Tag Archives: China and Emerging Markets

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

All eyes will, as usual, be on the US jobs numbers tonight. The question is as to whether there is any number sufficiently positive to suggest the Fed may yet, in the wake of Brexit, look to raise this year.

With that result out of the way, attention will turn back to China next week. June inflation data will be released on Sunday, trade numbers on Wednesday, and industrial production, retail sales and fixed asset investment numbers on Friday. Friday also brings the June quarter GDP result.

The Bank of England holds a policy meeting on Thursday night. There will be much surprise if the UK cash rate is not cut from 0.5%, perhaps to zero.

US data releases next week include inflation, retail sales, inventories, consumer sentiment and the Empire State activity index, all at the end of the week. The Fed Beige Book is due on Wednesday.

On Monday night Alcoa will report June quarter earnings, unofficially kicking off the US result season.

Locally we’ll see housing finance numbers and the NAB business and Westpac consumer confidence surveys. Thursday it’s the June jobs numbers.

Australia also enters a quarterly season next week of trading updates and resource sector production reports. Alumina ((AWC)), Iluka Resources ((ILU)), Whitehaven Coal ((WHC)) and Transurban ((TCL)) are among next week’s reporters.
 

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article 3 months old

The Monday Report

By Greg Peel

Playing to Script

Friday on Bridge Street played out as expected, despite it being the first day of the new year. The market opened higher in line with global momentum post-Brexit, traded sideways for a while and then at 2pm, the square-up bell was rung.

The index came most of the way back as traders took profits on a very solid week, ahead of a weekend, a long weekend in the US, and the local election, just in case something disturbing like a hung parliament should transpire.

On that note, we are reminded stock markets are usually ambivalent with regard which party is in power, but do not like uncertainty. And that’s exactly what we have this morning.

We also, of course, have a more elevated case of uncertainty over in the UK/EU. But whatever happens now, markets are convinced another wave of central bank easing is afoot. Central bank easing helps support stock markets but also directly supports commodity markets, and as such we saw some big moves up in commodity prices through Friday.

It it thus no surprise the materials sector was the stand-out performer locally on Friday with a 2% gain when every other sector closed as good as flat.

Investors were not fazed by the latest data out of China, which were far from encouraging. Beijing’s official manufacturing PMI fell to 50.0 in June from 50.1 in May, right on the cusp between expansion and contraction. Caixin’s independent equivalent showed a fall to 48.6 from 49.2 – the fastest decline in four months and the sixteenth consecutive month of contraction.

We can perhaps take some heart in the fact Beijing is trying to steer China away from reliance on manufacturing and export, and note the official service sector PMI rose to 53.7 from 53.1, although that doesn’t much help the sellers of rocks. What will help is government stimulus in the form of infrastructure investment, which is expected to be beefed up as China looks to its own favoured means of easing, beyond renminbi devaluations.

Who’d have thought?

Who’d have thought a week ago that Wall Street would post its best week since 2014? Both the Dow and S&P500 gained 3.2%. Friday’s trading nevertheless played to script as well, given both the week’s rally and the long weekend.

Afternoon selling wiped out initial gains, such that the Dow closed up 19 points or 0.1%, the S&P gained 0.2% to 2012 and the Nasdaq added 0.4%. Interestingly, the indices were back at the flat line just after 3pm before a late burst ensured the S&P closed above the psychological 2100 mark.

The US manufacturing PMI posted a much more encouraging rise to 53.2 from 51.2, beating expectations.

Traders have always been keen not to take positions home over weekends but weekends have become even more scary in this post-GFC world. Beijing likes to pull little tricks on a weekend and as we learned from the whole Grexit saga, weekends can often bring meetings between relevant parties that have particular ramifications the following week.

Nothing happened this weekend beyond the no-result Australian election, but the fact gold was up US$20.20 to US$1341.90/oz and the US ten-year bond yield fell back 3 basis points to 1.46% suggests investors were happy to top up their safe haven positions as a hedge against the “no alternative” equity rally.

Commodities

The UK has signalled monetary easing ahead, the EU is ready to do whatever it takes, Japan will probably be forced to do something and Beijing has already slipped in another renminbi devaluation. And on that basis, many do not see the Fed raising anytime soon. Put it all together and global stimulus is supportive of commodity prices.

The US dollar index fell a mere 0.3% to 95.64 on Friday but in London, aluminium rose 0.7%, copper 1.5%, zinc 2.5%, lead 3.5% and nickel 6%.

West Texas crude rose US90c to US$49.30/bbl.

Only iron ore bucked the trend, falling US20c to US$54.00/t.

The Aussie dollar was up 0.8% on Saturday morning at US$0.7499 as the sausages sizzled and the vanilla slices flew out the door, but in the cold hard light of Monday morning, has slipped to US$0.7465.

It was also Saturday morning when the SPI Overnight closed up 32 points or 0.6%.

The Week Ahead

Wall Street is closed tonight but there follows a big week for US releases, including the minutes of the June Fed meeting on Wednesday and the non-farm payrolls report for June on Friday.

Tuesday it’s the services PMI and factory orders, Wednesday the trade balance, and Thursday chain store sales and the ADP private sector jobs report.

In a rudderless, which unfortunately is not as positive as Rudd-less, Australia we’ll see ANZ job ads, the Melbourne Institute inflation gauge and building approvals today and retail sales and the services PMI tomorrow ahead of the RBA meeting. No rate change is expected, but the market will be interested to hear the board’s take on Brexit.

Thursday it’s the construction PMI.

Tuesday is services PMI day across the globe including Caixin’s take on China.

There is very little in the way of local corporate events or releases this first week on the new year but as of next week we start to see the first quarterly reports.

Rudi will be traveling to and presenting in Melbourne this week. Hence no live appearances from the Sky News studios in Macquarie Park.
 

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

Nigel Farrage may have called for June 24 to become Britain’s “Independence Day” holiday but the real one is on Monday, the Fourth of July, providing for a long weekend in the US. No Wall Street.

Before that, today we see China back in the spotlight after a brief absence with its June manufacturing and service sector PMIs. We’ll also see manufacturing PMIs from across the globe.

And the Fed comes back into play next week with the June non-farm payrolls report on Friday. Ahead of that we will see the services PMI, factory orders, trade, chain store sales and the private sector jobs report. The minutes of the June Fed meeting, which cited Brexit risk as a reason not to raise, are out on Wednesday.

In Australia we’ll see building approvals, ANZ job ads, the MI inflation gauge, retail sales and the services and construction PMIs.

After a tumultuous week, things will probably settle down a bit next week under what at this stage appears likely to be a returned government. It’s a quiet week on the local stock front until quarterly report season begins from the following week.
 

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article 3 months old

Treasure Chest: ANZ Warns Of Commodity Price Volatility

By Greg Peel

Earlier in the year it appeared as if Beijing’s stimulus measures, both monetary and fiscal, may have been starting to have their desired impact on the Chinese economy. The data began to improve. Mind you, one always has to be wary of misleading Chinese data fluctuations before, during and after the Lunar New Year holiday.

China’s May data now suggest things have taken a turn for the worse once more. Commodity price rebounds out of the February dip have to a degree been driven by stronger Chinese demand for the likes of iron ore, oil, and to some extent, base metals. There have been fears of such demand simply reflecting a re-stocking phase which must eventually come to an end, but analysts have been surprised that this had not yet become apparent.

Reality bit last weekend when Beijing released a weak number for May fixed asset investment, which reflects infrastructure spending. Industrial production was also uninspiring. The weakness in China’s financing numbers for May released earlier this week was notable, ANZ’s commodity strategists point out.

Loan growth was stronger than expected but total social financing was quite subdued, ANZ notes, corroborating the fall in fixed asset investment growth. A decline in the money supply and aggregate finance suggests the Chinese economy has peaked. Yet the data is not so poor as to press the PBoC into more aggressive monetary easing. ANZ nevertheless believes the government will likely launch further fiscal policies and speed up infrastructure approvals.

While the Chinese story is an ongoing one, of more immediate threat to commodity prices is next week’s Brexit vote. A “go” vote will likely send stock and commodity (ex-gold) markets into a tailspin. The impact may only prove temporary, ANZ suggests, but losses could be steep.

Commodity prices should otherwise be supported on the downside now that the Fed has returned to a more dovish stance, in line with market perception. Three anticipated US rate hikes this year have now become one, and that’s not a given either. Rate hikes would have placed upward pressure on the US dollar and thus by default, downward pressure on commodity prices.

It is still likely a Brexit “go” vote will result in US dollar strength as a safe haven for funds following out of the UK and Europe, adding to downside pressure on commodity prices irrespective of general volatility.

The exception is gold, which is more currency than commodity and as a safe haven, can move independently of the US dollar if circumstances warrant. Gold has already challenged the US$1300/oz mark, which will no doubt be breached were the Brexit vote to throw the world into turmoil.

The latest polls have the “stay” vote in front. It will be a nervous week.


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article 3 months old

The Monday Report (On Tuesday)

By Greg Peel

Friday

The SPI futures suggested a 27 point opening to the downside on Friday morning but instead the ASX200 dropped 50 points in the first half hour, which again looked like computers gone mad. This assumption was backed up by an immediate attempt to rally back such that within the subsequent half hour, the index was only down 30.

But this time what might otherwise have been another session of grafting back towards square turned into a “just sell and get out of here by lunchtime” session. The index declined again to be down 50 points once more by midday and there it stayed all afternoon as offices emptied for the long weekend.

Word is a couple of large lines were sold in the futures market early in the session, so maybe it wasn’t all the computers’ fault this time.

Aside from the desire to square up ahead of a holiday, we may also point to the fact the index had tried on about three occasions now to break up through 5400, without success. Typically if markets find they just can’t go up, they go down instead. Friday did look like a bit of a capitulation on that front.

And as it transpired, a prescient one.

Commodity price weakness and accusations against BHP Billiton had materials falling 2.3% on Friday but a 1.0% fall for the banks was the standout, and did the bulk of the index damage. Energy dropped 1.3% but thereafter, sector falls were not as significant.

If a proprietary desk made the market for the lines of futures and was hit on the bid, that desk then has to sell “the index” of stocks to hedge their position. One need only slap the big caps – even just the top ten – to have the bulk of the market cap covered. The first thing one thus does is hit the banks, the big miners and so on.

It may have been that come this morning, the market would be ready to regain some of Friday’s lost ground on a bargain hunting basis, assuming nothing came out of left field overseas on the weekend.

But it did.

Friday Night

A new poll was published on Friday night suggesting – for the first time – that more British are in favour of leaving the EU than staying. Prior polls have indicated the opposite balance but Friday night’s poll showed not just a slight bias, but a 55/45 leave/stay split.

The London FTSE fell 1.9%, the French CAC 2.2% and the German DAX 2.4%. Hardest hit were the British and European bank stocks. However, by the time the UK and European markets were closed on Friday night, that Brexit poll result had not yet been published.

Weakness was a reflection of the rolling tide of bond buying in Europe, ahead of next week’s Fed meeting and the following week’s Brexit vote, turning into a torrent. The German ten-year yield traded as low as 0.01%. Ahead of the weekend, European investors were getting out of risky stocks and into safe haven bonds.

Wall Street opened lower as a result but was beginning another familiar graft back again when the poll news hit the wires. The Dow subsequently closed down 119 points or 0.7%, having been down as many as 173 points. The S&P closed down 0.9% at 2096 and the riskier Nasdaq fell 1.3%.

The British pound fell 1.4% against the greenback on the poll news, sending the US dollar index up 0.6% to 94.65.

The US ten-year bond yield closed down 4 basis points at 1.64%.

In the US, it was also the banks that suffered most on the day. The US banks had previously been leading Wall Street back to all-time highs on Fed rate hike expectations, but then along came that May jobs numbers, and now this.

The LME had already closed on Friday night before the Brexit news and greenback rally, and moves among base metal prices were minimal.

Oil was still open nonetheless, and West Texas crude fell US92c to US$49.53/bbl. Aside from the impact of the stronger greenback, the weekly US rig count showed another slight tick up.

Despite the stronger greenback, gold rose $3.80 to US$1273.30/oz as a safe haven.

The SPI Overnight closed down 61 points or 1.2% on Saturday morning.

Sunday

May data released by Beijing on Sunday showed Chinese industrial production rose 6.0% year on year as expected, and retail sales rose 10.0% as expected. The concerning result was fixed asset investment, which fell to a growth rate of 9.5% in the year to May, down from 10.5% in the year to April. Economists had forecast 10.5%.

Within that fixed asset number, private sector investment rose only 3.9% compared to 22.3% growth from the state. This is the figure that has economists worried, as it suggests China’s economy is almost solely been driven by government stimulus at present.

It is nonetheless assumed Beijing will need to bump up that stimulus to offset a weak private sector if year-end GDP growth targets are to be met.

Monday Night

While Orlando provided the shock, the focus of attention for markets across the globe was still the Brexit poll. While there is more than one poll being conducted on a regular basis, and others have a much closer outcome at this stage, suddenly the world is realising the vote is only ten days away and the result is unclear. Previously the “stay” vote was winning in the polls, leading to a level of complacency.

That has now changed.

Having already closed to the downside on Friday night before the latest poll was published, the London FTSE fell another 1.2% last night, while the French CAC fell 1.9% and the German DAX 1.8%.

Wall Street attempted a recovery from the open, prompted by news Microsoft had made a takeover bid for LinkedIn. The bid sent LinkedIn shares soaring 50% and floated all similar boats, while Microsoft (Dow) shares came off around 2%. But it wasn’t long before the mood returned to Brexit concerns.

There is also, of course, a Fed meeting and press conference this week, and meetings for the Banks of Japan and England.

While no one expects a Fed rate hike, the market is simply unsure now whether the Fed will be back in dovish mode or remaining in hawkish mode since the May jobs numbers were released. The Fed is also even less likely now to do anything ahead of the Brexit vote and on that score, nor is the BoE.

It could be a different story for the BoJ nevertheless, who again through no fault of its own is being faced with a surging yen. Seen as a “safe haven” currency, then yen has risen on the poll news as carry trades are reversed in the face of increased volatility. Will this force the BoJ to move further into the negative, or at least step up QE?

That volatility was reflected in the VIX index on the S&P500 last night, which rose 23% to 21 as investors moved to hedge their positions. The sidelines seemed a safer place to be, resulting in the Dow closing down another 132 points or 0.7% last night, the S&P falling 0.8% to 2079 and the Nasdaq dropping 0.9%.

It is going to be an interesting two weeks.

The US dollar index actually managed to slip back a bit last night as the yen became flavour of the month, down 0.3% to 94.38 despite ongoing weakness in the pound and euro. There was therefore no reason not to buy the other safe haven – gold – which is up US$10.50 to US$1283.80/oz.

Having been quiet on Friday night, base metals were mixed last night. Copper rose 0.7% and aluminium and lead both rose 1.5% but nickel and zinc slipped slightly.

Iron ore is down US30c at US$51.80/t.

West Texas crude is down US97c at US$48.56/bbl.

The SPI Overnight closed down 40 points or 0.8% this morning. That equates to a net 101 points down since the ASX closed on Friday for the long weekend.

The Week Ahead

The Fed statement and press conference are due on Wednesday night. The BoE and BoJ meet on Thursday night.

The US will see retail sales and business inventories tonight, industrial production, the PPI and Empire State activity index on Wednesday and the CPI, housing sentiment and the Philadelphia Fed activity index on Thursday.

On Friday it's housing starts and if there were not enough volatility on offer this week already, Friday is the quadruple witching derivatives expiry for the June quarter.

In Australia we’ll see the NAB business confidence survey today and the Westpac consumer confidence survey tomorrow. On Thursday the May jobs numbers are due.

Investor days will be held this week by nib Holdings ((NHF)) tomorrow and Goodman Group ((GMG)) and Graincorp ((GNC)) on Thursday.

Rudi will appear on Sky Business today, via Skype, to discuss broker calls around 11.15am. He'll return on Thursday, twice. First from 12.30-2.30pm and then again, between 7-8pm, for an interview on Switzer TV. On Friday he'll Skype-link again to discuss broker calls around 11.05am.
 

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

China will release May industrial production, retail sales and fixed asset investment numbers on Sunday.

Australian markets are closed on Monday.

The short week will see the NAB business and Westpac consumer confidence surveys and the May jobs numbers.

The Bank of Japan will hold a policy meeting on Thursday. Rates further into the negative? The German ten-year yield has now almost hit zero. The Bank of England will also meet on Thursday but nothing will happen ahead of the Brexit vote.

The Fed will hold its policy meeting on Wednesday, with expectations for a rate hike now near zero. What will be important is the language of the statement and Janet Yellen’s press conference.

US data releases pick up again next week, and feature retail sales, inventories, industrial production, inflation, housing sentiment and starts and the Empire State and Philly Fed activity indices. Friday is a quadruple witching expiry of equity derivatives.

While local companies continue to hold investor days, corporate news is now thin on the ground as we approach year-end.


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article 3 months old

The Overnight Report: Slow Grind

By Greg Peel

The Dow closed up 66 points or 0.4% at 18,005 while the S&P gained 0.3% to 2119 and the Nasdaq rose 0.3%.

Flat

The ASX200 yet again suffered one of its first-half-hour plunges yesterday before immediately being bought back up again, to be only down slightly by midday. The futures only signalled down 18 on the open, so the rest was up to the computers.

The morning saw the release of the local housing finance numbers for April.

While the number of loans to owner-occupiers increased in April to be 4.6% higher year on year, the net value of those loans fell 1.8% to be 4.4% lower year on year. Meanwhile, loans to investors fell 5.0% in the month to be down 20.8% from a year ago, cycling a comparable reading ahead of the RBA/APRA clamp-down on investor lending mid-2015.

This is the housing market that has been offsetting the impact of weak commodity prices. Just as well commodity prices have rebounded, and China is buying greater volumes to offset the impact of weaker prices.

China’s net imports nevertheless fell 0.4% in May year on year but this was a better result than the 6.0% drop forecast, and the 10.9% fall in April. Exports fell 4.1% -- more than the 3.6% forecast and worse than the 1.8% April decline.

It was a mixed result which saw the ASX200 take another stumble at midday before grafting back again in the afternoon to a flat close.

Higher oil prices ensured a 2.1% gain for the energy sector yesterday so there needed to be an offset to square up the index. The banks were only a little weaker so it required materials to fall 0.6% due to weaker base metal prices, and despite a stronger iron ore price, and telcos to fall 0.9%.

Two sectors that have really been bouncing back and forth for no major reason these past few sessions have been telcos and consumer staples – both sectors one would normally expect to be plodders. Seems no one can make up their mind.

The index is poised at 5370, a number which is neither here nor there on a technical basis. We’re heading into a long weekend locally.

Muted Cheers

The Dow chopped around last night in an insignificant range before finally closing above 18,000 for the first time since April. But no corks were popped. The S&P 500 is within 0.6% of its all-time high, but no one is particularly excited.

It has been described as the unloved rally – a slow graft higher without any real impetus beyond the rebound in oil prices, which may yet fade, and central bank policy. A lot of attention is being focused on Europe at present, where the German ten-year yield (0.06%) continues to fall to reflect a step-up in corporate bond issuance. That step-up is all about the ECB.

The ECB’s latest QE upgrade included the addition of corporate bond purchases, on top of purchases of government bonds issued by eurozone members. Corporate Europe knows it has a willing buyer, and rates have never been so low. Why not borrow, even to buy back shares, as has been all the rage in the US. Deutsche Bank did it recently and in so doing, halted its share price slide and turned all European banks around.

Meanwhile on Wall Street, all discussion is about the Fed. Occasionally there is mention of actual corporate earnings, but they’re just a sub-text. The markets are being controlled by the central banks. In such an environment, the only real explanation many can come up with for the stock market rally on Wall Street is the TINA trade – there is no alternative investment one can make to provide any sort of positive real return.

At this rate the S&P will likely hit a new all-time high next week, possibly when the Fed puts out its statement on Wednesday night and no sign of the next rate hike is provided.

But there will likely be little excitement. An interesting element of last night’s trade was that oil rallied again, but the energy sector actually closed weaker.

Commodities

Amongst those Chinese May trade numbers was an indication of increased oil imports. US crude inventories fell again last week. There has been another pipeline attack in Nigeria. The US dollar index is down 0.3% at 93.56.

Add it all up and West Texas crude is up US$1.10 at US$51.53/bbl.

China was also importing buying base metals in May. Seems like the commodity funds picked the wrong day to bail out on Tuesday. In a session smacking of short-covering, lead rose 1%, aluminium 2%, zinc 3% and nickel 4%. Only copper stood still.

Iron ore fell US20c to US$52.10/t.

Having stalled for three days, gold appears to have decided the dip in the US dollar last night was enough reason to buy once more. It’s up US$19.30 at US$1262.50/oz.

The Aussie is up 0.4% at US$0.7485.

Today

The SPI Overnight closed up 9 points.

Presumably yesterday’s selling in the materials sector will turn into buying today on base metal and gold strength.

Chinese inflation numbers for May are due today.

ECB president Mario Draghi will speak tonight.

Rudi will make his weekly appearance on Sky Business today, 12.30-2.30pm.
 

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article 3 months old

The Monday Report

By Greg Peel

Buy the Dip

Last week saw the ASX200 falling from resistance at 5400 down towards support at 5250 as expectations of a rapid round of RBA rate cutting were reconsidered. Those expectations were fuelled by the weak march quarter inflation number but tempered by last week’s strong trade numbers reflected in both the March quarter GDP result and April trade data.

Expectations of further rate cuts led to strength in the banks – the biggest influence over the index by market cap weighting. Last week saw bank shares falling back again.

But as it looked like we might break back down through support and once again fall into the gravitational pull of 5000, the buyers stepped back in on Friday. Never mind what the US jobs number overnight might be, it was mostly a Buy Australia session. All sectors contributed on a relative equivalent basis.

Friday’s economic data release was the local service sector PMI, which swung back into expansion with a rise to 51.5 in May from 49.7 in April. Caixin’s independent take on China’s services PMI saw a fall to a three-month low 51.2 from 51.8. Nobody seemed to be paying much attention.

The rally on Friday took us into the middle ground of around 5300. Developments over the weekend may make for an interesting session today.

Yes, there is the US jobs report, which I’ll get to in a moment. But while the SPI Overnight closed up one point on Saturday morning, we’ve since seen destructive storms along Australia’s east coast, from South Queensland down to Tasmania, which are still in play. Immediately one might think of the impact on insurance companies, and the impact on retail sales. There were also major power outages in Sydney yesterday that shut down everything from online pizza ordering to EFTPOS payments at supermarkets.

That said, we also have tomorrow’s RBA policy meeting to consider, which might otherwise suggest a quieter day’s trading today in anticipation. While the market is only ascribing a small chance to a follow-up rate cut so soon, the central bank’s response to the balance of weak inflation and strong economic growth will be carefully analysed.

Job Shock

The US added 38,000 jobs in May. Even if you adjust for the 35,000 striking Verizon workers the result does not even come close to the 160,000-odd forecast. Wall Street was dumbfounded.

To confuse matters further, the unemployment rate actually plunged to 4.7% from 5.0%. But this was due to a big drop in the participation rate, which in itself is another negative. On the other side of the coin, wages grew by 0.2%, which in any other set of numbers would be considered reasonable.

The initial reaction on Wall Street was to sell, and the Dow was down 150 points from the open. But as had been the case almost every day last week, the rest of the session was spent grafting back that loss. There are three ways to interpret 38,000.

Either it’s bad news, suggesting the US economy is slowing, or it’s good news, suggesting the Fed will hold off on raising, or in the wider scheme of things, it’s neither here nor there. It is not the first time in the past few years Wall Street has been confronted with a jobs number that has fallen spectacularly short of expectation. In those instances, the following month saw a big rebound to a number above expectation.

So it could just be a blip. But suffice to say, ahead of the release the market was factoring in around a 33% chance of a Fed rate hike in June and a 66% chance in July. In the wake of the release, the market has June at a near zero chance and July at 33%.

The shift in odds is underscored by a huge drop in the US dollar index, down 1.8% to 93.87 in a heartbeat. At the same time the Aussie jumped 1.9% to US$0.7366 as a result, and gold jumped US$33.10 to US$1243.50/oz. The US ten-year bond yield fell 11 basis points to 1.70%.

On increasing expectation of a Fed rate hike, US banks have been enjoying a rally and leading Wall Street back towards its highs. The banks thus took a bit of a hiding on Friday night, but there was sufficient offset elsewhere to ensure a less dramatic close. A lower greenback is good for commodity prices, so resource sectors performed well, and yield stocks such as utilities regained their appeal.

The Dow closed down 31 points or 0.2%, the S&P lost 0.3% to 2099 and the Nasdaq fell 0.6%. That the S&P should close near 2100 is significant, as this has proven to be neutral territory of sorts in 2016 – the pivot point between strength and weakness.

Fed chair Janet Yellen will coincidentally give a speech tonight on monetary policy. The market has now dismissed a June hike, albeit many presumed the Fed would wait until after the Brexit vote anyway, but now July looks uncertain. We’ll nevertheless see the June US jobs report out before the July meeting and if there is indeed a rebound, the picture may well change once more.

What will Yellen have to say tonight?

Commodities

Commodity prices have been beholden of late to Fed rate hike expectations and the negative implications of a stronger US dollar. All base metal prices were stronger on Friday night but copper’s 1.5% gain was the stand-out, with other moves less significant. There is of course a trade-off implication of a weaker US economy.

Iron ore rose US$1.60 to US$49.50/t.

The oils did not rally, because for the first time since last August, the US rig count saw an increase over the week. West Texas crude fell US16c to US$48.90/bbl.

This is exactly what the market has been anticipating/fearing. A price of US$50/bbl has been widely considered as the threshold at which shuttered US production would begin to come back on line following a period of weak prices. While 50 has not quite been achieved the WTI price has stabilised above 45 and thus we see some producers now confident to fire up again, no longer burning cash at spot prices.

If they start to forward-sell their production, the risk is prices will fall again. Oil has surprised many by managing to hang onto its rebound despite runaway OPEC production increases.

The Week Ahead

As noted, the SPI Overnight closed up one point on Saturday morning, suggesting the local market is not quite sure what to make of the US jobs number.

Of particular interest locally today will be the release of the Melbourne Institute inflation gauge for May, leading into tomorrow’s RBA meeting. Is the weak inflation trend continuing? We’ll also see ANZ job ads today. The other highlight for the week locally will be housing finance numbers on Wednesday.

China will release May trade numbers on Wednesday ahead of the usual industrial production, retail sales and fixed asset investment suite on the weekend.

In the US, Yellen’s speech tonight will be the highlight in a week largely devoid of economic data, up until fortnightly consumer sentiment on Friday.

Things have quietened right down now for local corporate events and releases, beyond any unscheduled “confession session” announcements that may yet be forthcoming. Vicinity Centres ((VCX)) will hold an investor day on Wednesday.

The coming weekend is a long one, with the ASX closed next Monday for the birthday the Queen has already had. We should probably expect some squaring up towards the end of the week.

Rudi will appear on Sky Business through Skype-link on Tuesday, 11.15am to discuss broker calls. On Thursday he'll be on screen from inside Sky news studios from 12.30-2.30pm and on Friday he'll Skype-connect again at around 11.05am.
 

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

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article 3 months old

The Overnight Report: Paint It Beige

By Greg Peel

The Dow closed up 2 points while the S&P lost 0.1% to 2096 and the Nasdaq rose 0.3%.

Good News is Bad News

Yesterday’s plunge from the open for the ASX200 may have confused certain ABC finance commentators but I believe the story is pretty clear. The market may have dropped a couple of hours before the strong GDP result was released but the fact is we already knew the GDP result would be strong by virtue of Tuesday’s surprisingly positive net export result.

That result had economists scrambling to upgrade their GDP forecasts from under 3% annual growth to potentially over and guess what, it was 3.1%.

I noted yesterday that May had seen the ASX200 rise from 5250 to 5400. It was not about commodity prices – they rose in April, and while oil has moved little since, iron ore has fallen. This particular increase was all because at the beginning of the month the RBA delivered a surprise rate cut thanks to the March quarter disinflation shock, which again had economists scrambling, this time to lower their cash rate expectations and predict 1.00% by next year.

The May rally was thus led by the banks and other yield-payers. Yesterday’s strong GDP result, coming off the back of the strong December quarter result, now has economists questioning whether 1.00% is at all possible. Suddenly the yield-payers are not as attractive as they were last week. On Tuesday local investors started to sell these sectors in response to the export data, while the significant cohort of offshore investors in Australian yield slept. Overnight, offshore investors had the chance to place their “sell on open” orders ready for yesterday morning.

So down we went. There was a brief “buy the fact” rebound when the actual GDP result was released, but then the Chinese PMI results for May were released.

Beijing had the manufacturing PMI unchanged at 50.1. Caixin’s equivalent fell to 49.2 from 49.4. Beijing’s services PMI fell to 53.1 from 53.5. Caixin’s equivalent is due out tomorrow. For a brief couple of months the Chinese economy looked like it might have bottomed out, ahead of a stimulus-fuelled recovery. But as I had pointed out at the time: never trust the numbers around Chinese New Year.

Suffice to say the ASX200 fell again in the afternoon. The resource sectors joined in thanks to the China data, but we had lower oil and iron ore prices from the outset anyway. Any attempt by the ASX200 to conquer 5400 and push back up towards 6000 again appears now to have been postponed.

Or has it?

Economists agree the GDP result is unusual, and misleading. In short, the strong growth rate comes down to an increase in the volume of output, not the value. On the one hand, lower commodity prices had stripped export volumes of that value. On the other, wages growth is at its slowest pace since the Keating recession and inflation is also slowing. The official unemployment rate is surprisingly low but only because the official unemployment rate is a joke. The vast number of Australians who’ve given up looking for work are the ones ensuring there is no inflation in this country.

Does this, therefore, mean the RBA can keep cutting? That will be the question for June.

Modesty

When the numbers start to become misleading, analysts like to actually get out into the real world to get a handle on what’s actually going on. A good example of this is the Fed’s Beige Book – an anecdotal assessment of economic activity in the twelve Fed districts.

If yesterday’s Australian GDP brought into question further RBA rate cuts, last night’s Beige Book brought into question the June or July Fed rate hike Wall Street has all but come to assume. It was a Triple-M result – growth in each district was either “moderate”, “modest”, or “minimal”. If anything, the US economy has slowed since the last anecdotal assessment.

So maybe the Fed won’t hike after all. How does one respond?

Well it is no longer clear – on Wall Street at least – whether bad news is bad news or good news, or vice versa. Which probably explains why the Dow initially fell over a hundred points before recovering all of that loss by the close. I’ve made the reference before but it’s fitting once again – if this was QI, now’s the time to hold up your “Nobody Knows” card.

On the positive side, the US manufacturing PMI for May rose to 51.3 from 50.8. But while this is an improvement, it still suggests a very “modest” pace of growth. Not the stuff of rate hikes. Meanwhile, the pace of auto sales also slowed in May and construction dropped 1.8% in April.

To further complicate matters, the S&P500 index has had a couple of goes at the technically important 2100 level but failed to breach it. Just like the ASX200 keeps failing at 5400.

Attention now turns to the data biggie, being tomorrow night’s US non-farm payrolls report. Tonight sees the private sector precursor. I apologise for assuming that report was due last night, on a Wednesday as always, but the long weekend has knocked it back by a day.

Commodities

The US dollar index fell for a change last night, down 0.6% to 95.4, thanks to the Beige Book. That should be supportive of commodity prices, but the implications of a slower than assumed US economy, and disappointing Chinese data, should do the opposite. In short, there was no clear trend last night.

West Texas crude is little changed at US$48.91/bbl.

Copper fell over a percent when all other base metals rose, including zinc by 2.5%.

Iron ore fell US30c to US$49.30/t.

Gold is down slightly at US$1212.70/oz.

The Aussie dollar initially shot up on the GDP result yesterday, was then sold back down by those who bought it on the export number the day before, and rose again last night thanks to the weaker greenback. It’s up 0.3% over 24 hours at US$0.7255.

Today

The SPI Overnight closed up 3 points.

With the March quarter now put to bed, today brings local the retail sales numbers and trade balance for April.

The ECB holds a policy meeting tonight.

The ADP private sector jobs number for May is out in the US.

Challenger ((CGF)) will hold an investor day today.

Rudi will make his weekly appearance on Sky Business today, 12.30-2.30pm and then returns for an interview on Switzer TV between 7-8pm.
 

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article 3 months old

The Overnight Report: End of Month

By Greg Peel

The Dow closed down 86 points or 0.5% while the S&P fell 0.1% as the Nasdaq rose 0.3%.

Good News is Bad News?

We saw another questionable open on the ASX yesterday, in which the index plunged 43 points on the opening rotation with no lead-in from offshore whatsoever, following a flat session on Monday. As soon as the market was “open”, the index recovered virtually all of the ground the computers had lost.

Presumably the humans have learned to simply stand aside, let the computers run riot in the first half hour.

With normal programming re-established, all eyes were on the release of the March quarter current account data.

The current account and trade deficits both narrowed more than expected, which in short is good news for those who listen anxiously to politicians’ warnings over Australia’s debt. Importantly, the loss in export dollars experienced in the quarter due to plunging commodity prices was offset by the increase in volumes exported.

Export volumes rose 4.4%, underpinned by strong contributions from resources (5.6%) and services (6.1%). Export prices fell 5.0% and are down 11.3% year on year. The net result is a 0.7% fall in the value of exports.

On the other side of the ledger, the volume of imports fell 0.8%, led by a 7.0% fall in mining equipment. Import prices were 3.1% lower, and thus the value of imports 3.8% lower.

Put the two together, and the terms of trade will add 1.1 percentage points to March quarter GDP – a figure ANZ’s economists described as “very solid” and CBA’s as “whopping”. Economists have scrambled to lift their GDP forecasts from a prior 2.8% annual to as much as 3.2%.

But what does this mean for RBA rate cut expectations? Perhaps a clue lies in the fact yesterday saw the banks fall 0.5%, the telcos 1.2% and consumer staples 1.4%. Aside from a 1.5% fall in energy due to the lower oil price, these three yield-paying sectors led the index down. We should acknowledge there was also a pay dispute issue impacting Wesfarmers, and that utilities only fell slightly.

It’s not cut and dried, but the bottom line is if the March quarter GDP suggests the Australian economy is actually healthier than even the RBA had assumed, then economists might start to back away from their 1.00% cash rate forecasts.

And just to add fuel to that fire, yesterday’s data releases for the month of April showed a big rise in business borrowing – a positive indication for Australia’s economic “transition” – and an increase in building approvals when economists had forecast a fall following March’s strong result.

It would seem rumours of the housing boom’s demise are premature.

Yesterday it appeared the local market was trading off a theme so pervasive in US markets for so many years: With regard monetary policy, good news is bad news.

Sell in May? The ASX200 rose from 5250 to 5400 over the month. It would be of no surprise if yesterday simply saw some end of month squaring.

Flat in May

The same is likely true on Wall Street last night, albeit the Dow closed May only a handful of points higher for the month. Last night’s session was further complicated by stage 2 of the introduction of US-listed Chinese stocks into the various MSCI global indices.

Many an index-tracking fund benchmarks off the MSCI indices, and if new stocks are added, others must be sold to match new index weightings. The net impact should be a net offset, but if US stocks have to be sold, that impacts on US indices.

Last night’s data showed US consumer spending jumped in April by a better than expected 1.0% -- the biggest monthly gain in seven years. Incomes rose 0.4%. The personal income & expenditure (PCE) measure of inflation rose to 1.1% annual from 0.8% in March in core terms. This is the Fed’s preferred indicator.

Nothing to stop a June rate rise there, although Wall Street continues to favour a post-Brexit vote July hike. Having at one point priced in little chance of a rate hike in 2016, the market now sees July as about a 66% chance to June’s 33%.

Last night also saw oil continue to drift back, having failed to penetrate the 50 level.

Commodities

West Texas crude is down US79c or 1.6% at US$48.83/bbl.

Also failing at the 50 mark is iron ore, which fell US70c to US$49.60/t.

It was a quiet return to trading on the LME. Zinc jumped 1.5% but moves in all other metals were negligible.

Gold found a bit of a bid last night nevertheless, having fallen steadily of late on the stronger greenback. The US dollar index is up 0.2% at 95.86 but gold is up US$10.10 at US$1215.00/oz, possibly also reflecting the end of the month.

On the strong current account numbers, the Aussie is up 0.7% at US$0.7231.

Today

The SPI Overnight closed down 24 points or 0.5%.

While Sell in May might have been quashed for another year, June is a month downunder which can often be impacted by tax-related selling of underperforming stocks ahead of EOFY.

Australia’s March quarter GDP result is out this morning.

And being the first of the month, it means PMIs. Most importantly, we’ll see May manufacturing PMI numbers for China from both Beijing and Caixin, along with Beijing’s service sector PMI.

The Fed will release its Beige Book tonight, but the focus will be on the ADP private sector jobs number for May, ahead of Friday’s non-farm payrolls release. There is a complication this month given 35,000 workers at Verizon were on strike over the survey period and will thus be counted as “unemployed”, even though they’re now back. So there may need to be some averaging between the May and June numbers, albeit the Fed meets in between.

Rudi will host Your Money, Your Call Equities tonight on Sky Business, 8-9.30pm.
 

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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