Tag Archives: Currencies

article 3 months old

The Overnight Report: Be On Your Lagarde

By Greg Peel

The Dow closed down 133 points or 0.8% while the S&P lost 1.0% to 2045 and the Nasdaq fell 1.0%.

Market Worries

“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.”

This is the critical paragraph from yesterday’s RBA monetary policy statement, with the rest of the statement remaining little changed from previous months. Glenn Stevens has acknowledged that while stronger commodity prices are a welcome driver of a stronger currency, the “race to the bottom” among Australia’s trading partners has left the local currency sitting out like a shag on a rock through no fault of its own.

A weaker Aussie is important to aiding the transition away from dependence on mining investment in the Australian economy, hence recent strength is “complicating” the issue. This could be the first signal the RBA is prepared to act from an exogenous perspective, simply to bring Australia into line with the rest of the world. We note that even New Zealand has bowed.

The Aussie initially rallied on yesterday’s statement release because there was no rate cut – not that anyone was expecting one. Only then did the forex cowboys actually read the statement, and in so doing realise it was actually dovish. The Aussie is down 0.8% over 24 hours at US$0.7541 despite the US dollar being steady.

Yesterday was not a day, nevertheless, in which any hope of an imminent rate cut was going to make any difference to sentiment. The writing was on the wall at the close on Monday, when an attempt to rally above the 5000 mark failed. Markets that fail to go up tend to go down instead. And we’ve seen this movie all too often now – once we fall through 5000, we pretty quickly get down to 4900 or 4800, before returning.

Consumer discretionary is one sector that does not like a weaker currency, which may go some way to explaining that sector’s 2.1% fall yesterday. Although I’d suggest there was a delayed response to Monday’s weak retail sales data in play as well.

The banks don’t like lower rates, but there’s a lot more going on in the banking world at present than this concern alone. A 3.3% fall in the energy sector yesterday reflected a lower oil price, and for the banks this means an increased threat of default on energy sector loans. But we also had APRA releasing its discussion paper on Net Stable Funding Ratios on Monday, which by yesterday had bank analysts suggesting the majors will need to raise billions more in debt funding in order to comply. Throw in APRA’s warning that the current lending scene is beginning to look a lot like 2007, and there’s plenty of reason the banks were down 1.4% yesterday.

Including ASIC’s accusation Westpac has been rigging the bank bill swap rate settlement.

Despite an unchanged iron ore price overnight and mixed metal price movements, the materials sector fell 1.5% yesterday. Perhaps the ongoing insistence of analysts that the recent commodity price rally has no substance on a supply-demand basis is weighing. Or perhaps yesterday was just another day to sell everything. Only the telcos came out almost unscathed.

Not helping the mood was the release of Australia’s service sector PMI. It fell into contraction in March at 49.5, down from 51.8 in February. The service sector is the Australian economy’s underlying growth engine. The services PMI result is in stark contrast to the manufacturing PMI which is showing frenetic expansion, but the service sector is many multiples larger than the manufacturing sector in this country.

Around the Grounds

Which is not the case in Germany. If it wasn’t bad enough last night that the eurozone’s services PMI disappointingly fell to 53.1 from 53.3, data showing a 1.2% fall in German manufacturing orders when a 0.2% gain was expected caused ripples across the continent.  The German stock index fell 2.6% last night, while France chimed in with a 2.2% fall and the UK 1.1%.

The UK services PMI showed a gain to 53.7 from 52.7 while Japan again disappointed with a drop to 50.0 from 51.2. The winner on the night was the US, which posted a welcome return to expansion with a rise to 51.8 from 49.5.

IMF chief Christine Lagarde last night warned that global growth was slowing. The IMF has a habit of telling everyone what they already knew some six months after they originally knew it. Lagarde also suggested that while fiscal policy needs to play its part, negative interest rates represent “net positives” for the global economy. This is not an opinion held by the majority of the market.

The impact of Lagarde’s comments was a fall in the German ten-year bond rate to 0.10%, dragging the US equivalent down 5 basis points to 1.73%. There is  now talk of the German rate going to zero or lower, and the US rate thus testing GFC lows of 1.3%.

Healthy Pullback?

Oil prices opened lower last night, which, combined with the weak data out of Germany and Lagarde’s warning ensured a weak open on Wall Street. Tax policy was also in play, with Pfizer pulling out of a multi-billion dollar bid for global peer Allergen now the US government has clamped down on the practice of tax “inversion” – acquiring an offshore based company in a lower company tax regime and shifting headquarters.

Wall Street now anticipates more such takeover bids will be abandoned and takeover premiums will evaporate. Interestingly it was another session in which Wall Street ultimately ignored the oil price. WTI had already begun to bottom out and turn around when news came through of an explosion at an Iraqi oil well. Oil prices closed higher on the session but the selling in US stocks accelerated towards the bell.

The stronger service sector PMI was lost in the wash. Like Australia, the US service sector is much bigger than the manufacturing sector.

Last night’s weakness did not seem to bother too many traders, however, a lot of whom have been expecting a pullback following the sharp rebound from the February lows. Arguably Wall Street is consolidated back to a more measured platform from which to assess earnings results, which start to flow next week.

Commodities

West Texas crude is up US$1.06 or 3% at US$36.52/bbl while Brent is up US83c or 2.2% at US$38.34.

Yet another mixed night of trading on the LME saw copper and lead steady, aluminium down 1%, tin down 1.5% and zinc down 2%, while nickel rose 1%. If these ongoing ups and downs were consistent across the base metals then fair enough, but the reality is each metal is more often going up one night and down the next.

Iron ore remains unchanged at US$54.00/t.

Gold has jumped US$15.90 to US$1231.20/oz. It’s nothing to do with the US dollar index, which is steady at 94.63. It no doubt has a lot to do with the head of the IMF being keen on negative cash rates.

Today

The local energy sector should in theory find support today from a bounce in the oil price. Otherwise the SPI Overnight closed down 18 points or 0.4%.

Caixin will publish its China service sector PMI today, not yesterday as I erroneously assumed, because of the holiday in China on Monday. Renewed focus on the strength or lack thereof of the European economy will centre on German industrial production numbers.

The minutes of the last Fed meeting will be published tonight but they have already been superseded by the Fed chair herself, and Yellen will speak again tomorrow night.
 

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

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

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article 3 months old

The Overnight Report: Marking Time

By Greg Peel

The Dow closed down 55 points or 0.3% while the S&P lost 0.3% to 2066 and the Nasdaq fell 0.5%.

Devil in the data

The graph of yesterday’s trade in the ASX200 shows a near perfect arc, rising steadily to a peak of 47 points up around mid-session and then falling equally as steadily to a flat close. Once again it’s as if escape velocity was unable to be reached at the peak and the gravitational pull of 5000 was just too strong.

The stand-out sector move yesterday was in energy, which closed down 2.9% on a 4% overnight fall in oil prices. Despite a tick-up for iron ore and mixed base metal prices, materials closed down 0.8%. The only other sector to finish notably in the red was consumer discretionary, down 0.3%, which goes some way to explaining why early momentum was lost. The day’s economic data releases were not so flash.

Morning releases included February retail sales, which were flat on January despite forecasts of 0.4% growth. It appears economists underestimated a drop-off in demand in the mining states of WA and Queensland. Over the three months to February, sales rose 0.7%, compared to 1.0% in the previous three months. Over twelve months to February, sales rose 3.3%, down from 3.5% a year ago and below the 4.5% decade average.

Retail spending constitutes around 30% of household spending and around 17% of GDP, CBA’s economists note. The data thus provide a significant indicator of the health of the Australian economy. It is perhaps no surprise retail spending has cooled as housing growth has cooled.

Building approvals data released yesterday showed residential approval growth of 3.1% in February, down 9% over twelve months. Detached housing approvals fell 1% to be down 5.6%, so the balance came from apartment approvals which rose 7.7%.

That’s a decent clip for apartments, although approvals are down 12% year on year. We recall from last week’s data that investor loan growth is down 11% from its peak mid last year and apartment sales fell 11% in February. So one might say, good luck to those developers increasing apartment approvals by 7.7% in February. Let’s hope they’ve sold off the plan.

ANZ revealed yesterday job ads series grew by only 0.2% in March and have remained broadly unchanged in number since November last year. In trend terms, ads fell 0.2% in March, representing the first fall since October 2013.

It does not surprise ANZ’s economists given such a strong run last year, but jobs growth is clearly cooling.

Headline inflation was flat in March after falling 0.2% in February, according to the Melbourne Institute gauge. (Did we lose TD Securities somewhere along the way? I wasn’t told.) Annual inflation is running at 1.7%. Take out food and energy, and core inflation rose by only 0.8% in the March quarter.

Put all of the above together, and throw in an Aussie dollar at US$0.7605 (which is actually down a percent over 24 hours given those data), and it will be interesting to read what excuse Glenn Stevens comes up with today not to cut the cash rate when all about are cutting theirs, or in the Fed’s case, not raising.

Lacklustre

Oil prices were down another 3% overnight, which should be enough to explain weakness on Wall Street. That correlation is not as strong as it was previously but it’s still a factor.

We also had the Boston Fed president and FOMC member coming out last night to say that the Fed will probably raise its cash rate “sooner than the market expects”, which did appear to bump the indices down at the time, but given half the market is not even expecting a rate rise this year it’s hardly a significant statement.

US factory orders fell 1.7% in February. A lot of the fall was to do with a drop in lumpy aircraft orders but a 20% fall in oil and mining related equipment is more indicative of the current state of play.

Beyond that, it was a fairly light volume session on Wall Street last night showing no real conviction either way. Alcoa will report quarterly earnings next Monday night, unofficially kicking off the earnings season. Wall Street is now in a bit of a holding pattern.

Estimates have net earnings per share for the S&P500 falling 7% in the March quarter. A lot of that relates to the energy sector, where falls in excess of 100% (ie falling from profit into loss) are forecast. The focus will very much be on just how the non-energy industries fared.

Commodities

West Texas crude is down US$1.22 or 3.3% at US$35.46/bbl and Brent is down US$1.17 or 3.0% at US$37.51/bbl.

It was another mixed session on the LME last night. Zinc fell 0.5%, copper 1% and lead 2% while nickel rose 1%.

China was closed yesterday, thus iron ore is unchanged at US$54.00/t.

The US dollar index is flat at 94.57 but gold is down US$6.60 at US$1215.30/oz.

Today

The SPI Overnight closed up 2 points.

It’s service sector PMI day across the globe today, including in Australia. Caixin will represent China.

We will also see the local February trade numbers today ahead of this afternoon’s RBA rate decision, or lack thereof.

Rudi shall hook-up into Sky Business via Skype at around 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

Manipulation

It looked like a worrying start to the June quarter for the local market on Friday but really it was a reversal of the solid end to the March quarter on Thursday. On Thursday, fund managers bought up the market in general to fool you into thinking they’d actually generated better returns when in fact they were clueless. On Friday they simply sold back those trades.

So for all intents and purposes, the June quarter starts today. And where from? Well, 5000 of course. Prisoners of our own device.

Economic data were never going to matter on Friday. On any other day, news that China’s official manufacturing PMI swung back into expansion in March for the first time in eight months would have been met with cheers. Beijing’s index rose to 50.2 from 49.0 in February. Caixin’s independent measure did not quite make expansion but a move up to 49.7 from 48.0 at least corroborates the trend.

More important than China’s manufacturing sector is its services sector, which Beijing is supporting in favour of over-capacitated manufacturing. The government’s services PMI rose to 53.8 from 52.7, which also reversed the weak trend of the last couple of months.

And for the record, what’s left of Australia’s own manufacturing industry posted a PMI increase to a breakneck 58.1, up from 53.8. That’s the fastest pace of expansion since April 2004.

March is often a vacuum month for Australian corporates coming, as it does, in the wake of the February results season. Quite often not a lot happens to generate any market news and this year has been no exception. April features school holidays, which we’ve already had in Victoria and Queensland and are about to have in NSW, just to increase the potential for quieter markets.

But we do see the corporate news begin to ramp back up again in April, beginning with resource sector quarterly production reports and then moving on the ever increasing number of quarterly reports provided by the rest of the market. We are ever so quietly moving towards a US-style quarterly reporting calendar. If only we could adopt the US practice of providing homogenous EPS results for clear comparison rather than Australia’s antiquated obsession with this thing called “profit”, which is often misleading.

Around the Grounds

There may not be much left of Australia’s manufacturing industry but in Japan, manufacturing is the economy’s primary driver. It will thus be concerning for the Abe government that Japan’s manufacturing PMI fell to 49.0 from 50.2, representing the first move into contraction in eleven months.

It was steady as she goes on the other side of the world, with the eurozone’s PMI inching up to 51.6 from 51.2 and the UK similarly to 51.0 from 50.8.

Wall Street was relieved to see the US manufacturing PMI flip back into expansion at a better than expected 51.8, up from 49.5.

And suddenly, no one cared

The US added 215,000 jobs in March, although you’d have been hard-pressed to find that out on Saturday morning. The unemployment rate ticked back up to 5.0% from 4.9% but that was because the participation rate reached its highest level in two years.

As late as last year the US monthly non-farm payrolls report releases drew audience numbers exceeded only by the World Series and Super Bowl, but now the data have become relatively consistent across past months and Janet Yellen has emphatically set a dovish policy agenda, it really wasn’t going to matter what the jobs outcome was on Friday night.

If anything, a June Fed rate hike cannot be ruled out, but that does not represent a change in market view. The most important number within the data suite – wage growth – showed a better than expected 0.3% increase following a disappointing 0.1% drop in February. This is the inflation indicator Fed-watchers are targeting, but the flip-over hints at statistical noise.

On the strength of both better than expected jobs numbers and manufacturing numbers, Wall Street rallied on Friday. The Dow closed up 107 points or 0.6% while the S&P gained 0.6% to 2072 and the Nasdaq rose 0.9%.

The most interesting point to note about the rally is that it came in direct defiance of a fall in the oil price.

Oil fell 4% on Friday night and as a result, the Dow opened down over a hundred points. But traders who made the assumption the near perfect correlation still stands were in for a rude shock. Oil fell because Saudi Arabia suggested that Doha meeting or not, if Iran does not agree to a production freeze then Saudi Arabia will not agree to a production freeze.

If the near 50% rebound in the WTI price from its February low is all about hopes of co-operation between OPEC and non-OPEC producers in a concerted effort to reduce supply and support prices, then either oil traders are very stupid or the rally actually has nothing to do with such speculation. The rally is all about a market that became very oversold on panic and a subsequent short-covering scramble.

Throw in some early signs of falling US production, despite still rising inventories, lower US rig counts and a growing number of marginal producers falling by the wayside and we have sufficient reason for a rebound in oil. We can also cite a lack of major financial disaster in the US banking industry stemming from oil producer defaults and bankruptcies, as was at one point feared, as easing concerns.

The oil price had stabilised over March, but with nothing new going on, and short-covering now exhausted, it is of no surprise oil should fall back again. Perhaps Saudi Arabia was an excuse rather than a source of great angst but either way, oil is not going back to US$50/bbl until the trends noted above become more entrenched.

The fact Wall Street turned around and closed on a high note on Friday is testament to waning fear of another plunge in the WTI price to an even lower low.

Commodities

West Texas crude was down US$1.48 or 3.9% at US$36.68/bbl on Saturday morning and Brent was down US$1.65 or 4.1% at US$38.68/bbl.

Normally we would see positive results for both Chinese and US manufacturing provide a boost to base metal prices but the LME appears to be suffering from a bout of schizophrenia of late, suggesting price moves are more about metal-specific production and inventory levels than they are about the macro-economic picture.

On Friday night, with the US dollar index as good as steady at 94.58, tin rose 0.5%, aluminium 1%, lead 2% and zinc 3% while copper fell 1% and nickel fell 2%.

Iron ore rose US80c to US$54.00/t.

The solid US data helped gold down US$9.20 to US$1221.90/oz.

The Aussie rose 0.3% to US$0.7684.

With the Thursday-Friday shenanigans out of the way, the SPI Overnight closed up 23 points or 0.5%.

The Week Ahead

That Aussie will no doubt be a focus of attention when the RBA meets tomorrow. A rate cut is not expected but the market will be looking for hints the board might be prepared to act, or at least talk down the currency.

Ahead of the meeting we see local retail sales and building approvals numbers today along with ANZ job ads and the TD Securities inflation gauge. Tomorrow brings the trade numbers and the services PMI and on Thursday it’s the construction PMI.

Service sector PMIs will be posted across the globe on Tuesday, including Caixin’s China number.

In the US it’s factory orders tonight, trade on Tuesday along with the PMI, and chain store sales on Thursday. The minutes of the March Fed meeting will be published on Wednesday but they have already been trumped by Yellen’s speech last week. Yellen speaks again this week, on Thursday.

There’s a late trickle of ex-divs in the local market this week and Bank of Queensland ((BOQ)) will report earnings on Thursday. On Friday, both Dexus Group ((DXS)) and Investa Office ((IOF)) will hold EGMs to vote on the proposed portfolio management takeover.

Rudi will appear on Sky Business on Tuesday, via Skype-link, 11.15am and again twice on Thursday (Trading Day 12.30-2.30pm & Switzer TV between 7-8pm), and via Skype-link at around 11.10am on Friday.
 

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: Wild Quarter

By Greg Peel

The Dow closed down 31 points or 0.2% while the S&P lost 0.2% to 2059 and the Nasdaq was flat.

Delayed Reaction

Yesterday’s rally on Bridge Street was basically what I thought we might see on Wednesday in the wake of the Fed chair’s dovish speech. The ASX200 sold down by a similar percentage on Tuesday, possibly in fear of a more hawkish stance from Janet Yellen, so when the opposite proved true, it made sense that the index would recover.

The index tried to rally hard from the open on Wednesday but was immediately slapped down for a flat close. Nothing changed in the meantime, but yesterday we saw a rally equivalent to Tuesday’s plunge – not only in percentage move but in breath of sectors. Yesterday all sectors finished in the green by fairly similar amounts.

Buy Australia.

As to why the extra day was required is unclear. One can only assume end of quarter shenanigans played a part. Despite the benefits of a continually supportive Fed, the Aussie remains unsettlingly high. There was also some interesting local data out yesterday, but it doesn’t appear the market was going to pay much attention.

Australia’s housing market is cooling. Overall private sector credit rose 0.6% in February to provide a stable 6.6% annual growth rate. Housing credit rose by 0.5% for a 7.3% rate, down from 7.5% in late 2015. Investor housing credit rose by 0.6% for 7.6%, down from 11.0% in mid-2015.

New home sales plunged 5.3% in February. Analysts have been warning for some time of a bubble in apartment construction. Detached house sales fell 3.9% while apartment sales fell 10.9%. Oversupply in apartments is meeting tighter APRA lending rules and repriced bank mortgage rates.

Housing growth has been the major combatant against the plunge in resource sector investment over the past couple of years. While no one is expecting a housing crash, Australia’s economy will require the decline in mining investment to bottom out and commodity prices to stabilise if housing is not going to provide the same counterbalance it has to date. The good news is business credit rose 0.7% in February to a solid rate of 6.5% annual growth. As the CBA economists put it yesterday, “Firmer growth in non-resources related investment is the missing ingredient to broader-based growth outcomes”.

What a Quarter

The US indices may have closed with a whimper at the end of the March quarter last night but investors will be relieved to see the back of it. The S&P500 closed up 1.1% for the quarter which seems pretty ho-hum, until one notes that it had to rally almost 13% from the mid-February low to get there. March alone saw a 6.8% gain.

What drove that rally? Well we need look no further than the 17% gain for the energy sector and 20% gain for materials off their late January lows as commodity prices bottomed and short-covering rallies ensued. Assisting both commodity prices and the US export economy in general was a topping out of the US dollar, and further weakness from mid-March following the dovish Fed policy statement.

Did you know that US dollar gold posted its best quarter since …wait for it…1986?

Gold’s rally is indicative of what we might conclude really drove the rebound in world stock markets over the quarter. The BoJ moved to negative rates, the ECB pumped up its QE to shock & awe levels, the PBoC provided further stimulus and the Fed has now hinted that in retrospect, the December rate hike was not a good idea and there won’t be another one any time soon.

Central banks rule!

Commodities

Oil prices were little moved last night but at US$38.16/bbl, West Texas crude is trading 46% above its February low. Brent is up slightly overnight at US$39.60/bbl.

Over the course of the wild quarter, base metal prices have struggled to settle into any sort of pattern. The same was true again last night as nickel rose 0.5%, zinc 1% and aluminium 1.5%, while copper fell 0.5%, lead 1% and tin 1.5%.

With the US dollar index down 0.2% at 94.63, gold is up US$6.40 at US$1231.10/oz.

The Aussie is steady at US$0.7663.

Today

After yesterday’s surge, the SPI Overnight closed down 20 points or 0.4%.

Tonight sees the March US jobs report. While this monthly release has often been the source of much angst in recent years, Wall Street is now becoming increasingly ambivalent. The jobs number will come in around 200,000 and the unemployment rate – which no one believes – will come in at or under 5%. Yeah, yeah. The wage growth number will be scrutinised but Janet Yellen has already set the policy agenda, so inflation implications will also be met with disinterest.

There may also be a lack of volatility forthcoming from today’s Chinese PMIs. If they’re bad, the world will assume stepped-up stimulus from Beijing. If they’re good, well that’s good.

Australia, Japan, the eurozone, UK and US will also release manufacturing PMIs today/night.

Note that relevant Australian states go off summer time this weekend, so as of Tuesday morning, the NYSE will close at 6am Sydney time.

Rudi will skype-link with Sky Business today, around 11.05am, 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: Yellen Afterglow

By Greg Peel

The Dow closed up 83 points or 0.5% while the S&P gained 0.4% to 2063 and the Nasdaq rose 0.5%.

Struggling

Well the ASX200 was indeed off to the races yesterday, up 54 points from the opening bell, but very quickly it was not to last. If selling on Tuesday had anything to do with fears Janet Yellen was set to offer up a more hawkish Fed stance in her speech on Tuesday night, yesterday’s open supported that theory. But the sellers nipped everything in the bud.

By midday the index was back to square. Energy led the downside with a 1.5% drop thanks to lower oil prices while on the other side of the coin, healthcare rebounded 1.1% having had a hard time of it on Tuesday. Elsewhere, sectors traded off small moves up and down. The banks at the least managed to hold their ground.

The March quarter ends tomorrow and this must be taken into consideration in gauging market mood, given the pushing and shoving that can go on between traders squaring up and fund managers trying to window-dress returns. But we might also take into consideration that while lower for longer interest rates in the US might be good for the US, subsequent strength in the Aussie dollar acts as a brake on Australia’s export economy.

Earnings Loom

The UK and major European stock markets liked renewed Fed dovishness, as they all rose over 1.5% last night. Wall Street kicked on again from the opening bell to send the Dow up 157 points at its peak. But aside from the usual keeping half an eye on the oil price, momentum appeared to fade.

What will drive Wall Street higher from here?

The March quarter earnings season begins next month. The forecast is for a 6.9% net drop in S&P500 earnings and a 1.0% drop in revenues, which would mark the fourth consecutive quarter of negative earnings growth and fifth for revenues. It makes one wonder why Wall Street managed to run as high as it did ahead of the oil price collapse.

A big factor in that 6.9% is energy losses, with materials also chiming in. The banks have also had a tough quarter. The US dollar has only more recently retreated, so currency impact will be a big feature this season. As to why Wall Street can continue to rally on negative earnings growth, we may look no further than Fed influence.

Access to cheap funding has allowed US companies to borrow to buy back their own stock, thus increasing earnings per share not through increased earnings, but through a reduced number of shares. One day, somewhere down the line, the music will stop and so will the buybacks. But this will require Fed tightening, which in turn will require a more robust US and world economic outlook.

Meanwhile, it is typical for companies to suspend their buyback programs over earnings season. Buyback programs are supposed to be market agnostic, and a company would risk insider trading allegations if it were, for example, to suddenly step up its buying ahead of announcing a Street-beating result. This means that for the next month, Wall Street will lack buyback support.

If earnings results then come in net worse than expected, there is no safety net.

Ahead of earnings we have the March non-farm payrolls numbers tomorrow night. Last night the ADP private sector report showed the addition of 200,000 jobs, just a tick down from February’s 205,000 and in line with expectation. Forecasts for non-farm payrolls are for the addition of 205,000 jobs.

Wall Street will nevertheless not pay as much attention to the actual jobs number, assuming it falls within a reasonable band of expectation, as it will wage growth. This has been the missing link in the labour market story that has helped keep the Fed on hold, despite an unemployment rate considered to be near “full employment”. A jump in wage growth would bring a June Fed rate hike back into the frame.

Commodities

The oils were initially stronger during the session but fell back towards the close. West Texas crude is down US17c at US$38.27/bbl and Brent is own US10c at US$39.26/bbl.

Anticipation of Friday’s data, which includes not only US jobs but manufacturing PMIs from across the globe, and particularly China, is keeping LME traders on the sidelines. Base metals split up and down moves last night, none of them greater than one percent.

Is iron ore beginning to succumb to reality of lower Chinese steel production? It’s down US$1.50 at US$53.20/t.

The more interesting metal, nevertheless, is gold. Gold jumped up on Tuesday night, as one might expect, on increased Fed dovishness. But the US dollar index is down 0.3% to 94.84 overnight, and gold has given back most of Tuesday night’s gain. It’s down US$17.90 to US$1224.70/oz.

A couple of months ago it looked like gold was set to challenge 1300. Ahead of the March Fed statement release, gold sold off as traders took precautionary profits. The statement was dovish, so gold rebounded, but did not manage to return to its high. On Tuesday night Yellen was even more dovish, so gold shot up, but again it did not reach the previous high. Last night, despite dollar support, gold fell back again.

Markets that cannot go up do tend to go down instead.

The Aussie dollar is up 0.4% at US$0.7667.

Today

IT would seem futures traders are determined that if the ASX200 could not push away from the gravitational pull of 5000 yesterday, it can do it today. Despite the S&P500 being up only 0.4%, and oil, iron ore and gold prices being weaker overnight, the SPI Overnight closed up 42 points or 0.8%.

Locally we’ll see private sector credit data today along with new home sales.

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

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article 3 months old

Implications For Rates As Aussie Dollar Heads Higher

-RBA unlikely to respond to higher AUD yet
-Some fundamentals underpin the higher AUD
-AUD appears around fair value
-CBA analysts suggest steady cash rate in 2016
 

By Eva Brocklehurst

Australia's dollar has done an about turn. A weakening trend was foiled with remarkable speed in March, Commonwealth Bank analysts observe. Where to from here? What are the implications for official interest rates?

As of March 1 the Australia dollar was US71c and forecast to go lower. By late March it rebounded to US76c, with forecasts starting to appear suggesting it could hit US80c.

The analysts observe this resilient push by the currency has re-ignited the issue of official interest rates. Those calling for rate reductions are becoming more confident, but should they be?

The analysts describe the current policy approach from the Reserve Bank of Australia as one with a conditional easing bias. The central bank has indicated that inflation is benign and if the domestic economy needs a boost the board can act to lower the cash rate. Whether this will occur depends heavily on the Australian dollar's trajectory, as a stronger currency is a constraint on growth and curbing rates is a means to push it lower.

As the currency has receded somewhat from its highs of the month the analysts do not expect the RBA to act just yet, as any response requires a view on where the currency is going and whether its rally is long lasting. On that note, they observe the Australian dollar has risen more dramatically against the US dollar and assume the RBA would have been disappointed with the dovish tone espoused by the latest US Federal Reserve statement.

The conclusion remains that with US unemployment low and inflation nearing the Fed's target, US interest rates should slowly move higher. The analysts suspect this will occur sooner than the early 2017 time slot priced in by US financial markets.

There is also support for this expectation from the divergence with other central banks, with 2016 likely to witness further negative moves on rates by both the European Central Bank (ECB) and the Bank of Japan (BoJ) as these two expand their quantitative easing policies. This should provide some upside potential for the US dollar.

One thing the analysts are quite certain about is that the RBA will not be implementing quantitative easing. Australian interest rates further along the curve remain attractive to global investors, limiting the central bank's ability to influence the Australian dollar.

One aspect that may be of concern to the RBA in the current economic environment is deflation. Falls in inflation expectations blunt the impact of central bank stimulatory policies. The analysts observe this occurred following the moves by the ECB, BoJ and the Reserve Bank of New Zealand.

On the other hand, wage and price expectations in Australia have remained relatively stable over the past couple of years even with the decline in oil prices. Hence, the analysts believe the need for the RBA to respond in this way is less urgent.

The RBA has increasingly used rhetoric to pressure the currency in recent years, or "jawboning" as it is called in money market circles. Two aspects of this increasing use of jawboning stand out for the analysts: concerns are most prominent when the Australian dollar has diverged from fundamentals and are reduced when the currency moves into a US70-75c band.

Some fundamentals have underpinned the recent move higher. Commodity prices have improved, with the CBA commodity price index up 13% in US dollar terms on levels at the end of 2015. Moreover, central bank actions in Europe and Japan have increased the relative attractiveness of Australia as an investment destination.

The CBA analysts model fair value for the Australian dollar at US76c with the Trade Weighted Index (TWI) at 63. On this basis it appears there is no fundamental reason for the RBA to cut the cash rate. The US70-75c band is considered to be the comfort zone. Lower than this and policy makers will start to worry more about inflation risks than growth support, in the analysts' view.

Another debate is about what level of the currency causes economic pain. There is evidence, the analysts maintain, that this is higher than many would have expected. One piece of evidence is exports. There was a significant spike in the number of companies exporting in 2013/14 and this occurred when the Australian dollar was still high, averaging US92c throughout 2013/14. The drop since then should push the export trend along, the analysts suggest.

Non-resource exports may continue to surprise on the upside in 2016. This lift in exports is an unexpected outcome from an extended period of income weakness which the analysts maintain forced companies to focus on costs, with a risk that capital expenditure and labour hiring would be affected negatively.

One positive aspect, they note, is that the lift in productivity allowed the companies to adjust to the extended period of a strong Australian dollar. They believe restrained labour costs are turning the nominal depreciation in the currency into a real depreciation.

The analysts also observe the RBA was surprised at the rate of economic growth in 2015 and now believes unemployment can fall further. This lifts the hurdle for a rate cut. Moreover, there is debate about whether official rate reductions work now the cash rate is at a very low level. Another concern is that households will consider a reduction to record low rates a sign of an economic downturn.

In sum, the CBA analysts expect the cash rate will remain at 2.0% over 2016.
 

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article 3 months old

The Overnight Report: Gradualism Rules, Eventually

By Greg Peel

The Dow closed up 97 points or 0.6% while the S&P gained 0.9% to 2055 as the Nasdaq jumped 1.7%.

Fed Scare?

Got the feeling you’re on a dark desert highway? Cool wind in your hair? Well, it’s probably because we’re back at 5000. Again.

On Thursday ANZ Bank ((ANZ)) announced a $100m top-up to its earlier guidance of an expected $800m of provisions to be taken against potential bad debts, with the difference specifically relating to resource sector loans. Westpac ((WBC)) chimed in with a $25m top-up against personal loans in the mining states. The market panicked and sent the bank sector down 2.5%.

After a four-day chocolate binge, the sellers were back into the banks again yesterday. In their reports, bank analysts suggested that while neither provision increase represented any material impact on earnings, they both sounded a warning bell, particularly if the commodity price rebound proved to be fleeting. The bank sector was down another 2.0% yesterday.

But was it all just about those provisions again? On Thursday, the fall in the bank sector was a stand-out. Other sectors finished comfortably in the green – healthcare and utilities fared well for example – which suggested sector rotation as bank share funds were redirected. Yesterday, however, the bank sector was merely another face in the crowd, as every sector finished in the red.

Healthcare was actually the biggest loser this time around, with a 2.6% fall. Consumer staples dropped 1.7%. The fall in telcos was more minor by comparison, but it appears more like yesterday was a day to sell Australia, which one does via the large caps resident in the likes of the banks, healthcare, supermarkets and materials (which fell 1.2%). There was no reason why sector-specific bank provisions should trigger selling in companies providing hospital beds and selling Corn Flakes.

So, bank issues aside, one might conclude that a certain level of caution was adopted ahead of last night’s speech from Fed chair Janet Yellen. Since the Fed statement was released earlier in the month and Yellen held her press conference suggesting two Fed rate hikes were now more likely in 2016 rather than the previous four touted, dissention has grown in the FOMC ranks. Even some former policy centrists had begun to push for a rate hike as soon as April.

Which suggested to the market that when Yellen spoke last night, she would likely qualify her previous musings and evoke a more hawkish stance than the Fed’s March statement had implied. Each incremental US rate increase incrementally undermines the carry trade to foreign markets with attractive rates, and the king of available yield is Australia.

So was yesterday just a square-up? Well we may find out today, given Yellen has subsequently confounded and gone completely the other way – further into the dovish corner. Technically, yesterday’s breach of 5050 for the ASX200 is a negative signal that could suggest another dip down towards 4800, but first we have to get through that concrete foundation of 5000. And the futures are up 33 points this morning.

Back in your box

Wall Street was also playing it safe ahead of Yellen’s speech. From the open, the Dow was down a hundred points.  Around half of that ground was recovered before Yellen hit the podium at 12.30pm at which point stock markets spiked, and ultimately the Dow closed up almost a hundred points. The S&P500’s gain was even more significant, pushing the index above 2050 resistance to its highest level so far for 2016.

Gradualism is the word. The Fed had been touting a gradual approach to policy normalisation all through the second half of last year before finally bowing to the market and hiking in December. Reading between the lines, it now appears Yellen wishes the Fed had never moved in December. Back then four 2016 rate hikes were suggested. Two weeks ago, that became two. After last night, it now looks like one.

Is the Fed actually in a tightening cycle, as was suggested in December, or have the chances increased that the next move in rates will actually be down again? Global risks appear to be Yellen’s main concern. And as has been noted, when every other major economy has cut its own interest rates, it is the equivalent of the US hiking anyway. Yellen is preaching caution, and on the local front, she does not believe inflation is a certainty to continue rising in the US.

That would seem to put to bed any notion of a rate rise in April, or even June. The dissenters have been silenced.

Easy policy is good for stocks. Yield stocks particularly, but not for banks. So it was that the 0.9% gain for the S&P last night was led out by the defensive yield plays, and in defiance of selling in the financial sector.

Wall Street is back to believing the only thing that matters is Fed support. This time around it’s not about extended QE but about not raising rates. With commodity prices showing some tentative signs of stabilising at these lower levels, Wall Street has now wiped out the panic of early 2016 and moved upwards once more.

Elsewhere, market moves were consistent with a more dovish Fed. The US dollar index is down 0.9% at 95.15. Gold is up US$22.70 to US$1242.70/oz. The US ten-year bond yield fell 6 basis points to 1.81%.

Only commodities bucked the trend.

Commodities

The LME reopened following the Easter break last night and official closing prices were already being marked for base metals before Janet Yellen hit the podium. The US dollar was higher at that point and trading volumes remained thin. While Yellen turned the greenback around, lacklustre interest ensured most base metals remained weak through to the kerb close.

Copper fell a percent and lead and nickel fell 1.5%. Tin fell 2.5%, while aluminium rose 1% and zinc was flat.

Iron ore fell US50c to US$54.70/t.

The oils copped 2.5% falls, which seems somewhat incongruous in the face of less chance of a Fed rate hike (which would impact on energy sector credit costs) and a weaker greenback. Oil fell because of preliminary weekly US data which showed another significant build in inventories. West Texas is down US97c to US$38.44/bbl and Brent is down US91c to US$39.36/bbl.

So much for the oil-US stock market correlation.

Today

The SPI Overnight closed up 33 points or 0.7%.

Will we spin around today, assuming yesterday’s cautious call has proven incorrect? A more dovish Fed does increase the possibility of the RBA having to resort to a rate cut. That would be good for the local market, and particularly those yield stocks, except for the banks.

In the meantime, the Aussie is up 1.2% at US$76.35, which is not good for healthcare and other sectors with high proportions of offshore earnings. Glenn Stevens is still expecting the Aussie to fall without prompting. Is he still so sure today?

Tonight in the US sees the March private sector jobs report, a precursor to Friday's non-farm payrolls release.
 

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article 3 months old

The Monday Report (On Tuesday)

By Greg Peel

Thursday

Weakness in metals prices sent the local materials sector south by 1.7% on Thursday, while energy managed to hold up despite a fall in the oil price. While oil continues to fluctuate, it has pretty much been jogging on the spot for the last couple of weeks.

Only one other sector fell on Thursday, but a 2.5% plunge in the banks represents a big hit to the ASX200. Reality has bitten, with ANZ Bank ((ANZ)) announcing it would take an additional $100m provision against potential bad loans to the energy sector, while Westpac is setting aside $25m to cover personal loans in the stressed mining states of Queensland and WA.

No doubt investors saw parallels with European banks, which have suffered significant share price falls this year due to exposure to energy as well as emerging markets. Throughout the year, analysts have assured their clients Australia’s banks are not onerously exposed to the resource sector, and nor are the US banks in terms of proportion of all loans. Were they wrong?

No. Panic may have emerged on Thursday but these provisions represent small numbers in the scheme of things. A provision of $25m would about cover Westpac’s board room lunch bill for the year, and even $100m for ANZ is still nothing major compared to the banks’ capital positions. All banks were nevertheless sold down on Thursday on suspicion. Provisions do, of course, reduce the earnings pool from which dividends are paid out on a ratio basis.

The sell-down for the index on Thursday was all about the banks and not a market-wide event. Sector rotation was evident, with the defensive sectors of healthcare and utilities among apparent recipients of liquidated bank shares.

Thursday Night

On Thursday night the Dow closed up 13 points while the S&P was flat at 2035 and the Nasdaq rose 0.1%.

Oil prices fell again early in the US session following Wednesday night’s data suggesting ever more increasing inventories, but relief was found in the weekly rig count, which posted another fall. The Dow was down 100 point at one stage and the US banks, too, suffered from energy market-related selling, but when oil turned, Wall Street returned to a flat close.

The S&P500 nevertheless closed down for the week after a five-week winning streak.

Adding to early weakness was an announced 2.8% fall in US new durable goods orders in February – the third decline in four months. While this was not actually as bad as the 2.9% decline economists had forecast, the breakdown of the data showed weakness in every major industrial sector except autos.

Having enjoyed a revival of sorts post-GFC, US manufacturing has more recently been battling against a stronger greenback, a slowing global economy and the fallout from the energy sector rout.

All of which is another reason to assume the Fed will not be raising its cash rate in April.

The US dollar index was flat at 96.11 on Thursday night and the Aussie was also little changed at US$0.7531.

West Texas crude closed down US24c at US$39.60/bbl and Brent was little changed at US$40.49/bbl.

Zinc has recently taken the mantle as the most volatile of base metals on the LME and it dropped 2.5%, while the pre-Easter session saw all other metals not much trouble the scorer.

Gold fell US$4.20 to US$1216.70/oz.

The SPI Overnight closed down 12 points or -0.2% on Friday morning.

Monday Night

Wall Street was open on Easter Monday but for many it is still a holiday period, coinciding with Spring Break. Europe was closed and trading on US exchanges was very quiet. US stocks indices meandered mildly higher during the session before a shooting incident at the Capitol building in Washington put a brief scare through the market an hour ahead of the close.

The Dow retreated to the flat line once more but as the incident was quickly contained, a modestly higher close was achieved. The Dow closed up 19 points or 0.1% while the S&P closed two points higher at 2037 and the Nasdaq lost 0.1%.

Fed chair Janet Yellen will be speaking tonight, which was another reason Wall Street was not interested in getting carried away last night. To that end, last night’s US data releases included consumer spending and inflation numbers.

Incomes rose 0.2% in February having risen 0.5% in January, while spending rose 0.1% having risen by 0.1% in January. The January spending figure was revised down from a 0.5% increase published a month ago. The personal consumption & expenditure (PCE) index fell to 1.0% year on year from 1.2% in January.

The core PCE, which is the Fed’s preferred inflation indicator, remained unchanged at 1.7% year on year, stubbornly below the Fed’s 2% target.

There is nothing in those numbers to suggest the push from a cohort of FOMC members to hike in April will gain any traction. The March jobs data are due out this Friday. When Yellen speaks tonight, Wall Street will be looking for some clarification on whether the Fed chair remains the head of the US central bank, or whether she now considers herself head of the World central bank.

In other words, there is much debate in US markets as to whether it is the Fed’s role to set policy based on the state of the world economy rather than just the US economy, as is the mandate.

Other data released last night included February pending home sales, which rose 3.5%.

Oil prices are only slightly weaker last night from Thursday night with West Texas down US19c at US$39.41/bbl and Brent down US22c at US$40.27/bbl.

The London Metals Exchange was closed last night.

Over two sessions since Thursday, the spot iron ore price is down US$2.10 to US$55.20/t.

The US dollar index is slightly lower at 95.99 and the Aussie is slightly higher at US$0.7544. Gold is up US$3.20 at US$1219.90/oz.

The SPI Overnight was closed last night, leaving Thursday night’s 12 point fall as the starting point this morning.

The Week Ahead

Not a lot is expected from markets across the globe until Janet Yellen makes her speech tonight. Thursday is the end of the quarter, so there may be some pushing and shoving going on this week ahead of books close.

Books close also comes ahead of the all-important US non-farm payrolls report due on Friday, being the first of the new month. That also means manufacturing PMI numbers from around the globe and both the manufacturing and services PMIs from China.

Other US data releases during the week include Case-Shiller house prices and the Conference Board’s monthly consumer confidence measure tonight, the ADP private sector jobs report tomorrow, Chicago PMI on Thursday and construction spending, vehicle sales and Michigan Uni’s fortnightly consumer sentiment measure on Friday, along with jobs and the manufacturing PMI.

Besides the manufacturing PMI release on Friday, Australia will see private sector credit data on Thursday along with new home sales, and house prices on Friday.

There are just a few more stocks going ex-dividend this week, across Wednesday and Thursday.

Rudi will appear on Sky Business  on Thursday (12.30-2.30pm) and again on Friday around 11.05am through Skype-link to discuss broker calls.
 

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: April Fools?

By Greg Peel

The Dow closed down 79 points or 0.5% while the S&P lost 0.6% to 2036 and the Nasdaq fell 1.1%.

Square Up

Talk of an April rate hike from the Fed actually emerged on Tuesday night but at the time seemed a little fanciful. It nevertheless appears such chatter has put some pressure on the Aussie dollar which over the past 24 hours has steadily declined a full 1.2% to US$0.7528 this morning. We might argue that having set itself short previously, the forex market has more recently set itself long.

There has been much talk of late that the rebound we’ve experienced in commodity prices has been overdone and has no ongoing substance, which no doubt has led to nervousness. And I have noted this past week that in the wake of last week’s central bank action, and/or lack thereof, and ahead of the US earnings season beginning next month, there has seemed little reason for stock markets to go up.

And when they can’t go up, they go down instead. Indeed, despite a slightly positive lead from the overnight futures, the ASX200 plunged 42 points pretty much from the open yesterday. All sectors were in the red and there were no particular stand-outs, suggesting market-wide selling. Possibly a Brussels reaction? Volumes are light heading into the Easter break and so there was a bit of a vacuum, but the buying interest that subsequently emerged seemed fairly half-hearted.

By the closing bell it was the resource sectors which had taken the biggest hit while the banks and healthcare suffered mild weakness. A balance was struck with some buying in consumer staples.

Expectations of a sideways drift into Easter on declining volumes can probably now be put aside. There is always an incentive to square up ahead of a four day break and the resource sectors have been the best performers these past couple of weeks. On last night’s commodity price moves, resource stocks will be looking vulnerable today.

The Inflation Argument

One Fedhead has posited that instead of holding off on a rate hike because inflation is still low, a rate hike should be implemented in order to drive inflation. It’s an upside down theory from an economics perspective, but then as they say, the first law of economists is that for every economist there is an equal and opposite economist, and the second law is that they’re both wrong.

It now appears as many as five FOMC members are agitating for an April rate hike. Janet Yellen did suggest at her press conference last week that April is still “live”, but that’s the standard line. On the strength of the Fed statement and the press conference, the bulk of the market shifted expectation to September as being the next rate hike meeting, away from June. But does the market seriously believe there could be a rate hike next month?

Well it’s better to be safe than sorry, and as I’ve noted, nervousness had crept into commodity markets over the sustainability of recent price rebounds. The US dollar index rose 0.4% last night and Wall Street started dumping resource sector stocks.

The selling was exacerbated by the release of the weekly US oil inventory data. It showed a crude stockpile addition three times larger than analysts had forecast, and the sixth straight week of stockpile increases. Gasoline stockpiles came in lower than forecast, which is positive from the demand side ahead of the US summer driving season, but on the supply side, there appears no sign of relief.

Oil probably didn’t need too much of an excuse to fall anyway. West Texas dropped 4% and US energy stocks went tumbling alongside US material stocks, which themselves were looking at hefty falls in base and precious metals prices.

So between Fed confusion, a possible peak in the commodity price rebound, a long weekend, next week’s quarter-end, and a lull before US earnings reports start to flow, Wall Street sold down last night. It was “risk-off”, as supported by the 1.1% fall in the Nasdaq, although a 79 point drop for the Dow is hardly dramatic in today’s context.

“Risk off” was also evident in the US bond market, where the ten-year bond yield fell 6 basis points to 1.88%. But hang on, if Wall Street really does believe there could be an April rate hike, the bonds have gone the wrong way.

Which probably sums up the true likelihood of an April rate hike.

Commodities

West Texas crude is down US$1.60 to US$39.84 and Brent is down US$1.31 at US$40.53/bbl.

In thin pre-Easter trade, all base metals fell 1.5-2%. Copper led out with a 2% fall and dropped through the psychological US$5000/t level.

Iron ore fell US60c to US$57.30/t.

Gold is down US$25.90 at US$1225.90/oz. I would wager that the gold bugs had expected more from the Fed’s supposedly increased dovishness last week, and have now bottled.

Today

The SPI Overnight closed down 34 points or 0.7%.

Back in the day, the ASX used to close at lunchtime on the Thursday before Easter. While that is no longer the case, no one ever told the financial community, so don’t expect anyone much to be around this afternoon.

Westpac ((WBC)) will provide a strategy update today.

Tonight in the US its’s durable goods orders. Note that while the ASX is not open on Monday, Wall Street is. Next week’s regular Monday Report will thus cover two Wall Street sessions, and will be published on Tuesday.

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.)

Rudi will make his weekly Thursday appearance on Sky Business from 12.20-2.30pm and re-appear tonight on Switzer TV between 7-8pm.

(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: Terror Returns

By Greg Peel

The Dow closed down 41 points or 0.2% while the S&P fell 0.1% to 2049 and the Nasdaq rose 0.3%.

As a Tack

“Unless you think that the commodity price trend now is different and we are headed back to a world of considerably higher prices for an extended period and we think that the Fed is never going to lift rates, it’s not clear that the situation will warrant a much higher exchange rate than this and there is a risk actually that the currency may be getting a bit ahead of itself.”

In other words, RBA governor Glenn Stevens is not overly concerned about the recent bounce in the Aussie, implying it’s likely not to last. In his speech yesterday, Stevens talked up the Australian economy, noting the data suggest a “respectable” pace of growth in the second half of 2015. But when it came to the Q&A, there was only one topic covered by questioners – the Aussie.

As Jan Brady would say, Aussie, Aussie, Aussie…

The Aussie is incidentally 0.5% higher this morning over 24 hours at US$0.7617. The currency took quite a dip ahead of Stevens’ speech as traders no doubt squared any longs, expecting a bout of so-called “jawboning” intended to talk the Aussie down. The lack of any real mandible from the RBA governor was thus worth a more substantial bounce.

Meanwhile over on Bridge Street, nothing happened. With the ASX200 closing on a 0.00% move -- something you don’t see too often – one would be forgiven for thinking everyone has already left for the Easter break. But there was some movement amongst sectors.

Telcos were the star on the day with a 1.7% rise following a well-received earnings result from TPG Telecom ((TPM)), a subsequent 7% share price jump, and a floating of all telco boats including Telstra ((TLS)), which was up 1.4%. That move was countered by the banks, which fell 0.5%.

Energy predictably rose 0.5% on a stronger oil price while materials unpredictably fell 0.6% on a stronger iron ore price. At some point some of the gloss must come off iron ore’s price rebound following a currency conversion.

Muted Response

It’s a sad reality that global financial markets have become increasingly inured to terrorist attacks but the truth is, the world will go on. Last year’s attacks in Paris did spark a flight to safety – including stock market selling – but only briefly. The attacks last night in Brussels are no less significant but have not evoked any financial panic. The US dollar is slightly stronger, gold is relatively steady, the French stock market closed flat, the German market a little higher and the London market a little lower. There was some initial movement on the early news reports but that proved short-lived. Oil prices are also relatively flat.

The Dow opened down 80-odd points but was immediately bought. Wall Street looked set for a flat close before some selling emerged late in the session, but presumably not on a terror basis. The weaker close did, nevertheless, bring to an end what had been a seven-day winning streak.

Commodities

West Texas crude has now rolled into the May delivery front month contract, and in so doing has gained a couple of dollars and come right into line with Brent. The May contract is actually down US8c but that takes it to US$41.44/bbl thanks to the contango existing on the forward curve, which is driven by excessive near-term supply. Brent, which is already trading May delivery, rose US22c to US$41.84.

It was another mixed session for base metals in London. Aluminium and lead fell over half a percent while tin rose a percent and copper and zinc ticked up slightly.

Iron ore fell US10c to US$57.90/t.

The US dollar index is up 0.3% at 95.66 and gold is up US$3.80 at US$1246.80/oz.

Today

The SPI Overnight closed up 7 points.

With Glenn Steven’s speech now out of the way, and the Brussels attacks evoking no more than a sigh, it is difficult to see any major movement ahead for the local market ahead of the weekend. Most players will disappear from tomorrow lunchtime.

Today is the quarterly expiry of stock options on the ASX.

Brickworks ((BKW)) and Nufarm ((NUF)) will each provide earnings reports. CSL ((CSL)) is among a handful of stocks going ex today.
 

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