Tag Archives: Energy

article 3 months old

The Overnight Report: Going Nowhere

By Greg Peel

Alpha

It seemed like a quiet session in the local market yesterday as the index grafted slowly to a small gain following no real lead from offshore and minimal change in commodity prices. As calm descends on offshore markets, the local market is able to focus more specifically on earnings season.

The result is a lot going on under the surface of the index move, within sectors and individual stocks – the latter known as “alpha” movement which is not related to the market as a whole. Here there were some noteworthy moves yesterday.

Following on from Bendigo & Adelaide Bank’s ((BEN)) well-received profit result on Monday, yesterday ANZ Bank ((ANZ)) provided a quarterly update that was also well-received, mostly as it appears the bank may not be forced to raise new capital. Again all the banks were sought after, to provide a 1% gain for the financials sector and the bulk of index upside.

I have highlighted an apparent theme lately of rotating out of expensive defensives and into cheaper cyclicals, but perhaps this theme is a more simple one of rotating out of anything expensive into anything cheap. As market commentators have observed, results in line with expectation are evoking selling in a stock while even not so good results are encouraging buying as long as that stock was considered cheap beforehand.

The banks are a case in point – neither Bendelaide’s nor ANZ’s reports were anything to be too excited about, but buying has followed. Fund manager IOOF Holdings ((IFL)) copped a 7% trashing for a benign result, while market darlings in utilities and healthcare – Transurban ((TCL)) and Cochlear ((COH)), also saw selling following their results.

Sector moves were therefore a bit of a mish-mash yesterday. The result season is very much in its infancy, so really the games have only just begun. Woe betide any expensive stock that posts a miss.

And returning to the “China? Who Cares?” theme, yesterday we saw the Chinese headline CPI come in at a 1.8% annual rate for July, representing the third straight month of easing inflation. The PPI fell 1.7% to continue its unbroken four-year deflation trajectory, although the pace of deflation appears now to be slowing.

While slowing Chinese inflation should be bad news from an economic perspective, the fact it provides scope for further PBoC action is the countering good news.

Unproductive

Last night saw the release of June quarter productivity numbers in the US. Productivity (GDP per man hours worked) fell 0.5% when a 0.3% gain was expected.

This represents not only a big surprise, but the third straight quarter of productivity reductions. The only times a three-quarter decline has been booked in recent decades were in recessions. There are plenty of economists who have been warning for a while that the US is at risk of falling into recession.

The very weak June quarter GDP result gave weight to such an argument, and now this productivity number has provided a red flag. It is anticipated the relatively strong run of jobs numbers is soon to come to an end.

But does Wall Street care? Clearly not. If jobs numbers start to fade and/or the US falls into recession, there will be no Fed rate hike. And perhaps, if the situation warrants, QE will be reintroduced. The downside, therefore, is limited. And the need for yield is further underscored.

Markets that can’t seem to go up will typically go down instead. However this is not the case on Wall Street at the moment. Rather, the market has gone up and everyone’s happy for now, leaving volumes to drop away during the holiday period. It is not advisable to sell into a market when no one’s around.  A market rising on low volatility is considered bullish, despite being boring.

Commodities

There was not much going on in commodity markets last night either.

Base metal price moves were again mixed and minimal.

Iron ore is unchanged at US$61.40/t.

West Texas crude is down US10c to US$42.75/bbl.

The US dollar index is down 0.3% at 96.10 and gold is up US$5.60 at US$1340.60/oz.

The Aussie is up 0.2% at US$0.7668.

Today

The SPI Overnight closed up 10 points or 0.2%.

Westpac will release its monthly consumer confidence survey today while June housing finance numbers are also due. RBA governor Glenn Stevens will be making a speech today.

The biggest stock on the market will release its earnings result today, being Commonwealth Bank ((CBA)). The banks have seen some buying these past couple of days so CBA will not want to disappoint.

AGL Energy ((AGL)), Fairfax Media ((FXJ)) and OZ Minerals ((OZL)) are among others reporting today.
 

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article 3 months old

The Overnight Report: And Pause

By Greg Peel

The Dow closed down 14 points or 0.1% while the S&P fell 0.1% to 2180 and the Nasdaq lost 0.2%.

Step-Jump

It was actually a very dull day on the local bourse yesterday. The index opened up 40-odd points and that was the end of that. Among the sectors, yesterday’s 40 point rally for the ASX200 looked very similar to Friday’s 20 point gain. Again we saw cyclicals in favour and defensives not so.

Energy was again the winner on the day with a 1.5% gain despite only a slight tick up in the oil price, while materials traded off a big jump in the iron ore price against a big drop in the gold price to rise 0.7%. Telcos were again sold off and utilities slightly, while consumer staples managed only a minimal gain as consumer discretionary jumped a further 0.9%.

The most notable sector on the day was financials, which as I have oft suggested straddle the line between defensive (yield) and cyclical (economic growth). A 1.1% jump was largely due to a surprisingly good result from Bendigo & Adelaide Bank ((BEN)) despite a further squeeze on margins. Bendelaide rose 4% and provided impetus for gains amongst the Big Four as well.

ANZ Bank ((ANZ)) will provide a trading update today and Commonwealth Bank ((CBA)) will publish its profit result tomorrow.

We can put the rally on the day down to the solid US jobs number, and its implications for an improving US economy. But does China’s economy not matter to us anymore? Yesterday Beijing published weak trade data for July and the Australian market shrugged.

Imports to China fell 4.4% year on year in July when a 3% fall was forecast, marking 21 consecutive months of declines. Exports from China fell 12.5% when a 7% fall was forecast, marking twelve months of declines in thirteen.

The data suggest China’s economy continues to slow. Once upon a time the Australian market would have reacted poorly to such numbers, but now we seem to take it in our stride. Why? Well, central banks again. Weaker data simply reinforce the assumption the PBoC and the Chinese government will up the ante on monetary and fiscal stimulus.

At 5537, the ASX200 is still 50 points shy of the end-July high which was followed by a sudden plunge at the start of August when, among other things, the oil price looked to have broken down. Another 2% jump for oil overnight suggests that was just a mirage, and the futures are suggesting further gains for the index today.

Summer Returns

Having recovered from the Brexit scare, Wall Street proceeded to spend a long period in the doldrums just under fresh highs as it traded sideways for a couple of weeks. While the extent of the tight range broke records, traders were not too surprised given it is the height of summer in the US and participation is at a low ebb.

We then saw the brief oil scare followed by Friday night’s rally on strong jobs numbers. Having set new highs, last night Wall Street went back to the beach.

With the earnings season now tailing off and another month’s job numbers in the bag, Wall Street is bereft of further impetus. Traders continue to point to a historically long period without any decent sized pullback which suggests, given new highs, that one must soon be nigh, but this is now a long held assumption with so far no result.

Traders thus concede it is the TINA factor preventing meaningful downside. Yes, stocks might be on the expensive side, particularly where yield is the attraction, but in the unprecedented low interest rate world there is no alternative investment and historical comparisons of PE have to be rethought.

So the general feeling is the market will probably finish the year higher than it is now. We have to get through the historically volatile months of September and October nonetheless, and maybe, just maybe, that’s when the pullback will finally materialise. But there is still plenty of cash on the sidelines, and traders are only praying for a pullback so they can pick up favoured stocks at more attractive prices.

Another constant talking point is the VIX volatility index, the one month benchmark measure for which is sitting at the very low end of its range. This suggests complacency via a lack of demand for put option protection. The contrarian trade is to sell when the market reaches its greatest level of complacency. The VIX is currently at 11.5 and a level of 10.5 is considered the trigger point for this play.

Commodities

If they were yawning on Wall Street they were seriously nodding off on the LME last night. Base metal price movements were all positive but minimal.

There was more excitement on the Nymex as West Texas crude rose US88c to US$42.85/bbl.

Iron ore rose US70c to US$61.40/t.

The US dollar index ticked up 0.1% to 96.34 and gold is steady, after Friday’s night’s drop, at US$1335.00/oz.

Forex was another market to ignore weak Chinese data yesterday given the Aussie is up another 0.5% at US$0.7654. Glenn must be looking forward to passing the baton on that little “complication”.

Today

The SPI Overnight closed up 11 points or 0.2%.

China will release July inflation data today and locally, NAB’s monthly business confidence survey is due – the first to really have taken in the new gridlock parliament.

ANZ will provide an update today as noted and on the earnings front, we have reports due today from Cochlear ((COH)), Carsales.com ((CAR)), REA Group ((REA)), IOOF Holdings ((IFL)) and Transurban ((TCL)) among others.
 

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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

Rotation

5500 has become the new barrier for the ASX200 as the local market continues to show signs of wanting to push higher. On Friday, a steady morning rally took the index up 37 points to 5512 but a drift-back in the afternoon meant a close of only up 21, at 5497.

There was, of course, Friday night’s US jobs report to consider and it was a Friday, so no doubt there was some typical squaring up ahead of the weekend.

Looking at the sector moves however, Friday’s action screamed rotation. The best performing sectors were energy, up 1.1% on a small move up in the oil price, Materials, up 1.7% despite lower metals prices, and consumer discretionary, up 0.7% having been sold down over the week.

The only sectors to post losses were utilities, telcos and consumer staples, while all other sectors posted small gains. This sector spread screams rotation, from defensives to cyclicals. This is not the first time we’ve seen such action in the local market lately and often the defensives come roaring back, but at elevated levels, we may be reaching the point where reliable yield is just too expensive.

If cyclicals are now going to take the baton, they’ll still need some incentive to do so. Results season will provide some individual direction.

Good is Good

The US added 255,000 jobs in July, seasonally adjusted, smashing expectations of 180,000. The unemployment rate was unchanged at 4.9% despite an increase in the participation rate, suggesting those coming back to look for work found it. Wages increased by a healthy 0.3%.

It was the jobs report of an economy in good shape. But in the upside-down world in which we currently reside, tipping what Wall Street’s response to the report might be is not straightforward. Stocks could have risen on the good news is good news assumption or fallen on the good news is bad news assumption of a Fed rate rise being back on the cards. Either response was going to be explainable.

As it was, Wall Street liked it. The Dow closed up 191 points or 0.1%, the S&P rose 0.9% to a new all-time high 2182 and the Nasdaq also reached a new all-time high in gaining 1.1%.

Perhaps the reason why Wall Street chose “good news is good news” over “good news is bad news” is evident in the move in the Fed funds futures, which is cited as representing the chance of a Fed rate rise. The chance of a September hike moved up to a mere 18% from 9%, while December rose to 46% from 32%.

Great jobs report or not, virtually no one is expecting a September rate rise. And even December is yet to reach a 50/50 bet. Aside from all other data, there will be another jobs report before the September meeting. The general belief is that the US economy is beginning to look healthier – certainly healthy enough to justify a rate rise – but that the Fed will simply remain too timid to do so.

There is also the matter of what other central banks are up to. The BoE just delivered a substantial easing. The BoJ disappointed but eased further nevertheless. The RBA cut its rate. China is pursuing various measures. Around the globe, major economies are in easing mode. That, by default, is as good as a Fed rate rise.

And there’s the matter of the US dollar. It jumped 0.5% on Friday night to take its index to 96.24. A rising dollar will dampen the still “modest” US recovery. The Fed should not, by rights, pay attention to exchange rates but in the increasingly “globalised” world, of course it does.

The chance of a September rate rise may still be low but other markets were making adjustments on Friday night. Aside from the stronger greenback, the US ten-year bond yield rose 8 basis points to 1.58% and gold fell US$25.00 to US$1335.40/oz.

With the US results season now in its tail end, and everyone happy that was another not-as-bad-as-feared quarter, attention will now once again shift to central banks and economic data.

Commodities

A strong US jobs number also creates a push-pull for commodity prices. Gold aside, given its not a commodity per se, a healthy US economy is good for commodities but the stronger greenback offsets.

On Friday night we saw West Texas crude up US16c to US$41.97/bbl.

Nickel and zinc rose 0.5% and aluminium 1.5% while copper fell 1% and lead 0.5%.

Iron ore jumped US$2.00 to US$60.70/t.

Alas, despite the stronger greenback, the Aussie is only 0.1% weaker at US$0.7618.

The Week Ahead

The SPI Overnight closed up 31 points or 0.6%.

China will be back in the frame this week. Today sees July trade numbers, Tuesday inflation and Friday the monthly dump of industrial production, retail sales and fixed asset investment data.

On the central bank rounds, it’s over to the RBNZ to cut its rate on Thursday, as is expected.

It’s a quiet week for data in the US until week’s end. Tuesday sees June quarter productivity ahead of Friday’s retail sales, inventories, PPI and consumer sentiment.

In Australia we’ll see ANZ job ads today, NAB business confidence on Tuesday and Westpac consumer confidence on Wednesday. Wednesday also brings the critical monthly housing finance numbers.

The local results season steps up a gear this week.

Highlights will come from among the banks, with Bendigo & Adelaide ((BEN)) reporting today and Commonwealth Bank ((CBA)) on Wednesday, with ANZ Bank ((ANZ) offering a quarterly update tomorrow.

Classifieds will also feature, thanks to reports from Carsales.com ((CAR)) and REA Group ((REA)) tomorrow and Fairfax Media ((FXJ)) on Wednesday.

Other results of interest among the many this week include Transurban ((TCL)) and Cochlear ((COH)) tomorrow, OZ Minerals ((OZL)) and AGL Energy ((AGL)) on Wednesday and Goodman Group ((GMG)) and Telstra ((TLS)) on Thursday.

Rudi is attending and presenting at the AIA National Conference this week and will appear on Sky Business on Thursday between 7-8pm for the Switzer Report and again on Friday, through Skype-link, at around 11.05am to discuss broker calls.
 

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: Awaiting Jobs

By Greg Peel

The Dow closed down 2 points while the S&P closed flat at 2164 and the Nasdaq rose 0.1%.

Dead Cat

Yesterday saw yet another session on the local market in which the index took off sharply in one direction on the opening rotation, only to reverse steadily throughout the day. Yesterday the ASX200 shot up 44 points from the open before managing a mere 10 point gain by the close.

It seems the computers decided early that all would be forgiven following Wednesday’s steep falls and we’d be back on track towards the highs once more, but investors had other ideas. It is interesting to note, as revealed in yesterday’s Short Report, that the prior rally up to 5600 featured widespread reductions in short positions across the market, suggesting once the nervous shorters were cleaned out, there was no real reason to be there.

Hence we saw the plunge on Wednesday to more realistic valuations and hence yesterday’s attempts at a rapid reversal were thwarted. The futures are stronger again this morning but it would appear, as results season begins to unfold, the market is where it wants to be.

The bulk of the index gain yesterday came down to a 2% jump for energy following oil’s recovery off the US$40/bbl mark. Volatility ensures energy could just as easily be down by as much in coming sessions. Healthcare was the big underperformer yesterday, falling 1.2% as investors took profits on CSL ((CSL)) in particular. Having been slammed these past few sessions, consumer discretionary managed a 0.4% gain.

Which was counter to the data released yesterday. Consumer staples also rose 0.5% despite June retail sales managing only a 0.1% gain to take annual growth down to a tepid 2.8%.

The result provides justification for the RBA’s rate cut decision but there is nevertheless a misleading element to the low number. Low dollar value of sales is a result of two main factors – very low wages growth and discounting. But given low wages growth, consumers are benefitting from discount wars as an offset, particularly in supermarkets.

There was also good news among the data yesterday, with figures showing inbound tourism to Australia is up a significant 12% year to date. The number of Chinese tourists reached an all-time high. Presumably the number of Poms amidst that total will start to decline given the drop in the pound but hey, who are we to complain?

Fight them on the beaches

Markets were set for an expected rate cut from the Bank of England last night but there was still some nervousness that guvna Mark Carney would not act, having declined to do so at the last meeting immediately after the Brexit vote. As it was, the opposite proved true.

Not only did Carney cut the BoE cash rate for the first time in seven years, to 0.25% from 0.50%, representing the lowest level since 1694, he expanded the bank’s government bond purchase program (QE) and introduced corporate bond purchases as well. And he also introduced an exemption for banks on a long criticised reserve requirement that effectively amounts to double-counting of safe assets.

The extent of the package surprised markets. The FTSE jumped 1.6%, the pound fell once more, and the UK ten-year yield fell to an historically low 0.6%. The German equivalent fell further into the negative and the US equivalent fell 4 basis points to 1.50%.

Wall Street rose from the open on the news but quickly fell again, before posting a very typical pre jobs reports, middle of summer session. Ostensibly no one was quite inspired to do anything much.

Commentators agree that if tonight’s jobs number comes in close to expected, around about 160-180,000, not a lot will happen then either. The number will have to be either as shockingly low as the May number or as surprisingly high as the June number to spark a reaction, and even then, another wild number is going to leave Wall Street doubting the veracity of the data.

Commodities

The drop in the pound saw the US dollar index up 0.3% to 95.81 but unfortunately on the cross-rates, the Aussie is up 0.5% at US$0.7627. It’s all very well to cut the cash rate, but the impact is lost if everyone else does too.

Strength in the greenback helped base metal prices lower, with all of aluminium, copper and nickel falling over 1%.

Iron ore fell US$1.80 to US$58.90/t.

West Texas crude ignored the dollar, and rose US66c to US$41.81/bbl.

Given QE in any major economy is supportive of gold, it also ignored the dollar in moving slightly higher to US$1360.40/oz.

Today

The SPI Overnight closed up 17 points or 0.3%.

The RBA will issue a quarterly Statement on Monetary Policy today, ahead of tonight’s US jobs report.

Capilano Honey ((CZZ)) may buzz in with an earnings report today although I have conflicting dates from different brokers.

Rudi will link up with Sky Business at around 11.05am, through Skype, to discuss broker calls.
 

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(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

Value Over Volume For Rio

Rio Tinto delivered a first half result which was broadly in line, retaining a strict discipline on costs and a value-over-volume strategy.

-Growth emanating from Amrum bauxite, Oyu Tolgoi copper and Silvergrass iron ore
-CEO considers Silvergrass one of the most value accretive projects for Rio Tinto
-Lack of near-term re-rating catalysts but stock well positioned


By Eva Brocklehurst

Rio Tinto ((RIO)) has approved the final phase of the development of Silvergrass iron ore project and delivered a first half result broadly in line with expectations. Net debt ended the half year lower than many brokers expected, largely because of lower-than-forecast capital expenditure. This marks a 12-year low for capex for a half year result but that could change in the second half.

Macquarie does not believe Rio Tinto has the same luxury as Fortescue Metals ((FMG)) in being able to reduce cut-off grades and strip ratios to reduce sustaining capital. While the new iron ore division chief, Chris Salisbury, is expected to do all he can to keep costs down, the broker anticipates low levels can only be maintained in the short term.

Earnings were supported by results in aluminium and energy & minerals offset by a weaker performance in iron ore, copper and diamonds. Iron ore continues to be the main support for the company, generating 64% of underlying earnings. Earnings of US$5.37bn were within reach of most broker estimates. Capex guidance of US$4bn for 2016 and cost reduction guidance of US$2bn over 2016, 2017 are unchanged.

Of interest were comments from the new CEO, Jean-Sebastien Jacques, who reiterated the value-over-volume strategy in iron ore and refrained from providing guidance on the ultimate 360mtpa Pilbara target, instead reiterating a 330-340mtpa 2017 target. Macquarie observes he downplayed the potential for a spin-off of the newly formed energy & minerals division.

Jacques indicated growth will emanate from Amrum bauxite, Oyu Tolgoi copper and Silvergrass iron ore, which should underpin production into the next decade. This implies there will be no further project approvals in the near term.

The expansion of Silvergrass will cost US$338m and increase mine capacity by 10mt, with low phosphorous Marra Mamba ore lowering unit costs. Most of the capital will be spent in 2017, with first production expected in the fourth quarter of that year. The company assumes the return to be well in excess of 100%, with pay-back in less than three years at consensus prices of US$50/t or less. The new CEO has reassured brokers that he remains committed to disciplined capital allocation and considers Silvergrass one of the most value accretive projects.

Portfolio simplification is expected to continue and the company indicates it remains open to divesting non-core assets. UBS believes Rio Tinto can deliver over US$4bn from divestments over the next three years. The CEO, as a former head of copper & coal, has delivered around 70% of the divestments since 2013 and UBS expects him to reinvigorate the portfolio and to shy away from acquisitions.

The broker believes the company can sustain Pilbara earnings margins at US$20/t in the medium term and expects iron ore price to become less cyclical, with the upside capped by oversupply and the downside limited by the cost curve. UBS believes the company is well positioned in the current challenging commodity environment with long life, low-cost and well invested assets. Hence, a Buy rating is maintained. On the other hand, Ord Minnett prefers a Hold rating, given a lack of near-term re-rating catalysts.

Macquarie believes the stock is well positioned relative to BHP Billiton ((BHP)) in the race on lowering costs, and retains a preference for Rio Tinto. Deutsche Bank also believes Rio Tinto has the best balance sheet, production growth and cost reduction plans of the major diversified miners. The broker was particularly impressed with the cost performance in coal, alumina, aluminium, bauxite and minerals. The company has downgraded mined copper guidance slightly, to 545-595,000 tonnes.

Deutsche Bank reduces 2016 earnings estimates by a modest 1% after reducing aluminium metal premiums, bauxite price assumptions, and lowering group copper production in line with revised guidance. These charges are partly offset by lower depreciation across most divisions and lower alumina, coal and mineral costs. The latter three cost estimates lift the broker’s 2017 and 2018 forecasts.

The result was weaker than Citi anticipated although the US45c interim dividend was higher than expected. The company is maintaining a US$1.10/share 2016 minimum dividend. The main miss for both Citi and Credit Suisse was on copper, with the latter noting Kennecott reported a US$208m loss. Citi expects iron ore prices to fall to US$42/t in 2017 as supply increases and Chinese steel demand weakens but acknowledges, if current spot prices prevail, upside risk exists.

FNArena’s database contains four Buy ratings and four Hold. The consensus target is $53.30, suggesting 5.7% upside to the last share price. Targets range from $48 (Citi) to $57 (Macquarie, UBS).
 

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article 3 months old

The Overnight Report: Fightback

By Greg Peel

The Dow closed up 41 points or 0.2% while the S&P gained 0.3% to 2163 and the Nasdaq added 0.4%.

Bashed

Well the pitchforks are certainly raised and blood is being spat. It was heartening to see respected CLSA bank analyst Brian Johnson on the ABC news last night pointing out that what may be lost on the mortgage swings of less-than-the-RBA rate cuts has been gained on the retiree roundabout of increased term deposit rates. But who’s going to listen?

Retiree enclaves don’t win elections, mortgage belts do. So we’ll overlook the retirees and just go for the politically popular with the great unwashed. Bash, bash, bash. If capitalism isn’t working, perhaps the government could re-nationalise CBA. And on the former RBA governor’s not unreasonable call to investigate bank funds management divisions, he may be proved redundant. Analysts suspect the banks will be looking to offload these divisions in their desperate attempts to meet stricter capital requirements in the low growth environment.

The 2% fall in the financials sector yesterday provided the bulk of the index plunge. We can cite several reasons for bank selling – they were bought up ahead of the rate cut, their mortgage “repricing” measures are insufficient to overcome margin pressure, European banks posted some woeful results the night before, and the pitchforks are out.

Thereafter, the biggest falls were posted by the other sectors that were heavily bought ahead of the rate cut – consumer discretionary and utilities. Lesser falls were posted elsewhere and the resource sectors proved largely resilient.

It was somewhat of a capitulation trade, and as I suggested yesterday, it’s not unhealthy ahead of reporting season proper to rebase below inflated levels that might otherwise have led to small “misses” on earnings leading to panic stock-dumping. The trend, according to the chartists, remains bullish. There may also have been some fear yesterday that Wall Street’s apparent breakdown the night before might be the start of something bigger. Last night’s trade suggests otherwise, and the local futures are looking positive this morning.

Just a Blip

On Tuesday night the S&P broke down from its lengthy 2165-75 trading range which technically seemed onerous but in summer-thin, lackadaisical Wall Street trade in which central banks provide the safety net, not fundamentally significant. Suffice to say, the S&P is back at 2163 this morning and the Dow has reversed a seven-day losing streak.

Oil had a lot to do with it, or more specifically, gasoline. The weekly US inventory numbers came out last night and showed less of a build in gasoline stocks than was feared, hence WTI crude rebounded 3.6% with a bit of help, one assumes, from short-covering.

There was also mildly positive news on the data front, with ADP’s private sector jobs report showing a better than forecast 179,000 additions. Wall Street is pencilling in 185,000 for Friday night’s non-farm payrolls. We do need to bear in mind, however, that (a) the ADP report has a poor correlation record and (b) economists have been way off the mark with their forecasts these past couple of months.

A result of 185,000 would be fair to muddling – enough to restore some hope in the US economy following the weak GDP report but not enough to reignite Fed rate hike fears. On that subject, two Fedheads last night individually suggested at least one rate hike is still possible for 2016, although one is hard pressed to find anyone on Wall Street agreeing.

But if it is another number closer to 300k than 200k, as it was in June, there could be some mild panic. The ADP number was nevertheless enough to send the US dollar index up 0.5% overnight and force some consolidation in gold, which is down five bucks.

Aside from Friday night’s US jobs report, markets are looking to tonight’s Bank of England meeting. Immediately after the surprise Brexit vote result the BoE assured a rate cut would follow if necessary, but at the subsequent scheduled meeting the BoE did nothing. The post-Brexit bounce allowed more time to assess the issue.

The governor did, nonetheless, hint a rate cut was probably still likely, and that’s what the market has priced in for tonight. Volatility may transpire if one is not forthcoming.

Commodities

West Texas crude is up US$1.43 at US$41.15/bbl.

Base metals continue to move back and forth but aren’t making any headway. Only lead posted a move in excess of 1% last night, to the downside, while the others posted gains.

Iron ore is unchanged at US$60.70/t.

Gold is down US$5.10 at US$1357.70/oz, with the US dollar index up 0.5% at 95.53.

The Aussie is down 0.2% at US$0.7588.

Today

The SPI Overnight closed up 27 points or 0.5%.

Rio Tinto ((RIO)) reported after the bell last night and while in the interim the media has made much of the 50% profit decline, the result met expectations.

Earnings reports are due today from Downer EDI ((DOW)), Suncorp ((SUN)) and Tabcorp ((TAH)), among others.

June retail sales numbers are out locally today and tonight the focus will be on the BoE.

Rudi will make his weekly appearance on Sky Business today, 12.30-2.30pm.
 

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article 3 months old

The Overnight Report: Break Down

By Greg Peel

The Dow closed down 90 points or 0.5% while the S&P lost 0.6% to 2157 and the Nasdaq fell 0.9%.

Sell the Fact

There may be some confusion as to why an interest rate cut from the RBA would cause the first sell-off in some time on the ASX when one would assume the opposite. The explanation is merely that the market so aggressively priced in an expected cut over the past few sessions there was really nowhere else to go, as profits were locked in.

An August rate cut was being tipped by economists as far back as May, although there was a little wavering from the market in between. Though not referred to directly in the governor’s statement yesterday, the cruncher was likely the US GDP result. On justifying its decision, the board cited moderate local economic growth, low inflation, and that persistent “complication” of the strong currency.

The weak US GDP result largely killed off any expectations of a September rate hike from the Fed, or even this year. Hence the US dollar has been falling ever since, forcing the Aussie higher. Unfortunately for the RBA, it appears the rate cut will only serve to drag on the Aussie, not send it falling. Last night the US dollar index fell another 0.8% and the Aussie is back to where it was pre-cut this morning at US$0.7604.

With regard individual sectors, in yesterday’s report I observed “a weaker US dollar is supportive of commodity prices. As to whether such support was worth a 2.7% jump in the energy sector yesterday on only a slight tick up in the oil price is a different matter”. And yesterday energy fell 3.2%. This contributed significantly to the overall 0.8% index drop but if we average out the two sessions, energy has only fallen in line with other sectors.

Outside of oil, the big loser yesterday was again consumer discretionary, down 1.4%. This sector should be a beneficiary of lower rates, but it had also been heavily bought in the lead-up to the RBA’s decision. The banks should also benefit, and they fell 0.7%.

On that note we saw the banks move swiftly yesterday to hand over only around half of the RBA cut in variable rates. The peasants are already at the gates wielding pitchforks. The trade-off was an increase in deposit rates, which will be some comfort to those living off investments, but no doubt will be overlooked by blood-spitting politicians.

The ASX200 was very much due a correction from the post-Brexit run-up, which received extra fuel from RBA speculation. A re-basing ahead of earnings season proper is not such a bad thing, and to that end the futures are suggesting another decent drop today.

Fiscal Helicopter

The RBA’s problem with the Aussie is nothing compared to the Bank of Japan’s problem with the yen. Not only has the yen refused to fall despite everything the BoJ and Abe government have thrown at it, now hopes have faded once more of the Fed coming to the rescue and pushing up the greenback.

It has been expected for a month that the BoJ and Japanese government would unleash a combined monetary and fiscal shock & awe package as a last ditch effort, but on Friday the BoJ disappointed. So it was over to Abe, who yesterday announced a new fiscal stimulus package worth US$73bn over several years.

The package will cover everything from infrastructure, such as port upgrades, to child care and maternity leave. And 22 million low-income Japanese will all receive a direct “Pennies from Shinzo” hand-out of US$147. They can each now buy a beer in Tokyo.

Alas, the yen is another 1% higher against the greenback this morning, having jumped substantially following Friday’ BoJ disappointment. There may be some disappointment in the fiscal package as well, but it’s more a case of a weaker dollar.

Deflated

The US dollar was weaker again last night because the Fed’s preferred gauge of inflation, the core personal consumption & expenditure (PCE) measure, rose a mere 0.1% in June. An annual rate of 0.9% is well below the Fed’s 2% target.

It’s not that US consumers aren’t spending. Indeed, personal consumption rose 0.4% in June, and the increase in June quarter spending is the biggest since the GFC. But incomes rose only 0.2%, meaning the trend is consumers dipping into their savings continues. This does not bode well. The Fed would like to see rising consumption, but supported by rising wages.

And to add to concerns, last night’s US auto sales numbers for July were disappointing. For month after month recently, auto sales have surprised to the upside, sparking fear of a “subprime” bubble building in car loans given the near-zero interest rate environment. The “miss” was not substantial, but following on from a surprisingly weak earnings result from Ford last week, it appears the positive economic contribution of auto sales is finally fading.

This news weighed on Wall Street last night. The other issue was the oil price.

WTI is only down US36c this morning but the point is that at US$39.72/bbl, the 40 support level has been broken. With supply returning after outages everywhere from Nigeria to Libya and Canada, supply-side fears have returned. Wall Street has paid a lot of attention to an oil price which for some time had been fluctuating within a comfortable range, but a break-down is a different matter.

Wall Street has subsequently broken out of its own tight trading range as well. Although last night marked the seventh straight down-day for the Dow, it was the first substantial fall since the Brexit rebound began. The S&P500 has dropped out of its two-week 2165-75 range, and the Nasdaq turned south for the first time in six sessions.

Commodities

As noted, West Texas crude is down US36c at US$39.72/bbl.

Base metals were mixed yet again, with no metal moving more than 1%.

Iron ore rose US20c to US$60.70/t.

The US dollar index is down 0.8% at 95.07, thus gold is up US$10.40 at US$1362.10/oz.

Today

The SPI Overnight closed down 35 point or 0.6%.

It’s service sector PMI day across the globe today, including Caixin’s take on China’s number.

The US will see the private sector jobs report for July tonight.

On the local stock front, we’ll see earnings results from Rio Tinto ((RIO)) and Genworth Mortgage Insurance ((GMA)) and in the wake of yesterday’s shocker from Seven West Media ((SWM)), Seven Group Holdings ((SVW)) will also report.
 

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(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: Oil Wakes The Bear

By Greg Peel

The Dow closed down 27 points or 0.2% while the S&P fell 0.1% to 2170 as the Nasdaq rose 0.4%.

Pressure on Glenn

The NSW bank holiday yesterday led to light volume and exacerbated volatility as the local market surged through the morning session like a creature possessed. A near 50 point rally to lunchtime took the ASX200 well past the 5600 mark before gravity finally kicked in later in the day.

The sudden burst of enthusiasm was, supposedly, all about heightened expectations for an RBA rate cut today. Having been a 50/50 bet on Friday, yesterday saw the chances of a cut priced in closer to 65%. It was all to do with that weak US GDP result.

US GDP numbers are prone to being revised, often substantially, in subsequent months. But there is no doubting the 1.2% growth result on first estimate for June shocked a market looking for 2.6%. The US dollar plunged by 1.2% on the news, albeit helped by a stronger yen following the BoJ’s lack of action. And as a result, the Aussie shot back up to US76c.

That’s too high for the RBA, the local market decided. If the US economy is indeed weaker than hoped then the chances of a Fed rate hike in 2016 now seem more remote, therefore the US dollar will not rise but possibly weaken further, meaning the Aussie, through no fault of its own, will remain elevated. This provides the RBA with an ongoing “complication”.

On the other hand, a weaker US dollar is supportive of commodity prices. As to whether such support was worth a 2.7% jump in the energy sector yesterday on only a slight tick up in the oil price is a different matter. Materials managed only 0.9%, which seems more considered. The tune may be different today for the energy stocks after WTI traded under 40 last night.

Take out the resource sectors, and the only other sector screaming “rate cut” was the banks, with a 0.5% gain. Utilities were up, but only by 0.4%, while telcos were the worst performer with a 0.7% fall. Consumer discretionary should be the beneficiary of a rate cut, but it fell 0.1%, likely because it had been on a bit of a tear last week.

Whether or not traders decided over lunch yesterday that 50 points was a bit steep, or whether the Chinese PMI numbers were the cause of the afternoon pullback, is unclear. The Chinese numbers were mixed.

Beijing’s official manufacturing PMI for July fell to 49.9 from 50.0 in June, suggesting the impact of stimulus measures has worn off and the sector is back in contraction. However Caixin’s independent measure, more weighted to smaller businesses, saw a jump to 50.6 from 48.8, suggesting the first sign of expansion since February 2015. Beijing’s official service sector PMI rose to 53.9 from 53.7. Caixin will publish its equivalent tomorrow.

Not a lot of clarity in those numbers, nor any confirmation Beijing will be forced into more frantic stimulus. Most likely traders simply decided yesterday that once the index surpassed 5600, it was a good enough level to take profits. Earnings season awaits, and begins to ramp up by week’s end.

The RBA’s statement will be published at 2.30pm. Data yesterday suggested the Australian housing market is indeed cooling slightly, as prices and sales growth eased. This supposedly provides the RBA with more scope to cut if needs be.

Look out if they don’t.

Atlas Shrugged

If you’re into meaningless labelling, oil is now officially in a bear market. Having traded below US$40/bbl last night, WTI has fallen 20% from its prior peak. Yet for Wall Street, it’s no longer a big deal.

The US manufacturing PMI for July showed a fall to 52.6 from 53.2, and construction spending was down 0.6% in June. In the wake of the GDP report, there’s not a lot to be cheery about with regard the US economy. It was a choppy session on Wall Street, featuring a bit of a midday plunge, but when the dust settled it still appears Wall Street has no impetus to meaningfully correct and the S&P500 remains firmly entrenched in a 2165-75 range.

We’re getting towards the end of US earnings season and to date, 71% of S&P500 companies having reported have beaten on earnings and 51% on revenue. The net earnings decline has been in the order of 3.5% when 6.5% had been forecast. But realistically, US earnings seasons have become like those popular US sitcoms of bygone days that endlessly rotate on cable television.

Every quarter for however many now has seen earnings expectations marked down hard before “surprising” to the upside. Beats on earnings in the order of 60-70% are the norm. The fact remains, US earnings are in recession and revenues have failed to show any sign of actual recovery pretty much since the GFC, on a net S&P500 basis. Yet Wall Street keeps posting fresh all-time highs.

As to why, we only need appreciate that in some cases, US companies are offering a higher yield on their dividends than they are on their bonds. We are in a parallel universe that is unrecognisable. And central banks across the globe have no intention of changing that.

Commodities

Oil had a bit of a blip on Friday night when the US dollar plunged 1.2%, but it was back to business as usual last night as the dollar crept back up 0.3% and the realities of building inventories, and in particular building gasoline inventories at the height of US driving season, re-established. As to just how low oil can go, well that’s a matter of debate. Having suffered the shock of early 2016 and recovered to find a threshold of rig restarts at US$50/bbl, one presumes the downside is relatively limited as those rigs can just as swiftly shut down once more.

And at some point, what everyone has been expecting for nigh on two years now, the global economy must see some benefit from lower energy costs.

West Texas crude is this morning at US$40.08/bbl, down US$1.32 or 3%.

Base metals were again mixed last night, with aluminium falling 0.5% and copper 1%, while nickel and zinc each rose 1%.

But look out, iron ore has jumped US$1.70 to US$60.50/t.

Gold is relatively steady at US$1352.40/oz.

The Aussie’s been on a rollercoaster since Friday night, shooting up to 76 on the greenback plunge but falling back 0.8% in the meantime to US$0.7533 as RBA expectations intensify.

Today

The SPI Overnight closed down 21 points or 0.4%. NSW is back.

Locally we’ll see building approvals and trade numbers today ahead of the RBA’s decision.

The US will see the Fed’s preferred measure of inflation tonight as the PCE is released along with income and spending data.

Earnings reports are due today from a handful of companies locally, including Navitas ((NVT)) and Seven West Media ((SWM)).

Rudi will Skype-link with Sky Business today to discuss broker calls at around 11.15am.
 

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

Treasure Chest: Are Investors Overly Bearish On Oil?

ANZ Bank analysts suspect concerns over the build up of US oil stocks are unwarranted.


By Eva Brocklehurst

Are investors overly bearish on oil? ANZ Bank analysts believe this may be the case, and that concerns over the build-up of US inventories are unwarranted.

The analysts acknowledge momentum in re-balancing the oil market has eased somewhat recently but consider this to be a temporary feature of the market. Oil prices have been under pressure in recent weeks and this has sparked fears US gasoline demand is weakening.

Despite this being the peak season for driving in the US, oil inventories have continued to rise. Yet the fall in gasoline prices recently has coincided with an improved US jobs report which suggests demand may pick up subsequently in July and August. The peak in US travel occurs in July.

The analysts do not believe this rise in inventories is unusual, while underlying data suggests demand for crude products is strong. Despite oil prices falling nearly 25% in July they believe the broad upward trend remains intact.

Concurrently, US shale oil production is declining, having fallen almost 400,000 barrels per day, year on year, in the June quarter, and weekly data signals the downturn continues. US rig activity may be moving higher but remains well below the level required to maintain current production levels, with the analysts suspecting increased activity is unlikely to be sustained at prices in the low US$40/bbl range. This should push total US output below 8.5m barrels per day in coming months, they maintain.

Meanwhile, disruptions among OPEC members remain high and are likely to continue. Hence, the analysts would look to an even tighter market in the December quarter if prices remain at current levels.
 

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article 3 months old

The Monday Report

By Greg Peel

BoJ Disappoints

Well I hate to say I told you so, but I told you so. Whenever the world expects the Bank of Japan is about to unleash monetary shock & awe, it always disappoints. Then when no one’s paying much attention, it surprises with an extensive package.

The world was sure the BoJ would deliver something substantial on Friday – increased QE and/or a cash rate further into the negative, and the central bank itself had previously dropped a few hints. But Friday’s meeting brought no change to QE or rates, but rather the BoJ will increase its annual purchase of Japanese stock ETFs (exchange traded funds) by almost double, to around US$58bn.

The news lifted the Nikkei a little but sent the yen soaring, given the world was set for something more aggressive. It’s now over to the freshly mandated Japanese government to come up with something more substantial on the fiscal front.

The Australian stock market was bumbling along looking very “Friday” during the morning ahead of the BoJ announcement, which was worth a drop of 20 points. The index recovered late in the session, probably reflecting the fact it was the last day of the trading month and fund managers would have been keen for the index to close on a 2016 high.

With China such a focus, it’s easy to forget the importance of Japan as a trading partner, and specifically a buyer of iron ore, coal and LNG. The oil price had been down on Thursday which might otherwise explain a 1.3% drop for the energy sector on Friday, but iron ore was up strongly, base metal prices were up and the materials sector finished down 1.2%.

Elsewhere, a 1.3% gain for consumer discretionary is a “risk on” trade, probably backed by hopes of an RBA rate cut tomorrow, but this was countered by the biggest mover of the day – utilities, up 1.5%. Ditto on the RBA, so as usual, the markets are simply playing the central banks. And why wouldn’t you?

Could be some disappointment tomorrow if the RBA doesn’t oblige.

No Fed Rate Hike?

So we’ve covered the BoJ and RBA, so now we must move on to the Fed.

Economists had forecast a 2.6% growth rate for the US June quarter GDP. On first estimate, it came out at 1.2%. The March quarter GDP was also revised down to 0.8% from 1.1%. The culprit within the June numbers was a 3.2% decline in business investment – the largest since the GFC.

The US dollar index had fallen a full 1.2% on Saturday morning to 95.52 on a combination of the weak GDP result and the surging yen.

Yet the US stock market remained as it has been of late, as idle as a painted ship upon a painted ocean. The Dow fell 24 points or 0.1% while the S&P rose 0.1% to 2173 and the Nasdaq rose 0.1%. Over the last eleven trading sessions the S&P500 has moved in a range of 0.9%. The last time that happened was in 1970.

Fundamentally, one would suggest therefore that the US market is looking a bit toppy after its sharp rebound post-Brexit. Technically however, this stall in the rally without a pullback is deemed a bullish sign.

The biggest drag on the Dow on Friday night was ExxonMobil, which posted its worst quarter in some time after more than halving earnings compared to the same quarter 2015. The result was a miss. Fellow Dow component and oil producer Chevron also posted a miss but managed to avoid share price punishment.

The major take-out from Friday night was nevertheless another diminishing of Fed rate hike expectations. September now appears unlikely, unless there are some astounding data between now and then (US jobs this week).

Commodities

The big drop in the dollar and reduced rate hike expectations predictably had gold rising US$15.80 to US$1350.40/oz.

The story was more mixed in base metal markets, where metal-specific stories are more dominant at present. Aluminium jumped 2% and zinc 1.5%, but copper and lead only managed 0.5% and nickel fell 1%.

Iron ore fell US40c to US$58.80/t.

After having a good look at its 200-day moving average on the downside, West Texas crude rose US30c to US$41.40/bbl.

On greenback strength the Aussie was up 1.3% at US$0.7598 on Saturday morning.

The SPI Overnight closed up 17 points or 0.3%.

Not Stressed

Not long after Wall Street, and thus the world, closed for the weekend, the results of the latest UK/EU bank stress tests were released. There was a lot of eye-rolling when the bulk of 51 banks assessed were given a thumbs-up.

The tests are supposed to determine whether a bank has enough capital to survive another GFC-style shock. However, unlike the Fed’s equivalent tests on US banks, the European tests have no quantitative hurdles built in. The assessment is qualitative. The sceptics would say this allows the results to be prima facie positive in order to avoid a compounding panic on the day.

It was also noted the results provided no “test” to incorporate Brexit or negative interest rates. Nor were the results for Greek and Portuguese banks published – those banks are informed privately. In the end, the only banks deemed to be in trouble were the ones the world knew were in trouble anyway – mostly Italian.

The Week Ahead

On the subject of Fed focus, the US non-farm payrolls report for July is out on Friday night, preceded by the private sector report on Wednesday night.

Other US data releases this week include the manufacturing PMI and construction spending tonight, personal income & spending and vehicle sales tomorrow, the services PMI on Wednesday, factory orders and chain store sales on Thursday and the trade balance on Friday.

Today is manufacturing sector PMI day across the globe, with Beijing also throwing in China’s service sector PMI. Wednesday sees everyone else’s services PMI.

The Bank of England will meet on Thursday night but having done nothing at the last meeting not long after the Brexit vote, it’s unlikely to move at this meeting.

Aside from PMIs, Australia will see house prices and new home sales today, building approvals and the trade balance tomorrow, and retail sales on Thursday.

The RBA will meet tomorrow and publish a quarterly Statement on Monetary Policy on Friday. The chance of rate cut tomorrow is currently deemed to be 50/50.

Welcome to August, and that means welcome to result season proper. Things start slowly this week before snowballing through the month. Report highlights this week include those of Rio Tinto ((RIO)) on Wednesday, Suncorp ((SUN)) and Tabcorp ((TAH)) on Thursday and Virgin Australia ((VAH)) on Friday.

It’s a long weekend in NSW thanks to Banking Holiday today. The ASX remains open but things might be a little slow.

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

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

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