Tag Archives: Currencies

article 3 months old

The Overnight Report: Doha Indifference

By Greg Peel

The Dow closed up 106 points or 0.6% at 18,004 while the S&P gained 0.7% to 2094 and the Nasdaq rose 0.4%.

Playing it Safe

The primary talking point across financial markets over the last 24 hours is Doha, and genuine surprise that oil prices did not collapse in the wake of a lack of agreement at the meeting. But given no one believed there would be an agreement reached, why the surprise?

The Australian market had to make the call yesterday before northern hemisphere oil trading provided direction. I had noted yesterday that the Aussie had plunged over a cent on the Doha news but immediately recovered more than half of that drop, and suggested that might just be a hint as to what would happen in other markets.

Sure enough, the ASX200 fell 39 points from the open yesterday, led down by the energy sector, and it looked like we might be in for an ugly session. But no, by late morning the index was back to square.

We drifted off again in the afternoon to a close down 20 points, and the energy sector closed down 2.9%, suggesting it might be a good idea to square up ahead of what no one was sure was going to happen in oil markets last night. But the energy sector had fallen well over 3% initially.

The banks took a similar tack, given the market is tying in the energy sector loan factor at present. The financials sector fell 0.7%. Materials fell 0.9% on a pullback in the iron ore price.

Those losses were nevertheless offset by two other sectors – healthcare, which rose 1.1%, and telcos, which rose 1.5% after analysts all agreed a share buyback will likely follow Telstra’s ((TLS)) asset sale last week.

It was not the stuff of disaster. And just as well, given what did actually eventuate in oil markets and on Wall Street overnight.

Doha Schmoha

The WTI price plunged 6% on the open last night, hitting US$37.61/bbl. The fall most likely reflects buyers standing aside to see what would happen rather than sellers going in hard. When the price found a bottom, the buyers came in and steadily pushed the price back again throughout the session, to only a modest drop.

US energy stocks all opened lower from the opening bell, sending the Dow down 50 points, but as soon as the oil price found a bottom, so did Wall Street. Not only did energy stocks recover, they quickly became the leaders in a rally which took the Dow up to the 18,000 mark for the first time since last July. The suggestion is the market had set itself short oil and short oil stocks ahead of Doha, expecting a big plunge when no agreement was reached. As soon as buying appeared, a short-covering scramble was triggered. Oh no, we got it wrong.

I don’t buy that argument. I believe nobody expected an agreement in Doha and on that basis, WTI at 40 was already pricing that reality in. All that happened last night is that buyers stood aside in the oil and stock markets to let a few wood ducks make fools of themselves early, providing an opportunity for the smarter money to take advantage. WTI is at 40 because US production is on the decline. It’s got nothing to do with OPEC.

There is also a suggestion a strike by oil workers in Kuwait overnight was actually oil’s saviour. Nah.

Meanwhile, in US economic news, an index of housing sentiment held steady at 58 for the third month running, suggesting modest but consistent optimism. In earnings news, Morgan Stanley became the fifth major US bank to release a less-bad-than-expected earnings result. Pepsico also beat on earnings, while Disney had a strong session following solid weekend box office on the release of its Jungle Book remake.

I remember going to see the original when knee-high, at the Sky studios in North Ryde. Of course back then it was a drive-in.

On last night’s rally the Dow is now a mere 300-odd points shy of its all-time high. The S&P, which is the “real” market, is about 40 points shy. The Dow has reclaimed the psychological level of 18,000, while the S&P only needs a few more points to retake its psychological level of 2100, above which traders see only upside.

With the Yellen Put in place, and on the assumption the less-bad theme continues throughout the US earnings season, traders are feeling pretty confident. This week is an important one for earnings as the first of the big multinational industrials release their numbers.

Commodities

West Texas is down US37c at US$40.05/bbl and Brent is down US13c at US$42.93/bbl.

An increasingly more volatile iron ore price has bounced back a solid US$2.40 to US$59.90/t.

Aluminium, copper and zinc all rose around 0.5% on the LME and nickel managed 2%, while tin fell 1%.

Gold is relatively steady at US$1232.50/oz despite the US dollar index being down 0.3% at 94.46. The Aussie is nevertheless up 0.3% as a result to US$0.7749 – above where it was before Doha.

Today

The SPI Overnight closed up 53 points or 1.0%.

Presumably today we’ll see a recovery in the local energy sector after the safety game played yesterday. We should also see a reversal in the materials sector’s fortunes thanks to iron ore. And Dow 18k will likely in itself provide optimism the local market might just now have the capability to push through to the 5400 mark chartists have been adamant about for some time. Although it will depend on further US earnings reports.

And last night it was all but confirmed Australia is headed to, as the Brick would call it, a “double dis-allusion” election. While history shows stock markets are indifferent to political stripe, the prospect of a government being able to govern without the hindrance of senate cross-benchers resembling a bowl of mixed nuts should be a positive for sentiment, if that’s how things play out.

Back in the real world, Rio Tinto ((RIO)) and Oil Search ((OSH)) both report quarterly production today, Burson Group ((BAP)) hosts an investor day and Recall ((REC)) hosts an EGM with regard the Iron Mountain takeover offer, which has now been given the green light by the FIRB.

The minutes of the April RBA meeting will also be released today, with the market wondering what the central bank might ultimately do about the Aussie. Glenn Stevens will speak tonight in New York, which probably won’t be a forum for offering currency hints.

Rudi will Skype-link up with Sky Business at 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

No Deal in Doha

Shock horror. The meeting of OPEC and non-OPEC oil producers in Doha last night has failed to reach any agreement on a coordinated production freeze. The first market to respond this morning to the stunning news is the Aussie dollar, which fell from around US77.2c to under US76c in a heartbeat.

But in almost as short a space of time, the Aussie is currently back at US76.6c.

As to why the meeting in Doha even went ahead is a mystery. All year Saudi Arabia has said it will only freeze production if all relevant oil-producing nations, including Iran, freeze production, and all year Iran has said no. Heading into the meeting, Saudi Arabia maintained its position. As it turned out, Iran didn’t even bother to attend.

The question now is as to whether, heading into the meeting, oil and other markets had accepted the fact the whole thing was going to be a farce or whether today will bring substantial moves in response, in particular a plummeting oil price. Perhaps the Aussie has provided a clue. Were the initial response in oil prices to be a plunge, the buyers may well be ready to jump on the opportunity and damage will be limited.

There can hardly be any excuse for being surprised.

And then there’s China

Notably, the only sector not to finish in the green on the local market in Friday’s trade was energy. A slight dip suggested squaring up for Doha.

The banks and the materials sectors both had quieter sessions after their solid runs last week, up 0.5% each. This left the rest of the market, which had mostly taken a back seat last week, to pick up the ball and have a run. The consumer sectors, healthcare, telcos and utilities all posted gains of around 1% or more, with industrials just off the pace. It was a choppy session, but in the end the 0.8% gain for the ASX200 was mostly a market-wide effort.

The highlight of the day was the release, mid-session, of Chinese economic data.

China’s GDP grew by 6.7% in the March quarter, smack on expectation. That’s down from 6.8% in December, and, as the headlines in the populist press will be quick to point out, the slowest pace of growth since 2009. It may be a fact but it’s also an ignorant comparison. China’s economy has grown substantially since 2009, such that to achieve the dollar value of additional GDP represented by 6.7% growth today would have required a growth rate in 2009 well into double digits.

In the month of March, Chinese industrial production grew by 6.8% year on year, up from 5.4% in February and ahead of 5.9% forecasts. Retail sales grew by 10.5%, up from 10.2% and ahead of 10.4% forecasts. Year to date fixed asset investment grew by 10.7% over the same period last year, beating expectations of 10.3%.

While drawing upon the usual grain of salt, we may conclude from the data that the stimulus measures undertaken by Beijing last year and into this year are finally starting to see some results. But once again the caveat is the impact of volatility around the Lunar New Year break.

The Chinese numbers helped lift a wobbly ASX200 to a stronger close on Friday but it was not the sort of performance one might have expected in times past when China reported Street-beating numbers. The local resource sectors had a muted session.

Wall Street

Wall Street’s session on Friday was mostly about waiting for Doha. The WTI price fell a dollar to sit poised near the US$40 mark in anticipation. US oils stocks similarly saw a square-up.

Citigroup was the last of the major US commercial banks to report on earnings on Friday and just as had been the case for its counterparts throughout the week, Citi reported a result that was weak but not as weak as forecast. All up Wall Street finished slightly lower on Friday night but higher for the week, led by the rebound in bank stocks.

On Friday night the Dow closed down 28 points or 0.2% while the S&P fell 0.1% to 2080 and the Nasdaq lost 0.2%.

US data releases for the session were weak. Industrial production fell a greater than expected 0.3% in March to mark the sixth monthly decline in seven. The Michigan Uni fortnightly measure of consumer sentiment showed a fall to 89.7 from 91.0 at end-March, suggesting a fourth consecutive month of decline.

Bucking the trend, The Empire State activity index rose to 9.6 from 0.6 last month, to post its strongest reading since January 2015. But this series has become increasingly volatile, and could just as easily be negative next month.

Either way, Wall Street is currently supported by the Yellen Put. Weak data only serve to push out the expected timing of the next Fed rate hike.

Commodities

On Saturday morning, West Texas crude was sitting at US$40.42/bbl, down US$1.03 from Thursday night, and Brent was down US81c at US$43.07. We await tonight’s reaction to Doha.

We can say the same for base metal prices, given the direction of oil has this year been a significant factor in sentiment on the LME. Moves were mixed on Friday night, with zinc’s 1% gain the standout as copper fell 0.7%.

Iron ore fell US$1.10 to US$57.50/t.

The US dollar index had slipped 0.2% by Saturday morning to 94.70, which helped the Aussie up 0.4% to its pre-Doha level of US$0.7726. Gold rose US$6.50 to US$1234.10/oz.

The SPI Overnight closed down 4 points on Saturday morning, but that’s no longer relevant.

The Week Ahead

The US earnings season steps up a gear this week, as a range of Dow components across all sectors take centre stage. Morgan Stanley and Goldman Sachs will round out the investment banking performance, while everything from Johnson & Johnson to Google, Caterpillar and General Electric will offer a more widespread indication of the state of the US economy.

Economic data releases will come thick and fast as well, but as suggested, they lack any real clout above the Fed’s safety net.

Tonight sees housing sentiment, tomorrow housing starts and Wednesday existing home sales, while Thursday brings house prices, leading economic indicators, the Philadelphia Fed activity index and the Chicago Fed national activity index. Friday will see a flash estimate of April’s manufacturing PMI.

Japan and the eurozone will also flash on Friday. The ECB will hold a policy meeting on Thursday but no one is expecting anything new.

It’s a quiet week for Australian data, but the RBA will be in the frame nonetheless. The central bank’s Financial Stability report, released on Friday, suggests concerns over Australia’s apartment construction bubble. Glenn Stevens will speak on Tuesday, and the minutes of the April RBA meeting will be released.

There’s plenty of action on the local stock front this week. The resource sector quarterly production report season ramps up in earnest, with highlights this week featuring Oil Search ((OSH)) and Rio Tinto ((RIO)) tomorrow, BHP Billiton ((BHP)) and Newcrest Mining ((NCM)) on Wednesday, OZ Minerals ((OZL)) and South32 ((S32)) on Thursday and Santos ((STO)) on Friday.

Outside of resources, quarterly reports will be forthcoming from Transurban ((TCL)) today and Brambles ((BXB)) and Challenger ((CGF)) on Thursday. Wesfarmers ((WES)) will report quarterly retail sales on Thursday.

Cimic ((CIM)) and Woodside Petroleum ((WPL)) will hold AGMs on Thursday.

Watch the price of Woodside this morning.

Rudi will appear on Sky Business on Tuesday around 11.15am, via Skype-link, then again on Wednesday, to host YMYC 8-9.30pm, then twice on Thursday (12.20-2.30pm and Switzer TV between 7-8pm), and then again via Skype-link on Friday, usually 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: Banging Against The Ceiling

By Greg Peel

The Dow closed up 18 points or 0.1% while the S&P was flat at 2082 and the Nasdaq was flat.

Escape Velocity

Take what you will from yesterday’s local jobs lottery. A net 26,100 new jobs were added, more than forecast, and the unemployment rate fell to 5.7% from 5.8% on an unchanged participation rate. Sounds pretty encouraging, and the reason why the Aussie is up half a percent at US$0.7692.

The Aussie actually traded higher on the release, but closer inspection reveals 26,100 jobs represents the addition of 34,900 part-time jobs and the loss of 8,800 full-time jobs. This makes more sense, given high profile closures at the likes of Dick Smith and Masters along with Queensland nickel and any other resource sector business you’d like to name which should in theory be pushing the unemployment rate up, not down.

The definition of a part-time job is a minimum one hour’s work per week.

The jobs report probably gave a boost to the local consumer staples sector on the ASX yesterday, which posted a market-leading 2.6% gain. Otherwise, the supermarkets have been sold down heavily of late and thus it’s no surprise that in the “risk on” zone above 5000, “value” should be sought. Materials kicked on from Wednesday with another 2.3% gain while energy took a breather, and yet again the banks added most of the market cap clout to the index in rising 1.5%.

Once again the defensives were left on the sidelines.

Iron ore is the talk of the town this week, and the major reason behind strong rebound rallies in the big mining names. But you’d be hard pressed to find an analyst who does not believe the iron ore price will shortly come down again once the Chinese restocking phase swings seasonally into the destocking phase, sending prices back down from 60 to anywhere between 40 and 30, depending which analyst you choose.

It is likely investors were happy to again buy the banks yesterday on a lead from Wall Street, where JP Morgan set the scene for better than expected (or less worse) US bank results. Last night it was the turn of Bank of America and Wells Fargo.

Inflection

Both posted solid results, at least in the context. The US financials sector again led the indices higher last night but having already jumped in anticipation on Wednesday night, taking JP Morgan as a bellwether, upward moves were less dramatic. Citigroup reports tonight.

A little bit of squaring up in other sectors following two strong positive sessions ensured a quiet day on Wall Street and little net movement. Traders are watching the 2085 level in the S&P500. Break above that level and Wall Street has officially broken up out of the trading range it’s been stuck in now for many months. The S&P closed last night at 2082, basically unchanged.

As to whether Wall Street can indeed break to the upside or rather fall back down towards the bottom of the trading range (1810) once more, as it has done so many times of late, will depend on the avalanche of earnings numbers to come in the next couple of weeks. The banks have lifted the S&P to the inflection point and now it just depends on the numbers from other sectors.

The Fed debate has died down for now. Janet Yellen has made herself pretty clear, and last night’s March inflation data showed a lower than expected 0.1% gain for the CPI. And most of that was due to a higher oil price. Take out food and energy, and the core CPI also gained 0.1%, but fell back on its annual rate to 2.2% from 2.3% in February.

No reason to lock in a June Fed rate rise out of those numbers, although the Fed eschews CPI inflation data and prefers the PCE.

Commodities

Ahead of Doha on Sunday, oil prices were steady last night. West Texas is down a tad at US$41.45/bbl and Brent is down a tad at $43.88/bbl.

Base metal prices also consolidated last night after a couple of days of decent gains. Lead and zinc fell a percent and nickel rose half a percent, with other moves less significant.

More significant was a US$1.30 fall in the iron ore price to US$58.60/t.

The US dollar index also seems to found a new level for now, in this case lower. It’s up 0.1% at 94.91 and the gold bugs are again frustrated. Gold is down US$14.80 at US$1227.60/oz.

Today

The SPI Overnight closed up 14 points or 0.3%.

Today is that time in every quarter when the world tunes into Ripley’s Believe It Or Not, or as it’s otherwise known, China’s GDP result.

Month of March numbers for Chinese industrial production, retail sales and fixed asset investment will also be released.

Industrial production numbers will also be closely watched in the US.

And on Sunday, it’s Doha.

Rudi will skype-connect with Sky Business this morning, probably around 11.05am, to talk 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 Overnight Report: Short Squeeze

By Greg Peel

The Dow closed up 187 points or 1.1% while the S&P gained 1.0% to 2082 and the Nasdaq rose 1.1%.

Material Gains

Strong rallies overnight in oil, iron ore and base metals set the scene for yesterday’s market-leading 3.4% gain for Australia’s materials sector. Underscoring renewed interest in this beaten-down bunch were China’s surprisingly positive March trade numbers, released late morning.

The headlines in this morning’s papers are suggesting that after throwing loads of liquidity and stimulus into the system, Beijing has finally succeeded in reviving China’s “old economy”. “Old” being the economy of manufacturing and export – the economy Beijing is attempting to wind back from overcapacity -- with “new” being an economy based on services and domestic consumption.

In US dollar terms, Chinese exports rose 18.7% year on year in March after falling 25.4% in February. Economists had forecast a 2.5% rise, Imports fell 7.6% after falling 13.8% in February. Economists had forecast a 10.2% fall.

The sighs of relief across Australia’s mining industry were notably audible yesterday. We won’t mention, nevertheless, that every year Chinese data are volatile and distorted in the months around the New Year break and as such, usually misleading.

Such a consideration did not faze Fortescue Metals ((FMG)) yesterday, which having picked a good day to chime in with a production report showing even further astonishing cost cuts, saw its shares jump 8%. BHP Billiton ((BHP)), which drew upon the rallies in both iron ore and oil, rose 6%. Rio Tinto ((RIO)) gained 4.5%. On the base metal front, one of the most shorted stocks in the market – Western Areas ((WSA)) – enjoyed a 4% rally, as did Independence Group ((IGO)), which has also been popular among the shorters.

The energy sector was the next best performer yesterday, posting a 2.6% gain. But the real clout in market cap terms, helping the ASX200 up 1.6%, was a 1.8% rally in the banks. How are those resource sector loan exposures looking now? Not as bad as they were a week ago, when bank investors were heading for the hills.

We might suggest that every time the index heads north through 5000, it is a “risk on” trade. Telcos and utilities comparatively sat on the sidelines yesterday and healthcare managed only a modest gain. Consumer staples did post a 1.0% gain, but only after having been hammered this week thanks to the Target scandal.

Today’s session will be interesting. Iron ore and base metal prices are again up strongly overnight. Oil is off, but only by a tad. And on Wall Street, the banks were the big winners on the day.

Chase JP Morgan

Well you could knock me down with a feather, but apparently when asked whether an agreement on an oil production freeze was likely to be reached in Doha on Sunday, the Saudi oil minister last night responded with “Forget about this topic”.

One wonders, thus, just what the meeting is for.

I suggested yesterday that after a couple of days of sharp rallies, you wouldn’t want to be standing under an oil price on Monday if nothing was to come out of Doha. And to top things off, last night’s weekly US crude inventory numbers showed a build of 6.2 million barrels when analysts had forecast 1 million. By rights, oil prices should be down about 10% this morning.

But they’re not. They’re only off a smidge. There are two reasons we can consider.

WTI is not back over 40 due to any false sense of hope an agreement can be reached in Doha. Nobody ever actually believed one would be. Which leads into the second point, WTI is back over 40 because the trend of US production is heading in the right direction, ie down, notwithstanding weekly inventory fluctuations. The weekly US crude data also showed that production has now fallen below the 9 million barrels per day mark. And gasoline inventories fell more than expected in the week, as is the current trend, suggesting growing demand.

The fact that oil prices held up when they had every right to tumble was supportive of the rally on Wall Street last night, but not the driver. The driver was JP Morgan’s (Dow) March quarter earnings report. The talk leading into the US earnings season has been of forecasts being marked so far down as to skew the odds heavily in favour of upside surprise. All that was needed was some confirmation.

JP Morgan’s result was not a good one, but it wasn’t as bad as had been forecast. JPM shares jumped 4%, and subsequently floated all US bank share boats. Tonight sees results from Bank of America and Wells Fargo.

US bank stocks have been very much out of favour in 2016 for a number of reasons: sluggish US economic growth; ultra-low interest rates, crimping earnings potential; volatile markets, hitting trading profits; and credit exposure to the stricken energy sector. It is said that a bull market on Wall Street is not possible unless led by the banks. The fact Wall Street has been stuck in a range for many months now can to a great extent be explained by bank underperformance.

Maybe this earnings season will prompt a bank comeback. But as many a trader has pointed out, the short interest on US stock markets is currently as high as it was in 2009, and market scepticism surveys have been hitting peak levels. Wall Street is rife for a break-out rally, but does it have substance? Volumes have been on the tepid side, including last night, suggesting a lack of buying conviction. Retail investors remain absent. The conclusion as to why Wall Street rallied last night was simply one of “short squeeze”.

And short-covering rallies tend to be ephemeral.

Commodities

West Texas crude is down US8c at US$41.56/bbl and Brent is down US36c to US$43.90/bbl.

Harking back to the strong Chinese data released yesterday, all base metals are up 1-1.5%.

Iron ore is up another US$1.40 to US$59.90/t.

While the strong Chinese data are good news for the Australian resource sector, they are not good news for the Aussie dollar. It jumped sharply on yesterday’s release. So the RBA will be very relieved to see that last night’s bank-led rally on Wall Street was accompanied by a 0.8% bounce-back in the US dollar index, to 94.82.

The Aussie is subsequently down 0.3% over 24 hours to US$0.7652. Gold is off US$13.30 to US$1242.30/oz.

Today

The SPI Overnight closed up 38 points or 0.8%.

The Aussie will be very much in focus today when the local March job numbers are released.

The Bank of England will hold a policy meeting tonight, but no one much cares ahead of the Brexit referendum.

US CPI numbers are out tonight, following disappointing retail sales and PPI releases last night.

Whitehaven Coal ((WHC)) will release a quarterly production report today, Transurban ((TCL)) was to provide a quarterly update but postponed it until Monday, Bendigo & Adelaide Bank ((BEN)) will hold a strategy day and tonight, Rio Tinto will hold its UK AGM.

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

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

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

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

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article 3 months old

The Overnight Report: Could Pigs Fly?

By Greg Peel

The Dow closed up 164 points or 0.9% while the S&P gained 1.0% to 2091 and the Nasdaq rose 0.8%.

Bank on it

The prime minister has ruled out a royal commission into the Australian banking industry. ASIC has declared there is no need. Having been sold down steadily in recent sessions, yesterday the banks led the ASX200 up 0.9% single-handedly.

The financials sector finished the day up 1.7%. Daylight took both second and third, ahead of consumer discretionary with a 0.6% gain. Consumer staples again dragged, down 1.0%, as sellers continued to target Wesfarmers ((WES)). Moves in every other sector were negligible.

The ASX200 is once again closing in on 5000. On the strength of commodity prices and Wall Street overnight, along with the indication from the futures, we’ll be back over that mark today.

Again.

If we consider predictable pre-election bank bashing and dodgy accounting at a discount retailer to be micro stories isolated from the current macro environment, we’ll be back at 5000 because quite frankly there’s nowhere else to go. There is nothing going on at present to suggest the market should go meaningfully up or meaningfully down.

If anything, sentiment is leaning to the positive. Yesterday’s NAB business sentiment survey suggested that Australian businesses currently believe conditions are the best they’ve been since the GFC. The conditions index rose 4 points from February to plus 12. The long-run average for conditions (since 1989) is plus 1.

Confidence, which is the tomorrow indicator as opposed to the today indicator, rose 3 points to plus 6, a tick above the long-run average of plus 5.

The good news is capacity utilisation is now at its highest level in over five years and business profitability posted a strong increase, boding well for ongoing jobs growth. The bad news is the forward orders sub-index remains in the negative. An overall healthy picture nevertheless belies the December quarter private sector capital expenditure numbers released a month ago which were decidedly dour on the intentions front. Maybe the next quarterly numbers will be less negative.

Which is a problem for the RBA. It might be a good problem to have in terms of Australia’s economy in isolation, but it does suggest no chance of another rate cut in domestic terms. In international terms, everyone else is cutting (or not raising) which means by default, the RBA has effectively hiked just by standing still.

Economists have pointed to the weaker Australian dollar (as in, no longer up around parity) as a major driver of improving local business conditions and confidence. On a combination of the NAB survey results (which also indirectly suggest the March jobs numbers, due tomorrow, might be strong as well) and sharp overnight rallies in commodity prices, the Aussie is up 1.1% at US$0.7678 over the past 24 hours. We’re almost up US10c from the January low.

That’s the problem for the RBA.

Commodities

Last night the IMF lowered its global economic growth forecasts for the fourth time in twelve months. The IMF also tipped the Australian swimming team to do poorly at the London Olympics. Anyone who remains misguided enough to believe IMF forecasts have any impact on global financial markets might care to note risk assets surged across the globe last night, while bonds were sold.

West Texas crude is up another US$1.28 or 3.2% at US$41.64/bbl and Brent is up US$1.41 or 3.3% at US$44.26/bbl.

On Sunday, OPEC and no-OPEC members meet in Doha to discuss an oil production freeze. Saudi Arabia has always said it would not freeze if Iran doesn’t freeze and Iran has always said it will not freeze. Yet unlike a planned meeting in Moscow last month that was ultimately scrapped for this very reason, Doha is still going ahead.

Which goes a long way to explaining oil’s 10% jump this past few sessions. And the word last night is that Saudi Arabia and Russia now intend to meet prior to the meeting to agree to a production freeze whether Iran agrees or not.

The oil markets are taking this as a further positive. All I can say is you wouldn’t want to be standing under an oil price on Monday night if no Doha agreement is reached.

Oil sentiment is currently a benchmark for commodity sentiment in general. Last night in London, aluminium, copper and lead rose 2%, nickel 3% and zinc 5%.

In Singapore, iron ore rose again by US$2.60, to US$58.50/t.

The gains were achieved without any real movement in the US dollar index, which is little changed at 94.03. Gold is therefore little changed at US$1255.70/oz.

Wall Street

The US stock market rose 1% last night. See: oil.

The US ten-year bond yield rose 6 basis points to 1.78%. See: above.

Tonight JP Morgan (Dow) will report March quarter earnings. The major US banks are tipped to average around 20% earnings declines in the March quarter and indeed their share prices are all down by around that percentage in 2016. If the results aren’t quite so bad, look out. Data suggest net short interest in the S&P500 is currently above 4%, at the highest level since 2009.

Tomorrow night the fun really begins.

Today

Today’s fun will be led by a close in the SPI Overnight of up 42 points or 0.9%.

As business confidence has improved locally, consumer confidence has been declining. Mind you, that’s not unusual heading into a federal budget. Westpac will release its April consumer confidence survey today.

Then we'll see Chinese trade numbers for March.

In the US, retail sales numbers will be the highlight tonight, along with the PPI and Fed Beige Book.

Fortescue Metals ((FMG)) will release its quarterly production report today. IOOF Holdings ((IFL)) will hold an investor day.

Rudi will appear on Sky Business this morning, 10am-noon.
 

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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: Caution

By Greg Peel

The Dow closed down 20 points or 0.1% while the S&P lost 0.3% to 2041 as the Nasdaq fell 0.4%.

Consolidation

On Friday the ASX200 fell 70 points before recovering to a close of down 26, having briefly breached the 4900 mark at the low. Yesterday the index only made to 4910 on a 27 point drop to late morning before recovering to be down 6 at the close.

At the moment it appears the buyers are happy to step in around the 4900 mark. So many times this year we have seen sharp legs down through 4900 very quickly turn into sharp rebounds back again to the safety of the 5000 level. This time we’re actually seeing some consolidation at these familiar lows, which is probably a good thing.

Technical analysts are still calling the index to 5350-5400 as long as the previous lows hold. The last couple of sessions would suggest the lows are holding, barring anything unforeseen. Consolidation in commodity prices is making a supportive contribution, fighting back against bank woes. Other sectors have been largely oscillating up and down of late.

Yesterday the resource sectors held up the market, with energy rising 1.6% and materials 1.5%. Perhaps the interesting point to note is that energy only rose 1.6% when oil prices jumped 5-6% overnight. In the not so distant past, energy was flying around over 3% a day up and down with every little tick up or down in WTI. Similarly, the materials sector rose yesterday despite the iron ore price falling.

We might conclude that the dooming and glooming of analysts in recent weeks -- warning that commodity prices were being artificially supported by short-covering and temporary restocking – is no longer striking fear in the market given commodity price consolidation.

Can there be any more bad news for the banks? Well, they may yet be forced to raise more capital on stricter regulatory requirements, but this is pretty well understood and likely well priced in. The banks were off 0.4% yesterday in a session which saw mixed sector moves. An off-target Wesfarmers ((WES)) led the consumer sectors down a percent and helped balance resource sector gains.

Sitting here above the 4900 level, it appears the local market is looking towards Wall Street and the US earnings season to provide direction just as much as Wall Street is at present. But we must not forget China, which, having been out of the news for a few weeks, is back in this week with a load of March data and the March quarter GDP result.

Positive Sign?

China’s CPI came in at 2.3% annual in March, unchanged from February. Economists had forecast 2.5%, and Beijing’s target is 3%, thus the assumption is the door is still well and truly open for further stimulus.

The bad news is the PPI was down again in a negative run that has now lasted four years. The good news is that the 4.3% annual drop in March is an improvement on the 4.9% drop marked in February. Could there be light at the end of the tunnel? We’ll need to get past the typical distortion Chinese data suffers before, during and after the New Year break before any trend can be confirmed.

And We’re Off

Alcoa’s March quarter result beat on earnings but missed on revenue. The result came out after the closing bell and Alcoa shares are currently down 4.5% in the aftermarket, having closed up 4% before the bell.

While the focus is always on the S&P500’s net earnings result – and it is interesting to note these past couple of sessions have seen analyst forecast actually pulling back from the dour numbers previously forecast – it may yet be revenue growth, or lack thereof, that provides the most impact this season. Alcoa achieved an earnings beat through cost cutting. There is only so far cost cutting can go to improve earnings before revenue potential begins to be affected as well.

What Wall Street wants to see is real earnings growth, which needs to be supported by revenue growth.

It’s early days. Alcoa’s release is only considered to mark the unofficial start of each US result season because it was always the first Dow stock to report. Alcoa is no longer in the Dow, but traditions are hard to shake. We now have to wait until the end of the week before the big banks start reporting, including the actual first Dow stock, JP Morgan Chase. Forecasts are for the banks to have had a shocker, losing a net 20% in earnings from the March quarter 2015.

On Friday night the Dow rallied 150 points before pulling back to close up only 35. Last night the Dow rallied 150 points to close down 20. In each case a jump in the oil price provided initial incentive – the oils are up another couple of percent this morning – but Wall Street has not wanted to go on with it.

Patience is required.

Commodities

West Texas is up US75c at US$40.36/bbl and Brent is up US$1.00 at US$42.85/bbl.

Commodity prices were offered some support from the US dollar last night, which is continuing its gradual decline. The dollar index is down 0.2% at an eight month low 93.98.

The greenback didn’t help aluminium nevertheless, which closed down 1% in London, to mark the only move of any real significance amongst the base metals.

Slightly more significant is a near 5% jump in the iron ore price, which is up by US$2.60 at US$55.90/t.

Gold found some support in the greenback, rising US$19.70 to US$1258.10/oz.

But every silver lining has a cloud. The Aussie is up 0.6% at US$0.7598.

Today

The SPI Overnight closed down one point.

The global economic and local stock calendars are both exceedingly bare today. The only highlight is the release today of the NAB business confidence survey for March.

Rudi will appear via Skype-link on Sky Business this morning, 11.15am, 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

Comeback

It was looking pretty ugly for the ASX200 at the open on Friday, with early falls suggesting we could be in for one of those pre-weekend capitulations as sentiment turned sour once more. But having opened down 70-odd points, the index very quickly found buying support.

The early drop took us down through 4900, which suggests the impetus to buy at that point was largely a technical one. Or we might simply note that every time the index has fallen through 5000 this year, and even down towards 4800, it has subsequently recovered to trade back over 5000 every time.

Outside of a 1.3% fall in the insignificant info tech sector on Friday, the banks and energy led the index to its close of down 26 with 0.8% falls. Thereafter, sector falls were lighter and fairly uniform, but for utilities which managed the only gain on the day, up 0.2%.

Sentiment this week will centre on the first of the US earnings results, along with the first quarterly reports from local stocks.

Bring it on

Janet Yellen appeared at a gathering of Fed chairs past and present after the close of US trading on Thursday evening. Joined by Volker, Greenspan and Bernanke, it was not really the forum for Yellen to be spouting any significant change of heart on current monetary policy. Not that she was likely to anyway, and she didn’t.

The yen pulled back against the US dollar ahead of the open on Wall Street on Friday after its surging run on Thursday. Prime Minister Abe had previously ruled out intervention but on Friday Japan’s finance minister said he may act against a “one-sided” yen.

The easing yen allowed the US stock markets to open with some strength, taking the Dow up 150 points in the first half hour as oil prices posted another 5% jump. On the 2016 correlation, it was a no brainer for a solid session in US stocks. But this month that correlation has broken down.

The Dow closed up 35 points or 0.2% while the S&P gained 0.3% to 2047 and the Nasdaq was flat.

Oil prices may be bouncing around a lot, but at the moment they’re not really getting anywhere. The lack of overall direction, despite day to day volatility, has meant stock traders have moved on to concentrate on other drivers. This week that means corporate earnings, which by some measures have been now forecast to fall as much as a net double digit percentage.

Forecasts have actually been getting weaker and weaker this past couple of weeks, which tends to suggest they have become a little overblown to the downside. The proof of the pudding awaits over the course of the next month. Alcoa reports tonight, then there’s a bit of a gap to week’s end when the big bank results start to flow. The pullback from the highs for the indices on Friday night, despite oil holding onto 5% gains, likely reflects squaring up ahead of the first earnings numbers.

Commodities

Last week’s US data showed a surprise drop in crude inventories. On Friday night, the Baker Hughes rig count showed a drop to 354 from 362 a week earlier and 760 a year ago. While the third straight week of lower rig counts was no great shock, the oil market is beginning to see the numbers lining up and moving in the right direction.

No one expects this weekend’s meeting in Doha to result in any meaningful supply freeze agreement between OPEC and non-OPEC members, but on last week’s US data it probably doesn’t matter that much anymore. There may yet be some disappointment if nothing eventuates in Doha, but on the wider scheme of things, earlier talk of WTI having to go back to test its US$26 low is now waning.

West Texas was up US$2.08 or 5.5% at US$39.61/bbl on Saturday morning and Brent was up US$2.26 or 5.7% at US$41.85/bbl.

Stronger oil prices provided incentive for a more positive session on the LME. Copper and zinc rose 0.5%, tin 1%, aluminium 1.5% and nickel 2%.

Iron ore fell US50c to US$53.30/t.

Gold was relatively steady at US$1238.40/oz.

The US dollar index fell 0.3% to 94.19, helping the Aussie to rise 0.6% to US$0.7551.

The SPI Overnight closed up 20 points or 0.4% on Saturday morning.

The Week Ahead

US earnings results will be closely watched at the beginning and end of this week. US date releases this week include retail sales, inventories, the PPI and Fed Beige Book on Wednesday, CPI on Thursday, and industrial production, fortnightly consumer sentiment and the Empire State activity index on Friday.

China will release its March quarter GDP result on Friday. Forecasts suggest 6.7% growth, down from 6.8% in December.

Ahead of that release, Chinese monthly inflation numbers are due today, trade on Wednesday, and industrial production, retail sales and fixed asset investment on Friday.

Housing finance numbers are due out in Australia today. Tomorrow sees the NAB monthly business confidence survey and Wednesday the Westpac consumer equivalent. The monthly jobs lottery takes place on Thursday and on Friday the RBA will release a Financial Stability Review.

On the local stock front, Energy Resources of Australia ((ERA)) is due to release its March quarter production report today, thus kicking off the resource sector quarterly production reports season. Fortescue Metals ((FMG)) reports on Wednesday and Whitehaven Coal ((WHC)) on Thursday while Rio Tinto Plc ((RIO)) will hold its London AGM on Thursday night.

The non-mining quarterly report/update/ investor day season will be kicked off by IOOF Holdings ((IFL)) on Wednesday followed by Bendigo & Adelaide Bank ((BEN)) and Transurban ((TCL)) on Thursday.

Rudi will first appear on Sky Business on Tuesday, via Skype-link around 11.15am, then again for two hours on Wednesday morning (10-midday), on Thursday he'll be back from 12.30-2.30pm and finally he'll do another linkup via Skype on Friday morning, probably around 11.05am.
 

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

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided. www.fnarena.com

article 3 months old

The Overnight Report: The Rising Problem

By Greg Peel

The Dow closed down 174 points or 1.0% while the S&P fell 1.2% to 2041 as the Nasdaq fell 1.5%.

Fail

The ASX200 did not make it back to 5000 yesterday, peaking out at midday at 4984 as momentum stalled. Having already jumped over 3% the day before on a turnaround in the oil price, the energy sector managed only a 1.4% gain despite oil prices being up 3% overnight.

The market appears not yet convinced there is any reason for a push above 5000 at this point. When that’s the case, the only other way is down. Last night Wall Street provided the incentive for a possible lower low to be established today on this most recent down-leg.

While news that Arrium had placed itself into voluntary administration was hardly a shock to the market yesterday, it does highlight the extent of the reversal of fortunes of Australia’s economy from the heady days of the China-driven “super-cycle”. Is the steel industry in Australia set to go the way of the car industry? BlueScope’s hanging in there, but unlike Arrium, BlueScope doesn’t mine iron ore. And it sells Colorbond rooves, not construction girders.

If Arrium goes under so does the town of Whyalla, and that means increased unemployment. Arrium can’t move the market anymore but it can impact on sentiment.

Only the telcos and consumer discretionary finished in the red yesterday. The banks managed a 0.3% gain but that might change today.

Watch the Yen

The Japanese yen is the world’s “safe haven” currency. This might seem strange given the Japanese economy has been in the doldrums for 25 years but it was Japan’s persistent deflation that long ago created the “yen carry trade” that has served to drive the value of risk assets globally ever since.

Given Japan’s ultra-low interest rates, which existed long before the GFC, investors can borrow in yen at next to nothing and invest in the likes of the US, Europe or Australia to receive an “arbitrage” return on the yield differential. This requires selling yen and buying the currency of the target assets. That “arbitrage” only works so long as yen exchange rates remain relatively stable. If global risk begins to increasingly worry carry trade investors, foreign assets are sold and yen loans repaid. The result is a rising yen. The yen thus appears to be a “safe haven” currency because whenever risk increases, the yen rises.

Last night the yen hit its highest level against the US dollar in almost 18 months. The yen’s rise has been exacerbated by weakness in the US dollar since the Fed started backing down on its rate rise plans. Wall Street had not been paying a lot of attention up to now but when last night the Japanese government said they would not intervene in the currency, the world took notice. The last time the yen hit this level the Bank of Japan shocked the world by announcing a massive expansion to its QE program. More recently the BoJ has cut its cash rate into the negative. Last night the BoJ confirmed it will “undertake additional monetary easing measures if necessary”.

Which opens up the prospect of the Japanese cash rate going even further into the negative. The issue here is the “race to the bottom” among central banks, each equally desperate to devalue their currencies so as to maintain export competitiveness. If Japan goes again, then Europe would likely have to follow, and China. The Fed would likely need to hold out on raising for longer.

Hence the US ten-year bond yield fell 6 basis points to 1.69% last night. The German equivalent fell to 0.09%. The German yield curve is negative almost up to ten years. How does a bank make money on loans if rates are negative that far out on the curve?

Well they don’t. Last night European banks came under renewed selling pressure. The German index closed down 1.0%. On Wall Street, the primary driver of last night’s fall was a hammering of the financial sector.

And that, of course, prompted renewed calls of “overdone” and “oversold” when it comes to the US banks. Outspoken JP Morgan CEO Jamie Dimon, for one, described his bank as so well capitalised it is a “fortress” that would remain standing even if every other bank in the country went under.

With oil prices coming off slightly last night after Wednesday night’s big rally, there was no oil correlation support provided to offset weakness in the hefty financials sector. Yet traders are not overly concerned. Most have been expecting a pullback following the sharp rebound rally off the mid-February lows. Some are even salivating at the prospect of cheaper entry prices ahead of the earnings season, which begins next week. Earnings expectations have been marked down so low as to suggest, as has so often been the case in past quarters, that upside surprise is almost inevitable.

Commodities

West Texas crude is down US20c at US$37.53/bbl and Brent is down US22c at US$39.59/bbl.

Constant talk of slowing global growth is not providing any incentive to buy base metals, outside of supply curtailments. Last night copper fell 3%. Zinc fell 2.5%, nickel 2% and aluminium 1%. Only tin bucked the trend.

Iron ore is unchanged at US$53.80/t.

Despite the soaring yen, counter-balancing moves in other currencies sees the US dollar index steady at 94.49. But the “safe haven” shift means gold is up US$18.00 at US$1240.30/oz.

Which developed economy has not recently joined in the “race to the bottom” among central banks, nor even adjusted to account for it? The Aussie is down 1.25% at US$0.9505.

Today

The SPI Overnight closed down 74 points or 1.0%.

Coincidently, Japan will release its February trade data today.

Locally, REITs Dexus Property ((DXS)) and Investa Office ((IOF)) will hold extraordinary shareholder meetings today to discuss the proposed takeover by Dexus of management of Investa’s portfolio.

Rudi will skype-link with Sky Business this morning, around 11.30am, 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 Overnight Report: Oil Fights Back

By Greg Peel

The Dow closed up 112 points or 0.6% while the S&P rose 1.1% to 2066 as the Nasdaq jumped 1.7%.

Can’t buy it, can’t sell it

While the ASX200 keeps finding reasons of late not to push up sustainably beyond 5000 – perceived bank woes are a case in point most recently – it just doesn’t like being under 5000 for very long either. While it was a choppy session on Bridge Street yesterday as sellers and buyers battled it out, the buyers won out in the end without any real incentive to do so other than every time the index falls below 5000, it pretty soon recovers.

The energy sector was the exception yesterday, rising 3.2% because the oil price recovered from an initial fall on Tuesday night and closed slightly higher. Traders in oil stocks must by now have very stiff necks from whiplash as they stampede backwards and forwards on every one dollar move in the oil price, only to find themselves forever back where they started.

Beyond energy, there appeared to be some bargain hunting going on in the industrials, healthcare, materials and consumer discretionary stocks yesterday. The banks closed relatively steady, which at the moment is a good day for the banks, while telcos fell, having not fallen on Tuesday, and consumer staples saw minor selling.

Buyers of oil stocks will nevertheless be feeling chuffed this morning following another jump in oil prices overnight. The ASX200 closed 55 points shy of 5000 yesterday and will likely close some of that gap today. The overnight futures are calling 18 points up but then they were calling 18 points down yesterday morning, and we closed up 21. An outside bet on 5000 being recovered today is not a silly one.

Oil Shock

US crude inventories fell by 4.9m barrels last week. Analysts had predicted a 2.9m increase. I don’t ever recall analysts getting the weekly numbers spot on but this is a bit of boilover. For those who get a bit warm and fuzzy over stats, it is the biggest fall in crude inventories for this particular week of the year since 1997.

When WTI futures “closed” early in the afternoon, the benchmark oil price was up over 5%. The market doesn’t actually “close”, it simply switches to electronic trading and carries on non-stop from Monday morning to Saturday morning. A closing price is nevertheless marked for bookkeeping purposes. Since that mark WTI has come off a bit, to be up 3%.

The oil price rally pretty much turned around what had threatened to be a weak session. Wall Street was soggy on the open, in line with European trading which had been soggy for most of the day. After the shock fall in German manufacturing orders revealed on Tuesday night, last night saw German industrial production for February falling 0.5%. This actually wasn’t too bad a result given forecasts were for a 1.8% fall.

The minutes of the March Fed meeting were also scrutinised last night. While Yellen’s speech last week largely rendered these minutes redundant, what was interesting was a debate between FOMC members about whether April should see a rate rise. Those believing April is too soon apparently won out.

Now, Yellen has suggested that April remains “live”, meaning the Fed could still hike if it so decided, but then every meeting has to, by default, be deemed “live” or what’s the point holding it? What we saw in the minutes was a rather unusual discussion about the future rather than the moment, ie whether or not to raise in March, and despite Yellen’s speech implying even June is looking unlikely, the fact April can be taken off the table was at least enough incentive for traders to pile back into “risk” stocks last night.

The epitome of “risk” stocks are the US biotechs, and with risk you get “momentum” traders. So when biotechs began to move up last night, the bandwagon was jumped upon. That’s why the Nasdaq was up 1.7% when the Dow only managed 0.6%. The S&P split the difference.

It could just as easily completely reverse in a session or two. Yellen will speak again tomorrow morning Sydney time, after the close of Wall Street tonight.

So between oil and a “momo” rally, Wall Street had a positive session last night.

Commodities

We recall that producers within and without OPEC are planning to meet in Doha in a couple of weekends to discuss a production freeze. Last night the Kuwaiti oil minister expressed confidence that an agreement would be reached. This clown is probably cracking the champagne as we speak believing he managed to orchestrate a 5% oil price jump when all of OPEC knows a production freeze is complete fantasy.

Only supply curtailment in the US will move oil prices higher. Last night’s weekly US inventory drop is why oil prices are up.

West Texas is up US$1.21 or 3.3% at US$37.73/bbl and Brent is up US$1.47 or 3.8% at US$39.81/bbl.

Yet again there were mixed moves in base metals last night. No move exceeded one percent.

Iron ore fell US20c to US$53.80/t.

The US dollar index is down slightly to 94.50 but gold is also down US$8.90 at US$122.30/oz.

One presumes the 0.8% rally back for the Aussie overnight to US$0.7600 is oil-linked.

Today

The SPI Overnight closed up 18 points or 0.4%.

As noted, Yellen’s speech will begin after Wall Street closes tonight.

Before that, we’ll see the local construction PMI and Bank of Queensland ((BOQ)) will publish its first half result.

Rudi will make his weekly appearance on Sky Business, 12.30pm-2.30pm and re-appear again on Switzer TV between 7-8pm.
 

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

RBA Rate Cut On The Cards?

By Greg Peel

The State of Play

Nobody expected the RBA to cut its cash rate yesterday. A record low rate of 2.00% remains in place. But much anticipation preceded yesterday’s RBA policy meeting nonetheless.

There was no expectation of a rate cut given the RBA has, over the past few months, painted a relatively positive picture of the Australian economy. The stronger than expected December quarter GDP result underscored the central bank’s belief the economy is managing to transition away from dependence on mining and energy investment and towards more widespread contribution from non-mining sectors. Growth ahead is likely to be below trend, but not worryingly so. Certainly not enough to require a cut to an even lower record cash rate.

And we should recall that RBA governor Glenn Stevens has not so long ago questioned the value of further rate cuts to so low a base rate. While a 25 basis point cut from 2.00% to 1.75% represents a far greater percentage drop than a cut from say 7.25% to 7.00%, if businesses and households aren’t rushing out to borrow at 2.00%, why would 1.75% make the difference?

Nevertheless, the RBA remains in an easing bias. While talking up the Australian economy in the past several months’ policy statements, Stevens has ended each statement with an assurance that current low inflation does provide scope for another cut and that the central bank will monitor the situation.

The major source of the RBA’s upbeat assessment is the labour market. Despite dire warnings from many an economist over the past twelve months, Australia’s unemployment rate has not shot up to 6.5% or higher. Those predictions were largely based on expected mass job cuts across the resource sector. What they did not anticipate was a sufficient counter-balance to date of jobs growth in other industries, such as retail and health.

Yet Stevens, like many others, appears to have been left scratching his head. An unemployment rate under 6% is heartening, but curiously surprising. It is for that reason the last couple of RBA policy statements have suggested that the RBA board would keep an eye on new information to decide whether inflation will remain low and whether “the improvement in labour market conditions evident last year is continuing”.

Current low inflation provides the RBA with scope to cut rates further. A strong labour market suggests the potential for wage growth, which would flow into higher inflation in the usual higher wages equals more spending power equation. Take away labour market strength and the low inflation issue almost ensures another rate cut.

That’s the domestic picture. The other factor is the global picture, which is crystallised in the form of the exchange rate. The “Aussie dollar”, meaning AUDUSD, is the benchmark exchange rate but even as this threatened to drop below US70c last year, Stevens pointed out the AUDEUR, AUDJPY and other cross rates were going the other way and the US is not Australia’s only trading partner. And far from its biggest.

When the Aussie dollar was trading above parity not so long ago, the RBA called it “overvalued”. The world was seeking yield and Australia was offering a solution, thus forcing up the exchange rate above and beyond what the usual commodity price relationship would suggest. So when the resource sector turned south, the RBA went into cutting mode. Finally last year we saw an Aussie more in line with what value would suggest.

But we’ve since seen a bounce. Just when economists were forecasting an exchange rate of US65c, we shot back up over US75c. Just when many non-mining industries in the Australian economy were starting to see the benefits of a weaker Aussie after years of crippling currency headwinds (think tourism for example), the breeze stiffened once more.

The Complication

Yesterday when the RBA statement released confirming no rate cut, the Aussie shot up about half a cent. This seems strange given no one was expecting a rate cut, but what was expected was some so-called “jawboning” from the RBA governor, meaning a suggestion that the Aussie was “overvalued”.

Currencies move in anticipation of rate changes. They do not wait for confirmation. So if a central bank suggests currency overvaluation, the implication is “and if it stays that way we’ll have to cut”.  The currency thus falls anyway, and the desired outcome is already achieved.

Glenn Stevens did not “jawbone” down the Aussie yesterday with a typical “overvaluation” call as the forex market clearly assumed. What he said was:

“The Australian dollar has appreciated somewhat recently. In part, this reflects some increase in commodity prices, but monetary developments elsewhere in the world have also played a role. Under present circumstances, an appreciating exchange rate could complicate the adjustment under way in the economy.”

Stevens has broken down the Aussie’s rebound into two parts. One is the rebound in commodity prices which, if sustained, is welcomed, in which case a stronger Aussie is counter-balanced by greater resource sector earnings. The other, however, refers to the simple relativity of exchange rates. In Japan the cash rate has moved into the negative. In the eurozone it's now zero, although most individual European banks have now set negative rates. China’s rates remain positive but the central bank continues to ease by other means.

Even New Zealand saw a cash rate cut at the last RBNZ meeting.

It is clear that central bank easing across the major economies of the world is the primary reason why the US Federal Reserve is not going to pursue a quarter by quarter tightening policy as was assumed in December last year. By default, if everybody else cuts, you have raised on a relative basis. Thus it follows that while the domestic scenario in Australia is not yet one that warrants a rate cut in isolation, the strength in the Aussie implies we’ve effectively had a rate rise in relative terms.

And that could “complicate” the issue.

The Debate

Having leapt half a cent on the RBA statement release yesterday, the Aussie dollar promptly fell a cent. Glenn Stevens did not call the Aussie “overvalued” as he has done so often in the past, he simply suggested the matter is “complicated”. Central bankers are not known for being blunt. But it is not a stretch to assume Stevens is preparing the market for a macro “excuse” to override the domestic picture and cut the cash rate.

Or is he?

“On our reading, it is now quite clear that the RBA is close to acting on its easing bias,” say the Macquarie economists. “The RBA has reached a point of discomfort around the A$”.

Macquarie makes note that strength in the labour market has prevented a rate cut up to now, from a domestic perspective, despite low inflation. But recent employment data have actually been weaker. The ANZ job ads series has topped out, it appears, and Macquarie points out that were it not for a fall in the participation rate in February (job seekers giving up hope), the unemployment rate would have been 6.2%, not 5.8%.

Macquarie is forecasting a 25 basis point cut at the May meeting.

Goldman Sachs had already pencilled in a May rate cut, so yesterday’s statement only serves to underscore that forecast. The “complication” is one reason, but a terms of trade which remains “much lower than in recent years,” as noted in the statement, is the other.

Goldman concurs with Macquarie’s assessment of the labour market, and further points to declining private capital expenditure expectations in 2016 as well as “clear trend declines” for retail sales and building approvals.

Morgan Stanley concurs with Goldman’s assessment of a weakening Australian economy. Morgan Stanley’s economists had already pencilled in rate cuts in both the September and December quarters, down to 1.50%, and they have not changed their view.

UBS does not believe yesterday’s statement signal’s an “imminent” rate cut. The UBS economists cite ongoing moderate growth in the global economy, Australia’s 2015 growth pick-up, better global financial market sentiment (than earlier this year, presumably), and the commodity price rebound, part of which reflects recent improved data out of China, as reason the RBA would be in no rush.

The rebound in the Aussie dollar does “lower the hurdle,” but despite believing that if Australia’s cash rate goes anywhere this year it’s down, UBS still believes the RBA is likely to remain on hold in 2016.

If you laid every economist in the world end to end, they say, you still wouldn’t reach a conclusion. All the economists quoted above see the “complication” factor as suggesting the RBA either will or has more scope to cut sometime soon. But ANZ Bank’s economists see “complicated” as suggesting the RBA “is unlikely to react in a mechanical fashion to the stronger dollar,” even if it does make the board uncomfortable.

The St George Bank economists are of a similar mind:

“There was little to suggest that the RBA has changed its stance in monetary policy. We continue to expect that the RBA will leave rates on hold throughout 2016.  We do not believe that the RBA would cut the cash rate simply to target the AUD but a rise in the AUD without a corresponding rise in commodity prices would give them pause for thought.”

So, how do we interpret the word “complicate”?

Is it a “complication” that global central bank easing has driven the Aussie higher and hence this “outside” factor can only be corrected with a rate cut? Or is it a “complication” because the RBA, charged with a mandate of managing Australia’s economy, would never cut the cash rate because of what the rest of the world is up to?

Perhaps we can take comfort in the first and second laws of economists. The first law is that for every economist there is an equal and opposite economist, and the second law is that both of them are wrong.


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