Tag Archives: Currencies

The Overnight Report: Love That Bad News

By Greg Peel

The Dow closed up 177 points or 1.0% while the S&P gained 1.0% to 2147 and the Nasdaq rose 1.5%.

Seeking the Bottom

If you were a typical sports commentator, you’d say yesterday’s session on the local market was a game played in three halves.

It was expiry day for September quarter futures and index options, which can be blamed for early volatility that saw the ASX200 down 25 points very briefly before recovering to be only slightly down. That was the first half.

The second half saw the release of the jobs numbers late morning.

If we’re going to talk good news and bad news, yesterday’s local employment data for August provided a feast.

The good news is the unemployment rate fell to 5.6% from 5.7%. The bad news is 3,900 jobs were lost when economists had forecast a 15,000 gain. The decrease in the unemployment rate came courtesy of a decrease in participation, implying more people have given up finding work.

The good news is the loss of 3,900 jobs breaks down to a decrease of 15,400 part-time jobs and an increase of 11,500 full-time jobs. This mix bucks the trend of past months in which net job gains have all been about increases in part-time positions as full-time positions fell. But the bad news is this switch did nothing to improve the “underemployment” rate – the number of people who have jobs but would like more hours – which rose to a record 8.7%. As a consequence, hours worked fell by 0.2% to be up only 0.7% year on year.

The good news is these data justify an RBA rate cut.

It looked like the algos were in full swing on the data release given an initial plunge in the index (lower unemployment equals RBA rate cut less likely) followed by an equally sharp snap-back (fewer jobs, lower participation, higher underemployment, fewer hours worked equals rate cut more likely).

It pays to read the fine print before barging in, but no one’s told that to the computers yet.

From that point the dust settled, and the index proceeded to track a straight-line rally toward a close of up 12 to end the third and final half.

The low of the day was 5204, which is very close to technical support at 5200, but also an index option strike price and thus a magnet on expiry day. But if we’re trying to determine at what point the market has sold down yield stocks on Fed rate hike fears, we have perhaps found it in the banks, which rose 0.6% on the day to provide the bulk of the upside, but not in utilities and telcos, which continued to fall by 1.1% and 0.9% respectively.

The biggest winner on the day was materials, up 0.9% on the bounce in base metal prices, and the biggest loser was energy, down 1.2% on the lower oil price. While commodity prices are also under the spell of Fed policy, the metal price bounce was attributed to stronger Chinese data and the oil price drop was attributed to US inventory moves. Thus in both cases the fundamentals of demand-supply outweighed the esoterics of central bank intervention.

Today is another day, and after last night it looks like a September Fed rate rise is off the table once more. The futures are suggesting up 33 points. Will we finally see some support come in for beaten down yield stocks, or has that ship simply sailed?

The Growth Cycle

US retail sales fell by a greater than expected 0.3% in August to mark the first decline in five months. As the US economy is consumer-driven, retail sales are an important growth indicator.

But to add to the woes, industrial production fell 0.4% having risen in the past two months, the producer price index moved 0.0%, the Empire State activity index remained in contraction and expansion slowed for the Philly Fed activity index.

As has often been suggested by Wall Street commentators, if interest rates had already returned to normal by now the Fed would be talking rate cuts, not rate hikes. But all talk is of rate hikes and their timing, and on last night’s data it is assumed (until it isn’t again) September is off the table.

And maybe December too. Pass the champagne.

So the US stock indices rallied on the bad news is good news theme. However, the extent of the excitement over no rate hike is clouded yet again by another 3.4% jump in Apple shares – the third consecutive daily gain of around 3%.

The first two gains were courtesy of unexpected record sales for the new iPhone7. Last night’s gain came on news the iPhone7 Plus – same as the iPhone7 but with power steering and seven air bags – has sold out.

So Apple yet again led all three major stock indices higher, and yet again dragged other Big Tech names along with it. The sudden interest in Big Tech is not about the Fed not hiking, but about the Fed hiking eventually one way or the other. One by one equity strategists across the globe are suggesting it’s time to exit the search for yield and re-enter the search for cyclical growth. Record sales of iPhones (in contrast to the overall US August retail sales result) suggest Big Tech is a solid and, given these companies are now long established, safe place to be.

So just how much of last night’s rally can we really attribute to bad news is good news? Consider that the US dollar index fell, as one would expect, but only by 0.1%. Consider that gold dropped US$8.50/oz when it should have gone the other way, and that the US ten-year bond yield is up one basis point at 1.70% when it should have fallen.

While the stock market will remain its volatile self, particularly at this time of the year, other markets appear to be suggesting there can’t be much more to gain even if the next Fed rate hike is pushed further out in time. Might as well pack the bags now.

Commodities

And then we can look at commodities. West Texas crude duly recovered, but is only up all of US3c at US$43.71/bbl.

Having jumped up on Wednesday night thanks to China, base metal prices were all down 0.5-2%, except copper which held its ground, when no rate hike suggests the opposite. But again, it’s a fundamental issue – weak US sales, industrial production, regional activity…why would this inspire stronger base metal prices?

Iron ore is unchanged at US$55.50/t.

Gold is down US$8.50 at US$1314.10/oz.

The US dollar index is down only 0.1% at 95.25 but the Aussie has leapt back 0.6% to US$0.7516.

Today

The new December SPI Overnight closed up 33 points or 0.6%.

The changes to the S&P/ASX index components come into effect today so the index trackers will be busy. Following from yesterday’s local expiry it’s the quadruple witching expiry on Wall Street tonight, the August CPI will be released.

Rudi will make contact with Sky Business at around 11.05am, probably, via Skype-link, to discuss broker calls.

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The Overnight Report: Appletised

By Greg Peel

The Dow closed down 31 points or 0.2% while the S&P was flat at 2125 as the Nasdaq rose 0.4%.

Finally

Yesterday the local market finally decided enough is enough, at least for the time being. Despite the Dow falling 250 the ASX200 eked out a small gain, supported by the fact the local market has been leading global fear of a Fed rate rise, not following it.

The index has fallen over 7% from its most recent high when Wall Street has managed about 3%. The irony is, the US Fed funds futures market is still only pricing in around a 20% chance of a rate hike next week. If we don’t get one, do we go rushing back up again?

Or has reality finally bitten for the likes of the infrastructure stocks, REITs and telcos which have done nothing wrong other than to have proven too popular among desperate yield seekers? If there is no Fed rate hike next week, the odds of a December hike firm considerably. Is there any point in buying these names back up in the meantime?

Well yes there is – reliable yield – but perhaps the market has now learned what the top end of valuation for yields stocks should be. Yesterday we saw the banks bounce back and Telstra come back strongly, but we still saw selling in utilities. Falls in iron ore and oil prices ensured the resource sectors were the balancing factor on the day.

The other side of the coin is, of course, the support local yield stocks enjoy from local investors thanks to domestic monetary policy. Will the RBA cut again? Economists seem to believe so but the central bank itself is certainly not providing any hints. Were the Fed to raise next week the need for the RBA to cut again is diminished, given the Aussie should fall and thus ease that particular “complication”.

The August rate cut is still being cited as reason for Australian consumers remaining reasonably confident. Yesterday’s Westpac survey showed confidence has inched up again this month by 0.3% following last month’s RBA-inspired 2% jump. At 101.4, the index suggests optimists are just outnumbering pessimists at this time. But we are 8% more confident than a year ago.

Today we see the local jobs lottery, which while rarely much of a stock market mover does play into the currency and RBA policy.

Big Tech

Wall Street also largely stalled last night following three sessions of volatility, which had followed 43 sessions of a total lack of volatility. With the WTI price again falling close to 3%, it was again down to Apple and friends to balance the indices.

Apple had been sold down extensively in the lead-up to the launch of the new iPhone7 on the basis that all along Apple had said the 7 won’t be a lot different to the 6, but wait for the tenth anniversary model iPhone8 next year, that’ll be a cracker! So why would anyone buy the 7?

Because there are just too many Apple zealots out there. Much to everyone’s amazement, the iPhone7 has broken sales records. Having rallied 2.5% on Tuesday night, last night America’s biggest company gained another 3.5%. And along for the ride came all of Apple’s mates, the Big Tech names like Microsoft, Facebook, Amazon and Netflix.

A lot has been said about the TINA trade – there is no alternative. But while TINA largely refers to yield, which is why Wall Street has seen the same stretched valuations for utilities, telcos et al, there is also the matter of where does one go to try to find any growth? “New world” companies are one place, like your Teslas and cloud companies and so forth, but these come with commensurate risk. Dusty old Big Tech has an established track record.

Maybe next year will be more interesting, when, it is expected, some of the bigger “disruptors” will go public, such as Uber and Airbnb.

We recall that a week ago, oil prices bounced back hard on the surprise of substantial drawdowns of crude apparent in US weekly inventory numbers. Oil has fallen back this week following the IEA’s downgrade to global demand forecasts, and last night the latest US weekly data were released.

While the numbers showed nothing particularly exciting for crude, the oil market was flummoxed by a big build in products, ie gasoline etc. So an already nervous oil market went into selling mode again. But what also surprised last night was a sudden and sharp bounce in base metal prices.

Commodities

Global stock market weakness these past few sessions has been driven by Fed rate hike fears, which have driven up the US dollar and thus kept a lid on commodity prices. Last night Wall Street stalled at lower levels and the US dollar index slipped back 0.2% to 95.34.

This appeared to provide LME traders with the confidence to buy the metal they would otherwise have bought the night before on the reasonably positive Chinese monthly data dump. Copper, which has gone a whole lotta nowhere for some time, jumped 2.6%.

Aluminium rose 1.5%, zinc rose 1.8%, and lead shot up 3.8%. Alas nickel, which has been sold down heavily in recent sessions, couldn’t catch a bid.

On the other hand, iron ore fell another US70c to US$55.50/t.

West Texas crude is down US$1.29 or 2.9% at US$43.68/bbl.

On the dollar’s dip, gold is up US$4.20 at US$1322.60/oz.

The Aussie is relatively flat at US$0.7569.

Today

The SPI Overnight closed down 19 points or 0.4%, suggesting we take back yesterday’s hard-earned gains.

We have a very big day/night ahead of us for global economic data.

New Zealand will release its June quarter GDP this morning and Australia’s jobs numbers will be out late morning.

Chinese markets will be closed for the next two days.

The Bank of England will hold a policy meeting tonight.

And hang on to your Fed-watching, data-dependent hats, tonight in the US sees numbers for retail sales, industrial production, business inventories, the PPI, and both the Empire State and Philly Fed activity indices.

Among another handful of stocks going ex-div on the local market today, Myer ((MYR)) will release its earnings result.

Rudi will appear on Sky Business today, 12.30-2.30pm.

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The Overnight Report: Oil In The Mix

By Greg Peel

The Dow closed down 258 points or 1.4% while the S&P lost 1.5% to 2127 and the Nasdaq fell 1.1%.

Lined Up

The Dow had rebounded 250 points, the futures were suggesting up 79 and as the opening rotation was completed at 10.30am yesterday on the local market, the ASX200 was up 56 points. And that was the end of it.

The sellers were lined up waiting and wasted no time in sending the index back down on a steady path towards the red. Perhaps these were sellers who were caught in the headlights on Monday and had failed to respond. Or perhaps there is sufficient belief the Australian yield trade no longer deserves a premium.

When we break down the sector action we see only four sectors actually finished in the red yesterday: energy, banks, telcos and utilities. Other than acknowledging Woodside’s dividend, energy is the odd one out. The other three are yield sectors. Oil prices began to slip in Asian trade late afternoon on the release of an IEA report – more on that later – putting pressure on energy stocks.

There was a short-lived blip in the downward trajectory yesterday when China released a monthly data dump showing positive, if not runaway, signs.

Chinese industrial production rose 6.3% year on year in August, above July’s 6.0% and ahead of 6.2% expectation. Retail sales rose 10.6%, above 10.2% in July and beating 10.3% expectation. Fixed asset investment rose 8.1% year to date, ahead of 7.9% to July and beating 8.0% expectation.

But as I have noted before, the local market is not paying that much attention to China at the moment, so down we went again.

It is also notable that the Dow futures had begun to drop in the afternoon as well, likely picking up on the oil theme, suggesting a weak start for Wall Street last night. And indeed, the Dow closed down 258 points, cancelling out Monday night’s rebound. The good news is the Dow was down almost 300 at one stage, so Wall Street did not close on its lows.

Many Factors

The bad news is that given stats released showing record initial sales for the new iPhone, Apple shares rose 2.5% on the day, being the only Dow component to finish in the green. Had America’s biggest company fallen along with the market in general, it would have been quite a bit worse.

Oil was the major talking point on Wall Street last night. The International Energy Agency yesterday cut its 2016 demand growth forecast by 100,000 barrels per day to 1.3mbpd, and 2017 to 1.2mbpd, citing weaker economic growth in China and India.

Oil prices subsequently fell 2.5% which is not that dramatic, probably because there is still an assumption there may be some sort of deal struck at the upcoming OPEC meeting. But all along the weak oil story has been one of a supply glut, while steady demand growth has been assumed. Now that demand is being questioned, it’s another story again.

Other than oil, lingering fears of a Fed rate hike in September are still weighing on Wall Street. This is evident in that fact the US dollar index is up 0.5% at 95.56, gold is down US$9.00 and the US ten-year yield, which did not fall back on Monday night, closed up 6 basis points at 1.73%.

And then there is the Donald Trump factor. Yet again last night a trader suggested on US business TV that the market is concerned about a Trump presidency, particularly now he is closing the gap in the polls to Clinton, and because he publicly lambasted the Fed and Janet Yellen and that is simply not something a president does.

America is back from holidays. It is the month of September. Volatility has returned.

Commodities

West Texas crude is down US$1.09 or 2.4% at US$44.97/bbl.

Nickel was again the big loser on the LME, falling a further 2%. Zinc fell 1%, lead rose 1% and aluminium and copper were slightly weaker.

Iron ore fell US$1.30 to US$56.20/t.

Gold is down US$9.00 at US$1318.40/oz.

The stronger greenback has the Aussie down 1.3% at US$0.7464.

Today

The SPI Overnight closed down 11 points or 0.2%. This muted response to the much bigger fall on Wall Street suggests Australia was leading yesterday’s action and thus we don’t need to double up and follow.

But given current skittish sentiment, anything could happen.

What will happen is Westpac will release its monthly consumer confidence survey today.

July industrial production numbers out of the eurozone will be closely watched.

There is another handful of stocks going ex today.

Rudi will be presenting in front of AIA members (and others) at the Chatswood Club tonight, 11 Help Street. Starts at 7.15pm.

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The Overnight Report: Fedheads Or Fedtails

By Greg Peel

The Dow closed up 239 points or 1.3% while the S&P gained 1.5% to 2159 and the Nasdaq rose 1.7%.

Lemmings

I took an each way bet this time yesterday in suggesting maybe local investors would assume the Australian market had already seen a Fed rate hike-related sell-off and as such look to pick up some bargains, or perhaps we’d simply see “one of those panic 100 point drops we suffer every now and then”. Clearly, panic set in.

At yesterday’s close, fears of a Fed rate hike, surfacing late August, had manifested as 6.1% plunge for the ASX200. That’s 6% wiped off the Australian stock market for the sake of US rates going from 0.50% to 0.75%. At Friday night’s close, the S&P500 had fallen 2.9% for the same reason. Talk about coughs and colds.

But clearly it was a capitulation session yesterday on the local market as the resources sectors, industrials and utilities were sold down by 3%, the banks, healthcare, info tech and consumer discretionary by 2% and the staples and telcos by 1.5%. On such “outperformance”, clearly Woolies and Telstra had already suffered enough.

Yet last night we saw a rebound on Wall Street. And given the futures are up 79 points this morning which, funnily enough, is exactly what they were down yesterday morning, presumably we’ll see a rebound on the local market today as well.

However if we do rebound today, it won’t be because local investors have decided yesterday’s sell-off was indeed overdone given the selling that preceded it and nor will it be because investors have decided 25 bips on the Fed rate is really no big deal in the scheme of things. It will be because another Fedhead came out last night and this time spoke dovishly.

So if we rebound today, it will be because maybe there won’t be a Fed rate hike next week. If there is, one can only assume we’ll go down again, maybe all the way back to our old friend 5000.

And if there isn’t, who’s going to be game enough to buy the market back up ahead of the December Fed meeting, which would solidly firm as a rate hike chance?

But on the other hand…

Last night Fed governor Lael Brainard (sorry, who?) suggested “prudence” is required with regard rate hikes. The Fed governor is an official with a permanent vote on the FOMC unlike the Fed presidents of the various regions who form part of the FOMC on rotation.

Another little-known Fedhead also piped up on the dovish side while better-known Atlanta Fed president Dennis Lockhart suggested a hike would require “serious discussion”.

The good news is we have now entered a Fedspeak blackout period ahead of the Fed meeting. They will all now have to shut the hell up. The bad news is we still have over a week to wait. It has been suggested Brainard was sent out last night to “calm” the markets, following Wall Street’s big plunge on Friday night. If only these idiots could just keep their bloody mouths shut in the first place.

There is quite a lot of US data to be delivered between now and the Fed meeting so no doubt they will have the ferry swaying from side to side. Interestingly the Bank of Japan will also hold a policy meeting next week – on the day before the Fed statement is released that night.

On another interesting note, it was suggested by a Wall Street trader on US business TV this morning that Friday night’s sell-off was not just about the Fed, but also about the latest North Korean nuclear missile test vis a vis the thought of Donald Trump being the man with the US launch codes.

And on a final interesting note, Eric Rosengren’s comments on Friday night sparked the sell-off in US stock markets, a rise in the US dollar, a plunge in gold and a rally in US bond yields. Last night Brainard’s comments caused a rebound in US stocks and a dip in the US dollar, but gold and the US ten-year yield are unmoved.

Commodities

West Texas crude fell 3% on Friday night and last night rose US33c or 0.7% to US$46.06.

Base metal prices all fell bar nickel but last night only copper managed a slight bounce, while aluminium fell another 0.5% and lead and zinc fell 1.5%, and nickel copped a 2.5% hiding.

Iron ore is unchanged at US$57.50/t.

Gold is as good as unchanged at US$1327.40/oz.

The US dollar index is down 0.2% at 95.13 and following its big plunge on Friday night, the Aussie is up 0.3% at US$0.7565.

Today

The SPI Overnight closed up 79 points or 1.5%.

China will release its monthly industrial production, retail sales and fixed asset investment numbers today.

NAB will release its local business confidence survey.

A handful of stocks go ex today, including CSL ((CSL)) and Healthscope ((HSO)).

Rudi will link up with Sky Business around 11.15am, through Skype, to discuss broker calls.

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The Monday Report

By Greg Peel

Fed Sell-Off

There’s little point in trying to over-analyse the drop on Friday in the Australian market given Wall Street fell 2.5% on Friday night. But let’s make a comparison.

The Australian market loped along through almost the entire August result season doing very little on a net index basis. Only towards the end of the month did we see the market begin to fall, not because of earnings results but because of rising fears of a Fed rate hike in September.

As we entered September, US economic data releases began to look weak – the August jobs number being a case in point – hence markets relaxed a little on the assumption the Fed would not be hiking this month. But despite the weak data, Fedhead rhetoric continued to be hawkish. The feeling grew that weak data or not, the Fed was going to raise. Even if only to save face.

Australian yield stocks have been carrying a premium for some time now, not just because they are attractive to local investors but because they are attractive to foreign investors who otherwise are looking at zero to negative returns available on alternate investments. Australia’s comparatively high dividend yields are very attractive not only compared to US interest rates, but compared to US dividend yields. On Wall Street, 2% is considered an attractive return.

So whether or not anyone believed the Fed would raise, fear took hold. As a consequence, a trickle of selling on the Australian market has largely turned into a flood in September, and we can pretty much attribute the selling to Fed policy, which has implications not just for yield differentials but for commodity prices and beyond.

The ASX200 hit its recent peak on August 24. By Friday’s close it had fallen 4%. The S&P500 hit its recent peak – an all-time high – on August 15. Prior to Friday night’s session, it had fallen 0.4%.

Do you see where I’m going here?

Of Straws and Camels

On Friday night Boston Fed president Eric Rosengren joined the chorus of Fedheads suggesting the US economy was sufficiently in balance to imply gradual rate increases are appropriate. The Dow fell 394 points or 2.1%, the S&P fell 2.5% to 2127 and the Nasdaq fell 2.5%.

It was the first move in excess of 1% for the S&P500 since July 8. But we have had a procession of Fedheads coming out to make the same suggestion as Rosengren these past sessions with little impact, so why, all of a sudden, does Wall Street tank on one more similar comment?

One reason is that Rosengren has up to now been among the doves on the FOMC. And he has not said anything much of late. It is not insignificant for him to change his tune. But most likely Rosengren simply was the straw that broke the camel’s back. For the past month Wall Street has been saying they wouldn’t, would they? They might, could they? And even though there are still plenty of people insisting they won’t, well, maybe they just might.

Wall Street opened lower on Friday night and just kept on going, tracking a very straight line downwards to the close as more and more traders joined in. Many of those traders have only just come back from vacation. But there was no real panic.

There was no real panic because many have been expecting exactly this, whether it be triggered by a September rate rise or a December rate rise. The US indices have been sitting around all-time highs for no real reason other than central bank policy dictates there’s no alternative. Not only have traders been waiting for such a move, they’ve been looking forward to such a move.

At this stage Wall Street has fallen 2.5%. Not such a big deal. There could be more selling, but there are plenty of buyers lined up for just such an opportunity.

To underscore the fact Friday night was all about Fed policy speculation, the US dollar index rose 0.3% to 95.35, gold fell US$10.40 to US$1327.80/oz and the US ten-year bond yield rose 6 basis points to 1.67%.

From Australia’ perspective, the SPI Overnight closed down 79 or 1.5% points on Saturday morning. If accurate, that would take us down towards the next level of technical support for the ASX200 at 5250. It would not be surprising, given recent history, were we to see a much bigger capitulation day today – one of those panic 100 point drops we suffer every now and then.

But it would also not be surprising if we saw the buyers move in sooner rather than later. As I noted, the index has fallen 4% to now on Fed rate hike fears. The S&P500 had fallen 0.4%, and now has dropped 2.5%. Is Australia not already ahead of the game?

Commodities

Higher US rates implies a stronger US dollar and thus pressure on commodity prices.

On Friday night West Texas crude fell US$1.58 or 3.3% to US$45.73/bbl.

In London, lead dropped 1.5%, aluminium and zinc around 1% and copper around 0.5%. Nickel held its ground.

In typical independent fashion, iron ore rose US10c to US$57.50/t.

As noted, gold fell 0.8%.

The good news, on the other hand, is that the Aussie fell a solid 1.3% to US$0.7537.

The Week Ahead

Is the Fed data-dependent, as it claims to be, or not? Soft jobs, weak PMIs, low inflation – none of these in the past couple of weeks have silenced the chorus of hawkish Fedspeak. If it does actually remain data-dependent, then there will be a lot to consider towards the end of this week.

Thursday night brings industrial production, retail sales, business inventories, the PPI, the Empire State activity index and the Philadelphia Fed activity index. Friday night brings the CPI and consumer sentiment.

Friday night is also the quadruple witching equity derivative expiry.

The Bank of England will hold a policy meeting on Thursday night, but given its extensive easing at the last meeting and the fact the UK seemingly has shrugged off Brexit there is no change expected.

China will release industrial production, retail sales and fixed asset data tomorrow, ahead of public holidays on Thursday and Friday.

New Zealand will release its June quarter GDP on Thursday.

In Australia we’ll see NAB business confidence tomorrow, Westpac consumer confidence on Wednesday and the August jobs numbers on Thursday.

On Friday the changes to the components of S&P/ASX indices, announced earlier in the month, will become effective.

On the local stock front, we’re still working our way through the ex-dividends. On Thursday, earnings results are due from Myer ((MYR)) and OrotonGroup ((ORL)).

Rudi will appear on Sky Business on Tuesday, through Skype-link, to discuss broker calls around 11.15am. He'll be in the studio on Thursday, 12.30-2.30pm, and does the Skype-link again on Friday, probably around 11.05am.

On Wednesday evening he'll present to the Chatswood chapter of the Australian Investors Association, at the Chatswood Club at 11 Help St. Starts at 7.15pm.

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

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The Overnight Report: Central Bank Tango

By Greg Peel

The Dow closed down 46 points or 0.3% while the S&P lost 0.2% to 2181 and the Nasdaq fell 0.5%.

Sell Australia

There were a lot of stockbrokers and traders running around yesterday morning shouting “What the hell just happened?” As the opening rotation concluded on the ASX, the index was down 66 points.

Initial selling took the ASX200 down through the 5400 support level so at that point technical selling was triggered. And of course, as has been the case all week and will continue to be the case, albeit on a diminishing basis throughout the month, the index started with an ex-dividend handicap.

But it appears the selling began in the futures, thus triggering selling in the physical market. A big Sell Australia order hit the boards, most likely from offshore. As it was, this order provided a re-basing of the index from which point we could say the session featured a 28 point rally.

Australia’s July trade data were released yesterday and they looked good at first glance. Exports were up 3% on better commodity prices and imports were down 0.4% on the stronger Aussie. But it was notable that one small and typically volatile component of exports – gold sales – had made a difference in leaping 21%.

Take out gold and exports were still up 2%, and that number should continue to be supported in coming months given big moves up in coal prices and the ramp-up of production and sales of LNG. Bear in mind there’s always a lag effect as contract prices are set before actual sales are completed.

China also released its trade data yesterday, in this case for August, as it only takes Beijing a week to tally up the trade activity of 1.4bn people or whatever the count is these days. Surprisingly, imports rose by 1.5% year on year having fallen 12.5% in July, when economists had expected a 4.9% fall. It was the first monthly rise in imports in almost two years.

Within that imports number was plenty of coal and iron ore. Exports fell 2.8% year on year, but again this was a better result than the 4.0% decline anticipated.

The interesting point about the Chinese trade data, or any Chinese data for that matter, of the last few months is that they’ve generally been pretty bad but haven’t caused any sort of angst for the Australian market. That’s because the assumption is bad numbers simply imply further stimulus from the PBoC and/or Chinese government. So how do we interpret good numbers?

Well if bad numbers evoke a benign response then presumably good numbers do too – it’s just a balance of how much stimulus is required. And as I suggested, we could argue the ASX200 rallied over the course of yesterday as both the local and Chinese trade numbers were published, just from a lower starting point.

All sectors took a beating yesterday, as one would expect from index selling, with the exception of healthcare, thanks to a solid result and 11% share price jump for Sigma Pharmaceuticals ((SIP)). The biggest losses were reserved for the resource sectors which of course contain some of the bigger market cap names. Iron ore and gold prices were also weaker, but a jump in the oil price could not save energy. Consumer staples also took a beating but Woolies went ex.

Another 13 point drop in the futures this morning suggests this bout of weakness is not yet over. On the back of an increased chance of a Fed rate rise in September (if Fedspeak is anything at all to go by), a decreased chance of another RBA rate cut (if we assume the GDP to be too strong), nothing yet out of Japan, perhaps not so much out of China, and as was apparent last night, nothing out of the ECB, the net central bank influence on the Australian market is presently negative, or at least potentially negative.

Not Even Discussed

A rate cut wasn’t expected from the ECB last night but there was an assumption something would be suggested, particularly an extension to the QE program which is scheduled to end in March. The eurozone economy is not exactly firing and Brexit remains a threat.

As it was, Mario Draghi said in his press conference that a QE extension “wasn’t even discussed”. That was enough to send the euro flying.

And enough to foster weakness on Wall Street. The major indices were further hit by a slump in Apple shares prompted by early reviews of the new iPhone7 failing to excite.

The counterpoint was a solid rally in energy stocks on the back of another 2.5% jump in oil prices. If we consider that the inventory data released on Wednesday night hit the wires after Wall Street’s close, oil prices were up over 5%.

There are two organisations which each week publish US oil inventory data – the American Petroleum Institute and the Energy Information Administration -- a day apart. Half the time the two sets of data don’t even come close to matching. But there was no doubting the correlation last night as the EIA numbers suggested the biggest weekly drawdown of crude since 1999.

This result left the oil market pondering whether there is a cyclical indicator here – have we finally reached the point where the supply glut is easing? The problem is, there was a hurricane in the Gulf, which cut off supply. So it’s difficult to tell. Now that Gulf supply is running again, next week’s data will be closely watched.

Commodities

Over 24 hours West Texas crude is up US$1.17 or 2.5% to US$47.31/bbl.

Once again there was not a lot of action in base metals and moves were again mixed. Nickel rose 1% and zinc fell 0.5%.

Iron ore fell US90c to US$57.40/t.

While the US dollar index was up only slightly at 95.04, the ECB’s lack of action was enough to send gold down US$6.80 to US$1338.20/oz.

The Aussie is down 0.4% at US$0.7639.

Today

The SPI Overnight closed down 13 points or 0.2%. The next level to watch for the ASX200 is 5350.

Australian housing finance data are out today and China will release inflation numbers.

There are only a handful of small ex-divs today and Premier Investments ((PMV)) will release its earnings report.

Rudi's link-up with Sky Business via Skype has been delayed this morning and should occur around 11.45am.

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The Overnight Report: Modestly Moderate

By Greg Peel

The Dow closed down 11 points while the S&P was flat at 2186 and the Nasdaq rose 0.2%.

Happy Anniversary

At 0.5% quarter on quarter and 3.3% year on year, Australia’s June quarter GDP growth was as good as in line with expectations and marked 25 years of uninterrupted growth. Bearing in mind the last recession was one we had to have.

It was an unusual start to trading on the local bourse yesterday given the futures said down 10 points and the ASX200 shot up almost 30 points from the open. Then the GDP numbers came out.

You’d think we’d all be thrilled with the sort of growth number any major developed economy would swoon over but no, like the strong Aussie, it’s a complication. Can the RBA justify cutting the cash rate further on this growth number? Low inflation justifies a cut, but the GDP would suggest otherwise.

The Commonwealth Bank economists, for one, are still tipping a November cut to 1.25% but they do make a couple of points from the breakdown of yesterday’s numbers. One is that government infrastructure spending is picking up, which despite Labor’s sad attempt to negatively politicise is just what the RBA wants to see – fiscal support to take the pressure off monetary policy.

Another is that weak wages growth, which is keeping the lid on inflation, is concentrated in the mining states. This suggests the issue is cyclical and not structural, such that as the decline in mining investment abates, so too should wages in the industry stop weakening any further.

Either way, the market didn’t like the strong result, even though it came in pretty much on the money. The index closed the session up only ten points. Funnily enough, the consumer sectors did like numbers as they were the stand-out performers on the day. Retailers like rate cuts, but then they also like economic growth. The offset was energy.

Oil prices were a little lower but the 5% fall in Santos ((STO)) was the main drag on the sector. According to the AFR, the Shanghai Stock Exchange is questioning why a Chinese company took an 11.7% equity stake this year in an Australian company booking huge losses.

Moves in other sectors were benign.

Oh Please

It was another dull old session on Wall Street last night. Supposedly everyone is now back to work after their summer vacations but while volumes have picked up from the previous week, they remain tepid at best.

The highlight, supposedly, of the day was the release of the Fed Beige Book, an anecdotal assessment of the state of the economies of each of the Fed regions. Growth in each region was deemed to be either “modest” or “moderate”, not that anybody much knows what that means or what the difference is. And growth has been M&M in every Beige Book pretty much since about the time QE started.

As I’ve said before, never has a book been so aptly named.

Wall Street scoffed at the Beige Book and scoffed again when a couple of Fedheads came out to tout the usual “it’s time for a rate hike” spiel. No one expects a September rate hike unless it has come to the point the Fed decides to man-up and actually lead the market rather than meekly follow it.

Testament to a slow news day on the Street is that all anyone could seem to talk about was the new iPhone, which everyone agrees is little different to the old one. Still, Apple shares closed higher on the day and hence the Nasdaq once again snuck quietly to a new record high.

Commodities

What Wall Street missed was the late release of a weekly oil inventory report that showed a bigger drawdown than was expected (we play this game every week), hence in electronic trading West Texas has shot up US$1.26 or 2.8% to US$46.14/bbl.

A strike in Chile provided a bit of a boost for the copper price last night but the sellers were lined up for any sign of life and thus copper closed up only 0.7% in London. Nickel rose 1% and lead fell 1.5% in yet another mixed session.

Iron ore fell US30c to US$58.30/t.

After Tuesday night’s pop, gold has fallen back US$4.40 to US$1345.00/oz as the US dollar index bounced off technical support and is up 0.1% at 94.96.

The Aussie is subsequently off 0.1% at US$0.7673, with the in-line GDP result failing to make any impression.

Today

The SPI Overnight closed down 18 points or 0.3%. Not sure why, unless traders expect a response to last night’s hawkish Fedspeak. If accurate we may once again test support for the ASX200 at 5400.

Otherwise we’ll see trade numbers today both locally (July) and from China (August).

Tonight the ECB will hold a policy meeting.

Quite a few ex-divs today, including Woolworths ((WOW)), while Sigma Pharmaceuticals ((SIP)) will release its earnings report.

Rudi will appear twice on Sky Business today. First from 12.30 to 2.30pm and again during Switzer TV between 7-8pm.

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The Overnight Report: Out Of Service

By Greg Peel

The Dow closed up 46 points or 0.3% while the S&P gained 0.3% to 2186 and the Nasdaq rose 0.5%.

Not with a Bang

Glenn Stevens' last monetary policy statement as RBA governor, released yesterday, was benign, and little different to the July statement. After the May rate cut economists were rapidly pencilling in August as the next cut ahead of more in 2017, but by yesterday morning no one was expecting an August cut anymore.

Inflation, or lack thereof, had been the big issue back in May but as we await the release of the June quarter GDP result this morning, the fact it could be as high as 3.4% growth rather puts the need for further stimulus into question, low inflation or not.

Yesterday saw the release of the last component of GDP, being the current account. The current account deficit surprised economists by dropping down to $15.5bn from the March quarter’s $20.8bn when $20.0bn was expected for June, but then the March quarter result was revised down to $14.9bn so what’s the point in being surprised? In fact the deficit widened.

I use the word “fact” advisedly.

The terms of trade in theory rose 2.3% in the June quarter thanks to stronger commodity prices but it’s still down 5.7% from a year ago. Yesterday’s data did not alter economists’ expectations that the pace of growth will have slowed to around 0.5% in June from a shock 1.1% reading in March, but that annual growth will remain an envy-of-the-developed-world 3.4% or thereabouts.

It was a lacklustre session on Bridge Street following no lead-in from Wall Street but clearly there was some give-back after Monday’s surprising surge. Yield stocks that were hot property on Monday eased back. The banks dropped 0.5% for example.

Monday’s rally was all about the US jobs report which apparently killed off, many had decided, the chance of a September Fed rate hike. Yesterday we saw local rate considerations at work. When the current account numbers came out, the ASX200 slipped, likely because they did not alter strong GDP expectations and therefore provided no reason for an RBA rate cut.

After recovering thereafter, the ASX200 slipped again in the afternoon when the RBA statement offered no hint there may have to be another rate cut sometime soon.

The Aussie didn’t do much, given no one had expected anything from the RBA. But that all changed overnight. Glenn Stevens is probably relieved he’s getting out.

No Chance

The Dow initially dropped 40 points from the opening bell last night on the release of the US services sector PMI for August, which showed a sharp drop to 51.4 from 55.5 in July. It’s the lowest reading since February 2010.

But the weakness was short-lived as those investors relieved by weak data, which suggest the Fed will not be hiking in September, moved in and started buying.

The US dollar index plunged 1.0% to 94.84. No doubt to Phil Lowe’s frustration, the Aussie has shot up 1.3% to US$0.7683. The US ten-year bond yield dropped 5 basis points to 1.54% and gold leapt US$22.70 to US$1349.40/oz.

Forget September, we can now all spend three months debating the possibility of a Fed rate rise in December.

We’re back in TINA mode – one might as well buy stocks as there is no other alternative. The Nasdaq hit a new record high last night. It’s hard to find a Wall Street commentator who doesn’t like the high-growth tech sector at present. It’s also hard to find anyone who likes the high-yield sectors such as utilities and telcos, other than the people who keep buying them. Where else can one source income? TINA.

The story in Australia is very similar.

Commodities

A big drop in the US dollar should be good news for commodity prices, but there was little evidence of it last night. Other than in gold of course, but that’s not a commodity.

Oil prices continued to drift lower after the disappointment of the Saudi-Russia announcement of, effectively, no production freezes probably ever. West Texas crude is down US21c at US$44.88/bbl.

Trading on the LME continued to be mixed and largely sedate, although zinc did drop 2% and lead rose 1% while the others did nothing much. Base metals continue to be influenced by individual demand/supply equations.

Iron ore fell US20c to US$58.60/t.

Today

The SPI Overnight closed down 10 points or 0.2%.

The local GDP result will be out late morning.

The Fed will publish its Beige Book tonight which will no doubt be stuck on the usual assessment of modest or moderate growth across Fed regions.

Among another handful of ex-divs today on the local market, Brambles ((BX)), Cochlear ((COH)) and Qantas ((QAN)) stand out.

Rudi will be hosting Your Money, Your Call Equities tonight on Sky Business, 8-9.30pm.

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The Overnight Report: Labor Day Lull

By Greg Peel

Odd Jobs

The difference between 151,000 jobs added in the US in August and the 185,000 predicted led to a 1% rally for the Australian stock market yesterday. Go figure.

The point is Australian stocks sensitive to US interest rates – resource companies producing US dollar-denominated commodities and yield payers attractive to US investors – had been sold down last week on building speculation, post Jackson Hole, that the Fed was moving to raise its cash rate at the September FOMC meeting. The shortfall in jobs had many, but not everyone, in the market now assuming September is off the table.

So, as you were. Everything that was sold down came roaring back yesterday – the resource sectors, the banks, the telcos – to ensure the ASX200 made it comfortably back above critical support at 5400. Now we wait for the actual Fed meeting.

It was not, however, a good day for all sectors.

We’ve seen it in medical services, we’ve seen it in childcare, we’ve seen it in vehicle leasing and now we’ve seen it in residential aged care. Adding insult to the injury of disappointing earnings results last month, yesterday the three listed residential aged care stocks were absolutely trashed on the implication of likely new government regulations. At one point Estia Health ((EHE)) was down 30%, having already fallen a long way from its pre-result peak, and peers Japara Healthcare ((JHC)) and Regis Healthcare ((REG)) were not faring much better.

At the final bell each closed down 12%, 15% and 17% respectively. It was a capitulation. Not helping either recently was news the founder of Estia had sold his entire stake post-result.

In economic news yesterday, Australia’s service sector PMI went the same way as manufacturing PMI and collapsed, to 45.0 in August from 53.9 in July. Given tomorrow will see a GDP print in the order of 3% growth, we’ll also ignore this one.

Meanwhile, company profits rose over the June quarter by a greater than expected 6.9%, to be flat year on year. Manufacturing was the star performer with a 23% leap (See: PMI joke?) while mining chimed in with 14% thanks to the commodity price recovery. Construction fell 28% because the ongoing decline in resource sector construction out-weighed the residential construction boom.

The June quarter GDP remains on track to be over 3% (annual).

ANZ’s job ads series showed a solid 1.8% rebound in August after a weak July, to be up 8% year on year.

The RBA will meet today and do nothing, for the various reasons I outlined yesterday, and because Glenn Stevens is unlikely to do anything unexpected in his last statement.

Brexit Worries?

Caixin’s take on China’s service sector PMI showed a rise to 52.1 in August from 51.7 in July, in contrast to the official number. Japan still can’t take a trick – its equivalent fell into contraction at 49.6 from 50.4.

The eurozone saw a dip to 52.9 from 53.2 but the star of the show was the UK, which saw a jump back into expansion at 52.9 from 47.4. Once again we say Brexit Schmexit.

The US PMI is out tonight.

Commodities

Oil prices shot up by 5% at one point last night, in a thin market in the absence of the US, as it was reported the Saudis were set to make a “significant statement” at the G20 meeting. The assumption was an agreement between the Saudis and Russia to freeze production.

Prices soon retreated nonetheless when the announcement turned out to be one of agreeing to set up a working group to monitor the oil market. Led, one presumes, by Sir Humphrey Appleby. But West Texas crude is still up a net US87c or 2% at US$45.09/bbl.

Elsewhere, commodity markets were largely quiet in the absence of the US. In London, aluminium fell 1% and lead rose 1% but the other base metals moved little.

Iron ore fell US20c to US$58.80/t.

Gold is roughly steady at US$1326.70/oz.

The US dollar index is off 0.1% at 95.77 and the Aussie is up 0.2% at US$0.7584.

Today

The SPI Overnight closed down 20 points or 0.4%, probably suggesting yesterday’s bounce-back was a bit over-enthusiastic.

The last of the local GDP component releases is due today in the form of the June quarter current account, which includes the terms of trade.

As noted, the RBA statement will be released at 2.30pm today and the board will shoot off to the pub to toast Stevo.

There are a few more stocks going ex locally today.

Rudi will appear on Sky Business, via Skype-link, at around 11.15am to discuss broker calls.

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The Monday Report

By Greg Peel

Running in Fear

Fear of a September Fed rate rise had been building in the local market as we moved towards Friday, evident in selling in yield stocks. Things came to a head on Friday with forecasts of 185,000 jobs to have been added in the US in August which, it was assumed, would be enough to force the FOMC’s hand.

Nor did it help that the ASX200 broke strong technical support at 5400 from the opening bell, ensuring a weak session. A brief attempt by the buyers to push the index back was destined to fail and when it was all said and done it was a Friday – always a good day to sell, and this time more so given the US long weekend.

The banks led the selling on a cap-weight basis with a 1.0% fall while telcos and healthcare each fell 2.1% to be joint losers among the sectors. Utilities backed up with 0.9% and industrials, which includes some faithful dividend payers, lost 1.1%. Only the resource sectors finished in the green, slightly, thanks to supportive commodity prices and the fact they’d already had a bad week.

But all is forgiven. The US jobs number fell short, and the futures are suggesting an opening gain of 31 points, which would take the ASX200 back over 5400 and potentially stave off more substantial weakness.

Couldn’t have been worse

As far as US monthly jobs results go, August’s result on Friday night was nothing short of frustrating. At 151,000, the number fell short of 185,000 estimates.

But not that short. The bottom line is, 151,000 is not a number to end Fed speculation one way or the other. Indeed it is a number that has divided economists and ensured we’ll be arguing the case back and forward for another two weeks.

Had the number been in excess of 250,000, as was the case in both June and July, the assumption would be yes, the Fed will raise this month, and now we can all get on with it. Had the number been something like 120,000 we could have said no, clearly the Fed won’t raise this month, and now we can all get on with it, at least until it’s time to start discussing December.

But at 151,000, and an unchanged unemployment rate of 4.9%, half the market is saying yes, it’s still enough, and the Fed has been setting us up for a hike. The other half of the market is saying that a number short of estimates, and a drop-back in wages growth to 0.1% for the month, means no, a hesitant Fed will have an excuse to hesitate once more.

So take your pick.

The various markets took their picks on Friday night, in either direction.

The US dollar index initially plunged on the jobs release, suggesting no hike, before turning around and closing up 0.3% at 95.88. A stronger dollar should be a drag on gold, but gold is up US$11.20 at US$1324.80/oz, suggesting no hike.

The US ten-year bond yield closed up 3 basis points at 1.60%, suggesting a hike. Commodity prices were both up and down. The US stock markets opened up on the news – probably suggesting relief that there would not be a hike, before dropping mid-session as the debate raged, and finally recovering to a modest gain on the day.

The Dow closed up 72 points or 0.4%, the S&P gained 0.4% to 2179, and the Nasdaq rose 0.4%.

Not even a US jobs number day could break the Dow/S&P run of sessions of no move in excess of 1% in either direction, which has now extended to forty.

So how do we interpret these moves? We don’t. We’ll likely just have to wait till September 22.

Commodities

West Texas crude closed up US69c at US$44.22/bbl, suggesting the technical bounce off 43 was more influential than jobs.

Aluminium fell 1.5% but lead rose 0.5% and nickel and zinc rose 1%, with copper off a tad.

Iron ore rose US60c to US$59.00/t.

As noted, gold jumped US$11.20.

With the US dollar index up 0.3%, the Aussie is actually up 0.2% at US$0.7570.

And also as noted, the SPI Overnight closed up 31 points or 0.6% on Saturday morning.

The Week Ahead

US markets are closed tonight. It’s a quiet week thereafter for US data, but the Fed’s Beige Book will be released on Wednesday.

It’s far from a quiet week in terms of Australian data.

Today we’ll see the service sector PMI, along with everyone else except the US, which will publish tomorrow night. We’ll see the local construction PMI on Wednesday.

In terms of other monthly data, today it’s ANZ job ads, on Thursday it’s the trade balance, and on Friday it’s housing finance.

In terms of June quarter data, today we’ll see company profits and inventories and tomorrow the current account, including the terms of trade. On Wednesday the GDP result will be released. Expectations are for an ease-back in quarterly growth to 0.4%, down from March’s shock 1.1%, but for the annual rate to increase to 3.2% from 3.1%.

The RBA will hold a policy meeting tomorrow but no change is likely, given (a) they moved last month, (b) they usually don’t move ahead of a GDP result and (c), there’s no clarity around Fed policy.

The ECB will hold a policy meeting on Thursday, just to add to the fun.

China will release trade numbers on Thursday and inflation on Friday.

On the local stock front, we’ll see out-of-cycle earnings reports from Karoon Gas ((KAR)) tomorrow, Sigma Pharmaceutical ((SIP)) and Xero ((XRO)) on Thursday and Premier Investments ((PMV)) on Friday.

It’s a big week for companies going ex-dividend, acting as a natural drag on the index.

Rudi will appear on Sky Business on Tuesday, via Skype-link, to discuss broker calls at 11.15am. He'll be in the studio twice on Thursday. First from 12.30-2.30pm and again for an interview on Switzer TV between 7-8pm. He'll repeat the Skype-link up around 11.05am on Friday.

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

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Tag Archives: Currencies

The Overnight Report: Love That Bad News

The Overnight Report: Appletised

The Overnight Report: Oil In The Mix

The Overnight Report: Fedheads Or Fedtails

The Monday Report

The Overnight Report: Central Bank Tango

The Overnight Report: Modestly Moderate

The Overnight Report: Out Of Service

The Overnight Report: Labor Day Lull

The Monday Report