Tag Archives: Coal and Steel

article 3 months old

The Overnight Report: Afterglow

By Greg Peel

The Dow closed up 98 points or 0.5% while the S&P gained 0.7% to 2177 and the Nasdaq rose 0.8%.

Well Resourced

In the footsteps of the BoJ, the Fed was next to give the Australian market cause to recover yesterday. But buying was by no means evenly spread.

Finally we did see the beaten down junior telcos catch a bid, sending that sector up 1.0%, but while yield stocks had been the biggest victim of Fed rate rise fears leading into the September meeting, they did not recover any ground yesterday. The banks and consumer staples were both flat, and utilities fell 0.7%.

While industrials and healthcare put in decent performances, it was left to the resource sectors to drive the index higher. Energy rose 2.1% and materials 2.6%.

If yield stocks and resources were sold down ahead a Fed meeting that might have brought a rate hike, why have only resources recovered on no rate hike? Perhaps it’s because yield stocks were being called overvalued two weeks ago and resource stocks were not.

The odds of a December Fed rate hike have now firmed to over 60%. Is it worth pushing the PEs of yield stocks back up again over the next three months just to go through the same Fed hike sell-off? What we’ve likely seen is a rebasing to more realistic valuations.

Resource stocks were never called overvalued, rather there was only concern among analysts that rallies in the prices of iron ore, coal and oil would not prove sustainable. But those analysts have quietly begun to change their tune. There may yet be some price pullback, but more and more commentators have decided the trough in commodity prices is now in place, and the outlook for resource companies is much brighter following cost cuts and debt reductions. Cash is flowing in abundance.

A stronger US dollar is still the enemy of commodity prices, and a Fed rate hike would push the greenback higher, but at the end of the day demand and supply rule the commodity space.

That said, I noted yesterday that we’d have to wait until this morning to see how base metal prices responded to the no Fed rate hike given the LME was closed when the action started on Wall Street. Well, base metal prices all soared last night.

Gold has stalled following Wednesday night’s rally while oil is higher again and iron ore is up. It should be another good day for the resource stocks on the local bourse, with the futures suggesting up 27.

That would take the ASX200 up to 5400 once more.

Now What?

Suddenly there was a vacuum of anticipation, debate and argument last night on Wall Street given the central bank race has now been run and, as far as equity markets are concerned, won. So it’s back to TINA.

Given more than half of the market now believes a December Fed rate hike is inevitable, and that it will have to happen either way for the Fed to avoid losing whatever skerrick of credibility it has left, that reality is not much of a threat. One 25 basis point hike over the space of twelve months, with the prospect of another one not being for yet another twelve months, is little impediment to buying into the one market offering any sort of return.

It’s dangerous of course – buying stocks simply because there is no alternative, and at some point overvaluation calls must begin to strengthen if Wall Street just keeps on keeping on. Each move up in the Nasdaq at the moment is a new all-time high, but there are some themes running behind the scenes that are actually based on reality.

The aforementioned call of a trough in commodity prices is one. The undeniable advance of technology is another.

There’s a lot of data out in the US next week but we have three months to worry about any trends (no one believes the Fed would hike in November ahead of one of the most critical presidential elections in memory). The greatest focus will be on the OPEC meeting next week, which apparently has now been declared “formal” rather than “informal” as previously suggested.

Why? Is there a big announcement coming?

Next week will be the last in the historically worst trading month of the year, before we enter the historically scariest trading month of the year – October.

Commodities

There was no mucking around on the LME, and maybe a few short positions ahead of the Fed meeting. Lead rose 1%, zinc 1.5%, copper 2% and aluminium and nickel 3%.

Iron ore is up US90c at US$56.30/t.

West Texas crude is up US48c at US$46.10/bbl.

After its twenty dollar jump on Wednesday night, gold is just a tad higher at US$1336.70/oz.

The US dollar index is another 0.1% lower at 95.37 and the Aussie is 0.1% higher at US$0.7643.

Today

The SPI Overnight closed up 27 points or 0.5%.

Japan, the eurozone and US will all see flash estimates of September manufacturing PMIs today/night.

The calendar for Australian stocks is blank today. Not even an ex-div (among broker-covered stocks).

Rudi will link up with Sky Business through Skype at around 11.05am to discuss broker calls.
 

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article 3 months old

Material Matters: Outlook, Bulks, Oz Miners, And Gold

Pricing outlook for mining commodities; demand increases for bulks; positive trends for Oz coal and iron ore miners;  Ord Minnett's gold picks.

-Lift in Chinese imports of bulk commodities sets tone for higher prices
-Macquarie substantially upgrades forecasts for diversified miners
-Coal joins iron ore in Credit Suisse's upward revisions to prices
-Ord Minnett underweight on gold but recommends mid caps 


By Eva Brocklehurst

Commodities Outlook

Commonwealth Bank analysts have upgraded price forecasts for the next year or so, given China's stimulus measures continue to support commodity prices. The manufacturing and property sectors are leading demand while the analysts note upstream sectors are experiencing a deterioration in their financial conditions.

Sectors such as China's coal, iron ore and oil are experiencing a large lift in imports as the government appears to be replacing high-cost domestic capacity with lower-cost imports.

The analysts upgrade their price deck for most mining commodities but still expect the prices will fall next year as the effects of the stimulus fade. Producer margins also point to a price correction. Cash margins have expanded as prices lift and cost reduce but this raises the potential for more supply investment.

Zinc and coal markets are tighter because supply is reduced and this should mean milder price falls compared with other commodities. The analysts expect prices to bottom at the end of 2017 and bring margins back to sustainable levels. The degree of price declines has been moderated nonetheless and the analysts now believe a 20% decline in spot metal prices is more reasonable.

Bulks And Oz Miners

Stronger demand and the impact of supply-side reforms in China have enhanced the outlook for most bulk commodities and Macquarie has materially upgraded its forecasts for coking & thermal coal and manganese.

The latest data from China suggest construction activity is still in a positive trend and global industrial production is recovering. Macquarie continues to increase its 12-month forward demand outlook across the industrial metals as the Chinese government prolongs its commodity-intensive phase of growth.

The broker makes it clear that the fundamentals do not point to any sustained inflationary bottlenecks outside of raw material constraints, such as with zinc, and the long-term challenges of over capacity and lower industrial demand growth remain in place. Moreover, the usual seasonal weakness in demand is expected into the end of the year.

Coking coal price forecasts are lifted by 42% and 28% for FY17 and FY18 respectively, thermal coal by 21% and manganese by around 25% over the same period. The surge in coal prices combined with strength in iron ore, drives an earnings upgrade for the diversified major miners and coal producers.

Macquarie upgrades earnings estimates for BHP Billiton ((BHP)) and Rio Tinto ((RIO)), driving 20% and 10% increases in the price targets respectively. BHP is upgraded to Outperform from Neutral. As the three commodities being upgraded are dominant for South32 ((S32)), Macquarie upgrades to Outperform from Underperform. The rating on coal stock New Hope Corp ((NHC)) is also lifted to Outperform from Underperform.

Macquarie retains a preference for bulk commodities, nickel and gold stocks. In terms of the latter Northern Star Resources ((NST)) and St Barbara ((SBM)) are upgraded to Outperform from Neutral. The broker expects steel and bulks will underperform over the December quarter and the potential for a US rate rise will hamper precious metals. Upside is envisaged for nickel and, despite its structural pressures, alumina.

Coal has also joined iron ore in Credit Suisse's upward revisions to commodity prices. The broker expects China's steel production will surpass 800m tonnes in 2016 and iron ore prices should average US$54/t in 2016. Yet with new supply on board the broker's US$45/t forecast for 2017 is unchanged. A price around US$160/t appears likely for prime hard coking coal, given reduced supply in China and the broker looks for hard coking coal prices to average US$119/t in 2017.

For thermal coal, China is targeting a domestic price equivalent to US$60/t and the broker looks for prices to come under pressure in the medium term as China's and India's imports resume their down trend. Credit Suisse does not believe this is the time to be underweight the miners and upgrades Fortescue Metals ((FMG)), Alumina ((AWC)) and Iluka Resources ((ILU)) to Neutral, having previously rated them Underperform.

Gold

Mid cap gold stocks appear the most attractive to Ord Minnett at spot prices. The broker recommends investors be underweight on precious metals but for those that want gold exposure a basket of mid caps is suggested.

Ord Minnett retains a Lighten rating on Newcrest Mining ((NCM)), given the stock appears expensive on a relative and absolute basis. The broker suspects gold sector multiples are likely to de-rate as the gold price momentum stalls. Currently, valuations are implying a much higher gold price forecast versus spot and the broker believes precious metals are at risk of a consensus downgrade cycle.

Deutsche Bank recently hosted its gold sector conference in Sydney and notes a focus on organic value creation from the companies presenting. The companies remain cautious about premiums in deals being done and are hesitant to consider M&A outside of Australia.

What impressed the broker was how quickly the gold stocks have re-directed their focus to strategies that create value and not relying on the current Australian dollar gold price. Those that stood out with their growth stories were Northern Star, St Barbara and Evolution Mining ((EVN)).
 

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article 3 months old

The Overnight Report: Double Fizzer

By Greg Peel

The Dow closed up 163 points or 0.9% while the S&P gained 1.1% to 2163 and the Nasdaq rose 1.0%.

QQE?

If it’s not bad enough that half of media reporters and commentators, including on business television, cannot pronounce the word “quantitative” (here’s a clue guys, it’s not “quantative”), the Bank of Japan yesterday introduced a new monetary policy tool called quantitative qualitative easing, or QQE.

That’ll get some tongues twisting.

QQE will form part of a new package from the BoJ, which is really not a lot different to the previous package but for a bit of tweaking. Importantly, the BoJ did not cut its cash rate further into the negative. Aside from the current -0.1% not having worked, negative rates represent a tax on banks and entry in the great unknown that has investors very concerned.

The BoJ will retain its level of bond buying, or QE, but will drop the 7-12 year duration range so it can fiddle with the yield curve – QQE. By buying shorter durations the central bank will lower short term rates and thus steepen the yield curve out to longer term rates, which is positive for banks and wealth managers, and somewhat akin to the Fed’s “Operation Twist” of a few years ago. Purchases of stock market ETFs will also continue.

How was this received? Well, with a sigh of relief that there was nothing scary in there, and with a general shrug of fair enough, they’re at least trying to do what they can. The Nikkei closed up 1.9%, underscoring the belief this is a pro-equity policy move (in the form of TINA, of course).

The Australian stock market was already positive ahead of the BoJ’s announcement mid-afternoon, and kicked higher on the news to a solid close. Sector moves were relatively consistent, although it’s been a long time since we’ve seen industrials (1.3%) and consumer staples (1.0%) providing leadership. The banks (0.8%) provided the market cap clout.

The only loser on the day was telcos, given TPG Telecom’s ((TPM)) shock guidance has sparked a rethink for the sector. Selling continued in TPG yesterday, and peer Vocus Communications ((VOC)) is also being caught in the downdraft.

At the end of the day it was a strong session one might not normally expect ahead of a critical Fed meeting, but in retrospect the right move. For the time being the ASX200 has put 5300 behind it and will begin to eye off 5400 once again.

Mixed Messages

The Fed didn’t hike. Given a hike was only being ascribed a 15% chance ahead of the meeting this hardly comes as a surprise, but there would have been some nervous traders holding their breath given talk of the central bank trying to retake control with a surprise announcement.

Clearly Janet Yellen is not into surprises.

She is into repetition, nonetheless. Yes, she still expects there will be a rate rise in 2016. The November meeting is “live”, as is every meeting, but nobody expects a hike ahead of the election. So, it’s December. Lock it in.

Except that as ever, the Fed remains data-dependent. In this point the Fed’s focus has changed somewhat. No longer does the FOMC see the headline unemployment rate as a viable target, given the hidden rate of underemployment in that which is providing the clue as to just how much slack remains in the US labour market. So ignore the 4.9%.

Focus instead on the underemployment rate, participation rate and level of wage growth, which are all as important as that base number of jobs added the world focuses so heavily on each month.

So on the one hand Yellen remains hawkish – a rate hike is expected – but on the other dovish – employment is not yet where we want it to be. Then there are the “dot plots”, which this quarter suggest a sizeable cut to prior rate expectations for 2017-18, and also a cut to GDP growth expectations to benign levels of around 1.8%. From these we can deduce the Fed will deliver one rate hike this year, and then perhaps the next one will also take a year.

There were three dissenters among FOMC members, who wanted to hike now.

So it was a meeting of mixed messages, but in the end enough to provide a sigh of relief for equity markets. The thought of a December rate hike is not going to scare anyone given not so long ago the markets feared four rate hikes in 2016. And the lowering of rate and GDP expectations going forward means Fed tightening will likely be so gradual as to be almost imperceptible.

Might as well buy stocks.

Other markets reacted as would be expected. The US dollar index is down 0.5% to 95.48. Gold is up US$20. The ten-year bond yield is down 2 basis points to 1.67. The VIX volatility index fell 16% as fear subsided. The oil price is up 3%.

We can now spend the next two and bit months getting on with things, and if the world prices in a December hike and doesn’t fret about it, then we should not have to go through this tedious speculative process again this year. But of course, anything could change.

We could have a Trump presidency.

Commodities
As always, the shutters are coming down on the LME just as the Fed statement is being released, and ahead of the press conference. Thus we’ll need to wait until tonight to see just how base metal traders respond.

In the meantime, a mixed session had aluminium and nickel rising 0.7%, copper and zinc falling 0.7%, and lead dropping 2%.

Iron ore rose US10c to US$55.40/t.

West Texas crude has rolled over to the new November delivery contract which has probably played a part in a US$1.57 or 3.6% jump to US$45.62/bbl, otherwise due to the Fed, with November Brent only rising 2.1%.

Gold is up US$20.30 at US$1334.90/oz.

Alas, while the Fed outcome will be positive for the local stock market today, that “complication” is back in the form of a 1% jump for the Aussie to US$0.7632.

Glenn Stevens will be smiling wryly as he polishes his putter – not my problem anymore.

Today

The SPI Overnight closed up 32 points or 0.6%.

On the subject of the RBA, the new governor will today make his first testimony to the House of Reps economic committee.

There’s some data out in the US tonight, but December is a long way off.

Brickworks ((BKW)), Premier Investments ((PMV)) and OrotonGroup ((ORL)) will release earnings results today, there are a few more ex-divs, Scentre Group ((SCG)) will host an investor day and Suncorp ((SUN)) will hold its AGM.

Rudi will travel to Macquarie Park to appear on Sky Business twice today. First from 12.30-2.pm and later between 7-8pm for an interview on Switzer TV.
 

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

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article 3 months old

The Overnight Report: Double Header

By Greg Peel

The Dow closed up 9 points while the S&P was flat at 2139 and the Nasdaq rose 0.1%.

Poised

It was a wild old opening on the local market yesterday as the ASX computers worked through the process of matching out orders left over from Monday’s abbreviated session. When the dust settled the ASX200 came out relatively flat but for one rather notable move in the telcos sector.

One consistent theme of the August results season was some big drops among those “new world” and often smaller names that had been bought up into overvalued territory, thus risking a stampede to the exits on even the slightest hint of disappointment. Yesterday TPG Telecom ((TPM)) underscored that theme with its out-of-cycle report.

TPG has been among the popular stocks of 2016, rising over 30%. Yesterday’s result was largely in line with forecasts but weaker guidance came as somewhat of a shock, and the stock plunged 21% to basically wipe out the year’s gains. Subsequently, the telcos sector was the worst performer on the day with a 2.6% drop.

Despite no one expecting any shocks from the minutes of the September RBA meeting, released late morning, the stock market still fell in response. Perhaps some were hoping that while the September statement provided no suggestion of an imminent rate cut, the minutes might. They didn’t.

The board reiterated that “the current stance of monetary policy was consistent with sustainable growth in the Australian economy and achieving the inflation target over time”. This conclusion does not rule out another rate cut, but provides no reason to believe there’s one around the corner.

The index nevertheless climbed back in the afternoon to a slight positive close. The only other sector to finish in the red on the day was energy, down 0.9% despite a flat oil price. Materials rose 0.7% on better metals prices. These two sectors have been playing topsy-turvy for the past few days.

From a technical perspective, the index struggled back to close just over 5300 – a nice springboard position to contemplate the impact of whatever happens over the next 24 hours.

The Bank of Japan will deliver its policy statement at some time today. The BoJ is not into standard release times, and if you go to its website the scheduled time of release is “undecided”. With Tokyo a couple of hours behind Sydney, we may still be in the dark on the close.

In a tale of two central banks, it’s a case of whether the BoJ eases or remains on hold and whether the Fed tighten or remains on hold. While markets are mostly convinced the Fed will do nothing, the BoJ’s track record of surprising and the fact it is known the board members are split down the middle means nobody really has a clue what today might bring.

One More Sleep

It is really quite tedious the way these quarterly Fed meetings have become major market “events” but unfortunately that’s the world we now live in. Wall Street was expected to be quiet last night and it stuck to the script.

There was some surprise when data showed US housing starts dropped 5.8% in August, when only the night before the housing sentiment index surprised to the upside. But the drag came from the south, which suffered extensive flooding in the month.

The Fed funds futures are pricing in around a 15% chance of a rate hike. On the other hand, there are still those sticking to their guns that the Fed is set to spring a surprise, notably Barclays, Bank Paribas and US bond guru Bill Gross, formerly of Pimco.

What is agreed upon is that were the Fed to indeed surprise, the market would not like it. Were it not to hike, the market will probably just bungle along again towards the election.

There is no more that can be said at this point.

Commodities

It was zinc’s turn to have a pop on the LME last night, rising 2.3%. Nickel kicked on its recovery with a 1.4% gain while copper rose 0.6%.

Iron ore was unchanged at US$55.30/t.

West Texas crude is up US12c to US$43.30/bbl.

Gold is again little changed at US$1314.60/oz.

The US dollar index is up 0.1% at 95.98 and with no sign of an RBA rate hike, the Aussie is up 0.2% at US$0.7553.

Today

The SPI Overnight closed down 9 points.

I think we’re all aware there are a couple of central bank meetings coming up.

Kathmandu ((KMD)) and Nufarm ((NUF)) will release earnings results today and Newcrest ((NCM)) is among a small group going ex.
 

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article 3 months old

Panic Buying Sets Outlook For Coking Coal

A number of key factors have lined up in the coal market and the price canary has flown the cage, with coking coal surging significantly in August.

-Supply issues being aggravated by flooding in China amid government's planned production cuts
-Seaborne market unlikely to respond immediately, with Australian producers at capacity
-Prices likely to remain elevated for some months to come
 

By Eva Brocklehurst

A number of key factors have lined up in the coal market and let the price canary out of the cage. Chinese buyers have panicked and rushed to the market, with spot prices of premium hard coking coal touching US$200/t, a price that has not been witnessed since the disruptions caused by the Queensland floods in 2011-12.

Prices, near US$196/t FOB Queensland, are now 160% higher since reaching an all-time record low back in January. In August, total coal imports to China hit 26.6mt, over 52% above that of August 2015.

ANZ analysts observe the latest rally has underscored the impact domestic politics in China is having on global commodity markets. The effects of the government's planned mine closures have already been felt in thermal coal and are just now being felt in the metallurgical (coking) coal market.

China is targeting around 300mt of capacity to be closed in 2016 but as of July, only 38% of the target has been reached so far. If the government steps up its closures to meet its original target another 45mt of coking coal production could be closed in China this year, the analysts calculate.
 


Aggravating the supply issue, recent flooding in China has created domestic coal transport problems for local steel mills. Flooding has damaged road infrastructure and limited railway capacity. This has resulted in a boost to demand for coking coal from the seaborne market. The analysts calculate that imports in August surged over 100% year on year as the shortage increased.

Underlying pig iron and steel demand are still subdued so prices are likely to be driven by the supply side and, with the highest cost producers now making money, supply will undoubtedly react, the analysts expect. Nevertheless, exporters are not likely to be able to raise output immediately.

Outside of China there has been some tightness in the market and since prices weakened in 2014, high cost supply from North America has been taken out of the market and exports have been falling.

There are recent reports that Brazilian buyers have been struggling to get material, which the analysts suspect may explain why the panic buying has erupted in the market. Exports from North America are down 14% year on year for the seven months to July. North America is also unlikely to increase exports materially until prices show some signs of stability.

Australian producers, already at capacity, are struggling to respond to increased Chinese demand, and are now being hampered by wet weather. With long-term weather forecasts showing potential for higher-than-usual rainfall in Queensland there is also the probability of further disruption to exports.

If China's domestic output continues to fall, prices may remain elevated for some months, as support for steel demand continues with repairs and reconstruction over the next 6-9 months. Ultimately ANZ analysts envisage coking coal prices settling in the US$110-130t range, as supply tightness continues in both China and Australia.

Even though other countries such as Mongolia and US eventually take the opportunity to address any shortfall, prices are expected to be determined by domestic conditions in China.

China's apparent demand for iron ore also rebounded in August with imports up 18.3%. Domestic trade flows have been affected by bad weather in the north of the country, putting an increased reliance on imports.

Rising steel prices have in turn supported iron ore prices. Yet the analysts suspect, iron ore prices over US$60/t could mean domestic supply rebounds and places some downward pressure on imports.
 

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article 3 months old

The Overnight Report: Jittery

By Greg Peel

The Dow closed down 3 points while the S&P closed flat and the Nasdaq lost 0.2%.

No Hack

Futures traders had called for a flat opening on the local market yesterday and they were bang on – the market didn’t open at all. When it did eventually open at 11.30 the ASX200 immediately fell 23 points, probably driven by sellers who still haven’t been able to fill out the census and feared something sinister.

Just a technical glitch, the ASX declared, and quickly the index was back to flat again, before once again the exchange crashed at 2pm. No amount of scrambling from the geeks could prevent the umpires eventually abandoning play for the day.

The futures are showing down 5 points this morning, but the focus will be not on whether this proves accurate but on whether the exchange opens at all. The ASX has insisted this was not a hack, so presumably the geeks have put in an all-nighter and things should be up and running as normal.

Yesterday was not normal nonetheless, and there were likely a lot of players who elected to stand aside. There was a weakish lead from Wall Street to contend with but just as well this didn’t occur on a day promising elevated volatility. In the wash-up, the flat close was made up of a gain for materials balancing out a fall for energy, and falls in the consumer sectors of discretionary, staples and healthcare balanced by a small gain for the banks.

Beyond that, we can pretty much write yesterday off. We can assume a lack of volatility in the lead-up to the BoJ and Fed meetings on Wednesday and with Wall Street dead flat last night, not a great deal is expected today.

The Great Unknown

The flat close on Wall Street gave the impression the market did absolutely nothing last night as it awaits the central bank meetings but in fact the Dow was up a hundred points early, then down 50 and up 50 before finally going nowhere.

The initial rally was linked to the oil price. Venezuela declared last night a deal among OPEC members to freeze production is imminent, with OPEC set to hold an extraordinary meeting in Algiers this weekend. Those who are prepared to believe, or who just don’t want to be caught out, sent oil prices higher early in the session and the stocks indices followed.

Those who don’t believe there will be a wolf this time either then sent oil prices back down again, to flat, and dutifully the stock indices followed suit.

The only other news of influence on Wall Street last night was the monthly housing sentiment index, which showed a jump to 65 from 59 when assumptions were for no change. This 50-neutral index now suggests home builders are feeling more confident than they have so far this year.

Otherwise, it’s all about central bank speculation. Commentators agree that while the Fed’s decision is of vital importance, perhaps more important is what the Bank of Japan decides several hours earlier. The BoJ is known to be split down the middle on policy direction, leading to speculation it could either cut further into the negative or, given easing simply has not worked for Japan to date, surprise by going completely the other way, perhaps winding back QE.

It’s a great unknown, as is what the Fed might do. While few believe the Fed will hike based on the data, there are those who believe the FOMC will hike anyway just to save face and restore some credibility. What is agreed is that Wall Street has not priced in a September rate hike, and if there is one, the initial response could be ugly.

But then it may come down to what the BoJ does first.

Commodities

West Texas crude is up a cent at US$43.18/bbl.

There was suddenly a bit of action on the LME last night, with nickel jumping 4%. Zinc and lead rose 1% while copper slipped a little.

With China back on board, iron ore fell US20c to US$55.30/t.

Gold is relatively steady at US$1312.80/oz.

The US dollar index has dropped 0.2% to 95.86 but the Aussie has shot up 0.6% to US$0.7535, probably on vision of Malcom Turnbull strutting around the NYSE last night chatting to all and sundry.

Today

The SPI Overnight closed down 5 points.

It is hoped that at 10am, the ASX will open.

The minutes of the September RBA meeting will be released today, chronicling Glenn Stevens’ last meeting in the chair, with nothing of any great consequence expected.

TPG Telecom ((TPM)) will release its earnings results today.

Rudi will skype-link up with Sky Business today at 11.15am to discuss broker calls.
 

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

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

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article 3 months old

The Monday Report

By Greg Peel

Oversold

The local market decided on Friday that the Fed was not going to hike this week or, if it does, relevant stocks have been sold down far enough to take that into account. With the FOMC meeting now only three days away, no US data releases with the power to make a difference in the meantime, and Fedheads “blacked out” from making comments, nothing will change from here.

But that doesn’t mean we know what the Fed is going to do. The odds still favour no hike, however there’s a lot of “But I wouldn’t be surprised if…” going around. Anyway, soon we’ll know.

We may not get much action between now and Wednesday, when the Bank of Japan meets, and Wednesday night, when the Fed statement is delivered, and to underscore that likelihood, the SPI futures closed unchanged on Saturday morning. Japan is closed today and there are no local data releases of note.

The RBA will release the minutes of the September meeting tomorrow but they are unlikely to tell us anything new.

It was a strong session on the local bourse on Friday nonetheless. Having been the biggest loser over the last couple of weeks, utilities finally bounced back with a market-leading 2.3% gain. Telcos (+1.6%) and the banks (+1.1%) joined in the yield stock recovery but the rally was market-wide. Materials did little and staples struggled to 0.5% but otherwise other sectors posted around 1-1.5% gains.

Energy posted a 1.2% gain but that could change today. The oil price was up on Thursday night and down on Friday night and energy stocks have returned to their earlier bad habit of flying up and down on every little swing in oil prices, usually to go nowhere much.

Otherwise we’re in for another week of central bank watching.

Apple’s Week

The US CPI rose 0.2% in August when 0.1% was expected, taking annual headline inflation to 1.1%. The core CPI, which in particular excludes weak oil prices, rose 0.3% to 2.3%.

Once upon a time, Ben Bernanke’s targets to trigger the normalisation of US rates were 5% unemployment and 2% inflation. Unemployment is at 4.9% and inflation is at 2.3%. By rights, we should be having a rate hike.

But it’s not that simple. For starters, the Fed prefers the PCE measure of inflation over the CPI and that’s still under 2%. And does it make sense to ignore oil prices as if they have no impact? On the labour front, the 4.9% unemployment rate masks a record low participation rate and a high percentage of Americans without a job who don’t even bother trying, suggesting there remains plenty of slack in the labour market.

This is why there is no cut and dry expectation on Fed policy.

Wall Street has adjusted just in case. Two Fridays ago Wall Street tumbled as Fedheads made the case for a rate hike in September. From that new base, last week saw the S&P500 climb back ten points. Seven of those ten points are entirely attributable to the 12% rally in Apple shares. So ex-Apple, Wall Street has still very much adjusted for the elevated chance of a rate hike.

Does this mean, therefore, that if the Fed doesn’t hike this week, and Janet Yellen does not say anything definite enough that would lock in a December hike, that Wall Street will rally hard?

Maybe, but again, we’ll just have to wait and see. And the BoJ meets first.

Friday night’s session on Wall Street may have been a little better but for another dip in oil prices, courtesy of another increase in the US rig count, and a US$14bn fine slapped on Deutsche Bank which dates back to mortgage lending pre-GFC. Deutsche shares plunged 9%.

Banks in general were sold down in sympathy, largely because of regulatory fears and not because of Fed speculation.

Thus the Dow closed down 88 points or 0.5%, the S&P lost 0.4% to 2139 and the Nasdaq dropped 0.1%. On Friday night Apple shares finally gave back 0.5%, just as the iPhone7 actually hit the stores.

Commodities

West Texas crude fell US54c to US$43.17/bbl.

Base metal moves in London were mixed, with no price moving more than 1%.

With China on a holiday, iron ore remained unchanged at US$55.50/t.

The interesting thing about these smallish moves in commodity prices is that the US dollar index was up a solid 0.8% on Friday night at 96.04. This was attributed to the bigger than expected gain in the CPI, which in theory strengthens the odds of a Fed rate hike.

It was enough to see gold down US$4.10 to US$1310.00/oz but the US ten-year bond rate remained unmoved at 1.70%.

The Aussie is down 0.3% at US$0.7489.

The SPI Overnight, as noted closed unchanged.

The Week Ahead

The Fed statement will be released on Wednesday night, Janet Yellen will hold a press conference thereafter, and updated FOMC forecasts will be published.

The Bank of Japan will meet on Wednesday. Japanese markets are closed today and Thursday.

US data this week include housing sentiment tonight, housing starts on Tuesday, house prices, existing home sales, leading economic indicators and the Chicago Fed national activity index on Thursday, and a flash estimate of September manufacturing PMI on Friday.

The eurozone and Japan will also flash PMIs on Friday.

In Australia we’ll see June quarter house prices tomorrow along with the RBA minutes. On Thursday RBA governor Phillip Lowe will make his inaugural testimony before the House of Reps economic committee.

On the local stock front, Orocobre ((ORE)) will report earnings today, TPG Telecom ((TPM)) tomorrow, Kathmandu ((KMD)) and Nufarm ((NUF)) on Wednesday and Brickworks ((BKW)) and Premier Investments ((PMV)) on Thursday.

There are still a few ex-divs to work through, particularly on Thursday.

Rudi will appear on Sky Business on Tuesday, through Skype-link, to discuss broker calls at 11.15am. On Thursday he'll return in the studio from 12.30-2.30pm and again between 7-8pm for the Switzer Report. On Friday, he'll repeat the Skype-link up to discuss broker calls at around 11.05am.
 

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.)

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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: Love That Bad News

By Greg Peel

The Dow closed up 177 points or 1.0% while the S&P gained 1.0% to 2147 and the Nasdaq rose 1.5%.

Seeking the Bottom

If you were a typical sports commentator, you’d say yesterday’s session on the local market was a game played in three halves.

It was expiry day for September quarter futures and index options, which can be blamed for early volatility that saw the ASX200 down 25 points very briefly before recovering to be only slightly down. That was the first half.

The second half saw the release of the jobs numbers late morning.

If we’re going to talk good news and bad news, yesterday’s local employment data for August provided a feast.

The good news is the unemployment rate fell to 5.6% from 5.7%. The bad news is 3,900 jobs were lost when economists had forecast a 15,000 gain. The decrease in the unemployment rate came courtesy of a decrease in participation, implying more people have given up finding work.

The good news is the loss of 3,900 jobs breaks down to a decrease of 15,400 part-time jobs and an increase of 11,500 full-time jobs. This mix bucks the trend of past months in which net job gains have all been about increases in part-time positions as full-time positions fell. But the bad news is this switch did nothing to improve the “underemployment” rate – the number of people who have jobs but would like more hours – which rose to a record 8.7%. As a consequence, hours worked fell by 0.2% to be up only 0.7% year on year.

The good news is these data justify an RBA rate cut.

It looked like the algos were in full swing on the data release given an initial plunge in the index (lower unemployment equals RBA rate cut less likely) followed by an equally sharp snap-back (fewer jobs, lower participation, higher underemployment, fewer hours worked equals rate cut more likely).

It pays to read the fine print before barging in, but no one’s told that to the computers yet.

From that point the dust settled, and the index proceeded to track a straight-line rally toward a close of up 12 to end the third and final half.

The low of the day was 5204, which is very close to technical support at 5200, but also an index option strike price and thus a magnet on expiry day. But if we’re trying to determine at what point the market has sold down yield stocks on Fed rate hike fears, we have perhaps found it in the banks, which rose 0.6% on the day to provide the bulk of the upside, but not in utilities and telcos, which continued to fall by 1.1% and 0.9% respectively.

The biggest winner on the day was materials, up 0.9% on the bounce in base metal prices, and the biggest loser was energy, down 1.2% on the lower oil price. While commodity prices are also under the spell of Fed policy, the metal price bounce was attributed to stronger Chinese data and the oil price drop was attributed to US inventory moves. Thus in both cases the fundamentals of demand-supply outweighed the esoterics of central bank intervention.

Today is another day, and after last night it looks like a September Fed rate rise is off the table once more. The futures are suggesting up 33 points. Will we finally see some support come in for beaten down yield stocks, or has that ship simply sailed?

The Growth Cycle

US retail sales fell by a greater than expected 0.3% in August to mark the first decline in five months. As the US economy is consumer-driven, retail sales are an important growth indicator.

But to add to the woes, industrial production fell 0.4% having risen in the past two months, the producer price index moved 0.0%, the Empire State activity index remained in contraction and expansion slowed for the Philly Fed activity index.

As has often been suggested by Wall Street commentators, if interest rates had already returned to normal by now the Fed would be talking rate cuts, not rate hikes. But all talk is of rate hikes and their timing, and on last night’s data it is assumed (until it isn’t again) September is off the table.

And maybe December too. Pass the champagne.

So the US stock indices rallied on the bad news is good news theme. However, the extent of the excitement over no rate hike is clouded yet again by another 3.4% jump in Apple shares – the third consecutive daily gain of around 3%.

The first two gains were courtesy of unexpected record sales for the new iPhone7. Last night’s gain came on news the iPhone7 Plus – same as the iPhone7 but with power steering and seven air bags – has sold out.

So Apple yet again led all three major stock indices higher, and yet again dragged other Big Tech names along with it. The sudden interest in Big Tech is not about the Fed not hiking, but about the Fed hiking eventually one way or the other. One by one equity strategists across the globe are suggesting it’s time to exit the search for yield and re-enter the search for cyclical growth. Record sales of iPhones (in contrast to the overall US August retail sales result) suggest Big Tech is a solid and, given these companies are now long established, safe place to be.

So just how much of last night’s rally can we really attribute to bad news is good news? Consider that the US dollar index fell, as one would expect, but only by 0.1%. Consider that gold dropped US$8.50/oz when it should have gone the other way, and that the US ten-year bond yield is up one basis point at 1.70% when it should have fallen.

While the stock market will remain its volatile self, particularly at this time of the year, other markets appear to be suggesting there can’t be much more to gain even if the next Fed rate hike is pushed further out in time. Might as well pack the bags now.

Commodities

And then we can look at commodities. West Texas crude duly recovered, but is only up all of US3c at US$43.71/bbl.

Having jumped up on Wednesday night thanks to China, base metal prices were all down 0.5-2%, except copper which held its ground, when no rate hike suggests the opposite. But again, it’s a fundamental issue – weak US sales, industrial production, regional activity…why would this inspire stronger base metal prices?

Iron ore is unchanged at US$55.50/t.

Gold is down US$8.50 at US$1314.10/oz.

The US dollar index is down only 0.1% at 95.25 but the Aussie has leapt back 0.6% to US$0.7516.

Today

The new December SPI Overnight closed up 33 points or 0.6%.

The changes to the S&P/ASX index components come into effect today so the index trackers will be busy. Following from yesterday’s local expiry it’s the quadruple witching expiry on Wall Street tonight, the August CPI will be released.

Rudi will make contact with Sky Business at around 11.05am, probably, via Skype-link, to discuss broker calls.
 

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.)

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article 3 months old

The Overnight Report: Appletised

By Greg Peel

The Dow closed down 31 points or 0.2% while the S&P was flat at 2125 as the Nasdaq rose 0.4%.

Finally

Yesterday the local market finally decided enough is enough, at least for the time being. Despite the Dow falling 250 the ASX200 eked out a small gain, supported by the fact the local market has been leading global fear of a Fed rate rise, not following it.

The index has fallen over 7% from its most recent high when Wall Street has managed about 3%. The irony is, the US Fed funds futures market is still only pricing in around a 20% chance of a rate hike next week. If we don’t get one, do we go rushing back up again?

Or has reality finally bitten for the likes of the infrastructure stocks, REITs and telcos which have done nothing wrong other than to have proven too popular among desperate yield seekers? If there is no Fed rate hike next week, the odds of a December hike firm considerably. Is there any point in buying these names back up in the meantime?

Well yes there is – reliable yield – but perhaps the market has now learned what the top end of valuation for yields stocks should be. Yesterday we saw the banks bounce back and Telstra come back strongly, but we still saw selling in utilities. Falls in iron ore and oil prices ensured the resource sectors were the balancing factor on the day.

The other side of the coin is, of course, the support local yield stocks enjoy from local investors thanks to domestic monetary policy. Will the RBA cut again? Economists seem to believe so but the central bank itself is certainly not providing any hints. Were the Fed to raise next week the need for the RBA to cut again is diminished, given the Aussie should fall and thus ease that particular “complication”.

The August rate cut is still being cited as reason for Australian consumers remaining reasonably confident. Yesterday’s Westpac survey showed confidence has inched up again this month by 0.3% following last month’s RBA-inspired 2% jump. At 101.4, the index suggests optimists are just outnumbering pessimists at this time. But we are 8% more confident than a year ago.

Today we see the local jobs lottery, which while rarely much of a stock market mover does play into the currency and RBA policy.

Big Tech

Wall Street also largely stalled last night following three sessions of volatility, which had followed 43 sessions of a total lack of volatility. With the WTI price again falling close to 3%, it was again down to Apple and friends to balance the indices.

Apple had been sold down extensively in the lead-up to the launch of the new iPhone7 on the basis that all along Apple had said the 7 won’t be a lot different to the 6, but wait for the tenth anniversary model iPhone8 next year, that’ll be a cracker! So why would anyone buy the 7?

Because there are just too many Apple zealots out there. Much to everyone’s amazement, the iPhone7 has broken sales records. Having rallied 2.5% on Tuesday night, last night America’s biggest company gained another 3.5%. And along for the ride came all of Apple’s mates, the Big Tech names like Microsoft, Facebook, Amazon and Netflix.

A lot has been said about the TINA trade – there is no alternative. But while TINA largely refers to yield, which is why Wall Street has seen the same stretched valuations for utilities, telcos et al, there is also the matter of where does one go to try to find any growth? “New world” companies are one place, like your Teslas and cloud companies and so forth, but these come with commensurate risk. Dusty old Big Tech has an established track record.

Maybe next year will be more interesting, when, it is expected, some of the bigger “disruptors” will go public, such as Uber and Airbnb.

We recall that a week ago, oil prices bounced back hard on the surprise of substantial drawdowns of crude apparent in US weekly inventory numbers. Oil has fallen back this week following the IEA’s downgrade to global demand forecasts, and last night the latest US weekly data were released.

While the numbers showed nothing particularly exciting for crude, the oil market was flummoxed by a big build in products, ie gasoline etc. So an already nervous oil market went into selling mode again. But what also surprised last night was a sudden and sharp bounce in base metal prices.

Commodities

Global stock market weakness these past few sessions has been driven by Fed rate hike fears, which have driven up the US dollar and thus kept a lid on commodity prices. Last night Wall Street stalled at lower levels and the US dollar index slipped back 0.2% to 95.34.

This appeared to provide LME traders with the confidence to buy the metal they would otherwise have bought the night before on the reasonably positive Chinese monthly data dump. Copper, which has gone a whole lotta nowhere for some time, jumped 2.6%.

Aluminium rose 1.5%, zinc rose 1.8%, and lead shot up 3.8%. Alas nickel, which has been sold down heavily in recent sessions, couldn’t catch a bid.

On the other hand, iron ore fell another US70c to US$55.50/t.

West Texas crude is down US$1.29 or 2.9% at US$43.68/bbl.

On the dollar’s dip, gold is up US$4.20 at US$1322.60/oz.

The Aussie is relatively flat at US$0.7569.

Today

The SPI Overnight closed down 19 points or 0.4%, suggesting we take back yesterday’s hard-earned gains.

We have a very big day/night ahead of us for global economic data.

New Zealand will release its June quarter GDP this morning and Australia’s jobs numbers will be out late morning.

Chinese markets will be closed for the next two days.

The Bank of England will hold a policy meeting tonight.

And hang on to your Fed-watching, data-dependent hats, tonight in the US sees numbers for retail sales, industrial production, business inventories, the PPI, and both the Empire State and Philly Fed activity indices.

Among another handful of stocks going ex-div on the local market today, Myer ((MYR)) will release its earnings result.

Rudi will appear on Sky Business today, 12.30-2.30pm.
 

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

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article 3 months old

The Overnight Report: Oil In The Mix

By Greg Peel

The Dow closed down 258 points or 1.4% while the S&P lost 1.5% to 2127 and the Nasdaq fell 1.1%.

Lined Up

The Dow had rebounded 250 points, the futures were suggesting up 79 and as the opening rotation was completed at 10.30am yesterday on the local market, the ASX200 was up 56 points. And that was the end of it.

The sellers were lined up waiting and wasted no time in sending the index back down on a steady path towards the red. Perhaps these were sellers who were caught in the headlights on Monday and had failed to respond. Or perhaps there is sufficient belief the Australian yield trade no longer deserves a premium.

When we break down the sector action we see only four sectors actually finished in the red yesterday: energy, banks, telcos and utilities. Other than acknowledging Woodside’s dividend, energy is the odd one out. The other three are yield sectors. Oil prices began to slip in Asian trade late afternoon on the release of an IEA report – more on that later – putting pressure on energy stocks.

There was a short-lived blip in the downward trajectory yesterday when China released a monthly data dump showing positive, if not runaway, signs.

Chinese industrial production rose 6.3% year on year in August, above July’s 6.0% and ahead of 6.2% expectation. Retail sales rose 10.6%, above 10.2% in July and beating 10.3% expectation. Fixed asset investment rose 8.1% year to date, ahead of 7.9% to July and beating 8.0% expectation.

But as I have noted before, the local market is not paying that much attention to China at the moment, so down we went again.

It is also notable that the Dow futures had begun to drop in the afternoon as well, likely picking up on the oil theme, suggesting a weak start for Wall Street last night. And indeed, the Dow closed down 258 points, cancelling out Monday night’s rebound. The good news is the Dow was down almost 300 at one stage, so Wall Street did not close on its lows.

Many Factors

The bad news is that given stats released showing record initial sales for the new iPhone, Apple shares rose 2.5% on the day, being the only Dow component to finish in the green. Had America’s biggest company fallen along with the market in general, it would have been quite a bit worse.

Oil was the major talking point on Wall Street last night. The International Energy Agency yesterday cut its 2016 demand growth forecast by 100,000 barrels per day to 1.3mbpd, and 2017 to 1.2mbpd, citing weaker economic growth in China and India.

Oil prices subsequently fell 2.5% which is not that dramatic, probably because there is still an assumption there may be some sort of deal struck at the upcoming OPEC meeting. But all along the weak oil story has been one of a supply glut, while steady demand growth has been assumed. Now that demand is being questioned, it’s another story again.

Other than oil, lingering fears of a Fed rate hike in September are still weighing on Wall Street. This is evident in that fact the US dollar index is up 0.5% at 95.56, gold is down US$9.00 and the US ten-year yield, which did not fall back on Monday night, closed up 6 basis points at 1.73%.

And then there is the Donald Trump factor. Yet again last night a trader suggested on US business TV that the market is concerned about a Trump presidency, particularly now he is closing the gap in the polls to Clinton, and because he publicly lambasted the Fed and Janet Yellen and that is simply not something a president does.

America is back from holidays. It is the month of September. Volatility has returned.

Commodities

West Texas crude is down US$1.09 or 2.4% at US$44.97/bbl.

Nickel was again the big loser on the LME, falling a further 2%. Zinc fell 1%, lead rose 1% and aluminium and copper were slightly weaker.

Iron ore fell US$1.30 to US$56.20/t.

Gold is down US$9.00 at US$1318.40/oz.

The stronger greenback has the Aussie down 1.3% at US$0.7464.

Today

The SPI Overnight closed down 11 points or 0.2%. This muted response to the much bigger fall on Wall Street suggests Australia was leading yesterday’s action and thus we don’t need to double up and follow.

But given current skittish sentiment, anything could happen.

What will happen is Westpac will release its monthly consumer confidence survey today.

July industrial production numbers out of the eurozone will be closely watched.

There is another handful of stocks going ex today.

Rudi will be presenting in front of AIA members (and others) at the Chatswood Club tonight, 11 Help Street. Starts at 7.15pm.
 

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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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