Tag Archives: Currencies

article 3 months old

The Overnight Report: Bond Market Wakes

By Greg Peel

The Dow rose 228 points or 1.4% while the S&P gained 1.3% to 1978 and the Nasdaq added 1.1%.

Welcome Aboard

If Malcolm Turnbull is to restore confidence in the Australian market, as many a commentator has suggested, then he wasn’t exactly off to a flying start yesterday. But not even Malcolm has the power to turn back the tide of volatility still flowing through the local market as a result of global macro uncertainty.

We might again wonder what was going on in the market on Monday, before politics took the spotlight in the afternoon. The ASX200 opened up 60 points and yesterday closed down 78 points. Nothing (outside of politics) had changed in the interim, other than offshore markets had had a chance to respond to the weekend’s Chinese numbers which the Australian market didn’t seem to feel were a problem on Monday morning.

But while falls in the prices of oil, iron ore and base metals on Monday night showed up in falls in excess of 1% for the materials and energy sectors yesterday, every sector bar consumer staples fell at least 1%. This was thus another market sell-off, and simply another day of macro-related volatility. However there was a clear domestic bias to the final result, evoked by the minutes of the September RBA meeting, released yesterday.

While the board gave a nod to the China fears sweeping the globe at the meeting, it suggested the problems had “not impaired the functioning of other financial markets” and that Beijing’s stimulus measures had “not yet had their full effect”. But it was the domestic economic assessment that caused some ripples.

We note that the Shanghai index fell another 3.6% yesterday and was weaker when the ASX closed, adding fuel to the sell-off fire.

Only a month ago, at the August meeting, the RBA suggested: “Domestically, economic activity had generally been more positive over recent months”. But one month later: “Domestically, the national accounts were expected to show that output growth had been weak in the June quarter”. That’s quite a turnaround in a short space of time. June quarter growth was indeed weak, and we recall that the GDP result was released the day after the September RBA meeting.

So back in August, talk of another rate cut had subsided, and some economists were back to suggesting that it won’t be for a while, that the next move in rates will be up. On yesterday’s minutes we’re back to discussing just when the RBA might cut again. The impediment to a rate cut is nonetheless the soaring property market, but that barrier may now be in the process of being dismantled:

“There were indications that the measures implemented by APRA had slowed the growth in lending for investment housing.”

If the door is not yet fully ajar for another rate cut, it’s certainly not slammed shut.

So shouldn’t the stock market applaud the chance of another rate cut? Not if it is implicit of an Australian economy struggling not to slip backwards into contraction. The tenor of RBA rhetoric seemed to switch sharply from quietly confident to concerned from August to September, and there are many, the RBA itself included, who don’t believe another 25 basis points down from 2% would make the slightest bit of difference to business investment intentions.

If businesses aren’t investing for growth when cash is 2%, they’re not likely to suddenly all get up and cheer if it’s 1.75%.

But we needn’t despair. On Wall Street strength the SPI Overnight has closed up 56 points this morning.

Bonds Make A Move

Having hovered around the 2.18% mark for a few sessions lately, the US ten-year yield suddenly jumped 10 basis points to 2.28% last night. Does someone know something? The two-year yield jumped 7 basis points to 0.80% to mark its highest level in four years.

It certainly wasn’t anything to do with strikingly positive signs amongst last night’s US data releases. Industrial production fell 0.4% in August, albeit this was in line with expectations. Retail sales rose by only 0.2% but again that was in line with expectations. Not meeting expectations was the Empire State activity index, which only managed to tick up to minus 14.7 from August’s minus 14.9 when economists had forecast a return to zero.

No great incentive for a rate hike here, but then if the Fed is going to move, these late releases will not be the defining factor.

If the US bond market is suggesting the Fed is going to move, why did the US stock market rally? Shouldn’t a rate hike be “bad” news?

The two great uncertainties on Wall Street, for which there is no consensus view, are whether or not the Fed will hike on Thursday, and whether the US stock market will rise or fall on either outcome. Last night’s rally for US stocks suggests either that the stock market is in diametric disagreement with the bond market about a hike, or a hike will actually be positively received. Volumes were nevertheless light, thus most players are happy just to stand aside until the big announcement.

Which also means most commentators are trying not to read too much into last night’s stock rally and bond sell-off.

Commodities

The selling which gripped the LME on Monday night continued from the open last night before a square-up began, sparking some short-covering. Traders are basically jostling for position ahead of Thursday and only zinc finished lower, down 0.5%, while copper rose 0.7% and nickel rose 1.5%.

Alas, it had appeared only a few sessions ago that iron ore was setting to reclaim the 60-mark but last night saw another US$1.10 fall to US$56.40/t.

West Texas crude nevertheless rebounded, jumping US$1.00 to US$45.15/bbl, but again Brent exhibited dislocation in being barely changed at US$46.63/bbl. The spread is now under two dollars.

The US dollar index followed the lead from the bond market last night in rising 0.4% to 95.61, but commodity prices are not paying too much attention this week. Other than gold, which fell US$3.80 to US$1105.00/oz.

The Aussie is hanging on to its Turnbull adjustment and is steady at US$0.7139.

Today

As noted, the SPI Overnight closed up 56 points or 1.1%.

Tonight’s late mail for the Fed will be the US August CPI numbers, and the eurozone will also see inflation data. US housing sentiment will be in the frame as well.

There is another lump of stocks going ex-div on the local market today.

Rudi will make his usual appearance on Sky Business' Market Moves, 5.30-6pm.
 

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article 3 months old

The Overnight Report: Quietening Down

By Greg Peel

The Dow closed down 62 points or 0.4% while the S&P lost 0.4% to 1953 and the Nasdaq fell 0.3%.

Mal Content

Is it just me, or did that all seem to happen rather quickly?

There is little doubt yesterday’s rather bizarre trading pattern for the ASX200 included an overlay of domestic political uncertainty, although such intraday volatility is typical of a market attempting to consolidate after a correction. Commentary continues to point to “weak” Chinese data delivered over the weekend, but a 60 point opening rally for the Australian index might suggest otherwise.

As “weak” data goes, Sunday’s numbers were on the less disappointing side, given a slight “miss” on industrial production forecasts was offset by a slight “beat” on retail sales. But sixty points did seem a stretch, particularly when there are still those looking to sell out of investments for fear this correction is not necessarily over yet.

Thus we went back down again, and then up again, and then down into the red, briefly, before closing up 24 points, which on a close-to-close basis looks like a quiet day. But by the four o’clock bell, domestic uncertainty was rife.

As has oft been noted, stock markets are ambivalent to the political stripe of government – there is no correlation in Australia of market performance and Coalition or Labor governments – and presumably that stretches to who is actually in charge of the government. What markets fear is uncertainty, and this year constant talk of the prime minister being challenged and the treasurer being replaced has provided plenty of it at a time of global upheaval.

Last night the uncertainty ended. One presumes that unlike the prime minister he replaced, Abbott will not haunt the corridors and manage to muscle his way back in at the eleventh hour. Aside from ending the uncertainty, Turnbull brings to that table some distinct differences that should register as positives with the stock market: economic and business experience, widespread electoral popularity, oratorical eloquence (aiding policy justification) and climate change recognition. The latter might send some ripples through the fossil fuel industry, but when we consider many large energy companies are actually leading the alternate energy drive, up until now with a hostile government, the critics will find themselves a lonely collective.

But enough about politics, what’s done is done, and we still have to get past Thursday’s Fed rate decision, whatever that may be. Although it’s interesting to note the Aussie has done nothing but run up since the spill was announced, despite a steady US dollar.

Follow the Oil

If Bridge Street seemed unfazed about the Chinese data from yesterday’s opening bell, perhaps even seeing “not terrible” as “good”, the same cannot be said for commodity markets overnight. The weak August Chinese industrial production number was cited in the metals and oil exchanges as the reason for downside.

If there is an element of fear driven by the notion Beijing has been throwing everything bar the kitchen sink into stimulus and it has not worked, we should at least note that the sledge hammer of currency devaluation occurred in August and will take time to have an impact, and indeed the earlier interest rate and RRR cuts need, in theory, a good six months of run-time before their impact becomes evident.

The commodity markets are a hotbed of frayed nerves at present, and every little thing looks catastrophic. The oil markets are a case in point, and last night when WTI opened lower, so did Wall Street.

It was Rosh Hashana last night, ensuring trading volumes were light. While the Dow was down a hundred points at one stage before picking up towards the close, it was the least volatile session of intraday activity since August 18. Aside from the Jewish holiday, Wall Street probably would have banged along the flatline if it were not for oil. All anyone can talk about otherwise is the Fed, and no one knows what Thursday will bring.

Commodities

West Texas crude was down over 3% before kicking back up in electronic trading to be down only 1.4% over 24 hours, or US63c, to US$44.15/bbl. Interestingly, Brent did not rebound, and is down 3.2%, or US$1.56, to US$46.59/bbl.

This is interesting because it means the Brent-WTI spread is back at roughly two dollars. For a long time this was considered the “normal” spread and very infrequently would that gap move much one way or the other, except in the last decade, which has seen it blow out to as much as US$27. It’s taken that long to come back again, largely reflecting the gradual easing of storage and transport problems in the US.

Only tin managed to hold up against China-driven selling pressure on the LME last night. Aluminium, copper and lead all fell around 2% and nickel and zinc fell 4%.

Iron ore fell US$1.00 to US$57.50/t.

The falls had nothing to do with the US dollar, which was only a tad higher at 95.26 on its index. Gold, subsequently, is as good as steady at US$1108.80/oz.

The Aussie does pay attention to the US dollar, given it is the denominator of the exchange rate, so the 0.7% gain last night to US$0.7138 all came out of Canberra.

Today

The SPI Overnight closed down 29 points or 0.6%, which, in isolation, is simply a reverse of yesterday’s ASX200 close and a reflection of Wall Street’s and commodity markets’ responses to the China data. So if this is the starting point, we will then have to see whether the Turnbull factor in the currency can be replicated in the stock market.

The minutes of the September RBA meeting are out today, and it will be interesting to read what the board felt about China’s stimulus efforts and Fed speculation.

The Bank of Japan meets today but presumably will do nothing until that other central bank makes a decision, if anything was going to be done anyway.

There are some important US data releases due tonight, including August industrial production and retail sales. However, as I have suggested, it would be a flippant “data-dependent” Fed to wait for such late mail to inform Thursday night’s decision.
 

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article 3 months old

The Monday Report

By Greg Peel

Friday

Investors would have been relieved by Friday’s trade on Bridge Street which did not see any wild swings either way for a change. It was volatile, but in a tighter range and without much conviction. The ASX200 was down 40 early on and up 20 at lunchtime before meandering to a close of down 24.

For the first time in the week the banks were not a significant feature of index movement. Energy, healthcare and the telco saw falls of over 1% but all other sector movements were benign. Once again it was very “Friday”, ahead of a weekend featuring another round of Chinese data possibly set to scare the world again and ahead of a critical Fed meeting.

Wall Street

Wall Street’s Friday session was not dissimilar, the difference being the Dow opened lower on a weak lead-in from Europe before rallying hesitantly throughout the day to be up 102 points or 0.6% on a late kick. The S&P closed up 0.5% at 1961 and the Nasdaq rose 0.6%.

Once again traders had their focus firmly fixed on the oil price, such that a wobble in WTI mid-session was reflected in a temporary drop back to the flatline for the stock indices.

Oil opened lower from the outset, until the weekly US rig count showed a reduction of ten rigs. This was enough to promote a rebound but just when oil looked like heading into the green, out came a note from Goldman Sachs.

In 2008, Goldman Sachs famously called WTI at US$200/bbl as the US dollar collapsed on emergency Fed rate cuts and geopolitical tensions underpinned. The price ultimately peaked near 157 intraday. Last night’s note from Goldman called oil at US$20/bbl.

It is not the investment bank’s “base case” scenario, and indeed the analysts ascribe only a 50% chance of 20 dollar oil. For a while now we’ve heard many a commentator suggest oil in the thirties is not out of the question but this is the first call in the twenties from a major house.

Goldman’s base case has oil trading at US$38/bbl in one month and US$45 in twelve months. The analysts’ previous forecasts had US$45/bbl in one month and US$60 in twelve. So if we dismiss the 20 call for the moment (no doubt Goldman’s trading desk is short oil) we are still looking at a sizeable downgrade from the major house. It is not a call based on lack of demand, but on oversupply.

To that end, an oil price recovery still requires an awful lot of marginal supply to be shut down, and/or small oil companies going to the wall. The latter scenario interestingly brings us back to the Fed.

Wall Street is concerned that were the Fed to raise this week, collateral damage may be significant in emerging market currencies and in bank loans to small oil companies. There is a significant level of loans in the industry that at the time required oil price hedges in place before banks would hand over the money. Those hedges were typically for twelve months, beyond which hedging starts to become overly expensive.

It is now over a year since oil prices began to plunge, thus hedges have been rolling off. We’re not talking GFC II, but there remains concern a move towards normalisation from the Fed may set off a mini-crisis among regional banks in particular.

We enter the final week with the US bond market still suggesting no September rate hike (the ten-year yield fell 4 basis points to 2.18% on Friday night and has been as high as 2.50% this year when rate rise expectation was most rife) and the Fed futures market giving September less than a 50% probability. Those suggesting the Fed will raise this week are mostly stock market players.

Three more sleeps.

Commodities

Between a US rig count reduction and Goldman’s new price targets, West Texas was down US95c to US$44.78 on Saturday morning. Brent was down US62 to US$48.15/bbl.

Base metal trading was mixed and mostly insignificant. Lead traded a 1% drop with a 1% gain for tin.

Singapore had a holiday on Friday so iron ore is unchanged at US$58.50/t.

The US dollar index fell 0.4% on Friday to 95.18 which helped the Aussie up 0.2% to Saturday morning at US$0.7091.

Gold is relatively steady at US$1107.70/oz.

The SPI Overnight closed up 25 points or 0.5% on Saturday morning.

China

Yesterday Beijing provided a data dump of August numbers.

Industrial production grew by 6.1% year on year, up from 6.0% in July but below 6.3% forecasts. Retail sales grew by 10.8%, up from 10.5% and above 10.6% forecasts. Fixed asset investment grew by 6.3% year to date, in line with July and in line with forecasts.

The global proxy for trading China’s economy is the Aussie dollar. On Saturday morning the Aussie was at US$0.7091 as northern hemisphere traders hit the showers and this morning it’s at US$0.7084 as southern hemisphere traders pull on their boots. It’s an insignificant difference, reflecting a set of Chinese data that for once did not materially disappoint on a net basis.

The Week Ahead

It’s a Jewish holiday in the US tonight which takes a lot of Wall Street out of the scene. Wednesday night brings the Fed rate decision and a quarterly press conference from Janet Yellen. One might safely assume global markets will be dead quiet in the run-up but that hasn’t always been the case ahead of critical Fed meetings.

On Wednesday morning the US CPI is released for August, and inflation is the other big factor for Fed policy outside jobs. However, one presumes the fate of the world will not hinge on such late mail, and besides, the Fed prefers the personal consumption and expenditure (PCE) inflation measure as its benchmark.

Other US data releases this week include industrial production, retail sales, business inventories and the Empire State activity index tomorrow night, housing sentiment on Wednesday, housing starts on Thursday and leading economic indicators on Friday.

Friday is also the September quarter quadruple witching expiry of stock market derivatives.

The eurozone will see industrial production, trade, unemployment and inflation data across the week as well as the ZEW sentiment index on Tuesday, just to remind us Europe is still there. The Bank of Japan will hold a policy meeting on Tuesday but is likely to be in wait-mode like the rest of us.

The minutes of the September RBA meeting are due on Tuesday, an RBA Bulletin will be released on Thursday and on Friday, Glenn Stevens will provide a scheduled testimony to a parliamentary committee.

Australian data are thin on the ground this week. In the stock market, Thursday sees the quarterly expiry of ASX futures and index options and on Friday the pre-announced quarterly index promotions & relegations will take effect.

This week brings earnings results from New Hope Coal ((NHC)) today, OrotonGroup ((ORL)) on Thursday and Premier Investments ((PMV)) on Friday.

There are still a few more ex-divs to work through.

Oh, and Greece will hold an election on Sunday. I’m sure it will all go smoothly.

Rudi will appear on Sky Business on Wednesday at 5.30pm and on Thursday at noon.
 

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

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article 3 months old

Weekly Broker Wrap: Mobiles, Retail, Insurance And The Australian Dollar

-Handset repayments need scrutiny
-Competition tougher for supermarkets
-Homemakers top non-food retail
-Majors lose share in life insurance
-Pressure on AUD continues
 

By Eva Brocklehurst

Mobiles

Mobile sector activity was modest in August, with price cuts by all four major operators. Macquarie expects service revenues can continue to grow over the medium term, given the increasing demand for data. Rates of growth may be slower, nonetheless. The broker believes the current trends warrant close attention with regard to revenue per unit and handset subsidies.

Optus ((SGT)) and Vodafone reduced monthly handset repayments by an average of 5.0% and 6.0% respectively over the last two months. This is a turnaround from a rising trend since 2013. Morgan Stanley also believes this should be monitored, as it could negatively affect industry profitability, particularly when combined with a weakening Australian dollar. Most handsets are priced in US dollars.

Both brokers will be monitoring the launch of the new iPhone this month, particularly in the case of Telstra ((TLS)), which continues to increase handset repayments on average. Morgan Stanley forecasts Telstra will maintain a 40% mobile earnings margin in FY16 and decreasing handset repayments would likely have a negative influence.

Retail

Australian supermarket margins are unwinding and Morgan Stanley concludes consensus estimates remain too optimistic. Global average supermarket earnings margins are around 3.0%, compared with 5.4% and 7.8% for Woolworths ((WOW)) and Coles ((WES)) respectively.

The broker lowers earnings margins for FY20 for Woolworths and Coles to 5.5% and 4.7%, respectively. Morgan Stanley observes that the discounters' market share in Australia is only just going back to 1990's levels, a time when Bi-Lo, Franklins and Food for Less were in operation.

Aldi and Costco may appear to be aggressively taking share but at the 15% forecast by FY20 this remains less than the share of 20% the formerly mentioned discounters enjoyed. Nevertheless, Morgan Stanley expects the two new arrivals will achieve a similar market share and the Australian market is over-estimating the ability of the established chains to react.

Morgan Stanley calculates that returns for Australian supermarkets are high by global standards but are now decreasing. This has attracted players into the industry with deep pockets and vast experience in operating in different markets, with low return hurdles and disruptive discounting models.

Meanwhile, in the non-food department, Deutsche Bank considers conditions are the best they have been for some time. Non-food retail is growing at its fastest rate since 2008, which the broker attributes to strength in housing and some benefit from a weaker Australian dollar. However, not all categories are equal. Harvey Norman ((HVN)) is the broker's top pick, given late-cycle benefits from its exposure to homemaker categories.

Flight Centre ((FLT)) is attractive because of its valuation and improving outlook, while Dick Smith ((DSH)) also appeals on valuation. Wesfarmers is not considered cheap enough, although a solid FY16 is expected. Myer ((MYR)) has fallen since its FY15 results and, while there is still execution risk, Deutsche Bank notes some balance sheet head room and upgrades to Hold from Sell.

Retailing is about to get harder, in Credit Suisse's prognosis. The household goods sector may have a relatively more favourable outlook and should remain strong over 2015. Growth is expected to slow in other areas with the broker noting both clothing store sales and groceries weakened through the second half of FY15.

JB Hi-Fi ((JBH)) was the only company in the listed household goods sector to record an expansion in gross margin in FY15 for its Australian operations. Credit Suisse warns that consensus earnings forecasts for FY16 fell consistently throughout the past 12 months for the majority of retailers.

Insurance

Macquarie has reviewed and ranked Australian general insurers on premium growth, margin, capital flexibility and risks. QBE Insurance ((QBE)) tops the order of preference, with currency and interest rate tailwinds. Suncorp ((SUN)) is second, with strength in value metrics and the best expense ratio. Insurance Australia Group ((IAG)) brings up the rear and appears constrained without an imminent capital return, amid concerns about profitability of opportunities in Asia.

Changes in the remuneration of life insurance providers will start to take place in the lead up to the effective introduction of new requirements from January 2016. As reform takes place and lapse/claim challenges settle, UBS believes AMP ((AMP)) is right to prioritise margin over growth.

There are no signs the major players are stepping up to take back market share in life insurance. The broker observes AMP, National Australia Bank ((NAB)) and Commonwealth Bank ((CBA)) have given up 4.0% market share over the past two years. UBS does not expect this trend will turnaround in the medium term.

As a result, in-force growth for the three remains in a negative 1.0% to plus 2.0% range. UBS accepts, as new remuneration structures gain broader market acceptance, this may change. Still, the broker continues to forecast low single-digit in-force growth for AMP out to 2018.

Australian Dollar

With China and the rest of the global economy likely to stay weaker for longer, Asian currencies will probably fall further, analysts at Commonwealth Bank maintain. The Australian dollar is now expected to ease to US65c by the first quarter next year. The analysts foresee a risk for a larger fall to US60c in 2016.

The main reason underpinning the downgrade to forecasts is a pushing back of economic recovery in China. 2016 GDP growth is forecast to be 6.5%, down from prior forecasts of 6.9%. The main drag on China is decelerating growth in heavy industry and poor export growth, reflecting weak external demand. A hard landing for China is not expected, however, because a significant amount of policy stimulus is in place.

Other reasons for downgrading forecasts include the fall out for Asian economies from the easing back of growth in China, and the likelihood of subdued commodity prices as global demand fails to recover swiftly, following the largest global mining investment boom in four decades which continues to generate increased global supply.
 

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article 3 months old

The Overnight Report: Counting The Days

By Greg Peel

The Dow closed up 76 points or 0.5% while the S&P gained 0.5% to 1952 and the Nasdaq added 0.8%.

Back in your box

This week we have seen the ASX200 dip below 5000 on the open on Monday morning following weakness on Wall Street, but recover to close above that mark for the third time since the correction. This suggested 5000 is a floor, and it was thus no surprise the index took off on Tuesday.

But Tuesday also featured Woodside’s takeover bid for Oil Search, thus prompting outperformance for the energy sector. Meanwhile, investors decided that at these levels, the beaten-down banks looked attractive, particularly on a yield basis.

Having rallied over 2% on Tuesday, the banks rallied again by over 3% on Wednesday. The financials sector was far and away the major driver of the ASX200’s recovery to 5200. Then yesterday, the wheels fell off.

The biggest loss yesterday was reserved for the energy sector – the sector which had stuck its neck out a bit far earlier in the week. It fell 3.8%. Sure, the oil price fell again overnight, but while WTI has been to-ing and fro-ing of late with heightened volatility, it has really only oscillated around the mid-forty level without going anywhere much. Analysts do not expect Woodside’s bid to succeed but that matters not. Energy sector M&A has been anticipated for some time and the Genie is now out of the bottle.

Outside of energy, every sector copped a beating yesterday of 1.5 to 3% (excluding insignificant info tech). The banks lost 2.7%, but then the telco lost 3.0%. Materials fell 2.1% despite another tick-up in the ore price and stability in base metal prices. Yesterday was thus an index-selling day, rather than a sector-specific attack. The selling is thus not yet over, and it is likely the two dark clouds of China slowdown and Fed rate decision are ensuring enough fund managers are still not convinced the story has played out yet.

The good news is that yesterday took us back to just below 5100, and not all the way back down to 5000. While sell-on-close orders forced a late dip, the low of the day was actually just before midday, so we did not close on the low. If the index holds its ground today (SPI Overnight up 21 points), and being a Friday we should see less volatility, then we will have established a higher low. A positive sign, for now.

The Fed remains the swing factor. But one thing to remember is that the bottom of a correction is never immediately apparent at the time. More realistically, investors wake up one day to realise that the dust has settled and the market is actually moving up again.

Data

The ASX200 bottomed yesterday on the release of the local August jobs data. While the unemployment rate fell to 6.2% from 6.3% in July as expected, the actual jobs added figure was greater than expected. The jobs market is holding pretty steady for the time being.

The result sparked a big surge in the Aussie – unsurprising given everyone’s short. Market volatility and the China slowdown have recently heightened the possibility of another RBA rate hike, and this week’s RBNZ rate cut only served to further fuel that fire, but RBA rhetoric is suggesting nothing of the sort. The Aussie spiked on the release and kicked on overnight on a weaker greenback to be up 1.2% at US$0.7076 this morning.

Alongside the local jobs numbers yesterday we saw China’s August inflation data. The good news is China’s headline CPI jumped up to 2.0% annual growth from 1.6% in July. The bad news is most of that jump was due to a surge in volatile pork prices. Beijing does not publish a core (ex food & energy) inflation number so economists have to make their own calculations.

The other bad news is that the headline PPI fell for the 42nd consecutive month to be down 5.9% annually. That’s a drop from July’s 5.6% and the worst reading since September 2009’s minus 7% at the time commodity prices were crashing. The good news is this number will only encourage Beijing to steel its stimulus resolve.

Wall Street

Markets were weak across the Asian time zone yesterday and that weakness carried into Europe and the UK. But whereas this might typically prompt early weakness on Wall Street, instead the US stock indices rallied in the morning. The impetus for the rally was yet another volatile session for the oil price, which jumped 4%.

By 2pm the Dow was up around 190 points but that’s when the Nymex closed and oil trading went electronic. The WTI price drifted back a little, and so did US stocks, almost back to square. Late buying saved the day.

Fed, Fed, Fed – that’s all anyone can talk about. Until the September meeting is concluded next Wednesday night, we can’t expect any great market move beyond ongoing intraday volatility. Last night Goldman Sachs put out a note reiterating its call that the Fed will not raise in September, but in December. We might call this simply one view among many, except for the disturbing relationship Goldman has with the US Treasury and the Fed.

Last night the US ten-year bond yield rose 4 basis points to 2.20%.

Commodities

Latest prices have West Texas crude up US$1.60 or 3.6% at US$45.73/bbl. Brent is up US$1.27 or 2.7% at US$48.77/bbl.

Base metal trading was again subdued last night except for nickel and tin. Nickel decided to jump 4% and tin 2%.

Iron ore jumped US$1.60 to US$58.50/t.

The US dollar index fell 0.4% to 95.54 allowing gold to claw back US$4.90 to US$1110.30/oz.

Today

As noted, the SPI Overnight closed up 21 points or 0.4%.

It would not be surprising to see another very “Friday” session today, in which the week’s volatility wanes and no one wants to get excited either way ahead of the weekend.

On Sunday Beijing will release August industrial production, retail sales and fixed asset investment numbers.
 

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: What Goes Up

By Greg Peel

The Dow closed down 239 points or 1.5% while the S&P lost 1.4% to 1942 and the Nasdaq fell 1.2%.

Rising Sun

The Japanese stock market rose 7.7% yesterday. To put that into perspective, had the ASX200 rallied 7.7% yesterday we would have been back over 5500.

Commentary puts the Japanese surge down to a reaffirmation from Shinzo Abe that he still intends to deliver on his promise of a cut to corporate tax rates alongside maintaining significant monetary stimulus in order to revive the Japanese economy. He did not actually say anything new, and given the success of Abenomics has been clearly lacking to date, no doubt reaffirmation was a political move rather than a pragmatic one.

Abe nevertheless chose to speak at a convenient time, when the world had suddenly become excited about speculation Beijing is set to introduce another round of fiscal stimulus measures to support recent monetary measures. Although, as to whether stimulus speculation is the cause of recent global stock market strength, or just the excuse, is debatable.

More likely the bulk of the big rallies around the globe can be put down to investors suddenly deciding they’d better get in, on the assumption the bottom has now been established, lest the bargains they’d been waiting for quickly become bargains no more.

I tender as evidence, Your Honour, Australian banks.

Banking on it

I noted yesterday the local financials sector jumped 2.2% on Tuesday to provide the biggest points contribution to an index gain otherwise supported by energy, following the big merger offer. Yet banks have little connection to oil & gas, and realistically any connection to Chinese fiscal stimulus is also circuitous.

But yesterday the financials jumped another 3.1%. Daylight came in second, followed by the telco on 2.0%, with the resource sectors managing only around 1.5% each (albeit BHP went ex). The vast bulk of the hundred point rally for the ASX200 was attributable to the Big Four.

I suggest we’re probably seeing a kick-on in momentum from Westpac’s ((WBC)) strategy day on Monday, at which the bank announced some aspirational targets (too aspirational as far as most analysts are concerned) and did not announce a capital raising, as have its three peers. Given the banks were amongst the most heavily sold down in the correction, on a combination of the global macro story and the micro story of increased capital requirements, it stands to reason the banks should lead the rebound from “oversold” territory.

Let’s face it, investors found Australian bank yields very attractive at much higher share prices. They’re that much more attractive now, and no one wants to miss out.

As an aside, the value of Australian housing finance rose by 1.5% in July but the annual rate of growth slowed slightly to 15.0%. The value of loans to owner-occupiers rose 2.2% for a 14% annual growth rate. The number of loans approved over the past twelve months has only actually grown by 3.9%. The difference in number and value is a reflection of surging house prices, and the greater capacity of borrowers due to low interest rates.

Investor loans rose 0.5%, slowing annual growth to 16.5%. Lending to investors is quietly cooling, no doubt due to tighter capital requirements implemented by APRA but also due to the fact rental yields are now falling behind house values, making property investment less attractive.

Westpac’s index of consumer confidence fell 5.6% this month to a pessimistic 93.9. But Bridge Street was unfazed, as was the case with Tuesday’s similar NAB business confidence result, given the survey was conducted at the height of recent global market volatility.

Indeed, the consumer discretionary sector rose 1.6% yesterday. On any other day, such a weak confidence result would have garnered a diametrically opposite response.

So the market has been sold down on fear and over the past couple of days has rallied on fear – fear of missing out. It is not unusual at such times for markets to swing wildly between oversold and short-term overbought as a consolidation process following significant volatility.

And speaking of volatility…the SPI Overnight closed down 82 points.

Mood Change

For the best part of 2015 to date, Wall Street has traded on an underlying adverse economic theme that good news is bad news because good news means the Fed will raise sooner rather than later. Having not had a correction for four years, up until recently, the obvious trigger would be the day the Fed announced its hike, many a commentator suggested.

Well here we are, one week from a highly possible Fed lift-off, and the mood on Wall Street has largely swung around the other way. If fear of a Fed rate rise dominated earlier in the year, the fear now is that next week the Fed won’t hike. The cloud hanging over Wall Street at present is not what damage a rate hike might cause, but what damage ongoing monetary policy uncertainty might engender.

Indeed, commentators warning that the US stock market really needs to go back down to test recent lows before it can truly rise again are suggesting a trigger for a second leg down would be no rate rise and further non-committed waffle from an indecisive central bank. It would suggest either the Fed fears the US economy is not in as robust a position as has been assumed (June quarter GDP up 3.7%, unemployment 5.1%), or that the FOMC really has no idea what it’s doing.

And so it was that the Dow opened up over 200 points last night, riding a global wave that saw Australia up 2%, China up over 2%, Hong Kong up 4%, Japan up almost 8%, France up 1.4% and the UK up 1.4%. Germany had been up there too, but faded away at the close.

Arguably, yesterday’s rallies began on Wall Street on Tuesday night when the Dow jumped nearly 400 points. So it would have been double-counting for Wall Street to go again, rebound euphoria had created a short-term overbought situation, and it was time to take profits and apply caution ahead of next week’s Fed meeting.

And oil dropped 3.5% again, which is never a positive driver for the major indices.

Commodities

West Texas fell US$1.60 to US$44.13/bbl and Brent fell US$1.88 to US$47.50/bbl.

Base metals were nevertheless quiet, for once. All moves were negligible bar lead, which rose 1.4%.

Iron ore rose US50c to US$56.90/t.

It looks like gold traders have decided a September rate rise is booked in. The US dollar index is barely changed at 95.95 but gold has fallen US$15.80 to US$1105.40/oz.

The Aussie traded right up to 70.5 yesterday on short-covering as the local stock market surged, but has since been sold down again to be down 0.4% over 24 hours at US$0.6991.

Today

The SPI Overnight, as noted, closed down 82 points or 1.6%.

Australia’s August jobs lottery will be held today, while Beijing will release Chinese inflation data.

Sigma Pharmaceutical ((SPI)) will release its interim profit result today amidst another handful of stocks going ex-div.

Rudi will make his weekly appearance on Sky Business's Lunch Money at noon and appear again on Switzer TV between 7-8pm.
 

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article 3 months old

The Overnight Report: All Is Forgiven

By Greg Peel

The Dow rose 390 points or 2.4% while the S&P gained 2.5% to 1969 and the Nasdaq jumped 2.7%.

W-Bounce

“The next words you will hear with regard material and energy sector stocks around the globe will be ‘consolidation’ and ‘rationalisation’”.

- Overnight Report, August 25

The ASX200 jumped 70 points from the opening bell yesterday. Having failed to close under 5000 three times in a row, the index was always a good chance to see renewed strength in buying on its own, but a little bit of help from the energy sector also provided for a more positive mood.

Yesterday Woodside Petroleum ((WPL)) made a takeover offer for Oil Search ((OSH)), sending Oil Search shares up 17%. The move is seen as opportunistic – exploiting the fall in oil prices and thus energy sector share prices – and Oil Search may well reject it, but Oil Search shares jumped 17% yesterday and the bid floated all boats in the sector.

Woodside shares fell 3%, which is typical for the predator company in a takeover, but the third member of the LNG Big Three – Santos – jumped 5% and some of the smaller players, such as Beach and Senex, enjoyed 3% gains. The energy sector as a whole closed up 2.7%.

There is no connection between global LNG exporters and domestic banks, but the financials sector jumped 2.2% yesterday to add the most number of sector points to the index rally. This buying represents more general buying of beaten-down large caps in anticipation that the three failures under 5000 represents the beginning of a typical W-bounce for the Australian stock market.

The utilities sector definitely is connected to the energy sector, via pipelines, and it was the second best performer yesterday with a 2.3% gain. Materials rallied 1.8% thanks to a jump in the iron ore price, and all other sectors posted lesser moves into the green.

It was never going to matter what NAB’s business confidence survey revealed yesterday.

As it was, NAB’s survey looked pretty bleak at face value but was actually quite positive behind the scenes. Business confidence dropped 3 points to plus 1, to be well below the long run average of plus 5. But given the survey was taken two weeks ago, at the height of global market volatility, the result has been quickly dismissed as being reactionary.

On the other hand business conditions – the “now” – rose 5 points to plus 11 compared to a plus 1 average. The increase has been attributed to the falling Aussie dollar finally beginning to have an impact on the economy.

Again, the survey could have been much worse and the Australian stock market would not have much cared yesterday. Nor was there much angst evidently created by another weak set of Chinese data. The ASX200 dipped a little after the release, but kicked on strongly to the close.

Let’s Get Stimulated

I suggested last week that this week’s raft of Chinese data releases were unlikely to set off another round of selling, given the market is ready for them to be bad anyway. And yesterday’s August trade numbers were certainly bad.

Exports fell 6.1% year on year, having been down 8.9% in July. This was not only in line with expectations, but an improvement of sorts. But the shock came in imports, which fell a much greater than expected 14.3% having been down 8.6% in July.

Moreover, Beijing quotes its figures in US dollars, converted from renminbi. Last month the PBoC devalued the renminbi, and the new exchange rate was used for yesterday’s conversion. Given half the month represented trade at the old exchange rate, the numbers are a little misleading. At the old exchange rate, exports fell 10% and imports fell 17%.

The Australian stock market may have retreated yesterday afternoon if the Chinese stock market fell out of bed on the trade numbers, but it didn’t. Having been down 2% after lunch, the Shanghai index turned and rallied 5% to close up 3%.

While this might be explained by the PBoC kindly declaring on the weekend that the stock market rout was near to an end, it has been attributed to assumptions Beijing will consider even more stimulus measures, beyond the interest rate and RRR cuts and currency devaluation we’ve seen to date. One might also realistically consider that the data are yet to reflect any impact from the devaluation, notwithstanding interest rate cut impact has a lag-time in effectiveness as well.

Back to Business

I have suggested in this Report time and time again that the “smart money” on Wall Street stands aside on days of important economic releases, such as Fed statements and jobs numbers, and lets the headless chooks run around in panic. The smart money then makes its move the following trading day after more thoughtful consideration.

Friday on Wall Street saw a big drop, which was attributed to a 5.1% unemployment rate making a September Fed rate rise more likely. But we must also consider that it was a Friday before the long weekend that heralds the end of summer, and that most of the market disappeared at lunchtime. The afternoon session was then conducted among the tumbleweeds and trading was thin.

I have also suggested for a while now Wall Street is quite ready for a September rate rise, and indeed would just like to get it over and done with. Thus I also believe that while last night’s rally on Wall Street was attributed by commentators to a strong finish in Shanghai on hopes of further Chinese stimulus, it was more a case of the smart money deciding Friday’s drop was unnecessary and with global volatility easing, it’s a good time to buy.

September rate rise? Bring it on!

It is also interesting to note the Dow closed last night above the level at which it closed prior to the thousand point opening fall on August 21, which set off the aforementioned bout of heightened global volatility. And it is possibly more interesting to note the US ten-year bond yield jumped 7 basis points to 2.19%

There is some concern that the US indices did not go back down to retest the lows after the first drop, and hence may yet have to do so before the bull market can resume, it is suggested. In other words, we need another leg down before we can actually go up. Maybe a September rate rise could prompt this, but that would be to assume (a) Wall Street is terrified of a rate rise, which it appears not to be, and (b), stock markets follow rules.

Commodities

The “bad news is good news” theme out of China, meaning expectations of further stimulus, set off short-covering rallies on the LME last night. Base metal prices were weak on Friday night in the absence of US traders, and so short-covering was always going to spark sharp rallies.

Copper led the field with a 4% gain, while nickel and zinc rose 3% and aluminium rose 2%.

Iron ore rose US40c to US$56.40/t.

Oil traders are getting a bit giddy, and last night saw 3% jumps. West Texas rose US$1.29 to US$45.73/bbl and Brent rose US$1.59 to US$49.38/bbl.

The US dollar index fell 0.3% to 95.87, helped by some more positive trade data out of Germany supporting the euro. Gold was a little higher at US$1121.20/oz.

Aussie traders had set themselves very, very short, so a bounce in commodity prices was always going to be a sufficient trigger for an inevitable snap-back rally. The Aussie is up 1.3% to US$0.7017.

Today

The SPI Overnight closed up 45 points or 0.9%.

Today brings the Westpac consumer confidence survey, which will probably suffer the same fate as the business survey on the basis of timing. Housing finance data are also due.

Boral ((BLD)) will hold an investor day today, and there are a lot of stocks going ex-div, including BHP Billiton ((BHP)) and Woolworths ((WOW)).

Rudi shall make his weekly appearance on Sky Business's Market Moves, 5.30-6pm.
 

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article 3 months old

The Overnight Report: Third Time’s A Charm

By Greg Peel

US markets were closed last night.

Technically Positive

Yesterday’s Australian data included the August construction PMI, which jumped to 53.8 from 47.1 in July, mostly thanks to the apartment boom overcoming the ongoing decline in resource sector development.

We also saw the ANZ job ads series for August, which saw a 1.0% increase following a 0.5% drop in July. Ads are growing at an annual rate of 0.4%, but they were growing at 1.0% earlier in the year. The early pace was fuelled, ANZ suggests, by strong growth in service industry employment leading an accelerating pace of mining/energy job losses. The latter will catch up to the former, such that ANZ expects the pace of ad growth to continue slowing from here.

But local economic data are not the focus of the market’s attention right now.

The ASX200 was down 57 points from the opening bell yesterday, presumably reflecting a sizeable drop on Wall Street which, supposedly, was all about a 5.1% US unemployment rate providing a green light to the Fed to raise its funds rate next week.

The plunge took us down through 5000 to 4973 before the index steadied, consolidated, and then rose back to the 5000 mark by 11.30am. Thereafter, the buyers battled it out with the sellers for the rest of the session before the buyers ultimately prevailed. We still finished down 10 points, but at 5030, we importantly finished comfortably above 5000.

Last month’s intraday low point in the correction from 6000 was 4928, before a bounce to above 5300, and the second wave took us to 4995 last Friday before a bounce to 5040. Yesterday we saw 4973 before 5030, to mark a third failed attempt at breaching 5000 and closing below that level. Three failed attempts at a break-down is technically a rather positive sign.

Below 5000 it appears investors are confident in buying big, reliable names that have been caught in the downdraught of recent China and Fed-related selling through no real fault of their own. If we take out the performances of the energy (-1.3%) and materials (-0.7%) sectors yesterday the ASX200 would have finished in the green, and let’s face it, it is difficult to accuse some of the bigger names in those sectors of being reliable anymore. Or for that matter, quite that big.

Investors looking for value in safer names are clearly not concerned that today we will see China’s August trade numbers, and over the week inflation, retail sales, industrial production and fixed asset numbers. Indeed, the only surprise that could arise from the releases is if they are not too bad. Nor are the bargain hunters apparently concerned about Fed policy. In the wider scheme of things, the Fed is going to raise either next week or soon, and everybody knows that.

Chinese Checkers

Perhaps the buyers took some heart in the announcement over the weekend from the head of the PBoC that “the correction in the [Chinese] stock market is almost done”. Shucks, and there I was thinking stock markets are unpredictable. Perhaps the call was due to the government’s latest stock market-manipulating move, which sees tax exemptions for those holding onto their shares for more than one year.

But yesterday we also had Beijing admitting China’s 2014 GDP growth rate was only 7.3% and not 7.4% as first estimated. It’s interesting that Beijing can issue a quarterly GDP number only two weeks after quarter-close but it takes nine months to make a revision.

A drop to 7.3% from 7.4% is not exactly substantial, and has managed to shock no one. The more prescient issue is that the revision only serves to underscore a belief Beijing’s 7.0% target for 2015 might be looking a bit Disneyland at this point, but then just about every foreign economist set a forecast in the sixes at the beginning of the year. Beijing has assured us, of course, that China is still on track for 7.0%. It was also on track to meet the government’s 7.5% goal last year.

Commodities

When Wall Street is closed, every other market goes quiet. The European stock markets, for example, were up a bit last night having tanked on Friday night.

Nickel was the only metal to post a move of more than 1% on the LME last night, indeed falling closer to 2%, while the scorecard on the sub-1% moves was copper, lead up, aluminium, tin, zinc down.

Iron ore jumped US$1.00 to US$56.00/t.

Selling pressure hit Brent crude, which fell US$1.79 or 3.6% to US$47.79/bbl, and subsequently dragged down West Texas in electronic trade by US$1.27 or 2.8% to US$44.44/bbl. Traders suggested very thin volumes exacerbated the moves.

With the US dollar index little changed at 96.15, gold fell US$3.90 to US$1118.90/oz.

The Aussie had a brief look at 68 yesterday before trading up 0.2% over 24 hours to US$0.6924.

Today

The SPI Overnight closed down 3 points.

Locally, NAB will release its monthly business survey today.

China will release August trade data.

Japan and the eurozone will both revise their June quarter GDP estimates.

There’s another decent-sized group of local stocks going ex-div today, including Cochlear ((COH)).
 

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article 3 months old

The Monday Report

By Greg Peel

To recap on the correction so far, the initial drop took the ASX200 down to 5001 which marked the first bottom on a closing price basis. The next day it traded down to 4928 intraday, but closed at 5137. On the rebound, the closing price peak was 5263 (5303 intra) before the second wave of selling last week took us back down to 5027 on Thursday (4995 intra).

Friday was a nothing day, in which the ASX200 bungled along the flatline going nowhere much before closing up 12 points at 5040. It was very “Friday”, after another week of volatility and ahead of both the US jobs number on Friday night and the US holiday tonight.

We may conclude that the 5000 level, which offered impenetrable resistance from 2009 to 2013, is now the solid base of support. A close below that level would likely suggest more downside. The story would be different, nonetheless, were 5000 to hold right through the difficult month of September, which this week includes a raft of August Chinese data, next week the Fed meeting, and maybe by month’s end a Greek election.

No Clear Signal

Wall Street was nervous before the opening bell on Friday night, having seen selling pressure impacting on the Japanese stock market on Friday, which fell 2.2%, rolling into pressure in Europe, resulting in falls of 2.8% in France, 2.7% in Germany and 2.4% in the UK. It was all going to come down to the non-farm payrolls report.

Wall Street had expected 220,000 jobs, so the 173,000 result was a clear miss. However, this number alone does not tell the full tale.

Firstly, it had been widely discussed prior to Friday night that the first August number almost always comes in low, before subsequently being revised higher. It’s all to do with August being the summer shut-down month, similar to January in Australia. Thus the market was ready for a weak initial reading.

As it was, the August result included upward revisions to the July and June numbers, such that 173,000 still provided for a three-month rolling average of 200,000 plus. Then there’s the unemployment rate, which fell to 5.1% from 5.3% in July. The Fed has stated that it considers “full” employment to be 5.0-5.2%. Thus as far as the Fed is concerned, employment is now full, for the first time since April 2008.

For the past year there has been concern that while the unemployment rate has been falling, it has not been accompanied by wage growth, which supports inflation. August wage growth came in at 0.3%, beating 0.2% expectations. At 2.2%, year on year wage growth is the strongest it’s been in four years.

So overall, was it a “good” jobs report or a “bad” jobs report? It rather depends on who you ask.

The US stock market said “good” because the unemployment rate has fallen into the Fed’s target zone. That suggests lift-off at next week’s Fed meeting, and for the stock market, that’s taken as “bad”. The Dow fell on the open, traded to down 350 points around 2.30pm, rebounded to be down 200 points at 3.30pm and closed down 270. But if the jobs numbers were a clear green light to the Fed, we would expect to see both the US dollar and US bond rates rise.

The US dollar index fell 0.2% to 96.22 and the US ten-year bond yield fell four basis points to 2.14%. We recall that at the height of Fed rate rise speculation this year, the dollar index has been at 100 and the ten-year has been at 2.50%.

Meanwhile, commodity prices all fell, suggesting commodity traders believe it’s a green light for the Fed and thus the US dollar will have to rise.

So what are we to make of it all? Economists are largely split down the middle on September or December, with some outliers suggesting next year. Some suggest the Fed cannot raise when the markets are volatile, others say it is not the Fed’s mandate to placate the stock market. Some say the Fed cannot raise due to the threat of an accelerated Asian currency crisis, others say the rest of the world is not the Fed’s responsibility.

Many, like myself, simply say please get it over and done with. I continue to believe this is the way the Fed is feeling too.

Commodities

LME traders clearly took the US jobs report as ominous in Fed rate rise terms, given nickel fell 0.5%, aluminium, tin and zinc fell 1% and copper and lead fell over 2%.

Iron ore fell US80c to US$55.00/t.

West Texas crude fell US94c to US$45.71/bbl and Brent fell US97c to US$49.58/bbl.

Typically, gold takes a while to react, and hence Friday night gave us little indication of interest rate views given gold fell US$2.10 to US$1122.80/oz.

What is the Aussie telling us? I suggested on Friday morning that 70 appeared to be a line in the sand for now, but that idea was quickly kyboshed. On the break of 70, the Aussie fell sharply and is down 1.5% at US$0.6911. We haven’t seen the Aussie in the sixties since 2009. But are we seeing Fed speculation or ongoing Chinese slowdown fears? There is a raft of Chinese data releases due this week.

One thing’s for sure – the forex market is very short Aussie at present, hence sharp rebounds are on the cards.

The Week Ahead

The SPI Overnight closed down 28 points or 0.6% on Saturday morning which, if accurate, would take the ASX200 back down towards the 5000 level again today.

Tomorrow Beijing will release China’s August trade data. On Thursday the inflation numbers are due, and the weekend sees industrial production, retail sales and fixed asset investment. Chinese markets reopen today after two days off last week.

Wall Street is closed tonight for Labor Day, before consumer credit data tomorrow night, wholesale trade on Thursday and the PPI and fortnightly consumer sentiment on Friday.

The RBNZ and Bank of England will both hold policy meetings on Thursday.

In Australia, we see the construction PMI and ANZ job ads today, NAB business confidence tomorrow, and housing finance and the Westpac consumer confidence on Wednesday. Thursday brings our own August jobs numbers.

Quite a lot of stocks go ex-div this week, including CSL ((CSL)) and Insurance Australia Group ((IAG)) today.

Westpac ((WBC)) will hold a strategy meeting today and Boral ((BLD)) will host an investor day on Wednesday. Sigma Pharmaceuticals ((SIP)) will release its interim result on Thursday.

Rudi will appear on Sky Business on Wednesday at 5.30pm and 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: Job Watch

By Greg Peel

The Dow closed up 23 points or 0.1% while the S&P gained 0.1% to 1951 and the Nasdaq fell 0.4%.

Lacking Discretion

There were actually a lot of similarities between Wednesday morning’s trade on Bridge Street and yesterday morning’s trade on Bridge Street. On Wednesday morning, second-wave selling, spurred on by weakness on Wall Street, sent us down 70-odd points from the open. At 11.30am, the disappointing GDP was result was released but the index initially bounced before heading south again.

By yesterday morning at 11.30am we were down 50-odd points before the retail sales result was released. The difference is we were actually up 70 points from the opening bell, so this time we fell 120 points to 11.30am. When the disappointing retail sales number came out the index briefly bounced, before heading south again.

On Wednesday afternoon, the buyers arrived and pushed us back to flat for the session. Yesterday afternoon, those buyers were otherwise occupied. The late buying on Wednesday, and a positive session on Wall Street, encouraged buying from the open yesterday. But the sellers were biding their time. The index was not bought up from the open, it simply “fell into an upward hole”, as we say in the market, where the offer prices had been pulled right back.

Then someone said “Now!” and in they came. Yesterday morning told us the second wave of selling is not yet exhausted, as we might have hoped by Wednesday’s close. By lunchtime, the damage had already been done. All sectors had fallen by fairly even percentages, indicating “market” selling. The drift-off in the afternoon reflected the weak retail sales number, such that the consumer discretionary sector closed down 3.2% when all about lost about 1.5% (except consumer staples, which likely saw some switching to be down only 0.3%).

The consumer sectors saw switching because the 0.1% fall in retail sales in July, against expectations of a 0.4% rise, was split into a 0.6% fall for discretionary and a 0.5% gain for staples. The fall in discretionary was largely due to a big fall in spending on household goods. This is the element that took economists by surprise, but on reflection, they have realised that household goods spending was the driver of solid retail sales numbers in both June and May. In the first month of the new financial year, it appears households took a breather.

So we might conclude that yesterday’s sales numbers were not quite as bad as they appeared at face value.

That just leaves us with the question of whether or not the general selling is now exhausted. It would be foolish to call this, particularly ahead of the US jobs report tonight, the Fed meeting in a couple of weeks and, let us not forget, another Greek election soon to be held.

Whatever More It Takes

With Greece under a current caretaker government, China has been able to hog the spotlight this past month and send global markets into a spin. Such volatility has not been lost on the ECB, which held a policy meeting last night.

Mario Draghi did not name China specifically at his press conference, but cited a slowdown in emerging markets and a further decline in oil prices as posing fresh risks to a European economy already being propped up by QE. Lower oil prices should ultimately help the oil-importing eurozone but the payback is weak oil-producing trading partners and the deflationary impact of lower fuel costs.

The ECB’s last QE program began in March and at the time, it was slated to last through to September. So the central bank must now decide what to do next and as Draghi declared last night, an increase in QE is on the cards if deemed necessary. For a long time now, the ECB president has promised to do “whatever it takes”.

The response was a big drop in the euro and a big rise across European stock markets, including 2.7% in Germany, 2.2% in France and 1.8% in the UK.

Payroll Roulette

The buying carried across the pond onto Wall Street and by 11am in New York, the Dow was up 200 points. But given a 200 point gain in the previous session as well, it was time for the sellers to act.

The difference last night is that the sellers weren’t representing second-wave investor selling on general fear but rather traders squaring up ahead of tonight’s US non-farm payrolls report and the volatility that may well transpire. The Dow retreated in an orderly and almost leisurely fashion to be roughly square on the session, without heavy volume.

It’s also a long weekend in the US, when typically Wall Street clears out by lunchtime on Friday. So not much point in holding risky longs heading into tonight.

Square is the safest place to be when no one can tell you (a) how Wall Street will react if tonight’s number is good/bad or (b), how the Fed will react if the number is good/bad. There are plenty of opinions, but no consensus. The general feeling is that a forecast of around 220,000 means 170,000 is bad and 250,000 is good. But it has also been noted that seasonally, August tends to deliver a weak number. In fact, August jobs numbers have disappointed for eleven of the past twelve years.

But then if it’s bad, does Wall Street rally on the assumption the Fed won’t raise this month, and vice versa if it’s good? Such volatility will likely be on display, but we know that the smart money tends to stay out on the day as the headless chooks go berserk and come in the next trading day following more thoughtful consideration. My consideration would be what difference will it make in the scheme of things if the Fed raises in September, October or December? It’s going to raise either way. Get it over with.

And I’m prepared to bet a lot of people on Wall Street feel this way, and that ultimately a September rate rise will prompt a rally, if not on day one, particularly now that the market PE has come back to reality thanks to China.

Commodities

The oil market mimicked the US stock market last night in initially lapping up the promise of more stimulus from the ECB before fading away on a square-up. West Texas closed up US60c to US$46.65/bbl and Brent closed up US11c to US$50.55/bbl. You might be forgiven for thinking oil finally had a quiet night after the madness of the past couple of weeks, but actually WTI was up 6% at lunchtime.

The LME also saw fairly similar action, albeit there was divergence amongst metals. Initial price strength faded late in the day but still left copper up 2%, aluminium up 1.5% and nickel up 1%, while lead, zinc and tin were flat to slightly weaker.

With China on holiday, iron ore is unchanged at US$55.80/t.

Talk of more QE in Europe sent the euro plunging, as noted, hence the US dollar index rose 0.5% to 96.37. And hence gold fell US$8.90 to US$1124.90/oz.

We might say the stronger greenback is the reason why the Aussie is down 0.3% at US$0.7017 this morning, but over the past month there has been no direct (inverse) correlation whatsoever. On yesterday’s weak retail sales number, the Aussie took another little trip into the 69s before scrambling back to safety above 70. Having fallen 36% from 110, it seems at the moment that 70 is a bit of a line in the sand for the Little Battler.

Today

The SPI Overnight closed up 20 points or 0.4%.

China is closed again today.

The eurozone’s June quarter GDP result will be revised tonight, but is irrelevant after last night.

Everything hinges on tonight’s US jobs report.

Note that locally, the S&P/ASX will announce this quarter’s promotions and relegations into/out of their indices, including the ASX200, before the changes take effect in two weeks.
 

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