Tag Archives: Currencies

article 3 months old

The Monday Report

By Greg Peel

Restored

The wider world may have been worrying about Greece on Friday but clearly there were no concerns on Bridge Street, where an across the board rally restored the ASX200 to the level it had attempted to reach on Wednesday, being just below 5600. Wednesday’s attempt was thwarted by a big sell-off on Thursday, which appears to have been purely related to the expiry of futures and index options.

The index rallied 1.3% on Friday and there was little variation from this average among sector moves, suggesting this was very much a “Buy Australia” trade. This implies a level of foreign participation, which is fitting given it was foreigners who bailed out of the Australian market earlier in the month to send it hurtling down to just below support at 5500. The earlier support level of 5600 will now become resistance as the market looks for some stability.

Immediate stability may well depend on Greece.

Bewitched

In Australia, derivatives expiries are split into two sessions, being futures and futures and ASX index options on the second last Thursday of the month and stock options on the last Thursday of the month. While derivatives expire every month, quarterly contracts are still by far the most popular, thus June is one of four big expiries months and also end of financial year for most, thus offering potentially the greatest level of volatility, as was seen on Thursday.

While June is not EOFY in the US it is still a major expiry month, and on Wall Street all four equity derivative classes expire on the third Friday of the month. Hence the label “quadruple witching”. This occurred on Friday night, and while the US indices were soggy for most of the session, a late selling rush was attributed to expiry.

The Dow closed down 99 points or 0.6%, the S&P lost 0.5% to 2109 and the Nasdaq pulled back 0.3% from Thursday night’s all-time high. Sogginess on Wall Street was attributed to Greece.

The Greek situation is currently a very fluid one, with much development between the close of Wall Street on Friday and this morning. On Friday night the only news was that the ECB had been forced to extend emergency funding to Greek banks as a run on those banks accelerated in earnest. On Friday night it was assumed Greece and its creditors were still at a position of stalemate, with the creditors having now drawn a line in the sand and the Greek government having rejected that line.

It was also known that the EU leaders had brought a meeting previously scheduled for this Friday forward to tonight. With negotiations seemingly at an impasse and money pouring out of Greek banks, the assumption was that this would be a crisis meeting convened not to try to come up with a new deal to offer Greece, but to prepare for the fallout from a Greek default.

To that end, the US ten-year bond yield fell 8 basis points to 2.27% on Friday night.

White Flag?

However yesterday morning, the news was that the Greek prime minister would present a new deal to the creditors tonight. As a result, the eurozone finance ministers have hastily organised to meet again tonight, having met only on Thursday night, the sole purpose being to discuss what Tsipras is now offering. The finance ministers will meet ahead of the meeting of EU leaders.

This morning the news is that the new deal offered by the Greek government is, in Tsipras’ words, “mutually beneficial” to both parties. Tsipras has spent the past couple of weeks calling the creditors’ demands “absurd”, and last week the IMF withdrew from negotiations saying only that it expects its money on June 30. Has Tsipras being playing the game to the eleventh hour in the hope the creditors would buckle, only to find that ultimately it is he who must buckle?

The suggestion is that the new deal offers some ground on the particular sticking points of the creditors’ reform package, including an increase in the pension age and a broader based consumption tax. Maybe if the concessions are sufficient for an EU and eurozone not wishing to see an exit of one of its members, then the day might be saved.

However, this would mean tougher austerity ahead for Greece, and that’s exactly the opposite of the platform upon which the Greek left wing coalition was elected. Yet polls suggest 62% of Greeks want to stay in the euro, so we have a rock and a hard place situation, or a cake and eat it too. Were the creditors to accept Tsipras’ new proposal, the deal will have to be taken to each of the seventeen eurozone parliaments for approval. The questions then are (1), will every parliament provide approval – some leaders have been vocal on the “kick them out” side – and perhaps more importantly (2), will the left wing majority Greek parliament concede to tougher austerity measures and thus a betrayal of their electors?

If not, well, who knows what happens next. The process of parliamentary approval will probably take longer than the week available before the IMF repayment is due, but then if it looks like a deal may have been reached, the IMF can always hold out for a bit.

The ECB may be a creditor and at this stage the only lifeline Greece has ahead of a bank collapse, but the central bank is likely to take direction from what the politicians decide. No doubt the ECB will extend further emergency funds to Greek banks tonight ahead of the various meetings. As for tomorrow night, that remains to be seen. If there is no resolution, presumably currency controls will be put in place in Greece tomorrow night.

Watch this space.

Commodities

While Greece has been drawing the world’s focus, the Chinese stock market has been quietly plunging.

On Friday the Shanghai index fell 6.4%, bringing the fall from its peak a bit over a week ago to 11%. Once upon a time, this would have spooked the hell out of regional markets, including Australia’s. Readers may recall it was the “Shanghai Surprise” of February 2007 that set in train a serious of global sell-offs that also initially surprised, before ultimately leading the world to learn of things called “subprime mortgages” in the US.

But on Friday, all regional stock markets, including Australia’s posted solid gains. Given the Shanghai index has doubled and tripled in such a short space of time, driven by the end of China’s property boom and accommodative policy from Beijing, any correction would need to be rather substantial before global markets are really going to become concerned.

While the correlation is potentially a little spurious, it is interesting to note that in the time the Shanghai index has fallen 11%, the spot iron ore price has fallen 7%. On Friday the iron ore price fell another US20c to US$60.70/t.

Falling stock prices in China introduce a new concern for LME traders, who are already worried about Greece and Fed rate rise timing. On Friday night all base metals bar tin fell 0.5-1.5%, led by copper.

Over in the oil markets, amongst everything else going on in the world the Saudi oil minister suggested on Friday night that if were demand for oil to improve, OPEC would not hesitate in further increasing production. If so, this would rather put a cap on any potential oil price rise from here.

West Texas fell US$1.03 to US$59.46/bbl and Brent fell US$1.37 to US$62.87/bbl.

The US dollar index was relatively steady on Friday night at 94.09 and ditto gold at US$1200.30/oz. The Aussie was down 0.3% on Saturday morning at US$0.7772.

The SPI Overnight closed down 3 points.

The Week Ahead

Greece: see above.

It must be noted that the consensus view amongst fund managers has long been, and still is, that somehow, in some way, the Greek can will get kicked down the road. That’s why unlike years gone by when the potential for a Grexit sent markets spiralling, not a lot of angst has been evident this time around. On that basis, were a resolution to come out of tonight’s negotiations, any relief rally would be minimal given there has been no great sell-off so far.

If Greece does default, well, nobody knows.

Chinese markets are closed today for Dragon Boat Day, as you do.

Tomorrow sees a flash estimate of China’s June manufacturing PMI from HSBC, alongside equivalent flashes from Japan, the eurozone and US.

It’s a busy week of data in the US for the data-dependent Fed, and thus the market, to contemplate. Tonight sees existing home sales and the Chicago Fed national activity index, tomorrow brings new home sales, FHFA house prices, durable goods and the Richmond Fed activity index.

On Wednesday the US March quarter GDP is revised for the last time before the first estimate of June quarter GDP is released next month. Economists are forecasting a revision up to minus 0.2% growth from the previous minus 0.7%. Personal income & spending numbers are out on Thursday and consumer sentiment on Friday.

Australia will see a quarterly house price index out tomorrow in a week largely devoid of fresh data. As noted, stock options expire on Thursday.

On the local stock front, there is a large number of mostly REIT/infra names going ex-div on Friday.

Rudi will appear on Sky Business on Wednesday at 5.30pm and on Thursday at noon and again on Friday, 8-9pm, for Your Money, Your Call - Bonds versus Equities.
 

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: Lock The Doors Spiro

By Greg Peel

The Dow closed up 180 points or 1.0% while the S&P rose 1.0% to 2121 and the Nasdaq gained 1.3%.

Volatility

The interesting aspect to yesterday’s plunge in the ASX200 can be highlighted with hindsight, knowing that Wall Street rallied so strongly last night. While there is some confusion over news coming out of Europe this morning regarding Greece, the bottom line is Wall Street rallied last night as a next-day response (the big moves usually come the next day) to Wednesday night’s Fed statement and press conference, which implied to most that a September rate rise is no longer a given.

In other words, Bridge Street did not tumble yesterday because of the Fed. One might argue that Bridge Street tumbled due to the increasing risk of a Greek default, but if that were the case, why did we rally a percent on Wednesday? Nothing changed in between.

Hence we must assume the percent up-percent down moves the past two sessions were domestically driven. So, what changed from one day to the next? The banks, most notably, were darlings on Wednesday and pariahs on Thursday. Perhaps an explanation can be given by yesterday’s expiry of the June SPI futures contract and ASX index options – instruments used by large funds managers as hedging tools and others as speculative replicants.

It has been a horrendous two days for option market makers – those proprietary traders who are typically net sellers of calls and puts. As expiry approaches, each little move up or down in the index forces short option holders to buy going up and sell going down to ensure their risks are hedged. This necessity becomes even more self-defeating the act of buying pushes the index higher, requiring more buying, and vice versa on the downside.

Now we have the Dow up 180 points and the SPI Overnight – the new September front month – up 39 points. If Thursday cancelled out Wednesday and expiry is now over and done with, what happens from here should be more “real”. Mind you, we are about to head into the last week of trading before the end of the financial year, and that can also bring its own volatility.

Greek Drama

It wouldn’t be a good Greek drama without unconfirmed reports, denials, rumours and speculation, and last night saw plenty going on.

It is important to first appreciate that June 30 represents two critical events for Greece. One is the repayment date of its bundled IMF payments which if missed, sends Greece into default, and the other is the expiry of the current bailout tranche and potential payment date for the next tranche. It is assumed Greece cannot afford to repay the IMF unless it receives the next bailout tranche.

Why not just net them out then, I hear you think. Well the granting of the next bailout tranche is incumbent upon Greece agreeing to further austerity reforms, which it refuses to do.

As the eurozone finance ministers met in Luxembourg last night, a German newspaper reported, after the close of European trade but around mid-session on Wall Street, that the European Commission and ECB were considering breaking from the IMF to provide Greece with an extension of credit out to the end of the year. If this is the case, Greece could pay the IMF and avoid default, leaving more time for Greece to sort itself out and for negotiations to continue.

And we could then all be bored witless by Grexit talk right through to Christmas.

An already strong Wall Street popped further on this news, but it was quickly denied by the Germans. Christine Lagarde also made the point that there would be no extension granted for Greece to pay its IMF obligations. When the ministers emerged from the meeting, they did so with no deal of any sort having been achieved.

Then it got interesting. Reuters reported an overheard conversation in which one attendee was asked “Will Greece need to close its banks tomorrow [tonight]?” to which the response was “No not tomorrow, Monday”. We recall also that the ECB has been keeping the Greek banks, as opposed to the Greek government, on a separate liquidity drip to prevent their collapse while the credit negotiations have continued.

With all the talk of a Grexit being more likely, what had been a “walk” on Greek banks before this week has become more of a “trot” this week. The chances are, tonight that trot could become a fully blown run, forcing the banks to pull down their shutters over the weekend.

What we do know for certain is that the EU leaders’ meeting scheduled for later next week in Brussels has now been hastily brought forward to Monday. This would suggest it has become a crisis meeting with regard how to deal with a Grexit. The fact this meeting has been rescheduled is only more incentive for Greeks to try and get their euros out of the Greek banks tonight. The ECB could well shut off the tap next week.

Getting their euros out is one thing, but if currency controls are implemented, they may yet be subject to massive devaluation into drachma, unless they can be taken across the border. Look for Greece’s border crossings to be armed.

Or a deal will be reached. Chances? Well, a lot of people in the market still believe this is the only outcome, and clearly that would require capitulation from the lenders given the Greek government appears to be stubbornly defiant. But what message would that send to the rest of the eurozone periphery?

Who Cares?

If a deal is, by some miracle, reached, that would be positive for markets. If a Grexit occurs, is that negative? The common assumption is yes, for about five minutes. Then it becomes a positive, because the whole sordid, frustrating story will be over. The greatest enemy of markets is uncertainty.

This appears to be the way Wall Street was taking it last night. As the news out of Europe turned negative during the afternoon, Wall Street shrugged. The Nasdaq hit a new all-time high, as did the Russell 2000 small-cap index. The Dow and S&P held onto the bulk of their earlier gains.

Those gains represent a shift in expectation, in the wake of what was considered a dovish Fed statement and press conference, from a September first rate rise to a December first rate rise.

Such a view is supported by a 0.2% fall in the US dollar index to 94.04, and a sudden US$16.80 jump for gold to US$1202.00/oz. Or is gold jumping ahead of a Grexit? Doesn’t matter, it’s simply stuck at 1200 again.

But just to throw the spanner in the works, the US ten-year bond yield rose 5 basis points last night to 2.35%.

Commodities

It was the first chance for the LME to respond to the Fed last night, Greece notwithstanding, and nothing happened. Moves were inconsequential except for tin, which popped 3%.

Iron ore is unchanged at US$60.90/bbl.

The oils are a little stronger, with West Texas up US68c to US$60.49 and Brent up US47c to US$64.24//bl.

Today

As noted, the SPI Overnight closed up 39 points or 0.7%. The Aussie is 0.5% stronger at US$0.7798.

The Bank of Japan will hold a policy meeting tonight, although nothing new is expected.

Tonight is quadruple witching in the US, which involves the same type of index and option expiries the ASX saw yesterday. There is a suggestion last night’s big moves up on Wall Street may also have lent themselves to some expiry influence.

Locally, the quarterly promotions/relegations of stocks in the S&P/ASX indices come into effect this morning.

And unless he was bluffing, Alexis Tsipras meets with Vladimir Putin tonight.
 

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: Clueless

By Greg Peel

The Dow closed up 31 points or 0.2% while the S&P gained 0.2% to 2100 and the Nasdaq added 0.2%.

Excitement

Gotta love that red cordial.

Bridge Street was buffeted by the winds of exuberance yesterday on the thought that the biggest investor of them all might be interested in little old Australia. Not just an insurance partnership, it would seem, but perhaps banks as well and, gosh, who knows what else?

The financials led the charge yesterday with a 1.6% gain and to be fair, there has been much talk from stock analysts that following their solid correction, bank shares have returned to something estimating reasonable value. But falls in base metal prices and a near 4% plunge in the iron ore price overnight did nothing to prevent a 0.8% gain for the materials sector, and there was no rise in oil prices to justify a 1.6% jump for energy.

When the dust had settled only the fully valued healthcare sector missed out on the fun, falling 0.1%, while consumer staples remained flat on the news a failing supermarket chain had decided to pull the trapdoor underneath its CEO.

Insurance market analysts were quick to dismiss any notion yesterday, nonetheless, that Berkshire Hathaway’s partnership deal with IAG represented any form of endorsement of the Australian market in general by the great man himself. The deal is all about a safe and secure backdoor entry into China – the ultimate objective.

A 1.1% rally for the ASX200 represented a potentially risky trade yesterday, ahead of last night’s Fed statement release and press conference, and ahead of tonight’s meeting of eurozone finance ministers (See: Greece). The greater risk was and is to the downside.

Later This Year

That the US stocks markets moved only slightly last night and the US ten-year yield lost a mere point to 2.31% is testament to the fact last night’s Fed statement offered nothing new in the way of policy guidance, and Fed chair Janet Yellen was very careful to be vague at her press conference. “September, December, March…whenever it does happen…”

The US markets decided it was a rather dovish stance taken by Yellen, when no one would have been surprised if she had blurted out “Lift off in September!”. In her press conference Q&A, she variously waved around “later this year” and, as noted above, maybe not even until March as possible timetables. Thus market commentators remain split this morning between those believing there will not be a rate rise this year, and those still believing there not only be a rate rise in September, but in December as well. Yellen offered nothing that might bring those two camps closer together.

Or did she?

Personally, I suggest that behind the vagueness is a very specific intent. Yellen does not want to make the mistake made by her predecessor who, in 2013, sparked the so-called “taper tantrum” by being less guarded. Yellen, and other FOMC members, have been at pains to entreat the market not to worry the timing of the beginning of the tightening cycle, but of the timing of the cycle itself. The word they are yellin’ from the rooftops is gradual.

Which says to me they have every intention of implementing the first rate rise in September, and have done so for a while, so between now and then the clear intention is to play down the importance of that historical event in order to head off potential market volatility. Do not fear a little 25 basis point increase, they are saying, because the march back to “normalisation” from zero is a long one, and will be a very gradual one, but as someone once said, it must begin with the first step.

It may then be a second rate rise will not been seen this year, as the Fed hammers home this point and allows plenty of time for the dust to settle on the first hike.

Note that Fed policy meetings are held on a six-week rotation, not monthly like everyone else, meaning the only meeting between now and September will be in July. September is a quarterly meeting, meaning a press conference, and Yellen would not want to announce such a historical step without being in a position to field questions. The only reason a rate cut would not be forthcoming is if US economic data suddenly take a turn for the worse in between, and the June quarter GDP result proves a serious disappointment.

And just on that other source of potential market volatility, news just in is that Alexis Tsipras has organised an audience with Vladimir Putin on Friday night, after tonight’s eurozone finance ministers’ meeting. Clearly it is an attempt to gain some leverage with Europe, but then he has played the same fiddle before.

Ironed Out

The iron ore price pays little heed, if any, to US monetary policy. It fell another US$1.20 last night to US$60.90/t.

The LME pays no heed to Fed statements on the day of their release, because it closes beforehand. Thus last night base metal prices were relatively steady, moving slightly in either direction.

The oil markets “officially” close beforehand as well but continue on thereafter electronically, but little movement is evident anyway. West Texas is down US26c at US$59.81/bbl and Brent is down US3c at US$63.77/bbl.

Gold is the “commodity’ most impacted by monetary policy, and it’s up US$3.60 to US$1185.20/oz.

The US dollar is really the only financial instrument to have shown any significant response overnight, falling 0.7% on its index to 94.25 to imply forex markets read a dovish tone into the press conference.

The Aussie, nevertheless, is unchanged at US$0.7752.

Today

The SPI Overnight closed down 4 points.

New Zealand’s March quarter GDP result is out today. The RBNZ has already cut its cash rate this month of course, after previously hiking, proving yet again that central banks always go that one step too far.

An RBA Bulletin is out today but is unlikely to reveal anything new. It’s quarterly expiry day today on the ASX for SPI futures and index options, which can lead to some volatility.

The US CPI numbers for June are out tonight. The Fed doesn’t pay much attention to price inflation, preferring to assess the PCE (private consumption & expenditure) measure of inflation instead.

The fate of Greece will likely not be decided tonight as the eurozone ministers meet, but word is the EU is now preparing itself for a Grexit. A large crowd rallied in Athens last night in support of Tsipras’ defiance.

Rudi will make his weekly appearance on Sky Business' Lunch Money today, noon-12.45pm.
 

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: As You Were

By Greg Peel

The Dow closed up 113 points or 0.6% while the S&P gained 0.6% to 2096 and the Nasdaq added 0.5%.

Mirror

Yesterday’s trade on Bridge Street was largely a mirror image of Monday’s trade. On Monday the index fell sharply from the open only to graft back to a close of down 6 points. Yesterday the index opened sharply higher only to drift back to a close of down 6 points. Clearly there is not a lot that is clear to traders at present.

What was clear was a financials sector buffeted yesterday by a foreign invader. And bargain hunting in the banks continues to boot. What remains inexplicable is ongoing volatility in the utilities sector, which should be arguably the least volatile sector in the market. It rose 1.0% yesterday to post the largest sector gain, having fallen around a percent on Monday and risen around a percent on Friday while the index has not much moved.

The last two days’ trading suggests the local market is not prepared to either sell down or buy up dramatically while we have two potential volatility-producing events to consider this week, being the FOMC meeting and Greece. But having said that, last night Wall Street regained no more than what it lost on Monday night yet this morning the SPI futures are up an extraordinary 46 points.

Someone’s been on the red cordial.

The minutes of the June RBA meeting, released yesterday, were far from startling. There was nothing in them the June statement did not convey. The bottom line is the board intends to remain “accommodative” but having cut in May, any further move will depend on more data in the interim.

As for “crazy” Sydney house prices, the June minutes reiterated previous RBA commentary that “conditions in the housing market in Sydney and parts of Melbourne had remained very strong, though trends were more mixed in other cities,” suggesting the housing “bubble” is not an impediment to another rate cut, should one be deemed necessary.

Reversal

There was no new news on the Greek front last night other than an outburst from the Greek prime minister, who accused his creditors of pandering to the IMF for political gain and attempting to “humiliate an entire people that has suffered in the past five years through no fault of its own”.

No fault of its own? Systemic tax avoidance, corruption and bold-faced government book-cooking? Pull the other one Tsippy, it plays Nana Mouskouri.

But while it seemed that everyone worried about a possible Grexit and the fallout therefrom held sway in global markets on Monday night, last night it was the turn of those either believing, as many still do, a compromise will be reached or those believing any Grexit fallout would be minimal. Wall Street last night reversed its losses from Monday night, following modest rebounds on European bourses.

A 4 basis point drop in the US ten-year yield to 2.32% suggests the US bond market may still be concerned, but then given the big sell-off in bonds this month, it is just as likely the market is squaring up ahead of tonight’s Fed statement and press conference.

Wall Street’s economic data release of the day was difficult to read much into. After surging to their highest monthly pace since 2007 in April, US housing starts fell 11.1% in May. But permits, which are required before starts, rose 11.8% in May to, again, represent the fastest pace since 2007.

Traders largely fobbed off the numbers, noting housing start/permit data are notoriously volatile and subject to significant revision.

Adding some fuel to Wall Street’s fire last night was talk of a bit of an M&A frenzy in the health insurance space. Of five roughly equivalent insurance names, two pairs are rumoured to be in merger talks with each other but the fifth is not necessarily to be left out either.

Commodities

Global stocks market may have shrugged off Greece last night but LME traders didn’t, sending base metal prices southward for another session. Copper was down 1.3% on the day amongst moves of 0.5-1.5% down for all metals bar nickel, which fell 2%.

Is the iron ore rebound honeymoon over? Certainly market analysts have been warning investors not to expect the snap-back rally to be sustained. Last night iron ore fell US$2.40 to US$62.10/t.

Having risen by US$4.60 this time yesterday morning, this morning gold is down US$4.60 to US$1181.60/oz.

The spread reversal between the oils continued last night with West Texas trading up and Brent down, but given Brent rolled into the August front month delivery contract last night the spread will be off kilter until WTI follows suit next week. July WTI rose US45c to US$60.07/bbl last night and August Brent fell US21c to US$63.74/bbl.

Commodity prices were little impacted by a slight move up in the US dollar index to 94.92, while a lack of anything surprising in yesterday’s RBA minutes means the Aussie is a tad lower at US$0.7753.

Today

As noted, the SPI Overnight closed up 46 points or 0.8%.

Tonight the Fed will release its June policy statement and Janet Yellen will front the press. As an indication of just how uncertain Wall Street was about when the next rate rise might be, this morning on CNBC saw a floor trader suggest “not this year” while two fund managers agreed the first rise will come in September, followed by another in December, and four more in 2016.

But one of those fund managers suggested the Fed doesn’t know either, at this point. We can only hope Janet Yellen does actually set a date tonight so we can all get on with life, but she will likely just keep the ball in the air.

Rudi will appear on Sky Business' Market Moves today (5.40-6pm) and then later host Your Money, Your Call - Equities on the same channel, 8-9pm.
 

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: Be Afraid

By Greg Peel

The Dow closed down 107 points or 0.6% while the S&P lost 0.5% to 2084 and the Nasdaq fell 0.4%.

No Prisoners

It’s not often that the Saudi Arabian stock market is seen as an element of influence in global financial markets, let alone downunder. The Saudi influence on oil and OPEC is, of course, critical, but given the Saudi stock market is not open to foreign investors, it is not a market worth worrying about. Until yesterday.

The Saudi Arabian stock market is now to be opened to foreign investors. It’s a no brainer that the most dominant sector in that market is oil. If you are an international investor in the oil sector, Saudi oil companies would represent must-haves as a proportion of your portfolio. But in order to release funds to buy Saudi oil stocks, you’d need to first sell something else.

The ASX energy sector fell 2.6% yesterday. The majors all fell close to 3%, suggesting a blanket “sell Oz oil holdings” trade.

Energy was influential in sending the ASX200 down 53 points from the opening bell, but that took it under 5500 and it seems, for now, 5500 is the line of support. Just like 5600 and 5700 before it. The buyers came in, and the index climbed back steadily all day to a relatively flat close. Bank and industrials were nevertheless the only sectors to actually finish in the green.

As to why utilities was the best performing sector on the market on Friday, and the second worst yesterday (-1.2%), is anyone’s guess.

Take it or leave it

Northern hemisphere markets had their first chance to respond last night to the latest breakdown of talks between Greece and its creditors, on Sunday, at which the European Commission followed in the footsteps of the IMF in throwing up its hands.

There are three critical dates looming for Greece. On Thursday night the eurozone finance ministers are due to meet and the suggestion is an ultimate, take it or leave it deal will be offered to Greece at that time. On June 25, a eurozone leaders meeting is to be held in Brussels. Talk is Alexis Tsipras has his final hopes riding on this meeting, because on June 30, Greece’s bundled IMF repayment is due and its bail-out tranche expires. Thereafter, there will be no money to pay wages and pensions.

There is likely no money to pay the IMF either.

Global financial markets are beginning to realise that this time, it might just be real. A possible Grexit has been on the cards since 2011 and markets have simply become inured to the concept, watching the proverbial can being kicked for so long it seemed nothing particularly untoward would ever happen. This time, however, a Greek default is very much on the cards.

The Greek ten-year bond yield jumped 90 basis points to 12.7% last night and the Greek stock index fell 4.7%. The German stock index fell 1.9%, France 1.8% and London 1.1%. Most of the damage on the Greek market was in the banks, which are currently being supported by an ECB emergency lifeline. If this is pulled, given Greece’s failure to reach an agreement, then the current “walk” on Greek banks will turn into a “run”.

It is likely that before that can occur, the Greek government will be forced to implement “currency controls”, basically freezing the banking system. Rumours suggest, denied by Athens, the government is readying itself for implementation this weekend if it comes to that. Such an event occurred most recently in Cyprus, but Cyprus did manage to stay in the eurozone. In Greece’s case, currency controls may also be the first step in a preparatory, parallel reintroduction of the drachma.

It must be remembered nonetheless, that a Greek default on its IMF repayments does not automatically trigger a Grexit.

Mixed Messages

Selling in Europe flowed over into the US, sending the Dow down 200 points from the opening bell. Trading over the rest of the session then very much resembled Australia’s session yesterday, as buyers came in and steadily push stocks higher. But only half the loss was recovered in Wall Street’s case.

Safety buying was evident in US bonds, with the ten-year yield falling 3 basis points to 2.36%, and to some extent in gold, which rose US$4.90 to US$1186.20/oz. There was no specific collapse in the euro nonetheless, possibly because whatever fallout may occur from a Grexit would be international. The US dollar index is down slightly at 94.82.

Wall Street was also scratching its head over mixed US economic data releases last night.

Economists were expecting the Empire State activity index for June to rise to plus 5.7 from plus 3.1 in May, so a fall to minus 2.0 was a bit of a shock. They were also forecasting a 0.2% rise in industrial production in May, so were bewildered by a 0.2% fall. On the other hand, a rise in the housing market sentiment index to 59 in June from 54 in May represents a nine-month high.

Just when it seems US economic data are sufficiently robust to deem a Fed rate rise pending, a run of weak numbers pops out. While this is frustrating for markets trying to get a handle on the US economic trajectory, it must be even more frustrating for the Fed, which by all indications is now itching to just get the ball rolling.

Commodity Crunch

Sentiment with regard Greece also impacted on commodity markets last night. The LME shifted into sell-mode, with tin falling 0.5%, zinc 1.0%, aluminium, copper and nickel 1.5%, and lead 2.5%.

Iron ore fell US50c to US$64.50/t.

The oils were also sold down, and again Brent crude was sold down more. West Texas fell US43c to US$59.62/bbl and Brent fell US$1.26 to US$62.61/bbl, squeezing the spread further to US$3. When it hits US$2, we’ll be back to what used to be “normal”, many years ago.

With all that is going on in the northern hemisphere at present, the Aussie is looking like it might be a safe place to be. It’s up 0.4% to US$0.7765.

Today

The SPI Overnight closed down 3 points.

The RBA minutes are out today, and the markets will be looking for some further colour on the bank’s easing bias, or not, on “crazy” Sydney house prices and on that recalcitrant currency.
 

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article 3 months old

The Monday Report

By Greg Peel

Poised

Activity quietened down on Bridge Street on Friday – a typical Friday session – as the dust settled on Thursday’s big snap-back rally. Materials and the banks gave a bit back in what was otherwise a mixed session across sectors, which saw utilities (+0.9%) find some yield hunters.

The ASX200 has moved up from under 5500 to be sitting at 5550. What happens next will be determined by what happens this week, with the Fed policy meeting taking centre stage on Wednesday night and the Greek spectre hovering.

Greece

With negotiations in Brussels now reaching what this time looks like an unresolvable impasse, given the IMF has stormed out, a Greek default seems inevitable unless either Tsipras sees no alternative but to capitulate to creditor demands or the EU comes up with some other conciliatory plan. The latter seems increasingly less likely.

As to what happens next were Greece to default, nobody knows. While other countries have in the past been forced to organise a work-out of their IMF loan repayments, no one has ever actually defaulted. And no one has ever left the eurozone.

European stock markets went into selling mode on Friday night, with Germany down 1.2% and France down 1.4%. While there has been much talk that global markets are ready for a Grexit, and that the fallout would be minimal, the “nobody knows” factor encourages investors to play it safe rather than sorry.

That feeling spilt over into US markets, sending the stock indices south from the opening bell. The Dow closed down 140 points or 0.8%, the S&P lost 0.7% to 2094 and the Nasdaq fell 0.6%. The day’s major economic data release met forecasts.

The US producer price index rose 0.5% in May at the headline – the biggest jump since 2012. But it was all about the bounce-back in oil prices, and in fact the core PPI, ex food and energy, fell 0.1%. The core rate is tracking at a mere plus 0.6% annualised, which is not in itself impetus for a Fed rate rise. Despite May’s jump, the headline is actually tracking at minus 1.1%, given the big fall in oil prices on a twelve-month basis.

Nonetheless, with the Fed holding a policy meeting this week, releasing a statement and holding a press conference on Wednesday night, it is also safer for Wall Street to retreat to the sidelines, Greece notwithstanding. Despite the German ten-year yield falling back to 0.83% from 0.89% on Friday night on Greece fears, the US ten-year closed unchanged at 2.38%.

The US bond market appears to have now settled itself ahead of what might happen next. No one is expecting the Fed to announce a rate rise in this week’s statement, but there is a chance Janet Yellen might expand on her previous “this year” suggestion and hint that the September meeting – the next to include a press conference – is closing in as the likely candidate. Recent US data have suggested a rebound is indeed occurring in the US economy out of the weather-impacted March quarter.

As to what might happen were the Fed to specifically set a timetable, once again, nobody knows. Opinions range from “already baked in” to “there’ll be chaos, just like 2013’s taper tantrum”. The middle ground argument suggests there will be some initial volatility, but that markets will right themselves fairly quickly.

Or Janet Yellen may not add any more colour on Wednesday night, and simply reiterate that a rate rise is “data dependent”. Then we can all speculate for another three months. Oh joy.

Commodities

Two pieces of news impacted on oil prices on Friday night. The weekly US rig count dropped again, which is a positive for prices, but data indicated OPEC is currently producing at around a million barrels per day more than its own 30 million bpd quota. The implication is that Saudi Arabia is determined to maintain its market share even if it has to accept lower prices.

The impact was a US50c fall in West Texas to US$60.05//bbl, but a steeper US$1.24 fall in Brent to US$63.87/bbl. At under US$4, the Brent-WTI spread has begun to look more historically “normal” now a combination of reduced US supply and expanded US supply infrastructure has reduced the Cushing storage premium. A few years ago that spread blew out to US$27/bbl.

After falling steeply on Thursday night, base metal prices stabilised on Friday night. All metals posted small, mixed moves, except for nickel, which fell 1.2%.

Iron ore fell US40c to US$65.00/t.

Gold was steady at US$1181.30/oz.

A steady US dollar index, at 94.97, supported stability in commodity markets. The Aussie is nevertheless down 0.3% to US$0.7732.

The SPI Overnight closed down 6 points.

The Week Ahead

Negotiations between Greece and its creditors continued through to last night but again ended in stalemate. Tsipras again offered an alternative reform package, but EU officials saw nothing new. Tsipras’ refusal to touch pensions and taxes is the stumbling block. He has offered to continue discussions, but EU and IMF officials have now said they are no longer authorized to negotiate further.

Last night’s meeting was considered by the creditors as the “last attempt”. EU finance ministers will meet on Thursday to decide what to do next.

The Fed policy meeting will otherwise be the focus of global attention this week.

The US economic calendar is a full one this week, beginning with industrial production, housing sentiment and the Empire State activity index tonight. Tomorrow sees housing starts, and Thursday brings the CPI, Philadelphia Fed activity index and leading economic indicators.

Friday brings the quarterly derivatives expiry, or “quadruple witching”.

ECB president Mario Draghi will speak tonight, ahead of eurozone trade, employment and inflation data due this week and the ZEW investor confidence survey tomorrow night.

The Bank of Japan will hold a policy meeting on Friday.

It’s also an expiry week in Australia, with SPI futures and index options maturing on Thursday. On Friday, the quarterly S&P/ASX index changes come into effect.

Tomorrow sees the release of the minutes of the June RBA meeting. Opinions on whether we’ll see another rate cut or not have bounced back and forward since that meeting was held. The RBA Bulletin will be published on Thursday.

Rudi will appear on Sky Business on Wednesday at 5.30pm and on Thursday at noon. He shall host Your Money, Your Call - Equities again on Wednesday, 8-9pm.
 

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: IMF Storms Out

By Greg Peel

The Dow closed up 38 points or 0.2% while the S&P gained 0.2% to 2108 and the Nasdaq rose 0.1%.

Bounce

The ducks all lined up in a row for the Australian markets yesterday. After a week-long sell-off which took the ASX200 almost to "official" correction territory, three days of stalling at around 5500, a big rebound on Wall Street overnight, a jump in oil prices and a big jump in the iron ore price, the stage was clearly set.

And so we saw a predictable 1.4% bounce, led by materials (+2.0%) and energy (+2.1%), the banks (+1.8%) and the telco (+1.3%). In other words, all the big boys – the stocks that are always clobbered when the "Sell Australia" button is pressed overseas.

An additional boost was provided by yesterday's May jobs guess & giggle, which suggested a fall in the unemployment rate to 6.0% from 6.1% in April, with April having been revised down from an initial 6.2%. The number beat economist expectations, but rarely does the number match expectations. The fall in unemployment is nevertheless consistent with other related indicators, CBA's economists noted yesterday.

The Aussie dollar spiked on the jobs numbers of course, given the RBA is still forecasting unemployment to rise and thus a falling rate suggests another cash rate cut is less likely. But overnight the US dollar index recovered, hence this morning the Aussie is actually down a tad over 24 hours at US$0.7757.

China

It was probably never going to matter to an Australian market in rebound mode yesterday what the monthly Chinese data dump might bring. As it was, the numbers can be viewed in one of two ways.

Chinese industrial production rose 6.1% year on year in May, up from 5.9% in April and matching forecasts. Retail sales rose 10.1%, up from 10.0% in April and matching forecasts. Given the past couple of months' numbers have surprised to the downside, the fact these numbers met expectations, and suggested slight improvement, can be considered a positive.

The fact that they remain lower than markets, and the Chinese government, would like, is a negative. The May fixed asset investment number also fell to 11.4% growth year to date, down from 12.0% in April, and that's not good news.

Combined with this week's earlier CPI result of 1.2% year on year, down from 1.5% in April, the indication is China's economy continues to struggle. More stimulus ahead? Most likely.

Retail Surprise

As Beijing mulled a lack of domestic consumer enthusiasm, over in the US the story was a different one.

US retail sales rose 1.2% in May to mark the third consecutive rise and to add weight to the rebound from the snowbound March quarter thesis. Economists had forecast 1.5%, but the "miss" was counterbalanced by revisions to the April number, to 0.2% from 0.0%, and the March number, to 1.5% from 1.1%. Perhaps the US consumer is beginning to appreciate lower oil prices after all.

The sales number led Wall Street to kick on from Wednesday night's big gains from the opening bell, but thereafter momentum began to fade. The US dollar index rose 0.5% to 95.02 on the sales number but when one might expect another rise in US bond yields on the same theme, instead the ten-year yield suddenly fell back 10 basis points to 2.38%.

Why? I'll give you one guess.

They shoot horses, don't they?

On Wednesday night, it appeared Greece's creditors were offering at least some form of white flag in offering Athens some breathing space. With the big June 30 IMF repayment obligation looming, the troika offered to hand over a portion of the next tranche of bailout funds if the Greek government would just agree to one of the various reforms insisted upon. That way, Greece could pay the IMF, avoid default, and negotiations could then continue.

But no, Alexis Tspiras will not have bar of it. One of the biggest stumbling blocks is the troika's demand the government raise the retirement age to 63 from 61, and reduce pension payments. Greece's pension payments are the highest in the eurozone, and one can see why Germans are insistent given the German retirement age was recently increased to 67 from 65.

Tsipras has refused point blank, and so in a pique of frustration, last night the IMF walked out on negotiations. Not only did the negotiators leave the building, the IMF recalled the team from Brussels to Washington. The IMF has never walked out of negotiations with anyone before.

The ball is now in Greece's court. Greece cannot afford its payment due on June 30, nor can it afford to pay wages and pensions beyond that point. Greece needs those bailout funds, and even if Tsipras capitulates and the bailout funds are made available, the actual handover has to be approved by all eurozone parliaments. Not only is blanket approval not necessarily a given, there's only a couple of weeks left for parliamentary votes to even be organised.

The clock is ticking. That's why last night European bond yields fell back again, and US bond yields followed suit.

Commodities

The good news is iron ore rose another US30c to US$65.40/t. The bad news is everything else fell last night.

Base metals were particularly hard hit. LME traders are nervous about Greece, and took no solace from China's monthly data, particularly the weak fixed asset investment number. This number plays right into raw material demand. And while rising US retail sales are positive, a rising US dollar is not. Tired of waiting for a decent rebound in base metal prices, last night traders threw in the towel.

Aluminium fell 0.5%, zinc fell 1%, nickel fell 1.5%, copper fell 2.5% and lead and tin fell 3%.

The oils also turned tail last night, with West Texas falling US61c to US$60.55/bbl and Brent falling US49c to US$65.11/bbl.

The International Energy Agency released a report last night in which it increased forecast global demand for oil in 2015, but also noted supply growth will remain strong enough to more than cover any increase.

Gold slipped back US$3.80 to US$1182.00/oz last night on the stronger greenback.

Today

The SPI Overnight closed down 8 points.

After yesterday's big surge, a bit of a pullback would not be unusual today. And it's a Friday, so steaks and red wine beckon. US stocks closed higher and bond yields closed lower, which might otherwise provide impetus for the Australian market, but as the dust settles on yesterday's snap-back rally, there's still a slowing China and default-bound Greece to think about.

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article 3 months old

Has The RBNZ Finally Succeeded In Sinking The Kiwi?

By Chris Tedder, research analyst with Gain Capital

The Reserve Bank of New Zealand (RBNZ) cut interest rates for the first time in four years, lobbing 25 basis points off the official cash rate, citing low inflationary pressures and an expected weakening in demand. At the same time, the bank opened the door for even looser monetary policy later this year, with Governor Wheeler noting that further easing may be appropriate beyond today's cut that brought the OCR to 3.25%, despite the threat of a property bubble in Auckland. Wheeler pointed out that the proposed LVR measures planned for October 2015 should ease investor activity in the property market.

The NZ dollar was mauled by bears following the bank's decision to loosen monetary policy, with NZDUSD touching its lowest level in over 4.5 years. Meanwhile, the volatility in NZ dollar saw the biggest intraday move in AUDNZD since August 2013, with the pair gaining almost 2% at one stage as a slew of stops were wiped out between 1.0900 and 1.1000.

The volatility in the kiwi is due to the mixed expectations of the market prior to the meeting. Only around 50% of participants were expecting the RBNZ to loosen monetary policy, at least according to the interbank market. Furthermore, not only did the bank cut the OCR, it suggested that it may loosen policy even further in the foreseeable future and verbally assaulted the exchange rate once again. There's no silver lining for the kiwi this time around, it's all storm clouds.

The bank has been setting the stage for a cut for over a month now, ever since RBNZ Assistant Governor McDermott made some fairly dovish comments about the outlook for interest rates in NZ. McDermott stated that the RBNZ isn't considering hiking interest rates at this stage and weaker demand and inflation would prompt rate-cut talk. The RBNZ reinforced his view at its policy meeting a few days later and has been working on macro-prudential tools to cool the housing market. This was the beginning of the end for the NZ dollar.

Outlook for NZDUSD

Yesterday's announcement has clearly put the kiwi on the back foot, but it hasn't mortally wounded NZDUSD; the pair remains above an all-important support zone around 0.7000. Above 0.7000 there's some room for a technical retracement, but the fundamentals have now completely shifted to the downside for the NZD, at least in the near-term. A rebound in dairy prices, domestic economic activity and/or an even stronger than expected performance from Auckland's housing market may be needed to save the kiwi.

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article 3 months old

The Overnight Report: Rebound

By Greg Peel

The Dow rose 236 points or 1.3% while the S&P gained 1.2% to 2105 and the Nasdaq jumped 1.3%.

Consolidation

Yesterday's session on Bridge Street looked a lot like last Friday's session, in which the index chopped around in a small range and was balanced by specific sector moves. Sitting under 5500, it appears the market was trying to decide whether enough was yet enough after last week's big falls.

Energy led the positive sectors yesterday on a jump in oil prices but elsewhere sector moves were mixed. Healthcare gave back some its gains of the past couple of days and the telco also pulled back, and this time supermarkets were sought. With foreign "Sell Australia" orders now apparently exhausted for the time being, traders have been fossicking around in the rubble for right stocks to buy at lower levels.

The macro has become less important for the moment given the 500 point adjustment. Yesterday's big plunge in consumer confidence – the biggest monthly drop in a year – was not any source of panic and the consumer discretionary sector fell only modestly. The bump up from an initially well received federal budget has been wiped out and confidence is back on the pessimistic side of the equation, at its lowest level for the year.

This despite two rate cuts and a supposedly household friendly budget.

The dust has settled and households have likely come to realise it was not such a great budget, it just wasn't a shocker like last year. Meanwhile, the stock market has fallen out of bed and every man and his dog has cried "bubble" with respect to the Sydney/Melbourne housing market. Little wonder consumers are nervous.

The RBA governor was also in on the bubble act yesterday, pulling out his best Patsy Cline to entertain guests at a luncheon. In a Q&A, Glenn Stevens described the Sydney housing market as "crazy". And on that note, the Aussie dollar spiked up a cent.

The Aussie had previously fallen during Stevens' formal speech, in which he reiterated that the central bank still had room to ease further if needs be. But the conundrum is that "room" and "crazy" are counterpoints. Up to now the official language from the RBA has suggested the central bank is keeping an eye on house prices but is not in panic mode. "Crazy" suggests panic might have begun to creep in.

Stevens also reiterated that he felt monetary policy was having less effect than it otherwise would now that we're down at historical lows. The RBA may still have room to ease but if this is likely to have no more effect than make house prices even more crazy, in the governor's view, then what chance another rate cut?

The Aussie is up 0.9% over 24 hours at US$0.7762, aided by a fall in the US dollar index of 0.6% to 94.58.

Compromise

The German stock market also tumbled last week and actually reached the 10% correction mark, but last night rebounded 2.4%. The impetus was, of course, Greece.

Yawn.

German chancellor Angela Merkel has now indicated she might be prepared to release a portion of bailout funds earmarked for Greece in exchange for at least one of the creditors' reform demands. The troika is insisting on a full package of reforms including asset sales, higher taxes and less generous retirement benefits and the Greek prime minister has to date described the package as absurd.

But if Alexis Tspiras can agree to at least one element, the troika could release some of the funds and allow Greece to make good on its onerous IMF repayment obligation at the end of the month. Presumably, another reform would be rewarded with another hand-out. But Given Greece's repayment commitments only get worse as the year goes on, the full tranche is still ultimately needed by Greece and on that basis Tsipras would eventually have to agree to all the reforms, one presumes.

So will he go for it, or will he see it as a patronising tease? We don't know yet, but having been beaten down, European stock traders saw a least a glimmer of hope and thus reason to go bargain hunting last night.

Rebound

That hope flowed across the pond and sent Wall Street surging from the opening bell. The Greek news spurred a rally in the euro, which was responsible for the drop in the US dollar index. The lower dollar provided a fillip for commodity prices, and thus another rally in oil prices helped add further fuel to the stock rebound fire.

On Tuesday night the Dow was back into negative territory for the year. Last night's rally took it back to close smack bang on 18,000, which seems to be the point of balance between Fed rate rise fears and economic recovery hopes.

On the former point, the German ten-year yield rose again and is now knocking on the door of the full 1.00%. US bond yields also pushed higher, rising 6 basis points to 2.48%.

Commodities

Last week gold broke down out of its longstanding trading range which suggested it could be set for a move back to 1100. But instead it completely stalled and on last night's fall in the US dollar, is back inside that range once more. Rising US$9.40 to US$1185.80/oz, suddenly gold at 1200 is looking more likely than 1100 for the time being.

Lead and zinc couldn't manage to join in the weaker dollar fun on the LME last night which otherwise saw a 0.5% gain for aluminium and 1% gains for copper, nickel and tin.

Iron ore jumped US$1.20 to US$65.10/t.

As noted, the oils were stronger again, with West Texas up US55c to US$61.16/bbl and Brent up US95c to US$65.60/bbl.

Today

Hold onto your hats, the SPI Overnight is up 62 points or 1.1%. The consolidation we've seen these past few sessions has already suggested the local market is itching for a rebound and just needs some specific impetus. Today Wall Street's lead may just be what the doctor ordered.

On that basis it is again unlikely the macro will have much effect, even though we see May jobs numbers today. It might be hard to gauge just what leverage Joe Hockey will seek to gain from whatever the result may be, as it's difficult for one to speak when one's foot is so firmly wedged in one's mouth.

The other spectre in the room today could be China, where May industrial production, retail sales and fixed asset investment numbers are due. However if they are bad, that implies firmer stimulus, so it is unlikely Beijing can conjure up anything to spoil the party on Bridge Street today.

Rudi will make his weekly appearance on Sky Business' Lunch Money today.

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article 3 months old

The Overnight Report: Wall Street Joins In

By Greg Peel

The Dow closed down 170 points or 0.9% while the S&P lost 0.9% to 2095 and the Nasdaq fell 0.8%.

Freefall

What began with a technical trigger for the ASX200 has since deteriorated into freefall as investors across the globe exit government bond positions. The benchmark for this sell-off is Germany, as representative of the stronger members of the eurozone.

Mario Draghi indicated after the ECB policy meeting on Wednesday night that he had no intention of upping the ante on what is already an extensive QE program, and at the meeting the ECB lifted its 2015 eurozone inflation forecast to 0.3% from 0.0%. This implies that if anything, in due course the QE program will be reduced as the eurozone economy improves.

So call the sell-off in German bonds a form of pre-emptive “taper tantrum”, brought about by a very overcrowded market. Throw in the fact US investors are now largely resigned to a Fed rate rise this year, with specific timing no longer important, and it just comes down to who’s going to blink first in the US bond market. It is a given that US bond rates will rise when the Fed hikes its cash rate but markets move ahead of such developments, so when to bail?

Well, Germany seems to have forced the hand.

If a 20 basis move up in the German ten-year rate on Wednesday night was the butterfly, the typhoon yesterday was a 2.4% drubbing for the Australian utilities sector on the ASX. All other sectors (bar tiny info tech) were down around the 1.5% mark, which is implicit of “Sell Australia” or simple index selling and here the technicals also contribute. But all other sectors represent at least some opportunity for growth. Utilities, on the other hand, are the chug-along cash generators – not offering a lot in capital appreciation but providing a nice steady yield.

It was yield that took us up and it is yield that is bringing us down. Foreign investors are not waiting around to see if the US ten-year can hit 3% or if the Fed announces a rate rise, whichever might come first. They are selling their peripheral yield plays, established solely on the basis of rate differentials between Australia and the rest of the world, and the premiums quality Australian stocks offer above government paper.

At just above 5500, the ASX200 is down 4.7% from last Friday’s interim high and 8.6% from April’s post GFC high of not quite 6000. This is exactly the sort of move Wall Street has been looking for, almost pleading for, for itself the past couple of years of new all-time highs. It may not be very comforting downunder, but in historical market terms it is typical, very healthy for a bull market, and provides investors with a fresh opportunity.

Particularly if that opportunity has been missed up to now.

Closer to Home

If we leave global bond rates aside for a moment, yesterday’s domestic data were enough to inspire selling anyway. That is unless we take weak Australian data as increasing expectations of another RBA rate cut, which would offset some of that global interest rate differential squeeze.

Economists were forecasting 0.3% growth in Australian retail sales in April. The forecast takes into account April was before the last RBA rate cut and ahead of the federal budget release. So at 0.0%, it was a bit of a shocker. Economists can only assume that Australian consumers were so petrified about what Mr Hockey might deliver, given his previous effort, that they spent April hiding in the cupboard with all their cash clasped in their shaky hands.

It is very likely we’ll see a better sales result for May. But yesterday also featured another shocker, in the form of the April trade balance.

Forget Wednesday’s positive March quarter GDP result. That’s ancient history. It told of stronger than expected export volumes but given spot commodity price falls take a while to flow through to forward trade contracts, what it did not fully reflect were lower commodity prices.

Australia’s trade deficit widened in April thanks to a 5.7% in (the value of) exports and a 3.9% rise in imports. Iron ore exports fell 13% and coal exports fell 22%. Part of the plunge in coal export value can be attributed to the wild east coast weather in the month, closing ports, but the other part is prices, as is the case for iron ore.

The good news is that the lag in movement of contract prices from the movement of spot prices probably means April represents the nadir for iron ore pricing, and from here on the iron ore price rebound should flow through. Coal prices have seen little recovery.

The Australian economy needs the non-mining sectors to take the baton as the resource sector suffers the double-whammy of declining investment and lower commodity prices. Consumers are an important element. If April’s numbers are anything to go by, the prognosis for the Australian economy is bleak. Cue Stephen Sondheim:

Where are the clowns? There ought to be clowns.

Greece

And speaking of records, the broken one was still scratching away last night.

“Shocking, provocative, disgraceful and dishonourable”. No, this is not a description of Sepp Blatter. This was the response from members of Greece’s governing Syriza party when prime minster Alexis Tspiras showed them the reform ultimatum Greece’s creditors had handed him – deemed requisite for Greece to receive its next bail-out tranche.

“Such extremist proposals cannot be accepted by the Greek government,” Tsipras is quoted as telling his associates. “Everyone must understand that the Greek people have greatly suffered over the last five years and some have to stop playing games at their expense”.

Earlier this week, Tsipras assured IMF chief Christine Lagarde that Greece had the money and would make good on its E300m payment due tonight. Last night Athens informed the IMF this would not be the case. Instead, all four June payments will be bundled and the total of E1.6bn will be paid at the end of the month.

While such bundling has been suggested before now, this sudden shift has been taken as representing an angry backlash from Tsipras regarding the so-called austerity ultimatum. Commentators are suggesting a default has just become a little more likely.

And so it goes on.

Wobbly Wall Street

European stock markets traded lower on the latest development in the Greek drama and sentiment carried across the pond. News also came through that the IMF had cut its 2015 US growth forecast to 2.5% from 3.1% and that Christine Lagarde had told her chum Janet Yellen that the Fed should not raise this year.

But Yellen has already said it will, and last night’s US economic data provided another reason to believe it must.

Last night US March quarter productivity growth was revised to a negative 3.1%. Low productivity leads to higher wages. Higher wages lead to inflation. Inflation leads to a rate rise.

So there was cause enough for US stock indices to fall last night, but realistically the backdrop of bond market volatility is finally giving Wall Street the jitters. Last night the German ten-year yield came back a whole 5 basis points to 0.84%, allowing the US equivalent to fall back 6 basis points to 2.31%. But the seed is now sown, and with US jobs numbers out tonight, it makes sense for bond traders to square up beforehand.

The Dow has now fallen back through 18,000 and the S&P through 2100. Not that this hasn’t happened more than once already this year, but given what’s been going on in the Australian market, one feels something has to give on Wall Street fairly soon.

Commodities

No one was prepared to take any bets on US jobs on the LME last night either. Throw in Greece and the IMF cut to its US growth forecast and all base metal prices closed lower. Cooper led the charge with a 1.4% fall.

Ditto in oil markets, although for oil markets there is the added expectation of tonight’s OPEC meeting not bringing any cuts to production quotas, thus inspiring pre-emptive selling. West Texas fell US$1.63 to US$57.98/bbl and Brent fell US$1.66 to US$62.10/bbl.

Iron ore doesn’t pay much attention to such things. It’s up another US90c to US$63.50/t.

Gold fell US$8.50 to US$1176.10/oz. A 0.7% fall is not particularly remarkable, but last night gold broke out of its long-standing trading range. Goodbye 1200, hello 1100.

Commodity price moves leant little to the US dollar last night, as it ticked up only slightly on its index to 95.51. This means the 1.2% fall in the Aussie over the past 24 hours to US$0.7688 is all about yesterday’s data shocks, and subsequent expectations of another RBA rate cut ahead.

Today

The SPI Overnight closed down 17 points or 0.3%.

With the Dow down 170 and the futures down 17, one would normally assume a weak session today. I’m going to stick my neck out, however, and suggest we close higher today. Wall Street is following, not leading, global bond rates fell back a bit last night, and yesterday in this Report I said: “Maybe the day to buy is when the SPI Overnight closes down.”

But then again I wouldn’t be at all surprised if at 4.00pm we’re down another percent.

Australia’s construction PMI is out today, and S&P/ASX will announce its quarterly index changes, which may affect some non-macro argy-bargy amongst affected stocks.

US jobs tonight.

Long weekend for most of Australia. The ASX will be closed on Monday.
 

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