Tag Archives: China and Emerging Markets

article 3 months old

The Monday Report

By Greg Peel

There was not much holding back Bridge Street on Friday as the ASX 200 ploughed onward to rise another 0.9% for a close of 5356 – less than 100 points below the November post-GFC high of 5441. At a time when earnings season should suggest a little caution and some disparate moves among stocks and sectors, every sector was in the green.

China’s steady CPI reading of 2.5% (year on year) in January helped buoy markets, suggesting inflation is providing no need for Beijing to tighten monetary policy at a time China’s economy is apparently slowing. But China’s PPI inflation was down yet again, by 1.6%, as demand continues to moderate. The early lunar new year will distort the numbers, nevertheless.

The mood on Bridge Street is being assisted by the mood on Wall Street, and the mood on Wall Street remains exuberant. On Friday traders once again exercised the “weather put” to ignore the weak data while taking on board positive data and rallying once more. The Dow rose 126 points or 0.8% while the S&P gained 0.5% to 1838. The Nasdaq managed 0.1% and is back at a post-2000 all-time high.

US industrial production data for January released on Friday night showed a 0.3% fall when a 0.3% rise was expected, and capacity utilisation fell to 78.5% when 79.3% was expected. But hey – it was snowy outside in January, which one might expect to have an impact on production capacity. The snow does not have an impact on the mind though, and Wall Street was pleased to see Michigan Uni’s fortnightly consumer sentiment measure remain unchanged at 81.2 when economists were expecting a fall to 80.0.

It was a good enough excuse to buy.

Also providing confidence was the December quarter GDP performance by the eurozone. It rose 0.3% to mark its best quarter for the year and an annualised growth rate of 1.1%. Germany again did the heavy lifting but positive results were all marked by Spain, Italy and even France, the latter having posted negative quarters during the year. The European growth rate is still lagging behind those of the US, UK and Japan (and Australia, we hope) but given the basket case that Europe was not so long ago, the news can only be reassuring.

Reassuring enough that despite the rally back towards all-time highs on US stock markets, the US dollar continues to sag. It fell 0.2% to 80.13 on Friday night. Despite the strength one assumes should be provided by the Fed’s tapering policy, the dollar index is weak because (a) exchange rates are relative, not absolute, and (b) weather or not, US January economic data have been weak. It is this weakness that appears to be driving the surprise rally in gold, along with short-covering by all those who joined the “gold is done for” chorus at the beginning of the year. The break of 1300 on Thursday night sparked more buying on Friday night, with gold rising US$17.20 to US$1318.10/oz.

The combination of a weaker greenback on local data and Friday’s positive China data means the Aussie is unfortunately back at US$0.9053, up 0.7 cents from Friday morning.

Base metals did little on Friday night bar tin, which rose 2%. Brent crude rose US52c to US$109.04/bbl while West Texas was largely steady at US$100.30/bbl. US energy markets are currently more obsessed with the price of natural gas and the potential extent of the icy winter. Punxsutawney Phil saw one hell of a shadow.

Spot iron ore rose again, by US$1.20 to US$123.20/t. Perhaps we’re seeing the US steel industry quietly ramping up again after the holiday break.

More today on Bridge Street? The SPI Overnight rose 44 points or 0.8%.

Japan’s December quarter GDP is out today and the Bank of Japan holds a policy meeting tomorrow.

The US is having a long weekend for Washington’s birthday, although no one be will be much going anywhere, so no Wall Street tonight. A busy week of US data nevertheless follows, with housing sentiment and the Empire State manufacturing index on Tuesday, housing starts, the PPI and the minutes of the Fed meeting on Wednesday, the CPI, Philadelphia Fed manufacturing index and flash manufacturing PMI for February on Thursday, and existing home sales on Friday.

China’s flash manufacturing PMI from HSBC is also out on Thursday along with the eurozone equivalent.

Economic data are light on in Australia this week, with vehicle sales today (bitter sweet), the minutes of the RBA meeting tomorrow and the December quarter wage cost index on Wednesday, which tips us off that Australia’s GDP result is nigh (March 5).

Meanwhile the local earnings season will now shift into top gear for the next two weeks. There are too many results pending to provide highlights, so please refer to the FNArena calendar.

The G20 finance ministers begin a three-day meeting in Sydney on Friday. After months of dry, Sydney has turned on the rain just so George Osborne feels at home.

Rudi will only appear on Sky Business today at 11.15am. He will give a presentation on Thursday in Sydney for members of the Australian Shareholders Association (ASA).
 

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: Now What?

By Greg Peel

The Dow closed down 30 points or 0.2% while the S&P was flat at 1819 and the Nasdaq added 0.1%.

Bridge Street opened to the upside in line with Wall Street yesterday but once again received a midday data kicker to ensure another solid gain by the close. On Tuesday the kicker was a turnaround in Australian business confidence. Yesterday the kicker was not a local issue, as indeed the Westpac consumer confidence survey showed a 3% fall in confidence this month to its lowest level since May last year. Rather, the kicker was all about China.

Economists had expected Chinese exports to grow by a mere 0.1% (year on year) in January, following a 4.3% gain in December. The lead-up to Chinese New year typically sees a downturn in trade. But Beijing announced exports rose 10.6%. Really? Imports rose 10.0% and China’s trade surplus increased by 14%.

Official and unofficial (HSBC) PMI surveys in January showed China’s manufacturing sector contracting in January for the first time in many months and China’s services sector slowing its rate of expansion. China’s GDP grew by 7.7% in 2013 and is forecast to slow to 7.5% in 2014. Yet somehow China managed explosive export growth in January.

Chinese merchants are known to boost trade numbers with the support of provincial governments in order to remain in favour with Beijing. Tricks like over-invoicing and “round-tripping” of goods lead to over- and double-counting of trade numbers. The bottom line is that China’s export/import numbers can be cross-checked against the corresponding import/export numbers of the country’s major trading partners, such as Taiwan and Korea. Strangely enough, those countries recorded very weak numbers in January.

But Bridge Street liked it anyway.

Wall Street liked it too, but after four days of rallies decided it was time for a breather. Wall Street also liked the news from across the pond that the Bank of England had raised its 2014 GDP growth rate forecast for the UK economy to 3.4% from 2.8% and that it expects January jobs data to show a fall in the unemployment rate to 7% -- two years earlier than originally forecast.

These are significant upgrades, but in the UK’s case recent economic data provide support. Prime Minister Cameron, speaking through a snorkel, was very happy. Interestingly, the BoE echoed the Fed in suggesting that it would not begin raising interest rates based simply on an unemployment rate trigger – which previously was set at 7% -- but would rather make a broader assessment of the UK labour market. Central banks around the world have quickly back-pedalled from the concept of using unemployment rate targets in policy guidance.

One might suggest unemployment rates, as presently calculated, are an anachronism.

Wall Street was also happy that a day after Fed chair Janet Yellen donned a Ben Bernanke mask, St Louis Fed president James Bullard suggested he was still optimistic about the US economy and believed 3% GDP growth was achievable.

Yellen will be back again testifying tonight, this time in front of the Senate Banking Committee, which is expected to be a bit more inquisitive.

The pound jumped against the US dollar last night but all up the dollar index held its ground at 80.69. The Aussie is off a tad to US$0.9029, while gold is steady at US$1292.10/oz.

The LME was quite excited about the Chinese trade numbers. In particular, China supposedly imported 536,000 tonnes of copper in January, up 53% from last January, and only the second time in history Chinese copper imports have exceeded 500kt in a month. The copper price managed only a 0.6% gain nevertheless in a session which saw average 1% gains amongst the other metals.

Both the oils were a little more positive last night, with Brent up US26c to US$108.79/bbl and West Texas up US31c to US$100.25/bbl.

Spot iron ore rose US$1.00 to US$121.00/t.

Bridge Street looks keen to get on with it today, with the SPI Overnight up 9 points.

Aside from the spurious Chinese numbers, Bridge Street also found support yesterday from a batch of mostly positive corporate earnings results. Boral ((BLD)), OZ Minerals ((OZL)), Domino’s Pizza ((DMP)) and Carsales.com ((CRZ)) were among the big winners with CommBank ((CBA)) satisfying, albeit CSL ((CSL)) and Goodman Fielder ((GFF)) disappointed.

It’s another solid schedule today, led out by Rio Tinto ((RIO)) and Telstra ((TLS)) along with the likes of Transurban ((TCL)) and ASX ((ASX)) among many more. David Jones ((DJS)) will also release its December quarter sales numbers.

And today sees Australia’s January unemployment numbers. See above for relevance.

Rudi will appear on Sky Business at noon.
 

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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

Volatility levels have increased on Wall Street but after the last three sessions the indications are the pullback has run its course. We have to see tonight’s January jobs numbers nevertheless, and these may prove difficult to interpret given the incalculable weather effect. It would likely not take much to send Wall Street spiralling once more.

The US quarterly result season is now tailing off with analysts reasonably happy with earnings results but again concerned over missing revenue growth. Attention has now turned to home where the local interim result season steps up another gear next week. Among the big names posting are Cochlear ((COH)), Commonwealth Bank ((CBA)), Leighton Holdings ((LEI)), Rio Tinto ((RIO)), Telstra ((TLS)) and Newcrest ((NCM)).

Next week’s data releases in Australia include housing finance and investment lending and our own January jobs numbers.

US data releases include wholesale trade, inventories, retail sales, industrial production and consumer sentiment.

China will be back in full swing next week although it usually takes a while for everyone to crank up again after the all the horsing around. China’s inflation numbers are due on Friday.

Friday also sees the first release of the eurozone December quarter GDP, while Japan is closed on Tuesday for a holiday.
 

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article 3 months old

The Overnight Report: Weather Or Not

By Greg Peel

The Dow fell 302 points or 1.9% while the S&P lost 2.3% to 1741 and the Nasdaq dropped 2.3%.

Bridge Street has all but shut up shop these past two sessions, with China on holidays, earnings results about to flow and an RBA meeting today. The index has been unmoved, ignoring Wall Street, the overnight futures, and yesterday a 2% fall in the Nikkei. With regard to monetary policy, yesterday’s economic data highlighted the extent of the balancing act the central bank must perform.

Australia’s manufacturing PMI fell for the third consecutive month, to 46.7 in January from 47.6 in December, implying the pace of contraction is increasing. Meanwhile the government is to consider an aid package for farmers unable to pay their debts due to drought. ANZ’s job ads series fell for the 21st month of the last 23.

But house prices jumped again, to mark a 10% gain over 12 months. Building approvals eased in December, but were up 22% for the year. Yet clearly the pace of construction is insufficient to impact on the price of existing housing.

The RBA can also look to China, where recent data have also been weaker and the shadow banking system is again under scrutiny. China’s manufacturing PMI fell to 50.5 from 51.0 officially or to 49.6 from 50.5 on HSBC’s numbers. China’s official service sector PMI fell to 53.4 from 54.6 – still in expansion territory, but a five-year low.

And Wall Street is tanking. As to why it’s tanking, there are many elements to consider.

On the micro scale, price/earnings ratios were pushed to the limit in 2013 and December quarter earnings results and guidance are failing to provide the requisite justification. On the macro scale, the Fed is easing off the stimulus which, while having its own implications at home, has sparked an emerging market crisis as capital flows back to the US. Wall Street is also looking at China. And Wall Street is looking at recent economic data that have been clearly to the weak side.

The US manufacturing PMI plunged to 51.3 in January from 56.5 in December. This is the most recent in a run of disappointing numbers which began with the surprisingly weak December jobs number posted almost a month ago, and which have raised the question as to whether the Fed is premature in turning off the money taps. But the US has sat under heavy snow for two months and after a brief respite to ensure the Super Bowl wasn’t interrupted, the snow was back last night. The weather has been used as the excuse for all weak data releases since the December jobs release, and the January jobs numbers are due on Friday. Presumably they too will be snow-affected.

And then at the end of the day, US stock markets have run for a record period without a correction. That’s why, despite the sharpness of the selling, there appears to be little panic. Many in the market are welcoming this pullback. It is typical for stocks to be sold down on the last day or two of any month and bought back again on the first session of the new month. This didn’t happen last night, and indeed it is the worst start to any month since 1982. The S&P has now hit the 5% pullback mark. How far can it go?

It’s something for Janet Yellen to ponder. She officially became Fed chair last night. Thanks for coming.

Over in Europe, the ECB is facing its own dilemma. The eurozone PMI rose to 54.0 from 52.7 to mark the best result since May 2011, as Germany surged and even France showed improvement. Yet data on Friday showed annual inflation growth in the bloc of only 0.7%, suggesting the ECB needs to lower rates to avoid deflation and an implicit increase in the real value of debt. The ECB holds a policy meeting on Thursday.

The Bank of England also meets on Thursday, but the UK continues to be the star performer across the pond – at least economically. The UK PMI fell to 56.7 from 57.2 but remains solidly in expansion territory.

The US dollar index fell 0.3% last night to 81.02. But selling in emerging market currencies has not let up, with the Turkish lira down another 1.1% last night, the South African rand down 1.1% and the Indian rupee down 0.4%. Gold rose US$13.30 to US$1256.90/oz.

There was a rush into US bonds. The ten-year yield fell 9 basis points to 2.58%, suggesting to some that there’s more to the recent weak US data than just the weather, and that the emerging market crisis is of sufficient concern. The VIX volatility index jumped 16% to 21.5, suggesting that while there’s no real sense of panic, protection is being sought just in case. The VIX had not exceeded 22 since mid-2012, and indeed a trade above 20 has over that period signalled a market bottom.

The Aussie is the rabbit in the headlights, unmoved at US$0.8750.

When China goes on holidays the metals markets usually go quiet, but last night saw 1% to 1.5% falls in aluminium, lead, nickel and zinc, while copper fell 0.3% and tin was steady. West Texas crude fell US90c to US$96.59/bbl on the weak US PMI, while Brent dropped US22c to US$106.16/bbl.

Can Bridge Street ignore the futures lead again today? The SPI Overnight is down 99 points or 1.9%.

It’s not a great day for Challenger Diversified ((CDI)), Downer EDI ((DOW)) and REA Group ((REA)) to be releasing their interim results. The market nevertheless does not expect the RBA to cut its cash rate this afternoon.
 

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

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

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article 3 months old

The Monday Report

By Greg Peel

Where goes January, goes the year, or so the adage suggests. Wall Street saw its worst month since May 2012 in January, which doesn’t augur well. So we’d better all knock on wood, throw some salt over our shoulders and watch out for black cats. Or perhaps note that the adage is not always accurate, particularly in recent years.

The last session of any month often sees square-up selling but Wall Street wrapped up January in a fashion consistent with the recent trend. Emerging market currencies continue to fall and bond rates slide on the back of the capital exit sparked by Fed tapering. Earnings reports continue to flow in but simply are not consistent with inflated expectations implied by price/earnings ratios. Everyone had a good 2013, so why not lock it in?

The Dow fell 149 points or 0.9% on Friday night, and 5.2% for the month, the S&P fell 0.7% to 1782, down 3.6%, and the Nasdaq fell 0.5%, down 1.7%.

It was a particularly bad session for earnings results. Misses were reported by Amazon, which fell 11%, Mattel (12%), Mastercard (5%) and Chevron (Dow) (4%), while Wal-Mart (Dow) posted a profit warning. Wal-Mart has suffered since the government reduced the issue of food stamps.

The major US economic data release of the night saw personal spending rise 0.4% in December, down from November’s 0.6% but above 0.2% expectation. This would be good news for the Christmas month, except that incomes fell 0.2% and hence savings fell to 3.9% from 4.3%. It’s the first time since 2009 savings have fallen below 4%.

Europe has been a bit of a star of late, posting some surprisingly good economic data just about everywhere bar France. Certainly 2013 was the year we quietly started to forget about Europe and its “tail risk” and found other things to worry about instead. In their 2014 previews, many an economist forecast a further fading of the Europe threat in 2014. But for that to be the case, Europe will have to address its deflation problem.

The world was somewhat shocked when the eurozone posted an annual inflation rate of only 0.7% in October. The ECB was also shocked, and cut its cash rate to 0.25% from 0.5%. Markets were expecting another cut to be forthcoming given the ECB hinted it was ready to go down the Fed path of zero rates and even some form of QE if necessary, but solid data releases in the meantime saw that expectation fade.

On Friday, however, the eurozone January inflation rate again showed a fall to 0.7%, down from 0.8% in December. The ECB’s target rate is 2.0%. The last thing Europe needs is deflation, given the mountains of debt its banks and sovereigns are carrying. Inflation might have a dangerous impact on prices and wages, but it does reduce the real value of debt over time. Deflation increases the real value of debt.

The euro thus fell on Friday night allowing the US dollar index to rise by 0.2% to 81.27. The US ten-year bond rate ticked a couple of points down to 2.67% but has been hovering around this level recently without any great surge back into bonds coincident with stock selling. Gold was steady at US$1243.60 while the Aussie rose 0.4% to US$0.8750.

Base metals saw a mixed session, with the biggest moves being a 1.7% fall in aluminium offset by a 1.5% gain for nickel. The weak European data helped Brent crude down US$1.51 to US$106.38/bbl, while West Texas lost US82c to US$97.41/bbl. Having traded over US$5.60/mmbtu last week during yet another cold snap in the US, natural gas was back under US$4.90 on Friday as the latest forecast suggested some respite.

Iron ore will be closed all week at its last trade of US$122.60/t.

Friday on Bridge Street saw a lethargic session in which no one wanted much to play, despite a reasonable Thursday night on Wall Street. Friday night saw the SPI Overnight fall 23 points or 0.5%.

On Sunday, as the floats were being prepared in Haymarket and elsewhere for the New Year’s parade, Beijing released its January manufacturing PMI which saw a fall to 50.5 from 51.0 in December. The fall was not unexpected given last week’s HSBC result, and perhaps some comfort can be taken from the fact the number is still in expansion territory.

China will be closed until Friday but Beijing will release its service sector PMI today. For everyone else it’s manufacturing PMI day, with numbers due today from Australia, the eurozone, UK and US. On Wednesday everyone releases their service sector PMIs, including HSBC’s China number.

It is indeed a big week for both economic data and corporate earnings. The long tail of the US earnings season continues this week while in Australia, things start to hot up on the earnings front.

Aside from the PMIs, the US will see construction spending and vehicle sales tonight, factory orders on Tuesday, the ADP private sector jobs numbers on Wednesday, chain store sales, productivity and the trade balance on Thursday, and the all-important non-farm payrolls data on Friday.

Was December’s paltry 74,000 jobs added just a weather-related blip? Mind you, the weather was not much better in January.

The Bank of England and ECB will hold policy meetings on Thursday. The UK is sitting pretty but Friday’s weak inflation number will have the world focusing on Mario Draghi on the night.

Australia has a very busy week of data in store. We start today with the manufacturing PMI, building approvals, ANZ job ads, TD Securities inflation gauge and the RP Data-Rismark house price index. On Tuesday the RBA meets and will leave its cash rate unchanged.

Wednesday it’s the services PMI while Thursday brings the trade balance, retail sales and the NAB business confidence survey. Friday it’s the construction PMI and the RBA’s quarterly Statement on Monetary Policy.

With the local earnings season in first gear this week, reports are expected from the likes of JB Hi-Fi ((JBH)), Downer EDI ((DOW)), REA Group ((REA)), News Corp ((NWS)) and Tabcorp ((TAH)), among others. Woolworths ((WOW)) will report its quarterly sales results on Thursday.

At this point I would like to remind that Australian listed companies are not obliged to publish a reporting date, nor to stick to a date they may have previously indicated. Stock brokers do their best to produce reporting season calendars, but any three can offer up three different assumed reporting dates for the one company. FNArena produces its own calendar on a best endeavours basis but makes no apology if companies do not report on the suggested date, or jump the gun and report early.

Strap in.

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

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

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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 is now closed until next Friday for the New Year’s break but that does not stop the data flow, beginning on Sunday with Beijing’s official manufacturing PMI for January followed by the service sector PMI on Monday.

We then move into what is a very big week for data and corporate earnings.

The earnings season will continue in the US and while we’ve had a late burst this week of slightly better results, Wall Street remains relatively underwhelmed to date. With the Fed now in full tapering mode there will nevertheless be close scrutiny of economic data releases, and next week will provide plenty to chew over.

There is a global round of manufacturing PMIs on Monday with Australia, the eurozone, the UK and US all reporting, followed by the service sector round on Wednesday which will also see HSBC chime in with its China number.

Across the week the US will also see construction spending, vehicle sales, factory orders, chain store sales and the trade balance, with private sector jobs numbers on Wednesday and the January non-farm payrolls release on Friday. This number will need to be good to confirm December’s shock was just a blip.

The ECB and Bank of England will both hold policy meetings on Thursday following the RBA’s meeting on Tuesday which is expected to produce no rate change. The RBA will release its first quarter Statement on Monetary Policy on Friday.

Australian data releases next week include the manufacturing, service and construction PMIs along with job ads, building approvals, retail sales and the trade balance.

Focus in Australia will also shift to the local reporting season in which earnings growth needs to be seen in order to justify elevated price/earnings ratios. Look out for some big movers as the surprises and disappointments play out. It’s first gear next week before things really start to hot up, with Downer EDI ((DOW)), REA Group ((REA)), Tabcorp ((TAH)) and Cochlear ((COH)) among the highlights.
 

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article 3 months old

The Overnight Report: Fed Backs A Winner

By Greg Peel

The Dow rose 109 points or 0.7% while the S&P gained 1.1% and the Nasdaq surged 1.9%.

The final reading on HSBC’s China manufacturing PMI for January was released yesterday ahead of the New Year break. At 49.5 the result was in line with the flash estimate of 49.6 but down from December’s 50.5, representing the first slip into contraction in six months. It was not the best day for this number to be published on Bridge Street, given the weak lead in from Wall Street and growing uncertainty as 2014 fires up. At the end of the day we could have seen a lot worse than the 40 point fall in the ASX 200, nevertheless, which was largely indiscriminate.

With Australia Day past us and kids now back to school, we call the summer break finally over and assume everyone’s back to work. No more excuses for thin volumes or sharp moves. Next week the local results season kicks off in earnest, and macro influences aside, that’s when the fun will really start.

After Wednesday night’s not unexpected but worrying Fed taper confirmation, last night was when the Fed’s policy decision would be put to the test, with the release of the US fourth quarter GDP.

On first estimate, the US economy grew at an annualised rate of 3.2% in the December quarter, in line with expectations. This is down from the 4.1% rate booked in the September quarter but a robust result in the face of the two-week government shutdown in the period. For the full year 2013, the US grew by 1.9% compared to 2.8% in 2012, but the first two quarters were very much weakened by fiscal policy, specifically the so-called “sequester” which saw government spending slashed and taxes increased.

The most positive result was a 3.3% increase in consumer spending, which represents around 70% of GDP (albeit health and other essential services are significant in that figure), which compares to a 2.2% average since the US emerged from the post-GFC recession. Inventory growth was strong, suggesting perhaps slower restocking in March, but the trend is healthy. Not so healthy was housing, which registered its slowest quarter in fourteen after taper-talk sparked mortgage rate increases.

Arguably the most fundamental development evident in the numbers was apparent in the terms of trade. Exports rose 11.4% in the quarter while imports rose only 0.9%, reflecting the growth of US energy self-sufficiency in the wake of the shale revolution.

As is apparent in Wall Street’s reaction in this time of monetary policy uncertainty, the Fed’s tapering program is justifiable.

Aiding the positive session on Wall Street were last night’s earnings results. The star of the session was Facebook, which reported after the bell on Wednesday night and rallied 15% last night. Seems the old Faceplant isn’t yet yesterday’s fad after all. (Facebook drove the big Nasdaq move last night). Visa (Dow) beat on earnings and revenue for a 2% gain while positive responses were also posted for results from Qualcomm and ConocoPhillips.

The downer on the night was an 8.7% fall in pending home sales in December, but once again the heavy snow was blamed.

The other positive last night is that it appears the Turkish government has managed to talk the lira into a standstill. The Turkish central bank applied shock and awe earlier in the week by raising its cash rate to 12% from 7.75% but relief proved only fleeting, with the Fed’s taper confirmation on Wednesday night sending the lira tumbling and Turkish bond yields soaring once more. The government stepped up to talk turkey last night and insist it would take whatever measures were necessary to stem the flow. Stability returned, at least for now.

Throughout the recent emerging market currency crisis the US dollar index has remained steady, reflecting little net movement among developed market currencies. But last night the dam broke on the strength of the US GDP result and the index jumped 0.6% to 81.09. There was no a big turnaround in the bond market, with the US ten-year yield only gaining back 2bps to 2.69%, but gold was a victim with a US$17.30 fall to US$1244.40/oz.

The Aussie was also stronger by association, rising 0.6% to US$0.8785.

Base metals had their first chance to respond to the second Fed taper last night and while moves were all to the downside, aided by the stronger greenback, only lead and nickel fell by more than 1%. The iron ore market is now closed for Chinese New Year. The oils were again quiet, with Brent rising US10c to US$107.89/bbl and West Texas up US55c to US97.91/bbl, while natgas celebrated its new March delivery front month with a 9% fall to US$4.93/mmbtu.

Clearly Wednesday night’s natgas surge was due to the futures rollover and delivery squeeze.

The SPI Overnight has managed a tepid 16 point or 0.4% increase.

Australian private sector credit data are due out today along with a monthly data dump from Japan. China is now shut (although Beijing’s PMI will be released on the weekend).

There is a final raft of resource sector production results due out today ahead of the earnings season which begins in earnest on Tuesday.

Gong Hei Fat Choi.
 

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: Cold Turkey

By Greg Peel

The Dow fell 189 points or 1.2% while the S&P lost 1.0% to 1774 and the Nasdaq dropped 1.1%.

On Tuesday night Wall Street rallied on, among other things, anticipation of a Turkish rate hike. It’s not often Turkey steps into the global financial market spotlight. By the opening bell on Bridge Street yesterday, Turkey’s central bank had lifted its cash rate to 12% from 7.75% in order to support the lira and stem the rush out of Turkish bonds. It worked, and Bridge Street put on a solid session in anticipation Wall Street would follow last night.

Fundamental to that anticipation was a widespread expectation the Fed would announce further tapering last night and no one would bat an eyelid. Indeed, were the Fed not to announce more tapering Wall Street might well sell on the implication of insufficient economic growth, many assumed.

In the meantime, the South African central bank lifted its cash rate to 5.5% from 5.0% in a similar crisis control move. Once again the trick came off, with the rand and South African bond yields stabilising.

For about five minutes. By the time the opening bell sounded on Wall Street last night, the lira and rand were falling once more against the greenback and Turkish and South African bond yields were rising. The levee of emerging market central bank intervention is proving insufficient against the flood of funds out of high-risk assets and back into the safety of the largest economy in the world. This emerging market crisis is spooking Wall Street, and as such the Dow was down a good 120 points before the Fed statement even hit the wires.

When the statement arrived, it didn’t surprise. Fed bond purchases will be cut by a further US$10bn to US$65bn per month. But Wall Street fell again on the news, sending the Dow down 200 points.

It is now assumed the Fed will continue to taper at every meeting, thus bringing an end to QE by late 2014. The assumption is reinforced by the pledge within this statement that the Fed funds rate will remain at zero “well past” the point unemployment falls to 6.5%, as long as inflation remains low. Clearly the Fed believes the US economy is now recovering sufficiently to go it alone, and that ongoing QE at this stage would only lead to higher inflation.

There was no mention in the statement of the plight of emerging markets. A sceptic would suggest this is because the Fed couldn’t care less, although collectively the emerging economies equate to the Club Med of years past. Rising bond yields make emerging market budget deficits more expensive to fund. The take-away is that the Fed does not see the current emerging market crisis as anything more than temporary.

Wall Street is not so sure. Indeed, Wall Street is not so sure a rapid end to QE is such a good thing after all. Late last year, the assumption was the Fed would taper slowly. Taper and assess, taper and assess again. This assumption was enough to evoke one hell of a Santa rally following that initial announcement in December. But now it seems the band-aid is going to be ripped of quickly. It’s all a bit scary. It’s enough to create nervousness and send investors back into cash for the time being.

We may yet get that long overdue correction. It will depend on just how keen the buyers prove to be. In the last hour and a half of trading Wall Street tried to fight back, but could not hold on.

In the background of the macro is the micro, being the US results season. Weak results released after the bell on Tuesday night saw AT&T (Dow) down 1% and Yahoo down 8.5%. During the session Boeing (Dow) beat on earnings but weak guidance sent its shares down 6%. Facebook has just announced after Wednesday bell, and is up 6% in the after-market.

US December quarter earnings continue to be so-so collectively rather than solid enough to justify the dizzy PE heights of late 2013.

Throughout all the goings on of the past week, the US dollar index has remained steady, as it was again last night at 80.59. This is because we are seeing a developed versus emerging market currency play rather than plays of magnitude between the developed market currencies which make up the index. The US ten-year bond yield, on the other hand, fell 7 basis points to 2.68%.

In a sense this is the wrong way. When tapering was first hinted at last year, US bond yields rose on the assumption the first rate rise would soon follow. Since then the Fed has watered down its unemployment rate target guidance, and last night the Fed confirmed 6.5% was no target at all. And all the US money flowing out of emerging market bonds is going straight into US bonds.

Gold rose US$10.50 to US$1261.70/oz, while the Aussie fell 0.5% to US$0.8733.

Base metal markets closed in London ahead of the Fed statement, and all were down again by small increments. Spot iron ore clocked up one more session before the break, and it fell US$1.30 to US$122.60/t. The oils were mixed, with Brent up US42c to US$107.79/bbl and West Texas down US23c to US$97.18/bbl.

The big story in the US energy space remains that of natural gas. Last night the Henry Hub price jumped another 13% or US65c to US$5.69. While the Fed relaxes in a climate of low core inflation, Americans are beginning to worry about their next winter gas bills.

Sound familiar?

The SPI Overnight fell 62 points or 1.2%.

The first estimate of US December quarter GDP is due out tonight.

Locally, Fortescue ((FMG)) is among a handful of miners releasing production reports today while Energy Resources of Australia ((ERA)) will post its full year result. Navitas ((NVT)) will post its interim according to some, but not all, broker calendars.
 

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article 3 months old

The Overnight Report: Buyers And Sellers Battle

By Greg Peel

The Dow closed up 90 points or 0.6% while the S&P rose 0.6% to 1792 and the Nasdaq gained 0.4%.

Despite the SFE’s print on the SPI Overnight yesterday the futures fell a total of around 80 points from Friday, not 114 as it appeared, and when the physical market opened that’s about what we saw in the ASX 200, briefly, by the time the opening rotation completed. But the buyers were lined up in their ranks, and by 12.30pm, Bridge Street was only down 27 points – a rather remarkable achievement given the extent of weakness on Wall Street.

It wasn’t to last nevertheless, and having missed out on the opening plunge, the sellers saw the opportunity to hit the bids in the afternoon. We closed down 66 points or 1.3%.

The rally which began with QE1 in 2009 was regularly punctuated with pullbacks of 5-10% up until 2012. Such pullbacks suggest a healthy rally that is never able to get too far ahead of itself. But for twelve months we have seen an acceleration in the rally with no such pullbacks, leading many to call the market precipitously overbought. Is 2014 the year for the overdue pullback? Well not yet, it would seem. Neither Wall Street nor Bridge Street seem able to gain any downward traction. Once we panicked over Greece and Spain and the US credit rating and the Chinese slowdown but now, it seems, we’re over it. The Fed is about to turn off the QE tap, emerging markets are collapsing, and all anyone wants to do is look for an opportunity to buy.

What will it take to shake the market?

After five down-days on Wall Street, the buyers were back at it last night despite a Fed statement being due tonight. The Fed is expected to announce that tapering will now actually begin, and that another incremental reduction will follow. Such an announcement will fittingly bookend Ben Bernanke’s legacy as he departs to take up gardening, and no doubt becomes rather heavy handed with the fertiliser. But such an announcement will also stir up those who believe the end of the world is now nigh.

Throughout all of this, the retail money is still sitting in cash, as retail investors remain undecided about getting in. Maybe a correction is exactly what’s needed, if we ever see one.

Last night’s bounce on Wall Street was aided by some positive economic data and corporate earnings results. It was also achieved despite market cap heavyweight Apple failing to sell as many iPhones as expected, as announced after the bell on Monday night.

US durable goods orders fell 4.3% in December but then Boeing took 319 orders for new planes, so that will appear in this month’s numbers. For the December quarter, durable goods orders ex-planes rose 6.5%, which is the best result since the March quarter 2012.

The Case-Shiller house price index dropped 0.1% in November but then it always drops in November ahead of winter, and indeed this was the least negative result since November 2005. House prices rose 13.7% from November 2012.

The Richmond Fed manufacturing index fell to 12 this month from 13 in December, but 12 is still a solid pace of expansion.

And the Conference Board consumer confidence measure leapt to 80.7 from 77.5 in December when economists had expected a fall to 77.1.

On the earnings front, Dow components Pfizer, Ford and DuPont all beat earnings expectations, with Ford also beating on revenue. Apple, which is not in the Dow but is in the S&P and represents a big chunk of the Nasdaq, saw its shares fall 8%.

The US dollar ticked up 0.1% last night to 80.56 and gold was steady at US$1251.20/oz, ahead of tonight’s Fed statement. The Aussie is 0.3% higher at US$0.8775.

Base metals have now gone quiet in London with China shutting down from today. Spot iron ore fell US40c to US$123.90/t and there it will remain for a week. The consumer confidence report was a fillip for West Texas crude, which jumped US$1.60 to US$97.32/bbl, closing the gap somewhat on Brent, up US29c to US$107.37/bbl, as should be the case now the Gulf pipeline is open.

The SPI Overnight rose 2 points.

As noted, China will shut down from today for the New Year holiday and not reopen until Friday week, albeit there will be a couple of data releases in the period. This Friday is New Year’s Day.

The Fed will release its latest monetary policy statement tonight. After all the fear and loathing of 2013, the suggestion now is if the Fed decides not to press on with tapering, Wall Street will tank on the implication the US economy is not strong enough.
 

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article 3 months old

The Monday Report (on Tuesday)

By Greg Peel

It was a volatile session on Bridge Street on Friday. Having tanked on Thursday on the weak Chinese PMI, the ASX 200 opened lower but resisted the urge to double count and follow Wall Street down after US markets responded to the same Chinese data on Thursday night. Indeed, the index managed a rally to be up 15 points by midday, but then China reared its ugly head once more to affect a close down 22.

Information leaked from Beijing during the session that the Chinese banking regulator has ordered regional offices to scrutinise credit risks in China’s coal industry.  It is well known China is the biggest consumer of coal used for electricity generation and for steel production but few realise China is actually the world’s biggest producer of coal as well. In recent years production has fallen short of consumption, forcing China to import some coal from the likes of Australia (the world’s biggest exporter of coal, mostly to Japan, Korea, Taiwan) but suffice to say China’s domestic coal industry is fundamental to GDP growth.

Regional offices have been told to specifically investigate the extent of loans to coal companies by trust and wealth management funds. These products offer Chinese investors higher yields than traditional bank options but form part of the country’s unregulated shadow banking system. The alarm was raised when one coal company collapsed owing US$496m to investors. Such a default threatens to shake the faith in China’s US$1.7 trillion trust industry and raises questions over the risks of extensive loans to the coal industry from China’s official banks.

Sudden concern over China is flowing through to Australia’s markets. The stock market is obviously being affected but another 0.7% fall in the Aussie to US$0.8706 over the 24 hours to Saturday morning is the definitive indicator. The Chinese renminbi is pegged in a range to the US dollar, offering no efficient opportunity for trading/hedging of China exposures, but the Aussie satisfies as a proxy in an open but safely regulated market.

Before China started to raise concerns, money had already been flowing out of emerging market investments and currencies. This began as soon as the Fed raised the possibility of tapering and has accelerated now tapering has begun. Tapering implies a rise in US interest rates which closes the gap on emerging market yields on the one hand and implies US economic strength on the other. No longer are emerging markets, with their inherent risks, the place to be to offset minimal returns in the US. Among those currencies being thumped recently are the Indian rupee, Brazilian real, Turkish lira and the South African rand, while on Friday night Argentina gave up on intervention efforts and the peso took a dive. The currency exodus reflects an exodus from offshore investment in emerging market stocks and bonds.

Meanwhile, the US corporate earnings season has continued to deliver results which have been little more than “okay”, and still weak on revenue growth. Microsoft (Dow) and Starbucks reported after the bell on Thursday and the shares of each rose 3% on Friday. It was a very good effort against the powerful tide.

While China in particular and emerging markets in general are being seen as more than an excuse than a reason, heavy selling continued on Wall Street on Friday night. It has not been sufficient that earnings results to date are “okay”. They had to be pretty damned good to justify the faith placed in stocks by investors as indicated by elevated PE ratios, which rose all through 2013 on expectation of, rather than definitive evidence of, earnings growth. They also have to be good to prove US corporations and thus the stock market can survive without QE liquidity. So far, not so good.

The Dow fell 318 points or 2.0% on Friday night and closed on its lows, breaking back down through the 16,000 mark. The S&P broke 1800 to close at 1790, down 2.1%, while the Nasdaq fell 2.1%. The uniformity of index falls, unseen in earlier sessions last week, indicates the indiscriminate nature of the sell-off. The Dow and S&P both broke down through their 50-day moving averages, bringing technical sellers into the game as well.

Falls were also globally indiscriminate. London fell 1.6%, Germany 2.5%, France 2.8% and Japan 1.9%. What went up? China, by 0.6%. Go figure.

Not unsurprisingly thus, the US dollar index was steady on Friday night at 80.44. The index basket consists only of major developed economy currencies and not of any emerging market currencies, many of which saw 1-2% falls against the greenback in the session. Nor is the Aussie included. Interestingly, gold was also steady on Friday night at US$1264.00/oz. The US ten-year bond yield fell 4bps to 2.74%.

Base metals were all up to a percent weaker except lead, which went the other way. Spot iron ore rose US40c to US$123.30/t. Brent crude managed a US52c gain to US$107.92/bbl while West Texas fell US43c to US$93.89/bbl. But the big news in energy on Friday was natural gas.

At the beginning of November, the benchmark US natural gas price was trading at US$3.50/mmbtu. On Friday night it traded over US$5 after a whopping 10% jump in the session. Clearly traders are being caught short as US gas consumption surges in America’s Big Freeze.

Those looking to make a positive connection to the share prices of Australian gas producer stocks should note the correlation is minimal at this stage. The US does not export gas and will not begin to do so for a few years yet. Australian gas contract prices are benchmarked to the oil price, not the US gas price. It nevertheless doesn’t hurt, but then the US spot price is clearly volatile and weather-dependent.

On Friday night the SPI Overnight fell 75 points or 1.4%.

The global sell-off continued on Monday as Australia rested after its celebrations. Japan fell 2.5%, London 1.7% and Germany 0.5%. At lunchtime in New York, the Dow was down another 100 points.

Economic data weren’t helpful. US new home sales fell 7% in December, although once again snow was blamed. Sales for 2013 grew by 4.5% to an annualised rate of 428,000 which is the highest level since 2008. Those fearing the return of the housing bubble in the US will note the peak of annual sales occurred in 2005, at 1.4m homes.

The earnings highlight last night was Caterpillar (Dow). Seen as a global economic bellwether, Cat shares jumped 5.6% on an earnings beat, a guidance beat, and an announced buyback. But Caterpillar alone was not going to determine sentiment on the day. Aside from everything else going on at the macro level at present, the Fed is expected to announce further tapering on Wednesday. The nervous money is taking profits ahead of the meeting.

Wall Street did nevertheless stage a comeback in the afternoon, confirming there are plenty of investors looking to buy on any pullback opportunity and are not going to wait for an official “correction” whether one is overdue or not. Around 3.30pm the Dow was up over 60 points, for a 160 point rebound on the session, but the profit-takers remain intent and in the last half hour the average fell back into the red to mark a fifth consecutive fall.

The Dow closed down 41 points or 0.3% while the S&P lost 0.5% to 1781 and the Nasdaq dropped 1.0%.

The US dollar index remained relatively steady at 80.50 but while Australian markets were closed, the Aussie rebounded 0.5% to US$0.8750. The gold recovery is also faltering, with gold falling US$11.50 to US$1252.50/oz last night.

Base metals continued to drift slightly lower, albeit nickel fell 2.5%. Spot iron ore was unchanged in the session at US$124.30/t ahead of Wednesday’s New Year shutdown. The oils were weaker, with Brent down US84c to US107.08/bbl and West Texas down US76c to US$95.88/bbl.

The SPI Overnight is showing down 39 points. However the SPIO closed at 5122 on Saturday morning and at 5118 this morning, or down 4. A 39 point fall on top of a 75 point fall with no physical session in between looks a bit steep given Wall Street only lost 0.5% last night.

Wednesday night’s Fed statement will be the primary focus this week and on Thursday, markets are expecting the first estimate of US December quarter GDP to come in at 3.2% annualised. During the week we’ll also see durable goods, the Richmond Fed manufacturing index, the Case-Shiller house price index and the Conference Board consumer confidence measure, tonight, pending home sales on Thursday, and personal income and spending, the Chicago PMI and the Michigan Uni fortnightly consumer sentiment measure on Friday.

Elsewhere, the UK will provide its first estimate of GDP tonight, with 0.7% growth expected for 2.8% annualised, while Japan will provide a data dump of inflation, industrial production, manufacturing and unemployment numbers on Friday. Yesterday Japan reported a December trade balance showing a greater deficit than expected.

It’s a quiet week economically in Australia, with new home sales on Thursday and private sector credit on Friday the highlights.

It will be busier on the corporate front, with the last of the resource sector production reports merging with early earnings report. There are several production reports due across the week, including those from Oil Search ((OSH)) and Fortescue Metals ((FMG)), while Energy Resources of Australia ((ERA)) and Navitas ((NVT)) will release earnings results on Thursday.
 

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

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