Tag Archives: Currencies

article 3 months old

The Monday Report

By Greg Peel

Ground Zero

It was a stuttering session on Bridge Street on Friday as the local market struggled to establish any direction on the last trading day of what had been a disappointing month. One sector at least knew which way it was headed, with a 5% gain in energy off the back of the oil price rebound being the stand-out on the day.

There was some counterbalance from selling in the big hospital names, leading healthcare down 1.8%, but otherwise it looked like a weak monthly close at midday when the ASX200 was down 30 points. Then along came the Bank of Japan.

Having only a week ago assured markets there would be no dramatic move in monetary policy, the Bank of Japan shocked markets on Friday afternoon by dropping its cash rate to minus 0.1% from plus 0.1%. As Japanese banks will now have to pay 0.1% to park their money with the central bank, the move has been implemented to encourage lending into the economy instead. As to whether this is the magic bullet needed to get Abenomics back on the rails, well there’s not a lot of optimism across the globe.

But the move was certainly well received by stock markets. The Japanese Nikkei index jumped 2.8% to its close but beforehand the Australian market found the kicker it needed to carry the ASX200 back over the 5000 mark to close the month, as I had suggested on Friday morning would be the goal of fund managers in the session. The 5000 level is certainly ground zero for the local market – a centre of gravity so powerful we have ultimately returned to it every time there is any move above or below over the past 12 months.

All the Way with the BoJ

The BoJ rate cut also gave UK and European markets a shot in the arm, and that mood lost nothing as it crossed the pond to Wall Street. Underpinned by the week’s rebound in oil prices, the US markets took the Japanese rate cut as a major positive at a time the December Fed rate hike has been causing much consternation.

The Dow closed up 396 points or 2.5%, the S&P gained 2.5% to 1940 and the Nasdaq rose 2.4%.

Talk persists of Russia and Saudi Arabia agreeing to 5% oil production cuts. There are various reasons why the world is sceptical of this possibility, not least of which being a long history of failed co-operation between the two producing nations. But most importantly, it is the US which is creating global oil oversupply. With oil at US$30 a barrel, non-US oil producers have the best chance of affecting global supply reduction if, having come this far, they can just sit it out a bit longer and wait for a slew of underwater US producers to go to the wall.

If production cuts are implemented outside the US, pushing oil back to 40 or maybe even 50, then marginal US producers will hang in there and the problem will not have been solved. Oil would likely then go back down towards 20 again.

Oil prices stabilised on Friday night but there is no doubting the week’s rebound, to end a still woeful month, has given Wall Street some renewed hope amongst Fed rate rise fear and what is proving yet another disappointing US corporate earnings season. Energy sector losses have made net earnings look woeful but that aside, once again revenue growth across the US economy is sadly absent.

On the subject of Fed policy, Friday night’s first estimate of US December quarter GDP came in right on expectation at 0.7% growth. That’s down from 2.0% in the September quarter and 3.9% in June. The result might have met expectation, but on the basis of this trend, how could one see a central bank continuing on a steady tightening path? And for the third year running, snow is threatening to be a factor in the March quarter.

The GDP result was thus another outside factor in Wall Street’s rally on Friday night. It is hard to see the Fed raising in March. The BoJ has gone the other way, and oil has stopped falling. For now.

Commodities

West Texas crude was almost unchanged over 24 hours on Saturday morning at US$33.56/bbl. Brent was up US71c at US$34.74/bbl.

The BoJ’s move unsurprisingly sparked a big plunge in the yen and subsequently the US dollar index jumped 1% on Friday night to 99.58. This should have been bad news for commodity prices, but over in London, base metal traders were more heartened during the weak by the oil price rebound.

We are also now only a week away from that annual event that always has the capacity to throw commodity markets into a bit of a turmoil. Chinese New Year comes very early in 2016, beginning next week. There is always a scramble ahead of the break, which pushes prices up, deathly quiet during the week, and sell-off afterwards as life slowly returns to normal. The holiday also distorts Chinese data over the period which often causes distress.

You’d think we’d be used to it by now.

Copper rose 0.6% on Friday night but short-coverers sent zinc up 2.5%, lead up 3% and tin up 4.5%.

Iron ore was unchanged at US$41.50/t.

Gold was also little changed despite the big dollar jump, at US$1116.90/oz.

And the big rise in the greenback did not impact on the Aussie, which is steady at US$0.7080, given the counterbalance of a lower yen through the cross-rates.

The SPI Overnight closed up 37 points or 0.8% on Saturday morning.

The Week Ahead

Today is the first of February and that means two things: the first of the month brings the global round of manufacturing PMI releases; and we have now entered the local corporate earnings result season.

In China’s case, Beijing will release both the official manufacturing and services PMIs today. As we know from last month, these releases have the capacity to send the Chinese stock market into apoplexy.

For the US, it’s jobs week. I would suggest we’re probably now back into a “good news is bad news” setting on Wall Street, such that a better than expected non-farm payrolls result this coming Friday night will send US stocks south on Fed rate rise fears.

Before we get to that result, the US will see personal income & spending tonight, vehicle sales on Tuesday, private sector jobs on Wednesday, and factory orders, productivity and chain store sales on Thursday.

The Bank of England will hold a policy meeting on Thursday. What surprises might it come up with?

The RBA will meet tomorrow. No surprises are expected downunder. The RBA will also release a quarterly Statement on Monetary Policy on Friday.

Australia’ manufacturing PMI is out today, along with monthly house prices and the TD Securities inflation gauge. The services PMI is due on Wednesday and construction on Friday. We’ll also see building approvals and the trade balance on Wednesday and retail sales on Friday.

The first week of the results season proper will start slowly as always. Navitas ((NVT)) will report tomorrow, a small group will report on Thursday including News Corp ((NWS)) and Tabcorp ((TAH)), and Friday sees REA Group ((REA)) along with a couple of others.

Macquarie Group ((MQG)) will provide a trading update on Thursday.

Rudi will make his first appearance in 2016 on Sky Business as host on Wednesday, YMYC, 8.00-9.30pm and re-appear as guest on Thursday at noon.
 

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: Programming Restored

By Greg Peel

The Dow closed up 125 points or 0.8% while the S&P gained 0.6% to 1893 and the Nasdaq rose 0.9%.

We Shall Overcome

There must be a few bruised futures traders out there in the local market. On Wednesday morning they called the ASX200 up 54 points and we closed down 60, and yesterday morning they called it down 45 and we closed up 29. In each case the SPI went with Wall Street and in each case that was the wrong call.

I did note in the latter part of 2015 that the typical correlation we’ve come to assume between Wall Street and the Australian market had become blurry. And fair enough too. Energy is, or at least was, a very big chunk of US indices and thus more exposed to the oil price. Talk was of the Fed raising rates and the RBA cutting. Australia is more directly exposed to China. Wall Street boasts a new world big-tech sector led by FANG (Facebook, Amazon, Netflix, Google) that Australia lacks. US investors are excited over 2% dividend yields, here we like at least 6%, fully franked.

The other feature of late 2015 was that whenever the ASX200 dipped below 5000, it didn’t stay there very long. The biggest threat to this near certainty came earlier this month when we dropped below 4900 on the oil price scare, but yesterday we finished back at 4976 after a defiant rally and yet oil is ten bucks lower now than in December. Or 25%.

So clearly there was some technical trading going on yesterday, and perhaps a belief that we do not simply have to follow Wall Street in lockstep. Wednesday night was all about Fed speculation and the heightened volatility that always features on Fed statement days.

Meanwhile, another feature of 2015 was a local market split in two – the big caps of mining, energy, banks and the telco which were bleeding, and a raft of high-flying small caps cashing in on a 21st century world and/or the rise of middle class China. Blackmores comes to mind, the suite of milk/cheese stocks, anything to do with the ageing population, and also bling peddler Lovisa ((LOV)). Yesterday Lovisa pre-released slightly disappointed first half numbers and was carted 35%.

Caveat emptor.

Back to Oil

Statistics might prove me wrong but I would hazard a guess and say Wall Street more often than not moves in the opposite direction on the day after a Fed statement release than it did on the day. Typically the market, or perhaps more realistically the computers, overreact in those last two hours of trade.

Once the dust of fierce debate over just what the implications of yesterday’s Fed statement really settled, one might conclude the implication was that there may be another hike in March, or maybe not. That’s not news, so back to business. Wednesday night was the first session in 2016 that Wall Street did not trade in direct correlation to the oil price. The oil price rallied strongly on Wednesday night, and rallied again last night.

So there we have two reasons Wall Street was up last night, and we can throw in a strong rally from Facebook after a Street-beating earnings result. The night before Apple did the opposite, and as I write Amazon has just released its report and has disappointed.

Rumours continue that OPEC and non-OPEC are ready to hook up for a co-operative cut in oil production. Last night’s suggestion was that Saudi Arabia and Russia were in talks to do just that. That rumour has since been denied. And seriously, can you see Vlad cutting Russia’s prime source of revenue, when the country’s economy is bleeding, when it is US production that is the global swing factor?

The denial did bring what had been soaring oil prices back down to earth in the session but West Texas is still trading 5% higher as we speak.

Back in the real world, Wall Street had forecast US durable goods orders to have fallen 0.6% in December but they fell 5.1%. Taking out lumpy transport, orders fell 1.2% when 0.1% was expected. Economists are now reeling in their expectations for tonight’s first estimate of US December GDP. But Wall Street didn’t seem too fussed.

Commodities

West Texas is up US$1.71 at US$33.59/bbl and Brent is up US$1.35 at US$34.03/bbl.

January is the month in which Australian resource sector companies post their December quarter production and sales reports and this week has seen a late rush. So amidst all the commodity price horrors, actual numbers have influenced the recent ups and downs of those beaten-down resource names. Yesterday Fortescue Metals ((FMG)) jumped 4%, for example.

We shall soon be seeing those same companies' half or full-year earnings reports, so February may again bring share price movements not specifically related to overnight commodity price shifts.

In the meantime, the US durable goods orders shock weighed on the LME, turning base metal prices around after a couple of days of rallies. Lead was relatively unchanged but aluminium, copper and nickel fell just under 1% and tin and zinc lost over 2%.

Iron ore rose US20c to US$41.50/t.

Gold’s little run, steeped in Fed speculation, came to an end last night. It’s down US$12.50 at US$1115.00/oz despite the US dollar index being down 0.4% at 98.56.

If the Fed doesn’t raise in March, the Aussie carry trade will remain more valuable. The Aussie is up 0.8% at US$0.7084.

Today

The SPI Overnight closed up 14 points or 0.3%. On recent form, this would suggest we’ll be down today, but it is the last trading day of a very bad month so I’d suggest a close above 5000 on that basis alone.

Australia’s December quarter wholesale inflation numbers are out today along with monthly private sector credit. All eyes will be on the Bank of Japan’s policy meeting today – the first since the Fed rate hike.

And Wall Street will hold its breath for the first estimate of US December quarter GDP. The market is tipping 0.7% growth, down from 2.0% in the September quarter.

On the local bourse, Origin Energy ((ORG)) will lead out another bunch of resource sector production reports while Orica ((ORI)) will hold its AGM.
 

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: Let’s Talk Rates

By Greg Peel

The Dow closed down 222 points or 1.4% while the S&P fell 1.1% and the Nasdaq dropped 2.2% thanks to Apple’s weak result.

Central Bank One

The futures market clearly got it very wrong yesterday morning, calling the local market up 54 points. It was no doubt a call based on the oil rebound and Wall Street’s subsequent rally, but after the ASX200 put on 90 points in thin trade on Monday, it did seem ambitious.

As it was Bridge Street simply opened lower from the bell and was down 40 points mid-morning. Bold traders stepped in to send the index back up to be only around 15 points down on the session, but then the CPI result was released.

Australia’s headline CPI rose 0.4% in the December quarter to a 1.7% annual rate, beating 0.3% expectations. Underlying (core) inflation rose 0.5% to 2.0%, to sit at the bottom end of the RBA’s comfort zone. At the headline, a 5.7% fall in the oil price, tempered by the lower Aussie, was balanced out by higher import prices, driven by the lower Aussie.

The fact the ASX200 spent the afternoon falling steadily to be down 60 points at the close suggests the market was disappointed with stronger inflation numbers, which imply the RBA will be in no hurry to implement another rate cut despite the obvious impact of lower commodity prices on the Australian economy. Falls were relatively uniform across the major sectors except for one clear stand-out – energy – which fell 2.3% against the market’s 1.2%.

It’s not often oil goes up 5% overnight and the local energy sector falls 2%, but it was all about a disappointing quarterly production and sales report from gas major Oil Search ((OSH)), arguably the best of the bad bunch when one looks at Australia’s LNG hopefuls. Oil Search fell 4.6%.

The Aussie dollar jumped up as high as 70.8 on the CPI results, which is also discouraging for large parts of the market, but it has since fallen overnight to be only up 0.2% over 24 hours at US$0.7027.

Economists have now pushed their consensus forecast for the next RBA rate cut out to August from June.

Central Bank Two

There’s a strong argument to suggest the Fed would never, in isolation, have raised its cash rate in December, given prevailing economic conditions, but for the fact it had been talking about a hike for so, so long and the markets had become so, so frustrated with the central bank’s procrastination. Just get it over and done with, the markets screamed. And so it was.

The Fed had upset Wall Street by holding off in September following an August sell-off sparked by a collapsing Chinese stock market and falling commodity prices. The Fed raised in December, and what has happened since?

The implication when the Fed made its move is that a tightening cycle had begun that would see subsequent hikes in 2016. Typically these would be quarterly, although the Fed was at pains to point out the cycle would be “gradual”. Gradual or not, Wall Street debate turned to whether or not there will be a second rate rise in March. Given what has occurred in January, the market was looking to last night’s statement for clarification on the Fed’s rate rise timing.

Of course the one thing you will never get from a central bank is something called “clarification”. Last night’s statement did not say “We will not hike in March”. Therefore, it was left to the market to read between the lines of the rhetoric and attempt to gauge the Fed’s thinking. And guess what – there is complete disagreement.

The Fed statement was balanced between pointing out just how strong the US labour market is, and just how worrying just about everything else is. The US economy clearly slowed in the December quarter (first GDP result out tomorrow night). The global economy is slowing (China). The Fed is no longer so confident inflation will rise as was expected (oil). Markets are volatile. All up, the FOMC no longer believes the risks are “balanced”. This, in itself, should imply no March rate rise. If only if it wasn’t for that very strong assessment of the labour market.

So we might conclude the statement was on the “dovish” side, but with a caveat. In other words, the Fed will decide whether to raise in March in March, not in late January.

Why did Wall Street fall? Was it (a) because the Fed did not assure there would be no March rate rise; (b) because the Fed now seems quite worried for the US economy; or maybe even (c) Wall Street wants a rate rise and may not get one. All three arguments were being bandied about last night.

Two days back and it's 2015 all over again. Shoot me.

Commodities

Last night proved to be the first night in 2016 the US stock markets did not move in lockstep with the oil price. Oil prices rose ahead of the Fed statement release and fell back somewhat thereafter, but West Texas is still up US62c or 2% at US$31.88/bbl and Brent is up US$1.05 or 3% at US$32.68/bbl.

The US dollar fell on the supposedly “dovish” statement, but only by an inclusive 0.1% on the index to 98.91. (We note the US ten-year yield is also as good as unmoved at 2.00%).

LME traders were anticipating a dovish statement, and thus a weaker greenback, in again buying up base metals ahead of the release. Nickel missed out, tin rose 3%, and all others rose 1-2%. Fed statement releases always occur just after the LME closes.

To confuse the issue, last night was the last night of trade before the LME moves buildings, suggesting some squaring up of positions, and there were rumours a Chinese commodity fund that had been shorting copper last year was back in covering.

Iron ore rose US50c to US$41.30/t.

Gold rose US$5.30 to US$1127.50/oz.

Today

As usual, we really need to wait until tonight’s trade on Wall Street to gauge the true response to the Fed, given the “smart money” tends to stay out of the typically volatile last afternoon on Fed days. US durable goods data are also due.

It’s a busy day on the local bourse today, featuring a raft of resource sector production reports, with Fortescue Metals ((FMG)) the highlight, and earnings reports from Credit Corp ((CCP)) and Energy Resources of Australia ((ERA)) to remind us the February earnings season is nigh.
 

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: Merry Christmas

By Greg Peel

The Dow closed up 165 points or 1.0% while the S&P rose 0.9% to 2038 and the Nasdaq gained 0.7%.

Getting Square

Today marks the last full session for the ASX ahead of a half-day tomorrow and a four-day break over Christmas. Monday is a public holiday to account for Boxing Day. For local traders, this abbreviated week is all about squaring up positions in order to relax over the break, and for many it is a year-end exercise, given tumbleweeds will roll down Bridge Street in the abbreviated week before New Year.

On Monday we saw the ASX200 tumble then recover, ultimately defying a big drop on Wall Street, and yesterday we saw the index leap 50 points on the open, thanks to a Wall Street rally, before falling back to flat over session. A look at yesterday’s sector move s suggests everything being bought/sold on Monday was sold/bought yesterday as the square up process plays out.

Forex traders appear to be in the same mindset, given the Aussie rallied solidly throughout yesterday’s local session to be up 0.6% over 24 hours at US$0.7232. The US dollar is only slightly weaker so what we likely saw was short covering ahead of the holiday.

Two flat closes on two days suggests we’re unlikely to see anything much else today or tomorrow.

Low Volume

Wall Street has managed to put together a couple of sessions of rally but no one is suggesting relief that the Santa rally has finally arrived. Low volumes imply a lack of buying conviction and thus, again, squaring up ahead of the holiday rather than setting new positions. In contrast to Australia nonetheless, where we’re looking forward to a lazy, hazy summer break, it’s pretty much back to business as usual next Monday night for Wall Street.

The final revision of US September quarter GDP, released last night, showed a slight tick down to 2.0% from the previous 2.1% estimate. Consensus suggested 1.9%, so it’s a mild win, but also very old news by now. I say “final” but in fact the number can be revised again on the release of the first estimate of December quarter GDP.

On a year to date basis, the US economy grew by 2.2% over the first nine months of 2015. The December quarter is not expected to bring any great acceleration in growth, suggesting annual growth will come in under 3% for the tenth straight year. That’s the slowest stretch ever recorded since WWII.

But hey, the Fed’s already made its move, and a no other time since WWII has the US cash rate been at zero. So while one might question why the Fed would choose to commence a tightening cycle in such a dour growth environment, the other side of the coin is that even 2% growth suggests a zero rate is too low.

We are expecting to spend most of next year debating just when the next Fed rate rise will come, but we might also consider that in moving from 0-25 to 25-50 basis points, the Fed has also given itself somewhere from which to cut if necessary.

But let’s not worry about that ahead of Christmas.

Commodities

A funny thing happened in oil markets last night.

Oil markets mark an official closing price late in the afternoon New York time but continue to trade electronically around the clock. FNArena takes a snapshot of prices each morning well after the official close to provide a more up to date reading. On this morning’s snapshot, West Texas crude was up a tad at US$36.20/bbl and Brent was unchanged at US$36.18/bbl.

Spot the anomaly?

For the first time since 2010, WTI is trading above Brent, and this was also the case at the official close last night. The reversal of what was once a significant premium to Brent from WTI represents anticipation of the longstanding US crude export ban being lifted. It’s not yet official but it is assumed only a rubber stamp is needed from here.

It’s been noted that WTI had fallen to a seven-year low this month but more notably, Brent has fallen to an eleven-year low. When US oil hits the oceans, Brent will no longer lay claim to being the global benchmark export price.

The London Metals Exchange was apparently a bit of a ghost town last night as many traders have already headed home for Christmas. This week has seen to-ing and fro-ing of base metal prices on low volumes that has not leant itself much to fundamentals. Last night saw more fro-ing than to-ing, with nickel down 2%, copper, lead and zinc down 1% and aluminium down 0.5%. But we can’t read too much into this week’s moves.

It might just be a slightly merrier Christmas for iron ore miners. Iron ore traders are unlikely to be squaring up ahead of a Christmas most of them don’t celebrate but following a long, slow demise for the iron ore price these past months, there was always a chance of a rebound once prices reached oversold level. This morning the iron price starts with a 4, which is at least psychologically heartening. It’s up US80c at US$40.20/t.

The US dollar index is down 0.2% at 98.21 but gold is down US$6.50 at US$1072.20/oz.

Today

The SPI Overnight closed up 24 points or 0.5%.

Wall Street will see a late rush of pre-holiday data releases tonight, including new home sales, durable goods, personal income & spending and consumer sentiment.

Tomorrow the ASX will close at 2.10pm Sydney time and tomorrow night the NYSE will close at 1pm New York time.

Well, that’s it from me for 2015. Merry Christmas and Happy New Year to all and I hope you have a relaxing break, as I intend to do.

The shutters will come down this afternoon on FNArena’s regular daily service and roll up again on January 14. The website will remain fully accessible over that period. I’ll be back with the Overnight Report later in January.

Have a good one.
 

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: Santa Where Are You?

By Greg Peel

The Dow closed up 123 points or 0.7% while the S&P rose 0.8% to 2021 and the Nasdaq gained 0.9%.

Divergence

One would be hard pressed to find too many examples of when the Dow falls 350 points overnight and the Australian market closes flat on the session. Indeed, the thirty odd points the ASX200 did fall by yesterday, by midday, was proceeded by an early attempt to rally almost from the opening bell. A second attempt in the afternoon succeeded.

The divergence in US and Australian stock market sentiment now apparent can be largely attributed to a divergence in central bank policy. In Australia, the RBA is currently comfortable with its interest rate setting but has left the door open for more cuts, and most economists anticipate one or two more next year. Meanwhile, the Fed is now in a tightening cycle. The implicit stronger US dollar is weighing on US forecasts while the reverse is true downunder.

The negative impact of a higher US rate is a tighter carry trade gap, meaning Australian yield stocks are less attractive to US investors. We note that yesterday the losers on the session included telcos and utilities, while otherwise ongoing fallout from the MYEFO healthcare scare saw that sector as the worst performer, down 0.9%.

But a rally in iron ore saw materials up 0.5% and some consolidation in oil saw energy as the best performer, up 1.0%. In the US, ongoing oil price weakness will lead to inevitable defaults and bankruptcies amongst smaller oil producers, which is why high yield debt is under pressure. Australian oil producers don’t issue junk bonds as a rule (witness Santos’ recent equity raising) thus locally we don’t have the same problem. One wonders just how much more value can be stripped off local Big Oil.

That is not to say Australia can have its own little Santa Rally while Wall Street falls in a heap, if that is to be the case. But 2016 is shaping up as year in which Wall Street movements are noted, but not blindly replicated.

Is Santa Not Real?

Wall Street has begun to concede that history does not necessarily have to repeat itself every year. Just because it’s Christmas it does not mean a Santa Rally is thus a given. The first Fed rate hike in a decade clearly does not happen every year, for one, and concern over the energy sector is not going away anytime soon.

There was an attempt to rally early in the session last night, on the assumption Friday night’s big fall was as much about quadruple witching volatility as it was about actual negative sentiment. But when WTI crude fell to below US$34/bbl early on, that negative sentiment took over once more.

It was expiry day for the January delivery WTI contract so we can’t read too much into the final day’s move. If we look to the new February front month, it closed slightly lower but at least has a 35 in front of it. The big talking point on the day was, however, the Brent-WTI spread.

If we go back a few years, that spread was as much as US$27/bbl, back when oil was heading up towards triple digits. The reason was that there was an oversupply of WTI and not enough storage, or sufficient pipeline infrastructure to move crude out of Flushing Oklahoma. US oil could not, by law, be exported, thus there was no relief valve.

The US government is now in the process of lifting America’s longstanding oil export ban, which was put in place when the country was totally reliant on imports from the Middle East. That is no longer the case, and given the extent of US oversupply it is no longer worth arguing America needs to preserve its energy security.

The result is that last night the Brent-WTI spread reached as low as a mere US44c. With WTI soon to compete with Brent on the high seas, the two oils have become closer to interchangeable.

The only US economic data release of the day was the Chicago Fed national activity index for November, which showed a fall to minus 0.30 from minus 0.17 in October.

There is nevertheless a minor avalanche of US data due over the next two sessions before the Christmas Eve half-day. As to whether Wall Street can get excited about it all now the Fed has made its move is another matter. Traders suggest that most US fund managers closed up shop on Friday, not to return until the new year.

The Dow was up 150 points early in the session last night, fell back to the flatline, and staged a late comeback to be up triple digits at the close. But not convincingly.

Commodities

West Texas crude fell US32c to US$35.74/bbl on the new February delivery month. Brent, already on February delivery, fell US51c to US$36.18/bbl.

A group of major Chinese copper smelters has agreed to enact production cuts next year, providing some hope as LME traders begin squaring up for 2015. Copper rose 1.5% last night, and all base metals were stronger largely on a book-squaring basis. Lead was up 2.5% and nickel and zinc rose 1%.

Iron ore rose US10c to US$39.40/t.

The US dollar index was down again, overcoming potential weakness in euro following the weekend’s inconclusive Spanish general election result. The ruling centre right party failed to secure a majority, so weeks of negotiation with minor parties will now begin.

Oh goody, maybe Greece 2015 can now become Spain 2016.

European stock markets fell last night on the lack of result, particularly Spain’s, while the 0.3% fall in the US dollar index to 98.38 helped gold to another US$13.20 gain to US$1078.70/oz.

The Aussie is up slightly at US$0.7187.

Today

The SPI Overnight closed up 20 points or 0.4%.

Tonight in the US sees the final revision of US September quarter GDP, along with house prices and the Richmond Fed activity index.
 

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

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article 3 months old

The Monday Report

By Greg Peel

Too Soon, Again?

After a day of rallying ahead of the Fed rate decision, and a subsequent day of rallying after the Fed rate decision, a 250 point fall in the Dow on Thursday night spooked investors on Bridge Street who were likely convinced the Santa Rally had finally begun. False alarm! they cried. And they proceeded to offer the ASX200 down 76 points on the opening rotation.

Both Wall Street and Bridge Street had experienced a somewhat euphoric couple of sessions centred around the end of uncertainty resulting from the Fed’s long-awaited rate hike. Many had assumed the end of uncertainty would translate into a resumption of the longer term stock market rally. But when the champagne ran out and the band started packing up, reality set in that at least in the short term, the market would have to return to a consideration of those things called…um…oh yeah, fundamentals.

One of the more prominent fundamentals is the oil price. But the Fed has not gone away, as Wall Street now has to weigh up the likely pace of the Fed’s ongoing tightening cycle. Consensus had four subsequent rate hikes in 2016. The Fed’s “dots” suggested three. Suddenly US bank stocks, noting that banks are beneficiaries of higher interest rates, looked a little bit overvalued in anticipation.

And more generally, implicit strength in the US dollar is set to weigh further on the earnings of US multinationals.

None of which (other than the oil price) is likely to have a specifically negative impact on the Australian stock market. If anything, a stronger greenback means a weaker Aussie, and that’s positive, and a slower pace of Fed tightening means a slower pace of US investors bailing out of the longstanding carry trade (buying Aussie stocks for yield).

So when the ASX200 opened 76 points lower on Friday, in came the buyers. Outside of tiny info tech, the only sectors the ultimately end the session in the red were, predictably, energy and materials.

The question for today is: Can the ASX200 again defy another huge fall on Wall Street, as was the case on Friday night?

Toil and Trouble?

It is unclear just how much of Wall Street’s plunge on Friday night, which on the back of Thursday night’s fall represented the biggest two-day drop since August, is directly attributable to a “quadruple witching” expiry of equity futures and options that came so soon after the historic Fed rate rise.

The Dow fell 367 points or 2.1% while the S&P lost 1.8% to 2005 and the Nasdaq fell 1.6%.

It is not untypical to see a degree of volatility on “quad witch” days given the S&P500 tends to gravitate towards the most commonly held option strike price as market-makers race to cover their exposures. We may surmise that on Friday the target was S&P 2000. But behind that smoke screen there were clearly other issues at play.

The worst performing sector on the S&P was the banks, which harks back to the “slower pace of tightening” argument above. The best, or rather least-worst, performing sector was utilities. Again we see a slower pace of tightening at play. The oil price was down again, albeit by less than a percent this time, but bottom pickers in oil stocks appear to have retreated, bruised, to the sidelines.

Of more concern with regard to oil is the ever widening spread between investment grade corporate bonds and non-investment grade (junk) bonds which can be directly linked to fear of oil companies defaulting on their debt. The US ten-year Treasury yield fell another 4 basis points on Friday night to 2.20%.

There was also some concern surrounding a surprise announcement on Friday from the Bank of Japan.

Setting Sun?

Given Japan officially fell into recession in the September quarter, markets had been expecting the BoJ to announce increased QE. But no, all is on track, the central bank insisted. Then the ECB extended its own QE program early this month, so on a tit for tat basis the market again began to expect a response from the BoJ when it met on Friday.

The expectation was that the BoJ would increase the level of bond purchases within its QE program. But it didn’t. Instead, it extended the maturity of the bonds it would target. And it would increase the amount of equity EFTs it has been buying to “invest in physical and human capital”, which is code for “support the stock market”.

Again, the BoJ announced these adjustments with a familiar air of optimism for the Japanese economy. But the brave face is starting to become a little bit worn. If there’s no problem, why tweak QE? And if there is a problem, why not increase the level of bond purchases? Has the BoJ reached its limit of QE fire power?

On that fear, the Nikkei fell 1.9% on Friday, when typically extended QE would spark a rally. The surprise and concern was not lost on Wall Street, again making it difficult to decipher exactly what it was, other than a range of issues, that sent Wall Street into a tail spin on Friday night.

The US dollar subsequently fell against the yen, leading the dollar index down 0.6% to 98.68.

Commodities

The dollar’s decline could not stop West Texas crude falling another US26c to US$34.66/bbl and Brent falling US30c to US$36.69/bbl.

The dollar did help out base metals, although volumes have now become thin on the LME as the market winds down ahead of Christmas. News broke on Friday that nine major Chinese copper smelters would meet on Saturday to discuss stockpiling a level of production rather than dumping it onto an oversupplied market, and as a result copper jumped 2.7%. There were sympathetic moves in aluminium and zinc, up 2%, and lead rebounded 3.6% having been heavily sold down earlier in the week on excess inventory numbers. Nickel and tin sat put.

Iron ore rose US80c to US$39.30/t.

It was a rollercoaster ride for gold last week, as markets struggled to figure out whether a combination of Fed rate rise and gradual subsequent rises was bullish or bearish for the US dollar. On the dollar’s fall on Friday night, gold rallied back US$14.00 to US$1065.50/oz.

The Aussie dollar is also up on the greenback’s fall, by 0.8% to US$0.7178.

The SPI Overnight closed down 40 points or 0.8%.

The Week Ahead

Historically, two of the best two weeks of the year for Wall Street are the last two weeks of December. Yes, it’s called a Santa Rally. But the reality is the vast bulk US corporations, including fund managers and stockbrokers, account on a calendar year basis. Thus December 31 represents not only the end of the quarter but the end of the fiscal year and with that comes the potential for an elevated level of “window dressing”.

This is important for the purposes of lifting apparent fund manager performance as marked at the end of the year, but also important for employee bonuses, which are paid based on calendar year success, or lack thereof.

In other words, don’t yet write off Santa, as long as those dreaded fundamentals don’t get in the way.  And consider that most of Australia’s major investment banks are foreign, and also operate on a calendar year basis, and otherwise it’s still an end of quarter approaching. Being the December quarter, for most of the market the year actually ends this week – before Christmas and the summer break.

All Western markets are closed on Christmas Day, Friday.

The US will cram a lot of data releases into the first three days of this week. Tonight sees Chicago Fed national activity index, tomorrow the Richmond Fed manufacturing index, existing home sales, FHFA house prices and a final revision of the September quarter GDP. The market is forecasting a pullback to 1.9% from the last estimate of 2.1%.

On Wednesday it’s durable goods, new home sales, personal income and spending and the fortnightly Michigan Uni consumer sentiment measure.

The NYSE will close at 1pm on Thursday.

Japan will be closed on Wednesday.

There are no Australian data releases of note this week. The ASX will close at 2.10pm on Thursday.

FNArena will cease its regular daily service after Wednesday. Service will recommence on January 14. The website will nevertheless be accessible over that period.
 

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: Now, Back To Oil

By Greg Peel

The Dow closed down 253 points or 1.4% while the S&P fell 1.5% to 2041 and the Nasdaq lost 1.4%.

Euphoria

The rebound rally that began on Wednesday in anticipation of the Fed rate hike kicked on yesterday, locally and around the globe, on confirmation of the Fed rate hike. If you’d just landed from another planet yesterday you perhaps were wondering why on earth a tightening of monetary policy is so bullish for markets.

When a central bank tightens policy to take rates back towards “normal” the implication is of an improving economy, and that is positive. When rates are above normal and policy is tightened, this implies an overheating economy and that is negative. But importantly yesterday the Fed finally ended the uncertainty that had prevailed all throughout 2015 as to just when tightening might begin. And perhaps most importantly, the Fed was at pains to point out the subsequent cycle will be “gradual”, suggesting ongoing accommodative support for markets.

Of course the flipside to the Fed rate hike is a stronger US dollar. There has been much discussion on whether the US dollar had already priced in, and perhaps even overpriced, the beginning of the tightening cycle. Many thought there may be a sell-off in the greenback but overnight the dollar index has risen 0.8% to 99.23.

Not good news for already beaten-down commodities.

But this was not the issue yesterday on Bridge Street, where all sectors finished with solid gains, bar one. Energy managed only a 0.2% rise given the oil price had once again tumbled overnight. Healthcare, up 2.7%, was the market leader. Analysts and traders yesterday tempered some of their initial fears over the MYEFO outcome, at least for some stocks in the sector, and some bargain hunting ensued following previous big knock-downs.

Commodities

It was the most anticipated rate hike in history, yet still commodities markets, most of which had closed on Wednesday night prior to the Fed statement release, reacted as if it were a toss of the coin decision.

We had actually seen a little bit of buying this week in base metals ahead of Wednesday night, as traders squared up, but last night saw falls of over a percent for aluminium, copper and nickel, close to 2% for zinc and 3% for lead. Individually, lead again suffered from the excess of inventories revealed the night before.

Iron ore trading is largely removed from either Fed policy or currency considerations. It’s up US30c to US$35.50/t, despite a report out from Goldman Sachs overnight suggesting the iron ore price could remain sub-40 for the next three years.

In the commodity du jour, West Texas fell US73c to US$34.92/bbl and Brent fell US40c to US$36.99/bbl for the new February delivery front month. These moves don’t seem that large, but given how far oil has fallen we note that is a 2% drop for WTI and 1% for Brent. The current critical level for WTI is 35, so closing (officially, the market continues on electronically) under that level is seen as bearish.

On Wednesday night gold jumped up ten bucks and last night fell twenty. Gold is down US$20.60/oz at US$1051.50/oz. We can only assume here that there was an initial counter-trade of “buy the fact” in anticipation of an aforementioned “sell the fact” counter-trade in the US dollar. Clearly this did not happen, so gold turned tail.

As a result of commodity price falls, and of the impact interest rate differentials have on currencies, the Aussie is down a solid 1.4% at US$0.7121, heading in the direction one would assume following a US rate rise.

Reality

After the party comes the hangover. Wall Street was set to go on with it last night but managed only a slight tick up from the opening bell before the oil price started heading south once more. Dutifully, stock markets followed.

Traders were largely unsurprised given the rallies into and after the Fed decision, suggesting consolidation thereafter is not unusual.

It was not lost on Wall Street nevertheless that oil names big and small were again getting hammered last night, and that the flow-on into selling of high-yield bond funds recommenced in a higher interest rate environment. While the rate hike removes uncertainty, and uncertainty is the enemy of stock markets, the reality is a stronger dollar is another kick in the teeth for commodities and adds another notch of risk to high-yield instruments.

The recommencement of high-yield bond selling also re-triggered a flight to the safety of Treasuries. The US ten-year yield is down 5 basis points to 2.24% which, following a rate rise, is the wrong way around.

And just to provide another kick in the teeth for the energy sector, the US natural gas price fell another 5% last night. While natgas comes under the same dollar influence, this is an individual story of a lack of demand for heating given an unseasonably warm start to winter, which in turn is being blamed on El Nino.

We recall that the past two winters in the US were unseasonably cold, leading to negative GDP results in each March quarter and, to a great extent, helping to keep the Fed on the sidelines until now. If El Nino brings a mild summer, presumably the March GDP will look like a cracker on a year on year basis, while natgas producers will be cycling two boom years of domestic gas sales and will suffer very bad “comps”.

In the major US data release of last night, the Philadelphia Fed activity index fell back into the negative (contraction) to mark three negative monthly results in four. With the rate rise in the bag, Wall Street is not much focused on data right at this moment, but it will become important again next year as discussion begins on the timing of the next hike.

Meanwhile, the acceleration of the sell-off to the close last night on Wall Street is not a good omen, and may just have put Santa back in his box again. We will, however, need this post-Fed dust to settle. Tonight in the US is the quadruple witching derivatives expiry and this will no doubt already have been affecting markets last night in the lead-up.

Today

The SPI Overnight closed down 42 points or 0.8%.

The Bank of Japan will hold a policy meeting of its own today but Fed tightening has affectively handed Japan an easing by default, so no change is expected.

As noted, quadruple witching in the US tonight.

Today sees the quarterly changes to the constituents of the S&P/ASX indices, announced two weeks ago, become effective.

And just a reminder for subscribers trying to contact Rudi via Editor Direct, he’s on his end of year break, and is somewhere in deepest, darkest Africa.
 

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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: We Have Lift Off

By Greg Peel

The Dow closed up 224 points or 1.3% while the S&P gained 1.5% to 2073 and the Nasdaq rose 1.5%.

Must Be Christmas

Well, someone obviously waved a flag yesterday morning and declared it time to buy. These sudden snap-back rallies have become rather regular of late, following periods of snowballing anxiety which in 2015 for the most part have centred around commodity prices. We had a bounce in oil on Tuesday night, and iron ore at least didn’t fall further. Wall Street was positive ahead of last night’s Fed decision.

So first we saw the bottom pickers come in, then the short coverers, and the momentum traders. There are some big short positions being carried by the market at present across a range of sectors, but otherwise it was simply the beaten-down names amongst the large caps that were again the centre of attention in yesterday’s rally.

I noted yesterday that Macquarie had capitulated and dropped its commodity price forecasts earlier in the week, slashing target prices for resource sector stocks and flipping many a recommendation to an equivalent Sell from Buy. Well hot on the heels have come Deutsche Bank and Credit Suisse, conducting similar exercises with similar results. The materials sector nevertheless jumped 3.2% yesterday, but it was all about the BHPs and Rios and not the suite of junior miners in tenuous financial positions.

It should also be noted that brokers tend only to revisit their commodity price forecasts quarterly, thus this week’s mining stock target price cuts to a large extent represent a catch-up with the market. This also means that among the many recommendation downgrades there were also upgrades for stocks brokers felt had been oversold in the crowd.

A 3.4% jump for the energy sector yesterday was understandable after two sessions of oil price rallies, representing a 10% rebound from low to high. Alas, last night oil fell 4%.

The other stand-out mover among the sectors yesterday was consumer staples (3.4%), but there are some very big short positions out there on Woolworths. There are even bigger short positions on Primary Health Care but as that stock continued to cop the brunt of the MYEFO fallout yesterday, shorters saw no great incentive to take profits. The result was an against-the-trend 0.2% fall for the healthcare sector.

It was potentially a risky trade yesterday to be so bullish ahead of a Fed meeting, but given the world was so convinced the Fed would raise, while remaining dovish in its commentary, the potentially greater risk was to wait for the fact and miss out. The market backed a “have your cake and eat it too” result from the Fed, with the “cake” being the end of interminable uncertainty a rate rise would bring and the “eat it too” being the promise of still-easy policy for some time to come.

And So It Was

It was arguably the most anticipated Fed meeting in history. The last time the Fed raised its funds rate was in June 2006. The excitement ahead of the 2pm announcement was palpable. The response when the statement hit the wire was of almost complete silence.

There were no headless chooks this time. No frantic to-ing and fro-ing as the computer algos battled in out at humanly imperceptible speeds. The Fed funds rate has been raised to a range of 25-50 basis points from the 0-25 range that has prevailed for six years. The key word in the FOMC statement with regard ongoing rate rises was “gradual”.

This is exactly what everyone was expecting, so nobody batted an eyelid. Initially, stock and bond markets did not move. Only when Janet Yellen commenced here press conference, and when everyone had actually had a chance to read the full statement, did the buyers come into the stock market. I’m not sure, but as I watched the action on tele I think I might have seen a big guy in a red suit in the background on the NYSE.

I was definitely a “cake and eat it too” result. The only mild surprise is that the statement outlined a whole range of factors which informed the FOMC’s decision beyond the supposed twin mandates of employment and inflation. These included issues in offshore markets.

Many a commentator has criticised the official US unemployment rate of 5% as being fanciful, given it excludes so many willing workers out of a job. Janet Yellen addressed this issue in noting wider measures of actual unemployment had also been trending lower. In terms of headline inflation being zero when the Fed would like to see 2%, the Fed chair yet again suggested low oil prices – the reason why current US inflation is zero -- were “transitory”.

This prompted an interesting question from the floor in the Q&A session, pointing out that the Fed had called oil price weakness “transitory” back when oil was US$60/bbl. With oil now at US$35/bbl, the obvious question was “How long does ‘transitory’ last?” Yellen was unrelenting, suggesting that oil prices would eventually stabilise. But in headline terms, the Fed does not see inflation actually reaching 2% before 2018.

Thus the assumption of a very “gradual” pace of tightening from here. The Fed will nevertheless remain data-dependent, Yellen pointed out.

As Yellen spoke, the US stock indices moved higher in a relatively orderly fashion. There was an initial “sell the fact” move in the US dollar, but as I write the dollar index is 0.2% higher at 98.45. The US bond market was pretty well set for a rate rise, thus the ten-year yield is only up 2 basis points at 2.29%.

Thank God that’s over. It’s a nice way to cap off a year of frustrating uncertainty and allow for a relaxed Christmas break. Of course, in 2016 we’ll be back to the sport of pre-guessing the Fed once more in terms of exactly when the next rate rise will be. But now that the wheels are in motion, hopefully the lesser significance of the next hike will not lead to the extreme levels of anxiety we’ve seen in recent years over will they/won’t they raise, will they/won’t they taper, will they won’t they go again with more QE.

It would be nice to think that eventually, the Fed ceases to be the primary driver of financial market sentiment.

Commodities

Wednesdays bring a Fed statement every six weeks but every week Wednesdays bring the weekly US crude inventory numbers. Surprise, surprise, last week’s inventory increase was bigger than expected. So much for a bottom being evident following the oil price rally of the last two days. Last night West Texas fell US$1.62 or 4.4% to US$35.65/bbl and Brent fell US$1.16 or 3% to US$37.19/bbl.

It was all about inventories and nothing to do with the Fed. Prices fell well before the Fed statement release.

Lost in the wash of Fed anticipation last night were actual US data releases, which saw better than expected results for both housing starts an industrial production. These numbers were what LME traders had to hang on to last night given the shutters came down just before the Fed statement release.

All base metals traded higher, bar lead, with nickel the winner on a near 3% gain. Copper was up 0.7%. Lead fell 2% on announced record-high inventories.

Oil might have been down again but if you’re trying to balance a national budget, the good news is iron ore is up US70c to US$38.20/t.

Gold is also up, by US$10.50 to US$1072.10/oz, which seems counterintuitive, but is likely a “buy the fact” response.

It looks a bit like “buy the fact” in the Aussie too, given the market has been short for so long on an expected Fed rate rise. It’s up 0.5% at US$0.7222.

Today

Looks like we could be going on with it. The SPI Overnight closed up 54 points or 1.1%.

But a warning. Today is the expiry day for December quarter futures and options and only this quarter does the ASX set what is usually two rounds of expiries together, accounting for all of futures, futures options, index options and stock options simultaneouly. In other words, “quadruple witching”.

We could well see some volatility.

Otherwise, today is the first day of the rest of our lives. Enjoy.
 

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article 3 months old

The Overnight Report: Ahead Of The Fed

By Greg Peel

The Dow closed up 156 points or 0.9% while the S&P rose 1.1% to 2043 and the Nasdaq added 0.9%.

My Goodness

MYEFO dominated market sentiment late yesterday on Bridge Street. We could say that Scott and Arnie managed to turn a 41 point rally for the ASX200 into a 19 point fall but this is not quite the case.

In general terms, the budget update was a gloomy one, no matter what spin the pollies tried to put on it. Bigger deficits for a longer period is the headline, but hardly a surprise given commodity price falls and hardly the end of the world when global interest rates are at historic lows. Many of the spending cuts used in the numbers have already been rejected by the Senate, suggesting the government is simply preparing us for an election sooner rather than later.

Specific hits were taken yesterday by healthcare stocks Primary and Sonic on announced pathology subsidy cuts, while the various aged care stocks traded up and down moves on anticipated cuts in that sector. All up MYEFO managed to turn what was a flat market late in the session into a weak close.

It was earlier in the day that the market dismissed the opening 40 point rally. The index shot up from the bell led by the resources sectors, thanks to overnight rallies for both oil and iron ore. But by the end of the day it was these two sectors that registered the biggest falls. Energy closed down 0.6% and materials 1.0%.

There may well have been some influence from Macquarie’s resource sector capitulation. The broker has long been warning that its metal price forecasts were well above spot, and were spot prices substituted in the equation, big valuation cuts would follow. Macquarie was hoping spot prices would rise to meet its forecasts but the opposite has proven true, and thus the broker has slashed target prices and downgraded the ratings of no less than eleven miners within its coverage, many to an equivalent Sell from Buy.

We also had the RBA minutes out yesterday but they proved to be of the broken record variety and had little influence on the stock market. While many an economist is still predicting one to two rate cuts next year, the RBA is certainly showing no signs of planning such a move.

The Aussie dollar is down 0.7% over 24 hours at US$0.7190, but that move occurred overnight on a rally in the US dollar.  

Here we go

US data releases last night included the November CPI, which surprised no one by coming in flat for the month on the influence of falling oil prices. The December result is shaping up to be weak as well given not only crude oil but natgas prices have tumbled, driven down by unseasonably warm El Nino weather in the US and a subsequent lack of demand for heating.

The important number is the core CPI, ex food & energy, which rose 0.2% for an annual rate of 2%. There’s the Fed’s target level right there, although the Fed does prefer the PCE inflation measure over the CPI. It’s all academic anyway, given a rate rise tonight is baked in.

It is typical for Wall Street to rally ahead of a Fed meeting, and we’ve seen two lead-up sessions of rallies. In both cases, however, the primary driver has been a rise in oil prices.

On Monday night oil hit a new low before turning tail and rallying strongly to a positive close. Last night the market went on with it, although prices have since drifted back a bit since the official close. WTI is up 2.7%. From the low on Monday night to the high last night, WTI rallied 10%.

“Is the bottom in?” I hear you ask. Could be, or it could just be another short-covering snap-back.

Exxon and Chevron have led the Dow higher these past two sessions but the Dow was up 250 points at its peak last night, when WTI was also at its peak. The way oil prices are driving Wall Street at present one wonders whether the Fed has much of a role to play.

Currency markets were preparing for a rate rise last night nonetheless, sending the US dollar index up 0.6% to 98.25. Having fallen as low as 2.14% on high-yield bond sell-off fears, the US ten-year Treasury yield is back up at 2.27% and ready.

Discussion on Wall Street now is not of the familiar will they/won’t they variety, but of the how will markets respond variety. The removal of uncertainty should be a big positive for Wall Street, but might we see a “sell the fact” response instead?

Well, this time tomorrow we’ll know. Although, as I have often pointed out, the smart money tends not to join in as the headless chooks run around in the last two hours after the 2pm statement release. It waits until the following day, which is often when the market’s response can by truly gauged.

Commodities

Metals markets are nevertheless jittery, despite all and sundry assuming a rate rise is a given. Traders exited LME positions last night ahead of the announcement and on strength in the greenback. Copper and nickel fell over 2% and zinc close to 3%, while lead fell over 1% and aluminium and tin fell 0.5% each.

Iron ore was unchanged at US$37.50/t.

West Texas crude is up US98c at US$37.27/bbl and Brent is up US44c at US$38.35/bbl.

Gold is off a tad at US$1061.60/oz.

Today

The SPI Overnight is up 57 points or 1.2%. Quite a bold move ahead of the Fed meeting.

And nothing else matters much today, or tonight, at least until that decision is released.

If you’re keen, that will be at 6am Sydney time.
 

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: High Yield Horrors

By Greg Peel

The Dow closed up 103 points or 0.6% while the S&P gained 0.5% to 2021 and the Nasdaq rose 0.4%.

Economy Blues

The new Treasurer will deliver the government’s mid-year economic and fiscal outlook (MYEFO) today and unless you’ve been hiding under a rock you’d know that the budget projections of six months ago are set to be substantially reeled in due to the collapse in iron ore and energy prices. The impact of this focus on the Australian economy is to scare the market into realising it’s not just a resource sector story.

It was predictable yesterday that the 100 point fall in the ASX200 would be led down by energy (-3.3%) and materials (-2.2%) but a 2.4% fall for the banks is indicative of a market concerned about the widespread economic implications of a bigger budget deficit and the response the government may be forced to implement. All sectors finished in the red to varying degrees.

There was also no doubt an element yesterday of finally giving up on any possibility of a much talked about Santa Rally. That’s the problem with something everyone takes for granted as being a given. No rally? Then we must sell.

There was likely also an element of fear with regard recent developments on Wall Street. Falls in commodity prices are cut and dried, but the freezing of redemptions of US high-yield bond funds brings back eerie memories of the freezing of redemptions of many a straightforward equity fund back in 2008. Just how onerous is this issue?

Creeping Doubt

The problem for the US high-yield market at present is that the ebbing tide of oil-related junk bond values is dropping the value of other junk bonds that have no connection to oil and indeed are not in any sort of trouble. This is brings us to one of the fundamental problems of exchange traded funds.

ETFs have become a very popular way to trade baskets of securities as the grunt work of portfolio creation is the responsibility of the fund sponsor, allowing the investor to buy one single security that’s traded on the market just like a stock. Within the most popular high-yield bond ETFs traded on Wall Street are plenty of junior oil company bonds, and given a lot of these companies are set to go to the wall the natural response is to sell.

But one has to sell the whole ETF, when oil-related bonds may make up only, say, 12% of the portfolio, as is the case with at least one of the most popular. This suggests the possibility of a snowballing across sectors. The good news, however, is that when one redeems a bond ETF, one does not receive cash but those actual bonds that make up the ETF. There is thus an incentive for bolder traders to buy the ETFs being sold by panic sellers and pick out the good stuff that has been sold down implicitly below individual trading values. If the subsequent arbitrage profit exceeds the loss on the oil-related bonds that can’t be sold then the trader comes out a winner.

And that is why EFT managers were quick to point out last night that while there is indeed a rout going on in high-yield EFTs at present, managers re not having to break up the ETFs and sell the bonds to any great extent because there are plenty of buyers for the ETF at fire sale levels. There is thus an orderliness, and hence no reason to panic, which is very much different to the sub-prime sell-off of 2007 in which no one wanted to buy.

Markets do, however, tend to panic first and then think it through later.

Thus we saw a 300 point fall in the Dow on Friday night and early in last night’s session, the Dow was down another 127. At that point the S&P500 had crossed the psychological 2000 level. But critical to the stock sell-off was further initial selling in WTI crude, which traded under US$35/bbl.

And every time we see a big oil sell-off we see the buyers come in in the belief this time simply must be the bottom. They haven’t been right yet, but they will be right one day. WTI rallied back to close above 36, and the Dow came back to the flat line. The average was still flat within the final hour before the buyers poured in on the death.

This would tend to suggest Wall Street has concluded there will still be a Fed rate rise on Wednesday. The speed of the high-yield sell-off these past few sessions has led to some creeping doubt about whether such a development might be the one thing that would change the Fed’s mind, and lead to a decision to hold off.

What the FOMC members have to decide is whether a decision not to raise would send such a negative message that the volatility that would follow would be far more extensive that what we are currently seeing in one corner of the market.

Commodities

West Texas crude is up US81c at US$36.29/bbl having hit a low of US$34.53/bbl. Brent is steady at US$37.91.

Hallelujah! Iron ore rose US50c to US$37.50/t. Pass the bubbly.

The LME appears now to have gone quiet ahead of the Fed meeting. All base metals finished in the green but only by small amounts.

The US dollar index is steady at 97.66 but gold is down US$12.60 to US$1064.70/oz. The market is likely squaring up ahead of the Fed.

And it seemed one currency that might be safe to hide in is the Aussie. Last night saw a rally which has taken the Aussie up 0.8% since Saturday morning to US$0.7243.

Today

The SPI Overnight closed down one point.

Yesterday the ASX200 closed on its low at 4928. Closing on a low is always a worrying sign but the index did just manage to stop short of technical support at 4925. That will be a critical level for today unless we do follow Wall Street with a rebound.

As noted, Scott Morrison will deliver MYEFO today. The minutes of the December RBA meeting will be released and we’ll see house price and vehicle sale numbers.

Of interest in the US tonight will be the monthly CPI release, but no one is expecting the result to impact on the Fed decision at the eleventh hour.

Mesoblast ((MSB)) will provide a quarterly update today.
 

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