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

Tensions in the Ukraine and thus between Russia and the rest of the world have eased but are still simmering. When Putin sent the troops into the Crimea he was quickly forced to say “Comrade, I don’t think we’re in the Soviet Union anymore,” when the ruble tanked and Russian stock market plunged 12%. Yes Vlad, you’re part of a capitalist world now, and you need it.

Either way global markets have largely dismissed the geopolitical risk for now although US Treasuries are not expressing the same exuberance as the US stock market and gold has edged up on a watch and act basis.

Tonight sees the US jobs numbers released but they really will be a shot in the dark firstly, and then almost an irrelevance secondly if the Weather Put is exercised.

It’s a quieter week for US data next week with the highlights being retail sales and business inventories on Thursday and the Michigan Uni fortnightly consumer confidence measure on Friday.

China will be in the frame from this weekend, with the trade balance due tomorrow, CPI on Sunday, and industrial production, retail sales and fixed asset investment due on Thursday.

With Australia’s GDP result now in the bag, focus swings back to the ongoing monthly data. Next week sees housing finance and jobs numbers along with the NAB business and Westpac consumer confidence surveys.

The Bank of Japan will hold a policy meeting on Tuesday.

The US goes on to summer time this weekend so as of Tuesday morning the NYSE will close at 7am Sydney time, through to the weekend of April 6.
 

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article 3 months old

The Overnight Report: Snow Reason To Panic

By Greg Peel

The Dow closed down 35 points or 0.2% while the S&P was flat at 1873 and the Nasdaq rose 0.2%.

Bridge Street followed the global trend yesterday in rising from the bell on news of easing in tensions in the Ukraine. The local index never actually fell on the escalation in the first place, unlike other major centres, so it was down to local economic data to provide the real impetus to push higher over the session.

Australia’s December quarter GDP grew by 0.8% quarter on quarter for an annual rate of 2.8%. These numbers are a tick above consensus estimates of 0.7% and 2.7% respectively. The level is still below trend, and indeed growth of 2.8% over the year 2013 was at the low end of the range of the past few years, notwithstanding the headwind of a 2.0% fall in public spending which represented the first decline in, believe it or not, sixty years. A private sector inventory run-down also fought against growth.

The good news is we have now marked the 22nd year of consecutive growth. The bad news is that while the peak of mining spending was evident in the data, the beginnings of a transition away from mining were not. Spending on new dwellings and non-mining capex both fell in the December quarter.

But that was last year. We are already into the last month of the March quarter and the leading indicators have started to suggest improvement, the CBA economists note. Building approvals and commercial finance commitments are rising, while the December quarter provided a glimpse at the solid export numbers that will flow from the mining sector shifting into the production phase.

Aside from the GDP result, yesterday also brought Australia’s February service sector PMI. Are you sitting down? It leapt to 55.2 from 49.3 in January. That’s the first indication of expansion since January 2012, and healthy expansion at that, and the strongest result since March 2008. The main drivers were health and community services and finance and insurance.

Australia’s PMIs are always a lot more volatile than those of other developed economies (is it a population thing?) so we might see a tumble in March. But if the number can hold over 50 then we would have another indicator the non-mining recovery has begun.

HSBC’s services PMI for China rose to 51.0 from 50.7, and the eurozone saw a rise to 51.6 from 51.0. The UK continues to win the race, given a fall to 58.0 from 58.3 still suggests rapid expansion. The US saw a fall to 51.6 from 54.0. This was quite disappointing, but quickly blamed on the weather.

And if you’re thinking that the snow excuse seems a bit of a stretch for the service sector, it must be noted that while other centres (Australia included) publish separate construction sector PMIs, the US construction sector is a subset of the US services sector. So snow makes sense.

Speaking of snow, this month’s Fed Beige Book – an anecdotal assessment of economic activity in each of the twelve Fed regions -- could have been written by the Department of Meteorology as well. It was a shocker, but even the Fed was quick to admit a true interpretation is difficult given the weather impact.

And then there’s the all-important jobs numbers. No one in the US knows what to forecast right now, and no one knows how to respond to the result. The official non-farm payrolls number is due on Friday night but last night saw the ADP private sector result for February. The private sector added 139,000 jobs, which was better than January’s 127,000, but well down from last year’s milder February, when 205,000 jobs were added.

So the US stock indices chopped around going nowhere much last night. After the big rally on Tuesday night and the nominally weak data flow, there was little reason to buy with any enthusiasm. The snow provides a good reason not to sell enthusiastically either.

The US dollar index was steady at 80.12, US bond markets were steady and gold was up a whisker to US$1339.00/oz. The strong local data lifted the Aussie 0.4% to US$0.8985.

Having surged in Tuesday night’s trade, last night base metals were mostly a little weaker. The oils continued to wipe out their Ukraine premium and a jump in weekly inventories in the US added to the mix to send Brent down US$1.33 to US$107.84/bbl and West Texas down US$2.23 to US$101.10/bbl.

Spot iron ore fell US10c to US$116.70/t.

The SPI Overnight fell 12 points or 0.2%.

The January trade balance and retail sales numbers are out in Australia today while tonight the ECB and Bank of England both hold policy meetings which are not expected to produce any policy changes.

Rudi will appear on Sky Business at noon and again on Switzer TV with guest host Marty tonight between 7-8pm.
 

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article 3 months old

The Overnight Report: What Would Putin Do?

By Greg Peel

The Dow closed down 153 points or 0.9% while the S&P lost 0.7% to 1845 and the Nasdaq fell 0.8%.

This report is not the medium to debate or speculate on the implications of Russia’s move into the Crimean peninsula as the mainstream media have every angle covered. Suffice to say, markets always fall on the threat of war and can fall sharply. If a war begins, markets usually bounce. This war, if that is what it is to be, will certainly have wider reaching global implications than, for example, the Libyan conflict. If nothing else it should be noted Europe imports the bulk of its energy needs from Russia. Any local altercation would have a minimal chance of intervention from NATO.

I did suggest yesterday that Friday’s session in the US offered up some surprises in the form of markets that didn’t move much when one might have expected so under the circumstances of growing tension. Suffice to say, oil, gold and US bonds all woke up last night. Stock markets tumbled around the clock.

It was a resilient performance locally given the ASX 200 was down over 50 points in the morning but closed down only 20. Japan fell 1.3%, Hong Kong 1.5%, London 1.5%, France 2.7% and Germany, which is heavily reliant on trade with Russia, 3.4%.

There were a lot of economic releases around the world last night which had to take a back seat to geopolitical concerns.

Australia’s manufacturing PMI rose to 48.6 in February from 46.7 in January. It’s an improvement but still in contraction indicative of the slowly dying sector. HSBC’s China PMI fell to 48.5 from 49.5. The eurozone fell to 53.2 from 54.0 but this was not as much as expected, is still expansionary, and featured the first slowing of contraction in France for seven months. The US surged to 57.1 from 56.7.

In Australia, the negative trend in the ANZ jobs ads series reversed last month with a 5.1% jump following a flat result in January, suggesting fears of spiralling unemployment may be overblown. New home sales rose 0.5% in January after falling in December. The Rismark-RP Data house price index showed 0.0% change last month after eight consecutive months of gains, perhaps allaying some bubble fears. And the TD Securities inflation gauge suggested a headline CPI rate of 2.7%, up from 2.5% last month.

Add that all up and we can see firstly why the ASX200 arrested its slide at midday yesterday and why the Aussie is dead steady over 24 hours at US$0.8927 when the war factor might have sent it tumbling. The RBA will meet today and leave rates on hold, but once again the talk is of when the first rate rise might be.

In the US, consumer spending rose 0.4% in January when 0.2% was expected. Despite this largely reflecting heating costs in the particularly cold winter, economists were pleased. Indeed, along with the PMI we would otherwise have expected Wall Street to kick on strongly last night, and the same could be said for Australia yesterday.

But that is not the case, although the Dow was down 250 points at its depths last night before also staging a comeback. The US dollar index rose 0.4% to 80.90 having fallen sharply on Friday. The US ten-year bond yield fell 5 basis points to 2.61% in one safe haven trade, and gold rose US$26.50 to US$1351.90/oz in the other safe haven trade.

Oil traders were clearly asleep on Friday given last night Brent crude jumped US$2.38 to US$111.20/bbl and West Texas rose US$2.09 to US$104.68/bbl.

Base metal prices fell but not dramatically so, other than a 1.7% drop in aluminium which has little to do with Mister Putin. Similarly, iron ore fell US40c to US$117.70/t.

The SPI Overnight fell 14 points, suggesting a lack of real panic.

We must now let the diplomacy run its course.

Australia’s December quarter current account and terms of trade are out today, along with January building approvals. The RBA will also hold a policy meeting as noted.
 

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

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

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

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article 3 months old

The Monday Report

By Greg Peel

On Thursday night the US S&P 500 closed at 1854 which, after several attempts during last week, marked a new all-time high above the previous 1848 level. This represented a technically bullish signal, and a psychologically bullish signal given previous failed attempts to establish a new high suggested a potential pullback for the US stock market.

On Friday night the S&P closed at 1859, up 0.3%, with the Dow up 49 points or 0.3% and the Nasdaq slipping 0.1%. But it was a rock and roll ride to get there.

The mood was buoyant as the bell rang for the last trading session of the month. Sure enough, the indices sprinted out of the blocks, and received further boost from the session’s round of economic data releases.

The main release of the day was the first revision of the US December quarter GDP. It was revised down to 2.4% from an original estimate of 3.2%. This seems like a substantial downgrade, but indeed the number was in line with consensus forecasts and highlights the questionable process of providing a first estimate based on extrapolating month one of the quarter, then revising to include month two. Next month will see the month three revision, and even that can be substantially revised at the time the first March quarter estimate is released.

In other words, it was not the weak result it might appear, and a fall off from strong retail sales in the first month was the factor driving expectation of a much lower ultimate result.

The good news was that the Michigan Uni fortnightly gauge of consumer sentiment managed a rise to 81.6 from a previous 81.2 when economists had expected a flat result. What’s more, the pending home sales index rose 0.1% and the Chicago PMI crept up to 59.8 from 59.6.

Or is it good news? Every US housing data point over the last two months has been weak, and quickly dismissed as weather-related. Actual sales numbers for existing and new homes have plunged. Pending sales refer to sales in process but yet to be settled. Why would this number rise when other numbers have fallen? This month each of the New York, Philadelphia and Richmond Fed activity indices have tumbled, again attributed to the weather. While Chicago might be further west it ain’t California. No snow effect here?

US data are becoming more and more confusing, and bringing the weather excuse clearly into question. At the end of the day we won’t really know until the snow melts and a new round of data is in. But it’s not like Wall Street seems to care. Before 2pm on Friday the S&P had shot to 1867 and the Dow was up 126 points.

Then the news came through that Russian troops had moved into the Crimea. Just before 3pm the Dow was down 46 points. While the sharp fall was matched by an equally sharp rebound to the close driven by the bulls, the fear remained that tensions in the Ukraine would escalate.

And escalate they have, with more troops arriving over the weekend and tensions reaching a critical level. There is a clear possibility of the civil war erupting in the Ukraine between the ethnic Russian population loyal to, and supported by, Russia, and the anti-Russian Ukrainians who are seeking to align the country with Europe. Which puts Europe in rather a difficult position.

Ukraine’s economy is not globally significant. Yet the country is fundamental to Russia’s oil and gas export market given pipelines traverse the country and seaborne exports depart from Black Sea ports. That said, oil prices did not respond accordingly on Friday night, with Brent down US17c to US$108.82/bbl and West Texas up only US15c to US$102.59/bbl. Perhaps the escalation over the weekend will prompt a different response tonight.

Gold did not respond either. It fell US$4.40 to US$1325.40/oz despite geopolitical crises traditionally sending investors scurrying into the safe haven. It has been proven over the last few years, gold doesn’t always respond the way one might expect, making gold price forecasts increasingly difficult.

Base metal price movements have increasingly become divergent in recent weeks reflecting individual metal specifics. On Friday night the moves of any consequence were a 1% fall in aluminium and a 1.5% rise in nickel. Both metals are impacted to some extent by the Indonesian export bans but with aluminium in global oversupply, nickel is the most likely candidate for market tightness.

Spot iron ore rose US10c to US$118.10/t.

The drop in the gold price on Friday was even more perplexing given the US dollar index fell 0.7% to 79.77. The fall was a result of a surge in the euro against the greenback after the eurozone released a flash estimate of February CPI. At 0.8% annualised, the figure was unchanged from January but still anaemic and well below the ECB’s 2% target rate. But at least it didn’t ease further, allaying fears Europe is heading into a deflationary spiral.

The Aussie also fell on Friday despite the fall in the dollar index, and at present is hovering around the US$0.89 mark. The Aussie has been easing in the wake of last week’s disappointing construction and capex data and ahead of this week’s GDP result. But the Aussie is also a global risk indicator, given its commodity-heavy economy. Even tension in the Ukraine can filter through to Aussie weakness.

On the subject of the Aussie, China’s official February manufacturing PMI was released on the weekend and showed a fall to 50.2 from 50.5 in January. The fall is consistent with HSBC’s own PMI estimation, but markets have at least taken heart that the result was slightly better than the 50.1 forecast, and that the sector is still supposedly in expansion mode, just, despite HSBC’s numbers suggesting otherwise.

The SPI Overnight closed on Saturday morning up 21 points or 0.4%.

We enter the new week with a hovering Ukrainian cloud. That aside, the week is choc-a-bloc with economic data releases, including an avalanche in Australia. The February profit reporting season is now at an end, so the focus switches back to the macro from the micro.

Australia’s December quarter GDP result is due on Wednesday. Economists are forecasting a 0.7% quarterly gain to a 2.5% annualised rate, up from 0.6% and 2.3% respectively in the September quarter. Ahead of the result we’ll see December quarter numbers for company profits and inventories today and net exports and the current account tomorrow.

In terms of monthly data, today sees the ANZ job ads series, the TD Securities inflation gauge, HIA new home sales, the RP Data-Rismark house price index and the February manufacturing PMI. Tuesday it's building approvals, Wednesday the service sector PMI, Thursday retail sales and the trade balance, and Friday the construction PMI.

The RBA will hold a policy meeting tomorrow and while the Aussie has slipped on disappointing quarterly numbers released last week, there is no suggestion the RBA is about to change its “on hold” stance.

Today Beijing will release its official service sector PMI and HSBC will release its China manufacturing PMI, followed by its services PMI on Wednesday.

Manufacturing PMIs are also due for the eurozone, UK and US tonight and the service sector PMIs on Wednesday.

Aside from the PMIs, this week’s US data releases include construction spending and personal income and spending tonight, the Fed Beige Book and ADP private sector jobs number on Wednesday, chain store sales and factory orders on Thursday, and the trade balance on Friday, along with non-farm payrolls. The US is now at a point at which economists really have no idea what the jobs numbers might be, but let’s just say that with Wall Street in a bullish mood, a good number is good and a bad number is simply weather-impacted.

The ECB and Bank of England will both hold policy meetings on Thursday.

Rudi will appear on Sky Business today at 11.15am, on Wednesday at 5.30pm and on Thursday at noon and again between 7-8pm for the Switzer Report.
 

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

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article 3 months old

Next Week At A Glance

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

By Greg Peel

The local reporting season effectively ends today, at least for the larger caps. There are a few off-year large cap reports yet to come but otherwise we’re now down to micro-caps and junior miners. All up the season will go down as a good one, with beats roughly outpacing misses by 3-2.

With the reporting season put to bed, we suddenly find ourselves slammed with economic data next week. China will report its official manufacturing PMI on the weekend, while Monday brings HSBC’s equivalent along with PMIs from Australia, the eurozone, UK and US, and China’s official services PMI. The pattern repeats on Wednesday with services PMIs from the other centres, and at the end of the week China will report its trade balance and inflation numbers.

It’s a busy economic week in Australia, centring on the December quarter GDP result on Wednesday. In the run-up we’ll see quarterly numbers for corporate profits, inventories, net exports and the current account. The RBA will make an interest rate decision on Tuesday but is unlikely to waver from its current “on hold” stance.

The week also contains plenty of monthly local data releases, including ANZ job ads, the TD Securities inflation gauge, the RP Data-Rismark house price index, building approvals, retail sales and the trade balance.

It’s an important week in the US culminating in Friday’s non-farm payrolls release. Stand by for another snow excuse. Beforehand, we’ll see data on construction, personal income and spending, vehicle sales, chain store sales, factory orders and the trade balance, along with the ADP private sector jobs number and the Fed Beige Book.

If the local and US stock markets are looking for their next directional leads, well there’s plenty of fodder there.

The ECB and Bank of England will both hold policy meetings on Thursday.
 

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article 3 months old

The Overnight Report: Struggling At The Top

By Greg Peel

The Dow closed down 27 points or 0.2% while S&P lost 0.1% to 1845 and the Nasdaq fell 0.2%.

Bridge Street tried to follow Wall Street up from the bell yesterday but struggled, particularly under the weight of a big drop in the spot iron ore price impacting on the big miners. Profit-taking helped the index drift lower to the close, but without any particular panic.

News from China that the People’s Bank drained CNY100bn out of the money market and will likely drain more unsettled the Shanghai market, along with news some of China’s major banks are now stepping back from loans to property developers. As I noted yesterday, the words “China” and “property” in the same sentence evokes nervousness.

Back downunder, with effectively three days to go now to the end of the local result season proper we can safely call the season as a positive one, with FNArena’s beat/miss ratio maintaining a consistent 3/2 average. But given the elevation of the market PE in 2013 we needed a positive season simply to justify prices, rather than elevate them further. We now seem to be hitting a “what next?” period at the previous highs when all we hear on the economic front is bad news. Aussie icons going under, job losses, the death of manufacturing, fiscal austerity to be thrust upon us… Good news rarely makes for good headlines though, it should be noted.

The US appears to be in a similar position at the end of its own result season. Last night the broad market S&P 500 failed to hold above 1850, which is seen as a technical failure at what would be a new all-time high. The weather debate is confusing the issue as a stream of disappointing economic data continues to foster doubt and keep a lid on the US dollar and US bond yields. Last night’s data releases featured more of the same.

The Case-Shiller 20-city house price index showed a 0.1% drop in December. The annual growth rate for 2013 of 13.4% represents the fastest pace since 2005 but a peak of 13.7% was reached in November, thus indicating an easing toward year-end. The FHFA price index of houses with Fannie/Freddie mortgages showed a 1.2% seasonally adjusted rise in the December quarter. It was the tenth consecutive quarterly gain but “more modest”, suggested FHFA, than previous quarters.

Whether or not snow impacted on December numbers is by the by. Since tapering talk began, US mortgage rates have risen. As prices have risen the past couple of years, so too has inventory for sale as sellers look to cash in. These factors would clearly slow the pace of price rises and besides, an easing in the pace is healthier than another runaway bubble.

The Richmond Fed manufacturing index plunged to minus 6 this month from plus 12 last month, in line with falls in neighbouring (New York, Philadelphia) Fed regions. These numbers have been blamed on snow.

There is nevertheless no snow factor in the fall in the Conference Board’s monthly consumer confidence measure to 78.1 from 79.4 in January when economists had forecast 80.1. The “current conditions” sub-measure improved, which all-up suggests Americans feel things are better now but are not likely to get much better still from here.

The US dollar index continues to go nowhere and was a tick down again last night to 80.16. The US ten-year yield fell 5 basis points to 2.70% but has been fairly static around that level for a while. Gold was US$5.00 higher at US$1342.90/oz while the Aussie has slipped back 0.2% to 90.14.

Base metal markets seem to be doing an awful lot of jumping up and down on the spot in 2014 without achieving a great deal. Last night saw moves of around half a percent across the spectrum, in either direction. But spot iron ore continued its recent slide, dropping another US90c to US$119.10/t.

Natural gas continues to be the big talking point in energy markets and after having shot up like a bullet to over US$6/mmbtu recently, last night’s 8% fall has taken the price just as quickly back to around US$5/mmbtu. While some movement in Australian energy stocks is attributed to daily US gas prices, it must be remembered US gas is a closed shop. The US does not (yet) export gas so price fluctuations are a domestic issue and it is pretty obvious what’s been happening in the US this winter. It’s been a tad chilly.

Oil prices fell last night nevertheless, with traders citing the abovementioned Chinese liquidity tightening as the cause. Brent dropped US$1.10 to US$109.50/bbl and West Texas fell US80c to US$102.02/bbl.

The SPI Overnight fell 9 points.

There’s a long list of companies reporting today in the local market, and we’ll also see data for December quarter construction work done, which may or may not prompt adjustments to economists’ forecasts of next week’s GDP result.

Rudi will appear on Sky Business at 5.30pm.
 

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

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

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

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article 3 months old

The Overnight Report: Two Steps Forward…

By Greg Peel

The Dow closed up 103 points or 0.6% while the S&P gained 0.6% to 1847 and the Nasdaq added 0.6%.

The local index tried hard but struggled to gain traction yesterday and ultimately loped its way to a flat close. The session began with a 14 point handicap for the ASX200 as some big names went ex-div, and earnings results on the day were mixed. Another round of weak Chinese data at midday crimped any momentum.

Average home prices in China’s 70 major cities eased to a year on year growth rate of 9.6% in January from 9.9% in December. Hardly the stuff to inspire a leap from the office window, but it’s the first easing of the rate since November 2012. The mention of “China” and “property” in the same sentence is enough to turn the odd economist pale, albeit it has been Beijing’s policy for some time to contain the Chinese housing bubble through lending restrictions. The January data might suggest Beijing’s policies are finally beginning to work, or that the Chinese property market is about to collapse in a flaming heap and send the global economy into meltdown, or that early lunar new year in 2014 was mostly responsible for the blip and things will be back to normal forthwith.

Chinese property developers subsequently copped it on the Shanghai exchange yesterday, nevertheless, sending the Chinese index down 1.8% and helping to keep a lid on Bridge Street. With the ASX200 trading around its post-GFC high, a little work is likely needed to push through to fresh “blue sky”. (Not true blue sky, but the October 2007 high of 6828 seems an awfully long way away.)

Last night’s session on Wall Street may provide more upward impetus, although momentum did fade significantly to the close. From a strong open the S&P 500 breached its previous all-time high of 1848 and prompted technical buying and short-covering to send it racing to an intraday peak of 1858. At that point the Dow hit 16,300, up 197 points, and aside from being a round number the Dow has not posted a 200-plus point rally in 2014. Momentum faded, and the selling picked up pace into the afternoon until the S&P finally settled at 1847 – a tick under the previous closing high.

With the US earnings season now pretty much in the bag the attention has turned to M&A activity, which has picked up considerable pace. “Merger Monday” they call it on Wall Street, given for some reason US companies all pitch their takeover bids on a Monday. The action was hot again last night, particularly in the tech space. Last week’s US$19bn bid for WhatsApp from Facebook, gazumping Google in the process, has rather stirred up the hornets’ nest. And there is talk Apple for some reason is interested in Tesla. The iCar?

A solid jump in Germany’s IFO business sentiment index was also fodder for strength on Wall Street. An easing of tensions, somewhat, in the Ukraine was seen as a positive. And there was also a nod to Sydney’s G20 finance ministers’ meeting and the 2% additional global growth target (over five years). At least talk is now of growth and not further austerity, analysts offer.

There were no major US data releases last night to spark up the greenback so the US dollar index is again little changed at 80.23. Gold is also steady, at US$1337.90/oz, while yesterday’s suggestion by Deutsche Bank that the Aussie could fall to 66c had the effect of sending the currency up 0.7% to US$0.9036.

Base metals were mixed but mostly weaker last night while iron ore suffered a big drop, falling US$2.50 to US$119.90/t, which will likely weigh on the sector on Bridge Street today.

Clashes in Libya and the subsequent closure of an oil field is impacting on oil prices, with Brent up US86c to US$110.60/bbl last night and West Texas up US44c to US$102.64/bbl.

The SPI Overnight closed up 27 points or 0.5%.

There is quite a raft of US data due tonight but not before we get through another solid round of earnings releases in today’s local session.
 

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

Weekly Broker Wrap: New Shops Are Coming But What About Jobs?

-Price pressures for retailers
-Jobs market weak
-Rate cuts not off agenda
-Strong outlook for broadband telcos
-Mobile players chase share
-China's growth outlook slowing
 

By Eva Brocklehurst

This year Australia will see some new retailer brands gracing its streets. Citi notes certain global retailers, primarily in fashion, are intent on making their mark here and will open stores in 2014. Australia offers high GDP per capita and faster population growth than other developed countries. Over the next year H&M, Forever 21, Uniqlo and River Island intend to open. Citi observes the impact on pricing and margins, in terms of the local competitors, is far more important than the taking of market share. Most of the new entrants will probably take positions in existing shopping centres and they require more floor space than the average Australian specialty retailer. Citi expects the new entrants to target a store base of around 20, initially. The broker estimates that high profile entrants like Marks & Spencer, H&M, Zara, Uniqlo and Sephora will take over $1.1 billion in revenue once established.

H&M poses the biggest risk to the locals' profit margins, as that brand tends to have globalised pricing. Citi's survey has revealed this company is 30-50% cheaper than competitors such as Premier Investments ((PMV)) - think Dotti, Portmans and Just - and department store Myer ((MYR)). One challenge for those retailers entering Australia is the need to have stock for an alternative season. The scale advantages that are retained by H&M and Inditex in their own markets are reduced in this instance. Citi has Sell ratings on many of those exposed to the new entrants, such as David Jones ((DJS)), Wesfarmers ((WES)), Myer and Woolworths ((WOW)).

Economic activity may be strengthening but Australia's job market is weak. AllianceBernstein wonders whether the rise in the unemployment rate to 6.0%, the highest level in a decade, is an indicator of the need to re-assess the Reserve Bank's cash rate profile. While accepting that employment does lag the economic cycle, the economists wonder whether a virtuous circle is not going to work this time. That is, that the improvement in confidence, conditions and housing construction - signs that an economic recovery is underway - will generate the necessary capital expenditure, income and jobs growth down the track. The economists fear it won't be enough to counter the reduction in resources activity, combined with the increased focus on cost cutting and productivity in both the public and private sectors. This is a reason they are mindful that a reduction to the cash rate can still come back on the agenda later this year.

BA-Merrill Lynch suspects Australian house prices will hit new highs in 2014, propelled by low interest rates. Investors are expected to continue to dominate at the expense of first home buyers. Still, the analysts are of the view that gains in house prices are not the positive signal for the broader economy that the Reserve Bank seemingly hopes is the case. Domestic economic growth in the first quarter of 2014 may be modestly better, as indicated by the rise in business confidence in January, but Merrills notes a sharp decline in consumer confidence. Job security looms large as a key concern. Employment growth has been flat and the analyst expected the unemployment rate to continue rising this year. They suggest this measure will be monitored closely by the RBA, noting the central bank has never tightened policy while the unemployment rate has been rising. Hence, they also think expectations for tighter policy later in the year are premature.

Citi notes Telstra's ((TLS)) wholesale broadband subscribers rose by 69,000 in the first half, signaling there is continued subscriber growth among the internet service providers (ISP). This is the highest net subscriber movement in four years, according to Citi. Of the three leading ISPs, Optus reported declining subscriptions in fixed broadband so the growth appears to have come mainly from TPG Telecom ((TPM)) and iiNet ((IIN)) and signals a positive first half for the latter pair. The gain of around 8,000 in Telstra's wholesale off-net subscribers - used by the others to deliver services in areas where they do not have infrastructure - suggests a stabilisation of the customer bases after heavy declines in previous years. This is also encouraging for the aforesaid companies, given the need to establish a wider geographic presence ahead of the introduction of the National Broadband Network roll-out.

JP Morgan thinks Singapore Telecom ((SGT)) may have drawn a line in the sand when it comes to the trade off between Optus revenue and customer losses. The company appears to be targeting growth in mobiles and this is raising the competitive dynamics of the segment, in the analysts' view. In the merry-go-round of the mobile, the three main players - Optus, Telstra and Vodafone ((HTA)) - are chasing each other's business.

JP Morgan observes, when Vodafone was losing share, Optus grew its base significantly, even though overall share slipped. This situation arose because Optus gained from Vodafone at the value end but lost to Telstra at higher price points. If Vodafone ramps up attempts to recover lost ground then Optus may be vulnerable and resort to taking higher value subscribers from Telstra just to maintain share. And the market is rational, JP Morgan asks? The analysts do not think this is the case, with one player losing money and the other going backwards. If the Vodafone brand reaches some stability at the same time as Optus turns up the growth levers it could mean less favourable conditions for Telstra.

AllianceBernstein has revised down growth forecasts for China. A weakening of global emerging market demand is expected to act as a headwind for Chinese exports, even though developed markets are expected to stay firm. The analysts have reduced the growth forecasts for China in 2014 to 7.1%, which represents a deceleration from 7.7% in 2013. This is because of China's increasing domestic financial stress, induced by heightened credit default risk and tight monetary policy.

While the risk of systemic credit crisis is considered remote, the analysts note the People's Bank of China has maintained a hard line. The question is whether the central bank will come under political pressure to relax policy as the economy decelerates. To this end, the analysts estimate that, if the central bank is required to support a GDP target of around 7.5% for 2014, then the chances increase for some easing in credit conditions. In contrast, a 7.0% target would provide more room for the government to implement reforms. Given some major provinces have already marked down growth expectations, the analysts suspect the national target will be closer to this 7.0% rate.
 

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article 3 months old

The Overnight Report: Selective Weather

By Greg Peel

The Dow rose 92 points or 0.6% while the S&P gained 0.6% to 1839 and the Nasdaq added 0.7%.

It was a solid start on Bridge Street yesterday in the face of a fall on Wall Street, led by a raft of well-received corporate earnings results. Prior to yesterday’s results the FNArena Reporting Season Monitor was showing a beat/miss percentage ratio of 35/25 but that does not take into account the extent of beats and misses. Anecdotally one would suggest the beats on average have been more substantial than the misses, at this stage.

It all came a cropper around midday nevertheless on the release of HSBC’s flash estimate of China’s February manufacturing index. The market had been hoping for a return to expansion after January’s drop into contraction at 49.5 but, alas, the industry slowed further with a fall to 48.3. The morning’s gains were quickly erased to leave a relatively flat session.

After several years of following Chinese data I can confidently suggest that there is always surprise and concern around the numbers in the first two to three months of the year. Chinese New Year is quite simply a disruption, going in, going through and coming out again. We have to get at least into March this year to reliably (if, at all, one can say that with Chinese data) gauge performance.

After closing weakly on Wednesday night, Wall Street got off to wobbly start last night as it weighed up China and a mixed bag of local economic data.

The Philadelphia Fed manufacturing index fell to minus 6.3 this month from plus 9.4 in January when economists had forecast plus 7.4. Well that’s an easy one – snow.

Really? So how come the flash index for all US manufacturing rose to 56.7 from 53.7 in January? Were the production lines running hot in California? That’s the highest reading in almost four years.

The great weather debate will continue, and in the meantime Wall Street will use the excuse discriminately. The PMI was cited as reason to buy, and by session’s end all of Wednesday night’s fall was erased. In other economic news, the Conference Board leading index for January came in at 0.3% growth when 0.4% was expected, and the January CPI showed a mere 0.1% increase on the headline, despite the soaring cost of natural gas, and a 0.1% increase on the core as well. Annual core inflation is running at 1.6%.

So we have Chinese data we can never be sure of (that is not intended as a slight against HSBC – HSBC has to source the base numbers in China) and US data we really have no idea how to interpret. Meanwhile, the very tail end of the US earnings season is still with us, and after a so-so start the conclusion is earnings growth was actually quite healthy indeed, and the forward numbers look even healthier.

As noted earlier, if the Australian season maintains its tenor through next week then we are in for a better than expected result season as well.

The US dollar index ticked up 0.1% to 80.29 on the US PMI and while the Aussie fell under 90 yesterday on the Chinese PMI, it’s back at US$0.9011 this morning. Gold bounced back US$10.00 to US$1322.80/oz and as the US stock market has risen, so have US bond yields been quietly ticking up, with the ten-year yield now up to 2.75%. For once, that’s actually the right correlation – stock prices up, bond prices down.

Base metals were generally weaker in London last night on the Chinese PMI, with lead and nickel down 1%. Spot iron ore fell US$1.00 to US$122.90/t.

The oils have stalled again, with Brent down US19c to US$110.33/bbl and West Texas down US11c to US$103.20/bbl.

The SPI Overnight was all fired up for another solid session on Bridge Street today, up 44 points or 0.8%. If accurate, we’d be looking at regaining the October post-GFC high.

Insurance Australia Group ((IAG)), Iluka ((ILU)) and Santos ((STO)) are among the big names reporting in today’s local session while National Bank ((NAB)) will provide a quarterly update.

Sydney is abuzz with the arrival of the G20 finance ministers for their meeting over the weekend at which we can be assured absolutely nothing of any substance will be decided.

TGIF.
 

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article 3 months old

Emerging Markets A Crisis In A Tea Cup

By Greg Peel

The commencement of the tapering of bond purchases (QE) by the US Federal Reserve in January sparked an emerging market crisis. Tapering signalled the beginning of the end of “free money” and an eventual rise in US interest rates and as such prompted US investors to withdraw funds from high-yielding emerging market investments and bring the money back home.

The rush of capital outflows from emerging markets resulted in plunging stock markets and spiralling exchange rates with the US dollar, evoking fear around the globe and weakness on Wall Street. Emerging markets (EM) have provided the balance to developed market (DM) weakness since the GFC – weakness which has forced substantial money printing by DM central banks. 2013 appeared to be the year which marked a turnaround in DM fortunes, leading to relief that the GFC fallout may finally have passed. Fed tapering is representative of this belief, but for every action, it would seem, there is an equal and opposite reaction. With Fed tapering set to continue systematically to its conclusion, will the world be plunged back into financial crisis once more in 2014 as EM economies collapse?

No, says Commonwealth Bank’s Global Markets Research.

For starters, EM crises are a dime a dozen, notes CBA, occurring, as they have done, in some country or another every year since at least 1970. Governments default on or restructure their debt every year. Currencies and equity indices crash in some economies every year. There are banking crises in at least a handful of economies every year. The frequency of such crises emphasises to CBA the need to analyse specifically local conditions when predicting the risk of an economy falling into crisis.

The most recent crisis was more selective than widespread across EMs. Argentina, Brazil, Turkey, Russia and South Africa were the main victims. This is of little surprise, suggests CBA, given each of these economies was suffering from any or all of high inflation, low economic growth and a large current account deficit, prior to the Fed’s policy announcement.

Virtually all EM economies have at least some financial and external risks that may tip them into crisis at any time, CBA points out. Presently, Latin America and Asia remain at the lower end of the regional risk spectrum while Emerging Europe, the Middle East and Africa are at the higher end. The individual economies at greatest risk are Brazil, Turkey, South Africa, Morocco and Egypt.

There is little doubt the announcement of Fed tapering triggered a rush out of EMs and the resultant crisis in January but following some emergency measures those EMs have stabilised and DM stock markets have moved on. Analysis shows there is little historical evidence of EM crises specifically occurring the year a Fed tightening cycle commences and no evidence of government defaults or banking crises one year following. There is nevertheless some correlation between Fed tightening and EM currency and equity crashes one year following, suggesting to CBA a higher incidence of crises should be evident in 2016. CBA expects the next Fed tightening cycle (rising interest rates) to commence in 2015.

The market’s fear is that as QE is reduced, the “wall of money” which flowed out of DMs and into EMs supported by that QE must reverse. CBA notes EM investments by DM economies grew by US$0.8 trillion between end-2007 and end-2012. But it should be noted that the amount of money flowing into EMs during the boom years of 2002-2007 totalled US$1.8 trillion.

These figures only measure equity and bond investment, and not cross-border bank lending or foreign investor direct investment. Foreign capital inflows into the US have a heavy skew towards equity and debt securities whereas equivalent inflows into EMs represent only 32% of all inflows, with bank lending representing 21% and foreign direct investment 47%.

Does this mean the crisis could be even worse? Well not if you consider many EMs are actually “net exporters” of capital, mostly via the offshore investments of sovereign wealth funds and central banks investing foreign exchange reserves. Total funds invested by the US in EMs is less than total funds invested by EMs offshore. Then there are the public investors.

EM public investors increased their assets under management by US$3 trillion in 2007-12 and now have over US$11 trillion under management. CBA estimates the bulk of this is invested in DM equity and debt instruments. The US$3trn flowing out of EMs into DMs in the QE era rather dwarfs the US$0.8trn following the other way.

CBA admits there are variations among individual EMs as to the extent of DM investment but the point is there is plenty of EM capital sitting in DMs that could be liquidated were EM outflows threatening to spark genuine crises.

The conclusion is CBA expects 2014 to feature greater financial volatility than a more stable 2013 now Fed tapering has begun and expects that there will be some level of crisis among individual EMs, albeit there always is. The analysts do not expect there will be regional or global recession, large downward pressure on the Aussie dollar or extreme financial turbulence.

CBA will not, however, guarantee there could not be unexpected contagion.


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