Tag Archives: China and Emerging Markets

article 3 months old

The Overnight Report: Respite

By Greg Peel

The Dow closed up 82 points or 0.5% while the S&P gained 0.2% to 2052 and the Nasdaq added 0.4%.

Good News is Bad News

Economists were bracing themselves yesterday for a weak local jobs report. Not because they believe Australia’s economy is in trouble and unemployment is mounting – indeed, quite the opposite – but simply because when last month’s report suggested 56,100 new jobs were added, they all fell about in hysterics.

As if!

While suspicion has been mounting for some time that the ABS dart board had well and truly fallen off its hook, economists were at least prepared to be polite last month and suggest the October result probably was a case of statistical noise. The series is volatile, they acknowledged, and hence the November numbers would probably see a correction back to a more realistic result, while maintaining an underlying positive trend.

Yesterday’s number suggested 71,400 new jobs added.

This time there were just looks of exasperation. Struggling to remain polite, CBA’s economists summed up the mood in saying “There will be many doubters”. Still, various other employment indicators have been quite positive, CBA admits, such as the ANZ job ads series, and the underlying trend is a more believable 25,000 new jobs per month.

The November result, fantasy or not, was not well received by the stock market yesterday. In a week dominated by ever-falling commodity prices, for once it was not the resource sectors that led the index down. Energy fell 0.4% but materials was up 0.7%, while the banks fell 1.5%, the telco 1.1% and utilities 0.8%. If the October jobs report suggested the possibility the RBA would not be cutting its cash rate any further, the November report has killed off any thought of another cut altogether. As the Fed prepares to raise, goodbye yield.

The ASX200 was down around 40 points in the morning yesterday on further commodity price and Wall Street weakness, and when the jobs number came out, fell another 40. That took us, for about the umpteenth time this year, back down through 5000. Then the technical trade came into play, and late buyers pushed the index back to a more respectable loss of 42 points on the day, well clear of the 5000 mark.

Forex traders have given up all hope of another RBA cut, as is evident in a 0.9% rally in the Aussie to US$0.7291 despite the US dollar index being up 0.6% at 97.93, but they could well change their minds again tomorrow.

Love That Bottom

WTI crude fell again last night, by another 1.7%, and now Brent has joined the sub-40 club. Crude prices themselves have thus yet not quite bottomed but Wall Street clearly believes a bottom is in sight. For the second session in a row, energy stocks were most sought after. The S&P energy sector rose 1.2% last night following Wednesday night’s 1.3% gain, and after four down-days in a row, Wall Street finally managed a rally all round.

Despite those four down-days, Wall Street’s bounce off the September lows has meant the 50-day moving average on the S&P500 is now very close to crossing over the 200-day, which is called a “Golden Cross” and signals peace, love, harmony and bullishness for all evermore thereafter.

It’s all a complete load of crap of course, but some people do like to hold onto to these little fantasies. Don’t they Santa?

The Golden Cross will be triggered, it is assumed, next week when the Fed announces a rate hike and Wall Street takes off. Tonight sees the release of PPI and retail sales data, and next week sees CPI and housing sentiment ahead of the Fed meeting, but the market is convinced the Fed has already made its decision. As to being convinced the market will then rally is another matter, because everyone is assuming that will be the case.

Indeed, the Dow was actually up 200 points around 3pm before fading quickly away at the close.

Commodities

West Texas crude is down US64c to US$36.73/bbl and Brent is down US64c to US$39.74/bbl.

The pickers were out in the local materials sector yesterday, it would seem by the aforementioned 0.7% rally against the general index trend. But iron ore is down another US80c overnight to US$37.50/t.

Aluminium producer China Hongqiao yesterday announced the immediate curtailment of 250,000t of production, but still couldn’t manage to ignite the aluminium price on the LME, which closed flat. All base metals closed flat except for nickel which fell 1.5%. It seems in the run-up to year-end, nothing is going to excite world weary metals traders at the moment. We can only hope China Hongqiao’s capitulation is a sign of more to come from China.

The rally in the US dollar helped gold down US$4.50 to US$1072.30/oz.

Today

Despite a rally on Wall Street, the SPI Overnight closed down 11 points or 0.2%.

US November retail sales data will be the hot topic of conversation tonight, given the numbers will account for the Thanksgiving weekend shopping spree. The PPI and consumer sentiment numbers are also due.

Tomorrow brings China’s data dump for November, featuring industrial production, retail sales and fixed asset investment numbers.

Westpac ((WBC)) will hold its AGM today.
 

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article 3 months old

The Overnight Report: Not This Time

By Greg Peel

The Dow closed down 75 points or 0.4% while the S&P lost 0.8% to 2047 as the Nasdaq lost 1.5%.

Nice Bottom?

I suggested yesterday that perhaps the time was nigh for some bottom-picking in resource sector stocks, particularly in energy, given what appeared to be quite the capitulation trade in oil markets on Tuesday night. As it turned out, only three sectors finished in the green yesterday within a 0.5% fall in the index. One was utilities, up, 0.3%, while materials rose 0.1% and energy rose 0.4%.

But it appears someone had a red hot go at index bottom-picking in general at 11am yesterday. Having opened down 40 points and plateaued, the ASX200 suddenly shot back up to the flat line in a blink. It then began a slow drift down in the afternoon.

Momentum was probably deflated by yesterday’s local data releases.

Consumer confidence fell by 0.9% in Westpac’s December survey. That’s not really what retailers want to hear before Christmas. The two consumer sectors finished down 0.6% yesterday. However, the index remains on the optimistic side of the ledger, at 100.8, and is up from this time last year.

The fall in the index is mostly due to a lack of confidence in the economy going forward, out to five years, rather than right now, which remains fairly buoyant. There is thus no need to fear the Grinch. Household goods retailers, who have had a cracking couple of years, need also not cry into their egg nog, based on yesterday’s housing finance numbers.

The value of all housing loans fell 6.0% in October to slow to an annual pace of growth of 8.4%. Efforts by the regulator to cool runaway investment loans has clearly worked, given loans to investors fell by 6.1% and are now slowing at an annual rate of minus 9.2%. But, repricing of mortgage rates has not completely deterred owner-occupier borrowers, as o-o loans rose 0.1% to maintain a healthy growth rate of 21.1%.

Given it is the owner-occupiers and not the investors who will be buying all the furniture, spending on household goods should remain supported for now, and clearly there’s a lag effect. But builders and building materials providers will not be too thrilled that the investment housing boom has clearly now run its course. Industrials were the worst performer yesterday, down 0.9%. Falling loan numbers in general are not encouraging for the banks, which were down 0.8%, although the metrics of NAB’s UK demerger has not been met with great enthusiasm either.

Yesterday also saw the release of Chinese inflation data for November. A rise to 1.5% annual for the CPI, up from 1.3% in October, suggests Beijing’s stimulus measures might finally be having some effect. But industrial overcapacity remains rampant, as indicated by a 5.9% annualised fall in the PPI. That’s unchanged since October at least, but represents the 45th consecutive month of declines.

Too Soon?

The bottom-pickers were indeed poised for action on oil markets last night. When weekly US crude inventory data showed an unexpected drop in stocks, WTI shot up to US$39/bbl. Given the US oil and stock markets are currently attached at the hip, the Dow shot up 200 points as a result.

But then reality interfered.

Corresponding heating oil inventory data showed an unexpected rise, even as the US heads into winter. And while crude inventory levels may have fallen in one week, there’s no getting past the fact they are still as high as they have been in 80 years of data. The rapid WTI bounce quickly ran out of steam, reversing to a slight fall in price on the session.

The Dow subsequently closed down 75 points. It was not the day.

Commodities

West Texas crude is down US20c at US$37.37/bbl, while Brent has managed a slight gain of US17c to US$40.38/bbl.

Global divergence was apparent in a 1.1% fall for the US dollar index to 97.35 as the euro rallied. Weak oil prices are bad for the US market, but good for a European market that imports all its energy. The irony is that it is the US about to raise interest rates, while eurozone has just cut. But the fall in the greenback provided little support for commodity prices.

Base metal prices were all slightly higher last night, other than nickel which was flat, but no metal managed a 1% gain.

If we’re on the lookout for bottoms, there no sign of such yet in iron ore. It’s down another US50c at US$38.30/t.

Gold has managed to gain US$3.00 to US$1076.80/oz, while the Aussie is up 0.3% to US$0.7229.

Today

The SPI Overnight closed down 23 points or 0.5%.

Australia’s November jobs numbers are out today. Always good for a giggle.

Market darling CSL ((CSL)) will hold its annual R&D day today.

Rudi will make his final TV appearance for 2015 today at noon, on Sky Business' 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: All About The Oil

By Greg Peel

The Dow closed down 162 points or 0.9% while the S&P lost 0.7% to 2063 and the Nasdaq fell 0.1%.

Capitulation?

In depth analysis is not required to figure out why the ASX200 closed down 0.9% yesterday. Energy was down 6.4% and materials 3.4%, as both benchmark prices for oil and iron ore are now under the psychological US$40 mark. All other sectors traded off gains and losses of around a half a percent.

The big fall in the energy sector was compounded by Woodside Petroleum’s ((WPL)) announced withdrawal of its bid for Oil Search ((OSH)), thus removing a takeover premium from the Oil Search price. To explain the big fall in BHP Billiton ((BHP)), again, one must remember that while BHP is mostly thought of as an iron ore producer, it also has a large energy division.

The unfortunate reality for the market in general is that while recent falls can be squarely blamed on the resources sectors, as opposed to market-wide concerns, a lot of technical damage is being inflicted on the index. The 5100 level is considered support which, if breached, suggests another move down towards 4900. However, if investors can take anything away from the performance of Australian stocks in 2015, it is that index-tracking has been a disastrous strategy this year. Stock-picking has ruled, particularly outside of the large caps, with only one or two exceptions (CSL comes to mind).

It was probably never going to make much difference what China’s November trade numbers, released yesterday, looked like. It was not a day to be brave when playing the resources. Weak numbers would have been met with a “Yeah, well there you go,” and strong numbers would have been trampled in the stampede anyway.

As it was, the numbers offered a balance of sorts. They were weak, but not as weak as expected. Exports fell 3.7% year on year in November compared to 3.6% in October, but that was not as bad as expected, and imports fell only 5.6% following a 16.0% fall in October. Forecasts had suggested another double digit fall.

It is interesting to note the impact of China’s August currency devaluation. In USD terms, exports fell 6.8%, better than 6.9% a month ago, and imports fell 8.7%, better than the previous 18.8%. The numbers look worse in dollars, but is there a trend of stability emerging?

That’s a big question for 2016. Meanwhile, more immediately, have we seen the bottom for oil and iron ore prices? Monday night’s 6% trashing of oil had a hint of capitulation trade about it. Iron ore’s decline has been rather more orderly, so it is difficult to tell when that might stop. Iron ore is also beholden to Beijing’s efforts to reduce excess steel capacity – a slow process – while Beijing has no control over oil markets. That’s all down to US shale producers and OPEC.

Overnight WTI initially fell again, but found some support under the US$37/bbl level before closing only slightly lower on the session. It would be a brave trader who would suggest we’ve definitely now seen a bottom, and bottom-pickers who moved in too soon mid-year have been taken out on stretchers. But with all the talk of which US oil companies are now set to go to the wall, implying reduced supply, it may be time to look at those companies that can survive and maintain dividends. If you are stout of heart, that is. At least, that’s the call from some stout-of-heart US fund managers right now.

Wider Implications

WTI crude fell initially in last night’s session by about another dollar before finding support and rallying to be up slightly. It is currently down slightly on the session. The Dow fell 245 points in the morning before rallying back to be down 160 points. It was all about oil.

Traders were clearly hiding in the big tech space while the oil story played out. Hence we see the Nasdaq flat on the session. The S&P split the difference.

It might be all about oil, but wider implications threaten the US financial sector. Billions had been lent to mostly smaller shale oil companies by mostly smaller regional banks in the US at pervading low interest rates, against hedged barrels. Those hedges have now rolled off, the Fed is about to begin a tightening cycle, and many a shale producer was already burning cash under US$60/bbl, let alone under 40.

Wall Street is thus nervous about the flow-on effect into the financial sector. This is not the case in Australia. Outside of BHP, Australia’s Big Oil names are heavily exposed to LNG rather than crude, and the big LNG projects are financed mostly through pre-organised offtake agreements and, as is the case recently for Santos for example, fresh equity. Australia’s banks are negligible lenders to the energy sector.

Until oil can find a bottom, or at least some stability, the spectre of energy sector defaults and bankruptcies will worry Wall Street. The irony is, of course, that the more oil companies go bankrupt, or at least throw in the towel, the more likely the oil price is to stabilise on reduced production.

Commodities

West Texas is down US5c to US$37.57/bbl and Brent is down US45c to US$40.21/bbl.

In Australia, the focus is as much on iron ore as it is on oil, whereas in the US, oil is the far more dominant stock market sector of the two. Iron ore has not seen 6% overnight plunges and is not prone to such volatility, being more of a China-dominated rather than global market place and trading nothing even remotely close to the volumes that go through the oil market each day.

There is no doubt concern, nevertheless, that as the iron ore price continues to quietly slide – it’s down another US10c to US$38.80/t – there appears no reason for a bottom-picking cavalry to suddenly appear for a short-covering scramble to hint at possible consolidation. Thus junior Australian iron ore miners who are burning cash are facing heightened financial risk. But again, Australia’s banks are not in the business of lending vast sums to junior miners.

On the LME, activity has almost ground to a halt. Traders suggest end-of-year blues and next week’s Fed meeting are keeping the punters away at the moment. Last night saw mixed and smallish moves among the base metals, with the highlights being one percent falls for nickel and tin and a one percent rally for lead.

The commodity price issue has taken further toll on the Aussie dollar, which is down another 0.8% at US$0.7208. The US dollar index is also down, by 0.2% to 98.44, and gold is relatively steady at US$1073.80/oz.

Today

The SPI Overnight closed down 23 points or 0.5%. A breach of 5100 threatens for the ASX200.

Yesterday’s NAB business confidence survey was fairly benign, but today we’ll see Westpac’s consumer equivalent which has particular importance at this time of the year. We’ll also see housing finance data, which is also a strong focus of attention at present.

Beijing will release Chinese inflation data today.

 

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

Consensus forecasts are for tonight’s US November non-farm payrolls report to show 200,000 new jobs added, and if this is the case the Fed will hike in December. But for the past few months, forecasts have been mostly way off the mark. Could a low number derail the hike?

Unlikely, not unless it is ridiculously low, and even then the Fed (a) would probably suspect statistical noise and assume a revision the following month anyway and (b) has seemingly already decided to raise no matter what, despite insisting the decision remains “data dependent” at this last stage. To not raise would be to lose all credibility, and no hike likely would create the sort of market volatility, driven by uncertainty, the Fed is trying to avoid in the first place.

OPEC holds a regular six-month meeting tonight at which, typically, production quotas are reset. But it was this meeting last year that set off the big plunge in the oil price when Saudi Arabia decided not to defend the price through cutting its own production, given US shale was the reason for oversupply.

Saudi Arabia is now pumping out as much as it can sell, and while the oil rig count in the US has fallen, US crude inventories have still risen for ten weeks in a row. OPEC members may tonight well talk about a possible production cut down the track but not now, and even it a production cut were announced, never in OPEC history have members ever stuck to those quotas.

But strap in for an oil price surge were cuts to be announced.

The focus next week will return to China. Across the week Beijing will release November trade, inflation, retail sales, industrial production and fixed asset investment numbers.

A quieter week economically in the US leaves really only Friday’s retail sales number to sway the Fed, if at all it can, with inflation data due out the following week.

In Australia we’ll see ANZ job ads, the NAB business and Westpac consumer confidence surveys and our own jobs report.

The AGM season is now over bar the shouting but stragglers do include the banks. Westpac ((WBC)) meets on Friday while National Bank ((NAB)) will provide a UK update on Tuesday. Market darling du jour (et tous les jours) CSL ((CSL)) will host an R&D update on Thursday.


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article 3 months old

The Overnight Report: Dashing Through The Snow

By Greg Peel

The Dow closed up 168 points or 1.0% while the S&P gained 1.1% to 2102 and the Nasdaq added 0.9%.

Buy Australia

It’s unclear exactly who waved the flag, but whatever the case offshore investors decided yesterday, the First of December, was the day to Buy Australia after a period of weakness for the local index. That weakness has been as much due to company specific issues (think BHP, Woolworths for example) as it has to any macro consideration. And the fact the 5% fall in the Chinese stock market last week now appears to be a blip likely helped.

The investment strategy of yesterday’s buyers becomes clear if we break down the sector moves. The winners were consumer staples (2.8%), telcos (2.4%), consumer discretionary (2.3%), materials (2.3%) and financials (2.1%). We then drop to energy (1.5%) and thereafter, no sector move exceeded 1%.

In the big movers we see an intersection of the subsets of yield (staples, telco, banks and big miners, although don’t count your chickens on the last one) and beaten-down large caps (banks, BHP, Woolies). The consumer sector moves also provide evidence of short-covering (Metcash, Dick Smith).

 We also see evidence of the offshore element in an Aussie dollar that is up a full cent to US$0.7327 over 24 hours. Some of that is overnight due to the US dollar index being down 0.4% to 99.76, and some of it was due to yesterday afternoon’s “on hold” from the RBA. But the currency moved steadily up all day.

Yesterday’s RBA rate decision did not come into play in the local equity market. The ASX200 was up a hundred points by lunchtime and held that through the afternoon rate decision. But the statement did confirm stock market investors have the luxury of knowing the “RBA Put” remains in place. Glenn Stevens could not have made it any clearer:

“At today's meeting the Board again judged that the prospects for an improvement in economic conditions had firmed a little over recent months and that leaving the cash rate unchanged was appropriate. Members also observed that the outlook for inflation may afford scope for further easing of policy, should that be appropriate to lend support to demand.”

Everyone’s a winner.

In terms of economic conditions that have “firmed”, yesterday’s local data releases supported that thesis.

Australia’s current account deficit did not narrow in the September quarter by as much as economists had forecast but the terms of trade suggested a sizeable 1.5ppt contribution to today’s GDP result, ahead of 1.2ppt predictions. With all the angst created by falling commodity prices, it is often lost on observers that export volumes remain robust, and that the lower Aussie is offsetting price falls.

Australia’s manufacturing PMI improved for the fifth consecutive month in November, rising to 52.5 from 50.2 in October.

Building approvals rose 3.9% in October, against expectations of an easing. The annual pace of approvals has nevertheless eased to 12.3% from 21.4% in September, but this reflects lumpy apartment block approvals. A cooling in runaway apartment block construction is not a bad thing as it alleviates “bubble” fears. Ditto a 1.5% drop in average house prices. Construction will continue to support the economy for a little while yet, but not scare economists or the RBA.

Consensus forecasts for today’s September quarter GDP result are for 0.8% quarterly growth and 2.4% annual growth.

Disappointment

To the north, China’s economy is not showing signs of “firming”.

Beijing’s official manufacturing PMI slipped to 49.6 from 49.8 last month when economists were hoping for a steady result. Four consecutive months of contraction represent the longest run since the GFC. Caixin’s equivalent PMI preformed a little better, rising to 48.6 from 48.3, but still representing faster-than-official contraction.

Yet we must once again be mindful of Beijing’s attempts to shift China’s economy away from exports and towards consumption. The official service sector PMI came in at 53.6, up from 53.1. And the Chinese data appeared to have no effect on the Australian market yesterday, when in the past the response has often been substantial.

Around the grounds, Japan’s manufacturing PMI rose to 52.6 from 52.4, the eurozone rose to 52.8 from 52.3 and the UK slumped to 52.7 from 55.2. The most disturbing result came from the US, which saw a fall to 48.6 from 50.1.

That You Santa?

US economists had expected 50.5. It’s the first fall into contraction for US manufacturing since November 2012 and the lowest reading since June 2009, at the depths of the GFC. The last time the Fed raised rates when the US manufacturing sector was in contraction was in 1981, when inflation was 10%.

But ultimately this didn’t faze Wall Street last night. US investors had clearly made up their minds that on the First of December, they will buy US stocks as well as Australian stocks, with a preference for those that have been beaten down over the year. Such is the December theme, and one of the factors behind the famed Santa Rally.

The indices did suffer a rapid pullback from early strength when the PMI result was released, but it did not last long. Wall Street was in buying mode.

In contrast to the weak manufacturing data was last night’s consumer data. Wall Street continues to shake its head at the ongoing surge in US car sales, led by low petrol prices and low finance costs. Total sales for November were 18.2m, up from 17.2m a year ago. The big winner in the month was Toyota. No prizes for guessing the biggest loser (dak, dak, dak).

The weak manufacturing data did, nevertheless, spark a flight into US bonds for the first time in a while. Having fallen into a slumber of late, last night the US ten-year yield fell 6 basis points to 2.15%. Commentators were nevertheless quick to suggest this does not imply the US bond market has decided there may not now be a Fed rate hike this month. They have decided that the pace of subsequent hikes will be very, very slow.

Commodities

One would expect a combination of weak manufacturing data for both China and the US to be negative for base metal prices, but base metal prices have been pretty well thumped of late. Thus on the relief of the drop in the greenback overnight, prices rallied somewhat. Aluminium rose 2%, zinc rose 1.5% and copper, lead and nickel rose around 1%.

The trend is not good for the iron ore price. A US$1.20 fall overnight to US$41.60/t suggests a number with a three in front of it may well be on the cards.

The oils had another quiet session last night, as markets await the outcome of Friday’s OPEC meeting. West Texas is little changed at US$41.59/bbl and Brent is down US37c to US$44.18/bbl.

Gold is up US$3.70 at US$1068.60/oz.

Today

The SPI Overnight closed up 3 points.

Australia’s GDP result is out today as noted, while RBA governor Glenn Stevens will speak in Perth.

Wall Street will see private sector jobs tonight, ahead of Friday’s non-farm payrolls report.

Collins Foods ((CKF)) will report its interim result today, and Fletcher Building ((FBU)) will hold an investor day.
 

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: Eyes On China

By Greg Peel

The Dow closed down 78 points or 0.4% while the S&P lost 0.5% to 2080 and the Nasdaq fell 0.4%.

China Slam

It was a relatively benign first hour of trade on Bridge Street yesterday, suggesting the market was not quite sure how to assess overnight developments. It was sure that a $7bn lawsuit against BHP Billiton ((BHP)) was not good news, hence that stock unsurprisingly closed down 3.6% on the day, sending a materials index, also hit by lower base metals prices on Friday night, down 2.4%.

But the Shanghai index had suddenly fallen 5.5% on Friday evening after the close on the ASX, and it was anticipated the renminbi was about to be included in the IMF’s basket of global reserve currencies. Should Bridge Street be nervous?

The answer came at 11am local time when the daily fix by the PBoC for the renminbi was lowered, meaning devaluation. The last time the PBoC devalued the renminbi the Chinese stock market reacted badly, but at the time it was already in crashing mode. Either way, a wave of selling hit both the Australian and Japanese stock markets ahead of the open in China.

Whether or not the fact it was the last day of the month had anything to do with it, the ASX200 did not recover by the close. As it was, the Shanghai index was indeed down another 3% after the close on Bridge Street, but from there it recovered to be up slightly on the session. Nothing, it would seem, to be concerned about there.

Nor was there anything to be concerned about in yesterday’s Australian data releases.

September quarter company profit growth came in at a better than expected 1.3%, with the non-mining sector posting an encouraging 4.4%. Private sector credit grew by 0.7% in October to mark a solid 6.7% annual rate, with business credit leading the way – also encouraging. TD Securities’ November inflation gauge showed 0.1% growth at the headline, for 1.8% annual, and 1.6% annual for the core rate. The numbers are edging up to the RBA’s target 2% without running away.

Aside from the macro, yesterday on the local bourse was an interesting one for those who keep an eye on stocks that are heavily shorted.

At almost 25% shorted according to ASIC data, and thus top of the pops, supermarket try-hard Metcash ((MTS)) enjoyed a 12% share price bounce on short-covering yesterday after posting a better than expected half-year result. Slapped down ambulance chaser Slater & Gordon ((SGH)), 16% shorted, jumped 34% just by reiterating guidance. But troubled electronics retailer Dick Smith ((DSH)), 11% shorted, could not even encourage the shorters to cash in by issuing yet another profit warning. Dick shares fell 58%.

[Note: All major short positions are tabled in FNArena’s weekly Short Report.]

Hangover

Consumption is the driving force of the US economy and thus Christmas retail sales are of vital importance. Returning from the long weekend, Wall Street traders are still trying to assess the success or otherwise of this year’s Black Friday sales. What initially seemed like discouraging results have been tempered by the news, according to a survey, that more Americans shopped on line on Friday than in stores. Yet last night was Cyber Monday, the “traditional” online shopping day, so until the full picture emerges in a few days Wall Street is biding its time.

It was also the last day of the month, and no one seemed much in the mood to buy. Selling quietly accelerated to the close. The Dow closed the month pretty much where it started, despite some ups and downs.

The day’s data releases were mixed. The Chicago PMI dropped sharply back into contraction in November at 48.7, down from 56.2 in October. Pending home sales ticked up 0.2% in October after two months of declines.

As the new month dawns tonight, Wall Street will be looking ahead to Friday’s jobs number and its implications for monetary policy. Consensus suggests that as long as the result is not a shocker to the downside, a Fed rate hike is baked in.

Commodities

Commodities markets are similarly on watch, not just for US dollar implications but also for today’s PMI data out of China. The greenback is up only slightly at 100.18.

After several volatile sessions, the base metal market quietened down last night. Aluminium dropped 0.8%, nickel rose 0.8% and lead jumped 1.6%, but all other moves were negligible.

The same cannot be said for iron ore unfortunately, which fell another US70c to US$42.80/t.

The oils had a quiet night, with West Texas down US22c to US$41.62/bbl and Brent down US31c to US$44.55/bbl.

Gold managed to rally back US$8.30 to US$1064.90/oz, but closed down 6.7% for the month.

The Aussie dollar did not much react yesterday to reasonable local data but is up 0.5% over 24 hours at US$0.7232, despite little movement in the greenback.

Today

The SPI Overnight closed up 2 points.

It’s a big day for data today.

Locally, the September quarter current account will be released which includes the terms of trade. Monthly building approvals are also due, as is the local manufacturing PMI.

The RBA will issue its statement this afternoon which will be highly scrutinised, despite no one expecting a rate cut.

It’s PMI day across the world today, with manufacturing numbers also due from Japan, the eurozone, UK and US. But all eyes will be on four numbers out of China – Beijing’s official November manufacturing and service sector PMIs, and Caixin’s independent equivalents.

ALS ((ALQ)) will hold an investor day today.
 

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

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

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

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article 3 months old

The Monday Report

By Greg Peel

Mixed

With no Wall Street on Thursday night, Friday was never going to be a big session on Bridge Street. However strong gains for oil and base metals prices overnight, and a slight tick up for iron ore, ensured a solid start. The ASX200 was up 48 points from the open.

But if you’d blinked you would have missed it, as the index came right back down again before meandering to an insignificant close. While energy was able to lead the way with a 1.1% gain, materials slumped to a 0.4% fall. A pall still hangs over BHP Billiton and its dividend, and news over the weekend is that the Brazilian government is suing BHP and Vale for over $7bn for the dam disaster.

Elsewhere most sectors closed flat with the exception of utilities, down 1.8%. The market has voiced its disapproval of Spark Infrastructure’s involvement in the Transgrid consortium.

China

Bridge Street was winding to a close when the Shanghai stock market suddenly plunged on Friday evening to close down 5.5% for the session.

Neither the Chinese nor Australian stock markets showed much of a response earlier when Chinese industrial profits showed a 4.6% year on year fall in October, down from a 0.1% fall in September. Markets are currently taking Chinese economic weakness in their stride. The trigger for the Shanghai sell-off – the biggest since the August crash – was news the Chinese government is investigating several major brokerages for insider trading.

The news represents a widening of the investigation begun in August, growing to include the country’s largest brokerage firm Citic Securities. At the same time, China’s market regulator announced on Friday that Citic, a state-owned enterprise, had overstated the value of its derivatives portfolio by no less than one trillion renminbi, or around US$157bn.

If China’s stock market begins another sell-off, it will not be helpful for Santa. However, given the level of government intervention which finally halted the slide in August, one wonders just how far Chinese investors are game to sell down the market.

Meanwhile, the IMF is today expected to announce the addition of the Chinese renminbi into its basket of special drawing rights currencies, representing global reserve currencies. The addition follows Beijing’s clumsily handled “floating” of the renminbi a couple of months ago, which amounted to a significant devaluation and caused further global market angst. The renminbi will join the US dollar, euro, pound and yen.

Not So Black

It was a half-day session on Wall Street on Friday night, squeezed in between the Thanksgiving holiday and the weekend. Only the skeletons were in attendance. No surprise that activity was minimal and the indices closed flat. The Dow fell 14 points or 0.1%, the S&P was little changed at 2090 and the Nasdaq rose 0.2%.

For those who did draw the short straw, the focus was on the annual Black Friday sales fest. As the day progressed it soon became apparent America’s answer to Australia’s Boxing Day sales was proving to be a fizzer. Department store shares were sold down as a result.

But it was only a fizzer in terms of foot traffic in the big US bricks & mortar establishments. Online sales actually jumped 15% from last year, despite the fact the online equivalent is meant to occur tonight – Cyber Monday. The reality is the whole Black Friday/Cyber Monday thing has become an anachronism, and very blurred around the edges. Suffice to say in future the days after Thanksgiving will remain America’s biggest shopping days, just not under old-fashioned labels.

The only reason the Dow did not close flat was a 3% fall in Disney shares, thanks to news the company’s iconic ESPN sports network has lost three million subscribers in a year. The loss represents another example of “cord cutting” in the US – the shift away from cable television to online streaming services such as Netflix. In the case of sport, the major US sporting leagues are quietly shifting to their own live streaming services, thus drawing both content and viewers away from the likes of ESPN. The news in Australia last week is that the NRL will now jump on the streaming bandwagon, following in the footsteps of the AFL.

Bricks & mortar retailing and fixed-time television. Vale.

Commodities

The fall in the Shanghai stock market on Friday pushed the yen lower, given Japan’s trade dependency with China. This pushed the US dollar higher, to the point the index was able to raise its bat and salute the crowd. It’s up 0.2% at 100.09.

The combination of the stronger greenback and the potential of another Chinese stock market crunch was not what volatile metal markets want to contemplate, not to mention the 4.6% fall in Chinese industrial profits, within which the biggest falls were posted by China’s resource sector. Thus after a wild week, base metals prices finished Friday night with another round of steep falls.

Copper and lead fell over 1%, and aluminium, nickel and zinc all fell 3.5%. Tin was again the only non-mover.

Over the weekend, China’s nine biggest copper smelting companies met and agreed to cut production in 2016 by 200,000t or 5%. We shall await the LME response tonight.

Iron ore fell US10c on Friday night to US$43.50/t.

Gold fell US$14.00 to US$1056.60/oz as the dollar index reached the ton.

On the stronger greenback, the oils were weaker again. The geopolitical premium added last week following Turkey-Russia tensions has now waned as escalation fears have subsided. West Texas is down US54c to US$41.84/bbl and Brent is down US51c to US$44.86/bbl.

Lower commodity prices and strength in the greenback saw the Aussie down 0.5% on Saturday morning at US$0.7194, ahead of tomorrow’s RBA meeting and Wednesday’s GDP result.

The SPI Overnight closed down one point.

The Week Ahead

Wall Street will be quickly awoken out of its long weekend slumber this week with a raft of data releases, culminating on Friday with the all-important jobs report.

Tonight sees the Chicago PMI and pending home sales, Tuesday it’s construction spending and vehicle sales, Wednesday private sector jobs, Thursday factory orders and chain store sales, and Friday brings trade data along with non-farm payrolls. Tuesday also sees the manufacturing PMI and Thursday the services PMI, while the Fed’s Beige Book will be released on Wednesday and Janet Yellen will make a speech.

Tuesday is manufacturing PMI day across the globe, including in Australia, but China’s calendar now has both Beijing and Caixin publishing both their manufacturing and service sector PMIs on the first day of the month. The rest of the world will release service sector PMIs on Thursday.

The ECB will hold a policy meeting on Thursday, at which a QE extension is expected to be announced.

OPEC will meet on Friday but despite a lot of talk about oil price stability, is not expected to alter current production quotas.

It’s a busy week for Australian data, culminating in Wednesday’ September quarter GDP result.

Quarterly data releases beforehand include company profits and inventories today, and the current account, including the terms of trade numbers, tomorrow. There is also a raft of monthly data due out this week, including private sector credit and the TD Securities inflation gauge today, building approvals tomorrow, the trade balance on Thursday and retail sales on Friday.

The RBA will meet tomorrow and leave its rate unchanged, and Glenn Stevens will speak in Perth on Wednesday.

On the local stock front, the AGM season is now all but over outside of a trickle of stragglers meeting in December. Collins Foods ((CKF)) will report its half-year result on Wednesday.

On Friday, quarterly changes to the S&P/ASX stock indices will be announced, pending implementation on December 18.

Rudi will appear on Sky Business on Thursday at noon and again between 7-8pm for the Switzer Report.
 

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

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article 3 months old

The Overnight Report: Armistice

By Greg Peel

The Dow closed down 55 points or 0.3% while the S&P fell 0.3% to 2075 and the Nasdaq lost 0.2%.

Confident

The local market opened yesterday on news Australian consumers are feeling rather confident. Westpac’s consumer confidence index for November showed a 3.9% lift to 101.7, the highest level since May.

Within the components of the index, the biggest rise came from expected economic conditions in the next five years. Is this the so-called Turnbull Factor at play? The weakest result was in family finances compared to a year ago, but this is likely the impact of the banks’ out-of-cycle mortgage rate increases.

Whatever the case, retailers will be relieved to know confidence is on the optimistic side of the ledger as we head into Christmas. The most relevant sector here is consumer discretionary, which we recall on Tuesday fell heavily following the apparent tip-over of housing finance growth numbers. Consumer discretionary was up 0.6% on the session but this was not a stand-out result, merely in line with the overall index movement.

It was a very choppy session on Bridge Street yesterday, highlighting indecision amongst investors as we head towards the summer break. Twice the index rallied before turning tail and threatening to go negative, until finally the buyers won on the day. The BHP factor still hangs over the materials sector, which was down 1%, but otherwise all other sectors posted roughly similar gains.

It should have been a session in which China’s monthly data dump played a part, but for some reason Beijing decided it would release those numbers not at midday, our time, as has always been the case, but at 4.30pm, after Bridge Street’s closing bell.

Tentative Signs

China’s October industrial production showed 5.6% year on year growth, down from 5.7% in September and missing expectations of 5.8%. Fixed asset investment rose 10.2% year to date, in line with September but below 10.3% forecasts.

That was the bad news, before a backdrop of Beijing’s stimulus measures to date.

The good news was 11.0% growth in retail sales, up from 10.9% in September and marking the fastest pace of growth since December 2014. It is no secret China’s industrial sector is still struggling from overcapacity that Beijing seems reluctant to address, but given Beijing’s goal of swinging the Chinese economy around into one of consumption, this retail sales number seems a positive step down that path.

Further evidence of the rise of the Chinese consumer was provided yesterday by much talked about “Singles Day” – a reference to the date, 11/11. Singles Day is an online shopping spree along the lines of Cyber Monday in the US when online retailers offer discounts on their products and shoppers go nuts. It was introduced by Alibaba, China’s eBay, in 2009, and the closest thing we can compare it to in Australia is the bricks & mortar Boxing Day frenzy.

Singles Day turned over US$14bn yesterday, up from US$9bn last year.

Thin

By contrast, US department store icon Macy’s posted its quarterly earnings result last night and missed on the revenue line, resulting in a 14% share price shellacking. The company blamed the strong US dollar for lower sales to tourists and an unseasonably warm autumn crimping winter-wear sales, but failed to acknowledge the slow demise of the bricks & mortar department store globally.

There is little likelihood the digital age will usher in the death of beer, so the positive news on the night was an agreement between Anheuser-Busch InBev and SABMiller, two of the world’s biggest brewers, to merge, no doubt pending approval from relevant competition regulators.

These were about the only talking points last night in a session where US banks and the bond market were closed for Veterans Day and stock and commodity market attendance became optional. There were no data releases to speak of, volumes were thin, and without any particular incentive at present, the indices drifted lower. Mostly on lack of interest.

Commodities

Oil markets are “surprised” every week by weekly US inventory data, and I think John D. Rockefeller was the last person to actually make a correct forecast. But last night two separate surveys had the oil markets expecting a 500,000 barrel increase in US crude supplies or a 1.1m barrel increase, so when the number came in at 6.3m barrels the only way for oil prices to go was down.

West Texas is down US$1.15 or 2.6% at US$43.08/bbl and Brent is down US$1.59 or 3.4% at US$45.92/bbl.

The oils fell despite some respite from the US dollar, which has pulled back 0.3% to 98.95 on its index.

The weaker dollar was welcomed on the LME, which was otherwise disappointed in the weak Chinese industrial production and fixed asset investment numbers. The market remains very short, so gains were actually seen in all bar lead, while zinc recovered a percent having fallen two percent the night before.

Iron ore is again unchanged at US$47.70/t.

A combination of the strong local consumer confidence numbers and a weaker greenback has the Aussie up 0.5% at US$0.7060.

Today

The SPI Overnight closed down 17 points or 0.3%.

The local October job numbers are out today, providing the first opportunity for new treasurer Scott Morrison to test out his spin credentials.

Amidst another flurry of AGMs, Graincorp ((GNC)) will release its full year result.

Rudi will make his weekly appearance on Sky Business, Lunch Money, noon-1pm.

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: Deliberation

By Greg Peel

The Dow closed up 27 points or 0.2% while the S&P gained 0.2% to 2081 and the Nasdaq fell 0.2%.

House of Cards

Much has been made in the popular press of the OECD’s downgrade of its forecast GDP growth rate for Australia in 2016 to 2.6% from a previous 3.0%, reflecting slower Chinese growth. The reality is that organisations such as the OECD, IMF and World Bank tend to run a good six months behind the curve. Last week the RBA tightened its own forecast for FY16 to 2.25% from an earlier forecast band of 2.0-3.0%, and tightened its FY17 band to 2.75-3.75% from an earlier 2.5-4.0%.

Give it another six months and the OECD might catch up. Local economists are constantly reviewing their forecasts so the bottom line is yesterday’s OECD numbers would have had little impact on the market.

Critical to Australia’s GDP growth, ahead of the impact of the lower Aussie dollar finally flowing through to benefit non-mining sectors of the economy, is the housing construction boom. It alone has kept Australia out of recession over the past two years as mining investment and commodity prices have collapsed. Therefore yesterday’s housing finance numbers were something the market did pay close attention too.

The value of housing loans fell by 1.6% in September, to a lower annual rate of 12.4% growth. Owner occupier loans rose by 3.0% to be up 23.1% but the critical segment of investor loans fell by a whopping 8.5% to turn negative annually at minus 2.1%.

The party is over.

It is easy to point to tighter regulatory controls on investment lending, implemented by APRA, encouraged by the RBA and responded to by the banks with mortgage repricing, as the reason behind the peak in Australia’s investment housing boom. But realistically the tide was already turning, given property prices have been running away but rents have not been keeping pace. Mortgage repricing was just the straw that broke the camel.

Negative gearing might be the Holy Grail in Australia but it’s called “negative” because it simply means losing money. As the gap from rental yield to debt servicing obligation widens, the capital value increase required on the property to recover that negative cash flow becomes unrealistic. Either rents must rise (can you see the Chinese coming in and renting everything in Sydney?) or debt costs must fall (currently at historic lows, banks now in tightening cycle) or the investment is not economically viable at the price.

It is telling that the worst performing sector on the local market yesterday (outside a 2% fall for tiny info tech) was consumer discretionary, down 0.9%. The banks also came in for punishment, down 0.6%. The ASX200 did manage to stage a solid comeback on late buying, having been down 72 points mid-afternoon to close down only 20, but most of that buying was seen in the beaten-down resource, telco and consumer staples sectors. Consumer discretionary has very close links to Australia’s housing market.

It was a bumpy ride for the index yesterday, punctuated by the midday release of China’s October CPI. It fell to 1.3% annual from 1.6% in September, which had fallen from 2.0% in August. That’s bad news, but good news if bad news implies expectations of more concerted stimulus measures from Beijing. Bridge Street struggled to make up its mind over the implications, evidenced in index rocking and rolling through the afternoon but at least one big buy order late in the day reflected a mind made up.

The actual good news is Australian businesses otherwise believe conditions are very positive at present, thanks to low interest rates and a lower currency. NAB’s October business survey showed the conditions index steady at plus 9 – well above the long-run average of plus 1 and the best reading since the GFC. Confidence fell from the long-run average of plus 5 seen in September to plus 2.

Interestingly, the survey was conducted in the final week of October when substantial profit warnings were being issued by the likes of Dick Smith and Woolies, and the banks were posting disappointing earnings results and guidance. Home sales data was also released showing the first drop in however long. No wonder confidence was dented.

Yesterday’s late rally, which took us from an onerous looking 5050 back to a 5100 close, may indicate a willingness from buyers to pick up stocks above the 5000 level, but we’ve seen this movie before. Further weakness, and a drop through 5000, can take us down fast.

Whole lotta not much

There was not a lot going on on Wall Street last night beyond a few micro-specific issues. Traders are still trying to figure out if a December Fed rate hike is good or bad.

Lacking anything much else to focus on, traders were glued to the gripping saga that was McDonalds’ investor day. How is the all-day breakfast going? OMG, they’re going to change the recipe for the Egg McMuffin. (How does one fiddle an egg, and a muffin?) And they’re not going to spin off McDonalds’ property portfolio into a REIT, a la Woolies and Bunnings for example, downunder. Mickey D’s stock price went up and down all day with each new revelation.

Just goes to show what a lacklustre session it was. The other news was that Apple component suppliers were experiencing a slowing in demand. Apple shares thus kept a lid on the indices, despite this hardly being a surprise given aficionados always barrel in on Day One to buy new iThings, and sales always slow thereafter.

Tonight is promising to be even more lacklustre on The Street, given the Veterans Day quasi-holiday has US banks and the bond market closed and stock and commodity markets open.

Commodities

A technical breach was blamed for a sudden 2% price fall for zinc on the LME last night, while otherwise base metal movements were mixed and small. Copper fell half a percent and tin rose a percent.

Iron ore was unchanged at US$47.70/t.

The oils are both up US28c, to US$44.22/bbl for West Texas and to US$47.51/bbl for Brent.

The US dollar index is up 0.3% at 99.26 so gold is US$2.90 lower at US$1087.80/oz.

The Aussie is down 0.4% at US$0.7023, reflecting those weak housing loan numbers.

Today  

The SPI Overnight closed up 3 points.

Westpac’s local consumer confidence survey is out today but around midday we will see Chinese industrial production, retail sales and fixed asset production numbers for October, which will likely determine the direction of afternoon trade.

As noted, it’s a quasi-holiday in the US tonight.

On the local stock front, there are quite a few AGMs booked in for today while DuluxGroup ((DLX)) will report full-year earnings and Westpac ((WBC)) goes ex.
 

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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 Overnight Report: Rough Take-Off

By Greg Peel

The Dow closed down 179 points or 1.0% while the S&P fell 1.0% to 2078 and the Nasdaq fell 1.0%.

Tragedy

A dismal day on the local stock exchange was led out by BHP Billiton, which posted a 5.6% drop on news of a fatal disaster at a BHP-Vale-owned iron ore mine in Brazil. Early estimates suggest the mine may be closed for several years and cost US$1bn in clean-up and legal costs.

It was never set to be a good day for the materials sector anyway, as evidenced by falls in iron ore mining stocks across the board. The weekend’s Chinese trade data showed a big fall in imports in general and iron ore imports in particular. To date the sector has seemed not too concerned over the gradual fall in the iron ore price to below US$50/t as this has been largely anticipated and costs have been cut in preparation. But the weak Chinese numbers have crystallised the reality. The materials sector fell 3.7% yesterday.

The energy sector saw a 2.5% fall but elsewhere across the index, the other concern is that of rising US interest rates. Friday’s strong US jobs number has led to expectations the Fed will definitely raise in December, and attention now turns to just how fast the pace of subsequent hikes will be.

For years the Australian stock market has largely been a story of yield, given the fall in commodity prices. The banks, telco and utilities and any stock paying a solid dividend have been supported by those seeking a return in a low interest rate environment. Rates don’t get much lower than zero, hence Australian stocks have been very attractive to US investors. As the interest rate differential between Australia and the US begins to narrow, that attraction is incrementally eroded.

Yesterday saw the banks and telcos each down 1.6% and utilities down 2.2%. Only one sector managed to close flat on the session and that’s healthcare – defensive more so from its undeniable growth story than from its yield.

A US rate rise also alleviates some of the pressure on the RBA to cut its own rate, given the subsequent impact on the Aussie dollar, which will disappoint those sweating on further RBA support.

The ASX200 was technically damaged yesterday. The close below 5140 and the promise of further weakness today suggests, on the charts, that 4700 is the next target.

Adjustment Period

History tells us that a period of “normalisation” – lifting rates back to more normal levels – following a period of easing is typically accompanied by a stock market rally over the first four rate hikes. While normalisation implies the winding down of central bank support, that winding down is an indication the economy is growing again and, in normal circumstances, that is good for a stock market. But that does not mean the initial adjustment is not a difficult one.

It has been over ten years since the Fed commenced a tightening cycle – 2004, following the tech wreck and 9/11. Many commentators have alluded to the fact that not only is there a large cohort of younger market participants who can’t conceive that “social media” used to mean one landline telephone on the hall table, and who can’t read analogue time, they have never experienced a rate rise. Thus if the first move in a tightening cycle requires a bumpy period of portfolio adjustment and a rethinking of strategies, this time around that adjustment may be even more bumpy.

Throw in the fact that the UK is still hesitating on a wind-back of its QE program, Japan may yet increase its QE program, the eurozone is certain to extend its QE program in December, and China is all but certain to enact further stimulus measures, including a potential further devaluation of the renminbi, and there is only one way the US dollar can go.

The stronger US dollar is already impacting on large US multinationals, as this latest round of earnings reports confirms. The US manufacturing sector had been managing to get back on its feet post GFC but it is now faced with less competitive pricing power. In short, a Fed rate rise may imply a stronger US economy but a surging US dollar means the economy is dragging a heavy weight along with it.

Wall Street was somewhat stunned on Friday night by the shock jobs number, and its implications. With the weekend to think about it (and throw in the weak Chinese data), last night saw the Dow fall by as many as 243 points by midday. The combination of the stronger dollar (albeit last night the dollar index came back off a tad to 98.96) and further signs of weak Chinese demand sent all commodity prices lower again.

Stocks have managed to regain some ground to the close, falling an even 1% across the major indices. The S&P500 has broken support at 2100.

Santa? Please phone home.

There had been talk, in the wake of Wall Street’s 8% rebound out of the August depths, back to the level from which it had fallen, that perhaps this year the Santa rally came early. That rally was aided by a return to stability in Chinese markets, boosted by ECB QE, and confirmed by two weak US jobs reports for August and September that left Wall Street certain the Fed would not be raising in 2015.

Now that all has to be rethought. Once the difficult adjustment period is over, perhaps then can Santa hop back on the sleigh.

Commodities

The US dollar index was slightly lower last night but the weak Chinese trade data ensured falls across the board on the LME. Aluminium, lead, nickel and zinc were all down over 1% while copper and tin posted smaller falls.

A sad reality of the tragedy in Brazil is that prolonged closure of the mine reduces global iron ore supply, and hence is supportive for the iron ore price. Iron ore is up US30c to US$47.70/t.

Weakness in oil prices continued, with West Texas down US49c to US$43.94/bbl and Brent down US37c to US$47.23/bbl.

There was some respite for gold thanks to the dip in the greenback. It’s up US$3.40 to US$1090.70/oz.

The Aussie is relatively steady at US$0.7052.

Today

The SPI Overnight is down 52 points or 1.0%. If accurate this implies a fall through 5100 for the ASX200 and a move towards tenuous support at 5000.

Australian housing finance data – a hot topic at present – will be released today. NAB will publish its October business confidence survey.

Beijing will post China’s October inflation numbers later today.

The local market will see earnings reports from Incitec Pivot ((IPL)) and Eclipx ((ECX)).
 

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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