Tag Archives: Currencies

article 3 months old

The Overnight Report: Slow And Steady

By Greg Peel

The Dow closed up 16 points or 0.1% while the S&P gained 0.2% to 2166 and the Nasdaq rose 0.5%.

Grafting

The ASX200 posted its eighth consecutive up-day yesterday in rising 28 points. I haven’t seen any referrals to history, but I assume it’s been a while since we’ve seen such a run. The eight days have taken us from a Brexit low of 5197 to yesterday’s close of 5458 – a gain of 5%.

That’s a lot in a week but if we take out the hundred point gain of Monday last week we’re otherwise looking at a steady graft. That Monday was the day the world decided Brexit was no big deal but otherwise, our market, Wall Street and other markets clearly have a feel of “Where else could I put my money?”

Materials slipped a little yesterday to be the only losing sector while gains were mostly even across all other sectors with the exception of energy, up 1.2% as Oil Search ((OSH)) abandoned its bid for InterOil, and consumer discretionary, which gained 1.4%. JB Hi-Fi ((JBH)) was the mover in a sector that has been a little left behind in the rally so far, being one of the most cyclical.

Which brings us back to the question of just how long a rally based on defensives can last. The bounce in commodity prices helped the index back over 5000 pre-Brexit vote and while issues of capital and low interest rates still trouble banks, their yields cannot be ignored. Otherwise, utilities and telcos have been drivers, consumer staples has defied the supermarket wars, although we must remember there are other stocks in that sector, and healthcare has wobbled its way back after various regulatory and Brexit (currency) scares.

To seriously push to new highs – and here we remember that while Wall Street long ago surpassed its pre-GFC high, the equivalent ASX200 high is still 25% away – we will need growth stocks to take the baton. Yield compression in the banks, REITs and infra funds can only last so long before bond proxies become way too expensive.

Bring on the result season.

Grafting

It occurred to me this morning that the original FNArena Overnight Report was only ever written on days in which the Dow moved 50 points or more. That was ten years ago. The reason being that under 50 points there wasn’t really much to talk about – over 50 points obviously something had happened. Nowadays 50 points is a slow day.

The point is that with the odd exception of 1987, the tech wreck wreck and other spurts of volatility, grafting is what stock markets typically did up until the GFC. The financial world was a steadier, safer place. But for the fact there may not be a lot to talk about in an Overnight Report, it would be nice to return to that world.

Wall Street grafted higher again last night without any great conviction. Each move up in both the Dow and S&P is currently a new all-time high. The Nasdaq is back over 5000 and at new highs for 2016 but still below its 2015 high.

The Nasdaq was in the frame last night, outperforming with a 0.5% gain thanks to Japan’s Softbank making a takeover bid for US-listed but UK-based ARM Holdings, makers of technology for Apple and others. Jaws dropped at the 43% premium offered by Softbank, the CEO of which explained his eagerness as a longer term investment in the Internet of Things.

Call that “new tech”. New tech was otherwise dealt a blow after the bell this morning when Netflix posted a shocker that sees its shares down 14% as I write. Old tech, in the form of IBM (Dow) and Yahoo, posted reasonable results which have them both up slightly.

Bank of America joined its peers in posting a beat during the session, which sent BofA shares up 3%. But to put that into context, BofA’s “beat” was still on a 19% drop in June quarter earnings year on year, blamed on low interest rates.

Wall Street continues to worry over the TINA rally and the high multiples being paid for defensive yield, as is the case here. As the US result season rolls on, a clearer picture will emerge, particularly from forward guidance rather than just last quarter’s earnings numbers.

Commodities

Iron ore tumbled back last night, falling US$1.60 to US$56.20/t.

A mixed session on the LME saw nickel starring with a 2.7% gain (See Nickel Price Hike Likely).

West Texas crude fell back US$1.03 to US$45.20/bbl as it became clear the Turkish government is back in control. WTI is bouncing around a lot, and so too local energy stocks, but for the moment it’s firmly wedged into a 45-50 range.

Gold is down US$8.60 to US$1328.60/oz despite the US dollar index being down 0.1% at 96.56.

The Aussie is steady at US$0.7580.

Today

Anyone want to back nine days? The SPI Overnight closed up one point.

We’ll see the minutes of the July RBA meeting today. Economist consensus is still baking a rate cut next month.

The first post-Brexit ZEW survey of eurozone investor sentiment is out tonight.

On the local stock front, Oil Search and Rio Tinto ((RIO)) will post June quarter production reports.
 

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article 3 months old

Australian Dollar At Risk

By Ilya Spivak, currency strategist, FXCM

Fundamental Forecast for the Australian dollar: Neutral

  • Australian Dollar likely to fall in with risk sentiment trends yet again
  • Eurozone data, ECB rate decision to offer early Brexit spillover clues
  • Geopolitics complicate the landscape as coup breaks out in Turkey

A lull in top-tier domestic event risk puts the Australian Dollar at the mercy of risk sentiment trends once again. The currency remains highly sensitive to changes in market mood, with the correlation between AUD/USD and the benchmark S&P 500 stock index at a three-month high of 0.9 (on rolling 20-day studies).

The aftermath of the UK Brexit referendum remains a critical macro theme. With the threat of a financial crisis immediately following the vote seemingly out of the way, investors have turned their attention to gauging the severity of knock-on effects on global economic growth and financial stability.

Needless to say, the Eurozone is ground zero for spillover. Germany’s ZEW survey of investor confidence, the flash Eurozone PMI roundup from Markit Economics and the ECB monetary policy announcement will offer early clues about the severity of contagion being expected in official and private-sector circles.

Uncertainty about the ground rules of the future economic relationship with the UK – heretofore the second-largest EU member state – will almost certainly dampen activity on the Continent. PMI and ZEW data will hint at the severity of the cooling effect while the ECB will suggest what may be done about it.

Eurozone economic news-flow has somewhat softened relative to consensus forecasts recently, warning that signs of weakness may already be emerging (although it is premature to say this with confidence for now). If this paves the way for downside surprises, risk appetite may be undermined.

For its part, the ECB seems unlikely to deliver an outright expansion of stimulus measures but comments from central bank President Mario Draghi will be critical to gauge policymakers’ readiness to act if need be. A neutral wait-and-see posture may prove to be a disappointment, amplifying the threat of risk aversion.

On the geopolitical front, an attempted military coup in Turkey late Friday complicates the landscape further. The country’s proximity to and significant economic linkages with Western Europe may fuel fears that turmoil there will amplify existing post-Brexit vulnerabilities, catalyzing a broader unraveling.

Taken together, all this amounts to a precarious environment for the Aussie. Much of the landscape remains clouded however and a great deal can change quickly, triggering seesaw volatility. With that in mind, the probability of follow-through on seemingly decisive moves should not be taken for granted.



 

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

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article 3 months old

The Monday Report

By Greg Peel

Scripted

I suggested on Friday morning the local market would likely open to the upside on overnight strength before fading in the afternoon as traders took profits following a week-long rally, unless Beijing had something to say about it. Well Beijing did have something to say about it, but the market still played to script.

China posted GDP growth of 6.7% in the June quarter, in line with the March quarter result and beating expectations of 6.6%. Industrial production grew 6.2% year on year in the month of June, up from 6.0% in May and beating expectations of 5.9%. Retail sales rose 10.6%, up from 10.0% and beating 9.9%. Fixed asset investment grew 9.0% year to date, down from the 9.6% pace in May and below 9.4% expectations.

On face value, these appear to be a pretty encouraging set of numbers with the exception of fixed asset investment. To the ASX200, they were worth 20 points at midday, taking the index from up 20 points, and ready to fade, to up 40 points. But then the sellers arrived on cue.

Economists do not, however, suggest these were numbers out of China that offer relief. Within the GDP result, growth in private investment, representing 60% of all investment, fell to a record low for the quarter. This leaves the government to carry the can. On that note, the 9.0% growth rate in fixed asset investment to June is the lowest since 2000, suggesting the government is easing off on the infrastructure stimulus.

The June retail sales number was indeed encouraging, but in a way China’s economy is a bit like Australia’s in that it is trying to transition away from a previous model. Can the growth of China’s consumer economy offset the slowdown in the export-driven sectors? Not if private investors are not on board. Beijing can beef up the stimulus again, as everyone expects it will, but just how many airports and railway lines can you build for the sake of it?

Local traders may have had a closer look at the Chinese data, after the computers had had first shot, and decided they were not so hot after all. The index faded all afternoon.

But importantly, the index has clearly breached the 5400 resistance level, meaning that will now become support. Wall Street took a breather on Friday night and the local futures finished down 11 points on Saturday morning, so 5400 will now be the pivot level for the decision as to whether we have reason to push higher.

That will likely come down to the US earnings season now underway and the local earnings season due to start next month.

Almost

Had the S&P500 closed even a tenth of a point higher on Friday night, it would have been the first Monday to Friday run of all-time highs for the index since 1998. But alas, the S&P closed down two points at 2161. The Dow closed up 10 points but that only marked four days of rally. The Nasdaq lost 0.1%.

The fact the 1998 record was not achieved underscores the reality that markets do not usually go up five days in a row. Wall Street was all set for a similar session of Friday profit-taking after a very strong week, but instead hung in there. It is a positive sign.

Traders have also pointed to other positive signs in the Russell small cap index catching up to its large cap counterparts post Brexit and indeed outperforming on the upside. This suggests the rally has breadth. And a further six basis point gain for the US ten-year bond yield to 1.59% equates to over 20bps from the Brexit low and an indication the safe haven money is coming back out again.

The ongoing element traders have been pointing to for several post-GFC years is the level of cash still on the sidelines. If investors decide they have no choice but to deploy that cash in a low interest rate world, stock market upside could be substantial.

The US CPI rose 0.2% in June, in line with expectation. The increase was largely due to the oil price which many believe should ease off after the summer driving season. Annual inflation is only 1.0%, reflecting the initial big drop in oil prices. Core inflation, without oil, is 2.3%. This should be enough to prompt the Fed into hiking but for three reasons.

Firstly, the Fed prefers the PCE measure of inflation, and that is still running under 2%. Secondly, the Fed did not hike in June because of Brexit risk, and despite the rebound in markets a rate hike is not expected at the July meeting either, on a “too soon” basis. Thirdly, wages fell 0.2% in June. Lack of wage growth suggests a subdued inflation outlook.

But US retail sales jumped 0.6% in June when 0.1% was expected. It’s the third consecutive solid gain.

The big earnings result on Friday night came from the banks. Citigroup posted a beat and Wells Fargo posted in line. The shares of both closed down on the day, but this was more a case of a Friday after a week-long rally and the fact JP Morgan’s solid result on Thursday night had traders amped up for strong beats on Friday night.

As of this week, the earnings reports will come thick and fast, with a lot of Dow names in the frame. If Wall Street is to hang on to or exceed new all-time highs, it will need the run of results to be as positive as the early numbers have suggested.

Commodities

Since we’re focusing on records today, we can also note the 0.6% jump in the US dollar index to 96.69 on Saturday morning ended the strongest week for the dollar against the yen since 1999. The yen has been plunging basically since “Helicopter” Ben Bernanke met with officials in Tokyo early in the week, sparking speculation the BoJ may be prepared to use “helicopter money” as a last ditch effort to soften the yen and boost the Japanese economy.

Helicopter money directly refers to hand-outs of printed money to the populace as a form of stimulus, analogously dropped from helicopters. In the GFC, the famed “Pennies from Kevin” is a local example. But it can also mean other drastic stimulus measures, such as the BoJ buying government bonds and then forgiving the debt. Whatever the case the policy is highly inflationary, but given a low inflation world and over two decades of deflation in Japan, hyperinflation is not considered a risk.

The jump in the greenback on Friday night helped aluminium, copper and nickel down around 0.5% on the LME and lead down 1.5%, with zinc rising 0.5%.

Iron ore fell US20c to US$57.80/t.

Oil traders cited the better than expected China GDP and US retail sales in sending West Texas crude up US73c to US$46.23/bbl, despite the US rig count marking its sixth week of gains in seven.

Gold held its ground against the strong greenback in rising US$2.50 to US$1337.10/oz.

The Aussie is down 0.7% on the strong greenback at US$0.7580.

The SPI Overnight closed down 11 points or 0.2% on Saturday morning.

The Week Ahead

All eyes will be on the ECB on Thursday night when it holds a scheduled policy meeting. But given the wold has quickly recovered from Brexit fears, and the Bank of England elected not to react, it is likely Draghi will keep his powder dry.

The US will see housing sentiment tonight, housing starts on Tuesday and existing home sales, the Chicago Fed national activity index, the Philadelphia Fed activity index, FHFA house prices and leading economic indicators on Thursday. Friday sees a flash estimate of July manufacturing PMI, and Japan and the eurozone will offer the same.

Japan is closed today.

The minutes of the July RBA meeting are due tomorrow and otherwise, NAB’s June quarter business confidence summary on Thursday provides the local data of note this week.

It will be a bit different on the local stock front however, as the quarterly reporting season ramps up.

Western Areas ((WSA)) will report quarterly production today, Rio Tinto ((RIO)) and Oil Search ((OSH)) tomorrow, BHP Billiton ((BHP)) and Woodside Petroleum ((WPL)) on Wednesday, South32 ((S32)) on Thursday and Santos ((STO)) and OZ Minerals ((OZL)) on Friday, among others during the week.

Rudi has returned from two weeks of touring Victoria and Queensland. He will appear on Sky Business via Skype-link on Tuesday, 11.15am, to discuss broker calls. On Thursday he'll return to the studio at Macquarie Park, 12.30-2.30pm and on Friday he'll do the Skype-link again around 11.05am.
 

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: Risk Back On

By Greg Peel

The Dow closed up 134 point or 0.7% while the S&P rose 0.5% to 2163 and the Nasdaq gained 0.6%.

Hit for Six

I suggested in yesterday’s report that it may not be the day in which the ASX200 manages to breach the brick wall of resistance at 5400. Ultimately I was proven wrong, but it was no simple feat. On my count, the index rose above that level before pulling back to or below that level six times in choppy trading yesterday before the final assault.

At 2pm, just when it looked like the sellers may just win on the day, we turned and rallied to a close of 5411. With Wall Street up again last night, we may cement that breach today, although it’s interesting to note the S&P500 closed up half a percent in the US but the futures are only suggesting 0.1% for the local index today.

Bridge Street has seen its sixth consecutive up-day. But aside from Monday’s big surge, it’s been a grafting, somewhat cautious climb. On the other side of 5400, there’s a bit of a “Now what?” feel.

We actually saw a positive jobs number yesterday. On face value the net 7,900 jobs added fell short of 10,000 expectations but the big surprise was the mix – 38,400 full-time jobs were added and 30,600 part-time jobs were lost. For the past several months, apparently strong employment results have been misleading, given growth has been almost entirely led by the addition of part-time jobs. A job is a job on the ABS count, be it full or part-time. But part-time jobs mean fewer hours worked, thus lower net wages, thus limited positive economic impact.

So to see this sudden and sharp turnaround is heartening. We also saw the unemployment rate tick up to 5.8% because of increased participation – more people trying to find work – which again is an encouraging sign.

It’s not yet enough to suggest inflation is about to pick up again, so there is no reason yesterday’s jobs numbers would prevent the RBA from cutting in August once the June quarter CPI result is known.

After a very strong run this week, the resources sectors finally saw some profit-taking yesterday. Materials fell 1.3% and energy 0.6% to be the only sectors to finish in the red. The banks have also been a significant driver of the rally to 5400, but they had another positive session yesterday with a 0.8% gain. Elsewhere, gains were roughly even, but the defensive sectors continue to remain just as popular, indeed if not more popular, than cyclicals overall.

The new buzz word on acronym-obsessed Wall Street is STUB – staples, telcos, utilities and bonds. With Wall Street at new all-time highs, the outperformers in 2016 to date have been the people who make toothpaste, the people to whom one pays one’s phone, electricity and gas bills each month, and government-issued fixed interest. Investments that quietly yield while carrying limited risk.

In Australia, the picture is not dissimilar, if we substitute the likes of a pizza chain in for staples and toll roads for utilities, for example. The question is: how high can we continue to go on defensives? To get cyclicals up and running again – meaningfully -- we need some central bank stimulus.

Some days are Dimon’s

The Bank of England did not cut its cash rate last night, defying an 80% chance priced into the futures market. While this sounds like a trigger for major volatility, it wasn’t.

It wasn’t, because between the time BoE guvna Mark Carney suggested he would likely cut the cash rate and now markets have moved from Brexit panic to Brexit complacency, and from a collapse in the pound to…well…a still-collapsed pound. In other words, the BoE does not need to cut the cash rate to stop a market crash, nor to try to force currency devaluation. Markets have recovered and the pound has re-based, which alone should provide the additional economic stimulus the UK needs through this ongoing period of uncertainty.

The response on the UK stock market was a 0.2% fall. The response on Wall Street was…hey did you see JP Morgan’s result!

Right up to the last minute, analysts were marking down their forecasts for JP Morgan’s (Dow) June quarter earnings. We could thus say it was always going to be easier to post a “beat”, but as it was the bank’s result was very impressive not just in its EPS, but in the breakdown of where it made money and where it didn’t lose it. Most notable was a solid performance in consumer-related banking, and most comforting was no attempt to use Brexit as any sort of excuse.

The US banks have been enjoying a rally back from initial Brexit lows, just as Australian banks have been doing, and as such have been leaders in the push to new all-time highs. The banks themselves are nevertheless a very long way from all-time highs. JPM’s result helped float all US banks last night and thus lead this latest move into blue sky. Tonight sees results from Wells Fargo and Citigroup.

The other talking point on Wall Street last night was the June producer price index release. It posted the biggest jump in more than a year in rising 0.5% on the headline against 0.3% expectation. It was all about the oil price rebound nonetheless, and the core PPI remains in the doldrums.

Wednesday night on Wall Street saw a bit of a pause, as stock indices steadied and a bit of money flowed back into bonds and gold. It was as if Chris Froome had come off his bike and had to jog for a bit. Last night saw the stock rally kick back in, gold fall back again and the US ten-year yield rise 6 basis points to 1.53%, as Froome got back on a bike.

Commodities

The US dollar index is down 0.3% at 96.09 following a mild bounce in the pound on no rate cut. But gold is down US$7.70 at US$1334.60/oz.

Copper took a breather last night in a session which saw all other base metals mildly higher.

Iron ore fell US70c to US$58.00/t.

West Texas crude rose US39c to US$45.50/bbl.

The Aussie is 0.4% higher at US$0.7633.

Today

The SPI Overnight closed up 6 points. It’s a Friday, we’ve had six up-days in a row and we’re sitting just above what was major resistance. A bit of profit-taking today?

Beijing may have something to say about that. China’s June quarter GDP result is out today, alongside June industrial production, retail sales and fixed asset investment numbers.

Retail sales will also be in focus in the US tonight, amidst the big earnings reports.

On the local stock front, Whitehaven Coal ((WHC)) and Mt Gibson Iron ((MGX)) post quarterly production reports today.
 

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All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.

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article 3 months old

The Overnight Report: Caution At The Top

By Greg Peel

The Dow closed up 25 points or 0.1% while the S&P was flat at 2152 and the Nasdaq fell 0.3%.

Struggling

On a technical basis, the ASX200 trading at over 5300 since Monday suggests further upside towards 5800 is on the cards. The index still has to get through brick wall resistance at 5400, and thereafter there has to be a fundamental reason to support further gains.

With the world now settling down again following immediate Brexit fears, albeit still wary of further possible bouts of volatility, the local market may need to wait until the reporting season next month to find a new driver. Meanwhile, yesterday’s session may have been positive but there remained an air of caution.

The big movers yesterday were the resource sectors, thanks to big commodity price jumps. Materials was up 2.0% and energy 1.5%. But only three other sectors finished in the green yesterday – the banks, telcos and utilities. All offer yield as their primary attraction, not cyclical growth.

It was not a straight line rally yesterday either. After a spurt up on the opening rotation, interest faded. Late buying then righted the ship. There were also the Chinese trade numbers for June to consider.

Exports fell a slightly worse than expected 4.8% year on year following May’s 4.1% drop. Imports fell 8.4% compared to 0.4% in May, when a 5.0% fall was expected. While the numbers are not very positive there is no great panic, given Beijing is expected to rev up the stimulus any moment now beyond renminbi devaluations.

The index closed yesterday at 5388. Following a flat session on Wall Street and the futures up only 8 points this morning, today is unlikely to be a day to retest 5400. We also had oil falling back last night.

The local June jobs numbers are out today but nothing particularly market-moving is anticipated. There will likely be some caution in the market today ahead of tonight’s Bank of England policy meeting.

For so long, we’ve not been particularly interested in BoE meetings. The UK’s economic surge following the London Olympics brought expectations of a likely rate hike from a post-GFC 0.5%, but that surge soon faded and for the past few years the UK has simply bungled along, stuck on the same cash rate.

Tonight is expected to see a rate cut. BoE guvna Mark Carney has already hinted at one and the local market is pricing in an 80% chance. The risk to global markets, both to the downside and upside, is either no cut or a full 50 basis points to zero. A 25bps cut will no doubt be a non-result.

Let’s see some results

If Australia now needs to wait for results season, the same is true on Wall Street where quarterly results are now trickling through. So far we’ve seen earnings beats from Alcoa and rail company CSX, while fast food conglomerate Yum Brands is up around 5% in the aftermarket as we speak, having reported after the bell.

It’s early days, and as late as last night analysts were still downgrading their expectations for JP Morgan’s result, due tonight. JPM will be the first of the big banks and first Dow stock to report.

Having hit new highs in the S&P and Dow, Wall Street stalled last night. In Tuesday night’s session we saw a rush out of the safe havens of gold and Treasuries but last night gold clawed back ten dollars and the ten-year yield fall back 4 basis points to 1.47%.

This week’s US Treasury auctions of three-years and ten-years struggled to find any buyers. Last night’s thirty-year auction was a different story. Buying interest was the strongest it has been since September last year for a yield of 2.17%. That’s not a lot more than the current inflation rate but if we bear in mind last night Germany issued its first ever ten-year bund with a negative coupon, and that Swiss fifty-year bonds are currently trading negative, a 2% thirty year backed by the US economy looks like manna for pension fund managers at this time.

But that 2.17% settlement rate is still the lowest on record. Welcome to the new normal.

The latest Fed Beige Book was released last night. This anecdotal assessment has had US economic growth fluctuating between “modest” and “moderate” for so long now traders have stopped taking any interest. Never has a publication been so aptly named.

Commodities

It was that time of the week last night when the US weekly oil inventory numbers are released, and as usual they surprised. The drawdown on crude was not as big as expected and persistently high levels of gasoline stocks in the middle of summer have the market concerned.

Having jumped 6% on Tuesday night, West Texas crude is currently down US$1.51 or 3.2% at US$45.11/bbl. Having tried and failed at 50, it looks like 45 will be the pivot level for WTI for the time being.

Copper kicked on with a further 1% gain last night on the LME but nickel and zinc fell back 1%.

Iron ore fell US10c to US$58.70/t.

Gold is up US$9.60 at US$1342.30/oz with the US dollar index down 0.2% at 96.35.

The Aussie is off 0.2% at US$0.7606.

Today

The SPI Overnight closed up 8 points.

As noted, the local jobs numbers are out today but the big drawcard is the BoE meeting tonight.

Iluka Resources ((ILU)) and Transurban ((TCL)) will post quarterly reports today.
 

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: Now The Dow

By Greg Peel

The Dow closed up 120 points or 0.7% while the S&P gained 0.7% to 2052 and the Nasdaq rose 0.7%.

Resistance

Two weeks ago we were worried about the ASX200 falling through 5100. Yesterday the index had a good look at 5400. And to a great extent it’s all about politics.

Eight years ago Barrack Obama said “Yes we can”. On Monday night the Tories said “Theresa May”. At the height of Brexit concerns, and the depth of global markets, the transition from David Cameron to new UK prime minster was expected to take three months. But Cameron is currently wrapping the glassware and souveniring ash trays as we speak.

May may have been anti-Brexit, and bears a scary resemblance to a certain predecessor, but her rapid ascent to PM has ended at least one period of Brexit-related uncertainty. Presumably the Brexit button will now be pushed, but markets have come to acknowledge that the process of exit is actually going to take time, and that time has the capacity to smooth the transition.

On the weekend the Abe government won a landslide victory in the Japanese upper house. On Monday Malcolm Turnbull achieved a majority. That’s actually yet to be confirmed, but who would argue with Anthony Green?

Political uncertainty has thus been dampened. Political certainty means fiscal mandate. Fiscal policies, backed by central bank monetary support, are shortly expected to be underpinning the economies of Japan, China and perhaps even Australia. The bottom line is there’s no reason not to buy stocks.

The ASX200 scored a ton on Monday, and yesterday waved its bat at 50 points up before the air became a bit rarefied. The 5400 level has been brick-wall resistance these past few months. At 5391, the profit-takers moved in. And fair enough – there were plenty of profits to be had.

As the index fell back to close up only 16 points, profits were taken on the cyclicals that have led this recent surge. But defensives continue to be sold, underscoring the “risk on” nature of this rally as opposed to the yield-driven rallies of the previous months. Banks, as I noted yesterday, sit somewhere in between, and closed higher again yesterday. Materials won the day with another 0.9% jump.

Materials is set for another good session today, assuming the stock market hasn’t already jumped the gun. Global stimulus is a boon for commodities prices. Base metal, iron ore and oil prices all surged overnight. The offset is gold – which is not a commodity but a currency – which has fallen overnight in “risk on” fashion.

NAB released its June business confidence survey yesterday, which was conducted post-Brexit but pre-election. Despite the volatility Brexit unleashed, the confidence index (looking ahead) rose to 6.1 from 3.0 in May and the conditions index (right now) rose to 12.0 from 9.7. Stock markets like business confidence. The RBA also pays attention as well.

Sky’s the Limit

Last night the Dow closed at 18,347, above the previous all-time closing high of 18,312 set in May last year. The Dow briefly traded above the all-time intraday high of 18,351 before slipping back a tad. At 2152, the S&P500 has breached 2150 resistance and is now trading in blue sky. The S&P mid-cap and S&P small cap indices also traded up to all-time highs last night, suggesting the rally has breadth.

Supporting the breadth were relatively solid volumes on Wall Street last night. Rising volumes at new highs have chartists all excited. The Nasdaq is still short but is back over 5000 and as of last night, back in positive territory for the year. Still lagging is the Russell small cap, which contains a lot more smaller caps than the S&P small cap, and the Dow Transports.

Proponents of Dow Theory would suggest the rally in the Dow Industrials cannot be sustained unless the Dow Transports is leading the way. Proponents of Dow Theory wear boaters and striped jackets and dance the Charleston.

Confirming the swing to “risk on” in the US were last night’s twenty dollar fall in gold and a further 8 basis point jump to 1.51% in the US ten-year yield. The US Treasury has been holding bond auctions this week and suddenly the buyers have disappeared.

Wall Street’s rally of the past two sessions has come without any economic data releases of note and just the one earnings report from a major cap company. Alcoa posted a beat. JP Morgan will report on Thursday night.

What will derail the rally? Well, that’s the scary part. It’s being driven by central bank smoke and mirrors. To justify the surge in global PEs we’ll need to see supportive, hard fundamental evidence. This particular US earnings season will be an important one.

Commodities

West Texas crude is up US$1.87 or 4% at US$46.62.

Aluminium closed up 1.5% on the LME, copper, lead and zinc 2.5% and nickel 4%.

Iron ore closed up US$3.40 or 6% at US$58.80/t.

Gold is down US$21.60 at US$1332.70/oz.

All commodity price movements occurred on a flat US dollar index, unmoved at 96.52.

Far from unmoved is the Aussie, which is up another 1.2% at US$0.7623. Over to you Glenn.

Today

The SPI Overnight closed up 30 points or 0.6%. 5400 is 57 points away.

China’s trade numbers for June are out today.

Westpac will release its June consumer confidence survey result.

The Fed will publish its Beige Book tonight.
 

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article 3 months old

The Overnight Report: Getting High

 

By Greg Peel

The Dow closed up 80 points or 0.4% while the S&P gained 0.3% to 2137 and the Nasdaq rose 0.6%.

Surge

Well it’s amazing what one good US jobs report can do. A reconfirmation of a US economy still growing, a big jump on Wall Street, and Australian banks rise 2.5%. The iron ore price was unchanged, gold little changed, and the materials sector rises 2.9%. But was it about US jobs?

It is likely the rebound in US employment, putting to bed any fears over the May anomaly, was a contributing factor. But for further incentive we can look to a 4% jump in the Japanese stock market on the day.

Many have called Abenomics a failed experiment and with good reason. Everything the government and Bank of Japan has thrown at the Japanese economy has amounted to little to date, and the yen remains stubbornly high. Not that it’s all Japan’s fault, as the country continues to lose out in the global race to the bottom.

Over the weekend Shinzo Abe’s coalition won a landslide victory in the upper house election – something a certain Mr Turnbull would give his right arm for (his right arm, of course, being Tony Abbott). The implication is that Abe has been granted an even more definitive mandate to keep doing what he’s doing. It is now expected the government, fiscally, and the BoJ, monetarily, may be preparing for some shock and awe, after a couple of years of pure frustration.

So tick the box on further Japanese stimulus. China is expected to ramp up its stimulus measures any time soon. The Bank of England is expected to cut its cash rate and/or reignite QE on Thursday night. The ECB is no doubt readying itself for more of “whatever it takes” post Brexit. And despite the strong US jobs number, the Fed is not expected to raise its cash rate due to global uncertainty.

Here come the helicopters. What does one do with all that free cash? Invest in the only market offering a positive return.

There was clearly an element of “risk on” in yesterday’s local rally as well as a search for yield. Cyclical sectors performed well. Defensives were slightly more muted. The banks lie somewhere in between. For all the angst surrounding that sector, it’s impossible to overlook the yields on offer.

And while we tend to obsess over China, it must be remembered Japan is also a major importer of Australian resources.

Back to the future

It was May last year when the S&P500 closed at 2130, which for all that time has been the all-time high. Last night the S&P closed at 2137. It was not a volatile session – the US indices opened higher from the bell and despite a bit of a fade in the afternoon, basically held their ground.

Why did Wall Street rally? See all of the above.

The US rally was also more notably “risk on”, with defensive sectors rising but underperforming, having outperformed for a couple of years now. It was also notable to see the US ten-year bond yield spike up 7 basis points to 1.43% despite the promise of more central bank stimulus around the globe. It would appear some investors elected to remove money from that crowded trade to put into stocks.

Similarly, gold fell back US$11.

So, here we are, back at the high. Now attention will turn to the US earnings season. It will begin to kick into gear later this week.

Commodities

Stock markets may have been surging across the globe last night but it was more of a mixed bag for commodities. The US dollar index rose 0.3% to 96.53 which may explain the US$11.10 fall in gold to US$1354.30/oz but this is most likely due to some unwinding of the safe haven trade.

Copper rose 1% on the LME and nickel 1.5%, but the other base metals barely moved the dial.

Iron ore rose US20c to US$55.40/t.

West Texas crude fell US41c to US$44.75/bbl.

Today

The SPI Overnight closed up 26 points or 0.5%

Locally we’ll see the NAB business confidence survey for June today which I believe would have been conducted prior to the election.

Alumina ((AWC)) will provide a quarterly production report.


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All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.

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article 3 months old

The Monday Report

By Greg Peel

Breather

The local stock market took a breather on Friday, following two weeks of Brexit volatility and election uncertainty and ahead of Friday night’s US jobs report. Nothing new is known about potential Brexit fallout, but by Friday it at least looked like the Coalition would be able to form some sort of government.

By this morning it looks quite possible the Coalition will be able to form a majority government. This reduces the risk of a possible credit rating downgrade. On Friday night the Aussie went soaring, up 1.2% by Saturday morning to US$0.7564 despite the US dollar index being little changed.

But during Friday’s local session, it seems everyone went to lunch. The only movement of any note was a further 0.6% drop for the utilities sector, as “overbought” calls continues to hit home.

Yer Kidding

The US added 287,000 jobs in June, trashing estimates of 170,000. Mind you, estimates have been none too flash of late, given 170,000 was about the assumption for May as well, minus the 35,000 striking Verizon workers. May’s number came in at 38,000.

It was assumed the May result would be revised up with the June result, being such an anomaly, but instead it was revised down, to 11,000. We now have two consecutive anomalies, so economists prefer to average out to provide a three-month running indicator, which after the June result is 147,000 per month. Late in 2015, when the Fed decided to hike, that average was running at 200,000 plus.

Not only were more jobs created in June, but more hopeful workers re-entered the market, meaning the unemployment rate rose to 4.9% from 4.7%. Average wages rose 0.1% for a 2.6% annual rate.

Under normal circumstances, Wall Street would take the June jobs numbers as reason to expect a Fed rate hike in July. The response in the stock market would then be torn between good jobs result means economic growth, which is good, and good jobs result means higher borrowing rates, which is bad. But no one expects the Fed to hike in July because despite stock markets rallying across the globe, Brexit still provides for uncertainty.

So the Fed won’t hike this month. Maybe September, if the data continue to look positive in the meantime, but even then, probably not. So what does this mean? It means you can have your cake, being strong jobs growth, and eat it too, because the Fed will keep rates low. There is no reason not to buy stocks.

The Dow closed up 250 points or 1.4%, rising back over the 18,000 mark. The S&P rose 1.5% to 2129. The all-time closing high is 2130. The Nasdaq gained 1.6%.

But was this a “risk on” rally? No. Not only did investors buy stocks on Friday night, they also bought bonds and gold – the safe havens. The US ten-year yield fell 2 basis points to 1.37% and gold rose US$5.60 to US$1365.40/oz. Typically on a positive jobs number, and thus increased Fed rate hike expectations, investors would sell bonds and gold and buy stocks. In this case, stocks were bought because there is no alternative.

It’s hard to find any commentator that doesn’t believe US stocks can continue to rally under such circumstances. It is even more difficult to find anyone who is not nervous, given the lack of any fundamental drivers. The VIX volatility index fell back to 13 on Friday night, suggesting abject complacency.

Fundamentals will come home to roost from this week, however, as we enter the US June quarter reporting season. Alcoa reports tonight, and then there’s a gap to week’s end when the first of the big banks report.

As has become the trend, earnings forecasts are weak going into the season, offering up the opportunity of a “beat”, but a bit of a hollow one. Net S&P500 earnings are forecast to fall 5%.

Commodities

The US dollar index was steady on Friday night at 96.28, which is again not what one would expect from such a stellar jobs number. Base metal traders were therefore able to see the result as economically positive, hence we saw copper up 0.5%, aluminium and nickel up 1.5%, and zinc 2.5%.

For the oil market it’s a case of being torn between good economic data and the risk of further oversupply as US rigs kick back into gear above US$50/bbl. So oil prices did nothing, with West Texas steady on US$45.16/bbl.

Iron ore was unchanged at US$55.20/t.

The Week Ahead

After a flat close to last week, the SPI Overnight closed up 61 points or 1.2% on Saturday morning.

The Bank of England will hold a scheduled policy meeting on Thursday night. Given post-Brexit indications from Mark Carney, the market will be very surprised if there is no rate cut from 0.5%. Zero is a possibility.

This week will bring China back into focus.

Over the weekend we saw the release of China’s June CPI, which fell to a five-month low 1.9% from 2.0% in May. On Wednesday we’ll see June trade numbers and on Friday, industrial production, retail sales and fixed asset investment numbers.

And we’ll see the June quarter GDP result. The market is forecasting 6.6%, down from 6.7% in May.

In the US, the Fed Beige Book will be released on Wednesday ahead of CPI, retail sales, business inventories and consumer sentiment numbers on Friday.

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

On the local stocks front, this week heralds the beginning of the quarterly reporting season, which includes resource sector production reports and many a trading update from non-resource companies.

This week’s highlights include production reports from Alumina Ltd ((AWC)) tomorrow and Iluka Resources ((ILU)) and Whitehaven Coal ((WHC)) on Thursday. Transurban ((TCL)) will also report on Thursday.

Rudi will not make any appearances on Sky Business this week as he'll be presenting to investors on Gold Coast and in Brisbane.
 

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

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article 3 months old

Weekly Broker Wrap: Australian Dollar, Supermarket Suppliers And Banks

-Trade not influencing AUD value
-Official rate cut factored into AUD
-Woolworths struggling to improve sales
-Macquarie views ANZ returns sustainable
 

By Eva Brocklehurst

Australian Dollar

ANZ researchers have found little evidence that changes in Australia's trade composition have influenced the currency or the size of its risk premium. The analysts note the Australian dollar has been persistently overvalued relative to traditional commodity price models since 2010. The overvaluation was most extreme between 2010-13, which reflected foreign buying of Australian bonds because of relatively high rate spread differentials and absolute yields.

This came about at a time when the composition of Australian trade was evolving, with less reliance on cyclical resource exports. Services exports have risen sharply as a proportion of trade recently although these remain within historical ranges.

The analysis signals changes in Australian dollar valuations drive changes in the services balance but there is no converse link - changes in services do not drive the Australian dollar. The changing composition of trade cannot be responsible for the Australian dollar's resilience, the analysts maintain.

Rather, they continue to believe the persistent overvaluing of the Australian dollar reflects a heightened focus on sovereign rates in this cycle, rather than changes in the trade structure or broader vulnerabilities in the economy.

St.George analysts note risks to the outlook are broadly balanced and the Australian dollar is likely to trade within the mid US70c range for the remainder of the year. The analysts expect the Reserve Bank of Australia will reduce official interest rates again, observing this is largely factored into markets and the currency.

Downward pressure from a decision to reduce rates will be limited, in the analysts' view, given the easy monetary stances from other major central banks. While the US Federal Reserve may still rates rates this year the likelihood in the near term has lessened. Commodity prices are also unlikely to rally substantially, the analysts believe, given the modest pace of global growth. This underpins the view the currency will not trade far from the mid US70c range.

Strategy

The financial year has finished fairly flat for Australian equities, with the ASX200 index down 4.1% in FY16. Including dividends, the total return of the index was up 0.6%. UBS notes the fall in the return on the index was driven by a fall in earnings expectations offset by a small price/earnings multiple re-rating.

In terms of sectors, banks and resources underperformed and industrials outperformed, notably the yield sectors such as infrastructure, Australian Real Estate Investment Trusts (A-REITs) and utilities. Mega cap stocks underperformed while small-mid caps outperformed. UBS remains Underweight on mining, A-REITs and consumer staples, Neutral on energy and Overweight banks. The broker continues to have exposure to US dollar earnings and domestic cyclicals.

Supermarket Suppliers

For the first time in the UBS supermarket survey, Coles ((WES)) leads Woolworths ((WOW)) in all 26 sub categories. There were signs of better execution in areas such as fresh offerings and marketing and Woolworths is closing the gap to Coles. Yet, the survey found poor and deteriorating in-store compliance and internal culture are hurting the ability of Woolworths to translate its price investments into improving sales.

The risk of a price war grows, with suppliers forecasting shelf price deflation for the next 12 months. Suppliers were critical of marketing and in-store theatre and suggest Coles may need to invest more in operations going forward. Woolworths' average relative survey score did not improve, which suggests Coles will maintain its lead over the first half of FY17. Nevertheless, there are signs Woolworths is bottoming and UBS believes this could trigger increased investment from Coles to ensure top line momentum is maintained in a slowing market.

UBS expects Woolworths to still narrow the gap to Coles in the first half but acknowledges the survey does signal forecasts may prove optimistic. Thus a Sell rating is reiterated for Woolworths with a Neutral rating and negative bias for Wesfarmers.

Banks

The Australian Prudential Regulatory Authority has updated on the capital position of the major banks. The regulator believes, while the banks are in the top quartile of internationally active banks with an average CET1 ratio of 13.5%, the level of capital will need to continue increasing.

ANZ Bank ((ANZ)) is the only bank in Macquarie's view that should sustain its returns over the next three years, while the returns of peers are expected to decline by 11%. Forecasts currently incorporate $19-20bn of additional capital across the majors by 2019.

The broker continues to believe that in a low-growth environment, banks should be able to organically generate capital and maintain elevated pay-out ratios. Macquarie recognises some risk of further capital raising if banks are not prudent in capital management, if balance sheet growth exceeds expectations and/or if banks are reluctant to lower pay-out ratios.

Macquarie remains slightly Overweight the sector based on its relative yield attraction and expects share price weakness in the near term should political uncertainty continue.
 

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article 3 months old

The Overnight Report: Fed Focus

By Greg Peel

The Dow closed down 22 points or 0.1% while the S&P lost 0.1% to 2097 and the Nasdaq rose 0.4%.

Inevitable

There is much talk at present on US business television of the runaway performance of the S&P500 utilities sector over the past two years, in which downstream energy companies for example can offer, heavens above, yields in excess of 4%! And inevitably there is also much talk of this sector, and to a lesser extent the similar telco sector, being overpriced and a dangerous space to be buying into right now.

The Australian utilities sector can offer yields of 7% or more, particularly from infrastructure funds, when the differential on the US-Australian cash rate is only 1.5%. Thus it is no surprise the local utilities sector has also outperformed, and very much outperformed in the latest round of plummeting global interest rates post Brexit.

Yesterday saw a choppy session in the local market but ultimately every sector finished in the green. Except, that is, for utilities, which fell 0.9%. Telcos rose 0.5% but unlike the S&P500, in which telcos are not a big market cap, the gorilla that is Telstra is a must-have for any index fund and any offshore “Buy Australia” trade.

It was a good day for the banks, resource sectors and consumer sectors yesterday. Unfortunately it may not be so today. Late yesterday, ratings agency S&P put the country and the big four banks on negative watch implying, in the case of the country, the possible loss of a coveted AAA rating.

S&P has banks across the globe in the spotlight post-Brexit so no surprise there. These fools are geniuses when it comes to telling companies the risks have increased after the risks have increased. Pre-GFC, a brown envelope would have sorted the issue. In the case of the country, it’s all about political uncertainty post-election. There was likely some influence in yesterday’s rally from the ongoing improvement in the Coalition’s seat-count, and the increasing possibility of a majority government.

So not that much to worry about. The Aussie took a dive on the news but has since recovered to only be down 0.5% over 24 hours at US$0.7478, with the US dollar index up 0.2% at 96.24.

As to how investors respond to the banks today is another matter, if capital raising fears return. Meanwhile, a near 6% plunge in the oil price overnight does not bode well for energy today, which was yesterday’s outperformer with a 1.6% gain. Metals prices are also lower this morning, including that of gold.

Wall Street may have closed a little weaker but a 0.4% drop in the futures hints of greater weakness locally.

All About Jobs

With the pound now trading below 1.30 to the US dollar, the FTSE 100 continues to rally. It was up another 1.1% last night. It is also hoped that the weaker euro can help overcome both Brexit-inspired risk in the EU and last night’s news German industrial production took a dive in May, pre-Brexit. The German market still managed at 0.5% rally.

Wall Street opened to the upside last night, sending the S&P500 clearly through the 2100 resistance level. But then the weekly US oil inventory numbers came out.

US oil inventory numbers are a strange thing. Every week, early in the week, the American Petroleum Institute publishes its assumption on inventory changes from the week before. Then later in the week, the Energy Information Agency publishes what are considered to be the official numbers. And rarely, if ever, do the two correlate. Indeed often the results are wildly different.

On Thursday night the WTI price rallied on the expectation of a bigger than expected drawdown last week, which makes sense at the height of the summer driving season. Last night the EIA numbers indicated that the drawdown was only about average – in other words, a lot less than the market had priced in. Thus WTI plunged, it is currently down US$2.72 or 5.7% at US$45.19/bbl.

Week on week numbers may be influential but the reality the oil market is facing is that when WTI trades up to 50, some of those rigs that were shut down over the past year are fired up again.

On the back of the oil price, the Dow fell from being up 66 to being down a hundred. But then it quietly made its way back.

The ADP private sector jobs number for June came in at 172,000 when 158,000 was expected. The forecast for tonight’s non-farm payrolls number is 210,000, which is a big step up from May’s shock 38,000. Not only will the June number be very much in focus tonight, but so too will be the inevitable revision to the May number. Revisions of US data can often be very substantial given the rush to get some sort of early guesstimate out as quickly as possible.

If it is a big number, and big revision, tonight, do we go back to expecting a September Fed rate rise? Or has Brexit put the kybosh on that concept now for the foreseeable future?

That is the question no one can answer right now. Tonight’s market response will indeed be interesting.

Commodities

As noted, West Texas crude is down US$2.72 or 5.7% at US$45.19/bbl.

Base metal prices were all weaker in London, with copper leading the way down 1.6%.

Iron ore fell US60c to US$55.20/t.

Gold finally had a down day, but only by US$3.40 to US$1359.80/oz.

Today

The SPI Overnight closed down 21 points or 0.4%.

The world once again awaits the US jobs numbers.

Beijing will publish Chinese inflation data on the weekend.
 

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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