witching” on Wall Street, meaning expiry of quarterly equity derivatives.

Bridge Street also sees an index option expiry this Thursday while Australian data this week include vehicle sales today and the minutes of the last RBA meeting tomorrow. Premier Investments ((PMV)) and Myer ((MYR)) will report interim earnings this week.

China will report February property prices tomorrow.

But all will hinge on Crimea. The fallout will likely not be known until European and US markets open tonight so we may see a quieter session on Bridge Street today.

Rudi will appear on Sky Business today at 11.15am, on Wednesday at 5.30pm and on Thursday at noon and again on that day between 7-8pm for the Switzer Report. On Friday he will appear on Your Money, Your Call - Bonds versus Equities 7-8pm on the same Sky Business Channel.
 

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
 

By Monday night our time the situation in Crimea will have reached a head one way or the other following the referendum to leave Ukraine and join Russia. It is hard to see the majority local Russian population voting no, and at this stage it is hard to see the Ukrainian government meekly letting go. Where’s Florence Nightingale when you need her?

Leaving aside the unknown Crimean fall-out, next week is one which will be dominated by the Fed meeting on Wednesday night and the first press conference and thus first real Q&A ordeal for new chair Janet Yellen. The press pack will no doubt be unfailing polite to Granma Yellen and will likely spend a lot of time just talking about the weather.

My tip is Yellen will say the tapering program will proceed as is if the US economic recovery appears to still be on track, but can be tinkered with if it doesn’t. You heard it here first.

It’s otherwise a busy week for important US data with releases including housing sentiment, housing starts and existing home sales, the Empire State and Philly Fed manufacturing indices, industrial production, the CPI and the Conference Board leading economic index. Friday is “quadruple witching”, referring to the expiry of stock market derivatives, and can be stand-alone volatile.

The ASX will also see a quarterly stock index option expiry on Thursday in a week otherwise dominated by the release on Tuesday of the minutes of the last RBA meeting.

China is due to release property price data on Tuesday.

New Zealand will release its December quarter GDP result next week after having become the “first developed economy to raise its central bank cash rate since the GFC”. Rubbish, the Bank of Canada did that ages ago.

On the local stock front, retailers Premier Investments ((PMV)) and Myer ((MYR)) will report interim earnings next week.


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article 3 months old

The Overnight Report: Valley Of Death

By Greg Peel

The Dow fell 231 points or 1.4% while the S&P fell 1.2% to 1846 and the Nasdaq dropped 1.5%.

Yesterday Beijing reported 8.6% year on year growth in Chinese industrial production over January-February, down from 9.7% in December. January and February numbers are aggregated in order to smooth the lunar new year disruption. Economists had expected a 9.5% rise. Retail sales grew by 11.8%, compared to expectations of 13.5%, and fixed asset investment grew 17.9%, down from 19.6% in 2013 and representing the weakest growth since 2002.

In short, the results were a lot worse than the market expected. Why, then, did the ASX 200 rally 28 points and why is the Aussie up 0.5%? Strange, and ready to be very much reversed this morning.

The reason the local markets were positive yesterday was the local employment data, which showed 47,300 new jobs added in February for an unchanged unemployment rate of 6.0% despite an increase in the participation rate to 64.8%. Economists had expected an addition of 15,000 jobs.

We are again reminded that industries like hospitality and banking don’t have the same emotional pull as tinned peaches, so headlines only rail against the collapse of manufacturing and don’t bother mentioning where jobs are being created rather than lost. However, economists were once again left shaking their heads yesterday at this notoriously volatile series, pointing out last month’s January numbers were much weaker than expected. The underlying trend is running at 14,000 new jobs per month, and population growth requires 18,000. This implies the unemployment rate must rise further, and there is an added drag in a structural downward trend in the participation rate due to the ageing population.

It’s all well and good to become excited over the (spurious) local data but to ignore China? Bridge Street seems to have been jumping the wrong way all week. We’ll jump right in here and look at this morning’s close in the SPI Overnight, which is down 58 points or 1.1%. Why? Because the Dow fell 230 points. Why? The Chinese data.

At least the Chinese data were very much a catalyst. Beyond that, tensions are rising to boiling point in the Crimea.

Russian troops are assembling on the other side of the Ukraine border, ready for what Putin clearly sees as an inevitable win in the referendum this weekend and justification to annexe the peninsula. The Ukrainian president has now warned of war. President Obama has told Russia to back down, and last night a normally conciliatory Angela Merkel warned that if Russia continued on its intended course it would not only be a catastrophe for Ukraine, but would cause “massive economic and political harm to Russia”.

Outside of activities in Eastern Europe, last night ECB president Mario Draghi rather surprised markets by appearing to change course. In recent months, European economic data have improved but inflation has fallen dangerously low, yet Draghi has constantly insisted there is no threat of deflation. This week’s eurozone industrial production numbers disappointed, and last night Draghi warned the strong euro was “weighing on inflation” and that the ECB stood ready to take action (some sort of QE) in the case of “material” risk. On that note, the euro fell 0.3% against the greenback.

It’s not really a change of course, of course, but rather more of the new language of central bankers who realise they can “talk down” a currency just as easily as actually doing something about it. Glenn Stevens tried it on last year and found it works, so he’s been doing it ever since.

Lost in the wash of last night’s focus on China and Europe were the US retail sales numbers for February, which showed a 0.3% gain compared to 0.2% expectation. It’s the first rise in the three months in which US shoppers have been trapped inside their snowbound houses.

Despite last night’s big fall, Wall Street is only 2% off its latest all-time high. Volumes have not been heavy, and while the VIX volatility index jumped 11% last night, that took it only to a highly complacent 16. But talk has now been rekindled of the old “necessary correction”, that which has not been seen since 2012. Maybe this time…

The US bond market is certainly battening down the hatches. Many an analyst in the US has pointed to the disparity between the stock and bond markets, suggesting that bond yields remain rather low at a time the stock market has been exploring fresh blue sky. One of them is wrong, is the suggestion, and it’s probably not the bond market. Crimea was cited as the main reason the US ten-year yield fell 8 basis points to 2.64% last night, with a pinch of China thrown in.

Similarly, gold is up another US$6.20 to US$1373.00/oz. The US dollar index is steady at 79.58 despite the fall in the euro and the Aussie, as noted, is up 0.5% to US$0.9029.

Have you been on holiday? If you have, you probably think iron ore’s a boring old market. It’s now sitting at US$111.50/t. Never mind that last night iron ore jumped US$4.10 and Twiggy Forest has spent the last week having heart palpitations. It appears now that iron ore simply fell into a destocking hole which has quickly been filled, rather than any underlying fear of the impact of Beijing’s crackdown on indebted steel mills.

Which cannot be said for copper, nevertheless. Copper was down another 1.5% last night, spurred on by the weak Chinese data and the prevailing threat of the end of copper financing as another Chinese shadow banking sleight of hand. The other metals were also weaker except for the current star of the show, nickel, which rose another 0.5%.

It has been revealed to the oil market that the US government chose this week to do a little “test sale” of its Strategic Petroleum Reserve. Nice time to do it when the world is on edge over Crimea, but I suppose that’s the point. So the sudden drop in the West Texas price this week has largely been government driven, and now things are back to normal. Last night WTI rose US29c to US$98.28/bbl while Brent, which stands to become more valuable if Russia turns off the energy export spigot, fell US98c to US$107.33/bbl.

As an aside, I mentioned a month or so ago that Australian investors should not pay any attention to a then soaring US natural gas price when assessing local producers and LNG hopefuls. The US gas market is a closed shop, and the price spike was all about the snow dump. Sure enough, natgas peaked at over US$6/mmbtu in February and last night closed at US$4.38/mmbtu.

The SPI Overnight, as noted, is down 58 points or 1.1%.

The Crimean referendum is on Sunday.
 

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article 3 months old

The Overnight Report: The China Syndrome

By Greg Peel

The Dow closed down 11 points or 0.1% while the S&P was steady at 1868 and the Nasdaq rose 0.4%.

It was early last year when Beijing suddenly orchestrated a squeeze on Chinese short term interest rates and sent shockwaves around the global financial world. It was the government’s first indelicate step in smashing the country’s shadow banking system, beginning with restricting access to cheap funds for investment in non-bank wealth instruments and property speculation.

The move eventually became the shot over the bow China’s shadow bankers needed to realise the game would soon be up. Global markets recovered but Beijing pushed on, attacking corruption and pollution along the way. A combination of a maturing Chinese economy and government intent saw China’s 2013 GDP growth level at its lowest since the 1990s. In 2014, Beijing has not stopped pushing on with its guerrilla tactics against uncontrolled lending practices. While a Western government might first warn over-indebted corporations they would no longer be saved by the people, Beijing has simply stood back and let the first ever debt defaults transpire, even before the country has established any bankruptcy laws.

Solar panel manufacturers might be one thing but expediting the collapse of steel mills hits at the heart of China’s economic engine and thus those economies across the globe who rely on that engine. And then there’s copper – considered the world’s benchmark commodity. Chinese copper traders sitting on stockpiles used for no other purpose than collateral for shadow financing know they’re next in Beijing’s sights. The world knows that too, hence this week’s sudden copper rout.

Once the masters of the softly-softly approach, the Chinese government is now hell bent on reforming its economy and financial markets in a rapid pain for long term gain assault. Economists have for a long time insisted China must carry out reforms, and agree that once reforms have been implemented China will emerge a mature and stable economy that will still prove to be the global economic powerhouse of the twenty-first century. China will have “emerged”. But the question is one of how much short term damage will be wreaked along the way.

That is what markets are afraid of right now.

That and the Ukraine situation, which appears to be coming to a head. The Crimean referendum is to be held this week and presumably the local ethnic Russian majority will vote for alignment with the Motherland. Putin will have an excuse, but will still draw the wrath of the global community. The newly elected president of Ukraine is in Washington as we speak, being assured by President Obama that America stands in support. As to what happens next week is unclear.

These are the factors that could no longer be resisted by the Australian market yesterday morning as finally Bridge Street rolled over. Throw in an apparent easing in the pace of housing finance growth and a drop in consumer confidence into the pessimism zone and it looked for all the world by lunchtime we were in for one of those familiar snowballing shake-outs that have featured occasionally in recent months.

Typically those shake-outs last one or two days before buying re-emerges to drive the market higher once more. Up for grabs at lower levels are valuable bank dividends and more recently, increasingly valuable Big Miner dividends. The lower Aussie dollar enhances that value for offshore investors. But this time the buyers did not wait. Perhaps confident China will emerge from the dust of shadow banking a more stable economy, and believing that one way or another, the Ukraine will be sorted, the buyers piled in in the afternoon. A 1.2% fall became a 0.6% fall by the closing bell.

A similar pattern played out on Wall Street last night. The Dow was down around 90 points from the opening bell but managed to quickly recover by midday before drifting through the afternoon session. There were no major US data releases to consider.

As the stop-losses and technical panic subsided on the LME, copper managed to stabilise last night, rising 0.3%. Nickel and tin both managed gains over 1%. The iron ore price had stopped falling the night before, and last night bounced hard, rising US$2.50 to US$107.40/t.

Gold is looking to the Black Sea, and it rose US$18.90 to US$1366.90/oz. US bonds looked like a sanctuary once more and the ten-year yield fell 4 basis points to 2.72%. A turnaround in copper futures trading helped the Aussie to recover, rising 0.2% to US$0.8988 as the US dollar index fell 0.2% to 79.59.

An unexpectedly large jump in US crude supplies last week saw West Texas fall further, dropping US$1.88 to US$98.15/bbl. Brent is steady at US$108.31/bbl as traders wait to see what happens to European energy supply.

The SPI Overnight rose 2 points.

Strap yourselves in, today sees a Chinese data dump of industrial production, retail sales and fixed asset investment numbers for February. And Australia’s February jobs numbers are due.

Rudi is otherwise engaged today and will not make his weekly appearance 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 Overnight Report: Cracks In The China

By Greg Peel

The Dow fell 67 points or 0.4% while the S&P lost 0.5% to 1867 and the Nasdaq fell 0.4%.

The flat close for the ASX 200 yesterday was a resilient display featuring only a 0.6% fall in the materials sector on an 8% fall in the iron ore price overnight. On Monday the materials sector fell 4% on a 2% fall in iron ore, albeit China’s weak trade data and news of a corporate default were instrumental in that shake-out. The big miners are not concerned over a de-rating of the iron ore price, analysts have been expecting one for some time, and yesterday the buyers clearly saw value emerging, particularly where dividend yields are involved.

Nor did yesterday’s news from the Chinese parliament evoke any further panic. Beijing has elected to starve underperforming steel mills of credit and so kill three birds with one stone –excess risky lending, excess inefficient capacity and excess pollution. While such a move may cause volatility in iron ore and thermal coal demand in the short term, the hope is short term pain will lead to the longer term gain of more stable Chinese growth.

Yesterday’s weakness in the NAB business confidence survey results for February represented not so much a drop into fear but more a regression towards the confidence trend after initial election exuberance. The prevailing conditions index dropped 5 points to zero from January and the confidence index fell 2 points to 7. The historical trend for confidence sits at 5 and economists were quite surprised just how confident Australian businesses were feeling in December and January. The crumbling manufacturing sector featured heavily in the falls.

The good news overnight is that the iron ore price stopped falling, and instead rose US20c to US$104.90/t. The bad news is that speculators on the LME have hit the dump buttons on fears China’s crackdown on excess and shadow credit will extend into commodity-backed financing. Technical levels were breached in metals last night sparking a cascade of stop losses, with copper falling another 3% and other metals falling 1-2%. Only nickel remained unscathed.

The implications of forced Chinese slowing and commodity price falls were felt on Wall Street last night, which rocked and rolled but eventually traded south. In economic news, US wholesale inventories rose 0.6% in January when wholesale sales fell 1.9%, suggesting merchants have over-ordered and are stuck with stock.

Two of the major victims of the GFC – the quasi-private, government-sponsored Fannie Mae and Freddie Mac mortgage providers – are to be quietly dismantled under new proposed legislation and replaced with a scaled-back government mortgage guarantee and greater financial responsibility for private sector mortgage providers. The US government bailed out both companies in a heartbeat after the fall of Lehman and since that time the two have between them backed around 90% of all new mortgages. Suffice to say shares in both took a tumble last night.

The China-related commodity sell-off extended to US energy markets last night, with West Texas crude falling US$1.37 to US$99.75/bbl. Brent crude is more closely tied to European energy supply which is in a state of uncertainty as the Ukraine situation plays out. It rose US39c to US$108.34/bbl.

Ukraine tensions continue to simmer and are being held responsible for the rising gold price, which last night added US$7.80 to US$1347.90/oz. The US dollar index was steady at 79.77 following no announced change of policy from the Bank of Japan, while the Aussie is down another half a cent to US$0.8969 on the China connection.

Despite my doubts the SPI Overnight traders got it right yesterday with a flat call. This morning they have sold the SPI down 25 points or 0.5%.

Today we will find out how Australian consumers are feeling, other than patriotic. Having hoovered up every can of SPC baked beans and Two Fruits they could find on the shelves, perhaps consumers will feel empowered in Westpac’s confidence survey, due today. Or not.

Housing finance data are also due for release and have become a prime focus of overall market sentiment of late.

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

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article 3 months old

The Overnight Report: Iron Tanks

By Greg Peel

The Dow closed down 34 points or 0.2% while the S&P fell one point to 1877 and the Nasdaq rose 0.1%.

It was an unusual but unsurprising session on Bridge Street yesterday. The materials sector fell 4% while no other sector moved more than 1% and five of ten sectors rose. Material stocks were hammered on the back of falls in iron ore and base metal prices, particularly copper, on Friday which occurred even before Beijing released data on the weekend showing an 18% fall in Chinese exports last month.

The 18% fall is somewhat of a shock, although there are some extenuating circumstances. The 11% rise in exports in January also took analysts by surprise, given the typical seasonal weakness of the month. This quickly brings into focus the annual lunar year holiday effect, and I don’t recall a start to a year for some time when Jan-Feb-March Chinese data have not caused a lot of wailing and gnashing of teeth at the time only to be dismissed as distortions down the track. Mind you, 18% is quite significant.

So perhaps what we’re seeing is the impact of Beijing’s attempts to weed out misleading reporting practices. Over-invoicing is one such practice which has the effect of inflating export numbers, and rarely do the import numbers of the corresponding trading partner correlate with the Chinese data. If suddenly the bookkeeping tricks have been stamped on, then perhaps that’s apparent in the sudden plunge in the numbers. This would mean future numbers are more reliable, but no doubt less spectacular on the upside.

Underlying all of the above, China’s economy has likely slowed. Perhaps not as sharply as the export numbers might imply, and indeed exports to the US and Europe in February were not down heavily, rather exports to Asian neighbours. And these are the numbers that never correlate.

Whatever the case, Wall Street didn’t like it from the bell last night, and we can throw in the revision of Japan’s December quarter GDP result to 0.7% growth from 1.0% as well. The Dow was down 118 points around 11am, but in the spirit of a true bull market the buyers moved in and pushed the indices back up once more. By the closing bell, the S&P 500 had fallen a point, having risen by point on Friday.

Weakness in the Dow last night was due mostly to Boeing, maker of the 777 that still has not been found.

Having risen firmly back above the 90 level on strong local data and the diminishing chance of another RBA rate cut, the Aussie has felt the reverberations of the Chinese data in falling half a cent to US$0.9019 since Saturday morning. The US dollar index was steady last night at 79.73, as was gold at US$1340.10/oz, and the US ten-year bond yield is little changed at 2.78%.

Base metal markets attempted to find some stability in London last night despite not yet having responded to the weekend’s China data, with nickel in particular rebounding 1.5%. But copper was down another 1.5% on concerns over the extensive practice of copper-backed borrowing as another Chinese “shadow bank” sideline and the possibility of inventory dumping continue to grow. The big move last night, nevertheless, was in iron ore.

Spot iron ore fell a whopping 8%, down US$9.50 to US$104.70/t. Analysts have been suggesting for some time that iron ore would not be hit by another destocking flood this year as was the case in 2012, at which time the price fell below US$80/t and briefly sent many an Australian producer into negative cashflow, including Fortescue Metals ((FMG)). Analysts have, on the other hand, long suggested that US$100/t was closer to the equilibrium point that might be reached in time, although US$120/t has been seen in the nearer term as reasonable.

Is iron ore again being rapidly destocked? Not only were the Chinese export numbers a shock but Beijing’s possible clampdown on spurious bookkeeping and a strengthening of resolve to shut down excess capacity in various heavy polluting industries might just be the triggers analysts had not expected. We can now only hold our breath, although it might be a good time to look at BHP Billiton ((BHP)) and Rio Tinto ((RIO)) as yield plays (see story today).

Energy markets also responded to the China data last night, with Brent down US84c to US$107.95/bbl and West Texas down US$1.47 to US$101.11/bbl.

The SPI Overnight has rather optimistically closed up one point.

There will be carnage among the iron ore pure-plays today.

NAB will release its monthly business confidence survey today while OrotonGroup ((ORL)) will release its interim result.
 

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article 3 months old

The Monday Report

By Greg Peel

The US added 175,000 jobs in February, ahead of consensus expectation of 140,000. That 140,000 reflected anticipation of the weather effect, hence the positive result only adds to the confusion. The unemployment rate rose to 6.7% from 6.6% but due to an increase in the participation rate, which is a positive lead indicator for hiring in the months ahead.

The good result is good, but a lack of weather impact brings into question whether recent weak US data have simply reflected the weather issue or whether the US economic recovery has actually hit a pothole early in 2014. The result of confusion was a rollercoaster market on Friday night, with the Dow being up 84 points early and down 23 points around 3.30pm. The Dow closed up 30 points or 0.2%. A one point rise in the S&P took the broad market index back to the previous high at 1878 while the Nasdaq lost 0.5%.

Tensions have continued to bubble in the Ukraine. Clashes between pro-Ukrainian and pro-Russian demonstrators in the east prompt the question as to whether Putin might attempt to extend Russian control further into the country beyond just Crimea. To do so would be to attract UN sanctions but a tit for tat response would threaten the 30% of European gas supplies which are piped in from Russia. The Ukrainian economy has no notable impact on the global economy, but a rift between the US/Europe and Russia could have significant ramifications.

The US jobs result nevertheless dominated US markets on Friday night, with there now being little doubt the Fed will continue with its tapering program as outlined unless some major shift in economic fortunes were to transpire. Despite what threat the Ukraine might represent, the US ten-year bond yield jumped 5 basis points to 2.79% and gold fell US$11.00 to US$1340.00/oz. The US dollar index rose slightly to 79.73 and the Aussie is off 0.3% to US$0.90.68.

It was left to metal markets to price in the risk. Selling on the LME quickly turned into a flood on Friday following recent strength, triggering stop-losses and technical trades. Copper was the worst hit when the dust settled, falling almost 4%, with all other base metals falling 1.5-2.5%. Spot iron ore fell US$2.70 to US$114.20/t. The selling was not all about the Ukraine, with news from China also impacting.

A report circulated on Friday that a Chinese solar panel maker had defaulted on interest payments due on its bond. If this is the case, it would represent the first ever default on a Chinese onshore bond. Previously, the government via the state-owned banks would bail out businesses in trouble, but this default might be evidence of a restructuring of Chinese debt risk such that the government allows capitalism to run its course without communist intervention as a step towards shaking out tenuous businesses and discouraging unfettered lending. If this is a step in China’s gradual financial market reform agenda, it puts copper traders squarely on the radar. Commodity stockpiles, and copper stockpiles in particular, are used as collateral to secure financing when banks are otherwise reluctant to lend.

The news did not improve from China over the weekend. February trade balance data suggested Chinese exports plunged 18.1% year on year and imports rose 10.1%, sending the trade balance into deficit for the month. Economists had expected a 6.8% rise in exports and an 8.0% rise in imports to leave a small surplus. Exports rose 10.6% in January, which at the time greatly exceeded expectation on a seasonal basis. The seasonal hand was thus played as an excuse for the February data, given every year the lunar new year break throws China’s data into disarray before, during and immediately after the holiday.

The overall assumption nevertheless is that China’s economy is slowing. Beijing has set a target of 7.5% GDP growth for 2014 following 7.7% growth in 2013, which was the weakest growth rate since the 1990s. If Beijing were to feel the need to provide fresh stimulus to the economy then a fall in the CPI to 2.0% in February from 2.6% provides scope. The PPI fell 2.0% and has now been negative for two years. With both numbers going backwards, the new fear is that China will slip into deflation. Beijing is stuck between its familiar rock and hard place, given its efforts to reform China’s debt markets and stamp out shadow banking would be compromised if more government funds hit the system.

West Texas crude rose US$1.03 to US$102.59/bbl on Friday night, driven more by the positive US jobs result than any Ukraine implications. Brent rose US28c to US$108.79/bbl.

The SPI Overnight closed on Saturday morning down 16 points or 0.3%, capturing the metal shake-out but ahead of China’s weak data releases over the weekend.

There will be more Chinese data to contend with this week. Thursday sees the monthly data dump for February of retail sales, industrial production and fixed asset investment numbers which no doubt will also reflect lunar holiday disruption.

Industrial production numbers are also due this week for the eurozone and the UK.

It’s quiet economically in the US up to Thursday when February retail sales data are released along with business inventories. Friday sees the PPI and the Michigan Uni fortnightly consumer confidence measure.

Australia’s economic week begins tomorrow with the NAB business confidence survey. Wednesday it’s the Westpac consumer confidence survey along with housing finance and investment lending data and Thursday it’s the jobs numbers.

OrotonGroup ((ORL)), Alacer Gold ((AQG)), Bandanna Energy ((BND)) and Regis Resources ((RRL)) are due to provide profit reports this week.

Today is Labour Day in Victoria, South Australia, the ACT and Tasmania. With a weak session expected on China data and metals price falls, lighter ASX volumes could exacerbate the weakness.

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

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

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