Tag Archives: China and Emerging Markets

article 3 months old

The Overnight Report: Oversold Scramble

By Greg Peel

Wall Street was closed for a public holiday last night.

Rolling Thunder

Arguably it started in the European banking sector on Friday night. The announcement that Deutsche Bank would buy back its own bonds finally sparked a rebound in European bank stocks and sent European stock markets surging.

That surge continued into Wall Street, where US banks also rebounded in spectacular fashion, aided by an announced purchase of US$25m of shares of JP Morgan by the bank’s CEO.

At the same time, the oil price bounced up 12%. The trigger here was yet another suggestion from OPEC of possible production cuts. No one actually believes the suggestion, but given the long weekend in the US it was better to be safe than sorry. The Dow jumped 300 points.

As to whether market movements would have been less frantic were it not for the US long weekend, it doesn’t much matter. Bank shares across the globe have been hit hard, fuelled by weak profit results out of the European sector and exacerbated by negative rates being imposed on the Japanese sector. Resource stocks have been hit hard by falling oil and metals prices. For the banks in particular, calls of “oversold” have been loud. Not so loud have been the “oversold” calls in the commodities space, but then the carnage has been extreme.

In such circumstances, traders start looking for “the bottom”. And when they do, severe snap-back rallies, exacerbated by short-covering scrambles, often follow.

Yesterday Australia’s materials sector rallied 4.4%, for no particular reason other than it has been sold down a long way. At least the energy sector’s 3.1% jump can be explained by the oil price rebound. The banks managed a 1.6% gain, although in the global contest this was a pretty half-hearted effort. With the exception of telcos (-2.1%), all non-resource sectors rallied around the one percent mark.

Telstra ((TLS)) copped a beating thanks to its record-breaking “free data day”, offered as an apology for last week’s substantial outage.

Bad is Good?

Here’s a headline you will not often read:

Japan’s economy posted an annualised 1.4% contraction in the December quarter, it was announced yesterday. The Nikkei rallied 7%.

The GDP result was actually worse than forecasts of 1.2% contraction. But yesterday it didn’t matter. The Japanese stock market has been hammered since the BoJ moved to negative rates last week, which not only represents an impost on Japanese banks but also failed to provide any initial currency relief due to the crashing US dollar. Yesterday the Japanese stock market simply bounced back. Hard.

Also bouncing back hard was the renminbi.

Here’s another headline you won’t read every day:

Chinese exports fell 6.6% in January when a rise of 3.6% was forecast. Imports fell 14.4% when a rise of 1.8% was forecast. In response, the Chinese currency soared.

The world was already worried that the Chinese stock market might collapse again yesterday, given China has been on holiday in a week when global markets have gone to hell in a hand cart. The Shanghai index did close lower but only slightly, which realistically is just about as positive as a 7% gain for the Nikkei. The week also saw the US dollar tumbling, and hence the response in the renminbi was significant. Significant enough to wipe out the PBoC’s prior devaluation efforts.

Put those Chinese trade numbers in US dollar terms and exports fell 11.2% and imports 18.8%. These are very bad numbers. So bad, it would seem, that the Chinese market assumes the PBoC has no choice but to provide further stimulus.

The Australian stock market hovered for a while on the news out of Japan and China – the country’s two biggest trading partners – after having dipped back from an initial surge. But when nothing untoward happened, the buying resumed once more.

Europe picked up where it left off on Friday night, with major European stock markets rising another 2-3% overnight. There was some help from Mario Draghi who trotted out another one of his familiar “whatever it takes” speeches, but realistically Europe was already rallying well before Draghi spoke.

Commodities

I’ve been warning that the rally in the iron ore price running up to the Chinese New Year break should be treated cautiously, as there was always a possibility it would go straight back down again when China returned. Well, more fool me. Iron ore has jumped 5% or US$2.40 to US$45.60/t.

Never mind that steel prices continue to fall. Iron ore is one of the more beaten-down commodities so last night it bounced back.

As did the other most beaten-down of commodities – nickel, which jumped 6.7% on the LME. Why? Simply because it had been sold down so far, to 2003 levels. Copper rose 1.7% despite the Chinese data recording the first decline in copper imports since October. The other base metals were flat to slightly weaker.

Oil had its day in the sun on Friday, so in the absence of the US last night the oil markets were quiet. West Texas still managed to rise US72c to US$29.71/bbl in electronic trading, while Brent was steady at US$33.34/bbl.

The big moves in commodity prices overnight came in defiance of the US dollar index, which also reversed its recent trend in rising 0.9% to 96.79. Of course, something had to give. Joining the reversal theme, gold has fallen US$29.70 to US$1208.80/oz.

And following very weak Chinese date and a big jump in the greenback, the Aussie is up 0.5% at US$0.7141.

Funny old world.

Today

And that funny old world makes it very hard to be an investor at present. This is not a rational market. In the centre of the irrationality are the central banks, fighting it out to be the most effective in their market interference. Meanwhile, politicians across the globe just sit back and bicker.

The SPI Overnight closed up 27 points or 0.6%. The snap-back is not over yet, it would appear.

We are now deep into the local results season, and from here the micro stories will have to have some impact. Today’s slew of results includes that of CSL ((CSL)), while National Bank ((NAB)) will provide a quarterly update.

Note that Commonwealth Bank ((CBA)) goes ex 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 Monday Report

By Greg Peel

Capitulation?

It was a very choppy session on the ASX on Friday, which is not typical of a Friday. The index plunged 60 points from the open but immediately found buyers, who pushed the ASX200 back to the 4800 mark which signals the supposed bear market threshold.

The rebound didn’t hold, and we were down again mid-morning, before another brave assault was mounted and 4800 was again hit at lunchtime.

But it wasn’t to be. The index closed almost back at its lows again in what appeared to be a level of capitulation ahead of the weekend.

The banks (-1.6%) were hardest hit, and the biggest influence on the index, reflecting general bank selling across the globe. There is genuine, if not misplaced, fear that the likes of a Deutsche Bank could go down and send ripples across the global banking world a la 2008.

Given Friday night’s action in the northern hemisphere, it will be interesting to see how the local banks fare today.

The consumer sectors were among the bigger losers on Friday, both down 1.3%, while a coin toss decided Friday was a day to sell, rather than buy utilities. Telcos found some support and energy, for once, played no part.

If there were speculative buyers in energy on Friday, they’ve done well.

Bank on it

It was mid-week when Deutsch Bank threw up the idea of buying back its bonds but it wasn’t till Friday night when the bank’s intentions were truly translated into a market response. There had been a brief interruption in what might have been an earlier bank rebound in Europe when French bank SocGen posted a shocker of a result.

But the European banks all surged back on Friday night to send the relevant stock indices surging as well. The London market is usually the less volatile of the big three but it closed up 3%, with Germany and France both notching 2.5% gains.

It is typical for such a mood to carry across the pond but just to fan the flames, news came through that JP Morgan CEO Jamie Dimon had bought US$25m worth of the bank’s shares with his own money. The Dow component jumped 12% on the session and the US banking sector as a whole enjoyed a spectacular rebound.

Square-Up

Markets are closed in the US tonight for the Presidents’ Day holiday, and typically Wall Street traders are not inclined to want to take vulnerable positions home over a three-day break. The weekend, and tonight, bring with it potential for any sort of market-moving development.

So there was some surprise when traders piled into the US banks on Friday night. There may have been an element of short-covering, but banks aren’t usually popular stocks to short. On the other hand, oil futures are a very popular short trade.

On Thursday night West Texas crude hit a new thirteen-year low and threatened to drop through US$26/bbl. Then lo and behold, an OPEC oil minister chimes in with fresh talk of possible production cuts. It was also at that point, would you believe it, the S&P500 was threatening to breach important technical support at 1810.

Wall Street turned on a dime. Interestingly, the oil price stopped falling but didn’t post much of a rebound, unlike the US stock markets. But while every trader and his dog laughed off the UAE minister’s timing as being more than coincidental, no one wanted to carry heavy oil shorts through the long weekend. Just in case.

So on Friday night, WTI jumped 12%. Traders suggest the bulk of the rally can be put down to short-covering, but there were also some genuine bottom-pickers in there too. The oil price eased back a bit in electronic trade after Wall Street had closed but the move over the session, combined with the rebound in the banks, was enough to send the market as a whole on a flyer.

Wall Street broke a five-day losing streak in style as the Dow bounced 313 points or 2.0%, the S&P jumped 2.0% to 1864 and the Nasdaq rallied 1.7%.

The US ten-year bond yield, which had fallen like a stone all week to be as low as 1.53% at one point, jumped 10 basis points to 1.75%

The US dollar index rebounded 0.5% in the session to 95.96, sparking some profit-taking in high-flying gold. It fell US$9.80 to US$1238.50/oz.

Friday night basically saw a sharp reversal of everything that was going on all week. The question is: How much of that reversal can simply be put down to the fact the US is closed tonight?

Strong endorsements from the Deutsche Bank board and from the JP Morgan CEO corroborate a widespread call that bank selling across the globe has been overdone. No one, on the other hand, is willing to believe the veracity of any OPEC supply reduction talk. But there’s also the technical aspect. A bounce off 1810 for the S&P500 suggests a double-bottom has been established, and that can be a bullish sign.

Commodities

The late easing back in Friday night’s oil price rally meant that in the 24 hours from Friday morning to Saturday morning, West Texas crude gained US$2.16 or 8% to US$28.99/bbl and Brent gained US$2.08 or 7% to US$32.76/bbl.

Base metals had had a tough week but joined in the reversal trade to some extent on Friday night, ahead of the return of China today. Beaten-down nickel managed a 2% rebound while aluminium and copper both rose 1%, with tin and zinc missing out.

The Chinese were buying up iron ore ahead of the New Year break and it would appear the market is worried this will be followed up by selling as Chinese traders return today. Iron ore fell US$1.30 to US$43.20/t.

Gold has been noted above.

Despite wild fluctuations all week in the US dollar index, the Aussie has completely stalled. It is again steady at US$0.7103, reflecting a balance of cross-currency translations and a trade-off between the China connection and solid carry trade yields on offer.

The SPI Overnight closed up 87 points or 1.9%.

The Week Ahead

All eyes will be firmly fixed on the Shanghai stock market when it opens today around lunchtime local time. While the dragons have danced and the fireworks exploded, global markets have tanked.

To add fuel to the fire, Beijing will release China’s January trade numbers today.

Japan will release its December quarter GDP result today.

The US is closed tonight but the week follows up with housing sentiment and the Empire State index tomorrow, housing starts, industrial production and the PPI on Wednesday, leading economic indicators and the Philadelphia Fed index on Thursday, and the CPI on Friday.

Wednesday will also see the release of the minutes of the January Fed meeting.

The minutes of the February RBA meeting will be out tomorrow. Other than vehicle sales today, the only other economic highlight this week will be the jobs numbers on Thursday.

In the meantime, the local corporate reporting season shifts into top gear this week, and the next two weeks will see an avalanche of reports. Today’s highlights include Amcor ((AMC)), Aurizon ((AZJ)), Bendigo & Adelaide Bank ((BEN)) and Newcrest Mining ((NCM)).

There will be no appearances on Sky Business by Rudi this week.
 

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

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article 3 months old

Next Week At A Glance

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


By Greg Peel

China will be back in business next week, which may prove interesting for metals prices. The iron ore market all but shuts down in China’s absence but base metal markets suffer extreme volatility due to thin volumes, as has proven the case again this week.

Beijing will immediately hit the market with January trade numbers on Monday, followed by inflation numbers on Thursday.

The eurozone will report December quarter GDP tonight as will Japan on Monday.

It’s a long weekend for the US due to the Presidents’ Day holiday on Monday and all markets will be closed. This would suggest some squaring up on Wall Street ahead of the break but in the current volatile environment, anything can happen.

US data releases next week include housing sentiment and starts, industrial production, inflation and the Empire State and Philly Fed activity indices. The minutes of the January Fed meeting are due on Wednesday.

The minutes of the February RBA meeting are due on Tuesday, ahead of Australia’s employment numbers on Thursday.

Next week sees the local reporting season shift into top gear as the week progresses. The volume of reports means there are just too many from which to select highlights, so please refer to the FNArena calendar (link above).

Please note also the calendar is compiled on a best endeavours basis. Australian companies are under no regulatory obligation to publish reporting dates and three different brokers often provide three different date assumptions for the same company. Other companies simply report when they’re ready, leading to apparent calendar omissions.
 

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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

Jobs data are due out in the US tonight. With fears abating of a Fed rate rise in March, and the US dollar falling as a result, one presumes a strong jobs number will be poorly received.

China shuts down all of next week for the Lunar New Year break. Expect metal markets to go quiet. Also expect data distortion out of China for the next couple of months.

New Zealand is also closed on Monday and Japan on Thursday.

US data releases take a breather next week until Friday, when retail sales, inventories and consumer sentiment numbers are due. Janet Yellen will speak on Wednesday night, but is not expected to resolve rate hike speculation.

The first estimate of eurozone December quarter GDP is due on Friday.

In Australia we’ll see ANZ job ads on Monday, NAB business confidence on Tuesday and Westpac consumer confidence on Wednesday.

But the real action locally will come from a ramping up of the earnings result season. Releases are now becoming too numerous to offer highlights, although results from Commonwealth Bank ((CBA)) and Rio Tinto ((RIO)) will draw particular attention.
 

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article 3 months old

The Overnight Report: Midnight Oil

By Greg Peel

The Dow closed up 183 points or 1.1% while the S&P gained 0.5% as the Nasdaq fell 0.3%.

Hope Abandoned

The carnage was relatively uniform across the local market yesterday and the sell-off was quite orderly. Having opened lower on Wall Street’s influence, the ASX200 just kept sliding away all day to a 2.3% loss.

Weaker oil prices assured the energy sector (-3.9%) was the worst performer as speculation mounts ahead of results season that the likes of Woodside Petroleum ((WPL)) will cut its substantial dividend and that the other gas majors will not be paying dividends ahead that had previously been assumed.

The dividend story extended into the materials sector (-2.8%), where lower iron ore prices and downgraded credit ratings are expected to force the big miners into dividend cuts they have tried so hard not to have to implement. The ongoing rally in the iron ore price this week has been lost in the wash.

The resources sectors received no respite from yesterday’s December trade numbers, which showed a much bigger than expected deficit. It was all down to commodity exports, of course, but once again it’s interesting to note the volume of iron ore and coal being shipped to China is not wavering, just the prices.

There was nowhere much to hide yesterday, although the “outperformers” on the day, being utilities (-0.8%) and telcos (-1.1%) showed that yield is still king when dividend values are not under threat.

With mining in the mire, the RBA appeared pleased this week to note the non-mining sectors of the economy are beginning to carry the can. We’ve seen ongoing expansion in manufacturing but that sector is now tiny compared to the services sector. Yesterday’s services PMI result showed a plunge into steep contraction at 46.3 last month from 48.2 in December.

The major issue is the retail sector, reflected in ongoing rampant discounting. Didn’t do Dick much good. Meanwhile, health again starred as the fastest grower.

I noted on Tuesday that the world’s morbid obsession with a weakening Chinese manufacturing PMI fails to take into consideration the fact Beijing is forcing that sector to contract, while trying to boost the Chinese services sector. Beijing’s official services PMI showed a slight slowing in January but ongoing expansion (51.4), while yesterday Caixin’s independent PMI came in at 52.4, up from 50.2.

On any other day that might have been good news.

Around the Grounds

January service sector PMI results in other major centres included a rise for Japan to 52.4 from 51.5 and a tick up in the UK to 55.6 from 55.4. Losers included the eurozone, which disappointed with a fall to 53.6 from 54.3, and the US, which saw a drop to 53.5 from 55.8.

Rock and Roll

That US services PMI sparked a bit of a straw and camel effect. The US manufacturing result earlier this week had also been disappointing, but the US services sector is much, much bigger. Down went Wall Street, and down went the US dollar. Big time.

ADP’s measure of private sector jobs added in January came in at 205,000, down from December’s 267,000. The US dollar index is currently down 1.6% at 97.29 but had been lower earlier in the session.

The fall in US stocks took the S&P500 down to the technical support level of 1870 in the first hour, and at that point the buyers stepped in. Technical support notwithstanding, it was not lost on Wall Street that the weak data only served to increase the likelihood the Fed will not be raising again in March.

The ensuing rebound was relatively half-hearted until someone pointed up at the screens and said “Look at oil!”. West Texas crude was suddenly screaming upwards.

It was screaming upwards because, yet again, there were murmurs out of Russia about another meeting with OPEC to discuss potential production cuts. The growing belief on Wall Street is that every time WTI slips below US$30/bbl, Vlad starts talking about cutting supply. He has no intention of actually doing so of course, but as last night’s 8% oil price rebound suggests, it’s a ploy that tends to work.

The Dow had been down around 200 points at its low and as trading entered the last hour, was up around 200. A bit of wavering at the end led to a close of up 183.

Commodities

West Texas crude is up US$2.37 or 7.9% at US$32.33 while Brent is up US$2.35 or 7.2% at US$35.06.

Oil prices were also clearly helped by the plunging US dollar, as were commodity prices across the board. LME traders also cited the strong Chinese services PMI (although I’m not really sure how this translates into copper demand) and, again, squaring up ahead of Chinese New Year. All base metals rose 1.5-2.5%.

Iron ore gained another US90c to US$44.00/t.

Gold is up US$12.00 at US$1140.40/lb.

Every silver lining has a cloud. The Aussie is up a whopping 1.8% at US$0.7175 thanks to the greenback.

Today

The SPI Overnight closed up 32 points or 0.7%.

NAB will summarise its December quarter business confidence surveys today while tonight the Bank of England will hold a policy meeting and while nothing new is expected, recent central bank manoeuvres suggest one should not be too certain.

Downer EDI ((DOW)) and Tabcorp ((TAH)) will post earnings results today while Macquarie Group ((MQG)) will provide an update on whether this latest round of global volatility has dented trading profits.

Rudi will appear on Sky Business at noon, Lunch Money.
 

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: Fedspeak Follies

By Greg Peel

The Dow closed down 17 points or 0.1% while the S&P was steady at 1939 and the Nasdaq rose 0.1%.

Looking North

The local market jumped on the BoJ bandwagon from the open yesterday in concert with global markets on Friday night. A 20 basis point cut to the Japanese cash rate to minus 0.1% from plus 0.1% is apparently the stuff of global recovery. The ASX200 was up 68 points at its high.

Whether or not anyone noticed, TD Securities’ monthly inflation gauge released yesterday showed a 0.4% increase at the headline in January to 2.3% annual, despite the plunge in USD oil prices. Core inflation, ex-energy, showed a 0.2% gain to 2.0%. The market remains convinced the RBA will be forced to cut its cash rate again some time later this year, if for no other reason than everyone else, bar the US, is doing it, but on these numbers there’s clearly no rush.

Nor would the state of Australia’s once destitute manufacturing sector provide cause for the RBA to panic. Yesterday’s local manufacturing PMI came in at 51.5. That’s down from 51.9 in December, but represents the seventh month of expansion nonetheless.

But for global markets there’s only one PMI that matters, and that’s China’s. Beijing’s official manufacturing PMI showed a fall to 49.4 from 49.7 to its lowest level in three and a half years. This was sensational news, apparently. At least, it was if you were watching TV news broadcasts last night.

What isn’t sensational news for the popular press – probably because it all starts to get a bit complicated for the great unwashed – is that Beijing’s services PMI came in at 51.4. That’s down from 52.2, so there’s no denying China’s economy is still in slowing mode. But a major reason China’s economy is slowing is because Beijing is trying to transition China from a workshop-to-the-world to a domestic-based consumer of goods and services. To do this, one assumes the Chinese manufacturing sector would need to contract.

The Chinese PMI results took the ASX200’s gain yesterday down to 38 points at the close, from the 68 point peak.

And as an aside, Caixin’s independent measure of Chinese manufacturing PMI came in at 48.2. That’s a faster rate of contraction than the official measure, but actually up from 48.0.

In the wash-up, sector moves for the local market yesterday were relatively uniform with the exception of healthcare. The hospital stocks were down on Friday and bounced back yesterday, sending the sector up 2.8%.

Around the Grounds

Japan’s manufacturing PMI fell to 52.3 from 52.6, but that’s pre rate cut, while the eurozone was disappointing with a fall to 52.3 from 53.2 post the ECB’s stimulus kicker announced in December. The UK was pleasantly surprised with a better than expected 52.9, up from 52.1

Each of the above economies, and Australia, are at least seeing their manufacturing sectors expand. The US result showed improvement, but only to 48.2 from 48.0. The result represents the fourth consecutive month of sector contraction.

Love That Bad News

Which is one reason to assume the Fed will be in no rush to implement its second rate cut in March. Another reason was provided by last night’s release of US personal income and spending numbers.

Consumer spending in December was flat on November, despite incomes rising 0.3%. Savings have reached a three-year high. The personal consumption and expenditure (PCE) measure of inflation fell 0.1% in December to mark 0.6% growth for 2015. The Fed prefers PCE to CPI, and this is the number the FOMC wants to see at 2%.

US inflation has clearly become an issue for Fed vice chairman Stanley Fischer. Fischer was last year among the most hawkish of FOMC members, deriding the market at the time for assuming too slow a pace of Fed rate hikes in 2016. Last night he changed his tune, and admitted the market might be right. Global volatility is weighing on the US economy, and that is slowing the pace of inflation growth from previously assumed levels.

The Dow has opened down 167 points from the bell and was continuing to struggle when Fischer made his comments. By late afternoon the Dow was up 44, before settling down 17.

The initial fall was driven by yet another 6% plunge in the price of oil, which in turn was driven by the awesome power of the Chinese manufacturing PMI. And presumably the market is beginning to concede that co-ordinated OPEC/non-OPEC production cuts are the stuff of fantasy.

But between the data, and Fischer’s interpretation of that data, the outlook for the US economy is clearly weak. And that’s great news.

Meanwhile, despite Snowzilla attacking last month, the forecast in the US is now for a period of winter mildness, unlike the past two winters. Good news? Well not for US natural gas, which fell 6% last night. Kick ‘em when they’re down.

Commodities

West Texas crude is down US$2.13 or 6.4% at US$31.43/bbl while Brent is down US$1.95 or 5.4% at US$34.04/bbl.

Activity on the LME was mixed last night, and once again we are reminded that China shuts down for the New Year break next week and that means a late scramble to buy or sell material and to square up trading positions. So we saw aluminium and copper steady, nickel down 1.5%, lead up 1.5% and tin up 2%.

Iron ore jumped US$1.00 to US$42.50/t. This is likely to set the mining sector on fire today and spark talk of a comeback, but I’d be wary of the aforementioned holiday and its implications.

Weak data and Fedspeak has the US dollar index off 0.6% to 98.99 and gold up US$11.30 to US$1128.30/oz.

The weakness in the greenback has countered any China-related weakness in the Aussie, which is up 0.4% at US$0.7106.

Today

The SPI Overnight closed down one point.

The RBA will meet today and leave its cash rate on hold.

Navitas ((NVT)) will post its earnings result.
 

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

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

Next week is February and locally that means corporate reporting season. We’ve already had a couple of teaser reports late in January, next week sees a handful of releases including News Corp ((NWS)), Tabcorp ((TAH)) and REA Group ((REA)), and the following week sees the action step up a gear.

The last two weeks bring a torrent.

Before we get to that torrent we’ll have a busy week of local and global economic data next week. Monday is the first of the month, and that means manufacturing PMIs from across the planet, followed up with services PMIs on Wednesday. All eyes on China, with Beijing releasing both PMIs on Monday.

Locally we have an RBA meeting on Tuesday but no changes will transpire, and the central bank will release a quarterly Statement on Monetary Policy on Friday.

Outside of the PMIs we’ll see local building approval, trade and retail sales numbers next week.

It’s jobs week in the US, which will prove important as ever in 2016. Second Fed rate hike in March? First we need to see Wednesday’s private sector result and Friday’s non-farm payrolls.

US data releases next week also include construction spending, personal income & spending, productivity, factory orders, trade, and vehicle and chain store sales.

The Bank of England will hold a policy meeting on Thursday.

New Zealand will be closed on Monday in preparation for the upcoming test series.
 

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article 3 months old

The Overnight Report: And We’re Back, At 5000

By Greg Peel

The Dow closed up 282 points or 1.8% while the S&P gained 1.4% to 1903 and the Nasdaq added 1.1%.

Happy New Year

And here we are, back at that familiar level of 5000 for the ASX200. When I left for my break just before Christmas we were at 5140, so clearly it’s been a quiet January.

No?

Fair enough. One could have been holidaying on a rock in the ocean and still not managed to avoid the news the Chinese stock market had again collapsed and the benchmark oil price had fallen to US$26 a barrel.

In the former case, the Chinese stock market itself is basically a joke and realistically not much of an indicator of the true Chinese economy but the sell-off was triggered by weak data. That said, I imagine the 2015 GDP result of 6.9% was seen as reasonable, if it can be trusted. I see this morning the head of China’s Bureau of Statistics is now up on supposed corruption charges.

In the latter case, it must be said there were plenty of calls for oil in the twenties as we headed into Christmas, and so it came to pass. The good news is that we will now see the long assumed disappearance of smaller, high-cost US producers, thus meaningfully reducing supply. Had oil continued to hover around US$40, the story could have dragged on all through 2016.

The bad news is we have now seen the first trickle of small US banks getting into trouble over their loans to said oil producers, with Texas being the unsurprising starting point. As to just how bad this story can get is as yet unknown, but it is unlikely to impact on the major US banks and is not, alone, the stuff of another GFC.

While locally the focus tends to be on China, one doesn’t have to look far to see what’s been driving Wall Street in 2016. The S&P500 has to date registered 97% correlation with the WTI oil price. Earnings season has begun in the US but that doesn’t seem to matter much right now. Tonight brings the first Fed rate decision post the December hike, but nothing untoward is expected.

Shortly the local market will enter the February result season, and that will no doubt tell a tale. In the meantime, here we are at 5000, again.

Wishful Thinking?

Two or three times late in 2015 there was talk from OPEC officials of possibly conceding to production cuts. Those officials tended to be non-Saudi, and each time a Saudi official quashed expectations with a largely “She’ll be right mate” attitude, while Saudi Arabia continued to pump oil as fast as it could.

Last night’s latest production cut talk came from Kuwait’s OPEC governor, who suggested OPEC would be willing to cooperate with non-OPEC members if non-OPEC members were willing to do the same. Such members include Russia and Brazil, who are bleeding heavily, but also includes the US, which is the heart of the problem.

The chances of the US agreeing to sanctioned production cuts are zero, so it’s all just pie in the sky. Meanwhile, one would hardly expect Iran to finally return to oil exporting and immediately take a haircut. And the history of OPEC suggests production cuts, while always agreed to, are never adhered to. The only way global oil production can be reduced is through natural selection. The oil price will only ever go back to US$40 once a lot of the marginal production in North America is idled once and for all.

And this is what is likely to happen in 2016.

In the meantime, West Texas is up US$1.36 or 4.9% at US$31.26/bbl and Brent is up US$1.53 or 5.11% at US$31.63/bbl.

As a result, Wall Street rallied overnight. There were a couple of positive earnings results in the mix to help things along, but basically it was just that 97% correlation.

Commodities

Outside of oil, there were some solid moves up in other commodity prices. The usual short-covering and technical trading were cited on a volatile LME for snap-back rallies in base metal prices. Aluminium jumped a percent, copper, lead and nickel rallied around 2%, tin was up 3% and nickel almost 5%.

Iron ore fell US30c to US$40.80/t.

Gold also went for a run, up US$14.30 at US$1122.20/oz despite the US dollar index being only 0.3% weaker at 99.04.

The Aussie is up 0.9% at US$0.7013.

Today

The SPI Overnight closed up 54 points or 1.1%.

Today sees the release of the local CPI numbers for the December quarter, which will no doubt fuel debate about whether or not the RBA will be back in cutting mode in 2016.

And the other endless debate will also rage in 2016. Not of when the first Fed rate hike will be, but when the second rate hike will be. And the third… The Fed will release its first statement for 2016 tonight.

Happy New Year. I hope it’s a good one.
 

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The Next Three Weeks 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

Tomorrow the ASX will close at 2.10pm local and the NYSE will close at 1pm local.

All Western markets will be closed on Christmas Day while in Australian and New Zealand, markets will be closed on Monday December 28 in lieu of Boxing Day.

On December 31, the ASX will close at 2.10pm local. Japanese markets will be closed. All Western markets and the Japanese and Chinese markets will be closed January 1.

Next week the US will see house price, consumer confidence, trade and pending home sales numbers and the Chicago PMI. The first week of the new year will bring durable goods, factory orders, and the private sector and non-farm payrolls employment numbers. The week will also see the release of the minutes of the historic December Fed meeting.

Beijing will release official manufacturing and services PMI numbers on New Year’s Day while the rest of the world will deliver manufacturing PMIs on January 4 and services PMIs on January 6, including Caixin’s Chinese PMIs.

New Zealand markets will be closed on January 4.

Australia will see private sector credit numbers on December 31 and the first week of the new year brings house prices, the PMIs, building approvals, retail sales and trade numbers. Monday January 11 sees ANZ’s job ads series and Australia’s unemployment numbers are due on January 14.

FNArena’s regularly daily service will close from today and reopen on January 14.

Merry Christmas and Happy New Year to all.
 

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The Monday Report

By Greg Peel

No Bottom Yet

The benign close on Bridge Street on Friday is not much worth analysing, given all that has transpired in the meantime. Suffice to say industrials and telcos posted 1% falls and the resource sectors lost 0.6%, but the banks were slightly positive and a bit of green elsewhere resulted in a close of down 8 points for the ASX200.

Of more significance is the reality that a bottom is clearly not yet nigh for crude oil prices, despite what appeared to be some bottom-picking activity last week. West Texas crude fell US$1.25 or 3.4% on Friday night to US$35.48/bbl, representing a seven-year low. Brent fell US$1.84 or 4.6% to US$37.90/bbl.

Renewed selling was triggered by a report from the International Energy Agency which downplayed any expectation for a recovery in oil prices in 2016. The IEA is pessimistic about any easing in global oversupply ahead of a ramp-up of Iranian production once sanctions are lifted. The Agency was particularly critical of OPEC, blaming the bloc’s “freewheeling” supply policy.

OPEC’s total output in November was 900,000 barrels per day more than the estimated demand rate for OPEC crude in 2016.

The oil price fall proved another kick in the teeth for Wall Street, which is struggling to put together any sort of traditional late-year rally. The US stock indices posted their biggest one day falls since August, led down by the energy sector. The Dow closed down 309 points or 1.8% while the S&P lost 1.9% to 2012 and the Nasdaq fell 2.2%.

But it was not just the price of oil, per se, which spooked Wall Street.

I have warned in this Report recently of the flow-on risk into the US financial sector of junior shale oil producer defaults and bankruptcies due to persistent low oil prices. Many an oil producer has funded costs through high-yield junk bond issues and the potential for default is putting a lot of pressure on the junk bond market.

So much pressure that the high-yield Third Avenue Focused Credit Fund announced on Friday night a freeze on investor redemptions. Third Avenue is concerned the rush to redeem would lead to a fire sale of the fund’s assets at destructive prices. The freeze will allow Third Avenue to liquidate the fund in an orderly fashion. It hopes.  

The last time frozen redemptions were front page news on Wall Street was in 2008. And it is not going to help junk bond markets that the Fed is expected to make its first rate hike this week.

Despite that expectation, the US ten-year Treasury yield fell 10 basis points on Friday night to 2.14% as investors rushed to withdraw their investments in high-risk, high-yield instruments and  transfer into safe haven government bonds. Heightened fear was also apparent in the VIX volatility index, which jumped 27% to 24.6, taking it into nervousness territory.

Trade War

And it was not just the price of oil, or junk bond issues, that spooked Wall Street on Friday night.

In the wake of the inclusion of the Chinese renminbi in the IMF’s basket of global reserve currencies, the PBoC announced on Friday it was planning to loosen the currency’s peg against the US dollar and instead switch to a peg to a basket of global currencies – potentially 12 to 13 in total. The central bank is yet to provide details on currency weightings, or just how the switch will come into effect.

But it was not lost on markets on Friday night that the move amounts to a further devaluation of the renminbi. The fear is that in trying to revive its flagging export sector, China is orchestrating a trade war. The peg announcement on Friday follows an announcement from Beijing earlier in the week that export taxes on steel, pig iron and other products would be reduced, potentially leading to further dumping of cheap steel on global markets.

What Beijing should really be doing is addressing China’s steel production overcapacity, and indeed overcapacity in the refining of a range of metals. But to do so too aggressively would bring about the sort of social backlash Beijing forever fears, given the implicit loss of jobs. Capacity reduction will thus be a very long process, one presumes.

The whole point of the ECB’s beefed up QE policy is to lower the euro to ensure Europe’s export-led economy can recover. Japanese QE has a similar goal. With the PBoC now becoming aggressive in its own currency devaluation attempts, one wonders just where the “race to the bottom” and subsequent trade war potential can end.

And all the while, the Fed is set to raise.

The impact of the PboC announcement on Friday was evident in moves on European stock markets on Friday night. A 2.2% fall in London is understandable given the weighting of energy stocks in the FTSE, and renewed oil price weakness. But oil weakness is good for energy-importing European countries, yet the German stock market fell 2.4% on Friday night and France 1.8%.

But on the other side of the coin, the world in general is desperate to see the Chinese economy stabilise. Beijing might be ready to fight a battle in export markets, but for other export economies, China is critical as a customer. This means everything from US iPhones to German heavy machinery, French wine and Australian iron ore.

In this front there was actually good news over the weekend. Beijing provided China’s November “data dump” on Saturday.

Industrial production rose to 6.2% year on year growth, beating forecasts of 5.7%. Retail sales posted the strongest reading of 2015 with a gain of 11.2%. And at 10.2%, year to date fixed asset investment also proved to be better than expected.

The numbers suggest Beijing’s many and various stimulus efforts over the year may finally be starting to gain some traction. This is good news, but in the context of all else that’s happening in China, and of falling oil prices, the impact will no doubt still be lost as markets enter the new week.

Other Commodities

Iron ore fell another US50c to US$37.00/t on Friday night.

The US dollar index fell 0.4% to 97.57 (the renminbi is not in the index basket) which should have provided some support for commodities, but clearly not for oil or iron ore. But there were at least some positive moves for base metals prices in London.

US-based Freeport-McMoRan is now among those global resource sector companies announcing planned production curtailments. While Beijing may be moving very slowly on addressing overcapacity in China, Chinese metal smelters are themselves taking a more active stance in addressing their own oversupply issues. There is thus a glimmer of optimism returning to beaten-down base metal markets.

On Friday night copper jumped 1.9% and nickel 1.7%, while lead rose 1.1% and zinc 0.8%. Only tin and aluminium remained subdued.

Gold was US$5.00 higher at US$1077.30/oz.

The Aussie dollar fell a full 1.4% to be at US$0.7188 on Saturday morning, thanks to oil and iron ore prices, but has rebounded somewhat this morning to US$0.7203 thanks to the positive Chinese data released over the weekend.

The SPI Overnight nevertheless closed down 73 points or 1.5% on Saturday morning.

The Week Ahead

It’s the big one on Wednesday night. You may have heard about it. The Fed will hold a policy meeting and provide quarterly forecast updates, and Janet Yellen will hold a quarterly press conference.

It is not expected that any US data release ahead of that meeting will affect the Fed’s decision. This week’s releases include the CPI, housing sentiment and the Empire State activity index on Tuesday, housing starts and industrial production along with the Fed statement on Wednesday, and leading economic indicators and the Philadelphia Fed activity index on Thursday.

Friday is the quarterly quadruple witching derivatives expiry in the US, which itself often provides for heightened volatility, and being so soon after the Fed decision one presumes this may well be the case.

Japan and the eurozone will release trade and industrial production data this week and both the ZEW and IFO surveys will be closely watched in Europe.

New Zealand will release its September quarter GDP result on Thursday.

Australian data releases are thin on the ground this week, other than house prices and vehicle sales tomorrow. Tomorrow also sees the release of the minutes of the RBA’s December meeting and the government will deliver the mid-year budget update. An RBA Bulletin will be released on Thursday.

On the local stock front there is a trickle of AGMs this week including those of both ANZ Bank ((ANZ)) and National Australia Bank ((NAB)) on Thursday.

The ASX sees its own form of “quadruple witching” expiry on Thursday, and on Friday the recently announced changes to S&P/ASX index constituents come into effect.

Rudi is now off on his annual break and thus will not be making any media appearances until the new year.


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

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