Tag Archives: Currencies

article 3 months old

The Monday Report

By Greg Peel

No Bottom Yet

The benign close on Bridge Street on Friday is not much worth analysing, given all that has transpired in the meantime. Suffice to say industrials and telcos posted 1% falls and the resource sectors lost 0.6%, but the banks were slightly positive and a bit of green elsewhere resulted in a close of down 8 points for the ASX200.

Of more significance is the reality that a bottom is clearly not yet nigh for crude oil prices, despite what appeared to be some bottom-picking activity last week. West Texas crude fell US$1.25 or 3.4% on Friday night to US$35.48/bbl, representing a seven-year low. Brent fell US$1.84 or 4.6% to US$37.90/bbl.

Renewed selling was triggered by a report from the International Energy Agency which downplayed any expectation for a recovery in oil prices in 2016. The IEA is pessimistic about any easing in global oversupply ahead of a ramp-up of Iranian production once sanctions are lifted. The Agency was particularly critical of OPEC, blaming the bloc’s “freewheeling” supply policy.

OPEC’s total output in November was 900,000 barrels per day more than the estimated demand rate for OPEC crude in 2016.

The oil price fall proved another kick in the teeth for Wall Street, which is struggling to put together any sort of traditional late-year rally. The US stock indices posted their biggest one day falls since August, led down by the energy sector. The Dow closed down 309 points or 1.8% while the S&P lost 1.9% to 2012 and the Nasdaq fell 2.2%.

But it was not just the price of oil, per se, which spooked Wall Street.

I have warned in this Report recently of the flow-on risk into the US financial sector of junior shale oil producer defaults and bankruptcies due to persistent low oil prices. Many an oil producer has funded costs through high-yield junk bond issues and the potential for default is putting a lot of pressure on the junk bond market.

So much pressure that the high-yield Third Avenue Focused Credit Fund announced on Friday night a freeze on investor redemptions. Third Avenue is concerned the rush to redeem would lead to a fire sale of the fund’s assets at destructive prices. The freeze will allow Third Avenue to liquidate the fund in an orderly fashion. It hopes.  

The last time frozen redemptions were front page news on Wall Street was in 2008. And it is not going to help junk bond markets that the Fed is expected to make its first rate hike this week.

Despite that expectation, the US ten-year Treasury yield fell 10 basis points on Friday night to 2.14% as investors rushed to withdraw their investments in high-risk, high-yield instruments and  transfer into safe haven government bonds. Heightened fear was also apparent in the VIX volatility index, which jumped 27% to 24.6, taking it into nervousness territory.

Trade War

And it was not just the price of oil, or junk bond issues, that spooked Wall Street on Friday night.

In the wake of the inclusion of the Chinese renminbi in the IMF’s basket of global reserve currencies, the PBoC announced on Friday it was planning to loosen the currency’s peg against the US dollar and instead switch to a peg to a basket of global currencies – potentially 12 to 13 in total. The central bank is yet to provide details on currency weightings, or just how the switch will come into effect.

But it was not lost on markets on Friday night that the move amounts to a further devaluation of the renminbi. The fear is that in trying to revive its flagging export sector, China is orchestrating a trade war. The peg announcement on Friday follows an announcement from Beijing earlier in the week that export taxes on steel, pig iron and other products would be reduced, potentially leading to further dumping of cheap steel on global markets.

What Beijing should really be doing is addressing China’s steel production overcapacity, and indeed overcapacity in the refining of a range of metals. But to do so too aggressively would bring about the sort of social backlash Beijing forever fears, given the implicit loss of jobs. Capacity reduction will thus be a very long process, one presumes.

The whole point of the ECB’s beefed up QE policy is to lower the euro to ensure Europe’s export-led economy can recover. Japanese QE has a similar goal. With the PBoC now becoming aggressive in its own currency devaluation attempts, one wonders just where the “race to the bottom” and subsequent trade war potential can end.

And all the while, the Fed is set to raise.

The impact of the PboC announcement on Friday was evident in moves on European stock markets on Friday night. A 2.2% fall in London is understandable given the weighting of energy stocks in the FTSE, and renewed oil price weakness. But oil weakness is good for energy-importing European countries, yet the German stock market fell 2.4% on Friday night and France 1.8%.

But on the other side of the coin, the world in general is desperate to see the Chinese economy stabilise. Beijing might be ready to fight a battle in export markets, but for other export economies, China is critical as a customer. This means everything from US iPhones to German heavy machinery, French wine and Australian iron ore.

In this front there was actually good news over the weekend. Beijing provided China’s November “data dump” on Saturday.

Industrial production rose to 6.2% year on year growth, beating forecasts of 5.7%. Retail sales posted the strongest reading of 2015 with a gain of 11.2%. And at 10.2%, year to date fixed asset investment also proved to be better than expected.

The numbers suggest Beijing’s many and various stimulus efforts over the year may finally be starting to gain some traction. This is good news, but in the context of all else that’s happening in China, and of falling oil prices, the impact will no doubt still be lost as markets enter the new week.

Other Commodities

Iron ore fell another US50c to US$37.00/t on Friday night.

The US dollar index fell 0.4% to 97.57 (the renminbi is not in the index basket) which should have provided some support for commodities, but clearly not for oil or iron ore. But there were at least some positive moves for base metals prices in London.

US-based Freeport-McMoRan is now among those global resource sector companies announcing planned production curtailments. While Beijing may be moving very slowly on addressing overcapacity in China, Chinese metal smelters are themselves taking a more active stance in addressing their own oversupply issues. There is thus a glimmer of optimism returning to beaten-down base metal markets.

On Friday night copper jumped 1.9% and nickel 1.7%, while lead rose 1.1% and zinc 0.8%. Only tin and aluminium remained subdued.

Gold was US$5.00 higher at US$1077.30/oz.

The Aussie dollar fell a full 1.4% to be at US$0.7188 on Saturday morning, thanks to oil and iron ore prices, but has rebounded somewhat this morning to US$0.7203 thanks to the positive Chinese data released over the weekend.

The SPI Overnight nevertheless closed down 73 points or 1.5% on Saturday morning.

The Week Ahead

It’s the big one on Wednesday night. You may have heard about it. The Fed will hold a policy meeting and provide quarterly forecast updates, and Janet Yellen will hold a quarterly press conference.

It is not expected that any US data release ahead of that meeting will affect the Fed’s decision. This week’s releases include the CPI, housing sentiment and the Empire State activity index on Tuesday, housing starts and industrial production along with the Fed statement on Wednesday, and leading economic indicators and the Philadelphia Fed activity index on Thursday.

Friday is the quarterly quadruple witching derivatives expiry in the US, which itself often provides for heightened volatility, and being so soon after the Fed decision one presumes this may well be the case.

Japan and the eurozone will release trade and industrial production data this week and both the ZEW and IFO surveys will be closely watched in Europe.

New Zealand will release its September quarter GDP result on Thursday.

Australian data releases are thin on the ground this week, other than house prices and vehicle sales tomorrow. Tomorrow also sees the release of the minutes of the RBA’s December meeting and the government will deliver the mid-year budget update. An RBA Bulletin will be released on Thursday.

On the local stock front there is a trickle of AGMs this week including those of both ANZ Bank ((ANZ)) and National Australia Bank ((NAB)) on Thursday.

The ASX sees its own form of “quadruple witching” expiry on Thursday, and on Friday the recently announced changes to S&P/ASX index constituents come into effect.

Rudi is now off on his annual break and thus will not be making any media appearances until the new year.


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article 3 months old

The Overnight Report: Respite

By Greg Peel

The Dow closed up 82 points or 0.5% while the S&P gained 0.2% to 2052 and the Nasdaq added 0.4%.

Good News is Bad News

Economists were bracing themselves yesterday for a weak local jobs report. Not because they believe Australia’s economy is in trouble and unemployment is mounting – indeed, quite the opposite – but simply because when last month’s report suggested 56,100 new jobs were added, they all fell about in hysterics.

As if!

While suspicion has been mounting for some time that the ABS dart board had well and truly fallen off its hook, economists were at least prepared to be polite last month and suggest the October result probably was a case of statistical noise. The series is volatile, they acknowledged, and hence the November numbers would probably see a correction back to a more realistic result, while maintaining an underlying positive trend.

Yesterday’s number suggested 71,400 new jobs added.

This time there were just looks of exasperation. Struggling to remain polite, CBA’s economists summed up the mood in saying “There will be many doubters”. Still, various other employment indicators have been quite positive, CBA admits, such as the ANZ job ads series, and the underlying trend is a more believable 25,000 new jobs per month.

The November result, fantasy or not, was not well received by the stock market yesterday. In a week dominated by ever-falling commodity prices, for once it was not the resource sectors that led the index down. Energy fell 0.4% but materials was up 0.7%, while the banks fell 1.5%, the telco 1.1% and utilities 0.8%. If the October jobs report suggested the possibility the RBA would not be cutting its cash rate any further, the November report has killed off any thought of another cut altogether. As the Fed prepares to raise, goodbye yield.

The ASX200 was down around 40 points in the morning yesterday on further commodity price and Wall Street weakness, and when the jobs number came out, fell another 40. That took us, for about the umpteenth time this year, back down through 5000. Then the technical trade came into play, and late buyers pushed the index back to a more respectable loss of 42 points on the day, well clear of the 5000 mark.

Forex traders have given up all hope of another RBA cut, as is evident in a 0.9% rally in the Aussie to US$0.7291 despite the US dollar index being up 0.6% at 97.93, but they could well change their minds again tomorrow.

Love That Bottom

WTI crude fell again last night, by another 1.7%, and now Brent has joined the sub-40 club. Crude prices themselves have thus yet not quite bottomed but Wall Street clearly believes a bottom is in sight. For the second session in a row, energy stocks were most sought after. The S&P energy sector rose 1.2% last night following Wednesday night’s 1.3% gain, and after four down-days in a row, Wall Street finally managed a rally all round.

Despite those four down-days, Wall Street’s bounce off the September lows has meant the 50-day moving average on the S&P500 is now very close to crossing over the 200-day, which is called a “Golden Cross” and signals peace, love, harmony and bullishness for all evermore thereafter.

It’s all a complete load of crap of course, but some people do like to hold onto to these little fantasies. Don’t they Santa?

The Golden Cross will be triggered, it is assumed, next week when the Fed announces a rate hike and Wall Street takes off. Tonight sees the release of PPI and retail sales data, and next week sees CPI and housing sentiment ahead of the Fed meeting, but the market is convinced the Fed has already made its decision. As to being convinced the market will then rally is another matter, because everyone is assuming that will be the case.

Indeed, the Dow was actually up 200 points around 3pm before fading quickly away at the close.

Commodities

West Texas crude is down US64c to US$36.73/bbl and Brent is down US64c to US$39.74/bbl.

The pickers were out in the local materials sector yesterday, it would seem by the aforementioned 0.7% rally against the general index trend. But iron ore is down another US80c overnight to US$37.50/t.

Aluminium producer China Hongqiao yesterday announced the immediate curtailment of 250,000t of production, but still couldn’t manage to ignite the aluminium price on the LME, which closed flat. All base metals closed flat except for nickel which fell 1.5%. It seems in the run-up to year-end, nothing is going to excite world weary metals traders at the moment. We can only hope China Hongqiao’s capitulation is a sign of more to come from China.

The rally in the US dollar helped gold down US$4.50 to US$1072.30/oz.

Today

Despite a rally on Wall Street, the SPI Overnight closed down 11 points or 0.2%.

US November retail sales data will be the hot topic of conversation tonight, given the numbers will account for the Thanksgiving weekend shopping spree. The PPI and consumer sentiment numbers are also due.

Tomorrow brings China’s data dump for November, featuring industrial production, retail sales and fixed asset investment numbers.

Westpac ((WBC)) will hold its AGM today.
 

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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: Not This Time

By Greg Peel

The Dow closed down 75 points or 0.4% while the S&P lost 0.8% to 2047 as the Nasdaq lost 1.5%.

Nice Bottom?

I suggested yesterday that perhaps the time was nigh for some bottom-picking in resource sector stocks, particularly in energy, given what appeared to be quite the capitulation trade in oil markets on Tuesday night. As it turned out, only three sectors finished in the green yesterday within a 0.5% fall in the index. One was utilities, up, 0.3%, while materials rose 0.1% and energy rose 0.4%.

But it appears someone had a red hot go at index bottom-picking in general at 11am yesterday. Having opened down 40 points and plateaued, the ASX200 suddenly shot back up to the flat line in a blink. It then began a slow drift down in the afternoon.

Momentum was probably deflated by yesterday’s local data releases.

Consumer confidence fell by 0.9% in Westpac’s December survey. That’s not really what retailers want to hear before Christmas. The two consumer sectors finished down 0.6% yesterday. However, the index remains on the optimistic side of the ledger, at 100.8, and is up from this time last year.

The fall in the index is mostly due to a lack of confidence in the economy going forward, out to five years, rather than right now, which remains fairly buoyant. There is thus no need to fear the Grinch. Household goods retailers, who have had a cracking couple of years, need also not cry into their egg nog, based on yesterday’s housing finance numbers.

The value of all housing loans fell 6.0% in October to slow to an annual pace of growth of 8.4%. Efforts by the regulator to cool runaway investment loans has clearly worked, given loans to investors fell by 6.1% and are now slowing at an annual rate of minus 9.2%. But, repricing of mortgage rates has not completely deterred owner-occupier borrowers, as o-o loans rose 0.1% to maintain a healthy growth rate of 21.1%.

Given it is the owner-occupiers and not the investors who will be buying all the furniture, spending on household goods should remain supported for now, and clearly there’s a lag effect. But builders and building materials providers will not be too thrilled that the investment housing boom has clearly now run its course. Industrials were the worst performer yesterday, down 0.9%. Falling loan numbers in general are not encouraging for the banks, which were down 0.8%, although the metrics of NAB’s UK demerger has not been met with great enthusiasm either.

Yesterday also saw the release of Chinese inflation data for November. A rise to 1.5% annual for the CPI, up from 1.3% in October, suggests Beijing’s stimulus measures might finally be having some effect. But industrial overcapacity remains rampant, as indicated by a 5.9% annualised fall in the PPI. That’s unchanged since October at least, but represents the 45th consecutive month of declines.

Too Soon?

The bottom-pickers were indeed poised for action on oil markets last night. When weekly US crude inventory data showed an unexpected drop in stocks, WTI shot up to US$39/bbl. Given the US oil and stock markets are currently attached at the hip, the Dow shot up 200 points as a result.

But then reality interfered.

Corresponding heating oil inventory data showed an unexpected rise, even as the US heads into winter. And while crude inventory levels may have fallen in one week, there’s no getting past the fact they are still as high as they have been in 80 years of data. The rapid WTI bounce quickly ran out of steam, reversing to a slight fall in price on the session.

The Dow subsequently closed down 75 points. It was not the day.

Commodities

West Texas crude is down US20c at US$37.37/bbl, while Brent has managed a slight gain of US17c to US$40.38/bbl.

Global divergence was apparent in a 1.1% fall for the US dollar index to 97.35 as the euro rallied. Weak oil prices are bad for the US market, but good for a European market that imports all its energy. The irony is that it is the US about to raise interest rates, while eurozone has just cut. But the fall in the greenback provided little support for commodity prices.

Base metal prices were all slightly higher last night, other than nickel which was flat, but no metal managed a 1% gain.

If we’re on the lookout for bottoms, there no sign of such yet in iron ore. It’s down another US50c at US$38.30/t.

Gold has managed to gain US$3.00 to US$1076.80/oz, while the Aussie is up 0.3% to US$0.7229.

Today

The SPI Overnight closed down 23 points or 0.5%.

Australia’s November jobs numbers are out today. Always good for a giggle.

Market darling CSL ((CSL)) will hold its annual R&D day today.

Rudi will make his final TV appearance for 2015 today at noon, on Sky Business' Lunch Money.
 

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

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article 3 months old

The Overnight Report: All About The Oil

By Greg Peel

The Dow closed down 162 points or 0.9% while the S&P lost 0.7% to 2063 and the Nasdaq fell 0.1%.

Capitulation?

In depth analysis is not required to figure out why the ASX200 closed down 0.9% yesterday. Energy was down 6.4% and materials 3.4%, as both benchmark prices for oil and iron ore are now under the psychological US$40 mark. All other sectors traded off gains and losses of around a half a percent.

The big fall in the energy sector was compounded by Woodside Petroleum’s ((WPL)) announced withdrawal of its bid for Oil Search ((OSH)), thus removing a takeover premium from the Oil Search price. To explain the big fall in BHP Billiton ((BHP)), again, one must remember that while BHP is mostly thought of as an iron ore producer, it also has a large energy division.

The unfortunate reality for the market in general is that while recent falls can be squarely blamed on the resources sectors, as opposed to market-wide concerns, a lot of technical damage is being inflicted on the index. The 5100 level is considered support which, if breached, suggests another move down towards 4900. However, if investors can take anything away from the performance of Australian stocks in 2015, it is that index-tracking has been a disastrous strategy this year. Stock-picking has ruled, particularly outside of the large caps, with only one or two exceptions (CSL comes to mind).

It was probably never going to make much difference what China’s November trade numbers, released yesterday, looked like. It was not a day to be brave when playing the resources. Weak numbers would have been met with a “Yeah, well there you go,” and strong numbers would have been trampled in the stampede anyway.

As it was, the numbers offered a balance of sorts. They were weak, but not as weak as expected. Exports fell 3.7% year on year in November compared to 3.6% in October, but that was not as bad as expected, and imports fell only 5.6% following a 16.0% fall in October. Forecasts had suggested another double digit fall.

It is interesting to note the impact of China’s August currency devaluation. In USD terms, exports fell 6.8%, better than 6.9% a month ago, and imports fell 8.7%, better than the previous 18.8%. The numbers look worse in dollars, but is there a trend of stability emerging?

That’s a big question for 2016. Meanwhile, more immediately, have we seen the bottom for oil and iron ore prices? Monday night’s 6% trashing of oil had a hint of capitulation trade about it. Iron ore’s decline has been rather more orderly, so it is difficult to tell when that might stop. Iron ore is also beholden to Beijing’s efforts to reduce excess steel capacity – a slow process – while Beijing has no control over oil markets. That’s all down to US shale producers and OPEC.

Overnight WTI initially fell again, but found some support under the US$37/bbl level before closing only slightly lower on the session. It would be a brave trader who would suggest we’ve definitely now seen a bottom, and bottom-pickers who moved in too soon mid-year have been taken out on stretchers. But with all the talk of which US oil companies are now set to go to the wall, implying reduced supply, it may be time to look at those companies that can survive and maintain dividends. If you are stout of heart, that is. At least, that’s the call from some stout-of-heart US fund managers right now.

Wider Implications

WTI crude fell initially in last night’s session by about another dollar before finding support and rallying to be up slightly. It is currently down slightly on the session. The Dow fell 245 points in the morning before rallying back to be down 160 points. It was all about oil.

Traders were clearly hiding in the big tech space while the oil story played out. Hence we see the Nasdaq flat on the session. The S&P split the difference.

It might be all about oil, but wider implications threaten the US financial sector. Billions had been lent to mostly smaller shale oil companies by mostly smaller regional banks in the US at pervading low interest rates, against hedged barrels. Those hedges have now rolled off, the Fed is about to begin a tightening cycle, and many a shale producer was already burning cash under US$60/bbl, let alone under 40.

Wall Street is thus nervous about the flow-on effect into the financial sector. This is not the case in Australia. Outside of BHP, Australia’s Big Oil names are heavily exposed to LNG rather than crude, and the big LNG projects are financed mostly through pre-organised offtake agreements and, as is the case recently for Santos for example, fresh equity. Australia’s banks are negligible lenders to the energy sector.

Until oil can find a bottom, or at least some stability, the spectre of energy sector defaults and bankruptcies will worry Wall Street. The irony is, of course, that the more oil companies go bankrupt, or at least throw in the towel, the more likely the oil price is to stabilise on reduced production.

Commodities

West Texas is down US5c to US$37.57/bbl and Brent is down US45c to US$40.21/bbl.

In Australia, the focus is as much on iron ore as it is on oil, whereas in the US, oil is the far more dominant stock market sector of the two. Iron ore has not seen 6% overnight plunges and is not prone to such volatility, being more of a China-dominated rather than global market place and trading nothing even remotely close to the volumes that go through the oil market each day.

There is no doubt concern, nevertheless, that as the iron ore price continues to quietly slide – it’s down another US10c to US$38.80/t – there appears no reason for a bottom-picking cavalry to suddenly appear for a short-covering scramble to hint at possible consolidation. Thus junior Australian iron ore miners who are burning cash are facing heightened financial risk. But again, Australia’s banks are not in the business of lending vast sums to junior miners.

On the LME, activity has almost ground to a halt. Traders suggest end-of-year blues and next week’s Fed meeting are keeping the punters away at the moment. Last night saw mixed and smallish moves among the base metals, with the highlights being one percent falls for nickel and tin and a one percent rally for lead.

The commodity price issue has taken further toll on the Aussie dollar, which is down another 0.8% at US$0.7208. The US dollar index is also down, by 0.2% to 98.44, and gold is relatively steady at US$1073.80/oz.

Today

The SPI Overnight closed down 23 points or 0.5%. A breach of 5100 threatens for the ASX200.

Yesterday’s NAB business confidence survey was fairly benign, but today we’ll see Westpac’s consumer equivalent which has particular importance at this time of the year. We’ll also see housing finance data, which is also a strong focus of attention at present.

Beijing will release Chinese inflation data today.

 

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: Wasted Energy

By Greg Peel

The Dow closed down 117 points or 0.7% while the S&P fell 0.7% to 2077 and the Nasdaq lost 0.8%.

The Bad Oil

One year ago the world assumed that the regular December OPEC meeting would bring about announced production cuts to stem the tide of the falling oil price, as that’s what OPEC had always done in the past. The WTI crude price had fallen from above US$100/bbl to US$60 at that time. But OPEC did not cut.

Instead, as it turns out, OPEC, and Saudi Arabia in particular, increased oil sales at whatever price obtainable in order to protect market share, leaving it to the US shale producers to provide the production cuts given it was they who had brought about global oversupply. In late January WTI hit US$45.

Signs of apparent US production reduction, via lower rig counts, took oil back to US$60 in June but supply volumes just kept going up. WTI almost went through US$40 in August before stabilising, but overnight, in the wake of another OPEC meeting featuring no announced production cuts, West Texas has fallen US$2.43 or 6% to US$37.62/bbl – its lowest level since 2009.

This seems a delayed reaction. The OPEC meeting was held on Friday night and oil markets traded only slightly lower on the session, probably because no one really expected OPEC to cut anyway. Maybe Wall Street needed the weekend to think about it, away from the euphoric fog of Friday’s jobs number and Mario Draghi’s reassured commitment to QE. OPEC is backing a combination of US shale reduction and growing global demand to stabilise prices in 2016. But right now, US crude supply continues to grow and global demand, particularly that from China, is sluggish.

This scenario was apparently not lost on one or more investors who decided to slam Australian oil stocks yesterday. The ASX200 opened up 78 points, erasing the previous session’s “Draghi Disappointment” falls, in concert with the big rally on Wall Street. But in moved the energy sector sellers, and by lunchtime the index was flat, where it remained for the rest of the session. The telcos were the only other sector to see notable selling, down 1.9%. Otherwise all sector moves were negligible bar energy, which fell 4.6%.

It was smart selling, in retrospect. Oil prices did not start the tumble that has taken WTI well below 40 and Brent knocking on the door until after the local close yesterday.

Rock and Roll

It’s been a wild ride for Wall Street these past three sessions. Dow down 250 points on Thursday night on Draghi disappointment, up 350 points on Friday night on jobs and Draghi back-tracking, down 100 points last night on the oil price slide. The Dow was down 200 points at one stage last night, so at least there are some prepared to buy.

Oil did not impact upon European markets last night, as one might expect given Europe is an oil & gas importer, whereas Australia is an exporter and the US is a self-sufficient producer (if we bring along Canada and Mexico). Responding to US jobs and Draghi at the first opportunity last night, the German stock market jumped 1.3% and France 0.9%. There are oil names listed in London, but the FTSE only fell 0.2%.

The flow-on issue for Wall Street with regard falling oil prices is credit defaults. US business television has already been publishing lists of oil companies deemed most likely to go bankrupt were oil to fall below 40, but before bankruptcy comes default. US banks, many of the smaller regional variety, previously lent money to shale oil aspirants on the basis they hedge their production at the time. Those hedges, which would have been placed anywhere up to US$100/bbl, have been rolling off this year and rollover values at US$40/bbl mean an incapacity to service loans.

Having experienced a GFC in silly home loans, a still nervous Wall Street is always on the lookout for new GFCs in the making. There has been much concern that surging US auto sales these past few years are the result of cheap finance and “subprime” car loans, but it turns out car dealers have actually been quite tight with their finance criteria. For a while now oil loans in a low interest rate environment have been a source of angst. The jury is still out on whether a wave of oil company defaults will set in train a wave of bank failures, and whether that will reach to the high end.

The Fed is set to commence raising interest rates next week.

Commodities

As noted, West Texas crude is down US$2.43 or 6% at US$37.62/bbl. Brent is down US$2.41 or 5.5% at US$40.66/bbl. Even the US natgas price fell 5.5% last night.

The moves have little to do with the US dollar, which is up only 0.3% on its index at 98.64.

Base metals actually saw some short-covering on Friday night on the strong US jobs number, which cements a Fed rate rise. Last night traders seemed to have changed their minds nevertheless, in what has been described as a slow day that highlights the rapid approach of year-end. Copper and tin fell 1%, aluminium, nickel and zinc fell 2%.

That other member of the sub-40 club, iron ore, is down another US50c to US$38.90/t.

Gold’s moment in the sun didn’t last, confirming a short-covering scramble on Friday night. Gold is down US$15.20 at US$10.71.30/oz.

Today

Although oil prices crashed overnight, the Australian market arguably saw its oil-related sell-off yesterday. The SPI Overnight closed down 14 points.

The NAB business confidence survey is out locally today. China will release November trade numbers.

National Bank ((NAB)) has provided an update on the progress of its UK demerger.
 

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article 3 months old

The Monday Report

By Greg Peel

There is little point in analysing the big fall in the local market on Friday, as it was all about “Draghi Disappointment”. Suffice to say it was a market-wide sell-off, consistent with falls around the globe, triggered by the announced extension to ECB stimulus, and on Friday night Mario Draghi eased concerns and effectively assured markets the ECB is still ready with shock and awe if necessary.

Alongside yet another positive US jobs report, which cements a rate hike from the Fed next week, Friday night saw the Dow turn a 250 point drop on Thursday night into a 370 point rally. European markets did not participate in the rebound during their sessions as Draghi spoke in New York after they had closed.

Lock it in

Ahead of the release of the US non-farm payrolls report for November, Wall Street was reeling in its expectations. Assuming the big surge in the October report to be a seasonal blip of sorts, some commentators were talking a mere 100,000 new jobs. But not only did the November result come in at 211,000, the October number was revised up for a total of over 300,000 job additions.

The unemployment rate remained unchanged at 5.0% on a slight tick-up in the participation rate. The only stumbling block was wage growth, which eased to an annualised 2.3% from October’s 2.5%. But that alone is not going to stop the Fed.

Whether or not one believes the Fed had already made its decision, the November jobs report locks in a December rate hike once and for all, as far as Wall Street is concerned. As is oft noted in this Report, the biggest enemy of markets is uncertainty, and uncertainty has reigned throughout 2015 in regard to Fed policy, up until Friday night. Certainty was arguably worth about half of the subsequent rally on Wall Street, which saw the Dow close up 369 points or 2.1%, the S&P gain 2.1% to 2091, and the Nasdaq rally 2.1%. The “technical damage” done to the indices from Thursday night’s big drop was more than repaired.

The other half came thanks to Mario Draghi.

“Well, of course”

It is important to note that while ECB president Mario Draghi has been consistent in his hints that QE would be extended from December, and consistent in his “whatever it takes” mantra over the past few years, never did he actually provide any numbers that should be expected at the ECB’s December policy meeting last week. It was left to the markets to assume the quantum.

The market assumed a 20 point cut to the ECB’s bank deposit rate and some increase above the prevailing E60bn per month of bond purchases. Thus when a 10 point cut and no increase were delivered, the market spat the dummy. Mostly because the market had set loaded itself up long or short as appropriate – long US dollar, short euro for example – to the point that if Draghi had delivered on assumed numbers, there may even have been a “buy the fact” rally in the euro, for example. Disappointment meant the biggest move in the euro since 2009.

Mr Draghi, it seems, got a bit of a shock at just how big the moves were on Thursday night, and just how destabilising they were for markets when the whole point of central bank stimulus is to provide some stability. But he had an immediate opportunity to set things straight in a speech he was due to deliver in New York on Friday night.

In that speech he emphasised that while the ECB only extended QE to a level the market was disappointed with at the December policy meeting, there is “no limit” to what the ECB is prepared to do and the central bank will act “without delay” to bump up the stimulus in 2016 if deemed necessary. European markets were already closed when Draghi spoke, but Wall Street, which had arguably been oversold on the ECB knee-jerk reaction, was open, and ready to reverse Thursday night’s moves.

The comical moment came in the Q&A panel session after Draghi’s speech, in which former Bank of England guv’na Merv King evoked chuckles from the crowd when he asked Draghi whether his speech was in direct response to the market carnage the night before. “No, not really,” Draghi replied, “it…um…well, of course”. Hilarity ensued.

It’s a relief to see a bit of Italian self-deprecation in contrast to the typically po-faced Janet Yellen.

As to whether the strong US jobs report was the main driver of Wall Street’s rally on Friday night, or Draghi, or both, it doesn’t much matter. Clearly Draghi held sway over the US bond market, given the ten-year yield fell 5 basis points to 2.15%. This is the wrong direction for a certain rate hike, but the right direction to reverse the carry trade rally in yields on Thursday night which was prompted by big jumps in European yields, following ECB disappointment.

Similarly, gold posted an ECB response. While additional stimulus in Europe is a positive for the gold price in isolation, Fed tightening and a stronger greenback are more pervasive for USD-denominated gold. With expectations strengthening that the Fed will raise next week, gold has been sold down heavily, talk of triple-digits has prevailed, and everyone had set themselves short. The disappointing ECB package only served to reaffirm short positions.

So despite the US jobs report, gold surged US22.00 to US$1086.50/oz on Friday night. Draghi’s comments were enough to trigger a short-covering scramble. The rally came despite the US dollar index also rallying, as the euro rebounded, by 0.7% to 98.37.

Commodities

The LME was well and truly closed when Draghi spoke in New York, so base metal traders only had the US jobs report to respond to. A strong jobs number implies a Fed rate rise and thus a strong dollar, thus weaker commodity prices. That is if you ignore the fact a strong US jobs report implies a healthy US economy, which is good for commodities. Once again, the base metal market had set itself very short, and thus on the jobs numbers, a short-covering scramble was triggered.

Copper rose just under 1%, lead, nickel and zinc all rose just under 2% and aluminium jumped over 2%. Tin sat still.

The oil markets weren’t ignoring US jobs and Draghi’s comments on Friday night, but the overriding influence was the OPEC meeting also underway. While no one really expected the Saudis to concede to production cuts, disquiet among OPEC members who all have, Saudi Arabia included, heavily bleeding national budgets, meant that maybe there would be some talk of production cuts in 2016.

The Saudis proved defiant however, and continue to assume a combination of rising global demand and falling US shale oil supply will lead to oil price stability returning at some point in 2016. Oil prices had jumped on Thursday night due to the terrorism implications of the San Bernardino massacre, and following the OPEC meeting fell back from whence they came. West Texas is down US$1.07 to US$40.05/bbl and Brent is down US80c to US$43.07/bbl.

Iron ore cares not for central bank policy outside of China. It is official – iron ore is now sub-40. The spot price fell US90c on Friday night to US$39.40/t.

The Aussie dollar is caught in a bit of a push me-pull you situation at the moment under the influence of both global and domestic central bank policy, as well as commodity prices. It was down 0.2% on Saturday morning at US$0.7340.

The SPI Overnight closed up 31 points or 0.6% on Saturday morning.

The Week Ahead

We can now all start tediously debating just when the second Fed rate rise might be. Oh joy.

US data releases drop off a bit this week and ahead of Wednesday week’s Fed policy meeting. The important data releases this week are all on Friday, being November retail sales, which include “Black Friday” and the general Thanksgiving weekend shopping spree, and the PPI and fortnightly consumer sentiment. Next week sees the CPI ahead of the FOMC meeting.

China is back in the frame this week. November trade numbers are due tomorrow and inflation numbers on Wednesday. The usual data dump of industrial production, retail sales and fixed asset investment numbers will occur on Saturday.

Locally we’ll see the construction PMI today along with ANZ’s job ad series. Tomorrow it’s NAB’s monthly business confidence survey, and on Wednesday Westpac’s consumer confidence survey along with housing finance data. On Thursday it’s our own November jobs numbers.

The local AGM season is all but over but there remain some stragglers including Westpac ((WBC)), who will host on Friday. National Bank ((NAB)) is due to update on the UK situation tomorrow and CSL ((CSL)) holds its annual R&D Day on Thursday.

This week, Rudi will give his final presentation (the first after publishing his book) to members of Australian Shareholders Association (ASA) in Canberra on Tuesday. He'll make his final TV appearance for the year on Sky Business on Thursday at noon. There will be no more Weekly Insights until late January.
 

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: Draghi Disappoints

By Greg Peel

The Dow closed down 252 points or 1.4% while the S&P lost 1.6% as the Nasdaq fell 1.9%.

Commodity Crunch

The driver of weakness in the local market yesterday was writ large in sector moves by the closing bell. With both WTI oil and iron ore set to fall into the thirties, the energy sector lost 2.2% and materials 1.8% while almost all other sectors saw insignificant moves. Healthcare was the only other sector to see a plus 1% drop.

Bargain hunters were nevertheless waiting when the ASX200 fell 58 points on the open, quickly halving that drop ahead of the release of the local October trade data. The deficit revealed in the numbers was enough to bring in the sellers once more before again the buyers fought back, and we saw a net 30 point drop by the close.

September’s trade deficit was $2.4bn and economists were looking for $2.6bn for October, thus the result of $3.3bn came as somewhat of a shock, particularly in the wake of the “beat” on September quarter GDP due to a better than expected contribution from exports. Exports of goods and services fell 3.0% in October while imports rose 0.2%.

Breaking down exports reveals goods down 4.1% and services up 0.1%, while within goods, metals exports were down 6%. The bottom line is that the deficit blow-out can simply be blamed on the iron ore price. Elsewhere, there is good news in that while rural exports did sag in the month, annual growth in rural exports is running at 11.4% with more to come thanks to recent free trade agreements. And the lower Aussie dollar is clearly having a positive impact on tourism.

Not Happy Mario

At the same time that the world was quietly becoming convinced the Fed will hike in December, the world had more assuredly assumed the ECB would announce extended QE at its December meeting last night. QE has been duly extended out to March 2017, but the quantum is what caught markets by surprise.

It was assumed the QE program would not only be extended in time but also in quantum, but the ECB left its monthly bond purchase target unchanged at E60bn. It was also assumed the central bank’s deposit rate would be cut by 20 basis points but it has only been cut by 10, to minus 30 basis points. The response to these numbers was the biggest move the euro has seen against the US dollar in either direction since 2009. Every man and his dog was short.

The euro jumped over 3% against the greenback, sending the US dollar index down a whopping 2.3% to 97.66. There was carnage in European stock markets, with Germany and France both down 3.6% and London down 2.3%. The carnage was also evident in European bond markets, more closely linked to monetary settings. The German ten-year yield jumped 13 basis points to 0.60%. That’s a 42% jump.

The sell-off in European bonds flowed over the Pond on the carry trade connection, sending the US ten-year yield up 15 basis points to 2.33%.

I noted in yesterday’s Report that not everyone in Europe thought it a good idea were the ECB to go “shock and awe” on its easing, given recent positive signs in the economic data, and it appears Mario Draghi is of a similar mind. He is keeping his powder dry and, as always, promised he can do more “if necessary”.

Terror-Fied

It has been suggested that the Pakistani-born husband and wife team who carried out the mass shootings in San Bernardino were “radicalised”, suggesting America’s 355th mass shooting for 2015 was not the act of the usual home-grown nutter but indeed an act of terror. While commentators suggest last night’s sell-off on Wall Street was predominantly about the ECB, they concede an element of fear related to the shootings.

Meanwhile Wall Street also had economic data to deal with. The US November service sector PMI tumbled to 55.9 from 59.1 in October when economists had forecast 57.5. While 55.9 is nothing to shirk at, the easing in the pace of growth is the biggest since 2008. Factory orders posted a gain in October, but missed expectations.

A good time to tighten monetary policy? On that subject, Janet Yellen was providing a testimony to a House Economic Committee last night and once again her rhetoric implied the Fed has already decided to hike this month. With reference to San Bernardino, Yellen agreed terrorism had the potential to impact on the US economy but that there was no sign of such at this time. She also said that were the Fed to raise its cash rate, it could always cut it again if needs be.

Tonight sees the US non-farm payrolls report for November and economists are forecasting 200,000 new jobs. The market is assuming it probably doesn’t matter what the result is.

Commodities

If there was any market that specifically exhibited a terrorism-related response last night it was the oil markets. As soon as police officials used the word “radicalised” on live news broadcasts, oil prices jumped. West Texas is up US$1.05 at US$41.12/bbl and Brent is up US$1.26 to US$43.87/bbl.

WTI has avoided a 30 handle for now. Iron ore is also hanging in there, but fell another US30c last night to US$40.30/t.

Fear of a rising US dollar has been a big driver of commodity price falls most recently, so one would expect the big drop in the greenback to spark some short-covering. However the flipside of the dollar fall is disappointing stimulus from the ECB, which is itself disappointing for commodities markets. The oils rose on the terror element but last night in London, zinc fell 1.5% and nickel and tin 1% while the other base metals were relatively steady.

The winner on the currency move was gold, up US$11.60 at US$1064.50/oz.

The Aussie had fallen under 73 in yesterday’s trade on the release of the weak trade data, but the greenback’s fall has meant a 0.7% rise over 24 hours to US$0.7357.

Today

It just goes to show how dependent markets remain on central bank support, all these years after the fall of Lehman. The world has baked in a Fed rate rise and just wants to get it over with, knowing subsequent hikes will come very slowly. But the focus is now on Europe following in the footsteps of the US response to the GFC, and the world did not get what it wanted last night.

The SPI Overnight closed down 67 points or 1.3%.

Today sees retail sales data in Australia. Tonight sees the US jobs report which would typically be “all-important”, but one gets the feeling this one isn’t.

No one is expecting production cuts to be announced at tonight’s OPEC meeting, but then everyone expected more from the ECB.

On the local stock front, quarterly changes to the S&P/ASX stock indices will be announced today, becoming effective in two weeks’ time.
 

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article 3 months old

The Overnight Report: Life After Forty

By Greg Peel

The Dow closed down 158 points or 0.9% while the S&P lost 1.0% to 2081 and the Nasdaq fell 0.5%.

Quiet Achiever

Australia’s economy grew by 0.9% in the September quarter for a 2.5% annual rate, beating forecasts of 0.8% and 2.4%. It was a big improvement on the June quarter result, but indicates the economy is still growing at a sub-trend level.

It used to be accepted that 3.5% represented “normal” growth but in the post-GFC world, anything previously considered “normal” is being reassessed, particularly in light of an historically low global interest rate environment which, at least for the foreseeable future, appears to be the “new normal”.

The good news from the GDP result is that Australia’s non-mining economy is indeed growing sufficiently to offset the drag of declining mining investment. The housing sector remains the stand-out contributor, which is also providing a flow-on into consumer spending on household goods. And while investment might be declining now in mining, money previously invested has resulted in increased export volumes – at lower commodity prices, offset to some extent by a lower currency, but solid nonetheless.

The GDP result appeared to turn around what was an otherwise weak local market from the open yesterday, following on from Tuesday’s big surge. It was a very choppy session, suggesting a staunch battle between buyers and sellers, but the end result was only a small loss at the close. A profit-warning from Spotless ((SPO)) sent that stock down 40% and thus the industrials sector down 1.8%, distorting otherwise mixed and minimal sector moves.

Fear

Around 2pm New York time, news hit the wires of a mass shooting in San Bernardino, California. As the US markets came to a close the suspects were still at large.

The response on Wall Street was basically a hundred Dow points, given the Dow was down around 70 points before suddenly plunging to down 170 on the news, no doubt based on fear of another terrorist attack. Weakness prior was largely due to the WTI oil price once again trading below the US$40/bbl mark.

The US private sector added 217,000 jobs in November, up from 196,000 in October and beating forecasts of 185,000. The result does nothing to change the general assumption the Fed will raise in two weeks.

If there is to be a hike, Janet Yellen is still trying to assert that it is not yet a done deal. In a speech last night the Fed chair suggested she believed the two requirements for a hike – labour market improvement and inflation moving in the right direction – have been met, but the FOMC still intends to assess the data prior to making the decision. Presumably the highlight of “the data” as far as this decision is concerned is Friday night’s non-farm payrolls report, but there are plenty of other data releases due in the interim, including CPI numbers.

Whereas once Wall Street would surge and plunge on any little snippet of a clue about what the Fed might do, now the markets largely respond with a shrug. The US dollar index is up 0.2% to 100, helped by a weaker euro. The ECB meets tonight. The US ten-year bond yield closed up 2 basis points at 2.18%. The US stock market basically did not respond.

Commodities

Commodity markets nevertheless remain edgy over a Fed rate rise and the implications for the US dollar, particularly if we add in an extension of eurozone QE as markets are expecting tonight. It’s a double whammy for the greenback, and of little help to already weak commodity prices.

Last night saw the weekly US oil inventory data released, and they indicated the tenth weekly increase in crude supplies. West Texas crude settled in the afternoon at US$39.94/bbl but in later electronic trading has managed to sneak back up to US$40.07, down US$1.52 or 3.6% on the session. Brent is also down 3.6% at US$42.61/bbl.

Iron ore is down 2.4%, or US$1.00, to US$40.10/t. Analysts have for some time been assuming the potential of a number with a three at the front, and it looks very much like that time might be upon us.

Strength in the US dollar is forcing commodity funds to liquidate positions, which was evident last night in London as all metals bar aluminium fell once more. Copper fell 1.2% and zinc fell 2%.

The gold market likely saw the US private sector jobs number and Yellen’s “on track” comments as going further to cementing a December rate rise. Gold is down US$15.70 at US$1052.90. Analysts are now looking ahead to gold in triple digits in 2016.

The Aussie initially railed yesterday on the GDP “beat” but has since fallen on weaker commodity prices and the lower greenback. It’s down 0.3% over 24 hours at US$0.7308.

Today

With both oil and iron ore at the brink of trading under 40, the SPI Overnight closed down 53 points or 1%.

Australia’s October trade balance is due out today and across the globe it’s service sector PMI day.

All eyes will be on the ECB tonight. In stark contrast to counterpart Janet Yellen, Mario Draghi is a man who tends to offer clear intentions and then follow through on them. For some time Draghi has suggested a QE extension is possible if needs be, and European markets are assuming a “needs be” situation exists, particularly since Paris.

There is nevertheless an argument to suggest the ECB should not “ease” tonight nonetheless, given recent eurozone data have been reasonably positive. Inflation, or lack thereof, remains the sticking point. And one presumes the ECB cannot ignore the financial impact of the Syrian diaspora.

Rudi will make his usual weekly appearance on Sky Business' Lunch Money today (noon-1pm) and then later re-appears on Switzer TV, with Marty interviewing, between 7-8pm.
 

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article 3 months old

Short Term Upside For Aussie


Bottom Line 01/12/15

Daily Trend: Up
Weekly Trend: Up
Monthly Trend: Down
Support Levels: 70.10 / 67.80 / 66.80 / 63.00 - 64.00
Resistance Levels: 74.40 / 76.00 / 78.50

Technical Discussion

'We are going to give price a little more rope to hang itself before we cancel out on our trade recommendations, and that will occur via any move that sticks below 70.10.' Well 70.10 has held since our last review combined with our trade recommendation triggering. The Aussie over the past 24 hours has posted some nice gains on the back of pending home sales reporting in the U.S falling well short of forecast. And today our Reserve Bank has kept interest rates on hold at a record low of 2.0 percent. The added rhetoric by Stevens was a simple lets wait and see how things progress leading up to February 2016 yet it has to be said that economic data has been good recently, including an unemployment rate falling to a 6 month low. The Aussie has traded as high as 72.84 today post announcement as experts start to ponder whether we are now at significant lows in the interest rate cycle.

Reasons to stay bearish (back to neutral above 76.00):
→ Inflation remains in check in Australia.
→ unemployment remains an issue yet recent reporting more positive
→ Interest rates for the most part at record lows. U.S continuing to flag hikes
→ support zone 67.00 - 68.00 now in play

We've been watching the potential double bottom or cup and handle pattern slowly yet surely unfold over the past couple of months. The only thing we are not overly impressed with is the right shoulder / handle which time wise and depth wise has all but lost symmetry. These patterns certainly have better outcomes when symmetry holds together yet we did draw our line in the sand at 70.10 and to this point this number has not been broken below. The trigger for both these patterns to ignite is above 73.80 with further momentum building above 74.40 . The target is quite decent at 78.60 and when these patterns do trigger, targets are generally quite reliable. So we will definitely be buoyed if the desired moves do take hold over the coming weeks. We continue to be quietly optimistic be it overall price action continues to be a bit of a grind.    

Trading Strategy

After massaging our buy signal to time a more appropriate entry level, we have ended up trading long via an aggressive recommendation at 71.61 with stops below 70.10. It was an early entry as we continued to see signs that price was remaining robust above the 70c level after having double dipped below in September. The more conservative trigger is above 73.80 so for the less assertive, this would be another entry point worth considering with the target from such a move centered on 78.60 as mentioned above. We've been patient enough with this though, so lets raise the stop to just under 71.60 tonight to lock in an almost break even trade, which is always a comfortable position to be in.


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

Risk Disclosure Statement

THE RISK OF LOSS IN TRADING SECURITIES AND LEVERAGED INSTRUMENTS I.E. DERIVATIVES, SUCH AS FUTURES, OPTIONS AND CONTRACTS FOR DIFFERENCE CAN BE SUBSTANTIAL. YOU SHOULD THEREFORE CAREFULLY CONSIDER YOUR OBJECTIVES, FINANCIAL SITUATION, NEEDS AND ANY OTHER RELEVANT PERSONAL CIRCUMSTANCES TO DETERMINE WHETHER SUCH TRADING IS SUITABLE FOR YOU. THE HIGH DEGREE OF LEVERAGE THAT IS OFTEN OBTAINABLE IN FUTURES, OPTIONS AND CONTRACTS FOR DIFFERENCE TRADING CAN WORK AGAINST YOU AS WELL AS FOR YOU. THE USE OF LEVERAGE CAN LEAD TO LARGE LOSSES AS WELL AS GAINS. THIS BRIEF STATEMENT CANNOT DISCLOSE ALL OF THE RISKS AND OTHER SIGNIFICANT ASPECTS OF SECURITIES AND DERIVATIVES MARKETS. THEREFORE, YOU SHOULD CONSULT YOUR FINANCIAL ADVISOR OR ACCOUNTANT TO DETERMINE WHETHER TRADING IN SECURITES AND DERIVATIVES PRODUCTS IS APPROPRIATE FOR YOU IN LIGHT OF YOUR FINANCIAL CIRCUMSTANCES.

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article 3 months old

The Overnight Report: Dashing Through The Snow

By Greg Peel

The Dow closed up 168 points or 1.0% while the S&P gained 1.1% to 2102 and the Nasdaq added 0.9%.

Buy Australia

It’s unclear exactly who waved the flag, but whatever the case offshore investors decided yesterday, the First of December, was the day to Buy Australia after a period of weakness for the local index. That weakness has been as much due to company specific issues (think BHP, Woolworths for example) as it has to any macro consideration. And the fact the 5% fall in the Chinese stock market last week now appears to be a blip likely helped.

The investment strategy of yesterday’s buyers becomes clear if we break down the sector moves. The winners were consumer staples (2.8%), telcos (2.4%), consumer discretionary (2.3%), materials (2.3%) and financials (2.1%). We then drop to energy (1.5%) and thereafter, no sector move exceeded 1%.

In the big movers we see an intersection of the subsets of yield (staples, telco, banks and big miners, although don’t count your chickens on the last one) and beaten-down large caps (banks, BHP, Woolies). The consumer sector moves also provide evidence of short-covering (Metcash, Dick Smith).

 We also see evidence of the offshore element in an Aussie dollar that is up a full cent to US$0.7327 over 24 hours. Some of that is overnight due to the US dollar index being down 0.4% to 99.76, and some of it was due to yesterday afternoon’s “on hold” from the RBA. But the currency moved steadily up all day.

Yesterday’s RBA rate decision did not come into play in the local equity market. The ASX200 was up a hundred points by lunchtime and held that through the afternoon rate decision. But the statement did confirm stock market investors have the luxury of knowing the “RBA Put” remains in place. Glenn Stevens could not have made it any clearer:

“At today's meeting the Board again judged that the prospects for an improvement in economic conditions had firmed a little over recent months and that leaving the cash rate unchanged was appropriate. Members also observed that the outlook for inflation may afford scope for further easing of policy, should that be appropriate to lend support to demand.”

Everyone’s a winner.

In terms of economic conditions that have “firmed”, yesterday’s local data releases supported that thesis.

Australia’s current account deficit did not narrow in the September quarter by as much as economists had forecast but the terms of trade suggested a sizeable 1.5ppt contribution to today’s GDP result, ahead of 1.2ppt predictions. With all the angst created by falling commodity prices, it is often lost on observers that export volumes remain robust, and that the lower Aussie is offsetting price falls.

Australia’s manufacturing PMI improved for the fifth consecutive month in November, rising to 52.5 from 50.2 in October.

Building approvals rose 3.9% in October, against expectations of an easing. The annual pace of approvals has nevertheless eased to 12.3% from 21.4% in September, but this reflects lumpy apartment block approvals. A cooling in runaway apartment block construction is not a bad thing as it alleviates “bubble” fears. Ditto a 1.5% drop in average house prices. Construction will continue to support the economy for a little while yet, but not scare economists or the RBA.

Consensus forecasts for today’s September quarter GDP result are for 0.8% quarterly growth and 2.4% annual growth.

Disappointment

To the north, China’s economy is not showing signs of “firming”.

Beijing’s official manufacturing PMI slipped to 49.6 from 49.8 last month when economists were hoping for a steady result. Four consecutive months of contraction represent the longest run since the GFC. Caixin’s equivalent PMI preformed a little better, rising to 48.6 from 48.3, but still representing faster-than-official contraction.

Yet we must once again be mindful of Beijing’s attempts to shift China’s economy away from exports and towards consumption. The official service sector PMI came in at 53.6, up from 53.1. And the Chinese data appeared to have no effect on the Australian market yesterday, when in the past the response has often been substantial.

Around the grounds, Japan’s manufacturing PMI rose to 52.6 from 52.4, the eurozone rose to 52.8 from 52.3 and the UK slumped to 52.7 from 55.2. The most disturbing result came from the US, which saw a fall to 48.6 from 50.1.

That You Santa?

US economists had expected 50.5. It’s the first fall into contraction for US manufacturing since November 2012 and the lowest reading since June 2009, at the depths of the GFC. The last time the Fed raised rates when the US manufacturing sector was in contraction was in 1981, when inflation was 10%.

But ultimately this didn’t faze Wall Street last night. US investors had clearly made up their minds that on the First of December, they will buy US stocks as well as Australian stocks, with a preference for those that have been beaten down over the year. Such is the December theme, and one of the factors behind the famed Santa Rally.

The indices did suffer a rapid pullback from early strength when the PMI result was released, but it did not last long. Wall Street was in buying mode.

In contrast to the weak manufacturing data was last night’s consumer data. Wall Street continues to shake its head at the ongoing surge in US car sales, led by low petrol prices and low finance costs. Total sales for November were 18.2m, up from 17.2m a year ago. The big winner in the month was Toyota. No prizes for guessing the biggest loser (dak, dak, dak).

The weak manufacturing data did, nevertheless, spark a flight into US bonds for the first time in a while. Having fallen into a slumber of late, last night the US ten-year yield fell 6 basis points to 2.15%. Commentators were nevertheless quick to suggest this does not imply the US bond market has decided there may not now be a Fed rate hike this month. They have decided that the pace of subsequent hikes will be very, very slow.

Commodities

One would expect a combination of weak manufacturing data for both China and the US to be negative for base metal prices, but base metal prices have been pretty well thumped of late. Thus on the relief of the drop in the greenback overnight, prices rallied somewhat. Aluminium rose 2%, zinc rose 1.5% and copper, lead and nickel rose around 1%.

The trend is not good for the iron ore price. A US$1.20 fall overnight to US$41.60/t suggests a number with a three in front of it may well be on the cards.

The oils had another quiet session last night, as markets await the outcome of Friday’s OPEC meeting. West Texas is little changed at US$41.59/bbl and Brent is down US37c to US$44.18/bbl.

Gold is up US$3.70 at US$1068.60/oz.

Today

The SPI Overnight closed up 3 points.

Australia’s GDP result is out today as noted, while RBA governor Glenn Stevens will speak in Perth.

Wall Street will see private sector jobs tonight, ahead of Friday’s non-farm payrolls report.

Collins Foods ((CKF)) will report its interim result today, and Fletcher Building ((FBU)) will hold an investor day.
 

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