Tag Archives: Currencies

The Overnight Report: Buyers Evaporate

By Greg Peel

The Dow fell 368 points or 2.1% while the S&P lost 2.1% to 2035 and the Nasdaq dropped 2.8%.

Alexis Tsipras has resigned as Greek prime minister and dissolved the government ahead of a fresh election next month. Oh God, here we go again.

The Bad Oil

Stop the world, I want to get off.

While it’s frustrating enough that the local market should fall 1.7% yesterday, it’s more frustrating that we were up so solidly on Wednesday. Clearly, no one has a clue at the moment. On Wednesday the market was led up by a strong snap-back rally in the energy sector, which appears to have been triggered by Woodside maintaining an 80% payout ratio when there were concerns this would be reduced.

But 80% of what? In another six months that yield will be worth tuppence ha’penny. One might have argued on Wednesday that energy stocks had reached oversold levels, but that opinion looked a bit foolish yesterday. From yesterday’s opening bell, the energy sector led the ASX200 lower. By lunchtime, energy was still the stand-out on a 4% plunge, while other sectors were weaker but by a much lesser magnitude.

By the afternoon, energy just kept falling and the session morphed into a general sell-a-thon. Materials copped 2%, to be the next worst behind energy’s 5.8% capitulation. The banks had been sold off on Tuesday afternoon, bought right back on Wednesday morning, and held reasonably steady yesterday morning until being sold down 1.7% by the close.

What changed in bank land between Tuesday and yesterday?

The end result is a clear breach of support at 5350, the last stop, technical analysts attest, before 5100. Next month is September, traditionally the worst month of any year and this time around, possibly including the first Fed rate rise, so that 5100 level is not looking overly pessimistic.

The good news, from a technical perspective, is that after the low is locked in at 5100 the pullback will be complete, and the next target is 5800. Just as well it’s that simple.

Going, Going…

After two days of selling, Wall Street had been building up to something more substantial. The falling oil price was driving it home, Fed confusion only adds to the uncertainty, and last week’s renminbi devaluations have heightened fears China is actually slowing much faster than the data indicate.

Emerging markets, in general, have become a major issue. A slowing China means pressure on the economies of all of China’s Asian neighbours. Plunging oil prices threaten to bring down the economies of oil-exporting nations such as Brazil and Russia. Saudi Arabia needs US$90/bbl oil to break even on its government spending commitments. Venezuela needs US$140/bbl – good luck with that. All other exporters lie along that curve between the two.

Lower oil prices should, in theory, provide a welcome boost to oil-importing economies. But two obvious examples are China and Japan. China’s GDP growth is slowing rapidly, and Japan’s was negative in the June quarter. Only Europe seems to be holding its own, but only just.

Then the fear is the Fed raises its rate next month, or even in December, and the resultant jump in the US dollar sends commodity prices lower still and, possibly, creates another Asian currency crisis. There is much concern now amongst US banks over the amount they have lent to small US shale oil producers who are now either under or close to being underwater. If one throws in the towel, hold on for the rush.

And to top things off, the Chinese stock market closed down 3.5% yesterday (most of which occurred after the close on Bridge Street) and now Greece threatens to throw Europe into turmoil all over again.

Cue Satchmo: And I think to myself…

The S&P500 broke down sharply through its 200-day moving average at 2078 early in last night’s session and this time, the buyers did not appear. There had been just too much pressure building. The next stop was 2044 which is the bottom of the trading range the S&P has been stuck in basically all of 2015. For a little while late in the session, that level held, but as the sell-on-close orders mounted, Wall Street breached the bottom of the range.

The S&P closed at 2035. It all sounds very frightening, but actually that’s only 4% from the peak. Commentators have been banging on for ages now that Wall Street is well overdue a 10% correction. The popular suggestion is that the Fed will trigger this. Now that we’re outside the range, it’s a new ball game. Wall Street is down for the year. The Dow closed below 17,000.

Commodities

What is the winner in all of this? Gold. It rose US$18.20 last night to US$1152.30/oz, aided by a 0.7% drop in the US dollar index to 95.74, and talk is now of the very familiar 1200 level been reached once more.

The oils fell again last night, although not so dramatically. West Texas has rolled over into the October delivery contract and in so doing won a reprieve on the curve as far as 40-breach fears are concerned, but a US36c fall last night still has WTI dangling at US$40.91/bbl.

Brent fell US70c to US$46.17/bbl.

Base metals fared a little better, thanks to the fall in the greenback. After a week of selling, copper rebounded 1.7%. Aluminium and zinc regained a percent but nickel and tin went the other way.

Iron ore fell US30c to US$55.60/t.

Falling commodity prices and Chinese slowing fears mean the Aussie is not blindly running in converse to the greenback, as it is down 0.2% at US$0.7337.

Today

The SPI Overnight closed down 66 points or 1.3%.

Reporting season highlights today include Coca-Cola Amatil ((CCL)), Insurance Australia Group ((IAG)) and Santos ((STO)).

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US Dollar Rally Not A Given

By Kathleen Brooks, Research Director UK EMEA, FOREX.com

Some people have been looking for the Fed to hike interest rates to help reignite the dollar rally. Bad news, some fairly basic analysis suggests that the dollar is not that closely related to the Fed’s rate hiking cycles.

We looked at previous hiking cycles in 1987, 1994, 1999, and 2004, here are the results:

1987: dollar fell in the first few months of hikes.

1994: Dollar drifted sideways, before embarking on a mild upward trend.

1999: the dollar continued with its mild uptrend, which had started before the Fed began raising interest rates.

2004: The dollar fell as the Fed embarked on a rate hiking cycle.

You can see a visual representation of this in the chart below, which shows the dollar index and the US Base rate, this chart has been normalised to show how the two move together.

So what does this mean for traders?

Do not rely on the Fed to determine the direction of the dollar in the coming months.
The dollar tends to follow its predominant trend when the Fed starts to hike rates.
There is no direct link between the Fed hiking rates and the dollar falling, when a weak dollar has coincided with a Fed hiking cycle it has been falling for some time already.
Due to this, we may see a muted reaction to a potential Fed rate hike next month.

Where could the dollar go this time?

If the Fed does hike rates next month (the jury is still out with only a 50% chance of a hike priced in by the Fed Funds futures market), history tells us not to expect too much of a reaction in the buck. However, because the dollar has rallied into this rate hike, it has been in an uptrend since mid-2014, there is a chance that the buck could rally alongside a Fed rate hiking cycle, although our analysis tells us that this may have little to do with the Fed actually hiking rates.

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Re-published with permission. Views expressed are not by association FNArena's (see our disclaimer).

Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warrant that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, the author does not guarantee its accuracy or completeness, nor does the author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

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Technical limitations

If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.

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The Overnight Report: More Minutes Of Confusion

By Greg Peel

The Dow closed down 162 points or 0.9% while the S&P lost 0.8% to 2079 and the Nasdaq fell 0.8%.

Mystery

The motivation behind Tuesday’s sudden 2pm dumping of bank stocks on the local market will remain a mystery, other than perhaps someone, somewhere, decided to pocket the CBA div and switch into something else altogether. Yesterday the banks all flew back to Tuesday’s starting point immediately from the opening bell, and stayed there.

We can thus also throw out any theories that the Chinese market prompted the late fall on Bridge Street on Tuesday. Having fallen 6% on Tuesday, yesterday the Shanghai index was down another 5% at around lunchtime in Sydney. The ASX200 wobbled, but quickly regained its ground.

By the time Bridge Street was closing Shanghai had begun to recover, before ultimately closing up over 1%. The assumption is the government’s Plunge Protection Team, who had said they were not going to do anymore buying, had a change of heart.

Yesterday’s local market also featured another round of beats and misses amongst reporting stocks and some solid moves in either direction as a result. Woodside Petroleum ((WPL)) was one stock that surprised with a strong result and consistent dividend, helping the energy sector to join the banks with a 2% gain yesterday, thus reversing Tuesday’s oil price-related tumble.

Unfortunately that trade’s not looking so flash this morning.

Between the banks, energy and some surprise buying in supermarkets, yesterday the ASX200 recovered what it had lost on Tuesday. But hang on to your hats, the SPI Overnight closed down 48 points this morning.

Dovish?

One reason the SPI is down hard is because oil prices have turned tail again. Wall Street opened to the downside last night on some lingering concern over China but when the weekly US crude inventory data hit the wires, oil prices crashed once more and US stock indices followed suit.

Increasing US inventories do not bode well when the end of August signals the end of the US summer driving season and a seasonal drop-off in fuel demand through to November. WTI crude fell over 4% last night and just stopped short of reaching the thirties.

The Dow was subsequently down over 200 points in the morning session before someone accidently leaked the Fed minutes at 1pm, ahead of the usual 2.30pm release. Shortly after 2pm, the Dow was back in the green.

We could carefully deconstruct the minutiae of the language of the various FOMC member views minuted in July but realistically we’d only arrive at the same old conclusion – the Fed might raise in September, or might not.

The computers clearly decided the language was more dovish than hawkish (yes, language algorithms make these calls and respond in seconds, long before any human can get their head around the implications), and subsequently Wall Street rallied back on the assumption September is now less likely. But if commentary on US business television can be considered a reasonable sample set, it appears most still feel September will be lift-off month.

Either way, US stocks turned tail again in the afternoon and finished lower. If we look at it from a purely technical perspective, the S&P500 yet again fell through its 200-day moving average from the open last night, prompting the usual buying response. The fade-off in the afternoon took the S&P to a close of 2079, and right now the 200 MA sits at 2078.

The US bond market and currency markets clearly thought the minutes were more dovish than hawkish. The US ten-year bond yield fell 7 basis points to 2.12% and the US dollar index fell 0.6% to 96.45.

Commodities

Commodity prices and Fed policy are inexorably linked, even if central banks try to ignore volatile short-term fluctuations in food and energy prices. There is no denying structurally lower oil prices and their impact on inflation. The more oil falls, the more the market begins to feel a rate rise is off the agenda.

West Texas fell US$1.83 or 4.3% last night to US$40.55/bbl, and stock market traders stood and watched agape to see whether the thirties might be reached. It’s worth noting, nevertheless, that WTI rolls over to October delivery tonight and that month closed a little higher, at US$40.95/bbl.

Brent is already on October delivery and it fell US$1.68 or 3.5% to US$46. 87/bbl.

The panic apparent in iron ore futures prices on Tuesday night, as I noted yesterday morning, did not come to pass. Iron ore is down US10c to US$55.90/t.

The drop in the US dollar was never going to save oil prices last night but it did provide some support for base metals, which had been hammered on Tuesday night on Chinese stock market fears. Copper did fall another 0.3% and aluminium was largely steady, but the other metals all rebounded around 1%.

Gold traders looked at the Fed minutes, the fall in US bond yields and the drop in the US dollar and decided to buy. Gold is up US$16.60 to US$1134.10/oz.

All of a sudden there’s a lot of talk on Wall Street that gold might be the place to be. If the Fed does raise, and the US dollar jumps, the impact on emerging market currencies will be supportive of gold. If the Fed doesn’t raise, and the dollar falls, gold will be supported.

So the theory goes.

The Aussie dollar is a tad higher at US$0.7351.

Today

The SPI Overnight, as noted, closed down 48 point or 0.9%.

Thursdays are the shocker days in any result season, and today’s long list of reporters includes AMP ((AMP)), Brambles ((BXB)), Fortescue Metals ((FMG)), Origin Energy ((ORG)), Qantas ((QAN)) and Wesfarmers ((WES)).

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The Overnight Report: China Slide

By Greg Peel

The Dow closed down 33 points or 0.2% while the S&P lost 0.3% to 2096 and the Nasdaq fell 0.6%.

China Syndrome?

A funny thing happened on Bridge Street yesterday.

On Monday morning, Commonwealth Bank ((CBA)) came out of its trading halt and largely held its rights issue discount from the open. On yesterday’s open, CBA mostly held a couple of dollars’ worth of dividend, and the banks were generally steady.

Energy stocks were hit early on the overnight fall in the oil price, but other sectors did little and as the index drifted back and forth around the flat line, on a mix of positive and negative individual earnings results, it seemed we were in for a flattish sort of session.

But at 2pm, on the dot, someone started selling the banks and the big miners. At that point the Shanghai exchange was closed for lunch (gosh, closing for lunch brings back fond memories, and some forgotten afternoons) and the Shanghai index was down around 2% -- a decent fall, but within the context the sort of daily volatility we’ve all now become accustomed to.

So what was the selling trigger? It was not the RBA minutes, as they’d come out in the morning and revealed nothing new. By the close on Bridge Street, the Shanghai index was down 4% -- okay, maybe enough to unsettle some nerves – and the ASX200 closed down 1.2%. But the damage was all in the banks, and to a lesser extent the big miners, which together represent a big chunk of the index. The energy names were already down, and did not get hit again after 2pm. The telco wasn’t hit, and indeed, no other sectors copped any sort of similar beating.

The Shanghai index ultimately closed down 6% after having really lost its bottle after lunch. The word had gone out, apparently, that the Chinese equivalent of the US Plunge Protection Team had decided not to support the market yesterday. So if your government says it is not going to make all the numbers on the roulette wheel red today for your benefit, it’s time to leave the casino.

If you watched the news last night and saw Australia down 1.2%, China down 6%, you’d say, well, that’s an easy one to explain. Is another currency devaluation on the cards? But looking at the course of the day’s trade on the ASX, the story doesn’t quite play out so simply.

What we do know this morning, however, is that the 6% fall in Shanghai did put the frighteners through the LME last night. Base metal prices have been slammed. Yet the SPI Overnight is calling the index up 10 points this morning.

Strange days indeed.

No Worries

And if China was to blame in any way for the Australian market’s late tumble yesterday, it seems Australia’s was the only market that cared. Hong Kong was down, fair enough, but Japan didn’t fall much, and nor did the European markets or, ultimately, Wall Street.

Wall Street instead put in a choppy summer session on light volume that was mostly introspective. The materials sector did cop selling on the plunge in the copper price, but a tick up in the WTI price helped energy rebound. A solid earnings report from Home Depot (Bunnings on steroids) was offset by a weak earnings report from Wal-Mart (Woolies on steroids), while a 0.2% rise in US July housing starts, to the fastest pace since October 2007, was the economic highlight of the day.

With the S&P back around 2100 and many a trader on a beach somewhere, the US indices drifted around last night without any particularly solid lead. China was noted, but largely shrugged off.

Commodities

Aluminium managed to put in a pretty solid performance last night in only falling 1%. All other base metals fell 2-3%, including a 2.6% fall for copper to a new six-year low.

Iron ore was unchanged in physical trading at US$56.00/t, but the late Chinese stock market slide saw iron ore futures slammed 2.5% overnight in China which suggests a different story by tomorrow.

West Texas crude managed to rise US47c to US$42.38/bbl, helped along by a research report from Citi suggesting it is time to start buying energy stocks as oil probably won’t fall much further. Citi commands respect in the energy space, having correctly called the initial oil price tumble to much disbelief at the time.

Brent fell US17c to US$48.55/bbl.

Gold is steady at US$1117.50/oz, but silver copped a 3% hammering. The US dollar index was up last night which doesn’t help the commodity cause, but only by 0.2% to 97.00.

The Aussie is down 0.5% to US$0.7340.

Today

The SPI Overnight, as noted, closed up 10 points.

Wall Street will be dealing with CPI data tonight along with the minutes of the last Fed meeting, but no one is expecting any new rate hike hints therein.

Ahead of that, it’s a big day on the local earnings front. Today’s highlights include Seek ((SEK)), Stockland ((SGP)), Seven West Media ((SWM)) and Woodside Petroleum ((WPL)).

In the latter case, keep an eye on the dividend.

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

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The Overnight Report: Range-Bound

By Greg Peel

The Dow closed up 67 points or 0.4% while the S&P gained 0.5% to 2102 as the Nasdaq jumped 0.8%.

Adjustments

Commonwealth Bank ((CBA)) shares recommenced trading yesterday having successfully put away the institutional allocation of its $5bn capital raising and despite the 10% discount offered on the rights issue, fell only 1%. This contrasts heavily with ANZ Bank ((ANZ)) which, the week before, placed new stock at a 5% discount and saw its shares open down 7%.

The vote of confidence in CBA prompted a vote of confidence in the banking sector in general yesterday, which ultimately finished up 0.5%. Buyers are clearly interested in returning following the capital raising sell-offs as yield once again becomes difficult to ignore.

However it must be remembered that index-tracking funds and other large institutional investors in the Australian market must hold the banks, which represent over a quarter of market capitalisation, and therefore must buy CBA to reweight their portfolios. Ditto ANZ. Something then must be sold to adjust across both sector and index weightings.

The ASX200 was off to a flyer yesterday, aided by some reasonable earnings reports, and at 11am was up 43 points. But that was the end of that. Perhaps it provided a good opportunity to sell whatever it is one chooses to sell to fund new CBA shares.

Japan would not have helped either, posting a June quarter GDP result of minus 0.5% quarter on quarter growth, down from plus 1.0% in March. While not unexpected, it does bring into question the success, or lack thereof, of Abenomics. The June quarter saw 1.6% annualised GDP contraction. Exports are down 16.5%. Household consumption is down 3.1%. Inflation is nowhere to be seen.

Massive debt-funded QE may have driven optimism two years ago but the subsequent fiscal trade-off of an increased sales tax has killed off the momentum. Japan is Australia’s second biggest trading partner.

Familiar Territory

Wall Street was stunned at the open of trade last night when the Empire State activity index came in at minus 14.9, down from plus 3.9 in July, when economists had expected a rise to plus 4.5. It is the worst reading since April 2009.

The Dow promptly fell 120-odd points on the news, but in contrast, the US housing market sentiment index saw a one point rise to 61 to mark the highest level in a decade. The Dow then ran all the way back, and more.

The argument is that the Empire State index is merely a measure of one manufacturing region – New York State – and not a national indicator, and moreover it can be, and has been of late, very volatile. Housing sentiment, on the other hand, is national.

Or you can argue that the opening plunge based on the Empire State result was overrun by those cheering on weak data, as it implies delay from the Fed. The US ten-year bond yield fell 5 basis points to 2.15%.

Or you can look at the reality, which is that every time the broad market S&P500 index falls below its 200-day moving average, the buyers step in. This has been the case all year. Hence the S&P first hit 2100 in January and last night returned to 2100, having done nothing but travel backwards and forwards across that mark for eight months, whatever has been thrown at it – Greece, China, you name it.

We could speculate that given January was around the time debate began in earnest over a first Fed rate hike, all Wall Street has done ever since is mark time until the policy change is confirmed.

Commodities

A slowing economy has not stopped China increasing its production of metals. Data over the weekend showed production of aluminium, copper and nickel all rose in July, a point which was not lost on the LME last night. Base metal prices were all flat to modestly weaker.

Iron ore fell US20c to US$56.00/t.

The pervading opinion in oil markets is now one of oil must go lower. For a while there, after the rebound, the pervading opinion was US$50-60/bbl for WTI was about right, but not so anymore. West Texas fell US22c last night to US$41.91/bbl and Brent fell US47c to US$48.72/bbl.

Gold rose slightly to US$1117.40/oz despite a 0.3% gain for the US dollar index to 96.82. The Aussie is steady at US$0.7373 ahead of today’s release of the RBA August minutes.

Today

The SPI Overnight closed up 11 points or 0.2%.

Aside from the RBA minutes the focus today and for the next two weeks will be on corporate earnings reports. Highlights today include Asciano ((AIO)), Challenger ((CGF)), Dick Smith ((DSH)) and QBE Insurance ((QBE)).

We have now passed the halfway mark, time-wise, in the result season, but only a quarter of reports are in. The rest now flow in an avalanche.

The score card to date, according to the FNArena Reporting Season Monitor, is beats and misses equally on par but FNArena database broker upgrades to downgrades running at 29/18.

Please note that CBA goes ex-dividend today, as do a number of other stocks, so the index will start with a handicap.

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The Monday Report

By Greg Peel

Oil Worries

It was the energy sector that took the big hit on the ASX on Friday, driven down by falling oil prices and the belief West Texas crude may be poised to fall into the thirties, thus revisiting GFC lows.

Energy fell 3.7%, and next worst performer on the day was materials with a 1% fall. The banks also fell 0.5% to round out a tough couple of weeks since the ANZ capital raising announcement. Commonwealth Bank ((CBA)) is also raising capital, and will come out of its trading halt this morning.

To add insult to the injury of bank sector woes, the Australian market in general copped an additional beating last week thanks to the sudden and poorly explained Chinese currency devaluation. Beijing has been at pains ever since to insist the devaluation is not about boosting China’s flagging export economy via currency wars but about moving the renminbi towards a marker-based pricing mechanism, as the IMF has entreated the Chinese to do so.

Fair enough, but the timing is certainly interesting. And while the last thing we need is for Beijing to begin disclosing possible policy moves a year ahead, a la the Fed, so we can all die of frustration debating the issue for the months and months preceding, it would be nice if Beijing at least made their explanations at the time of the event, rather than in a scramble a day or two later.

The local index attempted to stabilise after a torrid week on Friday morning, but was unable to hold out. When the ASX200 broke support at 5380, the technical sellers poured in in the afternoon.

As You Were

Australia has felt the pain but the US stock market did manage to recover ground last week after the initial renminbi volatility spike. Wall Street remains very much stuck in its 2015 range, and will no doubt remain stuck at least until the September Fed meeting.

On that note, Friday night featured a 0.6% rise in July US industrial production when 0.4% was forecast. The previous two months’ numbers were also revised upwards. The US producer price index rose a muted 0.2% in July after having risen 0.4% in June. The impact of lower oil prices is clearly evident in the annual headline PPI rate of minus 0.8% against the annual core rate, ex food & energy, of plus 0.9%.

Friday’s data sufficiently offset each other to provide no fodder for either side of the Fed timing debate, and no real impetus for Wall Street. It was only the news from Europe that provided a little boost as the week came to a close.

The Dow closed up 69 points or 0.4%, the S&P gained 0.4% to 2091 and the Nasdaq added 0.3%.

You might remember Greece? Well on Friday night the eurozone signed the deal that will see Greece receive E86bn over the next three years in bailout package number three. Packages number four, five, six and so on remain pending. As to whether this is enough to save Greece from economic disintegration in the meantime remains to be seen.

The deal’s approval was more of a rubber stamp than a source of great market relief but at least Greece might slip out of the news now for a while. The approval also managed to soften the blow from the eurozone’s June quarter GDP result, which showed an easing to 0.3% quarter on quarter growth following March’s 0.4%, for an annualised growth rate of 1.3%. Germany’s growth rate improved but not by as much as hoped, while France’s economy stagnated once more.

The best we can say of Mario Draghi’s QE package at this stage is that it has stopped the rot, and brought stability to the European economy if not raging growth. Of course, China’s currency devaluation is not going help an economy dependent on exports.

Commodities

It was a mixed bag on the LME on Friday night, with lead up around a percent, nickel a percent and a half and tin two and a half but aluminium, copper and zinc all fell asleep.

Iron ore remained unchanged at US$56.20/t.

The oils found some stability, having fallen 20% in a month and looking dangerous. West Texas was down slightly at US$42.13/bbl and Brent was down slightly at US$49.03/bbl.

Gold was steady at US$1113.70/oz as the US dollar index rose a tad to 96.52.

The Aussie is up 0.3% at US$0.7379.

The SPI Overnight closed up 9 points on Saturday morning.

The Week Ahead

US inflation – the weakness of which is the main reason supporting the “not in 2015” side of the Fed rate rise argument – will be in the frame again this week with the release of the US CPI on Wednesday.

The US will also see housing sentiment and the Empire State activity index tonight, housing starts on Tuesday, and existing home sales, leading economic indicators and the Philadelphia Fed activity index on Thursday. Wednesday also sees the release of the minutes of the last Fed meeting but any specific clues are unlikely.

The release of the minutes of the August RBA meeting is the only real economic highlight for Australia this week. Given the meeting pre-dated the Chinese currency revaluation, the minutes will not be of any great value.

Instead, the Australian market will be heavily focused on corporate earnings this week, as the gentle trickle of reports to date turns into a barrage.

Today’s highlights include Aurizon ((AZJ)), Charter Hall ((CHC)) and Newcrest Mining ((NCM)).

And a reminder that CBA recommences trading today following its announced 10% discounted rights issue.

Rudi will appear on Sky Business on Wednesday at 5.30pm.

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

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The Overnight Report: Confusion

By Greg Peel

The Dow closed up 5 points while the S&P lost 0.1% to 2083 and the Nasdaq fell 0.2%.

Not a Devaluation

The PBoC is not deliberately devaluing the renminbi in a desperate attempt to revive China’s export economy, it is merely allowing the market to determine the exchange rate in a step towards floating the currency. At least that’s what the Chinese central bank has declared.

Yesterday the PBoC marked down the renminbi another 1.1% against the US dollar, representing the third “devaluation” in three days for a total 3.5%. Again, the reduction was in response to the market’s perceived level, but the good news this time is that the market did not sell down the renminbi any further, as it had done in each of the previous two days.

The market has been selling on the expectation the PBoC will ultimately “devalue” the renminbi by 10% to adjust for the perceived level of overvaluation of the Chinese currency against the global foreign exchange market. But yesterday the PBoC talked down such speculation, suggesting there is no reason for the currency to depreciate any further given a “strong” economic environment in China, a sustained trade surplus, sound fiscal position and deep foreign exchange reserves, all of which provide “strong support” to the exchange rate.

“Strong” economy? Suffice to say, economists are expecting the renminbi to eventually be devalued by 10%, just not all in one hit. China’s July producer price index, which fell 5.4% year on year to mark its biggest drop since 2009, is the biggest clue. Beijing is trying to head off deflation.

But how does the rest of the world respond? Well at the moment, it appears confusion reigns. After two days of steep falls, European stock markets managed to rally back somewhat last night. On Wednesday night the Dow fell 277 points before closing flat and last night rose 79 points before closing flat.

The Australian market was a rabbit in the headlights on Tuesday, freaked out on Wednesday, and attempted a comeback yesterday only to be slapped back to flat in the final hour of trade.

The problem here is one of disclosure, which is not China’s strong suit. The Fed has now learned to prepare markets for policy changes, to the point where we spend an entire, tedious, tiresome year discussing whether QE3 is coming, a taper is coming, a rate rise is coming…until everyone just wants to get it over and done with. Mario Draghi flagged QE for a good two years before he actually did anything.

The PBoC, on the other hand, feels no need to warn anyone of anything. The result is global market turmoil. One day the PBoC, too, will learn.

Choppy

The ASX200 chopped its way to be up 44 points just after 2pm yesterday as investors absorbed the China story, Wall Street’s impressive turnaround overnight and various local earnings reports. By the closing bell the index was up only 5 points.

The market was not thrilled with Telstra’s ((TLS)) dividend, sending the stock, and thus the telco sector, down 2%. After being trounced on Wednesday the resource sectors made a comeback, with energy rising 1.5% and materials rising 0.7% to be the leaders in the green of what was a very mixed bag of sector moves – not unusual in a result season.

Unfortunately for bargain hunters in energy names, West Texas crude last night traded under US$42/bbl briefly – its lowest level since March 2009 (when QE1 was introduced and the US dollar tanked).

We can again note that the support level for the ASX200 is 5380, which we’ve bounced off once, and yesterday we closed at 5387. The next level is 5100.

Sales Boost?

July US retail sales rose 0.6%. Although just shy of 0.7% forecasts, both the June and May numbers were revised higher, painting a brighter picture for the US consumer sector. At the same time, as noted, oil tanked again, and yet again bargain hunters in Wall Street energy names were forced to cut and run.

There is a growing concern weak energy prices are ultimately going to lead to deflation across the globe, and potentially in the US as well. For almost a year the expectation has been that US consumer spending would rise to provide the offset. This didn’t happen for months, but maybe it’s starting to happen now. But energy is an input into a lot more than just consumer petrol tanks, and thus consumer pockets via lower petrol prices. Hence the deflation concern.

Which brings us back to the Fed, and the aforementioned never ending debate over a September rate rise. Thank God there’s only one more month to go to find out. But at the moment, Wall Street, like Bridge Street, is just not sure what to do.

After its big fall on Wednesday night, last night the US dollar index was only a little higher at 96.39. The ten-year bond yield nevertheless bounced back 6 basis points to 2.19%. The US bond market, forever far less fickle than the stock market, also seems confused at present.

Commodities

With the dollar stable, base metals prices were mostly a little lower last night, with aluminium and nickel down around a percent.

Iron ore rose US40c to US$56.20/t.

West Texas closed down US$1.09 to US$42.24/bbl and Brent lost US61c to US$49.15/bbl.

The gold bugs are excited again, believing that Chinese investors, having been burnt in the property market, burnt in the stock market, and now finding their currency devalued from underneath them, will return to buying gold. But last night gold fell back US$10.90 to US$1114.60/oz.

The Aussie is 0.4% lower at US$0.7358.

Today

The SPI Overnight closed down 8 points.

The eurozone will release its first estimate of June quarter GDP tonight.

On the local earnings front, Automotive Holdings ((AHG)) and James Hardie ((JHX)) are today’s highlights.

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The Overnight Report: Reversal

By Greg Peel

Float on By

Perhaps we can blame the IMF, which told Beijing recently, in rejecting China’s application for the renminbi to be included in the fund’s basket of global reserve currencies, that Beijing must first let the renminbi float. A PBoC devaluation is not a float, but the intention is to take a step towards such a goal. Yesterday the PBoC followed up Tuesday’s 1.9% renminbi devaluation with a further 1.6%.

The central bank did so because that’s where the market was indicating the renminbi should be. The Chinese currency is pegged only to the US dollar, and in revaluing the currency over the past several years against the greenback alone, the PBoC has failed to account for large valuation variances against other major currencies, such as the yen and euro. In devaluing, the PBoC is trying to find the right overall level.

The problem yesterday was that the PBoC responded to the market but then the market went again, selling the renminbi down further in what threatened to become a self-feeding spiral. Thus on the close of trade in China (long after the close on Bridge Street) the central bank intervened to stabilise the currency.

This is not a sinister response – every central bank, including the RBA, intervenes on occasion to prevent excessive currency volatility.

But it does show that Beijing is nervous, and highlights that the Chinese government is rather new to this game. The stock market debacle of last month was enough to give them the willies and so yesterday they got a little jumpy again. The issue for the rest of the world is one of just how bad is the Chinese economy right now? While the currency devaluation may have come at the IMF’s behest, there’s no masking the fact this is Beijing’s “shock & awe” stimulus tactic.

But as opposed to Beijing’s massive fiscal stimulus package of 2008, this form of stimulus is linked directly into the global financial market system. There is now great concern what the impact will be on Other Asia, which is so closely tied to the Chinese economy, and to emerging market colleagues such as Brazil, which is already struggling, and to the economies of China’s major export competitors such as Japan and Germany, who now see their respective QE measures – to date showing relative signs of success – undermined.

And what does it mean for Australia?

Delayed Reaction

I can admit now Tuesday’s action on Bridge Street had left me somewhat confused. In the wake of the first renminbi devaluation, why did the materials and energy sectors stubbornly rise 1% on the day, when all other sectors fell, as if the previous night’s jump in metal prices was all that mattered? Was a 1.5% plunge in the Aussie in sympathy really enough to negate the impact?

Looking at yesterday’s action I can only assume Bridge Street did not know how to respond. By yesterday morning, following big overnight falls in commodity prices and on Wall Street, it was clear. The materials and energy sectors both plunged over 3%.

It was a perfect storm. Chinese currency aside, we saw poorly received earnings reports from the likes of Computershare ((CPU)), CSL ((CSL)), Carsales.com ((CAR)) and REA Group ((REA)). And in opening lower from the bell, the ASX200 broke down out of its longstanding trading range. From there we could throw in the technical trade. First stop 5380, next stop 5100.

And where did we stop? 5380.

Bear in mind also that the biggest stock on the market – Commonwealth Bank ((CBA)) – was in a trading halt, having announced a 10% discounted $5bn rights issue.

Rebound

Mario Draghi must be shaking his head in despair. The QE package he introduced earlier in the year had, in the background of the whole Greek farce, been quietly working. Major export economy Germany, along with France and others, had begun to see economic improvement. And now this.

The German and French stock markets dropped over 2% each on Tuesday night, and another 3% plus each last night. When Wall Street opened, mid-session in Europe, the selling flowed across the pond. In the first hour of trade in New York the Dow was down 277 points on heavy volume. But at the same time, the S&P500 reached the bottom of its 2015 trading range.

The selling suddenly stopped. On lower volume, Wall Street began to turnaround. Whether it be bargain hunting, short covering or both, the indices ran all the way back to square.

One consideration is that the renminbi devaluation may once and for all take September off the table as the Fed’s lift-off date. Maybe 2015 altogether. Although there is still debate. Whatever the case, the US dollar index fell 0.9% last night to 96.31, suggesting a delay is now the pervading expectation.

The US ten-year bond yield had seen its big fall the day before, and last night was only down another point to 2.13%.

The plunge in the greenback is not good news for the Australian economy. Having fallen a cent on the first renminbi devaluation, the Aussie fell another half a cent on yesterday’s second devaluation. If the Aussie could keep roughly in step with the renminbi, then the AUD-RMB trade impact would be negated. But alas, on the fall in the greenback the Aussie is this morning 0.8 of a cent higher than it was 24 hours ago, and about 1.3 cents higher than its nadir following the second devaluation. It is less than half a cent lower than where it was when the first devaluation was announced.

Commodities

Base metal prices fell again from the open on the LME last night, having plunged on Tuesday night, but then the buyers arrived. Aluminium, nickel and tin still closed lower on the day but copper rebounded 0.7%, lead 1.6% and zinc 1.8%.

Volumes were heavy, as at least some traders were prepared to “look through” the immediate impact of the renminbi devaluation to its intended goal – to stimulate China’s flagging export economy. Growth in exports means growth in raw material demand, albeit at a higher implicit price for the Chinese.

The oils also stabilised, with West Texas closing up US12c to US$43.33/bbl and Brent closing up US35c to US$49.76/bbl.

Iron ore ticked down US10c to US$55.80/t.

The US dollar drop finally sparked some life into gold, implicit of the Fed delaying its rate hike. Gold is up US$16.80 to US$1125.50/oz.

Today

The SPI Overnight closed up 24 points or 0.4%, suggesting that at this stage, the 5380 technical support level in the physical might hold.

Reporting highlights today include Crown Resorts ((CWN)), Fairfax Media ((FXJ)), Mirvac Group ((MGR)), Tabcorp ((TAH)) and the biggie, Telstra ((TLS)).

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The Overnight Report: Currency Shock

By Greg Peel

The Dow closed down 212 points or 1.2% while the S&P lost 1.0% to 2084 and the Nasdaq fell 1.3%.

China Cracks

What a difference a day makes. Yesterday global stock and commodity markets were all strong on the back of anticipation Beijing would shortly come in with hard hitting stimulus measures, given the weekend’s very weak Chinese trade and inflation data. But no one anticipated what came next.

Yesterday the PBoC devalued the renminbi by 1.9%. It is not the quantum that has spooked global markets – it has not been unusual for the euro, for example, to move by such an amount in a session in recent times – it is the implications that have frightened markets.

For years during the China boom of last decade, China’s trading partners cried foul over significant undervaluation of the renminbi, via the PBoC’s pegged currency policy, providing China with an artificial export advantage. In its attempts to reform its markets, thus to compete equally with Western open market economies, China has been revaluing that peg ever since, eventually wiping out what was once seen as 40% undervaluation.

But Chinese growth has now slowed. Beijing’s attempts to revive growth, through interest rate cuts, RRR cuts and various fiscal measures have, to date, failed. China’s export economy has suffered as all around its major trading partners have resorted to QE, which effectively promotes currency devaluation. China’s interest rates are not at zero but either way, China has no tradeable government bond. QE was never an option.

Instead, Beijing has simply devalued its currency. Given the government was intending to move the renminbi to full-float status as part of its ongoing reforms, such manipulation is a step backwards. But the PBoC pegs its currency every day, and has indicated it will now take direction from the CNY – the currency allowed to be traded outside China. Overnight the CNY has already anticipated another 2%-odd devaluation. The PBoC may well move again this morning. In a sense, China is trying to mimick some sort of “float”.

The ramifications, nevertheless, are worrisome. Firstly, commodity prices tanked overnight. They are US dollar-denominated and China has devalued the renminbi against the dollar, reducing the purchasing power of the renminbi to buy commodities in US dollar terms. The good news for the likes of Australia is that as a result, the Aussie dollar has also been sold down heavily, down 1.5% this morning to US$0.7303. The RMB-AUD effect is thus minimalized, with regard the trading price of iron ore, for example.

The Canadian dollar has seen the same sell-off for the same reason. From the outside looking in, less purchasing power in the renminbi leads to lower commodity demand from China. But from the inside looking out, if the export currency is also lower, equilibrium is maintained.

But the yen is another currency that was hit last night, and Japan is not an exporter of raw materials. It is an exporter of finished goods and thus a major competitor to China. The yen has been sold in anticipation the BoJ will now be forced to respond with more QE. Take it to the nth degree, and what markets really fear is an internecine escalation in the global currency war.

Result Concerns

On the local market yesterday, it was not a good one for earnings results. Cochlear ((COH)) disappointed and fell 7%. Domino’s Pizza ((DMP)) had a wild ride, plunging initially before recovering, while Transurban’s ((TCL)) result was not that well received either.

Yet we started to the upside, before swinging suddenly back to the downside. Leading that charge were the banks. After one day’s recovery from Monday’s big ANZ-inspired plunge, it seems the markets are not yet comfortable with bank valuations. Commonwealth Bank ((CBA)) reports today [and has done so, see below].

Then there’s the matter of the renminbi devaluation. It’s a bit difficult to know just what the impact will be on Australian exports – not only of commodities but also of tourism, education and so forth – given it depends on what the Aussie does. Indeed, the only two sectors to finish in the green yesterday were materials and energy, both up 1%, but possibly due to Monday night’s rally in commodity prices.

The situation was very different last night.

Commodities

Base metals rallied strongly on Monday night in expectation of Chinese stimulus, and collapsed last night when that stimulus turned out to be currency devaluation. Aluminium fell 1.5%, copper, lead and tin fell 2.5-3%, nickel fell over 4% and zinc fell almost 5%.

Iron ore returned to trading following the Singapore holiday, but only fell US40c to US$55.90/t.

Oil did not get off so lightly, with West Texas falling US$1.59 to US$43.21/bbl and Brent falling U82c to US$49.41/bbl.

Gold is not a commodity per se, and is up US$4.60 at US$1108.70/oz on a US dollar index which, on the balance of trading partner currency moves overnight, is flat at 97.17.

Wall Street

The US is the biggest loser. On the one-hand, weaker commodity prices on the back of reduced Chinese purchasing power impact on prices received domestically, given the US does not meaningfully export its commodities. But it does export manufactured goods and services to China, and here the reduced purchasing power effect is evident in the likes of Apple shares, which fell 5% overnight.

All up, the gains seen on Wall Street on Monday night were wiped out last night, when China did not do what anyone was expecting. But the other issue to consider is: what does this mean for Fed policy?

If China has now triggered another round of currency wars, it does not seem a good time for the Fed to be making its first rate hikes. US exporters are already crying foul over the strength of the US dollar. China’s move may well be the left-of-field event which prevents a first hike in September.

Which puts the Fed in a difficult position. Already it has been suggested that were China’s currency devaluation to continue, the US economy might head into recession. If the Fed has not raised rates by now, it has nothing to cut again to prevent such a result. That only leaves one policy alternative – a return to QE – and that’s really not what the Fed, or anybody else in the US markets – really wants.

The US ten-year yield closed down 10 basis points last night at 2.14%, having at one point seen 2.01%.

Today

The SPI Overnight closed down 28 points or 0.5%.

The world will hold its breath for another move from the PBoC.

Adding fuel to the fire will be today’s scheduled Chinese data dump of July industrial production, retail sales and fixed asset investment numbers.

In Australia, we’ll see the June quarter wage price index, which will be closely watched by the RBA, along with Westpac’s monthly consumer confidence survey.

It’s a big day on the earnings front. As we speak, CBA has gone into a voluntary trading halt. The bank has reported its FY15 profit and announced a greater than anticipated $5bn capital raising. The CBA board must be livid ANZ jumped the gun on them.

Today’s reporting highlights also include AGL Energy ((AGL)), Carsales.com ((CAR)), CSL ((CSL)), OZ Minerals ((OZL)), Primary Health Care ((PRY)) and REA Group ((REA)).

Rudi will appear on Sky Business' Market Moves, 5.30-6pm.

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The Overnight Report: China Watch

By Greg Peel

The Dow rose 241 points or 1.4% while the S&P gained 1.3% to 2104 and the Nasdaq added 1.2%.

Rebound

A nervous start on Bridge Street yesterday suggested potentially another bad session following Friday’s carnage, as bottom-of-the-range support threatened to give way. Very weak trade and wholesale inflation data from China over the weekend was not good news at this time.

But the weakness proved short-lived, and by lunchtime the ASX200 had recovered enough ground to put it back above the psychological 5500 level. Leading the turnaround was a quarterly update from National Bank ((NAB)).

Interestingly, the other three banks typically report their quarterlies after Commonwealth Bank ((CBA)) has published its earnings report each season, but clearly this season has required a different approach. With NAB having jumped the gun on a capital raising last month, ANZ obviously decided to get in before CBA with its raising last week.

ANZ also provided its quarterly numbers with the raising announcement, and they were not good. The bad debt reduction cycle has finally turned, it seemed, which is something analysts have been warning of for some time. Maybe NAB then decided to bring forward its own quarterly report, ahead of CBA’s result release tomorrow, to right the banking sector ship.

NAB surprised to the upside. Critically, increased bad debts did not feature, as they had for ANZ. The result was a 0.8% rebound for the banking sector following Friday’s 3% rout.

The other driver of yesterday’s local rebound, aside from the worst session in six years on Friday prompting a little bit of bargain hunting on Monday, was the old Wall Street theme of “bad news is good”, applied to China. Fresh stimulus has been expected from Beijing ever since last month’s GDP result release, as monthly Chinese data have continued to disappoint. The weekend’s trade and wholesale inflation numbers were so bad, the only assumption can be that Beijing is set to respond with something substantial.

The Shanghai index led the charge, with a 4.9% rally yesterday. The Australian materials and energy sectors managed small gains.

And Another Rebound

Following seven down-sessions in row for the Dow, the worst run since the 2011 US debt crisis, the US stock market had hit “oversold” territory as far as many were concerned and was rife for a rebound. Such snap-backs often occur without an obvious trigger, but there were a handful of drivers last night.

Firstly, expectations of Chinese stimulus. This led to rebounds in commodity prices, including oil, and thus the US materials and energy sectors were supported. Then there was the announced takeover of aerospace components manufacturer Precision Castparts by Warren Buffet, potentially his largest ever outlay. While Buffett is a long-term investor, his 21% premium provided a vote of confidence against those believing Wall Street to be overvalued.

Then there was Fedspeak.

In another session of “if you’re all going to say something different at the same time why don’t you all just shut up,” Fed vice chairman Stanley Fischer said one thing and Atlanta Fed president Dennis Lockhart said another. Fischer kicked off by suggesting the Fed won’t move on rates until inflation has returned to more normal levels, closer to the 2% target. Lockhart countered by reiterating his view the US economy is now resilient enough to handle a rate hike and that “the gyrating needle of monthly data” should not be a “decisive factor in the decision making”.

Market reports overnight and this morning suggest Fischer’s comments were the primary driver of last night’s Wall Street rebound, again drawing on the “bad news is good news” theme of a delayed rate hike. I think that’s rubbish.

Firstly, the Dow jumped nearly 200 points from the opening bell and only continued to rise after Lockhart made his counter-comments. Secondly, the US ten-year yield is up 6 basis points to 2.24% -- the wrong way around.

Thirdly, US inflation has not been at 2% since early 2012 and having fallen to near zero in the interim, has taken a long time to grind back to around 1.6% (core) where it is now. With wage growth negligible and commodity prices, particularly oil, remaining under pressure, it would likely be a long time yet before the 2% mark is revisited. The Fed is not prepared to wait that long.

Finally, I believe the “bad news is good news” theme no longer rules after almost a year of rate rise debate. Such responses have not been seen on markets these past couple of months. Wall Street is not just ready for a rate rise, it is impatient to get it over and done with.

And Yet Another Rebound

Coming back to the more pervasive China stimulus theme, short-covering was evident on the LME last night as all base metal prices leapt 2-3%.

Iron ore remains closed.

West Texas crude rose US$1.00 to US$44.80/bbl and Brent rose US$1.64 to US$50.23/bbl.

Gold jumped US$10.30 to US$1104.10/oz, which you could argue represents expectations of a rate hike delay. Or you could argue it speaks to renewed demand from China, or that gold just wanted to get back to 1100, or that gold never seems to know what it’s doing anyway.

The US dollar index did slip a bit, nonetheless, by 0.4% to 97.15.

The Aussie is steady at US$0.7415.

Today

The SPI Overnight closed up 36 points or 0.7%.

NAB will publish its monthly business confidence survey today.

Today’s earnings result highlights include those of Cochlear ((COH)), Domino’s Pizza ((DMP)) and Transurban ((TCL)).

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Tag Archives: Currencies

The Overnight Report: Buyers Evaporate

US Dollar Rally Not A Given

The Overnight Report: More Minutes Of Confusion

The Overnight Report: China Slide

The Overnight Report: Range-Bound

The Monday Report

The Overnight Report: Confusion

The Overnight Report: Reversal

The Overnight Report: Currency Shock

The Overnight Report: China Watch