Tag Archives: Currencies

article 3 months old

The Monday Report

By Greg Peel

Flat

It was a choppy session on Friday on the local bourse leading ultimately to a flat close. A fairly tight range belied some notable moves in sectors nevertheless.

Winners on the day included industrials (0.7%), utilities (0.7%), telcos (0.3%) and consumer staples (0.3%) while losers included the banks (-0.3%) and materials (-0.5%). Energy closed on a rare 0%. Here we see further evidence of a reversal of the theme of the past few weeks in which overbought yield stocks have been sold off on Fed rate rise expectations and undervalued cyclicals have come back to the fore.

It has been a substantial sell-off in yield stocks, and thus no surprise some consolidation has eventuated. But interestingly the initial trigger for the reversal of prior rotation was China’s trade data last week which surprised to the downside, reigniting China slowdown fears and perhaps raising doubts of a Fed rate hike being “baked in”. Friday’s Chinese data release paints a different picture.

China’s CPI rose 1.9% year on year in September having risen only 1.3% in August, beating expectations of +1.6%. But the big news is the PPI, which rose 0.1% to mark its first gain in five years. In August the PPI was down 0.8% and September forecasts had a 0.3% drop.

China’s producer price index had been in the negative since 2012 but recent months have shown it quietly beginning to graft its way back. Last month saw a turning point, which goes some way to relieving fears of Japanese-style entrenched deflation becoming the long term story for China – the twenty-first century’s version of the Japanese economic miracle.

The inflation data provide a little bit of confidence heading into this week’s major data event on Wednesday, which sees September industrial production, retail sales and fixed asset investment numbers along with the September quarter GDP result. Forecasts are for GDP growth to hold steady at 6.7%.

Yellen Gets Hot

While tradition has the Alcoa result signalling the beginning of any US quarterly earnings season, most now consider the real kick-off to be on the subsequent Friday, when all of JP Morgan (Dow), Citigroup and Wells Fargo report. A good result from the banks provides some confidence for the rest of the season.

All three reported earnings beats on Friday night, mostly due to elevated trading volumes in the fixed income market. US bank shares have been in a bit of a push me-pull you lately, on strength from Fed rate hike expectations on the one hand and weakness on European bank fears, Deutsche Bank in particular, on the other.

Friday night also saw all-important US retail sales numbers which showed a 0.6% gain in September. This was a tad shy of 0.7% expectations but not enough to alter any assumptions regarding Fed policy. The US PPI also continues to creep higher, rising 0.3% on the core in September to be 1.5% higher year on year.

Fed watchers may have been jolted, nonetheless, by comments made by Janet Yellen in a speech on Friday night, in which she suggested that in order to reverse the effects of the GFC recession it might be best to run “high pressure” economy with a tight labour market. The way to run a hot economy is, of course, to not fight heat with rate hikes.

December off again? No. Yellen’s supposed paradigm shift simply plays into what she and fellow FOMC members have been stressing for some time – subsequent policy tightening will be very gradual. While central bank preference is to get ahead of any potential inflation spikes, the implication is that a bit of inflation is a good thing in the post-GFC world.

This is longer term good news for the US stock market, and as such the Dow was up as many as 160 points early on. But just as Thursday’s 180 point fall was pared back to only a 45 point fall, Friday’s 160 point gain was ultimately pared back to only a 39 point, or 0.2%, gain. The S&P closed flat at 2132 and the Nasdaq closed flat.

The US dollar index, on the other hand, rose another 0.6% to 98.10. The dollar is quietly becoming what the RBA might call a “complication”, but that’s what you get with a rate rise. Friday’s retail sales and PPI data no doubt helped pushed the greenback along.

And having slipped back on last week’s weak Chinese trade numbers, Friday night saw the US ten-year yield pop up 6 basis points to reclaim 1.79%.

Commodities

The stronger greenback is acting as a drag on commodity prices but demand-supply equations remain the dominant theme.

West Texas crude closed down US16c on Friday night and at once stage dipped below 50, which is one reason Wall Street came off the boil.

Aluminium and copper both fell 1% on the LME but nickel and zinc each rose 0.5%.

Iron ore rose US20c to US$56.80/t.

Gold fell US$5.70 to US$1251.80/oz.

The strong greenback should be good news for the Australian economy by pushing down the Aussie and thus supporting the non-mining economic revival. But it is mining that is enjoying a revival at present – particularly coal – hence the Aussie is up 0.6% at US$0.7610.

The SPI Overnight closed down 9 points on Saturday morning.

The Week Ahead

China’s GDP result, as noted, will take centre stage, but US earnings season will dominate the week as the results start to come thick and fast, including from many Dow components.

There are also a lot of US data releases to mull over this week. Tonight it’s industrial production and the Empire State activity index, Tuesday it’s housing sentiment and the CPI, and Wednesday brings housing starts and the Fed Beige Book. Thursday sees leading economic indicators, existing home sales and the Philadelphia Fed activity index.

The ECB will hold a policy meeting on Thursday night amidst rumours, since quashed but not with any conviction, that QE tapering is being considered.

The minutes of the September RBA meeting are out tomorrow ahead of September jobs data on Thursday.

The local stock market calendar is beginning to fill up once more and this week sees a rush of resource sector production reports alongside various corporate quarterly updates and a building number of AGMs.

Today’s highlights include production reports from Evolution Mining ((EVN)) and Whitehaven Coal ((WHC)) and a quarterly result from James Hardie ((JHX)).

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

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article 3 months old

The Overnight Report: Risk Reversal

By Greg Peel

The Dow closed down 45 points or 0.3% while the S&P lost 0.3% to 2132 and the Nasdaq fell 0.5%.

Cracks In China

Just when it looked like the Chinese economy may have bottomed out, suggesting stimulus measures were finally beginning to gain traction, along came yesterday’s trade numbers. Slight improvement in the September PMIs was encouraging but now China-watchers have been left scratching their heads.

Chinese exports fell 10.0% year on year in September when a 3% drop had been forecast, while imports fell 1.9% when a 1% gain had been forecast. Within the numbers, imports of iron ore and copper were lower than expected. Given the oil price rallied over the month, in equivalent terms the import result would have been weaker still.

The ASX200 had been expected to open weaker yesterday morning on the lower overnight oil price, and indeed the index fell around 25 points from the open. From there it tracked sideways until midday when the Chinese data were released. At 2pm the index hit bottom, down 54 points.

Following a slight recovery to the close, the energy sector finished down 2.0% and materials 0.9%. Most influential was a 1.1% fall for the banks, reflecting the flow-through from the Chinese economy to the Australian economy. Adding to weakness in resources was the decision by Citi to downgrade both the Big Two miners to Sell because they had rebounded too far, in the analysts’ view.

Two of the sectors finishing in the green by the close were the safety plays of utilities and consumer staples.

The Aussie took a dive, dropping close to the US$75c mark.

We recall that the sell-off experienced in the beginning of 2016 had a lot to do with fears of a Chinese slowdown – or at least a more dramatic slowdown than might otherwise be expected. Those fears were one reason, among others, the Fed started to back down on its intention to raise rates several times in the year. But as fears slowly abated, attention became squarely focused on the next Fed rate rise. China somewhat slipped into the background as Brexit and European bank issues took centre stage.

Now China is back in focus. Chinese data are not seasonally adjusted and are notoriously volatile, and October numbers will likely be even more distorted given the week-long holiday. But concern has been building over a bubbling Chinese housing market. Were the bubble to burst, demand for steel, copper and other materials would likely crash too. Yesterday’s weak trade numbers do little to ease tensions.

Mind you, we went through this exact same scenario shortly after the GFC. Massive government stimulus flowed straight into asset price inflation, sparking fears of a property bubble and bust and prompting endless talk of a Chinese “hard landing”. Years on, we don’t hear that expression much anymore. Beijing muddled through, and most likely will muddle through again. But there are concerns over just how much China’s debt to GDP has grown in the meantime.

Will China once more provide the Fed with an excuse not to hike?  One month’s data do not a summer make.

Risk Off

But what they have done is sparked a sharp risk reversal on Wall Street overnight.

As Fed rate rise expectations have grown over the past couple of months, US investors have been selling out of high-yield utilities, telcos, REITs and government bonds, and buying the banks and the US dollar. Last night investors bought utilities, telcos, REITs and bonds and sold banks and the dollar.

It was all about China. The Dow was down 184 points early in the session before rallying back to be almost square, and fading off again towards the close. The movement suggests traders first sold what they wanted to get out of, and then turned around and bought what they wanted to get back into. On one set of numbers, Wall Street reversed from “risk on” to “risk off”.

The sell-off in bonds – the US ten-year yield fell 4 basis points to 1.74% -- came just after it had looked like a breakout to 2% was on the cards. The sell-off in bank stocks comes before tonight when all of Citigroup, Wells Fargo and JP Morgan (Dow) report quarterly earnings. This is when the US earnings season really starts.

It seems like an overreaction to so swiftly change tack after months of rotating portfolios in the other direction. But given those months of rotation, it makes enough sense and is hardly too worrisome to think some profits might be taken the other way around on a heightened sense of caution. The Chinese data provided a prompt.

Commodities

Copper posted the biggest loss on the LME last night, unsurprisingly, in falling 2%. Lead, nickel and zinc all fell 1% but aluminium managed a 0.5% gain.

Iron ore always confounds, and it rose US10c to US$56.60/t.

On the back of the China data, and the fact US weekly oil inventories showed a much bigger build than anticipated, we should have seen WTI drop through the US$50/bbl mark. But the weekly data also showed US refining has slowed considerably, albeit largely due to seasonal maintenance shutdowns, so actually West Texas crude is up US25c at US$50.46/bbl.

We might also have expected that as part of this risk reversal trade, and the fact the US dollar index is down 0.4% at 97.56, would mean gold would be back in favour once more. But gold traders must be feeling a bit once-bitten at the moment. Gold is up US$3.40 at US$1257.50/oz.

Having fallen in the local session on the Chinese data, the Aussie has since rebounded right back on the weaker US dollar to be little changed over 24 hours at US$0.7567.

Today

The SPI Overnight closed up 11 points. Here we likely see a case of Australia having reacted first to the Chinese numbers, so to react to Wall Street’s reaction would be double counting.

If the US banks come out with solid earnings result tonight, last night’s action may just prove a bit of a blip. Then there’s a month-long US results season to get through which will no doubt draw the focus away from China once more.

Janet Yellen will speak tonight, which as always will be closely monitored.

And tonight’s US data include the all-important retails sales numbers along with inventories, consumer sentiment and the PPI.

China will release inflation numbers today. They’re typically not as powerful as trade numbers these days but everyone’s now on edge. China’s September quarter GDP result is due next week.

The RBA will publish its Financial Stability Report today.

Rudi will Skype-link with Sky Business today to discuss broker calls at 11.10am.
 

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article 3 months old

Divided Fed Suggests A Rate Rise ‘Relatively Soon’

By Omar Habib, FXCM

- Fed officials decided to wait in September but Chair Yellen did not manage to get a unanimous decision.

- Some officials cited worries of downside risks from abroad and several headwinds to inflation.

- The USDollar spiked higher and then reversed against most major pairs.
 

The Federal Open Market Committee Minutes for its September 20-21 meeting showed a split in the path for rate hikes ahead, with some calling for a hike at the September meeting. This meeting saw three dissents in regional presidents as Presidents Esther George of Kansas City, Cleveland’s Loretta Mester and Boston’s Eric Rosengren all dissented for a rate rise. While most officials did not vote for the rate rise, the murmur of conviction was starting to build within the group. According to the transcript several officials saw the need to raise rates relatively soon. It was generally noted among the group that a reasonable argument could be made to hike now or for waiting for some additional inflation and labor market information.

One of the key statements that drew attention during the September-December 2015 timeframe, preceding the December 2015 rate hike, was that “the risks to the outlook are nearly balanced.” The Minutes of the September 2016 meeting showed officials once more use the term, saying that a “substantial majority now viewed the near-term risks to the economic outlook as roughly balanced.” However, there was some discussion regarding the cost/benefit of undershooting inflation as many officials viewed slight labor market slack remaining.

The Fed has so far had to decipher quite the mixed picture in economic data. Despite a consistently strengthening labor market via NFPs [non-farm payrolls] and the jobless rate, GDP has been significantly weaker than expected with US growth only 0.8% in Q1 and 1.4% in Q2. As of the latest update, GDP growth for Q3 is expected around 2.1, according to the Atlanta Fed's GDPNow.

The Fed’s mandate exemplifies the real dilemma facing the Fed. The employment half of its mandate has continued to maintain growth despite a significant slowdown in May, with the last four Jobs Reports showing job growth of above 150k, significantly more than Fed officials say is needed for a steady labor force. On the other hand, the Fed’s preferred measure of inflation has continued to run below the Fed’s objective of 2% growth, since April 2012. Headline Personal Consumption Expenditure (PCE) growth stood at a cool 1.0% in the August update; and the core PCE is below target at 1.7% growth.

The US dollar rose against all major pairs in the immediate wake of the FOMC Minutes. However, it reversed and wiped away the gain. By the time this report was written, the USD rose again and was trending at highs.
 

Reprinted with permission of the publisher. The above story can be read on the website www.dailyfx.com here.

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article 3 months old

The Overnight Report: Then Suddenly, Nothing Happened

By Greg Peel

The Dow closed up 15 points or 0.1% while the S&P rose 0.1% to 2139 and the Nasdaq fell 0.2%.

What Goes Up

Tuesday on the local market saw a rally led entirely by the resource sectors as China came back from holiday to buy up bulks and metals and Russia suggested it would be prepared to join with OPEC in oil production cuts. On Tuesday night the Dow fell 200 points for a number of reasons – one of them being a pullback in the oil price and another being a big miss on earnings from Alcoa.

I thus suggested in yesterday’s Report we would probably see the opposite yesterday, and indeed the only stand-out moves among the sectors yesterday was a 1.1% drop for materials and a 0.9% drop for energy.

But it was a lot worse early in the session. The ASX200 traded down as many as 46 points, led by resources, before the cavalry came over the hill and quickly pushed the index back up again to a fairly benign close. Aside from bargain hunting among resources, the banks managed to close on a slight positive and the early guide to AGM season appears to be one of capital management will buy you a bid.

Telstra’s ((TLS)) seen a bit of a revival since its AGM and yesterday CSL ((CSL)) confirmed its buyback, ensuring telcos and healthcare provided the offset yesterday against weak resources.

Consumer discretionary managed a slight gain. We might have expected more on the back of Westpac’s monthly consumer confidence survey showing a 1.1% index increase to 102.4, to mark three straight months of improvement, at a time the tinsel is going up and the muzak is becoming nauseatingly festive.

I made mention yesterday of general agreement among stock analysts that the housing boom is set to shortly cool and thus act as a drag on the economy, albeit there is disagreement about the timing. Market indicators such as finance, approvals and auction clearances are still positive but starting to now ease off.

Westpac’s survey yesterday nevertheless showed a 1.6% gain in the month in a sub-segment of expectations for rising house prices, to be 12% higher year on year. The proportion of respondents who think now is a good time to be buying a house has also been on the rise in recent months.

If your Uber driver tells you he’s just taken out a one million dollar mortgage to buy bed-sit in Blacktown, sell!

Shalom

Yom Kippur is not a public holiday in the US but it might as well be on Wall Street. That’s one reason why last night saw light volumes and little more than sideways trade all session, despite Tuesday night’s big plunge.

We may otherwise have expected a lack of activity ahead of the release of the Fed minutes at 2pm, but they failed to produce any excitement either. Basically they didn’t tell us anything we didn’t already know.

The case for a rate rise this year has strengthened, the FOMC believes. Indeed, September was a close call and three of twelve members dissented on the decision not to raise, and much has been made of the fact three is a lot. It was also noted that to not raise once by year-end after having talked rate rises all year, the Fed would lose credibility.

If it hasn’t already. It will still come down to the data, of course, but one presumes they would have to take a sharp turn for the worse to prevent the December hike that 70% of the market is predicting. Otherwise something out of left field is always possible, in Britain or Europe for example or even Russia. But these things we can never predict.

Assuming the majority of the market has now accepted a December hike and positioned accordingly, the focus between now and then is on two major issues – OPEC and the election.

Virtually nobody expects a production cut agreement in November will be reached but virtually nobody wants to take the risk. Hence the real risk is of an oil price tumble post meeting triggering another Wall Street sell-off.

There is the risk of the great unknown were Trump to be elected, but Wall Street has now shifted from being relieved Clinton will likely win to being rather concerned the Republicans could lose the House. Such concern was evident in the US healthcare and biotech sectors last night, which weakened on the fear Obamacare might be here to stay and the new administration will be able to clamp down on drug pricing.

As to how the Fed reacts to any such developments is unclear. The central bank is, of course, independent and apolitical. But it didn’t stop the FOMC overtly claiming Brexit risk as a reason to not to hike in June.

Either way, the US dollar continued to strengthen last night and an auction of ten-year bonds was settled at a lower price, such that the yield is up another 2 basis points at 1.78%. The past couple of months has seen the ten-year yield rise over 20 basis points. What does that tell us?

Commodities

West Texas crude is down US61c at US$50.21/bbl. Unless something is said between now and the OPEC meeting, oil is expected to hang around the 50 mark in the interim.

All base metal prices were positive last night despite another 0.3% rise in the US dollar index to 97.92, except lead, which fell 1.5%. Nickel was otherwise the only metal to gain in excess of 1%.

Iron ore was unchanged at US$56.50/t.

Gold is as good as unchanged at US$1254.10/oz.

The Aussie has bounced back 0.4% to US$0.7565.

Today

The SPI Overnight closed down 14 points or 0.3%, probably influenced by another dip in the oil price.

China’s September trade numbers are due today.

Iluka Resources ((ILU)) and South32 ((S32)) release production numbers today while Orora ((ORA)) and Transurban ((TCL)) are among those holding AGMs.

Rudi will travel to Macquarie Park to appear on Sky Business from 12.30 till 2.30pm.
 

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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: A Bout Of Nerves

By Greg Peel

The Dow closed down 200 points or 1.1% while the S&P fell 1.2% to 2136 and the Nasdaq dropped 1.5%.

Erratum

In yesterday’s report I suggested Energy Resources of Australia ((ERA)) is no longer “producing” uranium. I said so in the knowledge the company was drawing upon stockpiles. It was a poor choice of words on my part.

ERA is indeed producing uranium via the processing of stockpiled ore. It is not currently mining uranium ore, which is really what I meant and should have said.

My apologies to ERA, Rio Tinto, and anyone who may have been misled by my semantical error.

Meeting Resistance

Yet again we saw a sharp move in the opening rotation of the local market yesterday and an immediate reversal at 10.30am. The ASX200 hit 5497 before pulling back sharply. But this time investors were keen to have another crack.

At midday the index had pushed back up to 5498, led by the resource sectors, which in turn were led by strong gains overnight in the prices of oil, bulks and metals. But clearly traders have set 5500 as the level to take profits on the rally we have seen from 5200 a month ago. By 3pm we were back to square.

In the final sector breakdown, resources were still the clear winners on the day. Indeed, of the top ten ASX200 up-movers on the day, all ten were either miners, oil & gas producers or companies servicing those sectors. Materials rose 0.9% and energy rose 2.3%.

The flipside saw a mixed bag of down-movers, mostly stocks that not so long ago had been high-flyers, including gold miners. The rout in the residential aged care sector continues, and indeed healthcare proved the worst performing sector on the day with a 0.9% drop.

There will be a few traders breathing a sigh of relief this morning that they had considered 5500 as a good level to take profits.

One theme popular among analysts at present, albeit drawing some level of disagreement on timing, is expectations of a cooling housing market. Housing is very important to the Australian economy given (a) it drives construction earnings, (b) it drives flow-on earnings in household goods and appliances, (c) it underpins bank earnings, and (d), higher house prices imply greater wealth and this makes consumers more confident.

The housing market has recently been the primary driver of the “non-mining” economy, allowing for positive GDP growth despite the ongoing decline in mining investment. That is why analysts are concerned – housing booms don’t last forever.

Yesterday’s data showed the volume of loans to owner-occupiers fell a greater than expected -3.0% in August. Since APRA clamped down on loans to investors, O-Os have picked up the ball and run with it. But now it seems they, too, are starting to back off. Loans to O-Os are -4.2% lower than they were a year ago.

Loans for housing construction rose 3.7% in August but are -1.7% lower than a year ago. We can conclude that the housing boom is indeed cooling, but slowly. Low interest rates continue to underpin.

Australian businesses remain confident, nonetheless. NAB’s survey for September showed a rise in the conditions index to 7.7 from 6.8 and a rise in the confidence index to 5.9 from 5.6. Slightly worrying, however, is a fall in capacity utilisation to 80.6% from 81.0%. After rising steadily over past months, utilisation appears to have peaked out. This does not bode well for ongoing business investment.

Potpourri

Why did Wall Street tumble last night? Take your pick.

Firstly, the rally over the past week has been led by the energy sector thanks to the price of WTI rising back over US$50/bbl, in turn due to talk of an OPEC/non-OPEC production freeze agreement. Last night WTI pulled back a bit. Hardly sinister nor any great surprise, but inevitably the energy sector saw selling.

Secondly, Alcoa reported a September quarter miss on both earnings and revenue and its shares fell 11%. Alcoa is always the first large cap company to report in every earnings season. Once upon a time the Alcoa result was considered an early indicator of how the season as a whole would play out.

Since the end of the commodity super-cycle, this is no longer the case. And Alcoa is not even a Dow component anymore. But with Wall Street heartened by the fact forecasts are for a net S&P500 decline of “only” -2% for the September quarter compared to -6% or more numbers of past quarters, such a weak start is just a little ominous.

Thirdly, Clinton is deemed to have won the second debate. Outside of oil, the swing towards Clinton has been cited as a reason for Wall Street strength given she represents the less dangerous status quo and Trump represents…well…who knows what Trump represents. But for Wall Street, “status quo” includes the Republicans retaining their majority in Congress so as to block anything fiscally unpalatable.

But now, as the Trump campaign quietly disintegrates, Wall Street has begun to fear the train crash may reflect on the Republican party in general, to the point the Democrats could win control of Congress. This has Wall Street worried.

While all of the above are contributing factors, perhaps the underlying macro reason for last night’s sell-off is the most influential.

Central banks across the globe are backing away from ultra-easy policy experiments. But the Fed is one step ahead, looking at a second tightening. Last night the US dollar index jumped 0.8% to 97.65. A strong dollar is not good for America’s multi-national exporters.

The expectation of a Fed rate rise has also had bond yields on the rise, and last night the US ten-year yield rose 4 basis points to 1.76%. This is the top of the range in place since the Brexit shock. If yields break out of the range, Wall Street fears a long-awaited rush to sell bonds may be triggered, sending the ten-year rapidly towards 2%.

That would not be good for stocks. Last night the VIX volatility index on the S&P500 jumped 16%, suggesting investors have again begun to seek downside protection.

So put it all together, and the fact the market was back to full participation last night following Monday’s holiday, and the Dow dropped 200 points – not quite the low of the day but not far off it.

Commodities

Throw a 0.8% jump in the greenback at commodities and price weakness is not hard to explain.

West Texas crude is down US38c at US$50.82/bbl.

Aluminium, copper and nickel all fell between -0.5 and -1% in London while lead fell -2.5% and zinc fell -3%. So much for China’s return.

But China’s return is clearly impacting on iron ore. It rose another US70c to US$56.50/t.

Gold has already had its big adjustment, but on dollar strength is down -US$6.50 at US$1252.90/oz.

The Aussie is down -0.9% at US$0.7538.

Today

The SPI Overnight closed down -45 points or 0.8%. Notwithstanding iron ore, the leading sectors to the upside yesterday may lead the downside today.

Westpac will release its October consumer confidence survey locally today.

With Wall Street on edge over Fed policy, the minutes of the September FOMC meeting will be released tonight.

CSL ((CSL)) will hold its AGM today.
 

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article 3 months old

The Overnight Report: Putin On The Spin

By Greg Peel

The Dow closed up 88 points or 0.5% while the S&P gained 0.5% to 2163 and the Nasdaq rose 0.7%.

On The Money

The futures had suggested an 8 point gain for the local stock market yesterday and that’s exactly where the ASX200 closed. As to why the computers pushed the index up 27 points on the opening rotation is anyone’s guess. From there on, all we did is drift back.

We are seeing these sharp opening moves followed by immediate reversals time and time again. If the high frequency traders are putting in bogus bids/offers to push the market up/down, then selling/buying into the move, they are doing it very well.

The wash-up among the sectors yesterday indicated no clear trend whatsoever. Energy was down and materials up. Banks were up and industrials down. Telcos were up and utilities were down, again. The tepid US jobs report on Friday night has done little to change the status quo. A December Fed rate rise is still expected.

The consumer discretionary sector was the worst performer on the day, with a 0.9% fall, but that was all about individual stories in individual stocks.

Despite the quasi-holiday in the US last night, we should see some more definitive movement in the market today. For that we can thank Russia and China. The index shied away from 5500 yesterday but today may be different.

Blind Faith

Speaking at another informal meeting of oil producers last night, this time in Istanbul, Vladimir Putin said Russia was ready to “join in common efforts to limit oil production and urges others too as well”. At the same meeting, the Saudi oil minister suggested he was confident an agreement will be reached at the formal OPEC meeting in November and that it was “not unthinkable” oil could reach US$60/bbl.

What does one do with that information? OPEC has set production quotas throughout its history which members have famously never stuck too. Russia has offered to curb production several times over past years and never done so. But once again oil traders have decided they have no choice but to play it safe. Hence WTI has jumped 3%.

If it turns out the Saudis and Russians are simply gaming the market once more, then oil will come crashing back down again. But at least they’ll get to sell some oil at a better price for a couple of months. And there’s also the reality that were oil really to trade up to US$60, a lot of marginal US shale rigs would be brought out of mothballs.

But on a day when US banks and the bond market were closed, and only about half of the usual stock market participants bothered to turn up to play, Wall Street rallied on the energy sector’s lead. It was not too convincing nonetheless. On light volume, the Dow opened up 160 points and spent all day drifting back again.

A nod was also given to the US presidential debate the night before. While it is considered Clinton did not deliver a knock-out blow, it is suggested Trump did nothing to improve his position either. Hence the polls still favour Clinton and Wall Street is happy with the status quo.

Commodities

West Texas crude is up US$1.62 or 3.2% at US$51.20/bbl.

The Chinese are back. While they were off celebrating Golden Week, Fed rate rise speculation saw the US dollar on the rise and metals prices on the sag as a result. This, it appears, has provided Chinese traders with the opportunity to pick up some cheap supplies.

Aluminium, copper and lead all rose over 1% in London last night, while zinc played wood duck. Nickel shot up 4% but that came down to the Philippines issue. When Duterte is not off murdering drug dealers he is shutting down polluting nickel mines, and then he’s not, and then he is again. He shut one down yesterday so nickel is up 3.7%.

Iron ore jumped US$1.40 to US$55.80/t.

Metal markets were not fazed by the fact the US dollar index rose another 0.5% last night to 96.92. Indeed all oil-related currencies rose. The Aussie is up 0.3% at US$0.7605.

By rights gold should be lower, but after its big plunge last week gold has been inching back up since. It’s up US$3.10 at US$1259.40/oz.

Today

The SPI Overnight closed up 21 points or 0.4%. The energy sector rollercoaster should head up the hill today, providing for another opportunity to test resistance at 5500.

Housing finance numbers are out locally today along with NAB’s monthly business confidence survey.

Not much attention will be paid to Energy Resources of Australia’s ((ERA)) September quarter production report, given ERA is no longer producing, but it does signal the production report season is upon us.

More attention will be paid to the Telstra ((TLS)) AGM.

Rudi will link-up with Sky Business today, at 11.15am, via Skype to discuss broker calls.
 

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article 3 months old

The Monday Report

By Greg Peel

Rotation

Friday’s trade on the ASX was a bit of a non-event ahead of Friday night’s US jobs number but behind the tepid close we still saw further evidence of investors reallocating their portfolios. The global interest rate cat is out of the bag and not showing any signs of wanting to go back in.

The biggest sector losers on Friday were once again the yield-plays telcos (-1.1%) and utilities (-0.9%), backed up by industrials (-0.5%) where many of the popular reliable-growth-and-yield names reside. On the flipside we saw energy up 0.7% with oil rising over the US$50/bbl mark, underscoring the ongoing move back into cyclicals.

Beyond that, it was all pretty quiet. The US jobs report was going to tell us whether perhaps the Fed might even be forced to raise in November, rather than December, given the urgency that appears to have crept into Fed rhetoric.

Benign

As it was, 156,000 new jobs in September in the US was one of those neither here nor there results. Forecasts were for around 175,000, and the so-called “whisper number” had suggestions as high as 200,000. I’ve never known these whisper numbers to meet their mark.

Had the result indeed been 200,000, then we would all have been talking about the possibility of a November Fed hike. Given it fell short of expectation, that isn’t the case. But the August result was revised up by about as much as the September result missed the forecast, which realistically implies “as expected” all up. That means the market is still assuming a December hike. The futures have this as a 66% chance.

The unemployment rate ticked up to 5.0% from 4.9%. Not so long ago 5% was the Fed’s prime target to trigger monetary tightening but that has since gone out the window on recognition of what that figure does not disclose. It does not disclose the level of long term unemployment – those who aren’t registered as job-seeking – and it does not disclose underemployment – those with a part-time job who’d like more hours. With the participation rate – those trying to find work – at an historical low, the Fed can justifiably point to “slack” in the labour market not revealed by that 5% figure.

And this year we have found Wall Street really not all that fussed about the actual number of jobs added. The number that really matters is wage growth, as it is the indicator of potential inflation – the other prime Fed target. Average wages grew by 0.2% in September to be 2.6% higher year on year. While this is not runaway stuff, the job of a central bank is to act against inflation before it does run away, when it is usually too late.

So put it altogether and Wall Street came out of Friday’s jobs result assuming December is still the date, which is how traders were positioned ahead of the result.

The Dow did initially fall over a hundred points on Friday night to midday. It remains difficult to know whether Wall Street is in a mood of bad news is bad news – i.e. a miss on the jobs number – or bad news is good news – i.e. a less trigger-happy Fed. But Friday’s trade was clouded by an announced earnings guidance downgrade by large cap heavy industrial Honeywell.

With Alcoa’s report tomorrow night unofficially kicking off the September quarter result season, this late “confession session” announcement from Honeywell saw its shares down 8% and shares of all similar companies in aerospace and other big-end industries taking a hit as well. A lot of the morning fall can therefore be attributed to these moves rather than jobs.

And then Wall Street came all the way back in the afternoon before closing only a tad weaker. We would have to think that investors, while not specifically happy with the idea of a December rate rise, are not going to be shocked into selling off if that is to be the case.

There’s still more data to flow before December of course, and the small matter of the US election. The weekend’s developments in the Trump camp had the peso soaring again this morning on the assumption The Donald’s chances are going down the gurgler. At midday Sydney time today the two candidates will hold another debate which, it is being said, will probably decide The Donald’s fate one way or other.

Wall Street is cringing at the thought of a Clinton presidency, four more years of Democrat rule and four more years of Congressional inertia on the assumption the Republicans will still win one or both houses. But more cringe-worthy is Trump. And more frightening.

Commodities

After its solid run up through the 50 mark, West Texas crude pulled back a bit on Friday night, dropping US95c to US$49.58/bbl.

Base metals were again mixed. Copper rose 0.5%, lead rose 1% and nickel fell 1%, with aluminium and zinc little moved.

Iron ore fell US10c to US$54.40/t.

The US dollar also fell back a little, down 0.2% to 96.49 on its index. But gold only managed a US$2.10 gain to US$1256.30/oz.

The Aussie was relatively flat on Saturday morning at US$0.7583 but is a little higher this morning.

The SPI Overnight closed up 8 points on Saturday morning.

On Saturday, Caixin released its take on China service sector PMI for September. It showed a drop to 52.0 from 52.1.

The Week Ahead

The minutes of the September Fed meeting are due on Wednesday. As usual, they will be closely scrutinised.

It’s a quiet week in the US data-wise until we get to Friday, when retail sales, business inventories and fortnightly consumer sentiment numbers are released. Tonight in the US is a quasi-public holiday for Columbus Day. The stock and commodity markets are open but with banks and bond markets closed, activity will be limited.

That will provide more time to discuss today’s debate.

Japan is closed today but China is back after its week-long break. Chinese trade numbers are due on Thursday and inflation on Friday.

Locally we’ll see data for housing finance and housing affordability tomorrow along with NAB’s monthly business confidence survey. Wednesday it’s Westpac’s monthly consumer confidence survey.

On the local stock front, this week brings the first of the resource sector quarterly production reports. Among those reporting this week are Iluka Resources ((ILU)), South32 ((S32)) and Whitehaven Coal ((WHC)), all on Thursday.

We are also now seeing the AGM season start to ramp up. Telstra ((TLS)) will meet tomorrow and CSL ((CSL)) on Wednesday.

Rudi will appear on Sky Business on Tuesday morning, via Skype-link, at 11.15am to discuss broker calls. On Thursday he'll appear in the studio, 12.20-2.30pm and he'll repeat the Skype-link again on Friday, at around 11.10am.
 

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article 3 months old

The Overnight Report: Awaiting Jobs

By Greg Peel

The Dow closed down 12 points or 0.1% while the S&P rose one point to 2160 and the Nasdaq fell 0.2%.

Well Oiled

I suggested yesterday that outside the big moves we’ve being seeing in commodity prices, the rate-related theme remains the same for Australian stocks. Sure enough the telcos fell another 1.6% yesterday against the tide of the market and utilities were slightly weaker. Bucking the trend was consumer staples, up, 1.4%, given the supermarkets found some buying support.

I also suggested the selling in gold stocks would stop given gold had been steady overnight, but this was not the case overall. Yesterday’s top ten down-movers again included no less than seven gold producers. And fair enough too – gold is down another US$12 overnight.

The materials sector did manage to close up 0.6% nonetheless thanks to support for the Big Miners. The banks gained 0.7% despite an earnings miss from Bank of Queensland ((BOQ)). There has been talk recently from brokers that after a very poor year, perhaps now it is time to readdress Australia’s Top 20 big caps which have been cast aside in favour of small cap growth names. Those growth names have pushed far enough, and big caps like the miners, banks and supermarkets, are showing value.

So it is said.

The energy sector was nevertheless the predictable winner yesterday, rising 2.0% on the stronger oil price. WTI last night moved above the US$50 mark, so energy should also do well today.

Yesterday’s data release was the August trade numbers, which showed a narrowing of the deficit due to imports falling and exports remaining flat. The deficit is otherwise slowly reducing as the impact of higher commodity prices flows through on flatter export volumes. There is a considerable lag between delivery contract prices set and today’s spot price, so that trend is set to continue for now.

Taper Off

Wall Street traded in a straight line sideways all afternoon, just as one might expect ahead of yet another critical jobs report. But this lack of movement belies the fact the Dow was actually down a hundred from the open.

It is unclear just what was behind initial weakness. The weekly new jobless claims number was positive in the sense of a very low level of claims, suggesting tonight’s non-farm payrolls outcome might be better than the 170,000 expected. This would boost the chance of a December Fed rate hike.

So is that bad? Again we see a market split between “omigod, not a rate rise” and “for God’s sake just get it over with”. It may be that the nervous types sold stocks down early, or perhaps weakness had something to do with Hurricane Matthew, which is posing a serious threat to both life and the Atlantic coast economy.

Either way, mid-morning the ECB vice president announced the central bank had no plan to begin tapering bond purchases (QE) next March. It was this rumour perpetuated earlier this week, alongside Fed rate rise expectations, that provided a boost to the portfolio reallocation theme of which I spoke yesterday.

But why did the ECB wait days, not hours, to quash the rumour?

Whatever the case, the Dow immediately bounced back one hundred points. This implies Wall Street is still happier to suckle on the milk of easy global monetary policy for the time being.

The US ten-year yield continues to push higher nonetheless, up 3 basis points last night to 1.74%.

The other influence on markets this week other than monetary policy has been oil, and last night WTI traded above the US$50/bbl mark on news OPEC was planning yet another informal meeting this month ahead of the official November meeting. This might suggest a further nutting out of production freeze/cut measures and exemptions.

Commodities

West Texas crude is up US80c at US$50.53/bbl.

Base metal moves were mixed last night, with only a 1.7% gain for nickel exceeding 1%.

Iron ore is unchanged at US$54.50/t.

Gold is down another US$12.90 at US$1254.30/oz.

Gold is down on another 0.6% jump in the US dollar index to 96.68, driven by both the strong jobless claims number and the ECB’s announcement.

The Aussie is subsequently down 0.5% at US$0.7586.

Today

The SPI Overnight closed up 14 points or 0.3%. Looks like futures traders are expecting oil strength to pip gold weakness once again.

The local construction PMI for September is out today.

Then its jobs in the US tonight.
 

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article 3 months old

The Overnight Report: Rates Moving Higher

By Greg Peel

The Dow closed up 112 points or 0.6% while the S&P rose 0.4% to 2159 and the Nasdaq gained 0.5%.

All About Rates

As global central banks look to shift away from ultra-easy monetary policy, the scramble amongst global investors to reallocate portfolios is on in earnest. No more was this in evidence than on the Australian stock market yesterday.

Aside from the direct impact of rising US rates or tapering ECB QE on Australian stocks with offshore exposure, rising global rates also eases the need for the RBA to cut further. That “complication” of a too-strong Aussie will be dealt with.

Already the yield-paying sectors have borne the brunt of portfolio reallocation, as investors move away from safety and guaranteed return into growth and risk. Gold is a beneficiary of low global rates, and thus a loser on the flipside. While yesterday did indeed see carnage amongst Australian gold producing stocks, the materials sector was not the biggest loser on the day.

That privilege was reserved for utilities, which suffered another 2.0% drop. Telcos fell 1.1%. The diverse industrials sector contains many a dividend payer and it fell 1.5%. Despite eight of the top ten biggest down-movers on the ASX yesterday being gold stocks, the materials sector clocked up only a 1.4% fall, as other commodities provided some balance.

On the other side of the ledger, the Australian company most leveraged to US interest rates, QBE Insurance ((QBE)), won the day with a 3.4% gain. In a similar position is registry company Computershare ((CPU)), which rose 2.2% against the tide. These moves helped the financials sector to a 0.4% gain to provide some offset. The Big Four banks saw mixed moves.

This new global paradigm is a tough one for Australian banks. US banks rose on Wall Street last night because banks are beneficiaries of rising rates. A steeper yield curve means a bank can borrow cheap and lend dear. But why is the theory not the same for Australian banks?

Well, it should be. But the problem is the local banks pay high yields, so they are under pressure as yield stocks like any other. They also lend most of their money based on short term rates – mortgage rates are based off the RBA cash rate -- and not off the long term government bond rate as they are, far more logically, in the US. RBA rate cuts have provided the opportunity for the local banks to reprice their mortgage books amidst otherwise tepid growth in general credit demand.

Rising global rates are therefore not great news for Australian banks, albeit not a disaster either.

On a more domestic front, yesterday’s August retail sales number showed a 0.4% jump after being flat in July, beating expectations of 0.2%. This provided some balance to the consumer discretionary sector yesterday, given higher rates, or no further RBA cuts, are a headwind for retailers.

The local service sector PMI was also released yesterday, which showed a jump back to 48.9 in September from 45.0 in August. A positive, no doubt, but as I have said often enough, Australian PMIs are so volatile they are pretty meaningless.

Rates and Oil

Not so meaningless is the US service sector PMI, given the US economy is 70% domestic consumption based. It shot up to 57.1 from 54.1 and thus provided further cause for Wall Street to believe a December Fed rate hike is locked in. Or maybe even a November hike, although that is seen as unlikely. Tomorrow night’s non-farm payrolls number could nevertheless be a determinant.

To that end, the ADP private sector jobs number for September came up short, showing a drop to 154,000 new jobs from 175,000 the month before. But as long as non-farm payrolls come in with something reasonable, Wall Street will still assume a December hike.

And that means banks are the stocks of preference. While fears over Deutsche Bank’s survival have not gone away, they have abated somewhat. This has allowed the US banks to regain some lost ground on the back of rate rise expectations. Last night financials were a primary driver of Wall Street strength.

The other primary driver was the energy sector. Financials and energy are the two biggest sectors in the S&P500. Weekly US oil inventory data showed a drawdown last night when a build was forecast. The WTI price shot up to US$50/bbl at one stage before settling just under that level.

Of course it could all come a cropper if two things don’t happen before year-end – a Fed rate hike and confirmation of an OPEC production freeze. And there’s the US election of course. But the question is: were the Fed to stay on hold, is that good or bad for stocks?

On the one hand there are those believing a rate hike would trigger a sell-off, and on the other those who believe a lack of action from the Fed would have markets turning tail on sheer frustration. The fact that Wall Street rallied last night on, in part, rate rise expectation, is evidence that investors are adjusting to the inevitable rather than running scared.

Hence we see the same ongoing portfolio reallocation pattern as is underway in Australia – sell yield, buy cyclicals. Were the Fed not to hike this would all swing back the other way, but it’s hard to see, given the TINA effect, what would actually send Wall Street crashing. Except maybe Deutsche Bank crashing.

Commodities

West Texas crude is up US$1.10 at US$49.73/bbl.

Base metals were steadier last night other than lead and zinc, which both suffered 1.5% falls.

With China absent, iron ore fell US50c to US$54.50/t.

Gold has managed to steady, dropping slightly to US$1267.10/oz.

The US dollar index is steady at 96.15 and the Aussie is steady at US$0.7621.

Today

The SPI Overnight closed up 25 points or 0.5%.

While gold stocks should stop falling today, the rate-related theme otherwise remains the same.

Australia’s August trade data are due out today.

Bank of Queensland ((BOQ)) will release its earnings result.

And it’s the turn of the Westpac and NAB CEOs to be hit over the head with a parliamentary wet newspaper.
 

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article 3 months old

The British Pound Breakdown

By James Stanley, currency analyst, FXCM

  • GBP/USD [Cable] has staged a large breakdown as a target deadline has been set for triggering Article 50 in order to begin discussions on how to divorce the U.K. from the European Union.
  • Cable gapped-lower to start the week, and the losses haven’t yet stopped.  

In our last article, we looked at the higher-lows that had built in GBP/USD in the post-Brexit environment. And as we had written, the biggest driver to the currency had appeared to be Mr. Mark Carney, Governor of the Bank of England, as each opportunity that he had to speak seemingly entailed a weaker British Pound, driven by even more dovishness from the representing Central Bank.

But over the weekend a fresh development brought upon a big move in GBP-pairs, as British Prime Minister Theresa May indicated that the U.K. will trigger Article 50 by the end of Q1 2017. This brings on the possibility of a ‘Hard Brexit’ scenario that could lead to acrimonious discussions between politicians of both the U.K. and the E.U. as the details of the split are decided upon.

This report over the weekend created a gap on the open in GBP, and the selling hasn’t yet stopped with only brief respites of very short-term support. This means that there aren’t many near-term support or resistance levels, and this makes the prospect of risk management even more daunting given a lack of longer-term or nearby price action swings as fresh 30-year lows continue to print.

This can create a real quagmire of a situation for GBP, as liquidity will likely subdue as a whole series of ‘unknowns’ become the focal point of global markets. And further, for those looking to execute swing or longer-term strategies, price action in the Cable is rather difficult to work with given that we’re currently trading at 30-year lows, and there aren’t many near-by resistance swings that can be used for stop placement.

So for traders executing short-term or momentum strategies, a bearish bias will likely remain attractive in the near-term. Top-side rips higher can be faded as resistance sets in and the prevailing, predominant trend of weakness comes back into the equation; and for swing traders this would likely be the most attractive way of handling GBP in the near-term.



Reprinted with permission of the publisher. The above story can be read on the website www.dailyfx.com here.

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