Tag Archives: Currencies

article 3 months old

The Overnight Report: Where To Now?

By Greg Peel

The Dow closed up 21 points or 0.1% while the S&P gained 0.1% to 2051 and the Nasdaq rose 0.3%.

Bring It On

There is likely a level of fiscal nervousness creeping into the Australian stock market now that the government has pulled the double dissolution trigger and brought forward the budget release to allow for an early election. We have Easter this weekend and then we head into April – so often a peak month for the market ahead of the old “Sell in May” period.

The healthcare sector has been suffering from fiscal nervousness for some time given the number of government reviews underway of various elements of the country’s healthcare system. But at this stage of the game, the government’s May budget is still a bit of a mystery. Tax reform looms as a potential issue for the superannuation industry. Thereafter, well, we just don’t know yet.

Commodity prices have stabilised for now and we are still in the vacuum left behind from the February results season. Market news and research is very thin on the ground. Glenn Stevens is set to speak today and the market will be very interested to hear what he has to say, summed up by the one question: Is an interest rate cut now likely in response to global developments?” Just suggesting the Aussie is “too high” probably ain’t gonna cut it.

The overnight futures market signalled another strong day for the local market yesterday but it never happened. Energy was down a percent on a lower oil price but otherwise most sectors appeared to be hit with a bit of profit-taking, with one exception being healthcare, having suffered enough of late.

There is no doubt also some nervousness with regard Wall Street, which as of last night has posted its longest winning streak since December 2014, marking seven consecutive up-days and a 13% rally from the February low for the S&P500. What will drive it higher from here?

Hanging On

That will probably come down to US earnings reports, which will begin to flow next month. Meanwhile, there’s Easter and then end-of-quarter and plenty of profits to be locked in following the 13% run. Stock markets do not keep going up forever and hence there must be a pullback around the corner.

The oil correlation appears to have faded for now given consolidation in the oil price, but that’s not to say Wall Street wouldn’t tumble in a heartbeat if oil were to suffer another dip. Many believe it will, although there are tentative signs emerging of US production finally responding to low oil prices.

There are always more economic data releases to consider of course. Last night it was revealed US existing home sales plunged 7.1% in February, more than economists expected. But then economists did not forecast December’s record jump in sales and incorrectly suggested January would see some give-back. Existing home sales numbers can be volatile.

The Chicago Fed national activity index fell to minus 2.9 in February from plus 0.41 in January. January was actually a surprise blip. The index has fallen five months out of six.

WTI crude did close a little higher last night but given it was the expiry of the April delivery contract, there’s not much to be read into it. More interesting is that after surging all the way up to 2050 at the quadruple witching expiry on Friday night, last night the S&P500 held on for a 2051 close when no one would have been surprised by a pullback.

Volumes were nevertheless minimal last night following the biggest numbers for the year on Friday’s expiry/rebalance day. There were a couple of merger announcements to excite the market, but not much else.

Of course the problem with markets that can no longer find a reason to go up is that they inevitably go down instead.

Commodities

West Texas crude is up US58c at US$39.91/bbl and Brent is up US16c at US$41.62/bbl.

Base metal markets have found themselves in a similar position to stock markets, and with a four-day break coming up for the LME there’s likely to be some squaring. With the US dollar index ticking back further overnight with 0.4% gain to 95.37, metal prices were mixed. Copper was steady, aluminium and tin fell 0.5% and lead, nickel and zinc rose 1%.

The fun and games continued in iron ore nonetheless. Analysts have been scratching their heads as to exactly why iron ore has found such renewed strength, outside of seasonal restocking, and thus the warning stands that strength will likely be fleeting.

Last week it looked as if we might have begun the pullback but no – iron ore has turned around again and last night rose US$1.70 to US$58.00/t.

While the slight recovery for the US dollar following its Fed-related plunge last week is not having a lot of impact on consumable commodities, last night gold fell US$12.10 to US$1243.00/oz.

The Aussie is down 0.3% at US$0.7580.

Today

The SPI Overnight closed up 11 points or 0.2%.

All ears will be on the RBA governor when he speaks today.

Kathmandu ((KMD)) and TPG Telecom ((TPM)) post earnings results today.

Rudi will Skype-link up with Sky Business today at around 11.15am to talk broker calls and tonight from 8-9.30pm he will host Your Money, Your Call Equities. Nigel has not been invited.
 

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

Consolidation

The ASX200 surged almost 50 points early in the session on Friday but eased back by lunchtime ahead of a quiet afternoon. Stronger commodities prices again supported the resources sectors but the banks were flat, and we’re beginning to see evidence of the damage caused by a suddenly much stronger Aussie.

Materials closed up 1.7% and energy 0.8% but healthcare fell 1.1% as offshore exposure and ongoing fears surrounding the upcoming federal budget continue to weigh.

It's Easter this weekend providing for short weeks this week and next, plus next week also sees the end of the March quarter before we then shift into a school holiday period in April. As excitement over the Fed’s more measured policy stance dies down, we should now see a period of consolidation following the solid bounce up to 5200 from 4800 for the index.

The subject du jour is of course commodity prices, and whether they can hold up at these rebound levels. The banks have returned from what were considered oversold levels and as yet there is no expectation of a rate cut from the RBA anytime soon.

That might possibly change tomorrow when Glenn Stevens makes a speech and takes a Q&A, given all that has transpired in central bank and currency land since the March RBA meeting.

Start Again

Wall Street posted its fifth straight week of gains last week and the Dow rallied six sessions in a row for the first time since October. After Friday’s rally, which was really just more of the same from Thursday post-Fed, both the Dow and S&P500 are in positive territory for the year.

The Dow closed up 120 points or 0.7% while the S&P gained 0.4% to 2049 and the Nasdaq added 0.4%.

The major driver of the stock index rebound has been the commodity price rebound and the weaker US dollar, driven by abating Fed hike fears. The lower greenback also feeds into stronger commodity prices. Commodity prices may be back where they began the year but there has not been any change to the outlook for the Chinese economy, which supposedly was one of the scare factors that took Wall Street down in the first place.

That puts the focus squarely back on central bank policy as the provider of stock market stimulus.

Michigan Uni reported on Friday night that its fortnightly US consumer sentiment gauge had fallen to a five-month low 90.0 from 91.7. US consumers are apparently now worried that the US economy is not going to grow as fast as early assumed and that on the rebound in the oil price, gasoline prices will begin to rise ahead of the summer driving season.

The WTI price fell 2% on Friday night because for the first time in 13 weeks, the domestic rig count rose. The bounce was in the order of…drum roll…one rig, but no doubt it had the market wondering whether reductions have now reached their limit.

Nevertheless, the total rig count, which includes Gulf oil that has recently taken a back seat to domestic shale oil, fell by four rigs to 476 last week to a new record low. Since a year ago, 593 rigs have ceased operation. One would think that such a massive shutdown of supply would have to suggest oil prices have seen their lows and should go higher form here but the problem is one of a self-defeating feedback loop. Modern shale oil rigs can be switched back on again in a heartbeat and if oil prices remain supported, many probably will.

And that’s likely why the addition of one lonely domestic rig tipped oil prices over.

It’s also interesting to note, once more, that the correlation between the oil price and Wall Street was negative on Friday night.

It was actually the biggest volume day of 2016, but that’s understandable given the March quarter quadruple witching expiry and the closing bell rebalancing of S&P500 weightings. Given the S&P closed just a tad under 2050, one presumes this strike price was influential in Wall Street’s move on Friday night.

So we’ll see what happens tonight.

Commodities

West Texas crude fell US79c to US$39.33/bbl and Brent rose US12c to US$41.46/bbl.

After falling solidly in the wake of the Fed meeting, the US dollar index rebounded slightly on Friday night, up 0.3% to 95.01. This was a sufficient trigger to spark some profit-taking in base metals prices that have been enjoying the benefits of the weaker greenback up to now. Aluminium and copper fell 0.5%, lead and tin fell 1%, nickel fell 2.5% and zinc was steady.

Iron ore rose US90c to US$56.30/t.

The bounce in the greenback helped the Aussie down 0.5% to US$0.7604 on Saturday morning but gold held its ground, steady at US$1255.10/oz.

The SPI Overnight closed up 29 points or 0.6% on Saturday morning.

The Week Ahead

US data releases this week include the Chicago Fed national activity index and existing home sales tonight, FHFA house prices and the Richmond Fed index on Tuesday, and new home sales on Wednesday. Thursday it’s durable goods, and Friday another revision of December quarter GDP.

Which reminds us the Good Friday is not actually a national public holiday in the US despite markets being closed. And Wall Street opens on Easter Monday. Markets are closed on Friday in Australia, New Zealand, the UK and Europe.

Thursday also sees a flash estimate of March manufacturing PMI in the US, as well as in Japan and the eurozone. The eurozone also sees the release of both the ZEW investor sentiment and IFO German business sentiment indices on Tuesday night.

Australia is devoid of major economic data this week, although as noted, Glenn Stevens’ speech tomorrow will be a must-see event.

On the local stock front, there are still a handful of stocks left to go ex-div this week while out of cycle earnings reports will be forthcoming from Kathmandu ((KMD)) and TPG Telecom ((TPM)) tomorrow and Brickworks ((BKW)) and Nufarm ((NUF)) on Wednesday. Westpac ((WBC)) will provide a strategy update on Thursday.

Rudi will appear on Sky Business on Tuesday morning (11.15am) via Skype-link, then later on Tuesday he'll host Your Money, Your Call (8-9.30pm). On Thursday Rudi re-appears at noon and again between 7-8pm for the Switzer Report.
 

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

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article 3 months old

Next Week At A Glance

For a more comprehensive preview of next week's events, please refer to "The Monday Report", published each Monday morning. For all economic data release dates, ex-div dates and times and other relevant information, please refer to the FNArena Calendar.


By Greg Peel

Tonight is the quarterly quadruple witching expiry in the US which, along with the quarterly rebalancing of the S&P500 index, can lead to heightened volatility that is removed from actual trend of the market.

That trend is up for now, following the boost a more prudent Fed has provided for commodity prices, along with resultant weakness in the US dollar. The Dow is at a 2016 high and S&P just shy. With the latest round of central bank policy adjustments now out of the way, attention will once again turn to earnings in a couple of weeks when the first US March quarter reports start to flow.

It’s a short week next week due to Easter, with the bulk of developed world markets closed on Good Friday.

US data releases across the week include existing and new homes sales, house prices, durable goods, and the Chicago Fed national and Richmond Fed activity indices.

There is little of note in the way of Australian economic data next week but the market will be keen to hear what RBA governor Glenn Stevens has to say in a speech on Tuesday, in light of recent central bank activity and the big rally in the Aussie.

Next week will also feature earnings reports from Kathmandu ((KMD)), TPG Telecom ((TPM)), Brickworks ((BKW)) and Nufarm ((NUF)). Westpac ((WBC)) will provide a strategy update on Thursday and there are still some stocks left to go ex-dividend next week.
 

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article 3 months old

The Overnight Report: The Day After

By Greg Peel

The Dow closed up 155 points or 0.9% while the S&P gained 0.7% to 2040 as the Nasdaq rose 0.2%.

Odd Jobs

Congratulations to the three hundred Australians who managed to find a job last month. Commiserations to the far greater number who abandoned hope of finding a job in Australia’s currently difficult economy.

The market saw a fall in Australia’s unemployment rate to 5.8% from 6.0% as reason to believe there is no way the RBA can cut its cash rate further. The Aussie had already spiked overnight as the US dollar fell on the Fed’s policy pullback, and kicked again yesterday on that 5.8% number. It’s kicked even further overnight on ongoing greenback weakness to be up 1.1% over 24 hours at US$76.43, up around two cents from pre-Fed.

Yet economists had forecast an addition of 13,500 jobs in February and the result was a mere 300. Not that economist forecasts ever get anywhere near the complete lottery that is the monthly ABS jobs data. The fall in the unemployment rate was due to a sharp fall in the participation rate. In September, October and November, Australia added a net 124,700 jobs. In December, January and February, Australia has lost a net 6,600 jobs.

It is not unusual for jobs growth to ease back after such a spurt, but we are reminded that in his March monetary policy statement, the RBA governor suggested, in relation to policy setting, “Over the period ahead, new information should allow the Board to judge whether the improvement in labour market conditions is continuing”. Well, it’s not.

But along with the currency, the Australian stock market kicked higher on the release of the unemployment number. Just prior, the opening Wall Street-inspired rally had begun to fade. There was a sharp jump up to 50 points higher on the session for the ASX200, and that’s pretty much where we stayed for the rest of the day.

The rally was led out by energy (+2.8%) and materials (+2.3%) which is understandable given the jump in commodity prices provided by the weaker US dollar. But the real clout came from a 1.1% gain for the banks. I noted yesterday that US bank stocks had fallen in defiance of the rest of the market post-Fed on Wednesday night because banks need higher rates, and subsequently suggested the local banks might come under pressure yesterday if the Fed had opened the door for an RBA cut. But 5.8% unemployment! No cut, the market has decided.

The RBA’s April statement is going to make for interesting reading.

All is forgiven

I note every time there is a Fed meeting that the smart money tends to let the headless chooks run around for the couple of hours post-release and instead take a night to think about it before making a more studied investment decision the next day. Wall Street did rally post-Fed, but the more thoughtful investors decided to push on with it more emphatically last night.

The two main drivers were a US dollar which has fallen another 0.9% overnight to 94.77 on its index and the WTI crude price, which has retaken US$40/bbl. WTI fell through 40 last December and began its rapid slide down to 26 in February, sending global stock markets into a spiral, not the least Wall Street. Well with oil now back at 40, the Dow last night turned positive for the year. The S&P traded positive for the year but eased a little toward the close.

The indices were led out by the energy and materials sectors once more, but the weaker greenback also provided support for the significant number of multinational industrials. Stocks like Dow component Caterpillar, which is not only tied to commodity prices but derives more than half of its revenue offshore, are making a comeback.

Meanwhile, the star performer in the broader market last night was FedEx, which shot up 10% on its earnings result release. FedEx is a direct beneficiary of the rapidly growing on-line shopping business, but it is also a company for which lower oil (and while we may be back at 40 that’s still a long way from 100) means lower costs.

It would appear that if the US economy can find a sweet spot of balance between an oil price that is low enough to force supply curtailment and provide a boost to oil consuming companies and households, but not so low as to threaten economic meltdown, there is cause for optimism. And the Fed is being supportive by keeping a lid on the US dollar.

Commodities

West Texas crude is up US$1.61 or 4.2% at US$40.12/bbl and Brent is up US$1.05 or 2.6% at US$41.34/bbl.

The LME had its first chance to respond to the Fed last night having closed on Wednesday night just before the statement release. The US dollar index is down 2% in that time, so no surprise that copper is up 1.5%, lead and tin up 2%, nickel up 2.5% and zinc up 4%. Only aluminium struggled, up a mere 0.3%.

Iron ore rose US$2.90 to US$55.40/t.

Gold, on the other hand, has not been able to push to new 2016 highs despite another 1% fall in the greenback overnight. It’s down US$4.90 at US$1256.40/oz.

Today

Yesterday was expiry day for the SPI and the new June front month contract closed up 24 points or 0.5% overnight.

Today will see the changes to the components of the ASX/S&P indices announced two weeks ago become effective.

Tonight will see an equivalent rebalancing of the S&P500 in the US, along with the quarterly quadrupled witching expiry of equity derivatives. There could thus be some heightened volatility, particularly at the close.

Premier Investments ((PMV)) will release its earnings report today.

Rudi will link up with Sky Business through 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 Overnight Report: The Fed Meets The Market

By Greg Peel

The Dow closed up 74 points or 0.4% while the S&P gained 0.6% to 2027 and the Nasdaq rose 0.8%.

Nothing to see

The ASX200 opened lower yesterday on overnight falls in commodity prices but quickly recovered to spend the rest of the pre-Fed session chopping around the flat line.

Ultimately energy finished up 0.4% while the big fall in the iron ore price saw materials down 0.7%. Consumer staples was also down 0.7% but balance was provided by a modest recovery for the banks after Tuesday’s fall, up 0.5%.

The world then awaited the Fed.

Global Game

When the Fed made its first post-GFC rate hike in December, the expectation from both the FOMC and the market was that another four rate hikes would follow in 2016 at each of the quarterly meetings. Then the bottom fell out of the oil price.

The fall in oil had reverberations around the globe and forced a reduction in 2016 global growth expectations. While it seemed logical to assume that lower oil prices would feed increased consumer spending and provide a boost to industry through lower fuel costs, the market initially underestimated the impact of lower oil on the global energy sector itself and particularly on global oil producing nations. Meanwhile, China’s painful process of reform and subsequent slowing growth added to the angst.

Pretty quickly the market trimmed back its Fed rate expectations to two hikes in 2016 from four. Last night the Fed left its funds rate on hold at 0.25-0.50% as expected, taking one rate hike off the table. The Fed statement also lowered the central bank’s expectations to two rates hikes in 2016 rather than the previous four.

The Fed met the market.

The two main reasons provided for the downward revision were ongoing labour market slack, which is a nod to low wages growth and thus limited inflation pressure, and, in simple terms, the rest of the world. Since December, Japan has gone to negative rates, China, is upping the stimulus and the ECB has gone to zero and pumped up QE. If we consider the global economy as a closed shop, the Fed has actually achieved a March rate rise relative to the rest of the developed world without actually doing anything.

While the Fed statement could be considered neither more dovish nor more hawkish than the market expected, the US dollar index still tanked 1.1%, to 95.65. The greenback fell against the euro, yen, pound and Swissy and therefore only served to frustrate the central banks of those economies who are all trying to lower their currencies relative to each other.

The predicted two Fed rate rises are not set in stone, Janet Yellen was quick to point out. The Fed statement actually omitted the long-standing "we are data dependent" line this time around, but I think we can take "not set in stone" to mean unless things change, and change is usually evident in data.

Prior to the Fed release last night the US February CPI data were published. Headline inflation fell 0.2% due almost entirely to cheaper gasoline. The year on year headline rate has fallen to 1.0% from 1.4% in January. Stripping out energy and food, the core CPI rose 0.3% to be up 2.3% year on year.

The Fed’s inflation target is 2%, but not for the CPI. The Fed wants to see the personal consumption & expenditure (PCE) measure at 2% and that’s currently at 1.7%, and Fed forecasting does not have the PCE hitting 2% in 2016.

While the Fed acknowledges strong US jobs growth it also recognises a recovery in job seeking (participation rate), which is providing the drag on wage growth given there are still plenty of candidates ready to fill positions. The resultant lack of wage inflation is holding back overall inflation, and thus providing the Fed with the scope to be “prudent” in its policy.

While Wall Street clearly welcomed the Fed statement, a 74 point rally for the Dow is nothing reminiscent of the days of yore when hints of no rate rise would send Wall Street skyrocketing on the old “bad news is good news” theme. Indeed, the major drivers of last night’s post-Fed rally in US stocks were the materials and energy sectors, which were boosted by the weaker US dollar and the assumption the greenback will stay that way given the Fed has pulled back its hiking timetable.

Commodities

West Texas crude is up US$2.06 or 5.7% at US$38.51/bbl and Brent is up US$1.52 or 3.9% at US$40.29/bbl. Aside from the currency boost, oil rallied last night due to two other factors.

The weekly US crude inventory data showed that stockpiles continued to rise but at a lower rate than expected. Weekly production once again fell.

Qatar’s energy minister announced OPEC, Russia and other non-OPEC oil producers will meet in Doha on April 17 to negotiate an agreement to limit output.

As to why anyone can be excited about that last one is anyone’s guess. Readers may have noticed I’ve had an OPEC/non-OPEC meeting in Moscow pencilled in to the FNArena calendar this Sunday because that was the schedule set at the beginning of this month. I’ve been waiting to take it out and now I have, moving it to April 17. I will not be the least surprised if I end up moving it again.

Iran will not come to the party. End of story. If Iran’s not at the party then Saudi Arabia’s not joining in either. End of story. Investors need to focus on the weekly US oil data, including the above and each Friday’s rig count number, and on the number of defaults among marginal US producers. That’s where the oil story lies. OPEC meetings are a myth.

Gold is up US$28.20 at US$1261.30/oz which is no great surprise with the greenback down a percent. This jump nevertheless does not fully reinstate gold to where it was at the beginning of the week before nervous holders decided to square up ahead of the Fed meeting.

The LME always closes just as the Fed releases its policy statements so we have to wait until tonight to gauge the reaction for base metal markets. Last night all metals bar tin edged up a bit in anticipation.

After crashing back to earth, iron ore is up US80c at US$52.50/t.

And, of course, the flipside of the weaker greenback is a stronger Aussie, which is up 1.3% and back at US$0.7557.

Today

The SPI Overnight closed up 36 points or 0.7%.

If this proves accurate it will be the resource sectors leading the way today. The counterbalance may be the banks. US banks were among the worst performers on Wall Street last night given banks earn more with higher rates. The April RBA meeting will be interesting. With the Fed confirming a slower pace of raising, and central banks around the globe further easing since the March RBA meeting, what will our central bank want to do about that Aussie?

Australia’s February jobs numbers are out today. There’s some more fodder.

The Bank of England will hold a policy meeting tonight, but no one seems to care.

Myer ((MYR)) and OrotonGroup ((ORL)) will post earnings results today. Keep an eye on Myer. At 21% it’s the most shorted stock on the ASX. A better than expected result could spark a very sharp rally.

But that would require a better than expected result.

Rudi will appear on Sky Business today between 12.20-2.30pm.
 

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.

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: Over To Janet

By Greg Peel

The Dow closed up 22 points or 0.1% while the S&P lost 0.2% to 2015 as the Nasdaq fell 0.5%.

Just a Head Fake?

“Members judged that there were reasonable prospects for continued growth in the economy and that it was appropriate to leave the cash rate unchanged at an accommodative setting.”

So said the minutes of the March RBA meeting, released yesterday. With that, the local market tumbled.

As to whether we can blame the minutes is nevertheless questionable. At two weeks old, they might as well have been two years old given what has transpired in the interim, including the surprisingly strong local GDP result, the rebound in commodity prices and, subsequently, the Aussie dollar, and shock and awe from the ECB. Two weeks ago Glenn Stevens’ policy statement was near word for word a repeat of his February statement. But things have now changed.

So it would have been naïve to be have been disappointed that there was no hint of an RBA rate cut in the minutes. And given the banks fell 1.4% yesterday to provide the greatest impact on the ASX200, and banks don’t like lower rates, it seems more a case of a sudden burst of uncertainty in the local market.

There has been much talk of late of the commodity price rebounds, particularly in oil and iron ore, being unsustainable blips. Oil has simply seen a short-covering snap-back. Iron ore has simply jumped on hurried Chinese restocking that will shortly end. With falls in the prices of both overnight, it was no shock that yesterday saw the energy sector down 3.6% and materials down 2.4% following their recent sharp recoveries.

But the selling was market-wide, with only the telcos holding their ground. I suggested yesterday that the local market had reached a point of indecision, as there appeared to be nothing in the near term to justify ongoing upside. And when markets can’t find a reason to go up, you can always count on them going down instead, until a new pathway is established.

Regarding commodity prices, Goldman Sachs has recently articulated that which I have been implying in this Report for a while, in that the only catalyst for higher oil prices is lower oil prices. Things won’t get better unless they get worse first, and stay that way for a while. Oversupply in all commodities must lead to capitulation and closures among miners/drillers. That requires a prolonged period of pain at lower prices. Only when supply is actually abandoned, and not simply put on hold, can prices rise once more.

Meanwhile there was no surprise yesterday when the Bank of Japan held its cash rate steady at minus 0.1%, while nevertheless tempering its view on Japan’s economy. There was some surprise that the BoJ statement this month omitted the line suggesting further cuts if necessary that had been present in previous statements. It would appear the central bank is not prepared to go more negative.

Low Volume

The oil rally appears now to have fizzled out as hopes fade – if there really were any in the first place – of production freezes from OPEC and non-OPEC producers. WTI fell 2.3% overnight and initially took Wall Street with it, with the Dow falling by a hundred points at its low.

Also driving weakness was a disappointing US February retail sales result. Not only did February sales fall 0.1%, January’s tepid 0.2% gain was revised down to a whopping 0.4% fall.

(And we always joke about Chinese data.)

Retail sales represent around 25% of all US consumer spending, and these numbers are setting the scene for another disappointing March quarter GDP number this year, despite the lack of weather impact this time around. But elsewhere the US housing sentiment index held steady at a slightly optimistic 58, and the Empire State activity index has flipped over to plus 0.6 in March from minus 16.6 in February, so not all is doom and gloom.

How does a data-dependent Fed see the US economy? Well that we will find out tonight. With the combination of Fed statement, revised forecasts and Janet Yellen press conference all having the potential to move the markets sharply tonight, traders decided to square up positions last night and took the indices back towards flat. Volumes, however, were anaemic, suggesting most of the world is on the sidelines.

Commodities

West Texas crude is down US84c at US$36.45/bbl and Brent is down US82c at US$38.77/bbl.

The iron ore retreat has gathered pace. Spot iron ore down US$3.80 to US$51.70/t. We’ve now taken out that ridiculous jump last week.

LME traders chose to prepare for the Fed meeting with some selling of their own. Copper was little changed but nickel fell 1%, aluminium 1.5%, zinc 2% and lead 3%.

Gold is steady at US$1233.10/oz.

The US dollar index is steady at 96.63 but as commodity prices retreat, so does the Aussie. It’s down 0.7% at US$0.7458.

Today

The SPI Overnight closed down 6 points.

Fed meeting tonight. Enough said.

Sigma Pharmaceuticals ((SIP)) will deliver its earnings result today.
 

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article 3 months old

The Overnight Report: Central Bank Watch

By Greg Peel

The Dow closed up 15 points or 0.1% while the S&P fell 0.1% to 2019 and the Nasdaq was flat.

Out of Gas

The local market tried to get excited about ECB-inspired rallies in the northern hemisphere on Friday night in driving up the ASX200 by close to 50 points in the morning. The index stuck its head above 5200 but there the momentum faded.

With Victoria enjoying a long weekend yesterday, volumes were always going to be lower, and with today’s Bank of Japan policy meeting and Wednesday night’s Fed statement looming it appeared to be a good opportunity to square up.

Energy followed oil up with a 1.4% gain, the banks found some more support and rallied 0.6%, and telcos posted a solid 2.0% gain. Thereafter, sectors exchanged small ups and downs.

Having rallied back strongly from 4800 to 5200 on the back of commodity price rebounds and a realisation the banks were not about to go to the wall, the local market has run out of reasons to push forward and on to 5400. The iron ore price is now falling back, the oil price has largely stabilised and the gloss seems to have come off gold. Indeed, Aussie dollar gold has taken a bit of a tumble on strength in the currency.

The next move in either direction will likely be central bank driven. The Bank of Japan may feel the need to counter the ECB today although typically when everyone expects the BoJ to act it doesn’t, and vice versa. While no one expects a rate hike from the Fed the world will be closely scrutinising FOMC forecasting for clues as to whether and when there might be another rate hike.

Caution

The story is the same in the US where the S&P500 is now only 100 points shy of its all-time high despite the turmoil of early 2016. There are also a lot of US data releases due as the week progresses but none of note last night, ensuring a quiet session as Wall Street waits to see what, if anything, the BoJ might do today.

I suggested yesterday that the strong correlation between US stock indices and the oil price has begun to fade as the oil price finds some stability near the US$40/bbl mark. Last night WTI fell 3% but the stock markets weren’t interested.

At least we’re now seeing more moves of 3% or less for oil when 6% plus had become the norm in the past couple of months. And despite the volatility, we’re not really going anywhere at the moment.

Last night’s fall in oil stemmed from Iran declaring that it would not consider freezing its production until a target rate of 4 million barrels per day has been achieved. The rate is currently around 2 million. OPEC members have suggested they would agree to production freezes as long as it’s one in, all in. If Iran’s not in, then no freeze. Not that it makes much difference to global supply if the likes of Saudi Arabia freezes production at record levels.

The oil price did not plummet on Iran’s defiance, as it may have done a month or so ago, because data suggest other OPEC members actually are cutting production to stem financial losses and that US production may well be now on a downturn.

With commodity price rebounds now accounted for, what can drive Wall Street all the way back to all-time highs? It won’t be the economy, because that’s a tit for tat consideration – good numbers raise Fed rate hike expectations and bad numbers ease Fed rate hike expectations. It will probably have to come down to earnings, which were weak in the December quarter.

Interestingly, this year’s March quarter, earnings from which will be reported next month, was the first in two years without a major weather impact in the US. There was “Snowzilla”, but it was an isolated incident compared to the snowbound slowdowns of the March quarters of 2015 and 2014. In other words, year on year earnings “comparables” should look pretty good this time.

Commodities

West Texas crude is down US$1.21 at US$37.29/bbl and Brent is down US77c at US$39.59/bbl.

LME traders had the first opportunity last night to respond to the weekend’s data out of China and indeed these evoked some weakness, but with the Fed meeting coming up there was no rush to over-sell. Aluminium, nickel and zinc each lost a percent while copper stood still.

Iron ore fell another US60c to US$55.50/t.

After a solid run-up for gold recently, it appears traders are not too keen to run the gauntlet of central bank meetings this week without locking in some profits. Following Friday night’s fall, gold is down another US$17.00 at US$1234.70/oz.

The US dollar helped, rising 0.4% on its index to 96.59. That also promoted a 0.7% fall in the Aussie to US$0.7507 but I did flag yesterday that the Aussie’s short-covering rally would likely run out of steam.

Now it just depends on what the Fed comes up with.

Today

The SPI Overnight closed up 4 points.

The RBA will release the minutes of its last policy meeting, held two weeks ago, today, but I would suggest rallies in commodity prices and the Aussie and action by the ECB in the interim render those minutes a bit behind the times, notwithstanding what else happens this week.

The Bank of Japan meets today.

Wall Street will cop a dump of retail sales, inventories, wholesale inflation and housing sentiment numbers tonight along with the Empire State activity index.

Rudi will link up with Sky Business today through Skype to discuss broker calls at around 11.15am.
 

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article 3 months old

Australian Dollar May Turn

By Ilya Spivak, currency strategist, FXCM

Fundamental Forecast for the Australian Dollar: Neutral

  • Australian Dollar surged to 11-month high vs. US counterpart last week
  • Hawkish cues in FOMC announcement may hurt risk appetite, sink Aussie
  • Soft employment figures may rekindle RBA interest rate cut speculation

The Australian Dollar continued to press upward last week, rising to the highest level in 11 months against its US counterpart. The velocity of the move has been undeniably impressive: prices have now completed the biggest two-week rally in 4.5 years. Favorable risk appetite trends fueled the latest advance. Share prices continued to recover from lows set in mid-February, spurred on by aggressive expansion of ECB stimulus. The S&P 500 stock index – a benchmark for global sentiment – has now nearly erased its year-to-date decline.

Risk trends are likely to remain central in the week ahead as the Federal Reserve takes it turn to deliver a monetary policy announcement. This time around, the policy statement will be accompanied by an updated set of economic forecasts and interest rate projections as well as a press conference with Chair Janet Yellen. A rate hike is almost certainly not in the cards: Fed Funds futures imply a 96.1 percent probability of staying within the current 25-50 basis point range for the benchmark lending rate. This puts the onus on forward guidance and mismatch between the central bank’s outlook and that of the markets.

Investors have been decidedly more pessimistic than Fed officials. When the FOMC projected four rate hikes in 2016 as it issued its first post-QE increase late last year, priced-in expectations envisioned just two. The subsequent turmoil in financial markets through the first quarter hasn’t helped matters. Traders briefly abandoned bets on even one 25bps up move in mid-February. The outlook has recovered a bit alongside stock prices and the markets now put the Fed Funds rate at 67bps by year-end, meaning they see one hike from the current setting into the 50-75bps range.

For its part, the Fed has continued to make progress on its mandate. Since the start of the year, the unemployment rate has dropped to 4.9 percent, the lowest in eight years. Meanwhile, the core PCE gauge of inflation – the Fed’s favored price growth indicator – jumped to 1.7 percent in January, the highest in three years and within a hair of the Fed’s target of 2 percent. Most critically, this happened before the start of a pullback in the US dollar and a rebound in crude oil prices in early February. Both have been important headwinds for prices. While explicit energy costs are factored out of core inflation data, its impact still bleeds into the reading because it is an input in the production of many other goods.

On balance, this means that the US central bank has a compelling argument to tighten further. Tactically speaking however, doing so this time around seems unwise. The disconnect between the Fed’s view and that of investors means tightening now would probably trigger panic. Market participants will have to be pushed to acclimate to further stimulus withdrawal however, meaning the FOMC shall have to fine-tune its language to be both reassuring and decidedly more hawkish than status-quo bets envision. This will probably weigh against risk appetite as portfolios adjust, sending the Aussie Dollar lower alongside share prices.

February’s Employment report takes top billing on the domestic front, with a net 12k jobs gain expected. This would mark an improvement from January’s 7.9k job loss but fall short of trend averages running above 20k/month. Furthermore, Australian news-flow has tended to underperform relative to consensus forecasts over recent weeks, opening the door for a downside surprise. The RBA has maintained a neutral data-dependent posture, a stance likely to be reinforced in minutes from the March policy meeting to be released next week. With that in mind, a soft result may rekindle near-term rate cut speculation, compounding any sentiment-driven weakness facing the Aussie.
 


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article 3 months old

The Monday Report

By Greg Peel

Determination

The Australian market appeared similarly confused as to how to interpret Mario Draghi remarks on Thursday night following the ECB’s surprisingly extensive stimulus package announcement. European markets had sold down heavily but while Wall Street also tumbled on the open, the buyers soon returned with gusto.

Buyers also reappeared on Bridge Street at midday on Friday to send the ASX200 up to a positive close from a 32 point drop. The biggest move among sectors was a 0.9% gain for consumer staples. We might assume last week’s strength in the Aussie will ease some of the food deflation pressure the supermarkets have been suffering of late.

The Aussie has become somewhat of a concern, rising yet another 1.6% to Saturday morning at US$0.7562. Will the RBA be forced into action? Rebounds in commodity prices have driven short-covering in the Aussie and central bank easing all over the globe is making our 2% cash rate ever the more attractive to foreign investors.

The saviour could be the Fed, were it to raise its own cash rate this week. But that’s not going to happen. The Aussie will likely find resistance once the shorts have all been cleared out but to fall back to 70c would require an indication from the Fed that rate hikes are still very much expected in 2016.

In the meantime, the local market seems fairly determined it is going to push up to previous resistance levels and, if all goes well, perhaps make another shot at 5400.

Rethink

The German stock market jumped 3.5% on Friday night. On Thursday night the DAX initially rallied 2.5% on the ECB’s bigger than expected stimulus package, but then crashed to be down 2.5% following Mario Draghi’s press conference in which the ECB president declared he “did not anticipate the need for further rate cuts”.

European markets interpreted this statement to imply the ECB has now thrown everything at it, and that’s all there is. But another interpretation, and no doubt what Mario Draghi was trying to say, is that such an extensive stimulus package should be enough to support the eurozone economy. It does not mean the ECB has no further “whatever it takes” capacity.

Wall Street initially fell along with Europe on Thursday night before rallying back to be flat on the session. European investors had a night to think about it, and decided on Friday night their initial interpretation might have been a bit short-sighted and unnecessarily panic-driven. So the DAX jumped 3.5%. We might therefore conclude with some rough maths that the fresh ECB stimulus was worth a net 1.5% rally in Germany.

France chimed in with a 3.3% rally on Friday night and London rose 1.7%. Wall Street shot up from the open and largely held that gain throughout the session. The Dow closed up 218 points or 1.3%, the S&P gained 1.6% to 2022, and the Nasdaq rose 1.9%.

Oil Talk

The headlines suggest Wall Street rallied because oil did, because that’s been the correlation throughout 2016 to date. I believe, however, that the correlation is beginning to fade somewhat now oil appears to be consolidating around the high thirties for WTI. West Texas rose US67c on Friday night, which is not typically worth 200 Dow points even if it is off a low base.  Wall Street was more likely embracing ECB QE.

Oil found renewed strength on Friday night because the International Energy Agency suggested oil prices may now have seen a bottom. Iran’s return to the market has been less dramatic than Iran implied it would be, and despite all the spurious chatter about meetings, it does actually appear supply from producers outside OPEC has begun to fall. Within OPEC, all of Nigeria, Iraq and the UAE saw reduced production in February.

A chastened Goldman Sachs also agreed on Friday night oil might have seen the bottom. Goldman sent oil tumbling earlier in the week by suggesting the rebound was all about short-covering and was unfounded on supply-demand realities, but on Friday night forecast a range of US$25-45/bbl for the June quarter, up from a previous US$20-40/bbl. The investment bank has now qualified its earlier call be suggesting simply that oil will take time to recover from the lows given the extent of inventory rundown required, so don’t expect any major rally from here.

Commodities

West Texas crude rose US67c to US$38/bbl on Friday night and Brent rose US28c to US$40.36/bbl.

Aluminium was flat on the LME but the other base metals posted modest gains as traders awaited Saturday’s Chinese data dump. Copper rose 1% and zinc 1.5%.

The pullback from iron ore’s single-day near 20% jump last week continues, with the metal falling US$1.30 on Friday night to US$56.10/t.

Despite the US dollar index remaining flat at 96.21, gold has fallen back US$16.10 to US$1251.70/oz, retracing Thursday night’s ECB-inspired jump.

The SPI Overnight closed up 42 points or 0.8% on Saturday morning.

Slow Start

Data released by Beijing on Saturday showed industrial production up 5.4% year on year for the January-February period, down from 5.9% in December and missing forecasts of 5.6%. Retail sales rose 10.1%, down from 11.1% and missing 10.8% forecasts. Fixed asset investment rose 10.2% year to date, down from 11.1% but exceeding forecasts of 9.5%.

Beijing combines data for January and February rather than the usual monthly numbers because of the New Year interruption. That interruption can often to lead to misleading results in trend terms, but there are no real surprises in this data dump from a trend perspective. Subsequent months will nevertheless reveal whether China’s own stimulus measures are having an effect, such that Beijing’s 6.5-7.0% GDP target for 2016 can be achieved.

The Week Ahead

The Bank of Japan will no doubt be frustrated but hardly surprised by the ECB’s stimulus step-up last week. The BoJ meets tomorrow but no one is expecting any further plunge into the negative for Japanese rates, especially given the Fed will release its quarterly policy statement on Wednesday night.

No one is expecting the Fed to hike this month but the focus will be on the so-called quarterly “dots”, which represent forecasting from each of the FOMC members and thus provides an indication of net dovishness/hawkishness. At this stage the Fed futures market has a June rate hike at 43% chance. Janet Yellen will hold a press conference post release.

The Bank of England also holds a policy meeting this week, on Thursday night, but no one seems to care. Of more interest is the growing wave of Brexit support now Mad Boris has thrown his weight behind the campaign.

The RBA will release the minutes of its March policy meeting today. With all that’s transpired in the past two weeks, including the Aussie shooting up to 75 from 70, these minutes are a bit stale.

US data releases this week include retail sales and inventories, housing sentiment, the PPI and Empire State activity index tomorrow night, industrial production, CPI and housing starts on Wednesday, and leading indicators and the Philadelphia Fed activity index on Thursday.

Friday it’s fortnightly consumer sentiment and the quarterly quadruple witching expiry of equity derivatives.

The highlight of Australia’s economic data week will be the jobs numbers on Thursday.

On Friday the quarterly changes to the S&P/ASX indices will become effective.

Note that the US went on to summer time on the weekend, so as of tomorrow the NYSE will close at 7am Sydney time.

Rudi will appear on Sky Business through Skype-link on Tuesday, 11.15am, and in the studio as guest on Thursday from 12.30 till 2.30pm, and again through Skype-link on Friday, 11.15am.
 

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

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article 3 months old

Next Week At A Glance

For a more comprehensive preview of next week's events, please refer to "The Monday Report", published each Monday morning. For all economic data release dates, ex-div dates and times and other relevant information, please refer to the FNArena Calendar.


By Greg Peel

Tomorrow, China will release industrial production, retail sales and fixed asset investment numbers.

The ECB will now throw everything it has at the eurozone economy. Fearing there may be nothing left to throw, the market has bought up the euro, in stark contrast to the intention of ECB policy.

At its last meeting, the Bank of Japan cut its cash rate to negative. Unfortunately for the BoJ, the US dollar chose the same time to start retreating, as expectations of a March Fed rate rise faded. The yen subsequently rallied, in stark contrast to the intention of BoJ policy.

When everything is moving the same way, it is impossible to get ahead. Next week the BoJ will hold another policy meeting on Tuesday and the Fed will release its latest policy statement on Wednesday night. It’s a quarterly meeting, thus Fed forecasts and the famous “dots” will be updated and Janet Yellen will hold a press conference.

No one is expecting a Fed rate hike. But will there be one in June?

Just about everyone would like to see an RBA rate cut, except the banks perhaps. But with a GDP growth rate of 3% and strong employment, it just can’t happen. The minutes of the last RBA meeting are due on Tuesday. On Thursday, the February unemployment numbers are set for release.

It won’t receive nearly the same level of attention, but the Bank of England holds a policy meeting next Thursday.

The Fed meeting will get all the attention but next week also sees a lot of US data, including numbers for inflation, housing sentiment and starts, retail sales, industrial production and consumer sentiment, along with the Empire State and Philly Fed activity indices.

Friday night on Wall Street is the March quadruple witching equity derivatives expiry.

Friday on Bridge Street will see the quarterly promotions/relegations within the S&P/ASX stock indices become effective.

There is another round of ex-divs to get through on the local bourse next week, and also a bout of out-of-cycle earnings reports. They include Sigma Pharmaceutical ((SIP)), OrotonGroup ((ORL)), Premier Investments ((PMV)) and the most heavily shorted stock on the market, Myer ((MYR)).
 

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