Tag Archives: China and Emerging Markets

article 3 months old

The Overnight Report: Confusion Reigns

By Greg Peel

The Dow closed down 5 points while the S&P was flat at 1989 and the Nasdaq fell 0.3%.

Nothing to See

China’s CPI jumped to 2.3% year on year in February, up from 1.8% in January. It was the biggest monthly jump since mid-2014, but nothing to get excited about.

It was all about a 7.6% jump in food prices, driven by a combination of the Lunar New Year holiday week of feasting, and cold weather. Fuel prices also saw a rebound in the month. Beijing neither seasonally adjusts its data nor provides a core CPI reading (ex food & energy), so realistically we need to wait to see what transpires over the next couple of months.

The Chinese data were never really going to have much effect on the local bourse yesterday as all and sundry awaited last night’s ECB meeting. The ASX200 made a few attempts to rally 20-odd points but failed each time, before settling relatively square. Sectors traded off small ups and downs, with a 1.5% drop in healthcare the only move of note.

Say What?

At last night’s ECB policy meeting, Mario Draghi pulled out his bazooka and waved it about for all to see. Any doubts about being overly cautious were quickly dismissed as the ECB rattled off a full shopping list of fresh stimulus measures.

The central bank has cut its key lending rate to zero from 0.05%, cut its deposit rate to minus 0.4% from minus 0.3%, expanded the size of its monthly bond purchases (QE) to E80bn from a previous E60bn, and expanded the breath of bond purchases to include investment grade European corporate debt. It was everything and more – certainly more than markets were expecting.

Consequently, the euro tanked 1%, as is the intention of the stimulus. The German stock market jumped 2.5%, and took all other European stock markets along with it. The ECB statement was released just in time for the open in New York, and the Dow shot up over a hundred points.

Then Mario Draghi held a press conference, at which he read a prepared statement. In that statement Draghi declared that he did not anticipate any need to cut rates further.

Come again?

Does that mean: (a) this new and comprehensive stimulus package will do the trick; or (b) that’s it folks – if this doesn’t work, there’s nothing else?

In Europe, panic set in. The interpretation was (b). The euro spun around and rallied back 3%, to be up 2% on the session – one of the currency’s biggest turnarounds ever posted. Having been up 2.5%, the German stock market closed down 2.3%. France closed down 1.7% and London 1.8%. It was only early in New York, and the Dow fell from up one hundred to down two hundred points by lunchtime.

But hang on. Did Draghi really mean (b)? Surely not. Surely he meant (a). Indeed, he even qualified his “no further need to cut” suggestion by adding words to the effect of “unless things change in the meantime”. The debate on Wall Street was furious. But by the closing bell it was clear the ultimate assumption was (a). Following all the rocking and rolling, the Dow closed flat.

So where did it all leave us? Well, Wall Street may have returned to base camp but the euro is still up there. The US dollar index is down 1.0% at 96.16 and the Aussie dollar has fallen 2% against the euro and half a percent against the greenback to US$0.7445.

Gold is up US$15.00 at US$1267.80/oz, which is what one would expect from boosted central bank stimulus, even if gold is down against the euro.

Attention now turns to next week’s Fed meeting. Will the Fed feed global central bank divergence and make a hawkish statement with regard its cash rate? Or is Japan in negative and the ECB now hurling in the kitchen sink enough to keep the Fed at bay irrespective of US economic forecasts?

Oh, and the Bank of Japan meets on the day before the Fed statement release.

Commodities

The thing about central bank stimulus is that it’s a double-edged sword. A bigger than expected stimulus package can either be seen as wonderful news, as it should help boost the economy, or terrible news, because it means the economy must be in much worse shape than assumed. Throw in last night’s currency histrionics, and one can understand why commodity markets were a bit all over the shop as well.

West Texas crude is down US32c at US$37.83/bbl and Brent is down US73c at US$40.08/bbl.

Base metal prices are all down half to one percent.

European stimulus is a world away from the spot iron ore market, but iron ore is down US$2.20 at US$57.40/t. It’s a big move, but unlikely to evoke too much angst given nobody really believed in the spike up to over 60 earlier this week anyway.

Today

The SPI Overnight closed down 6 points.

Tomorrow, China will release February industrial production, retail sales and fixed asset numbers.

On Sunday, the US goes on to summer time, meaning that come Tuesday morning, the NYSE will close at 7am Sydney time.

Rudi will link with Sky Business via Skype and discuss broker calls at 11.15am today.
 

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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: False Dawn

By Greg Peel

The Dow closed down 109 points or 0.6% while the S&P lost 1.1% to 1979 as the Nasdaq fell 1.3%.

Worst Since 2009

Yesterday’s Chinese trade data showed a 25.4% year on year fall in exports in February when economists had expected 12.5%. Imports fell 13.8% when 10.0% was forecast. The fall in exports is the steepest since 2009.

Suffice to say, the news was not well received in the Australian stock market. If nothing else, the bad news provided good enough reason for traders to take profits on resource sectors positions they’ve done rather well out of these past few sessions. Energy fell 1.1% and materials 0.8%, while the banks, which have also been rallying strongly, joined in with a 1.0% fall.

Of course, as is the case every year, we can point to the Lunar New Year disruption when it comes to the Chinese numbers. Beijing does not smooth its data to account for the one week break, which this year happened to be early in the solar calendar. But that is not to suggest the numbers would have looked at all healthy if so adjusted.

It is of no great surprise the ASX200 saw a pullback yesterday after having powered back from around 4800 to pass through 5000 yet again, and almost to 5200. The news did not get much better overnight.

Meanwhile, if there is anything troubling the Australian business community at present you’d never know it. Yesterday’s NAB business confidence survey for February showed a jump in the confidence index to 3.4 from 2.5 in January and a surge in the conditions index to 8.3 from 5.4.

Commodities

Last night both Goldman Sachs and Citi issued reports suggesting the market is kidding itself if it believes there is a balance returning to oil and metal markets. The short-covering rallies witnessed on oil markets and on the LME will prove but a false dawn, they suggest, as was the case last year.

While there have been some positive signs of a reduction in US crude output, tonight’s weekly inventory numbers are forecast to show another big jump in stockpiles. Meanwhile, more OPEC chatter flowed last night, with Kuwait’s oil minister declaring Kuwait would only freeze production if Iran did. Iran’s not going to, so that’s that.

West Texas crude is down US$1.69 or 4.5% at US$36.24/bbl and Brent is down US$1.33 or 3.4% at US$39.45/bbl.

Base metal prices had already appeared to be overcooked heading into yesterday’s Chinese data and last night’s investment bank analysis. Aluminium, copper and lead fell 2%, last night, zinc fell 3%, tin 5% and nickel 8%.

So what’s going on in iron ore? It’s up another US70c at US$63.30/t.

The US dollar index is up 0.1% at 97.19 and gold is down US$5.90 at US$1260.10/oz.

The Aussie has retreated on the Chinese data. It’s down 0.5% at US$74.36.

Resistance

The Australian market had a good run of it lately so profit-taking was no surprise yesterday. The Dow and S&P500 recently hit psychological levels of 17,000 and 2000 respectively so they, too, were due some consolidation.

A fall in the oil price is always a good excuse for Wall Street to follow suit, and so it did last night. The combination of weak Chinese data and the Goldman and Citi reports had US traders similarly bailing out of the energy and materials sectors and back into defensives, and also back into bonds. The US ten-year yield fell 7 basis points to 1.83.

It’s a week largely devoid of US economic data releases so Fed-talk has been off the table this week, allowing markets to concentrate on the commodities story. But tonight the ECB will hold a policy meeting and the expectation is Mario Draghi will announce some further extension to stimulus.

So the market has also readied itself in case of disappointment.

Today

The SPI Overnight down 26 points or 0.5%.

Westpac will release its monthly consumer confidence survey today and local housing finance numbers are due.

There is another solid block of stocks going ex-div today.


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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

Risk On

As expected, it was a relatively quiet day on the local bourse on Friday ahead of the US jobs report and following a strong recovery week. However sector moves were not all that quiet.

The banks only posted a 0.2% gain following a very strong run over the week, but apparent recovery in oil and iron ore prices, along with strength in base metals prices, saw the energy sector up another 0.4% and materials 1.4%. Investors appear to be undertaking a “risk-on” sector switch, drawing on the defensive sectors of healthcare (-1.2%) and utilities (-1.2%) for funds.

Normally telcos would be included in that group but Telstra has been trading more like a cyclical of late. Having taken quite a hit recently, the telcos were up 1.1% on Friday and similarly consumer staples posted a 0.7% gain. The downer was consumer discretionary, which lost 1.0% due to a disappointing January retail sales result.

Retail sales grew 0.3% in January, short of 0.4% expectation. This follows the strong December quarter GDP result for the consumer spending component, and at 4.0% annual growth, spending looks reasonable compared to last year’s 3.5% and the decade average 4.5%. Bear in mind that 4.5% includes a couple of pre-GFC years of growth around the 6% mark.

Still, the market didn’t like Friday’s result. Aside from an unsurprising trend of the non-mining states spending more than the mining states, the other takeaway of note is that we are spending a lot more on services than we are on goods.

Something for Everyone

The US added 240,000 jobs in February, beating 190,000 expectations and continuing a trend of surprising strength in the US labour market. This might be a concern for those fearing the Fed may yet look to hike again in March, but there is always more to a US jobs report than just the headline number.

The unemployment rate remained steady at 4.9%, implying the participation rate fell. But most importantly, after a very strong burst of wages growth in January which heightened Fed rate rise fears at the time, wages fell back 0.1%. Annualised wage growth is running at a below-trend 2.2% -- healthy enough considering lingering recession fears, but not enough to force the Fed into action next week.

June remains the current target date for the next Fed move.

Wall Street initially dipped on the jobs report release on Friday night but quickly resumed its rally once more. Simultaneously, the Dow crossed over the 17,000 mark and the S&P500 crossed over the 2000 mark. These numbers offer resistance merely on a “round number” psychological basis, and as such the sellers moved in. But a late rally at the death ensured another assault.

The Dow closed up 62 points or 0.4% at 17,006, the S&P gained 0.3% to close on 2000, and the Nasdaq rose 0.2%.

Proving further support, and risk-on confidence for Wall Street, was yet another rise in oil prices. A 4% gain for WTI meant the second consecutive weekly 6% gain for the global benchmark. Friday’s strength was driven by another drop in the weekly US rig count, suggesting next week’s weekly crude data may show a third week of falling production.

Commodities

West Texas crude rose US$1.37 to US$35.99/bbl and Brent rose US$1.62 to US$38.72/bbl.

Australia’s May budget is beginning to look a lot healthier. It will be interesting to see whether Scott Morrison does the right thing, and warns that a smaller deficit must be treated with caution given forecasters are not convinced the recent rally in the iron ore price will last, or plays the idiot politician, and gloats.

Iron ore was up another US70c to US$52.40/t on Friday.

The “risk-on” trade is now well and truly on show in base metal markets. When prices were heading towards their lows, commodity funds were bailing out rapidly. Now that the supply-demand balance across many a commodity is looking a little healthier – including global production cuts for base metals, particularly in China – the commodity funds are piling back in again, lest they be left behind.

Copper, nickel and tin all rose 3% on Friday night. Aluminium managed 0.7% and zinc was a wood duck.

Gold was relatively steady at US$1262.30/oz with the US dollar index down 0.2% at 97.36.

There’s no stopping the Aussie at present, which may be reaching a short-covering crescendo. It was up 1% on Saturday morning at US$0.7427.

The SPI Overnight closed up 36 points or 0.7% on Saturday morning.

The Week Ahead

The US goes into a bit of a data vacuum this week so the focus this week will be on the ECB, which holds a policy meeting on Thursday night. December’s extension to ECB QE has made little impression on the eurozone economy, which has also had to fight a pullback in the US dollar (ie stronger euro) as Fed rate rise expectations have been tempered.

The market is expecting something from Mario Draghi this week, but it’s not quite sure what.

China will be in the frame this week. Economists were disappointed with the Chinese government’s performance at the weekend’s national conference, at which it appeared Beijing’s focus is now back on reviving growth rather than addressing debt and further reforms. That should mean further stimulus from the PBoC, but Beijing has lowered its 2016 GDP growth target to 6.5-7.0% from 2015’s 7.0%.

The 2015 result was 6.9%. Perhaps by switching to a range rather than a single figure, Beijing is making it easier for its number crunchers to orchestrate an expected result.

This week China will release trade numbers tomorrow, inflation numbers on Thursday, and results for retail sales, industrial production and fixed asset investment on Saturday.

Australia will see ANZ job ads today, NAB business confidence tomorrow and Westpac consumer confidence on Wednesday. We’ll also see the construction PMI today and housing finance numbers on Wednesday.

As the ASX200 appears set to push further away from the gravitational pull of 5000 as the week begins, from tomorrow it will be fighting a large number of ex-divs throughout the week. These include BHP Billiton’s ((BHP)) dividend on Thursday, what there is of it.

Rudi will appear on Sky Business via Skype-link on Tuesday, 11.15am, to discuss broker calls. Next he'll appear twice on Thursday, from 12.20-2..30pm and between 7-8pm for the Switzer Report. On Friday he'll repeat the Skype-link performance at 11.15am.
 

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

Tonight’s US non-farm payroll release will be last before the Fed meets mid-month. Recently the actual quantum of jobs added and the unemployment rate have taken a back seat in importance for Wall Street behind wages growth, which feeds into inflation.

Next week’s US data releases are thin on the ground.

China will be in the spotlight nonetheless, releasing February trade data on Tuesday and inflation data on Thursday.

The ECB will hold a policy meeting on Thursday. Since the ECB beefed up stimulus in December, eurozone data have been disappointing. Fading expectations of consistent US rate rises have also led to a weaker greenback, undermining sought after euro weakness. Mario Draghi has persistently pledged he will do “whatever it takes”.

Australia will see the TD Securities inflation gauge, ANZ job ads, and the NAB business and Westpac consumer confidence surveys next week.

With the local reporting season now behind us, everything grinds to a halt for the time being on the local stock front. But next week is the biggest in the calendar for the number of stocks going ex-dividend, including BHP Billiton ((BHP)). Not that BHP’s downgraded offering is anything to be excited about.
 

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article 3 months old

The Overnight Report: Bring On Jobs

By Greg Peel

The Dow closed up 44 points or 0.3% while the S&P rose 0.4% to 1993 and the Nasdaq gained 0.1%.

More of the same

The major drivers of Wednesday’s big rally on Bridge Street were the banks, then daylight, then the resource sectors. Having pushed through 5000 for the umpteenth time, the green light is now on for the market to at least take a shot at 5200, if not the 5400 level chartists are flagging.

Yesterday simply saw more of the same. The banks led the charge again with a 1.8% gain, materials backed up with a 2.0% gain, with a little help from a stronger iron ore price (note the banks are now relatively a much bigger cap weight), and energy chimed in with 1.2% as, increasingly, it looks like the oil price might have stabilised.

There was little to speak of happening in other sectors. The banks and resources led us down, so it stands to reason they should lead us back up again.

Oil price stability, if that’s what we’re seeing, is important for LNG exporting. The iron ore price is holding above US$50/t on Chinese restocking but that must soon reach a conclusion. It is important to recognise the lag time between export prices pre-determined for cargoes delivered and spot pricing in relevant markets. Ditto the impact of the falling Aussie. This lag was apparent in yesterday’s January trade data.

Wednesday’s strong December quarter GDP result featured a surge in consumer spending to more than offset weakness in commodities exports. The bad news was a decline in volumes of exports as well as declining prices. Yesterday’s January trade data nevertheless showed a 1.2% increase in exports following the three months of declines over the December quarter. Exports are still reflecting the worst of commodity prices, but the weaker Aussie is starting to have an impact on AUD pricing.

The weaker Aussie is now also having the opposite effect on imports, which fell 1.1% in January. Foreign goods are becoming more expensive. The December quarter GDP was driven by consumer spending. If this now backs off in 2016, due to rising prices, and a predicted slowing in the housing boom, is there enough in non-mining to overcome weakness in mining going forward?

What we can place some hope in is that things do not look like they can get much worse for mining (and energy is included in the “mining” tag here). A rebound in commodity prices would be nice, but even stability of prices would be comforting such that, alongside the benefits of the weaker currency, mining at least stops dragging on the GDP.

The lower Aussie is also having an impact on Australia’s service sector, it would seem. The services PMI flipped back into expansion at 51.8 in February, up from January’s 48.4. Australians are shifting back to domestic services from overseas services (eg travel) due to the price.

The only problem, in the shorter term, is that the Aussie’s currently on a bit of a tear. Following Wednesday’s big jump, the Aussie is up another 0.9% at US$0.7356 thanks to a narrower trade deficit and strength in the services sector. There is no doubt an element of short-covering involved, given everyone was expecting the Aussie to be at 65 by now.

Around the Grounds

China’s service sector continues to expand, but the pace of that expansion continues to slow. Caixin’s independent China services PMI came in at 51.2, down from 52.4, and largely mirroring Beijing’s official number released on Tuesday.

China’s manufacturing sector continues to contract and keeps the world up at night, but the Chinese government is sleeping easy because contraction is the intention. Not so services, which is meant to take the baton. If investors want to worry about China’s economy, they should fret about the slowing pace of service sector growth and ignore manufacturing.

Japan’s services PMI rose to 52.4 from 51.5. The eurozone saw a fall to a 13-month low of 53.3, down from 53.6. The UK saw a fall to a near three-year low at 52.7, down from 55.6.

The US saw a fall to 53.4 from 53.5.

Waiting for Jobs

Wall Street took the services PMI as a good result, given economists had forecast worse. The oil market simply saw a weaker number, and sold off. The sell-off was probably due to some trigger happy day-traders, as oil came right back again to finish the session little changed, probably driven by those who see an improving trend (ie falling production).

The Dow was down 76 points on weak oil and rallied back to a stronger close, with oil. But volumes were low and volatility minimal as Wall Street awaits tonight’s all important non-farm payrolls report, the last jobs number ahead of the March Fed rate meeting.

That aside, last night’s January factory orders release showed a pleasing gain of 1.6% following two months of declines.

Commodities

LME traders noted indications of global base metal production cuts in sending prices higher for yet another session. Aluminium bucked the trend with a 1% fall, but copper, lead and tin were up 1%, zinc 2% and nickel 3%. Price rises were aided by a weaker US dollar, which fell 0.7% on its index to 97.55.

The dollar fell because of the weak US service sector PMI, despite similar weakness in the PMIs of Europe and the UK. The US service sector is far, far bigger than the US manufacturing sector.

If the US data continue to weaken then perhaps the Fed will adopt a more dovish tone at the March meeting. The greenback fall suggests this, and gold is up US$25.50 to US$1264.70/oz.

Iron ore rose US10c to US$51.70/t.

West Texas crude is steady at US$34.62/bbl and Brent is up a tad at US$37.10/bbl.

Today

The SPI Overnight closed up 5 points.

It would make sense that Bridge Street will also have a quieter session today, given two days of strong rallies, it’s Friday, and US jobs numbers are out tonight.

We will nevertheless see local January retail sales numbers today.

Medibank Private ((MPL)) is among a handful of stocks going ex-div today, and S&P/ASX will announce quarterly changes to index constituents, which will come in effect in two weeks’ time.

Rudi will appear twice on Sky Business today. First via Skype-link around 11.15am to discuss broker ratings and later, from 7-8pm, as guest on Mark Todd's Your Money, Your Call Fixed Interest.
 

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: Forward March

By Greg Peel

The Dow closed up 348 points or 2.1% while the S&P gained 2.4% to 1978 as the Nasdaq surged 2.9%.

Bank on it

It appears there were two particular drivers of yesterday’s rally in the local market which ultimately led the ASX200 to a 0.9% gain: stimulus in China, and no stimulus in Australia.

We can draw this conclusion from looking at yesterday’s sector movements. Commodity prices had a relatively quiet overnight session and yesterday’s local December quarter trade data were nothing to be happy about, ditto the Chinese PMIs, but materials rose 1.9% and energy 1.8%. The banks rose 1.6%, providing the bulk of the index gain.

Moreover, the index rally would have been a lot stronger if not for Telstra going ex-div, sending the telco sector down 4.4%.

It was still a choppy session nonetheless, in which we actually reached the day’s closing level in the morning before twice stumbling back to square ahead of a final rally back again, which took us almost to 4925 resistance.

The PBoC cut its bank reserve ratio requirement by 50 basis points overnight, suggesting Beijing is still ready and willing to provide more stimulus beyond renminbi devaluation. That’s good news for the local resource sectors.

But during the morning we saw the local December quarter current account numbers, including the terms of trade. The trade deficit widened further in the quarter as the value of exports fell. This was not a shock, given the falls in commodity prices over the period. But as commodity prices fell through 2015, it was always notable that the volume of exports of iron ore and coal continued to grow.

Not so in the December quarter. We saw both value and volumes down.

By late morning we saw China’s PMI data. Beijing’s official manufacturing PMI fell to 49.0 in February from 49.4 in January to mark the seventh consecutive month of contraction. Caixin’s independent equivalent measure fell to 48.0 from 48.4. Beijing’s official service sector PMI fell to 52.7 from 53.5.

Both the local export data and the Chinese PMI numbers were enough to cause individual stumbles in trading yesterday on the way to a final rally. It appears prior Chinese stimulus ultimately trumped all.

It was the 1.6% rally in the banks that really drove the index. The market went very quiet at 2.30pm yesterday, and then kicked on to the close. While no one was expecting the RBA to cut its cash rate, there was clearly expectation the language of Glenn Stevens’ statement could well be more dovish, given local data releases over the month (note that building approvals fell 7.5% in January) and a fears of a global recession.

As it was, the March statement was as good as identical to the February statement. The RBA believes the current rate is appropriate, but given low inflation there is scope for more easing if needed. This will likely be determined by the labour market, were recent strength to evaporate.

No cut on the horizon then. Rate cuts are bad for banks, as they squeeze net interest margins, particularly when we’re down at such low numbers. Ergo, no dovishness on the RBA’s part is good news for banks, and for the Aussie, which is up 0.6% at US$0.7176 for the same reason.

Around the Grounds

Incidentally, Australia’s manufacturing PMI showed a healthy gain to 53.5 from 51.5, marking the eight consecutive month of growth. This would be great news were Australia’s manufacturing sector not a mere shadow of its former self.

The Australian result was actually a global stand-out. Beyond China, Japan’s manufacturing PMI fell to 50.1 from 52.3, the eurozone fell to 52.1 from 52.3, and the UK dropped ominously to 50.8 from 52.9. It was left to the US to provide some good news, which it did with a big gain to 49.5 from 48.2. But that’s still contraction.

New Month

I suggested yesterday that the weak session on Wall Street overnight was more about end of month squaring than much else, particularly given it flew in the face of the entrenched oil price correlation. Well last night the Dow jumped 350 points and while WTI crude was stronger, it was only modestly so.

There were, admittedly, some stronger US economic data releases last night. One was the aforementioned manufacturing PMI which, while still indicating contraction, at least indicated a solid slowing in the rate of contraction. There was also a positive reading on construction. The better the data, the more chance of the Fed raising again.

And if the Fed raises rates, that’s good for the banks, as discussed earlier. So last night the US banks led the strong rally on Wall Street.

But wait! Aren’t we meant to be in “good news is bad news’ mode? Well in the case of last night, apparently not. The banks led out all the cyclical sectors with strong gains, while the underperforming sectors were the defensives such as utilities and telcos. Such a spread is emphatically indicative of a “risk-on” rally.

And why, suddenly, should Wall Street be “risk-on”? Well it’s a new month, the bad news is largely baked in – to date – China is stimulating and once the S&P500 breached 1950 to the upside, it was technically on for young and old. A close above 1975 was also going to be technically bullish, and the broad index closed at 1978.

Confirming the ‘risk-on” play was a 9 basis point jump in the US ten-year bond yield to 1.83%, and a 14% drop in the VIX volatility index to a confident 17.7.

Commodities

West Texas crude is up US65c at US$34.40/bbl and Brent is little changed at US$35.96/bbl.

Chinese stimulus and better US data were good for base metals, and they all rose 0.5-1.5%.

Iron ore jumped US$1.50 to US$50.40/t.

All of the above came despite a 0.2% gain in the US dollar index to 98.39. Gold fell a tad, to US$1234.90/oz.

Today

The SPI Overnight closed up 92 points or 1.9%, so strap in. While there are several stocks going ex-div today, there are no Telstra-style biggies.

It’s GDP day today. We’re looking for 2.6% annual, up from 2.5% in the September quarter.

February private sector jobs numbers are due tonight in the US, and the Fed will release its Beige Book.


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: Month End Blues

By Greg Peel

The Dow closed down 123 points or 0.7% while the S&P lost 0.8% to 1932 and the Nasdaq fell 0.7%.

Flat Finish

It was another choppy session on Bridge Street yesterday as the result season drew to a close. Being the end of month, there was no doubt attempts at window dressing from fund managers, which would explain why we were up 45 points at the peak around midday. That took us to 4925 on the ASX200 which happens to be a technical resistance level.

And it worked. Back down we came for a flat close. All sectors finished mildly positive on the session bar financials and consumer staples, both of which were impacted by stocks going ex-dividend.

Today is a new month.

Yesterday’s January private sector credit data showed assumptions of a slowdown in housing in 2016 are yet to manifest. Certainly in Sydney. The only difference is it is now the owner-occupiers driving the housing market as the investors back off following tighter lending parameters imposed last year.

Housing is particularly important as it is the one true sign of strength in an Australian economy still reeling from the pace of collapse of commodity prices. But for how long can the housing market continue to grow?

The good news in the credit data is that business lending continued to grow a-pace in January. The bad news is that last week’s December quarter private sector capex intentions measure pointed to a significant slowing of expenditure, which would translate to softer demand for credit.

Yesterday’s December quarter data showed corporate profits coming in weaker than expected, dragged down by mining but also disappointing in the non-mining segment. Wages growth remains tepid, which belies apparent strength in the employment numbers.

Soft wages in the face of resilient employment may yet provide the scope the RBA needs to cut its cash rate once more. The board meets today but no change is expected at this stage.

Non-Core Promises

At the G20 finance ministers meeting held over the weekend in Shanghai, the Chinese delegate assured those present China was not about to join in a mutually destructive global war of currency devaluation, otherwise known as “the race to the bottom”. Yesterday the PBoC pegged the renminbi lower for the fifth straight session.

It was in August last year when the PBoC sent the world into a tailspin by suddenly floating the renminbi against a basket of global currencies, amounting to a hefty devaluation no one saw coming. It was all about the renminbi being included in the IMF’s basket of reserve currencies. Having achieved inclusion, the PBoC is back to pegging against the US dollar once more.

Yesterday the PBoC also cut the bank reserve ratio requirement by a further 50 basis points. This is a more typical monetary easing tool China has deployed over past years, alongside occasional interest rate cuts. China may deny any attempt to join the race to the bottom, but it’s in stimulus mode nonetheless.

Being will release February manufacturing and service sector PMIs today, and Caixin will release its independent manufacturing PMI.

Decouple

It must have been the last day of the month. Oil rallied and US stocks indices fell. It’s been a positive month on Wall Street, having bottomed out at 1810 in the S&P500 and rallied all the way back to meet 1950 resistance. Last night’s selling was likely related to end of month profit-taking.

Last night it was Nigeria’s turn to talk up the possibility of an OPEC production freeze. Oil prices dutifully rallied, but one wonders whether much was made of further OPEC rhetoric. Last week’s US rig count showed the tenth straight week of rig declines and this week’s production data will be closely watched. Oil markets also applauded China’s RRR cut in rising a couple of percent.

In US economic news last night, pending home sales fell 2.5% in January, but weakness was partly attributed to the east coast’s Snowzilla blizzard.

Having leapt up solidly in January, the Chicago PMI – a measure of economic activity in the Chicago area – crashed back again into contraction in February, at 47.6. The underlying trend suggests contraction for the past three months.

The Fed remains data dependent, but the data are not painting a very clear picture at present.

Commodities

West Texas crude is up US79c at US$33.75/bbl while Brent is up US66c at US$36.01/bbl.

It was a quiet session on the LME for once, with a 1% gain for lead the only movement worthy of mention among the base metals.

Iron ore fell US10c to US$48.90/t.

The US dollar index is relatively steady at 98.19 but gold is up US$14.50 at US$1238.10/oz.

The Aussie is steady at US$0.7136.

Today

The SPI Overnight closed down 12 points or 0.3%.

The world will release manufacturing PMIs today, including those for Australia and China as noted.

Locally we’ll also see monthly building approval and house price numbers while the December quarter current account will be released, including the terms of trade.

The RBA will meet today.

There’s another sizeable round of ex-divs today, including AMP ((AMP)), Bendigo & Adelaide Bank ((BEN)), and the mother of all dividends, Telstra ((TLS)).

Rudi will make a brief appearance on Sky Business today at around 11.15am through Skype-link to discuss broker ratings.
 

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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

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

Australian corporate reporting seasons typically end on the last day of the month but most companies like to to get their results out by the final Friday. Thus beyond a couple of stragglers next Monday, today is as good as the last day of the season.

Now can all get some sleep.

But attention will quickly turn to the economy, which has been taking a bit of a background role this month.

Next week sees December quarter readings for company profits and inventories and the current account, including the all-important terms of trade, ahead of the ultimate GDP result on Wednesday.

In monthly terms we’ll see the manufacturing and service sector PMIs, building approvals, trade numbers and retail sales. The RBA will meet on Tuesday and while no change is expected, rate cut pressure is quietly building.

Tuesday is manufacturing PMI day across the globe and in the case of China, official service sector PMI day as well. Everyone else will release services PMIs on Thursday.

It’s jobs week in the US, which is always a lark for Fed-watchers. Ahead of Friday’s non-farm payrolls release the US will also see numbers for pending home sales, vehicle and chain store sales, the Chicago PMI, construction spending, private sector jobs, factory orders, trade and the PMIs. The Fed Beige Book is out on Wednesday.

Note that while the local results season may be wrapping up, we’ve already morphed into the subsequent ex-dividend season and they’ll start coming thicker and faster from here, acting as a drag on the index.


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article 3 months old

The Overnight Report: Flying Pigs

By Greg Peel

The Dow closed up 212 points or 1.3% while the S&P gained 0.8% with the Nasdaq up 0.4%.

Choppy

Alas poor Dick, I knew him well.

The ASX200 headed south again from the open yesterday, with Wednesday’s trashed names coming in for further selling, including the banks. But once the opening rotation was complete, buyers emerged to begin a choppy, bungling ride back towards square by lunchtime.

As the index fell into the low 4800s it’s possible technical buying was in play, and let’s face it – every time we get down this far we eventually end up back at 5000. But when the Shanghai index started sliding in the afternoon, we went with it. Around 2.30pm, someone placed a big buy order and we quickly shot back to a small gain on the session.

The Chinese stock market is a circus best viewed from the bleachers, offering little in the way of correlation to the Chinese economy. While China’s collapsing market was giving everyone a scare in August, by now it’s been largely dismissed as a joke and not something to lose too much sleep over.

The Australian government may nevertheless lose some sleep over yesterday’s December quarter private sector capex numbers.

The good news is capex actually rose 0.8% in the quarter when economists had forecast a decline. There was enough spending outside of mining and manufacturing to overcome ongoing falls in those sectors. The bad news is, capex intentions over 2016-17 dropped by 19.5% from a quarter ago. This implies that “non-mining” will not have sufficient firepower to overcome ongoing spending cuts in mining (and energy), thus providing a negative influence on the GDP.

And the housing construction boom is expected to end, or at least ease, in 2016. This has been the main offset to declining resource sector capex these past couple of years.

But is the bad news good news? Yesterday’s numbers provide more fodder for an RBA rate cut.

When the dust settled on Bridge Street yesterday, the banks had squared up, higher oil sent the energy sector up, and a mixed bag of earnings reports saw industrials up a percent. The big loser on the day was once again consumer staples, as the selling continued in Wesfarmers ((WES)) and impacted on Woolworths ((WOW)).

Woolies reports today.

Seriously?

In Wednesday night’s trade, oil fell from the open in the wake of the Saudi oil minister’s dismissal of any thought of production cuts. It then bounced into positive territory when it was revealed US production might actually be starting to fall.

Last night saw oil fall again from the open, and once again bounce back into positive territory. And while the US stock markets didn’t have much of a chance to follow oil down before it was dutifully following it up, the reason why oil rebounded is a case of back to the same old pie in the sky.

Venezuela has announced plans to meet with Russia, Saudi Arabia and Qatar next month to talk production cuts.

I wonder if the OPEC members have decided to take turns. Each time oil looks like slipping dangerously below US$30/bbl, someone comes out and talks “meeting” and the oil price rebounds, temporarily. Last night must have been Venezuela’s turn. Each time commentators scoff and suggest it’s all just brinkmanship, or at the very least a bet to nothing. But each time the oil price has a Pavlovian rebound. As does Wall Street.

Traders are just too worried that this time, maybe it might actually be true. Better to be safe than sorry. Particularly if you’re short oil.

Last night’s major US data release was January new durable goods orders, which posted their biggest gain in ten months. But take out lumpy aircraft and auto orders, and the gain was much more modest. Zero in on core capital goods – the component considered the true indicator of business investment – and orders are down 3% year on year.

Nothing there to ensure a Fed rate hike in March.

Commodities

West Texas crude is up US88c at US$33.06/bbl and Brent is up US74c at US$35.20/bbl.

Is iron ore’s little run now over? Iron ore fell US$1.00 to US$49.20/t.

Base metal prices continue to chop around and traders admit there’s no real direction evident at this point. Daily movements have been volatile but metal prices have basically been stuck in clear ranges. Last night aluminium, copper and lead all fell around a percent while nickel and zinc fell close to 3%.

The US dollar index is 0.2% lower at 97.30 and gold is US$6.80 higher at US$1235.80/oz.

The Aussie is 0.4% higher at US$0.7238.

Today

The SPI Overnight closed up 32 points or 0.7% -- about the same as it did yesterday. Yesterday the ASX200 fell 30 points from the open.

US personal income and spending data will be closely watched in the US tonight as these included the Fed’s preferred measure of inflation, the PCE. The US December quarter GDP result will be revised once more.

On the local stock front, it is with unimaginable pleasure I can announce that effectively, today is the last day of the results season. There are a few reports to come on Monday, being the last day of the month, but the avalanche ends today.

Today’s highlights include Harvey Norman ((HVN)), Super Retail ((SUL)), Tatts Group ((TTS)) and – brace yourselves – Woolies.
 

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article 3 months old

The Overnight Report: Déjà Vu

By Greg Peel

The Dow closed down 188 points or 1.1% while the S&P fell 1.3% to 1921 and the Nasdaq lost 1.55.

Reversal

It started well – the ASX200 was up over 30 points around 11am thanks to a positive lead from Wall Street and jumps in oil and iron ore prices. BHP Billiton ((BHP)) shares had closed up 6% in London. But then the wheels fell off, and we closed the session down 21 points.

Commodity prices may have jumped overnight but it happened to be the day BHP reported a $7.8bn first half loss and, contrary to assurances from the company’s CEO, abandoned its sacred progressive dividend policy for a 50% payout ratio. The move did not come as a shock, and as it was BHP still closed up 2.6% on the session, helping the materials sector to a counter-trend 0.9% gain.

The Qantas ((QAN)) CEO waxed lyrical about just how wonderful his team was in turning the airline around from steep losses to steep profits but the company kept all the money for itself. No dividend? Qantas shares nosedived 5%.

Aside from the earnings reports on the day which had some influence in stalling the market’s attempts to head north from 5000 once more, news that the PBoC had devalued the renminbi by the most in six weeks sent Asian markets scurrying from the open and turned the tide locally.

Adding to the turnaround were falling oil prices in the Asian session. The 200 point rally in the Dow overnight and the 6% rally for BHP in London had a lot to do with a supposed big jump in the oil price overnight. But it was expiry day for WTI, everyone was short, and an ensuing short-covering scramble on the rollover was quite simply the only reason for the pop. I made note of this yesterday and suggested we wait to see what happens overnight. Well, WTI’s down 5%.

Square the two sessions and oil’s gone nowhere. The stock market has been led around on a chain.

The turnaround saw the local energy sector close down 0.5%, albeit Oil Search ((OSH)) joined the LNG loss-makers club and was hit 3%. Telstra ((TLS)) copped another hammering as the gloss continues to rub off that leviathan and a 0.7% fall for the banks after a reasonable recovery cemented a weak session.

And speaking of banks…

Oil was up on Monday night and back again last night and US stock markets have followed suit. So nothing much has changed. Admittedly, oil’s overnight fall was helped by a comment from the Saudi oil minister who suggested “there’s no sense wasting our time seeking production cuts”.

Really? So perhaps from now on you might just shut the **** up and stop playing your juvenile little games.

Last night’s weakness on Wall Street also lent itself to that other subject du jour – global banking weakness. Standard Chartered was the latest of the EU banks to report substantial losses which, while simply an echo of peer results to date, served to again highlight the impact of weak oil prices and slowing emerging market economies, particularly that of China, on the European banking industry.

On the back of Standard Chartered’s result came JP Morgan’s trading update, at which CEO Jamie Dimon admitted the March quarter to date has been a shocker, fees are down 25%, trading profits are down 20%, and hundreds of millions in provisions have been taken against loans to the energy and commodity sectors. Were oil to trade around the US$25/bbl level for some time, up to US$1.5bn would need to be taken as provisions, Dimon revealed.

It’s a bit of an eye-opener but not completely a shock, and not enough to derail the US banking industry once more. JP Morgan (Dow) shares fell 4%.

The Conference Board’s monthly measure of US consumer confidence showed a fall to a seven-month low 92.2 from January’s 97.8 when 96.9 was expected. That’s not good news for an economy that’s 70% consumption driven.

The reality is the usual correlation between US consumer confidence and actual consumption has faded of late because no matter how confident consumers feel, they’re not spending. They’re buying cars and they’re buying houses (existing home sales were up 11% year on year in January) but that’s all about cheap finance. Still rattled from the GFC, US consumers are taking the windfall gain of lower petrol prices and pocketing it.

And that’s where a big part of the problem lies. Low oil prices would not lead the world into another recession if only the rest of the global economy would provide a spending offset.

Commodities

The new April delivery contract for West Texas crude is down US$1.58 or 4.7% at US$31.81/bbl. April Brent is down US$1.41 or 4.1% at US$33.25/bbl.

Iron ore is up another US20c to US$50.50/t.

While one can never quite be sure who is following who, base metals fell back again last night having rallied on Monday night, following the same oil-stock market path. Aluminium and zinc closed down 2%, nickel and lead down 1% and copper down 0.5%.

Mention weakness in banks and you’re likely to see a pop in gold. Gold is up US$14.80 at US$1223.70/oz.

The US dollar index is a tad higher at 97.47 and the Aussie is 0.2% lower at US$0.7214.

Today

The SPI Overnight closed down 31 points or 0.6%.

Locally we’ll see the first of the December quarter GDP component releases today, being construction work down and wage prices.

How Bridge Street finishes its session will likely again have a lot to do with earnings reports, and today is a biggie in terms of volume. Highlights include Asciano ((AIO)) and Qube Holdings ((QUB)), which are very much in the spotlight at the moment, Fortescue Metals ((FMG)), Wesfarmers ((WES)), Westfield ((WFD)) and WorleyParsons ((WOR)).

Note also that as the reporting season builds towards its crescendo, the ex-divs are beginning to come thick and fast, acting as a natural drag on the index. Today’s ex-div highlight is Rio Tinto ((RIO)).

Rudi will be hosting Your Money, Your Call Equities on Sky Business tonight, 8-9.30pm. Rumour has it, he's invited a special guest. I think most of us know what this means...
 

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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