Tag Archives: Currencies

article 3 months old

The Overnight Report: Slow Grind

By Greg Peel

The Dow closed up 66 points or 0.4% at 18,005 while the S&P gained 0.3% to 2119 and the Nasdaq rose 0.3%.

Flat

The ASX200 yet again suffered one of its first-half-hour plunges yesterday before immediately being bought back up again, to be only down slightly by midday. The futures only signalled down 18 on the open, so the rest was up to the computers.

The morning saw the release of the local housing finance numbers for April.

While the number of loans to owner-occupiers increased in April to be 4.6% higher year on year, the net value of those loans fell 1.8% to be 4.4% lower year on year. Meanwhile, loans to investors fell 5.0% in the month to be down 20.8% from a year ago, cycling a comparable reading ahead of the RBA/APRA clamp-down on investor lending mid-2015.

This is the housing market that has been offsetting the impact of weak commodity prices. Just as well commodity prices have rebounded, and China is buying greater volumes to offset the impact of weaker prices.

China’s net imports nevertheless fell 0.4% in May year on year but this was a better result than the 6.0% drop forecast, and the 10.9% fall in April. Exports fell 4.1% -- more than the 3.6% forecast and worse than the 1.8% April decline.

It was a mixed result which saw the ASX200 take another stumble at midday before grafting back again in the afternoon to a flat close.

Higher oil prices ensured a 2.1% gain for the energy sector yesterday so there needed to be an offset to square up the index. The banks were only a little weaker so it required materials to fall 0.6% due to weaker base metal prices, and despite a stronger iron ore price, and telcos to fall 0.9%.

Two sectors that have really been bouncing back and forth for no major reason these past few sessions have been telcos and consumer staples – both sectors one would normally expect to be plodders. Seems no one can make up their mind.

The index is poised at 5370, a number which is neither here nor there on a technical basis. We’re heading into a long weekend locally.

Muted Cheers

The Dow chopped around last night in an insignificant range before finally closing above 18,000 for the first time since April. But no corks were popped. The S&P 500 is within 0.6% of its all-time high, but no one is particularly excited.

It has been described as the unloved rally – a slow graft higher without any real impetus beyond the rebound in oil prices, which may yet fade, and central bank policy. A lot of attention is being focused on Europe at present, where the German ten-year yield (0.06%) continues to fall to reflect a step-up in corporate bond issuance. That step-up is all about the ECB.

The ECB’s latest QE upgrade included the addition of corporate bond purchases, on top of purchases of government bonds issued by eurozone members. Corporate Europe knows it has a willing buyer, and rates have never been so low. Why not borrow, even to buy back shares, as has been all the rage in the US. Deutsche Bank did it recently and in so doing, halted its share price slide and turned all European banks around.

Meanwhile on Wall Street, all discussion is about the Fed. Occasionally there is mention of actual corporate earnings, but they’re just a sub-text. The markets are being controlled by the central banks. In such an environment, the only real explanation many can come up with for the stock market rally on Wall Street is the TINA trade – there is no alternative investment one can make to provide any sort of positive real return.

At this rate the S&P will likely hit a new all-time high next week, possibly when the Fed puts out its statement on Wednesday night and no sign of the next rate hike is provided.

But there will likely be little excitement. An interesting element of last night’s trade was that oil rallied again, but the energy sector actually closed weaker.

Commodities

Amongst those Chinese May trade numbers was an indication of increased oil imports. US crude inventories fell again last week. There has been another pipeline attack in Nigeria. The US dollar index is down 0.3% at 93.56.

Add it all up and West Texas crude is up US$1.10 at US$51.53/bbl.

China was also importing buying base metals in May. Seems like the commodity funds picked the wrong day to bail out on Tuesday. In a session smacking of short-covering, lead rose 1%, aluminium 2%, zinc 3% and nickel 4%. Only copper stood still.

Iron ore fell US20c to US$52.10/t.

Having stalled for three days, gold appears to have decided the dip in the US dollar last night was enough reason to buy once more. It’s up US$19.30 at US$1262.50/oz.

The Aussie is up 0.4% at US$0.7485.

Today

The SPI Overnight closed up 9 points.

Presumably yesterday’s selling in the materials sector will turn into buying today on base metal and gold strength.

Chinese inflation numbers for May are due today.

ECB president Mario Draghi will speak tonight.

Rudi will make his weekly appearance on Sky Business today, 12.30-2.30pm.
 

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article 3 months old

The Overnight Report: Bridge Too Far

By Greg Peel

The Dow closed up 17 points or 0.1% while the S&P gained 0.1% to 2112 and the Nasdaq fell 0.1%.

Policy Shock

In his April policy statement, RBA governor Glenn Stevens concluded: “Continued low inflation would provide scope for easier policy, should that be appropriate to lend support to demand.” Inflation proved to indeed be low, so the RBA cut in May to 1.75%.

So low was inflation, as evidenced by the March quarter CPI numbers, that economists immediately pencilled in further rate cuts. August was assumed as the next move, with potentially as many as two more into 2017. Nobody expected a follow-up June cut, so yesterday economists were simply looking for confirmation that the RBA remained in an easing mode. But this was the conclusion of yesterday’s statement:

“Taking account of the available information, and having eased monetary policy at its May meeting, the Board judged that holding the stance of policy unchanged at this meeting would be consistent with sustainable growth in the economy and inflation returning to target over time.”

The RBA is not in an easing mode at all. Having cut once, it has returned to a “holding stance”.

That is why the Aussie dollar shot up a cent yesterday at 2.30pm. This morning the Aussie is 1.2% higher over 24 hours at US$0.7458.

It’s also why the ASX200, having peaked at 32 points up on the day around lunchtime yesterday, was back to square by 3.20pm. A slight recovery thereafter left a close of up 10 points.

Among those sectors suddenly turning tail were the banks, although they still managed to close with a sufficient gain to offset further insurance company selling in the financials sector. Utilities managed a flat close, while telcos fell 0.4% and consumer staples 1.0% as yield-plays lost some of their gloss. Although the flipside is the benefit of the Fed supposedly not raising.

The Fed not raising implies less strength in the greenback, so the resources sectors were able to lead the gains yesterday to offset the losses in other sectors, thanks to higher commodity prices. Materials rose 1.1% and energy 1.7%.

But for local investors, it’s back to square one. If the ASX200 was to push up through 5400 as the technicals have been suggesting, it would require a combination of a lower local interest rate and a subsequently weaker Aussie dollar to provide support. That doesn’t look like happening now, so we have to look forward past the June Fed meeting, the Brexit vote and the local federal election towards the August result season before – left field events notwithstanding – this market finds a new impetus.

Perhaps that impetus could come from rising commodity prices – oil closed above 50 last night and iron ore is up another 3% -- but just how far can these rallies run when capacity is idled?

Getting High

WTI crude rallied 1.4% last night to its first close above US$50/bbl in ten months. Disruptions in Nigerian supply aside, the oil market has begun to focus more on rising global demand.

The energy sector drove Wall Street higher last night, backed up by an ongoing feeling of relief following the Fed’s apparent back-down on a summer rate hike. Having closed above 2100 on Monday night, the S&P500 was also supported by the technicals, with traders beginning to eye off the all-time high of 2134.

But while the S&P500 is the traders’ preferred indicator, being a broad market, cap-weighted index, the antiquated Dow average still has lingering power. When the Dow hit 18,000 last night, the sellers moved in.

Round numbers are always difficult to breach in one go. The S&P is still sitting above 2100, but clearly more work will need to be done to get to the Dow all-time high of 18,188.

Next week’s June Fed meeting is no longer as critical as it was a week ago, given no one is expecting a rate hike. Then there’s the Brexit vote, which is the big unknown for markets. Perhaps new all-time highs on Wall Street will have to wait until a Brexit outcome is clear.

Then there’s the small matter of a looming presidential election, which many believe will also serve to keep the Fed at bay. Rate hike expectations have shifted away from the summer and towards year-end, with September a chance but December now preferred. By December, the Fed will know who will be controlling fiscal policy for the next four years.

Commodities

West Texas crude is up US71c at US$50.43/bbl. Many are assuming 50 is the line in the sand for the recovery rally, given it is a sufficient price to trigger the restart of idled production. The US Energy Information Administration nevertheless begs to differ.

“Low oil prices continue to cut into domestic oil production, with US monthly oil output not expected to start steadily increasing until the end of 2017,” said an EIA statement last night. This implies oil prices still have further upside on increasing demand.

The Fed-inspired base metals rally of the past few days came to an abrupt halt last night as commodity funds decided a weaker US dollar is not in itself enough to suggest higher prices. Copper was slapped 2.7% in London, while lead fell 2% and nickel and zinc 1%. Only aluminium was spared, with a 0.5% gain.

Iron ore rose US$1.70 to US$52.30/bbl.

The US dollar index is down 0.2% at 93.84 but gold remains steady at US$1243.20/oz.

Today

The SPI Overnight closed down 18 points or 0.3%. The RBA statement has taken the wind out of the sails.

Locally we’ll see housing finance numbers out today, while much attention will be paid to the release of China’s May trade data.

Vicinity Centres ((VCX)) will host an investor day today.
 

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article 3 months old

Wait-And-See RBA To Encourage Larger Aussie Rebound

Please note: This article contains a selection of tables which cannot be reprinted here. To view these tables please refer to the original story on the FXCM website (direct link below).

By David Song, currency analyst, FXCM

- Reserve Bank of Australia (RBA) to Keep Official Cash Rate at Record-Low of 1.75%.

- Will Governor Glenn Stevens Keep the Door Open for Lower Borrowing-Costs?

Trading the News: Reserve Bank of Australia Interest Rate Decision

According to a Bloomberg News survey, 25 of the 26 economists polled forecast the Reserve Bank of Australia (RBA) to keep the benchmark interest rate at the record-low of 1.75%, but the fresh batch of central bank rhetoric may prop up the Australian dollar and generate a larger rebound in AUD/USD should Governor Glenn Stevens and Co. soft their dovish outlook for monetary policy.

Why Is This Event Important:

The RBA may largely endorse a wait-and-see approach over the remain of 2016 after cutting the Official Cash Rate (OCR) to a fresh record-low of 1.75% in May, and a shift in the policy outlook may prop up the Aussie over the near to medium-term should the central bank show a greater willingness to gradually move away from its easing cycle.

Expectations: Bullish Argument/Scenario

Signs of a stronger-than-expected recovery accompanied by the improvement in the terms of trade may encourage the RBA to adopt a more upbeat outlook for the region, and the Australian dollar may face a bullish reaction should the central bank talk down bets for lower borrowing-costs.

Risk: Bearish Argument/Scenario

Nevertheless, the slowdown in private-sector consumption paired with the contraction in business investment may force Governor Stevens to further support the rebalancing of the real economy, and the higher-yielding currency may face near-term headwinds should the central bank keep the door open to further embark on its easing cycle.

How To Trade This Event Risk

Bullish AUD Trade: Growth Rate Slows to Annualized 2.8% or Lower

  • Need green, five-minute candle following the rate decision for a long AUD/USD trade.
  • If market reaction favors a bullish aussie position, buy AUD/USD with two separate lots.
  • Set stop at the near-by swing low/reasonable distance from entry; look for at least 1:1 risk-to-reward.
  • Move stop to breakeven on remaining position once initial target is met, set reasonable limit.

Bearish AUD Trade: Australia GDP Report Exceeds Market Forecast

  • Need red, five-minute candle to consider a short AUD/USD position.
  • Carry out the same setup as the bullish Aussie trade, just in the opposite direction.

Potential Price Targets For The Release
 

AUD/USD Daily


 

  • Longer-term outlook for AUD/USD remains tilted to the downside as the Relative Strength Index (RSI) preserves the bearish momentum from March, but the pair may continue to retrace the selloff from earlier this year should it break out of the downward trend from April, with a break/close above 0.7380 (50% retracement) to 0.7390 (78.6% expansion) to open up the next topside region of interest coming in around 0.7490 (61.8% retracement) to 0.7500 (61.8% expansion).
  • Key Resistance: 0.7848 (June 2015 high) to 0.7860 (61.8% expansion)
  • Key Support: 0.6826 (2016 low) to 0.6830 (161.8% expansion.

The Reserve Bank of Australia (RBA) unexpectedly cut the Official Cash Rate (OCR) to a fresh record-low of 1.75% in May, with Governor Glenn Stevens and Co. arguing that ‘the inflation outlook provided scope for a further easing in monetary policy’ as the central bank curbs its outlook for inflation. Moreover, the RBA warned ‘employment growth has slowed from the strong pace of last year and leading indicators of employment have been somewhat mixed of late,’ and the central bank may further embark on its easing cycle in 2016 in an effort to further assist with the rebalancing of the real economy. The Australian dollar slipped below the 0.7600 handle following the RBA rate-cut, with AUD/USD extending the decline throughout the day as it closed at 0.7483.
 

Reprinted with permission of the publisher. The above story can be read on the website here.

The views expressed are not by association FNArena's (see our disclaimer).

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article 3 months old

The Overnight Report: Flip Flop

By Greg Peel

The Dow rose 113 points or 0.6% while the S&P gained 0.5% to 2109 and the Nasdaq added 0.5%.

Interest Rate Tango

Three factors impacted on the local market yesterday: Friday night’s weak US jobs number; yesterday’s weak local inflation gauge; and the storms wreaking havoc on Australia’s east coast.

While Wall Street would have been surprised if the Fed chose to hike again as early as this month, Friday night’s shockingly weak US jobs number left markets in no doubt it’s not going to happen. Janet Yellen has since implied as much overnight. This has two implications for Australian stocks.

Firstly, the resultant plunge in the US dollar lifted commodity prices and in particular the gold price, lighting a fire under the materials sector yesterday. While gold stocks rallied hard, 4% gains for both BHP Billiton ((BHP) and Rio Tinto ((RIO)), thanks to stronger iron ore and copper prices, helped drive the materials sector up 3.8% to be the clear winner on the day.

Secondly, a move up in US rates makes Australian yield stocks incrementally less attractive to US investors, hence the fact the weak jobs number has killed that off for now provided incentive to buy the yield-payers, being the banks, utilities, consumer staples and to some extent, BHP and Rio. Telcos should also be in that group, but they stayed put yesterday, probably because of weekend outages due to the storm.

The flipside of no US rate hike being positive for yield-payers is an RBA rate cut also being positive for yield-payers. From May into June we’ve seen expectations of further RBA rate cuts leap up on the weak March quarter CPI result and fall back again on the strong March quarter GDP result. Yesterday the Melbourne Institute’s monthly inflation gauge showed a 0.2% fall in headline inflation in May.

That follows April’s 0.1% gain, and takes annual inflation to 1.0%, down from 1.2% in April. That’s the lowest annual reading ever in the history of the gauge. Result? The market is now back to expecting further RBA rate cuts – not today, but probably in August and beyond.

So yesterday the yield-payers were more attractive on two counts. At 0.3%, yesterday’s rise in the financials sector reflected a balance between bank buying and insurance company selling, thanks to the storm. Consumer discretionary missed out, likely due to the impact on retail trade, albeit this sector often sees benefits down the track as affected households look to replace damaged furniture, whitegoods et al.

Add it all up and we saw a 0.8% gain for the ASX200 to 5360. The lead-in is positive again overnight, suggesting further upside today. Technically, if the market holds above 5350 the trend remains to the upside.

Coming Months?

Wall Street opened higher last night before settling down to await a speech by Fed chair Janet Yellen which by coincidence happened to be scheduled for one trading day after the weak jobs number.

In her speech, Yellen echoed the view of many in the market that one should not read too much into one strange looking data release, ie the surprisingly weak May jobs number, but instead concentrate on the trend. Assuming the trend remains intact, the Fed still intends to raise interest rates.

Yellen also confirmed the view of many in the market that the next hike will not be this month, ahead of the Brexit vote. The Fed chair made specific mention of the potential of this event to impact heavily on market sentiment. July would then tighten in the odds, but for one rather glaring omission.

In her previous speech, Yellen had underscored the more hawkish views of her FOMC colleagues in suggesting the next rate hike would occur in “the coming months”. Now, while in theory every month is “coming”, hence this hardly nails down the date, Wall Street took this to mean quite possibly June/July. But last night, all of a sudden, the “coming months” suggestion was gone from Yellen’s rhetoric.

Thus while Wall Street had already assumed the weak jobs number took both June and July off the table, Yellen’s comments, or lack thereof, have now reinforced that view.

This was enough to kick Wall Street on last night to its strongest closing level in 2016.

Commodities

A decent jump in the oil price also contributed to Wall Street strength. Oil did not participate in the post jobs number commodity price rally on Friday night because of the first jump in the US rig count in eleven months. But with Yellen’s effective confirmation, and further pipeline attacks in Nigeria, last night West Texas crude rose US82c to US$49.72/bbl.

Copper was the star base metal on Friday night while the others were caught in the headlights, but last night aluminium and lead rose over half a percent, and nickel and zinc both rose around two percent. Copper had a rest.

Iron ore is up another US$1.10 at US$50.60/t – back above the psychologically critical 50 mark.

Gold had its big move on Friday night and is steady at US$1244.70/oz, thanks to the US dollar index ticking back up 0.2% to 94.04.

The Aussie is steady at US$0.7365.

Today

The SPI Overnight closed up 15 points or 0.3%.

We saw 4% gains for BHP and Rio on the local market yesterday, and in London overnight the big miners each gained 6%. While there’ll be an element of double-counting, gains in iron ore and oil last night should ensure further strength today.

At 2.30pm the RBA will release a policy statement that will leave the cash rate unchanged, so the market will be very eager to read between Glenn Stevens’ lines to gauge whether an August rate cut is still a likelihood.

Meanwhile, as the storm rages on through Tasmania and damage begins to be assessed in Queensland and NSW, the scramble is on amongst analysts to figure out which of the insurers will be hardest hit and by how much, and which have sufficient reserves set aside.

Rudi will link up with Sky Business via Skype at around 11.15am today 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.)

(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

Buy the Dip

Last week saw the ASX200 falling from resistance at 5400 down towards support at 5250 as expectations of a rapid round of RBA rate cutting were reconsidered. Those expectations were fuelled by the weak march quarter inflation number but tempered by last week’s strong trade numbers reflected in both the March quarter GDP result and April trade data.

Expectations of further rate cuts led to strength in the banks – the biggest influence over the index by market cap weighting. Last week saw bank shares falling back again.

But as it looked like we might break back down through support and once again fall into the gravitational pull of 5000, the buyers stepped back in on Friday. Never mind what the US jobs number overnight might be, it was mostly a Buy Australia session. All sectors contributed on a relative equivalent basis.

Friday’s economic data release was the local service sector PMI, which swung back into expansion with a rise to 51.5 in May from 49.7 in April. Caixin’s independent take on China’s services PMI saw a fall to a three-month low 51.2 from 51.8. Nobody seemed to be paying much attention.

The rally on Friday took us into the middle ground of around 5300. Developments over the weekend may make for an interesting session today.

Yes, there is the US jobs report, which I’ll get to in a moment. But while the SPI Overnight closed up one point on Saturday morning, we’ve since seen destructive storms along Australia’s east coast, from South Queensland down to Tasmania, which are still in play. Immediately one might think of the impact on insurance companies, and the impact on retail sales. There were also major power outages in Sydney yesterday that shut down everything from online pizza ordering to EFTPOS payments at supermarkets.

That said, we also have tomorrow’s RBA policy meeting to consider, which might otherwise suggest a quieter day’s trading today in anticipation. While the market is only ascribing a small chance to a follow-up rate cut so soon, the central bank’s response to the balance of weak inflation and strong economic growth will be carefully analysed.

Job Shock

The US added 38,000 jobs in May. Even if you adjust for the 35,000 striking Verizon workers the result does not even come close to the 160,000-odd forecast. Wall Street was dumbfounded.

To confuse matters further, the unemployment rate actually plunged to 4.7% from 5.0%. But this was due to a big drop in the participation rate, which in itself is another negative. On the other side of the coin, wages grew by 0.2%, which in any other set of numbers would be considered reasonable.

The initial reaction on Wall Street was to sell, and the Dow was down 150 points from the open. But as had been the case almost every day last week, the rest of the session was spent grafting back that loss. There are three ways to interpret 38,000.

Either it’s bad news, suggesting the US economy is slowing, or it’s good news, suggesting the Fed will hold off on raising, or in the wider scheme of things, it’s neither here nor there. It is not the first time in the past few years Wall Street has been confronted with a jobs number that has fallen spectacularly short of expectation. In those instances, the following month saw a big rebound to a number above expectation.

So it could just be a blip. But suffice to say, ahead of the release the market was factoring in around a 33% chance of a Fed rate hike in June and a 66% chance in July. In the wake of the release, the market has June at a near zero chance and July at 33%.

The shift in odds is underscored by a huge drop in the US dollar index, down 1.8% to 93.87 in a heartbeat. At the same time the Aussie jumped 1.9% to US$0.7366 as a result, and gold jumped US$33.10 to US$1243.50/oz. The US ten-year bond yield fell 11 basis points to 1.70%.

On increasing expectation of a Fed rate hike, US banks have been enjoying a rally and leading Wall Street back towards its highs. The banks thus took a bit of a hiding on Friday night, but there was sufficient offset elsewhere to ensure a less dramatic close. A lower greenback is good for commodity prices, so resource sectors performed well, and yield stocks such as utilities regained their appeal.

The Dow closed down 31 points or 0.2%, the S&P lost 0.3% to 2099 and the Nasdaq fell 0.6%. That the S&P should close near 2100 is significant, as this has proven to be neutral territory of sorts in 2016 – the pivot point between strength and weakness.

Fed chair Janet Yellen will coincidentally give a speech tonight on monetary policy. The market has now dismissed a June hike, albeit many presumed the Fed would wait until after the Brexit vote anyway, but now July looks uncertain. We’ll nevertheless see the June US jobs report out before the July meeting and if there is indeed a rebound, the picture may well change once more.

What will Yellen have to say tonight?

Commodities

Commodity prices have been beholden of late to Fed rate hike expectations and the negative implications of a stronger US dollar. All base metal prices were stronger on Friday night but copper’s 1.5% gain was the stand-out, with other moves less significant. There is of course a trade-off implication of a weaker US economy.

Iron ore rose US$1.60 to US$49.50/t.

The oils did not rally, because for the first time since last August, the US rig count saw an increase over the week. West Texas crude fell US16c to US$48.90/bbl.

This is exactly what the market has been anticipating/fearing. A price of US$50/bbl has been widely considered as the threshold at which shuttered US production would begin to come back on line following a period of weak prices. While 50 has not quite been achieved the WTI price has stabilised above 45 and thus we see some producers now confident to fire up again, no longer burning cash at spot prices.

If they start to forward-sell their production, the risk is prices will fall again. Oil has surprised many by managing to hang onto its rebound despite runaway OPEC production increases.

The Week Ahead

As noted, the SPI Overnight closed up one point on Saturday morning, suggesting the local market is not quite sure what to make of the US jobs number.

Of particular interest locally today will be the release of the Melbourne Institute inflation gauge for May, leading into tomorrow’s RBA meeting. Is the weak inflation trend continuing? We’ll also see ANZ job ads today. The other highlight for the week locally will be housing finance numbers on Wednesday.

China will release May trade numbers on Wednesday ahead of the usual industrial production, retail sales and fixed asset investment suite on the weekend.

In the US, Yellen’s speech tonight will be the highlight in a week largely devoid of economic data, up until fortnightly consumer sentiment on Friday.

Things have quietened right down now for local corporate events and releases, beyond any unscheduled “confession session” announcements that may yet be forthcoming. Vicinity Centres ((VCX)) will hold an investor day on Wednesday.

The coming weekend is a long one, with the ASX closed next Monday for the birthday the Queen has already had. We should probably expect some squaring up towards the end of the week.

Rudi will appear on Sky Business through Skype-link on Tuesday, 11.15am to discuss broker calls. On Thursday he'll be on screen from inside Sky news studios from 12.30-2.30pm and on Friday he'll Skype-connect again at around 11.05am.
 

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: Bring On Jobs

By Greg Peel

The Dow closed up 48 points or 0.3% while the S&P gained 0.3% to 2105 and the Nasdaq rose 0.4%.

June Swoon

It’s as if someone called “last drinks” on the rally at the end of May and the punters have been gradually making their way out the door ever since. May saw the ASX200 rally from around 5250 to over 5400 and the past three sessions have us back at 5278. Were the market to break back down through 5250 it would be technically bearish, although we’ve seen a big jump in the futures overnight.

The change of heart between May to June has been all about a contradiction having arisen between Australian inflation and Australian economic output. The weak March quarter CPI result prompted the RBA to cut the cash rate and economists to predict at least one if not three more to come. This week’s March quarter GDP made the market think again. It’s a tough one, given typically one would expect strong economic growth to drive stronger inflation. But really all we’ve seen is solid sales of rocks while price and wage growth has been non-existent.

Then we can throw in the Fed, which Wall Street has come to believe will hike again in July, if not in June. A Fed rate hike by default acts like an RBA rate cut via the exchange rate.

The banks had been the major driver of the rally in May, on a supposed promise of lower local rates to come, which offer up the opportunity for mortgage repricing and eases the pressure on bad debts. The banks have now led the index back down again.

There was not much happening yesterday ahead of the day’s economic data releases. And again, the April data is underscoring the contradiction of the March quarter. Retail sales rose by a modest 0.2%, missing expectations and leaving the annual growth rate unchanged at 3.6%. This number points to low inflation. Meanwhile the trade deficit fell in April, driven by a 0.6% rise in exports and 0.8% fall in imports. The positive trade numbers echo the GDP strength.

The market sided with the GDP, and sold the banks down again, by an influential 1.2%. Materials backed up with a 1.0% fall on lower copper and iron ore prices. Healthcare lost 0.7% after one broking house downgraded the listed aged care sub-sector but otherwise there wasn’t much else going on.

Interestingly, the SPI Overnight has closed up 40 points or 0.8%, when Wall Street only rose 0.3% and commodity prices are again lower. Perhaps as we near 5250 in the physical, traders who sold at 5400 are now looking to get back in on better value.

Do Jobs Matter?

For the second session in a row, Wall Street fell on the open and rallied back to the close. This time the indices finished a little higher, such that the S&P500 is sitting above the 2100 level – significant because it is a round number.

Wall Street has now gone into summer-lite mode, with the long weekend signaling the beginning of the annual leave period. Volumes typically drop in the summer, and there was never going to be much going on last night ahead of tonight’s jobs number.

OPEC oil ministers held their regular mid-year meeting last night for the world’s amusement, which, blow me down, did not produce any agreement. The oil price is little changed.

Otherwise, the question on Wall Street last night was not so much “What’s the jobs number going to be?”, but more a case of “Does it really matter what the jobs number is?”. The “whisper” number is 160,000, which is in line with April and below the 200,000 trend of previous months. But there is a complication with regard the 35,000 Verizon workers who went on strike has month, and either way Wall Street is coming to believe the Fed has already made up its mind.

If it wasn’t for the Brexit vote, the Fed would hike in June. Because of the Brexit vote, they’ll hold off till July. So what impact is this final bit of data meant to have?

And these days it’s never quite clear whether Wall Street wants good news or bad news anyway. The S&P500 is back at its April high and only 34 points from the all-time high. There doesn’t seem to be a lot of rate rise fear.

Commodities

West Texas crude is up US15c at US$49.06/bbl.

Copper has fallen another half a percent and aluminium 2%.

Iron ore fell US$1.40 to US$47.90/t.

The US dollar index is slightly higher at 95.54 and gold is slightly lower at US$1210.40/oz.

The Aussie is down 0.4% at US$0.7227 and is right back where it was before this week’s GDP result.

Today

The SPI Overnight closed up 40 points or 0.8%.

It’s service sector PMI day across the globe today, including Caixin’s take on China.

US jobs tonight.

Asciano ((AIO)) holds an EGM today to discuss the wolves at the door.

Rudi will Skype-link with Sky Business this morning, likely around 11.05am to discuss broker calls.
 

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article 3 months old

The Overnight Report: Paint It Beige

By Greg Peel

The Dow closed up 2 points while the S&P lost 0.1% to 2096 and the Nasdaq rose 0.3%.

Good News is Bad News

Yesterday’s plunge from the open for the ASX200 may have confused certain ABC finance commentators but I believe the story is pretty clear. The market may have dropped a couple of hours before the strong GDP result was released but the fact is we already knew the GDP result would be strong by virtue of Tuesday’s surprisingly positive net export result.

That result had economists scrambling to upgrade their GDP forecasts from under 3% annual growth to potentially over and guess what, it was 3.1%.

I noted yesterday that May had seen the ASX200 rise from 5250 to 5400. It was not about commodity prices – they rose in April, and while oil has moved little since, iron ore has fallen. This particular increase was all because at the beginning of the month the RBA delivered a surprise rate cut thanks to the March quarter disinflation shock, which again had economists scrambling, this time to lower their cash rate expectations and predict 1.00% by next year.

The May rally was thus led by the banks and other yield-payers. Yesterday’s strong GDP result, coming off the back of the strong December quarter result, now has economists questioning whether 1.00% is at all possible. Suddenly the yield-payers are not as attractive as they were last week. On Tuesday local investors started to sell these sectors in response to the export data, while the significant cohort of offshore investors in Australian yield slept. Overnight, offshore investors had the chance to place their “sell on open” orders ready for yesterday morning.

So down we went. There was a brief “buy the fact” rebound when the actual GDP result was released, but then the Chinese PMI results for May were released.

Beijing had the manufacturing PMI unchanged at 50.1. Caixin’s equivalent fell to 49.2 from 49.4. Beijing’s services PMI fell to 53.1 from 53.5. Caixin’s equivalent is due out tomorrow. For a brief couple of months the Chinese economy looked like it might have bottomed out, ahead of a stimulus-fuelled recovery. But as I had pointed out at the time: never trust the numbers around Chinese New Year.

Suffice to say the ASX200 fell again in the afternoon. The resource sectors joined in thanks to the China data, but we had lower oil and iron ore prices from the outset anyway. Any attempt by the ASX200 to conquer 5400 and push back up towards 6000 again appears now to have been postponed.

Or has it?

Economists agree the GDP result is unusual, and misleading. In short, the strong growth rate comes down to an increase in the volume of output, not the value. On the one hand, lower commodity prices had stripped export volumes of that value. On the other, wages growth is at its slowest pace since the Keating recession and inflation is also slowing. The official unemployment rate is surprisingly low but only because the official unemployment rate is a joke. The vast number of Australians who’ve given up looking for work are the ones ensuring there is no inflation in this country.

Does this, therefore, mean the RBA can keep cutting? That will be the question for June.

Modesty

When the numbers start to become misleading, analysts like to actually get out into the real world to get a handle on what’s actually going on. A good example of this is the Fed’s Beige Book – an anecdotal assessment of economic activity in the twelve Fed districts.

If yesterday’s Australian GDP brought into question further RBA rate cuts, last night’s Beige Book brought into question the June or July Fed rate hike Wall Street has all but come to assume. It was a Triple-M result – growth in each district was either “moderate”, “modest”, or “minimal”. If anything, the US economy has slowed since the last anecdotal assessment.

So maybe the Fed won’t hike after all. How does one respond?

Well it is no longer clear – on Wall Street at least – whether bad news is bad news or good news, or vice versa. Which probably explains why the Dow initially fell over a hundred points before recovering all of that loss by the close. I’ve made the reference before but it’s fitting once again – if this was QI, now’s the time to hold up your “Nobody Knows” card.

On the positive side, the US manufacturing PMI for May rose to 51.3 from 50.8. But while this is an improvement, it still suggests a very “modest” pace of growth. Not the stuff of rate hikes. Meanwhile, the pace of auto sales also slowed in May and construction dropped 1.8% in April.

To further complicate matters, the S&P500 index has had a couple of goes at the technically important 2100 level but failed to breach it. Just like the ASX200 keeps failing at 5400.

Attention now turns to the data biggie, being tomorrow night’s US non-farm payrolls report. Tonight sees the private sector precursor. I apologise for assuming that report was due last night, on a Wednesday as always, but the long weekend has knocked it back by a day.

Commodities

The US dollar index fell for a change last night, down 0.6% to 95.4, thanks to the Beige Book. That should be supportive of commodity prices, but the implications of a slower than assumed US economy, and disappointing Chinese data, should do the opposite. In short, there was no clear trend last night.

West Texas crude is little changed at US$48.91/bbl.

Copper fell over a percent when all other base metals rose, including zinc by 2.5%.

Iron ore fell US30c to US$49.30/t.

Gold is down slightly at US$1212.70/oz.

The Aussie dollar initially shot up on the GDP result yesterday, was then sold back down by those who bought it on the export number the day before, and rose again last night thanks to the weaker greenback. It’s up 0.3% over 24 hours at US$0.7255.

Today

The SPI Overnight closed up 3 points.

With the March quarter now put to bed, today brings local the retail sales numbers and trade balance for April.

The ECB holds a policy meeting tonight.

The ADP private sector jobs number for May is out in the US.

Challenger ((CGF)) will hold an investor day today.

Rudi will make his weekly appearance on Sky Business today, 12.30-2.30pm and then returns for an interview on Switzer TV between 7-8pm.
 

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article 3 months old

Aussie Dollar: Trend Remains Negative


Bottom Line 31/05/16

Daily Trend: Down
Weekly Trend: Down
Monthly Trend: Down
Support Levels: 71.40 / 69.70 / 68.20
Resistance Levels: 74.00 / 75.40 / 77.20 / 78.40

Technical Discussion

The AUD fundamentally looks to be at the mercy of a raft of upcoming data releases that could well dictate whether the all important 71.40 price point is going to be able to hold up over the coming weeks or not. Janet Yellen continues to strongly jaw bone the need for further rate hikes, potentially two more before the year is out, which may well put a floor under the USD for the time being. Today monthly building approvals will be released along with CPI and employment figures in the Eurozone. Wednesday we look out for GDP figures combined with manufacturing data out of China. Then this will be followed up on Thursday with retail sales figures, and Friday with the non farm pay roles. All potential currency movers so expect volatility this week.   

Reasons to stay neutral (bearish again below 71.40):
→ Inflation remains in check in Australia (deflation a concern)
→ unemployment remains an issue yet recent reporting more positive
→ Further interest rates drops still possible
→ support zone 67.00 - 68.00 continues to hold

As readers on these pages know, we were very optimistic about the price move higher off the 15th January low at 68.20. It was a 5-wave structure which is exactly what you want to see as part of potential trend reversals, and the move fitted in nicely with all of Elliott's core rulings. Even though we were expecting a pullback off this move with some reasonable depth attached, there are some red flags now in play that we are a little concerned about. Firstly the retracement has been impulsive to the downside so clearly stronger than we normally like to see if the initial move higher is to have bullish backing on a longer term basis. Also we normally like to see price pull back no deeper than the 50.0% - 61.8% retracement zone which aligns 73.30 and 72.10 respectively. Price on this move has now tagged 71.40, so lower than what we would normally like to see.

We do sometimes look at another Fibonacci number especially for Wave-2's and that is the 78.6% retracement zone which in this case measures in at 70.40. From our experience though, this sort of depth can be damaging so its not one we often refer to. For now we are ok (just !) with the 71.40 low point yet this is our line in the sand where we need price to make a recovery from and not head any lower. We still have our eye on the larger bullish reverse head and shoulders pattern as well . It is complex (note the two heads) yet it doesn't trigger until 78.40 can be broken past. It has a solid target of 90.00 if this can be achieved though. On the flip side, symmetry within this pattern break downs badly below 71.40. So right at this juncture, its all eyes on 71.40 !  

Trading Strategy

We continue to try and maneuver ourselves for another trade on the long side yet basis our analysis price appears to be doing everything in its power to cancel our pending trade recommendation. For now our aggressive strategy is to trade long at 72.70 with stops below 71.40 if triggered. Yet any price drop below 71.40 from here and the recommendation will be taken off the table. A shorting opportunity could be considered below 71.40 for agile traders, yet as things presently sit, the risk reward doesn't look that great so this is not a trade we are going to recommend right at this point in time.
 

Re-published with permission of the publisher. www.thechartist.com.au All copyright remains with the publisher. The above views expressed are not by association FNArena's (see our disclaimer).

Risk Disclosure Statement

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Technical limitations If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.

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article 3 months old

The Overnight Report: End of Month

By Greg Peel

The Dow closed down 86 points or 0.5% while the S&P fell 0.1% as the Nasdaq rose 0.3%.

Good News is Bad News?

We saw another questionable open on the ASX yesterday, in which the index plunged 43 points on the opening rotation with no lead-in from offshore whatsoever, following a flat session on Monday. As soon as the market was “open”, the index recovered virtually all of the ground the computers had lost.

Presumably the humans have learned to simply stand aside, let the computers run riot in the first half hour.

With normal programming re-established, all eyes were on the release of the March quarter current account data.

The current account and trade deficits both narrowed more than expected, which in short is good news for those who listen anxiously to politicians’ warnings over Australia’s debt. Importantly, the loss in export dollars experienced in the quarter due to plunging commodity prices was offset by the increase in volumes exported.

Export volumes rose 4.4%, underpinned by strong contributions from resources (5.6%) and services (6.1%). Export prices fell 5.0% and are down 11.3% year on year. The net result is a 0.7% fall in the value of exports.

On the other side of the ledger, the volume of imports fell 0.8%, led by a 7.0% fall in mining equipment. Import prices were 3.1% lower, and thus the value of imports 3.8% lower.

Put the two together, and the terms of trade will add 1.1 percentage points to March quarter GDP – a figure ANZ’s economists described as “very solid” and CBA’s as “whopping”. Economists have scrambled to lift their GDP forecasts from a prior 2.8% annual to as much as 3.2%.

But what does this mean for RBA rate cut expectations? Perhaps a clue lies in the fact yesterday saw the banks fall 0.5%, the telcos 1.2% and consumer staples 1.4%. Aside from a 1.5% fall in energy due to the lower oil price, these three yield-paying sectors led the index down. We should acknowledge there was also a pay dispute issue impacting Wesfarmers, and that utilities only fell slightly.

It’s not cut and dried, but the bottom line is if the March quarter GDP suggests the Australian economy is actually healthier than even the RBA had assumed, then economists might start to back away from their 1.00% cash rate forecasts.

And just to add fuel to that fire, yesterday’s data releases for the month of April showed a big rise in business borrowing – a positive indication for Australia’s economic “transition” – and an increase in building approvals when economists had forecast a fall following March’s strong result.

It would seem rumours of the housing boom’s demise are premature.

Yesterday it appeared the local market was trading off a theme so pervasive in US markets for so many years: With regard monetary policy, good news is bad news.

Sell in May? The ASX200 rose from 5250 to 5400 over the month. It would be of no surprise if yesterday simply saw some end of month squaring.

Flat in May

The same is likely true on Wall Street last night, albeit the Dow closed May only a handful of points higher for the month. Last night’s session was further complicated by stage 2 of the introduction of US-listed Chinese stocks into the various MSCI global indices.

Many an index-tracking fund benchmarks off the MSCI indices, and if new stocks are added, others must be sold to match new index weightings. The net impact should be a net offset, but if US stocks have to be sold, that impacts on US indices.

Last night’s data showed US consumer spending jumped in April by a better than expected 1.0% -- the biggest monthly gain in seven years. Incomes rose 0.4%. The personal income & expenditure (PCE) measure of inflation rose to 1.1% annual from 0.8% in March in core terms. This is the Fed’s preferred indicator.

Nothing to stop a June rate rise there, although Wall Street continues to favour a post-Brexit vote July hike. Having at one point priced in little chance of a rate hike in 2016, the market now sees July as about a 66% chance to June’s 33%.

Last night also saw oil continue to drift back, having failed to penetrate the 50 level.

Commodities

West Texas crude is down US79c or 1.6% at US$48.83/bbl.

Also failing at the 50 mark is iron ore, which fell US70c to US$49.60/t.

It was a quiet return to trading on the LME. Zinc jumped 1.5% but moves in all other metals were negligible.

Gold found a bit of a bid last night nevertheless, having fallen steadily of late on the stronger greenback. The US dollar index is up 0.2% at 95.86 but gold is up US$10.10 at US$1215.00/oz, possibly also reflecting the end of the month.

On the strong current account numbers, the Aussie is up 0.7% at US$0.7231.

Today

The SPI Overnight closed down 24 points or 0.5%.

While Sell in May might have been quashed for another year, June is a month downunder which can often be impacted by tax-related selling of underperforming stocks ahead of EOFY.

Australia’s March quarter GDP result is out this morning.

And being the first of the month, it means PMIs. Most importantly, we’ll see May manufacturing PMI numbers for China from both Beijing and Caixin, along with Beijing’s service sector PMI.

The Fed will release its Beige Book tonight, but the focus will be on the ADP private sector jobs number for May, ahead of Friday’s non-farm payrolls release. There is a complication this month given 35,000 workers at Verizon were on strike over the survey period and will thus be counted as “unemployed”, even though they’re now back. So there may need to be some averaging between the May and June numbers, albeit the Fed meets in between.

Rudi will host Your Money, Your Call Equities tonight on Sky Business, 8-9.30pm.
 

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article 3 months old

The Overnight Report: Tumbleweeds

By Greg Peel

Last night’s public holidays closed US stock and bond markets and UK markets including the LME.

Losing Streak

It was thrill-a-minute stuff on the local bourse yesterday. The ASX200 whipped around violently to be as much as 10 points up from the opening bell and 14 points down mid-morning. The whipsaw ride continued through the afternoon before traders were finally able to draw breath with a close of up 2.

Jokes aside, there was more than one reason the local market should put in a quiet session yesterday.

The lead-in from Wall Street was insignificant, following commentary from Janet Yellen that neither confirmed nor denied a June Fed rate hike. US markets then shut down for the long weekend, ahead of a week full of economic data releases culminating in the last monthly jobs report before the next Fed meeting.

It is also a big week for Australian data, with tomorrow’s GDP set to provide either greater or lesser cause for the RBA to cut again in August.

And on that note…

Yesterday’s March quarter data showed company profits falling by 4.7% when economists had forecast a flat result, to be down 8.4% year on year. The December quarter number was also revised down to a greater fall than previously published.

Among the sectors, mining profits (which includes energy) fell 9.6%, manufacturing 14.5%, utilities 5.6% and property and business services 6.4%. The stand-out positive contributors were transport and storage up 5.3% (online shoppers?) and accommodation and food services up 3.8%. Construction only managed a 0.6% gain, as did retail trade.

Wages data within yesterday’s release underscored the current trend. Employment is presently growing at an annual rate of 2.1% and yesterday’s numbers noted 3.5% growth in wages. But because 60% of jobs growth is part-time, annual weekly wages growth, CBA economists calculate, is only 1.4%.

Put the profits and wages data together and there is no reason to foresee anything other than low inflation. On that basis, actual GDP result notwithstanding, there is little to suggest the RBA will not cut again.

Indeed, the Aussie dollar did drop yesterday on the data release to around 70.5, but has recovered overnight to be unchanged at US$0.7183, despite the US dollar index being little changed. The market is already pricing in an August rate cut.

The other reason the local market went a whole lot of nowhere yesterday is largely a technical one. We are stuck on a pivot point at 5400. This week’s data here and in the US will be critical to central bank monetary policy, and hence we are likely seeing some pause for thought among investors.

But despite the flat close for the ASX200, there was actually some movement among sectors yesterday. Materials was the only major loser, falling 0.7%, while energy was up 0.7%, consumer staples was up 0.8% and discretionary 0.5%, with healthcare up 0.5%. The banks and other sectors went nowhere. Clearly materials has regained a lot of its market cap oomph lost when the big miners were trolling the bottom.

Commodities

No base metals, with the LME closed.

West Texas crude is little changed at US$49.62/bbl.

Iron ore fell US60c to US$50.30/t.

Gold is down US$7.90 at US$1204.90 despite the US dollar index being little changed at 95.65.

Today

The SPI Overnight closed down 7 points.

Tonight in the US brings house price and consumer confidence numbers. Most critical, however, will be the April personal income and spending data, including the Fed’s preferred PCE inflation measure.

Data releases in Australia today include April building approvals and private sector credit, along with the March quarter current account, including the terms of trade.

Rudi will Skype-link with Sky Business today to discuss broker calls. Macquarie has initiated coverage on lithium stocks. Should be fun.
 

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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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