Tag Archives: Currencies

article 3 months old

Weekly Broker Wrap: Housing, Oz Equities, Consumer, Gold Stocks, FX And Asian Economies

-Deutsche Bank positive on housing
-Are equity raisings hindering growth?
-Morgans' consumer picks for a downturn
-AUD gold price support as US rates rise
-AUD, NZD rally fading?
 

By Eva Brocklehurst

Housing

Deutsche Bank confesses to being uncertain about what the word "peak" actually means when it comes to housing. Does it mean prices, or construction? Does it mean a peak in the growth rate or the level of construction?

The broker believes the distinctions are crucial to the picture. Recent falls in auction clearance rates may not mean house construction has peaked. It may pre-empt a slowdown in house price growth but, historically, there have been periods when house prices have been flat after a boom.

There is no reason why this time it should be different. The broker also contends there is scope for momentum to spread beyond Sydney, particularly to Queensland.

In terms of record housing starts, relative to the population these are below previous peaks. Deutsche Bank suspects there is a lot of catch-up to be done in terms of building. Construction needs to rise 20% to get back to trend.

The broker also believes renters, not mortgagees, are the ones struggling with affordability. The cycle is also well explained by domestic factors as foreign inflows are not that large in relative terms.

Apartment prices, the main target of foreigners, haven risen 10% less than detached houses. All up, Deutsche Bank finds it is not too difficult to construct a positive view on housing.

Portfolio Strategy

One reason cited for a lack of earnings growth in local stocks has been the large amount of equity issuance, with Goldman Sachs noting that few companies have embarked on a strategy of shrinking to grow.

There are around 400 global firms which have managed to shrink their share base by more than 10% since 2009 while only one Australian has achieved this, that being CSL ((CSL)). Goldman calculates that the net supply of Australian equity is running at twice its historical average. This is bucking a global trend.

Capital raising by the banks may have been a major contributor but the increased flow of small cap initial public offerings of shares has also been significant. Goldman notes the gap is widening between the amount of capital raised by small companies and their performance levels.

Since 2005, the market cap of the small ordinaries index has risen by 68%, despite the index having produced a negative return of 14% over that period, Goldman notes.

Consumer Discretionary

Morgans observes there has been speculation about Australia entering a recession. Regardless of whether this is the case, the broker takes a look at those stocks which would be best positioned to perform in a soft domestic economy with fragile consumer sentiment.

Burson Group ((BAP)) is considered to have defensive earnings growth and a lower Australian dollar should be offset by higher than expect cost synergies. The broker also likes Domino's Pizza ((DMP)), Super Retail ((SUL)) and RCG Corp ((RCG)) as these have strong core products and a dominant market position as well as reasonable valuation.

Wesfarmers ((WES)) and Lovisa ((LOV)) are also in the mix. The strength of the Wesfarmers balance sheet provides additional comfort it can weather a slowdown while Lovisa has a low average transaction value and the fast fashion nature of the product makes it more resilient.

Having a strong competitive advantage is also important and Morgans likes Beacon Lighting ((BLX)) in this regard.

AUD Gold

UBS suspects many investors have been avoiding gold because of risk aversion to commodities in general as well as expectations that higher US interest rates will weigh on the precious metal going forward.

Yet, as the broker notes, some gold names are up around 54% in the year to date, beating the Australian dollar gold price, which has risen 11% while the ASX-200 is down 3.0% comparatively. US interest rates remain the primary driver of the gold price but other factors are inflation, safe haven perceptions and central bank transactions.

Recently China lifted its official gold reserves and, when combined with strong consumer demand, UBS believes this transfer of physical gold from the west to the east could play a crucial part in how gold is priced in future.

The broker believes investor sentiment towards Australia's economy may mean the local dollar trades lower if the US Fed raises rates and this will offset any potential downgrade in the US dollar gold price.

UBS is drawn to Evolution Mining ((EVN)) for its free cash flow which is driven by output of 800,000 ozs per annum at an all-in sustainable cost (AISC) of $1,000/oz. Alacer Gold ((AQG)) also offers exposure to one of the lowest cost gold projects in the world and Regis Resources ((RRL)) has re-positioned to better compete in the mid-tier space with guidance of 200,000 ozs at an AISC of $1,020/oz.

Australian and New Zealand Currencies

Commonwealth Bank analysts suspect the recent rally in the Australian and New Zealand dollars will fade. The pair have risen since the beginning of October, mainly on the back of the weaker US dollar as market participants push back the start of the US Fed's rating tightening cycle.

The analysts believe surging commodity supply is a significant headwind to a recovery in the currencies as commodities comprise around 70% of the two countries' exports.

Mining commodity supply should stay strong because of a decade-long investment surge which has permanently expanded productivity capacity. It is not easy or cheap to close a mine.

The analysts have recently reduced 2016 forecast for global growth to 3.1% from 3.5% because of poor prospects for emerging markets. They believe there is a rising risk of crises in emerging markets. Both Brazil and Russia are already in recession.

In connection, the Australian dollar is often used as a proxy for non-Japan Asian currencies and these are expected to weaken because of soft demand in more advanced economies, which in turn reduces export demand from Asia. In this, New Zealand has less of a direct link but has a high export exposure to Asia via Australia.

The biggest risk to the analysts' view on the currency pair is a further delay to the start of rate hikes in the US.

Asian Economies

The CBA analysts expect most Asian economies will decelerate in the near term, as the demand for products made in the region remains sluggish. China's economy has been slowing for more than five years and there is further to go, the analysts maintain.

The housing market poses the largest threat to Hong Kong's stability as prices have risen more than 183% since 2009. A correction is pending, the analysts maintain. India's economy, meanwhile, is less exposed to global demand and should maintain momentum, driven by increased infrastructure investment and robust urban household consumption.

Indonesia's economic outlook is bleak given the soft commodity price environment but the government is pushing through some reforms to accelerate investment. Malaysia is also struggling while the Philippines has recently showed signs of weakening. The analysts observe South Korea will continue to moderate and growth in Taiwan has turned out at the slowest pace in three years.

Vietnam has been the exception recently, with faster economic growth and its export profile now more technology-intensive. One third of its exports now electronics.

Osprey Medical

Osprey Medical's ((OSP)) trial of the AVERT system did not achieve one of its primary end-points - a reduction in contrast-induced acute kidney injury in patients who had been administered dye with the AVERT system.

Still, based on interim data, the US Food & Drug Administration has approved the addition of claims for dye reduction, image quality and reflex reduction to the AVERT system approval. So, while the company cannot market the direct benefits of using AVERT, it will be able  to promote the product as the only FDA-approved system for minimising the amount of contrast given to patients.

As most guidelines recommend minimising dye, Canaccord Genuity believe  there will be robust adoption of the AVERT system by clinicians. The broker maintains a Buy rating and has reduced its target to $1.15 from $1.50 on the stock.

Blackmores

Chinese consumer demand for foreign health supplements is a bright spot as far as Blackmores ((BKL)) is concerned. Goldman Sachs believe the increased outbound travel to Australia and the popularity of the company's brand in Australia, as well as attractive margins, means strong earnings growth is on the cards for FY16.

The broker has upgraded its target to $150 on higher margins, given operating leverage from strong revenue growth. Goldman retains a Buy rating. The broker believes the stock's premium to the market is justified given its 3-year earnings growth rate  of 27% and high cash returns.
 

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article 3 months old

The Overnight Report: Santa Mario

By Greg Peel

The Dow rose 320 points or 1.9% while the S&P gained 1.7% to 2052 and the Nasdaq rose 1.7%.

Santossed

A weak opening sent the ASX200 back down towards the 5200 support level again yesterday morning but this time the turnaround point was 5217. There began a choppy rally back into the green to close the session up 15 points on the day.

When the dust settled, most sectors had traded off modest up or down moves but one sector stood out, that of energy, up 3.1%. Yesterday debt-burdened LNG major Santos ((STO)) announced it had received a takeover offer from private equity at $6.88 per share. The news sent Santos shares up 16% to close at $6.32.

Analysts have for some time been predicting M&A activity in the energy space and recently we saw Woodside Petroleum take an opportunistic swing at Oil Search. The bid was subsequently rejected and there has been no new news out of Woodside since so the consolidation story faded again, until yesterday. Woodside was only up slightly yesterday but Oil Search jumped over 1% and the Cooper juniors, such as Senex Energy (up 8%), all received significant attention.

Suddenly there was something to focus on in the market yesterday, after a week of meandering and wondering what might happen next. But what has also happened next is Mario Draghi.

QE2

The European Central Bank’s QE program, implemented earlier this year, is set to expire in December. QE1 has managed to stabilise the eurozone economy, but growth remains sluggish and deflation remains a threat. Speculation has grown recently that the ECB would extend its QE program into 2016.

ECB officials recently threw cold water on the notion but last night president Mario Draghi, speaking at a press conference following the ECB policy meeting, all but confirmed QE2 would be announced in December. It is likely the failure of the Fed to act on its first rate rise, and waning expectation of a 2015 lift-off, provided impetus.

The German stock market rallied 2.5% last night and France 2.3%. The mood flowed over into Wall Street, where the indices opened to the upside and continued to rally all day, turbocharged by domestic factors.

McMuffins Rule

After two years of continuous declines, which many assumed heralded a structural shift away from unhealthy fast food, McDonalds (Dow) last night posted an earnings increase and forecast beat for the quarter. It all came down to a rebound in China following a previous food safety scare, and the introduction in the US of all-day breakfast. Oh, and now they spread butter on the McMuffins. You want fat with that? Mickey D shares jumped 8%.

Manufacturer 3M, another Dow component, also posted an earnings beat and saw a 4% gain. Together these two stocks were worth 100 Dow points on the day.

Last night also saw some positive US economic data releases. Existing home sales rose 4.7% in September to the second highest level since 2007. Prices of houses with Fannie/Freddie mortgages rose 0.6% in August. And in defiance of recent weak monthly jobs numbers, the monthly running average of new jobless claims has fallen to a four-decade low.

There were also some less positive releases nonetheless. The Conference Board leading economic index surprised economists by falling 0.2% in September – its first decline in seven months – when a flat result was forecast. The Chicago Fed national activity index remained in contraction in September at minus 0.37, up from minus 0.39 in August.

But that’s okay, because all week Wall Street has been looking for something – anything – to provide a reason to buy. On Wednesday night the market closed on its lows after a late sell-off, and suddenly there was talk of the August lows being retested once more. But Mario and Ronald have saved the day.

The trade-off is nevertheless the US dollar, which last night jumped 1.4% on its index to 96.38 as the euro plunged on QE speculation. Many a US company reporting so far has pointed to the strong greenback as a drag on earnings.

Commodities

Base metal prices initially jumped on the LME last night on expected ECB stimulus, with shorts being caught. But the offset for metal prices is the US dollar, so by the close prices had drifted back again. Copper managed a 0.8% net gain but aluminium lost 2% on its own oversupply issues.

Iron ore fell US50c to US$51.40/t as the decline many an analyst has predicted continues.

The oils similarly traded off the positive of ECB stimulus and the negative of the stronger greenback. West Texas rose US24c to US$45.44/bbl and Brent rose US36c to US$48.23/bbl.

One would expect gold to fall on a 1.4% jump in the greenback but the trade-off here is the EUR gold price and the implications of more money printing in Europe. Gold is steady at US$1166.20/oz.

And a similar explanation can be given for the Aussie, which is steady at US$0.7214. The Aussie is not in the US dollar index, and the euro’s plunge does not have to impact on the AUD-USD exchange rate.

Today

The SPI Overnight closed up 78 points or 1.5%. Happy days are here again. If accurate, that would take us to a new post-correction high.

But it’s flash day today. In particular, Caixin will release its flash estimate of China’s October manufacturing PMI. Mind you, if it’s not too “flash” then the market will likely not panic, expecting Beijing to announce new stimulus measures at its Plenary Session next week.

Japan, the eurozone and US will also flash.

On the local stock front, OZ Minerals ((OZL)) and Santos feature among the quarterly production reports due today while Qantas ((QAN)) features among the AGMs and ResMed ((RMD)) will report quarterly earnings.
 

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article 3 months old

The Overnight Report: All The Wild Horses

By Greg Peel

The Dow closed down 48 points or 0.3% while the S&P lost 0.6% to 2018 as the Nasdaq fell 0.8%.

Late Buying

The lead out of Wall Street on Tuesday night was not such much weak as indifferent, as US earnings reports fail to either inspire or spark fear on a net basis and data releases are now less pressing given downgraded Fed expectations. If markets can’t find any particular reason to go up, they tend to go down until a reason emerges.

Bridge Street thus drifted off from the open yesterday, with a little help from lower commodity prices. BHP Billiton ((BHP)) posted a quarterly report showing strong iron ore volume growth, but met broker expectations. The real test came at lunch time when the ASX200 drifted below the 5200 level – previously strong resistance, now in theory strong support.

The index reached 5195 but when traders came back from the sandwich queue, the technical trade kicked in and the index began to drift back up again, confirming 5200 support. Then just before 3pm someone obviously put in a big buy order, focused on the resources sectors, and we rallied into the green to finish the session up 12 points.

The positive close was all about a 1.3% gain for materials and a 1.2% gain for energy, with no other sector standing out. The banks remained stagnant as investors continue to mull over the impact of the government’s near wholesale adoption of the Murray Inquiry.

Red ones go faster

Wall Street’s session began last night as another dreary drift, offering little conviction. Traders had strolled past a line-up of gleaming sports cars and grand tourers outside the NYSE looking as expensive as they are, ensuring the focus of the day was on the partial float of Ferrari for the simple reason that hey, it’s Ferrari, and there was nothing much else to draw attention.

The IPO was well received for the simple reason that hey, it’s Ferrari. Meanwhile General Motors posted a solid result and enjoyed a rally, as did Boeing (Dow).

There were no major data releases on the day, and otherwise the only talking point was a trashing of pharma company Valeant, after one notable fund manager accused the company of being engaged in fraudulent, Enron-style booking of revenues that really aren’t. Another major fund manager and Valeant shareholder responded by buying another 2 million shares at 40% down on the day, and the company itself issued a categorical denial.

It probably didn’t help the accuser’s case that the fund in question is a well known short-side player. Presumably Citron Research wasn’t in buying as the stock rallied back to close the session flat, as that might look a little dodgy.

But while the Valeant story may prove little more than a distraction the healthcare/biotech market is so on edge at the moment, following threats of increased regulation, that the sectors were sold down anyway, taking the Nasdaq down 0.8%. In the last half hour the Dow was dead flat, before late selling led to a 0.3% drop.

As noted, markets tend to go down if there’s no real reason to go up.

Commodities

There has be no announcement forthcoming from China on any new stimulus measures which might have been expected following a run of weak data, but it’s probably the case Beijing is saving up its firepower for next week’s Plenary Session in which the government will outline its latest five-year plan. Any or all of interest rate and RRR cuts, renminbi devaluation and targeted fiscal stimulus is anticipated.

Until that time it seems LME traders can’t find any reason to buy either, so again we see a market going down for lack of any reason to go up. Aluminium, lead and zinc all fell 2-3% last night and nickel and tin fell 0.5%, with copper only slightly lower.

Iron ore fell another US20c to US$51.90/t.

The oils were weaker again, as WTI rolled into a new December delivery front month. Weekly US crude supplies showed a bigger than expected jump and while hopes that a meeting in Vienna between OPEC members and others, such as Russia and Mexico, might lead to production cuts, it seems that’s not going to be the case.

West Texas fell US$1.12 to US$45.17/bbl and Brent fell US86c to US$47.87/bbl.

With Fed rate rise expectations being pushed out in time, gold had rallied towards the 1200 mark on expectations the US dollar would now give up some of its recent gains. But the greenback has failed to come to the party, mostly because it is only one of the major currencies supported by easy monetary policy. The ECB meets tonight and there is much anticipation with regard extended QE.

Traders appear to be losing patience, as gold fell US$9.60 to US$1166.80/oz last night. The US dollar index is up 0.1% at 95.03.

As commodity prices continue to drift lower, so too does the Aussie. It’s down 0.7% at US$0.7211.

Today

The SPI Overnight is down a rather imposing 36 points or 0.7%, which if accurate would once again take the ASX200 down to test support at 5200.

NAB will release a September quarter summary of its business confidence and conditions survey today, while tonight the ECB meets and the US sees existing home sales, house prices and the Chicago Fed national activity index.

On the local stock front, there are quite a few AGMs being held today alongside production reports releases from the likes of South32 ((S32)), while Wesfarmers ((WES)) will report September quarter sales.

Rudi will appear twice on Sky Business today. First at noon (Lunch Money) then again on Switzer TV, between 7-8pm.
 

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article 3 months old

The Overnight Report: Drifting

By Greg Peel

The Dow closed down 13 points or 0.1% while the S&P lost 0.1% to 2030 and the Nasdaq fell 0.5%.

Resource Rout

When China’s data came out on Monday the local materials sector fell a percent but the energy sector was little moved. On Monday night oil fell a couple of percent and base metal and iron ore prices fell, so yesterday the local materials sector fell 2.1% and energy 3.3%.

It seems like a delayed reaction. Perhaps traders were satisfied on Monday with China’s GDP result actually coming in better than expected at 6.9%, while ignoring weaker than expected industrial production and fixed asset investment numbers for the month of September.

Yesterday’s 0.6% fall for the ASX200 was all about those two sectors. The offset was telcos, up 2.6%, because for some reason a very unloved Telstra on Monday became the go-to stock yesterday. Perhaps those dumping resources switched into Telstra instead.

The banks are usually the counter-sector for resources, but yesterday they had their own issues. The government’s response to the FSI did not have a huge impact – the financials sector only fell 0.8% -- because there were no surprises on important capital ratios or risk weights. The main issue was a ban on excessive credit card surcharges, but we’ve been down this path before with excessive bank fees and late payment fines and the banks have managed to sail through.

There was some weird trade on the open on the ASX yesterday but we’ll ignore that as being a blip, and thereafter the index just quietly faded away all day. Not a lot of conviction. The minutes of the October RBA meeting would not have provided much excitement either.

The rate that stops the nation

Australia’s June quarter GDP growth was weak, the RBA board members noted at the meeting, but in line with expectations, due to “what appeared to be temporary weakness in resource exports” and a further decline in mining investment. But, and this is the big “but”:

“…there had been further evidence of rebalancing from the resources sector towards non-mining activity. This rebalancing was being increasingly supported by the depreciation of the Australian dollar, which had led to a noticeable increase in net service exports over the past year.”

The RBA also gave a nod to unemployment not being as high at this time as was expected earlier in the year, but otherwise the board could not ignore the ever lurking housing bubble, if that’s what it is. The board suggested that “The key domestic sources of risk to financial stability, and stability of the Australian economy more broadly, revolved around developments in local property markets”. Recent APRA tightening was having an impact, it was acknowledged, but clearly the housing market remains one of the central bank’s primary concerns.

Now, bear in mind that this meeting was held before the September US jobs number release kicked Fed rate rise consensus into 2016, and before Westpac led out with a mortgage rate increase. Both provide just a little more room for the RBA to cut its cash rate again. However that aside, the minutes suggest we can scratch a Cup Day rate cut here and now. The words are in front of us: temporary weakness; evidence of rebalancing; supported by Aussie depreciation; notable increase. And, the RBA is still very worried about the housing bubble – the “key domestic source of risk”.

Scratch December too.

Earnings Mix

Australia’s housing concerns currently revolve around apartments, and US housing starts data released last night showed an overall 6.5% jump in September starts thanks to an 18.3% increase in apartment starts. Starts of houses rose only 0.3%. Whole apartment blocks of course make the numbers lumpy.

Thus while it was the first monthly increase in net starts following two months of decreases, there was no great reason to be excited. The focus thus turned back towards earnings season.

Among the Dow components, “old tech” IBM’s fourteenth consecutive quarter of lower revenue sent its shares down 6%, balanced by beats from aerospace company United Technologies (up 4%) and financial conglomerate Travelers (up 2.5%). Harley Davidson blew a gasket and fell 14%.

“New tech” names like Facebook, Google and Amazon all saw some selling last night as traders decided these had become a bit overblown, sending the Nasdaq lower. The Dow balanced itself out and the S&P netted out a slight decline.

Beyond earnings, there’s not a lot of impetus evident.

Commodities

Nor is there much commitment in commodities markets at present. Sluggish trading on the LME last night saw all of aluminium, copper, lead and zinc a little lower while nickel rose 0.5% and tin jumped 2%.

Many an analyst expects iron ore to slide back below 50 and that’s a story in progress. Last night iron ore slipped another US40c to US$52.10/t.

West Texas fell another US51c to US$45.55/bbl while Brent was as good as unchanged at US$48.73/bbl.

The US dollar played no part, its index is flat at 94.90.

The Aussie is 0.2% higher at US$0.7260.

Today

The SPI Overnight closed down 12 points or 0.2%. It would seem this consolidation phase just above the 5200 break-out level is set to continue.

There is very little in the way of data out over the next 24 hours, locally or globally.

BHP Billiton ((BHP)) will report quarterly production numbers today, along with other iron ore juniors. Amcor ((AMC)), Insurance Australia Group ((IAG)), Medibank Private ((MPL)) and Origin Energy ((ORG)) are among those companies holding AGMs today while Macquarie Atlas Roads ((MQA)) will provide a quarterly update.
 

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: Neither Here Nor There

By Greg Peel

The Dow closed up 14 points or 0.1% while the S&P was flat at 2033 and the Nasdaq rose 0.4%.

Fizzer

Absolute edge of the chair, heart in the mouth, hide behind the sofa stuff. No, I’m not referring to China’s GDP result yesterday. While I waited for that announcement I was watching my recording of the Scotland game, having managed to avoid hearing the result. I was transported back to Lansdowne Road, 1991. Back then we went on to win the cup.

The Chinese GDP result, on the other hand, was so benign one might almost be tempted to believe it was scripted. The government is targeting 7.0%, economists had forecast 6.8% in the September quarter, and the result came in at 6.9%. What does one do with that number?

No one knows, it seems. Yesterday the ASX200 rose 20-odd points from the open, as the futures had suggested, before meandering aimlessly through to lunchtime and Beijing’s announcement. When the result was known, the index similarly meandered aimlessly through to the close.

Sector results were mixed, and the only notable moves were a 1.1% fall for materials, for which a lower iron ore price had already provided impetus, and a 2.4% fall for telcos. Suddenly Telstra is looking very unloved.

The 6.9% number is probably the Goldilocks result. It’s not bad enough to send markets into a tailspin but not good enough to prevent Beijing from implementing further stimulus measures. Meanwhile, the accompanying data for the month of September was also mixed.

Chinese retail sales grew 10.9% year on year in September, up from 10.8% in August, beating forecasts of 10.8%. Industrial production grew 5.7%, down from 6.1%, and missing 6.0% forecasts. Fixed asset investment grew 10.3% year to date, down from 10.9%, missing forecasts of 10.8%.

Beijing is attempting to transition the Chinese economy away from reliance on heavy industry production and towards domestic consumption. While the above production and investment numbers are disappointing, the better sales result suggests things are at least moving in the right direction. But of course the likes of BHP are not going to be ecstatic to learn the Chinese are buying more iPhones.

With the results providing no great incentive to buy or sell, we’ll now just have to wait to see what Beijing’s response will be. The numbers similarly sent European and US markets into a torpor last night. And this morning the local index futures have closed unchanged.

Commodities

To find any notable response to the Chinese data we have to go to the commodities markets. Here the response was negative, although not dramatically so. If we suggest that the GDP result was better than expected, then the monthly industrial production and fixed asset investment numbers were likely the cause of commodity market angst.

On the LME, all base metal prices fell roughly one to one and a half percent.

Iron ore fell US10c to US$52.50/t.

West Texas crude fell US$1.16 to US$46.06/bbl and Brent fell US1.69 to US$48.75/bbl. While these are reasonable falls, they only take prices back to the lower end of the ranges they have been trading in for some months now. Indeed, it’s amazing how much our local energy index has been flying around of late when WTI has not broken 45-50 since July.

The US dollar index is up 0.3% at 94.95, which also would not have helped commodities. Gold is down US$6.30 to US$1170.00/oz.

The Aussie initially shot up on what was a forecast-beating Chinese GDP, but fell thereafter and is 0.5% lower at US$0.7246 over 24 hours.

Stagnant

Commodity prices falls had their impact on Wall Street last night, but the major indices balanced out for an overall flat result.

On the earnings front, Morgan Stanley posted the biggest miss of all the major banks and its shares dropped 5%.

On the data front, the US housing sentiment index rose to 64 from 61 in August to mark its highest level in ten years. While Wall Street is encouraged by the news, it is also somewhat perplexed. Housing starts are still growing steadily but at much slower pace now than they were two years ago. Why the jubilation?

While there are plenty of data releases yet to follow this week, the data-watching game has rather now lost its excitement given expectations of a Fed rate rise have waned. It would probably require a huge surge in October jobs to spark up interest once more.

That leaves US earnings results to watch, and there are plenty more of those to come in the next couple of weeks.

Today

As noted, the SPI Overnight is unchanged.

The minutes of the October RBA meeting will be released today. We’ve nevertheless had two significant developments since that meeting was held. Firstly, a second consecutive US jobs shocker took a 2015 Fed rate rise off the table for most. Secondly, Westpac has increased its mortgage rates and the other banks are expected soon to follow. Both developments shift the dial more towards the possibility of an RBA rate cut.

On the subject of banks, this morning the Turnbull government will issue its official response to last year’s Financial Systems Inquiry. News services are a-buzz this morning, breathlessly reporting that Turnbull is “going after the big banks” and warning viewers they may have to pay more for their mortgages.

The reality is, of course, that the banks have already largely adjusted for what the FSI recommended, through capital raisings, risk weight adjustments and mortgage repricing. Tightened APRA regulations have also pre-empted likely new rules. So unless the government decides to legislate to a degree far more onerous than David Murray has recommended, there should be no real surprises.

Cochlear ((COH)) will hold an AGM today. Newcrest Mining ((NCM)) and Oil Search ((OSH)) will post quarterly production reports.
 

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

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

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

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article 3 months old

The Monday Report

By Greg Peel

Poised

The ASX200 shot up on Friday morning on the opening rotation, peaking at 10.30am when that process is completed. A solid rally on Wall Street, driven largely by general acceptance that the Fed will not be raising this year, provided the impetus as the index rose 64 points.

But that was the top for the day, and in true Friday style the index spent the rest of the session drifting back to a less dramatic rise of 38 points. Looming large in investors’ minds heading into the weekend was today’s release of China September quarter GDP, and also the possibility Beijing may pre-empt with a monetary policy announcement this weekend ahead of that release, given last week’s weak data, particularly the inflation result.

No announcement has been forthcoming, so we await the midday release of the number economist consensus has at 6.8%.

There was nothing particularly remarkable about Friday’s trade on Bridge Street. The banks provided most of the upside on a cap basis with a 1.1% gain, with utilities and consumer discretionary backing up. It was an up-day for energy but materials proved the only laggard, closing slightly weaker on another fall in the iron ore price.

The RBA released its six-monthly Financial Stability Review on Friday, which also proved unremarkable. The central bank remains concerned over property markets – seeing risks growing in commercial lending but noting that macro-prudential controls are having their intended effect on housing – and noting that Australia’s banks are facing “heightened, but manageable risk” in a number of sectors.

Confused

The most oft heard word on Wall Street at present is “confused”, with Credit Suisse even putting out a research note suggesting investors are presently more confused than they’ve ever been.

The greatest source of confusion is of course the Fed, and here we find Janet Yellen still beating the 2015 rate rise drum, the rest of the Fedheads offering diametrically opposed opinions, and the market now shifting its highest probability to March next year from January previously. The other issue is China, where monetary policy is also a source of confusion. Will Beijing pull another renminbi devaluation rabbit out of the hat?

Once upon a time stock markets traded on fundamentals. Wall Street closed the week on a positive note on Friday, with the Dow rising 74 points or 0.4%, the S&P up 0.5% to 2033 and the Nasdaq up 0.3%. It was the third straight week of net gains.

None of which has much to do with fundamentals, it would seem, given US economic data have been weak and US corporate earnings reports have not set the world on fire either. There was good news on the data front on Friday, with Michigan Uni’s fortnightly measure of consumer sentiment rising to 92.1 from 87.2 previously, but September industrial production fell 0.2%, as expected. General Electric (Dow) posted an earnings beat which saw its shares rise 3.4%, but the three sector leaders for the week of gains were utilities, healthcare and telecoms. Therein lies the tale – no rate rise.

It was also the quietest week on Wall Street in volatility terms since July. One would be forgiven for not realising there is an earnings season in progress.

Commodities

It was another mixed and largely uneventful night on the LME on Friday night ahead of today’s major Chinese data releases. Copper and zinc fell 1%, lead rose 1% and the others did not much bother the scorer.

Iron ore fell US60c to US$52.60/t to be down 5.2% for the week.

The oils were also down around 5% for the week. Friday night nevertheless saw West Texas rise US36c to US$47.22/bbl and Brent rise US71c to US$50.44/bbl. OPEC announced it would hold a “technical meeting” next week, ahead of its scheduled December meeting where production quotas are typically set. This gave oil markets some hope maybe production cuts are back on the cards, despite OPEC spokespeople strongly suggesting otherwise.

Gold fell US$6.60 to US$1176.30/oz as the US dollar index rose 0.3% to 94.71. Despite last week being the week in which Wall Street decided there would be no 2015 rate rise, the dollar is back where it was when the week began. The balance is largely the euro, given the ECB has been hinting at extended QE and holds a policy meeting this week.

The Aussie dropped 0.7% to Saturday morning, to US$0.7279, probably as traders square up ahead of the Chinese data.

The SPI Overnight closed up 22 points or 0.4%.

The Week Ahead

Beijing will release China’s September quarter GDP number today along with month of September industrial production, retail sales and fixed asset investment numbers. On Friday Caixin will release a flash estimate of October manufacturing PMI.

As we are not trading in fundamentals, the response to China’s GDP will be interesting. Were the result to match or beat Beijing’s 2015 target of 7.0%, the market may start to doubt baked-in expectations of further stimulus being forthcoming at any moment. That would be potentially negative.

Were the result to match consensus expectations of 6.8%, the popular media will have paroxysms and the headlines will scream Weakest Chinese Growth Since The Boxer Revolution or some such, but the response may actually be positive on the same bad-news-is-good-news basis.

Beyond China, the US will see housing sentiment tonight, housing starts tomorrow, house prices on Thursday, along with existing home sales, the Chicago national activity index and the Conference Board leading index, and a flash manufacturing PMI on Friday.

Japan and the eurozone will also flash on Friday.

The ECB will hold a policy meeting on Thursday night. With a 2015 Fed rate rise off the table, at least as far as the market is concerned, will Mario Draghi see extended QE as more pressing?

And ditto, will the RBA now see greater reason to consider a Cup Day rate cut? The minutes of the October meeting are out tomorrow, but that meeting was held before Westpac announced increased mortgage rates that led the market to assume (a) the other banks will quickly follow and (b) this opens the door further for a rate cut, given the impact on the housing market.

The only other local data release of note this week is NAB’s September quarter summary of business confidence.

It’s a busy week on the local stock front nonetheless.

The AGM floodgates begin to open this week, with highlights including Cochlear ((COH)) tomorrow, Amcor ((AMC)), Insurance Australia Group ((IAG)) and Medibank Private ((MPL)) and Origin Energy ((ORG)) on Wednesday and Qantas ((QAN)) on Friday, just to name a few.

On top of the AGMs we have ongoing quarterly production reports, and this week sees Newcrest Mining ((NCM)) and Oil Search ((OSH)) tomorrow, BHP Billiton ((BHP)) on Wednesday, South32 ((S32)) on Thursday and Santos ((STO)) and OZ Minerals ((OZL)) on Friday.

But wait, there’s more. Wesfarmers ((WES)) will release its quarterly sales numbers on Thursday and ResMed ((RMD)) quarterly earnings on Friday.

Could be an eventful week.

Rudi will appear on Sky Business on Thursday at noon and again between 7-8pm for the Switzer Report.
 

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

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article 3 months old

The Overnight Report: Bull Market Resumes?

By Greg Peel

The Dow closed up 217 points (back above 17,000) or 1.3% while the S&P rose 1.5% to 2023 and the Nasdaq jumped 1.8%.

Flash Boys

Yesterday’s intraday chart of the ASX200 is an interesting one. At 11am the index was up only by single figure points and at 12.30pm it was up by only single figure points. But at 11.38am it was up 40 points. What happened in between? The ABS released the September jobs numbers.

Ahead of the release, the ASX200 suddenly took off, then retreated, then took off again. At 11.30am the ABS announced a 0.1ppt fall in the unemployment rate to 6.2% and the index shot up to its high. But the drop in unemployment was due to a rise in participation, and September saw a net reduction in jobs when economists had expected an increase. Down we came in a hurry, back to where it all began.

At that point the call went out: If you flash boys are finished having your fun then perhaps you’ll now let the grown-ups take over the session.

The index then rallied in a steady trend to a close of up 32 points. The high frequency traders were left to mull over their algorithms.

In Wednesday’s session we saw the release of weak Chinese inflation data, which yet again confirmed fears of a slowing China. Energy – the market’s current plaything – was carted. On Wednesday night oil prices closed little changed. Yesterday the energy sector rallied 1.7%, outstripped only by materials, which saw 1.8%. Next best was consumer discretionary, on 1.1%. Notwithstanding the broad spectrum of businesses that fall under the “industrials” banner, these three sectors have the clearest connections with China.  

Yesterday’s rally, we may assume therefore, which defied a fall on Wall Street, is all about expectations of fresh Chinese monetary stimulus. Maybe as early as this weekend.

And we’re still playing the technical trade. Wednesday closed just under what is now solid support at 5200. This is now a springboard for buyers.

Lower for Longer

As the period 2009-2014 attests, the greatest beneficiary of low, or zero, or even effectively negative (QE) interest rates, are asset prices – property and equities. Not business investment, as is the intention. The S&P500 bottomed out, famously, at 666 intraday at the depth of the GFC and thanks to Fed QE, which finally “tapered” off last year, 2015 saw a high of 2134.

All through 2015 the discussion has been whether or not the first Fed rate rise will cause a major sell-off. Well we had the sell-off, and not the rate rise. And now Wall Street has come to the conclusion that there simply will not be a rate rise in 2015, and maybe not even early in 2016. October is famously “the month for bottoms”, and November-December typically brings us the famed “Santa Rally”. Certainly this has been the case over the past, QE-driven six years.

Last night saw September CPI data released in the US. The headline CPI fell 0.2%, mostly due to another dip in oil prices. The annual headline rate is zero. The core (ex food & energy) CPI rose 0.2% for an annual rate of 1.9%, basically where it’s been sitting for the past few months. Wages grew a paltry 0.1% despite a US unemployment rate of only 5.1%. Annual wage growth is tracking at a modest 2.2%.

In other data, both the Empire State and Philadelphia Fed activity indices saw improvement for the month, but both remain in contraction.

These weak data releases follow on from Wednesday night’s sombre retail sales result, soggy Fed Beige Book and a profit warning from retail leviathan Wal-Mart. On Wednesday night Wall Street sold off on the realisation the US economy is not picking up pace into the December quarter as previously expected. But last night that weakness completely reversed.

On Wednesday night shares in JP Morgan and Bank of America sold off. JPM posted an earnings miss and BofA’s result failed to inspire. Last night Citigroup posted a beat, but only because it didn’t have to fork out any more hefty fines and legal costs relating to the GFC. Goldman Sachs missed. So as one might expect, last night Wall Street piled into the financials sector, and it led the main indices higher.

Sorry? They also piled into heavily beaten-down biotechs, which is why the Nasdaq rallied strongly. It would appear that last night the Santa Rally began. It’s early days of course, but (a) everyone has been expecting a Santa Rally, so might as well get in early and (b), if anything’s going to fuel the Santa Rally, it would be a lower for longer Fed interest rate.

The US financials sector typically leads a bull market. Or looking at it another way, you can’t have a bull market without the financials sector being involved. Last night’s seemingly contrarian activity on Wall Street appears to have signalled the end of will they/won’t they Fed speculation. Perhaps the CPI was the one last piece of the puzzle needed. History shows that zero interest rates are positive for stock markets.

Commodities

And it’s a global phenomenon. The US dollar index bounced back 0.5% last night to 94.43 despite last night’s data hardly being encouraging, but it was more talk in Europe of further ECB stimulus that dragged down the euro and thus pushed up the greenback.

The balance of a higher dollar and stimulus talk left base metal prices mixed on the session in London, with aluminium’s 1% fall the standout amongst otherwise small moves in either direction.

Iron ore dropped US$1.10 to US$53.20/t.

The oils were gain relatively quiet. West Texas rose US23c to US$46.86/bbl and Brent, on the expiry of its November delivery contract, fell US44c to US$48.71/bbl.

Gold fell back US$4.10 to US$1182.90/oz.

The Aussie initially plunged on the local jobs data yesterday but has since rallied back and is actually up 0.4% at US$0.7333 over 24 hours despite the stronger greenback.

Today

The SPI Overnight closed up 40 points or 0.8%.

The RBA will publish a Financial Stability Review today. Tonight sees CPI data in Europe, and the US will see industrial production and consumer sentiment numbers.

Rio Tinto ((RIO)) will release its quarterly production report today.

Over the weekend, all eyes will be on Beijing. The Chinese government seems to favour Sunday policy announcements. If there is no announcement, there will be the potential for this early Santa Rally, if that’s what it is, to derail. We’ve seen at least one big Beijing disappointment sell-off earlier this year. Although Beijing did respond fairly promptly thereafter.
 

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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: US Gloom Descends

By Greg Peel

The Dow closed down 157 points or 0.9% (to below 17,000) while the S&P lost 0.5% to 1994 and the Nasdaq fell 0.3%.

Beijing phone home

Australia’s energy sector has become particularly fickle of late, flying around on the slightest moves in overnight energy prices. The rally in WTI crude back to almost US$50/bbl last week had the big oil names on the fly as bargain hunters piled in, but this week hopes of a break to the upside for oil prices have evaporated.

Crude oil prices were weaker on Tuesday night so yesterday those big oil names were hammered, sending the energy sector down 3.3%. But this move proved to be very much a standout among the sectors.

The ASX200 fell around 40 points from the open yesterday and despite a couple of blips, was still around that level when Beijing released China’s September inflation data.

China’s headline CPI fell to an annual rate of 1.6% in the month, down from 2.0% in August. The PPI was down 5.9%, unchanged from the August annual rate, to mark the 43rd consecutive negative number and maintain a six-year low.

Of course in this upside-down economic world, this is good news. It is now assumed Beijing will be jolted into acting, and acting swiftly, with further monetary policy stimulus, most likely in the form of interest rate and/or reserve ratio requirement (RRR) cuts.

To that end, the ASX200 recovered through the afternoon to be down only 5 points at the close. Energy remained hammered, but materials fell only 0.4%, while consumer discretionary (+0.9%) and healthcare (+0.8%) provided a balance.

The banks were also very much in the spotlight following Westpac’s ((WBC)) announced capital raising and increase in floating mortgage rates. Westpac shares remained in a trading halt, thus were not factored into yesterday’s 0.2% gain for the financial sector. The points to note about Westpac’s announcements are firstly that the bank is the last of the Big Four to raise new capital, thus there is no further sector implication to consider, and secondly that Westpac’s rate hike will probably prompt its peers into following suit.

RBA?

Analysts were surprised when Westpac didn’t join in the capital raising rush last quarter when ANZ Bank and Commonwealth Bank announced in quick succession, with National Bank having raised previously. Perhaps the volatility at the time, which saw bank shares carted, encouraged the board to delay.

The potentially good news for the wider Australian economy is that in lifting mortgage rates, and assuming all will follow, the banks have relieved the RBA, to some extent, of the need to carefully balance monetary policy for the wider economy against the rampant Sydney-Melbourne housing boom. Across the board 20 basis point mortgage rate hikes leaves the door a lot more open for the central bank to deliver a 25 basis point cash rate cut, perhaps on its oft favoured date of Cup Day.

The housing boom is already showing signs of having topped out, particularly in the apartment segment, following stricter APRA regulations and supply rising ahead of population growth. Mortgage rate increase will go further towards taking the heat out.

Possibly hindering a decision by the RBA to rush into another rate cut, despite the drag of lower commodity prices, is the fact the Aussie has finally come down to a more realistic level, and the impact of that is yet to really be seen in the Australian economy. However, the news coming out of the US last night may offer the RBA sufficient grounds to take the cash rate down to a new historic low.

Retail Rout

US retails sales rose just 0.1% in September, it was revealed last night, following a flat August result. While meeting expectations, the number nevertheless remains disappointing. Take out the balance of strong auto sales and lower fuel prices, and sales were actually flat.

The fall in gasoline prices over the month saw the US PPI fall 0.5%, again in line with expectations. The core PPI, ex food & energy, fell 0.3%.

Just as Wall Street was absorbing these rather dour data, America’s biggest bricks & mortar retailer and employer, Wal-Mart, issued a profit warning which suggested earnings would be flat for the next three years. The company’s decision earlier in the year to raise wages for its enormous employee pool is the issue, along with impacts from the stronger US dollar.

Wal-Mart shares were subsequently slammed 10%, which is why the fall in the Dow last night was much greater than that of the S&P500. However, the Wal-Mart news sparked selling across all US bricks & mortar names, most likely because of selling in the leading related exchange traded fund.

If the above wasn’t enough to ensure a soggy session on Wall Street last night, later in the day the Fed Beige Book was released. The anecdotal assessment noted apparent slowing in three of the twelve Fed districts, with the remaining nine posting only “modest” or “moderate” growth. The report specifically pointed to the impact of the stronger US dollar as being behind this weaker assessment.

All up, last night’s economic news suggests the US economy is not going to grow as strongly in 2015 as had been hoped earlier in the year, particularly after the strong June quarter rebound from the weather-bound March quarter. The US economy is consumer-led, and consumers are not coming to the party.

Fed rate rise in 2015? Forget it. At least, that’s what most commentators are now suggesting, while the Fed itself is appearing to be more and more fractured in its views, frustrating Wall Street and adding to uncertainty. This would explain why last night’s bad news was indeed taken as bad news, when otherwise further confirmation of a 2015 rate rise being off the table could be seen as bullish for the stock market.

The US bond market certainly doesn’t expect a rate rise. Last night the ten-year yield fell 7 basis points to 1.98%. And that US dollar that has been causing all the trouble took a beating last night, with the dollar index falling 0.8% to 93.97.

Commodities

The weaker greenback and heightened expectations of further Chinese stimulus were enough to spark some buying of base metals last night. Tin lead the charge with a 2.6% gain while copper and lead rose 1%, with the others posting smaller gains.

Iron ore nevertheless fell US60c to US$54.30/t.

The oils were almost unchanged last night, which we haven’t seen for a while, no doubt balancing underlying weakness against the impact of the lower US dollar. West Texas is at US46.63/bbl and Brent is at US$49.15/bbl.

The big winner on the night was gold which, on the dollar crunch, rose US$19.00 to US$1187.00/oz.

The loser, we might say in a reverse sense, was the Aussie, which having fallen sharply after the release of the weak Chinese trade data earlier this week has jumped 0.7% to US$7303.

If the US dollar is now set to lose its rate rise expectation premium and force the Aussie higher, the chances of a November RBA cut improve.

Today

On the balance of everything, the SPI Overnight closed down only one point.

It’s jobs day in Australia today, while tonight the US CPI will provide further fuel for the Fed speculation fire.

It’s a busy day on the local stock front today featuring several AGMs, including that of CSL ((CSL)), along with a raft of resource sector production reports. Fortescue Metals ((FMG)), Iluka Resources ((ILU)) and Woodside Petroleum ((WPL)) provide the highlights.

Rudi will make his weekly appearance on Sky Business. Tune in midday-1pm for Lunch Money.
 

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: Marking Time

By Greg Peel

The Dow closed down 49 points or 0.3% while the S&P lost 0.7% as the Nasdaq fell 0.9%.

China Factor

At the beginning of the month we saw Chinese PMI numbers that were inconclusive. The market hung on to a reduction in the pace of manufacturing contraction according to the official data, preferring to ignore the independent Caixin result of accelerated contraction, and ignore reduced expansion in the now larger Chinese service sector.

Yesterday’s Chinese trade numbers can be similarly assessed with either a glass half full or empty approach. Exports fell year on year by 3.7% in September and imports fell 20.4%. Those numbers look bad in anyone’s book. But the export number is an improvement from the 5.5% yoy decrease marked in August, and is not as bad as was forecast. Hence, we might say that’s an encouraging result.

Imports, nevertheless, fell 13.8% in August so 20.4% looks rather alarming for an economy attempting to transition to domestic consumption-based.

How did Bridge Street respond?

Well the resource sectors took us down from the bell, responding to lower oil prices in particular, but ahead of the Chinese numbers the ASX200 was only down around 12 points. The sellers piled in once the numbers were known just prior to midday and by around 2pm the index was down 60 points. Clearly the Chinese numbers were a concern. But from there we rallied back to halve that loss, down only 30 points at the close.

If the resource sectors were weak to begin with, then these trade numbers were never going to help. Energy closed down 2.8% on the session and materials 2.0%. Next worst was consumer discretionary with 1.0%, where sales to China are a factor. But domestic-oriented sectors such as consumer staples and healthcare finished higher on the day, and a 0.7% rise for industrials was very healthy against a backdrop of yet another resource sector plunge. The banks were only down 0.4%, so there was no “Sell Australia” going on.

At least not in the stock market. The Aussie is this morning over a cent lower at US$0.7252 despite the US dollar index dipping 0.1% to 94.74. The short-covering rebound in the currency has clearly now run its course.

The domestic economic news of the day centred around NAB’s monthly business survey. There were no surprises when the September confidence measure jumped to plus 5 from plus 1 in August given Turnbull had seized the reins two weeks prior to the survey. However it must be noted that August was a month dominated by a plunging Chinese stock market and much subsequent wailing and gnashing of teeth, so we would expect an easing in that arena to have provided for some return to confidence.

Conditions remained unchanged at an elevated plus 9, reflecting solid local employment and profitability measures, ANZ’s economists suggest.

We also had RBA deputy governor Philip Lowe suggesting yesterday business conditions appear to be okay and firms are willing to hire, but as to whether this would convert into a much needed boost in non-mining capex to offset the resource sector decline he was not so sure.

There is also a lot of talk coming from stock analysts and from the central bank that the local housing boom may now have peaked, and to date it’s really only been housing that has provided the offset against the impact of low commodity prices on the Australian economy. It’s time now to see the lagged flow-through of the much lower currency start to make an impact on the numbers in other industries. We may recall that a decade or so ago, tourism, for example, was Australia’s second biggest contributor to GDP.

Mixed

Leading US bank and Dow component JP Morgan had always reported its earnings at the opening bell, but of this reporting season has now decided to do so after the closing bell. With Intel (Dow) an aftermarket reporter as well last night, Wall Street was set for another meandering session of quiet trade until these important results were known.

Wall Street did see the numbers from Johnson & Johnson (Dow), which came out as a mixed bag of earnings beat, revenue miss and guidance beat. But beat or not, J&J’s earnings were down sharply year on year thanks to what the company measured as a 16% currency impact, that being the strong US dollar. J&J shares closed down 0.6%, but in a market that had already opened weaker on the Chinese trade data.

After the bell, Intel beat on both earnings and revenues but traders did not like the report otherwise and Intel shares are down 2% in the aftermarket. Rail freight company CSX, a major coal hauler a la Aurizon/Asciano, also beat top and bottom and its shares are up 1%, but only after having fallen 2% in the session on the China numbers. CSX also posted a fairly dim outlook for coal, but no surprises there.

Forecasts for JP Morgan’s result had been so knocked down ahead of the result traders were prepared to back an easy beat, but alas the leading bank posted a miss on both the top and bottom lines. JPM shares are down 1.2% in the aftermarket.

All things being equal these results do not bode well for a positive start on Wall Street tonight, albeit one session’s results do not an earnings season make. Traders are holding out for at least a full week of numbers which feature more big banks and other significant Dow names before beginning to draw any conclusions.

Commodities

Responses in commodity markets to the China data were predictable. On the LME, only aluminium was little changed as all other metals fell around 1-1.5%.

Iron ore fell US80c to US$54.90/t.

After Monday night’s OPEC disappointment, the oils were once again weaker. West Texas fell US79c to US$46.75//bbl and Brent fell US$1.05 to US$49.17/bbl.

As noted, the US dollar was steady, but gold rose US$5.50 to US$1168.00/oz.

Today

The SPI Overnight closed down 30 points or 0.6% which would put us back at yesterday’s post-China low.

Today Beijing will report September inflation numbers.

Westpac will follow up locally today with its monthly consumer confidence report.

September retail sales numbers will be closely watched in the US tonight as the earnings results flow in, including those of Bank of America.
 

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: Looking For The New World

By Greg Peel

The Dow closed up 47 points or 0.3% while the S&P gained 0.1% to 2017 and the Nasdaq added 0.2%.

Oiled Out

We recall that over a week ago, the head of OPEC suggested two things. Firstly, that he expected the oil market to return to balance in 2016 as rising global demand met falling non-OPEC supply, specifically reduced US shale production. Secondly, that he was prepared to discuss the state of the oil market with the US.

The latter comment sparked hopes OPEC may finally be prepared to look at production cuts, perhaps having expected that by now, oil prices may have recovered above levels that have left most OPEC producers, including Saudi Arabia, underwater on their fiscal obligations. But this is not to be the case. Speaking on Sunday at a conference in Kuwait City, El-Badri reiterated his expectation of a rebalance in 2016 but made no mention of any production cuts.

It was left to the Kuwaiti oil minister to suggest at the conference that leaving OPEC’s output target at 30mbpd was the “ideal solution” to rebalance the market and support prices.

We had to wait until last night to see oil prices respond, and they fell 4%. Having made a couple of attempts to close over the US$50/bbl mark, WTI has now slipped back to the 47s once more. Australian investors did not wait yesterday to see what oil prices would do last night. They sold the energy sector down 2.3% in yesterday’s session.

It was the perfect trigger for a day of profit-taking across the board following five days of rally which had taken the ASX200 from a new post-correction low to a breach of the previous trading range to the upside. While energy led the charge, all sectors were sold off for no other particular reason. While materials suffered the least with only a 0.4% fall, it’s not often we see the materials sector trading lower when iron ore has a good gain and base metals put in a flyer, including zinc up 10%.

Both energy and materials have seen very solid gains in this recent rebound having been the most beaten down on China fears. But yesterday also some of the recent small cap high-flyers copping solid profit-taking hits for no other reason as well.

All up it is exactly what one might expect given the performance of the past week – a bit of consolidation following a solid bounce off the low. We also have China trade data out today, and squaring up ahead of what recently have been some market-crunching data releases out of Beijing makes a lot of sense.

We also have US September quarter earnings season beginning in earnest tonight, with all eyes on the likes of Dow stocks JP Morgan and Intel.

Earnings Angst

Consensus forecast for S&P500 net earnings in the September quarter is for a 5.3% year on year decline. If this forecast rings true, it would be the first negative quarter of earnings for the US market since the GFC rebound began.

Which begs the question, why has Wall Street rallied for seven consecutive sessions ahead of what is expected to be the worst earnings season in several years?

Well firstly, while Wall Street has rallied it has rallied back from a solid fall on the China story, boosted by a shift in expectations that there will not indeed be a Fed rate rise this year, to regain about half of what had been lost. The weak earnings forecast has a lot to do with expectations of lower revenues offshore due to both a stronger US dollar and weaker demand in the likes of China in particular. So we might suggest a reduction in earnings is priced in.

Secondly, ahead of both the March and June quarter earnings seasons, consensus was also for reduction in net S&P500 earnings. In both cases net earnings surprised to the upside to produce basically flat results. Are we about to see the same story play out a third time? The only difference this time, it has been noted, is that in the previous two quarters, net forecasts had been revised up slightly to be less negative just ahead of the results season. That has not happened this time.

Last night was Columbus Day in the US for which banks and the bond market were closed. Stock markets were open but the Dow posted its least volatile session since the China-based turmoil began back in July. Volumes were thin, and all is in readiness for a barrage of earnings reports beginning tonight.

While the energy sector was weak on the day, the usual impact the oil price has on the wider US market was not evident.

Commodities

West Texas is down US$2.06 or 4% at US$47.44/bbl and Brent is down US$2.22 or 4% at US$50.22/bbl.

After very solid gains posted on Friday night thanks to Glencore’s announced production cuts, base metal markets also took a breather last night. Given it’s LME week this week trading can often be thin with most of the market in conferences or at the bar.

Lead still managed to rise another 1% having risen 6% on Friday night, following the Glencore announcement. Zinc only came back 0.6% after jumping 10%. Copper is steady, aluminium down 1%, and the others posted slight dips.

Iron ore rose US20c to US$55.70/t.

The US dollar index is steady at 94.84 and gold has ticked a little higher to US$1162.50/oz.

The short-covering rally in the Aussie dollar has continued despite the easing back in commodity prices and a steady greenback. The Aussie is 0.4% higher at US$0.7359.

Today

The SPI Overnight closed down 16 points or 0.3%. It will be interesting to see if the energy sector goes on with it today, selling once more on confirmation of a drop in oil prices.

RBA deputy governor Philip Lowe will make a speech today and he often has something to say that catches the attention of forex markets. NAB will release its September business confidence and conditions survey, covering the first full month of the new Turnbull government.

Beijing will release Chinese September trade data around midday today. The last round of PMIs were a little more promising, if not mixed, and with China having been shut down for a week, markets have had nothing to be particularly scared about. So today’s data will be interesting.

Tonight in Europe sees the release of the ZEW investor sentiment survey for the eurozone, which will be the first measure since the VW scandal hit its heights.

Telstra ((TLS)) will hold its AGM today and Energy Resources of Australia ((ERA)) will release its quarterly production report.
 

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