Tag Archives: Energy

article 3 months old

The Overnight Report: Going Nowhere

By Greg Peel

The Dow closed down 15 points or 0.1% while the S&P gained 0.2% and the Nasdaq rose 0.3%.

Risk On?

The ASX200 is not exactly shooting the lights out at the moment but the bias clearly remains to the upside. The index has spent the week grafting its way to 5550 from 5500 with the technicals still suggesting higher levels to come.

The Brexit blip notwithstanding, the longer run rally from below 5000 to yesterday had initially been led by defensive stocks, with the big cap banks and miners dipping and recovering at different times. I have made mention often enough of how the utilities sector just kept rising and rising.

Analysts were already struggling with valuations among the defensives, while at the same time conceding the fact global interest rates continue to fall, the Fed continues to stall, and the RBA may yet act again. So throw out your historical PE comparisons – what’s the point when the German government is issuing zero coupon ten-year bonds? We have never been here before.

But on Wednesday we finally saw some selling in the local utilities sector and yesterday that continued. The banks have quietened down now with Commonwealth Bank’s ((CBA)) result, due in a couple of weeks, set to be the next catalyst other than a rate cut next week.  Yesterday’s big movers were materials, up 1.5% consumer discretionary, up 0.8%, and energy, down 1.0%. Everything else was pretty quiet.

Energy fell on the oil price and that currently is looking a bit vulnerable but solid iron ore prices, resilient gold prices and some strength in base metals have seen materials now taking the lead. This is cyclical, not defensive, as is consumer discretionary, which of course would benefit from another rate cut.

Central banks are driving global markets. They are the “free put”. If the defensive yield plays have now stretched about as far as they can, even under the new world order, will it be cyclicals that take us back to 6000? That, supposedly, will depend on result season.

Stalled

And on the subject of earnings, Ford (Dow) shocked all and sundry last night by posting a weak result and disappointing guidance. Its shares fell 8%, and ensured the Dow was down over hundred points early in the session in a dour mood.

The result was a shock because US car sales have been posting record after record every month and providing some hope for the US economy. But on the one hand there are concerns about the growing number “subprime” car loans being issued, and on the other, it turns out Ford has been forced to offer huge money-back incentives in order to post those record sales numbers. Globally, Ford cited the China slowdown as also being a drag.

However, General Motors reported earlier in the season and beat on expectations. So maybe Henry just needs to have a good look at himself. Whatever the case, and as so often has played out these past couple of weeks, Wall Street grafted its way back through the session to a relatively flat close.

The past ten sessions of almost no close-to-close movement is the tightest in a couple of decades.

US earnings season is at the halfway mark, with just over 50% of S&P500 companies having reported. So far, everybody’s pleased. The quarterly decline in earnings to date is closer to 3% than the 6% forecast pre-season.

Just don’t tell anyone the same has been happening every quarter for some time now. Forecasts are marked down and down and down until most companies can’t help but beat.

Wall Street may be pleased, but it’s still not going anywhere.

This mornings after-the-bell results have included a beat from Amazon which has its shares up 2%, and a strong beat from Google parent Alphabet, which has its shares up 4%.

One obvious drag on Wall Street at the moment is oil. Following another 2% fall last night, WTI is close to its 200-day moving average. If that breaks, commentators assume the oil-stocks correlation of early 2016 will reassert itself.

Commodities

West Texas crude is down US81c at US$41.10/bbl.

The US dollar index is only down 0.1% at 96.68 but base metals had a strong session last night following a couple of weaker ones. There is likely positioning going on ahead of today’s BoJ meeting for which great expectations are held, and in between there’s the Filipino nickel industry story.

Nickel rose 3% in London last night, zinc 1.5%, aluminium 1% and copper 0.5%.

Iron ore rose another US$1.20 to US$59.20/t.

After jumping sharply post-Fed on Wednesday night, despite the Fed remaining as inconclusive as ever, gold is back down US$5.10 at US$1334.60/oz this morning.

The Aussie is 0.2% higher at US$0.7504.

Today

The SPI Overnight closed up 8 points.

As I have noted before, whenever the world is expecting shock & awe from the BoJ the central bank usually does nothing, but often catches everyone out another time when expectations are negligible. Expectations are very high that today the BoJ will do something significant on the monetary front, to be followed up next week by something significant from the government on the fiscal front.

Stay tuned.

Locally we’ll follow up Wednesday’s June quarter CPI result with the PPI today, along with month of June private sector credit.  Japan will dump a lot of monthly data and the BoJ meets, and tonight sees first estimates for June quarter GDP in both the eurozone and US.

Origin Energy ((ORG)) is among those posting the last of the production reports today.

Rudi will Skype-link with Sky Business around 11.05am today to discuss broker calls.
 

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article 3 months old

Material Matters: Energy, Coal And Nickel

Oil & gas outlook; coal pricing and demand; nickel outlook in the wake of the Philippines review of its nickel mines.

-LNG markets to be well supplied until 2021
-Proposed LNG projects need to be highly cost competitive
-Seaborne coal demand to remain robust
-7% of Philippines nickel production forced to close
 

By Eva Brocklehurst

Energy

A moderate recovery in oil prices will support the energy sector but Deutsche Bank maintains the main differentiator among stocks will be an ability to demonstrate production growth and low-cost expansion opportunities.

New LNG project opportunities in Australia are challenged and this means Deutsche Bank emphasises a preference for Oil Search ((OSH)), given its exposure to expansion opportunities in PNG.

Wood Mackenzie forecasts robust oil demand growth in 2016, driven by China and India. The reduction in oil prices since late 2014 is finally expected to result in a reduction in oil supply in 2016, driven largely by US tight oil. As a result, demand is expected to surpass production from the December quarter onwards.

Wood Mackenzie has downgraded Asian LNG demand estimates for 2025, led by downward revisions to Japanese demand, largely because of LNG displacement in the power sector from nuclear, renewables and coal.

LNG markets are expected to be well supplied until 2021 and Wood Mackenzie calculates new LNG capacity that needs to be sanctioned to meet 2025 Pacific basin demand is around 55mtpa. In the near term, well supplied Asian markets are expected to keep spot LNG prices below US$5/mmbtu out to 2021.

Given the narrowing market opportunity for pre-final investment decisions (FID) on LNG to meet 2025 demand, Wood Mackenzie believes proposed projects will need to prove highly cost competitive to proceed to FID. PNG LNG expansion involving Oil Search and Santos ((STO)) is considered to be one of the most cost competitive proposed LNG projects globally, with break-even prices around US$7.50-8.00/mmbtu.

Deutsche Bank acknowledges the rising level of onshore drilling activity is beginning to call into question the assumption total US liquids production will fall again in 2017, on the back of a decrease in tight oil production, offset by natural gas liquids growth and Gulf of Mexico offshore production growth.

Several factors that could sustain these assumptions, if growth in drilling activity does not accelerate, include rig counts, which have lagged the rising price of oil and should mirror the sluggish pace of last year after oil prices rose 42%. Deutsche Bank also observes, even when drilling activity has risen quickly in the past, declines in productivity have been observed.

The broker expects drilling activity will stop rising in 2017 as the West Texas Intermediate price of US$53/bbl is reached, as this threshold makes economic sense only in a portion of the US onshore tight oil resource.

Coal

The price surge of recent weeks aside, Citi still expects long-term thermal coal prices to fall to the mid US$50/t range with metallurgical coal prices in the high US$80/t range as seaborne demand declines structurally in the years to come.

That said, the broker suspects seaborne thermal coal demand may remain more robust than previously expected because of production cuts and resilient consumption. Citi expects the structural shift out of coal could be slow, as demand won't decline as rapidly as some expect. Natural gas prices ex US still do not compete effectively with coal on an economic basis.

For now, cost deflation, partly driven by aggressive producer cost cutting, may mean the days of US$100/t thermal coal are over, while a more robust cost curve could now provide support in the mid US$50/t region.

Citi expects coking (met) coal prices to remain range bound in the near term, averaging US$87/t in 2016, as improved Chinese import demand, in the wake of domestic production cuts, is met primarily by Australian production growth.

Nickel

ANZ Bank analysts observe the threat from the Philippines in terms of a broad review of its nickel operations, involving nearly a quarter of the world's nickel mine supply and key supply to the Chinese nickel pig iron industry, has come just as the market moves into substantial deficit.

Already Berong Mining and Benguet Coro have been forced to close operations, which make up 7% of the country's nickel production. While the likelihood of the Filipino nickel industry being completely shut down is low, the amount of supply sources at risk warrants a substantial premium. Hence, the analysts expect nickel prices to push towards US$12,000/t.
 

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article 3 months old

The Overnight Report: Limbo Land

By Greg Peel

The Dow closed down one point while the S&P fell 0.1% and the Nasdaq jumped 0.6%.

Two Speed Inflation

If you look at yesterday’s Australian June quarter CPI numbers at face value it’s hard to see why the RBA wouldn’t have already decided to cut in August. Headline inflation rebounded 0.4% from the March quarter shock -0.2% fall but annual inflation is still lower, and at 1.0% is the lowest since 1999.

Core inflation rose 0.5% for an annual rate of 1.5%, which while better than 1.0%, is still below the RBA’s 2% target and a record low.

So why was there uncertainty in the market yesterday? Why did the Aussie go up first – seemingly the wrong way – then straight back down again to be little changed?

Well for once, it’s all about the breakdown of CPI components. As the CBA economists, for one, suggested yesterday, not all deflation is bad. The major drag on the headline were lower costs for groceries (down, down), lower costs for telco services (consolidation and competition in the industry) and lower rents (apartment oversupply). All of these are beneficial for consumers suffering from record low wages growth.

And indeed, while inflation might be low, the numbers were no lower than the RBA’s updated forecasts following the March numbers. March caught the central bank by surprise, but these June numbers are as expected.

The RBA, via APRA, may have successfully headed off a housing bubble for now, but whereas overstretched mortgages were a prior concern, the new concern is too many apartments. Cut the cash rate again, and there is a risk of further fuelling that particular fire. And will a rate cut have any impact whatsoever on grocery price inflation, for example? No. So once again the RBA finds itself between a rock and a hard place.

A quick straw poll of bank economists has them split this morning between cut and no cut next week, with CBA possibly summing up the mood by suggesting the RBA will indeed cut, “through gritted teeth”.

The stock market was already heading down from a spike opening yesterday and traded lower after the CPI release, then higher, then flat. No one’s quite sure what to make of it.

Among the sectors, the two stand-out moves were materials, up 1.8% on the iron ore price jump, and – yes it had to happen eventually – utilities, down 1.3%.

Clarity Diminished

We knew yesterday morning that Apple (Dow) had posted a strong result after the bell and last night the stock led indices to a strong opening with a 6.5% gain. Apple held its ground but the wider market then sold off to be flat, as per usual, ahead of the Fed statement.

Balancing out Apple to some extent in the Dow was Coca-Cola, who disappointed and suffered a 3% fall. After the bell this morning, a good result from Facebook has its shares up 5.5%.

There was one sentence in the Fed statement that has been at the centre of the debate since the release: “Near term risks to the economic outlook have been diminished”.

That word, “diminished”, has been enough to have business TV commentators locking in a September hike and at least one investment bank immediately issuing a note to that effect. But one TV economist did point out that while “diminished” is new, previously “balanced” has been used in the language. Is diminished more hawkish than balanced, or not?

Well look at it this way. This morning we obserfve the US dollar index down 0.4% at 96.76, the US ten-year yield down 5 basis points to 1.51% and gold up US$20.00 at US$1339.70/oz. Those moves scream no September rate cut. To top it off, the Fed funds futures market has reduced its implied chance of a September rate hike to 18% from 30% before the statement release.

Is it any wonder Wall Street closed flat (notwithstanding Apple’s skewed impact on the Nasdaq)? No one is any the wiser.

Given the Fed meets every six weeks, not calendar monthly, there is no meeting in August. But every August, central bankers meet at the place of QE infamy, Jackson Hole. It was here Ben Bernanke tipped the market off to upcoming QE1, QE2 and so on all those years ago. Janet Yellen didn’t go to Jackson Hole last year (she’s under no obligation), but she is going this year.

Before then we’ll have another jobs number. Incidentally, I have been highlighting a solid run of US data recently but last night’s durable goods orders result disappointed with a -4.0% fall when a -1.7% fall was expected. Perhaps the main reason why Wall Street does not see September as a goer.

Commodities

LME traders certainly did not like the weak US durable goods number. Despite the weaker greenback, copper, lead and zinc all fell 2% in last night’s trade.

Oil is also down another 2%, with West Texas crude falling US73c to US$41.91/bbl. While the resumption of lower oil prices is impacting on US energy sector stocks, it is having nothing like the sort of impact on Wall Street psyche it did earlier this year.

That’s probably because there was surprise WTI made it all the way back to 50, and a lot of analyst talk oil would need to go lower again before it could go higher, in order to squeeze out marginal supply. But we’re not talking 25 again. Maybe 35, but perhaps 40 is enough to bring the buyers back in. There’s no real panic.

Iron ore is up US60c at US$58.00/t.

The Aussie is down 0.2% at US$0.7487.

Today

The SPI Overnight closed up 11 points or 0.2%.

Today we see a bit of a support act doing its thing ahead of the main event next month. We have a burst of early-season earnings results, including those from CYBG Plc ((CYB)), Henderson Group ((HGG)), GUD Holdings ((GUD)), OceanaGold ((OGC)) and (tonight) ResMed ((RMD)).

Macquarie Group ((MQG)) holds its AGM today and invariably provides a trading update.

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


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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: Poised

By Greg Peel

The Dow closed down 19 points or 0.1% while the S&P was flat at 2169 and the Nasdaq rose 0.2%.

Resilient

It was back to a familiar pattern on the local market yesterday as the ASX200 plunged 35 points on the opening rotation before bouncing sharply to ultimately stumble its way back into the positive. Any attempts to send this market into reverse appear ill-fated at present.

The sector to watch yesterday was always going to be energy, given the oil price fell out of its technical range overnight. In the end a 1.5% drop on the day was a modest response compared to the sort of volatility we were seeing earlier in the year.

With the short-coverers licking their wounds, Woolworths ((WOW)) was able to fall back 3% yesterday to a more sensible level after Monday’s 8% pop. Analysts have applauded the tough stance being taken by the embattled supermarket, but do not foresee any great turnaround for some time yet.

Consumer staples thus closed down 0.8% in what was otherwise a mixed session across the sectors. Investors were no doubt positioning ahead of today’s local CPI release, and RBA implications, and tonight’s Fed statement release. The banks had a good day, healthcare didn’t, the telcos are being dominated by a down-playing of expectations from Telstra ((TLS)) and would you know it, utilities was up again.

Materials was flat yesterday but may not be today following a big jump in the iron ore price overnight.

Today’s June quarter CPI numbers could be interesting. The March numbers shocked with a 0.2% drop in quarterly headline inflation and despite a 0.2% rise in the RBA’s core inflation measure, the central bank wasted no time in acting.

Economists are forecasting a turnaround in June to 0.4% headline growth but for annual headline inflation to fall to 1.1% from 1.3%. If the RBA acted at 1.3%, why would it not act again at 1.1%? Except for the fact economists expect core inflation to rise to 1.7% from 1.5%.

That’s still outside the RBA’s 2-3% comfort zone, but is it enough to ensure an August rate cut?

Looks like we’ll have to wait for the actual results.

Hamburgled

McDonalds (Dow) posted a shocker last night. The 4.5% fall for this otherwise defensive consumer staple (Yes – in America fast food is considered staple) was its biggest one day drop since the GFC, and worth 40 Dow points.

It was enough to sour the early mood on Wall Street, along with another dip in the oil price, and the Dow was consequently down over a hundred points in early trade. But as was the case on the local market yesterday, Wall Street fought its way back to a flat close.

In other Dow earnings news, new Yahoo owner Verizon posted a beat but its share price fell, while share price gains were booked for DuPont and United Technologies following positive reports.

After the bell this morning, Twitter disappointed and its shares are down 10% as I write, while Apple (Dow) did the opposite and its shares are up 7%. This bodes well for the Dow tonight, although we will likely see the usual quiet market ahead of the Fed.

The Fed keeps telling us it’s data dependent. Last night saw US new home sales up 3.5% in June to the highest level in seven years. Case-Shiller house prices were slightly higher in May, while the latest Conference Board monthly consumer survey showed confidence steady this month from the last.

Overall the data continue to improve, prompting many on Wall Street to point out that in any other era, the Fed would be hiking steadily. Brexit is now past us in terms of an immediate threat but no one expects the Fed to raise tonight, and there are still plenty of pundits believing the Fed will not move ahead of the election.

Any excuse, it seems. While history shows the Fed is not always kept at bay by an election, the long-running and often hysterical sitcom that is the US election process has arguably “jumped the shark” this year in terms of sheer ludicrousness.

Commodities

West Texas crude is down US41c at US$42.64/bbl.

The US dollar index is steady at 97.16 and all base metals moved 0.5-1% last night in London – copper up and the others down.

Iron ore jumped US$1.60 to US$57.40/t.

Gold is US$4.40 higher at US$1319.70/oz.

The Aussie is up 0.5% over 24 hours at US$0.7504 despite the flat greenback. This occurred in the local session yesterday and suggests there may be some concern amongst those short the currency that today’s CPI numbers won’t be as weak as many assume.

Today

The SPI Overnight closed up 12 points. We can probably attribute most of that to the iron ore price.

The CPI numbers will be out late this morning.

Tonight sees the UK post its first estimate of June quarter GDP, but being pre-Brexit it won’t mean much.

The US sees durable goods ahead of the 2pm release of the Fed statement.

On the local stock front, Fortescue Metals ((FMG)), Independence Group ((IGO)), Sandfire Resources ((SFR)) and Senex Energy ((SXY)) will post production reports today, although Independence has already pre-released some numbers.

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

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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: Oil Jitters Return

By Greg Peel

The Dow closed down 77 points or 0.4% while the S&P lost 0.3% to 2168 and the Nasdaq fell 0.1%.

Pride Cometh

Once the undisputed and complacent king, Woolworths ((WOW)) will now close stores and cut back staff in order to reverse course after a lengthy fall from grace. As a Top 20 company, Woolies has offered nothing but disappointment for several years now for those still hanging on to a mega-cap, must-have principle. Yesterday was a different story.

The market saw the news as positive, and the short-coverers did the rest as Woolies jumped 8% yesterday, sending the consumer staples index up a stand-out 3.3%. At near 8%, Woolies was far and away the most shorted Top 20 stock in the market until the scramble began.

It was a less exciting session for other sectors. Consumer staples and healthcare resumed their rallies following some profit-taking on Friday, and utilities just keeps on keeping on. Outside of info tech, the resources sectors offered the only drag on a market that clearly remains in positive mode.

As to whether we can go again today is unsure nevertheless. Energy may prove a drag without another Woolies, although metals prices were relatively steady overnight and the ever-confident SPI Overnight closed up one point. Yesterday saw the ASX200 rally 35 points after the SPI had closed up 4.

Oil Concerns

The oil price was almost the singular driver of Wall Street earlier this year but once the WTI price recovered and settled into a range of US$44-50/bbl, the market turned its attention elsewhere. Last night oil traded down to US$43 and settled at its lowest level since April. Representing a break-down through the bottom of the range, oil now poses a renewed threat.

On the topside, the issue was one of a price of 50 bringing idled production back on line. This set 50 clearly as an upside barrier. On the downside, the issue is not crude but refined products.  There is a glut in the US of gasoline, diesel and other products, squeezing refiner margins and forcing refining cutbacks. These cutbacks lead to less crude demand, unwanted crude ends up in storage, and so down goes the price.

With the annual refinery maintenance season soon to begin, oil traders fear the level of crude in storage will only rise.

But it could have been worse. Sharp movements in the oil price earlier in the year had Wall Street panicking in either direction. The earnings season rolls on, and Wall Street still awaits the Fed’s decision and commentary on Wednesday night. The technicals remain to the upside, and pullbacks on the way are always considered healthy.

With regard the Fed, it is interesting to note last night’s auction of US two-year Treasuries saw the weakest demand in seven years. Dealers were left holding some 60% of notes on offer. Clearly investors are reluctant to buy short-term bonds ahead of the Fed and BoJ meetings this week.

The benchmark US ten-year yield remained unchanged at 1.57%, bearing in mind it was over 20 basis points lower at the Brexit nadir.

Commodities

West Texas crude is down US$1.20 at US$43.05/bbl.

With the US dollar index slipping 0.1% to 97.24, base metal price moves were minimal in London.

Iron ore rose US10c to US$55.80/t.

Gold is down another US$6.80 at US$1315.30/oz and is starting to look a little vulnerable ahead of the Fed meeting. If the FOMC comes out with a hawkish statement, and the market starts to bake in a September hike, gold will struggle to hold 1300.

The Aussie is up 0.2% at US$0.7468.

Today

The SPI Overnight closed up one point.

It’s a quiet day for data across the globe until the US reopens tonight, when home sales, house prices and consumer confidence will be in the frame.

Locally, ALS Ltd ((ALQ)) will hold its AGM today and Alacer Gold ((AQG)) will reportedly issue an earnings report.

This would be a good time to remind readers that all the upcoming reporting dates of major companies are listed in the FNArena calendar, on a best endeavours basis. In Australia, companies are not obliged to set a reporting date nor stick to one if they do, and for many a company, three different brokers will suggest three different dates for the same report.

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

Brokers Await Clarity On GLNG Progress From Santos

-Cost guidance conservative
-Roma wells slower than expected
-Over reliance on Fairview?
 

By Eva Brocklehurst

Cost reductions are well underway at Santos ((STO)), with brokers encouraged by indications that further progress is being made. Maintenance issues at PNG LNG offset the ramp up of Gladstone LNG production in the June quarter, Macquarie observes, while strong rises in oil prices were offset by the lag to weaker LNG prices.

Morgan Stanley maintains that as the company’s realised LNG pricing is lower than other Australian companies, this may reflect a higher proportion of spot sales and/or limited downside protection in its LNG contracts. The broker expects Santos will beat full year guidance on production costs, given the first half performance. The company has updated guidance on upstream production costs to US$9.50-10.00/boe.

Deutsche Bank attributes the miss on revenue in the quarter, relative to its estimates, to much lower third-party sales, a lag between production and sales, and a skew towards lower-priced domestic gas in the numbers.

There was no change to full year production guidance of 57-63mmboe and 31.1mmboe has been recorded to date, with GLNG now ramping up. This suggests to Ord Minnett there is potential upside to full year production. The broker also suspects cost guidance is now conservative. Unit costs in the June quarter were below the guidance range, suggesting the savings measures are gaining traction.

Ord Minnett commends the company for the cost performance, but remains concerned about what further rationalisation decisions may need to be made over the medium term to reduce through-the-cycle costs to the low US$30 barrel range.

While Credit Suisse contends the move to US dollar reporting makes changes to guidance confusing, assuming spot FX, it seems the company has downgraded both production costs and FY16 capital expenditure by 5% and 10% respectively. Hence, the broker awaits the half year results to obtain more clarity.

Meanwhile, the broker observes, 26 wells were drilled in the quarter. Admittedly this is an acceleration but Credit Suisse highlights that just 74 development wells have been drilled in the past 18 months. Given compression capacity constraints, the broker cannot accept this as a positive sign of performance. Roma needs more than 1,000 wells to be drilled to run at capacity, the broker calculates. To date, just 300 have been drilled.

Credit Suisse suspects that joint venture partners are slowing upstream capital expenditure as well, slowing the ramp-up. For now the stock is a play on the oil price, the broker maintains, and there is around 6-9 months of waiting before longer-term challenges and resolutions, hopefully, will drive the share price.

Production beat UBS estimates as output was better than expected from both the Cooper and Carnarvon Basins. The broker expects spending to pick up in the second half as activity increases in the Cooper Basin and GLNG. UBS concurs that cost reductions remain central to the thesis, given the company's high sustaining costs. Further cost cutting measures are needed in order to reduce break-even free cash flow, but the broker anticipates the targets can be achieved without major reductions.

UBS expects higher volumes in the coming quarters as contracted deliveries increase, retaining a 3-year ramp up in forecasts for GLNG. Still, the broker maintains a view that GLNG's over-reliance on the Fairview field for equity gas supply will lead to additional investment being required in the future, as output from the plant is increased and Fairview declines. Up to 90% of GLNG's current equity gas supply is estimated to be sourced from Fairview.

Morgan Stanley agrees Roma and Fairview production remain the swing factors for GLNG during the ramp-up stage of train 2, given fixed third-party supply arrangements. The broker assumes train 2 ramps up slowly over 2016 and 2017 and full production is reached in the final quarter of 2017.

Citi just suspects the company is keeping its good news until the first half results in August. The broker considers cost guidance conservative and, by August, expects Bechtel will have handed over GLNG train 2 operations to Santos, resulting in higher production. The broker had hoped flow rates from Roma would be higher by now but expects the asset will be run harder once Bechtel hands over.

FNArena's database has four Buy ratings for Santos, two Hold and one Sell (Ord Minnett). The consensus target is $5.04, signalling 5.8% upside to the last share price. Targets range from $4.10 (Credit Suisse) to $6.44 (Citi).
 

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article 3 months old

The Monday Report

By Greg Peel

Predictable

The dip overnight on Wall Street provided an excuse but realistically it was an all too predictable session on the ASX on Friday assuming no unexpected news. We had a solid run-up during the week, profits are often locked in ahead of a weekend, and next week sees critical central bank meetings that offer reason to move back to the sidelines to see what transpires.

The consumer sectors had been leaders in the rally over the week, so no great surprise they were the underperformers on Friday. Telcos also came in for some more selling, but otherwise downward moves across sectors were minimal and materials posted a sole gain with a 0.2% increase.

The pullback put the ASX200 pretty much on the 5500 level, which is rather neat, and suggests a pivot point for what happens next. The technicals remain generally bullish at this stage but we’ll still need some sort of fundamental justification to move into the next up-leg.

While markets across the globe may go quiet early this week ahead of the Fed meeting and statement release on Wednesday night, in Australia we will also see the release of June quarter CPI numbers on the Wednesday ahead of the Fed. The RBA has left the door open for an August rate cut were the June numbers to again be weak. Economists are forecasting weak numbers.

We also saw falls in commodity prices on Friday night, which should weigh on the ASX200 this morning.

Poised

The focus on Wall Street this week is clearly on the Fed, although US indices did manage slight gains on Friday night. The Dow closed up 53 points or 0.3%, the S&P gained 0.5% to 2175 and the Nasdaq rose 0.5%. The Dow and S&P both posted new highs.

On the US earnings front, the trend continues to be positive, or at least “less bad”. General Electric’s (Dow) result disappointed somewhat on Friday but with 100 of the 500 S&P stocks now having reported, the running change in earnings per share is minus 4.2% compared to a consensus forecast ahead of the season of minus 5.3%.

There are still 400 stocks to report over the next couple of weeks.

Meanwhile, the early earnings trend may be positive, thus justifying Wall Street strength, but the indices were again led by telcos and utilities on Friday night. The hunt for yield continues to override any notion of economic improvement.

US economic data have nevertheless been positive this month, and the trend continued on Friday night. A flash estimate suggested the US manufacturing PMI for July would come in at 52.9, up from 51.3 in June and well ahead of 51.5 forecasts.

It is this sudden turnaround in US data that has Wall Street assuming the Fed must now be seriously looking at a rate hike sooner rather than later, given the feared Brexit disaster did not transpire. Up until this month US data had been a bit too mixed to assure a hike, and the shockingly weak May jobs number was the cruncher. But since the June jobs number came screaming back, a string of very positive releases including retail sales, industrial production and various housing numbers has followed.

There is no hike expected on Wednesday night. But markets will be looking to see just what sort of hint the FOMC may be prepared to provide of a September move.

The Fed is under no pressure to hike this week, which is handy given Friday brings a Bank of Japan policy meeting. Strictly the Fed should not be in any way beholden to what Japan does, but given some form of shock & awe is being assumed out of Tokyo, the FOMC will no doubt be keen to see what that is before having to make its own decision.

Commodities

The issue of a Fed rate hike is one commodity markets will be concerned about. While the justification for a hike – stronger US economy – is positive for commodity prices, a consequentially stronger US dollar is not. The US dollar index rose 0.5% to 97.35 on Friday night.

An outage of a commodity trading platform during the Asian session meant many traders were cut off from base metal markets as trading shifted over to London, ensuring very light volumes were then traded on the LME. This didn’t stop nickel falling 3%, although nickel has been the outperformer of late, while other metals fell by small amounts except aluminium. It’s been the underperformer of late, and rose slightly.

Iron ore fell US40c to US$55.70/t.

West Texas crude fell US29c to US$44.25/bbl.

Gold doesn’t quite know whether it’s Arthur or Martha at the moment, as it shifts back and forward inside a 1320-40 range. Friday night’s jump in the greenback prompted a fall of US$8.60 to US$1322.10/oz.

The strong greenback ensured the Aussie was down half a percent at US$0.7455 on Saturday morning.

The SPI Overnight closed up 4 points on Saturday morning.

The Week Ahead

Fed on Wednesday night, BoJ on Friday.

Ahead of the Fed meeting, the US will see new home sales, Case-Shiller house prices, consumer confidence and the Richmond Fed index on Tuesday, and pending home sales and durable goods on Wednesday. Thereafter, Friday will bring the first estimate of US June quarter GDP.

The UK will report its GDP on Wednesday, and the eurozone on Friday, although both reflect a pre-Brexit Europe.

Along with the BoJ meeting on Friday, Japan will see a raft of June data, including inflation, retail sales, industrial production and unemployment.

On the local stock front, the last of the resource sector quarterly production reports merge this week with early movers in what is otherwise the August result season.

Among the production reporters we’ll see Newcrest Mining ((NCM)) today, Fortescue Metals ((FMG)) and Independence Group ((IGO)) on Wednesday, and Origin Energy ((ORG)) on Friday.

Thursday will bring earnings reports from CYBG Plc ((CYB)), Henderson Group ((HGG)), GUD Holdings ((GUD)) and ResMed ((RMD)).

Thursday also sees the Macquarie Group ((MQG)) AGM, at which guidance will be updated.

Rudi will appear on Sky Business via Skype-link on Tuesday to discuss broker calls, 11.15am. Then on Wednesday he'll host Your Money, Your Call, 8-9.30pm. On Thursday he'll re-appear in the studio, 12.30-2.30pm and later that day he'll join Switzer TV on the channel. On Friday he'll repeat the Skype-link up at 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: Consolidation

By Greg Peel

The Dow closed down 77 points or 0.4% while the S&P lost 0.4% to 2165 and the Nasdaq fell 0.3%.

Stall

The ASX200 posted its tenth gain in eleven sessions yesterday but conviction waned as the day wore on. After such a solid run, not only recovering the Brexit plunge but far overshooting it, it is inevitable that a pullback of some extent should occur as profits are booked.

Having opened up over 40 points, the index closed only up 24. With Wall Street also finally seeing some consolidation last night, the futures are suggesting an open of down 32 points this morning.

Healthcare was again the star yesterday, having previously been a bit of a laggard in the rally. It rose 1.5%, outperforming more modest and relatively even gains in other sectors. The exceptions were materials, which fell another 0.4% having led out the rally from the start, and telcos, finally seeing a dip of 0.1%. Utilities were still in favour nonetheless, rising 0.6%.

The materials sector should continue to play more of an “alpha” (stock-specific) game through to next week as more quarterly production reports roll in, and as they wrap up we’ll be into the reporting season proper.

Technically, the ASX200 has done all the right things in rising to 5500. The next target should be 5800 but first we need to get past a couple of significant central bank meetings and then we need to see a successful reporting season.

Banking It

A market can’t make new highs forever, which is why nobody much minded that Wall Street pulled back last night. There were some good and not so good earnings reports on the day, but Wall Street is now looking ahead to next week’s central bank meetings and deciding to move to the sidelines.

The Fed will release its policy statement on Wednesday. A rate hike is not expected at this meeting but in the constant ebb and flow of Fed speculation, September is now firming as a good chance. Brexit has been a storm in a tea cup and recent US data, including jobs, housing industrial production and retail sales have all been solid – solid enough to put the onus on the Fed to explain why it would not raise.

The US ten-year yield has moved back up from its Brexit low of 1.36% to now sit at 1.56%. Gold has stopped rising, although it’s interesting to note that having fallen around US$15 on Wednesday night understandably, gold last night rallied back US$15.40 to US$1330.70/oz on only a 0.3% retreat for the dollar index to 96.88.

Next Friday the Bank of Japan will meet. No one knows for sure what it has in mind, but ever since the Abe government won a sweeping majority in the recent upper house election the market has assumed that whatever it is, it won’t be pop gun stuff. Mind you, I have noted before that whenever the world assumes big things from the BoJ it does nothing, and vice versa.

And on that subject, nothing is exactly what the ECB did last night, unsurprisingly. Mario Draghi pledged low rates for longer and a continuation of QE into 2017, and perhaps beyond, but saw no reason to introduce any new measures. The ECB’s status quo decision follows the Brexit rebound and a similar decision by the Bank of England last week.

Had any combination of the BoE, ECB and BoJ been forced to act swiftly to stave off post-Brexit disaster, the Fed would have an argument that staying put is the sensible option. We still await the BoJ.

And just to underscore the argument for a Fed rate hike, US existing home sales rose 1.1% in June to the strongest rate since February 2007.

Commodities

There is talk of Libya being able to recommence export from an oil terminal and that had a negative impact on oil prices last night. However, the West Texas contract rolled over into September front month delivery and often we see some selling at expiries. It’s down US$1.21 to US$44.54/bbl.

Aluminium continues to suffer from building inventories and it was down another 1.5% last night in London. The Philippines story continues to drive nickel, which rose 1.5%, while the other metals were quiet.

Iron ore rose US$1.00 to US$56.10/t.

On the dip in the greenback, the Aussie is up 0.4% at US$0.7495.

Today

The SPI Overnight closed down 32 points or 0.6%. And it’s Friday.

Japan, the eurozone and US will all post flash estimates of July manufacturing PMIs today/night.

Santos ((STO)) and OZ Minerals ((OZL)) will post production reports today.

Rudi will Skype-link with Sky Business this morning at around 11.05am to discuss broker calls.
 

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.)

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article 3 months old

The Overnight Report: Conviction Lite

By Greg Peel

The Dow closed up 36 points or 0.2% while the S&P gained 0.4% to 2173 as the Nasdaq rose 1.1%.

Healthy

Healthcare led the local market up yesterday with a 1.7% rise thanks to a 2% gain for mega-cap CSL ((CSL)) in response to a broker upgrade. Meanwhile, the consumer sectors continue to be the consistent players in the run above 5400 for the index, with both staples and discretionary gaining 1.4%.

One might argue whether staples is truly a “defensive” sector these days amidst the supermarket wars and the sheer size of the major players in the sector, but it seems Woolies is a stock investors find difficult not to hold in a portfolio.

The same could be said for BHP Billiton ((BHP)), which yesterday posted a mixed production report and helped materials down 1.4%, to post the only sector loss. The move down in the big miners was countered by a 1% gain for the banks, for which the story is much the same in terms of “must-haves” of the bygone era.

Were this recent rally to be a cyclical one, we would be seeing a rotation out of some of the defensives many an analyst sees as overbought. But yesterday telcos and utilities continued to rise along with the market.

What we’re likely seeing here is a combination of TINA and FOMO – there is no alternative and fear of missing out. With a central bank safety net under global stocks – and that will likely include another RBA rate cut -- there doesn’t seem much risk in holding stocks and there’s no point in suggesting the rally lacks fundamental basis if it’s just going to keep moving higher.

Yesterday’s session represented the ninth gain for the ASX200 in ten.

The Aussie is continuing to go the right way as well, down another 0.6% this morning at US$7463.

Spectators

There may not be too much FOMO going on on Wall Street at the moment given the ongoing graft into new blue sky territory is occurring on very low volumes, even for summer. Commentators make constant reference to historically high levels of US cash on the sidelines but new all-time highs, and bullish talk, has not yet been enough to shift that cash back into play.

Which is interesting considering you basically get no return on your cash in the US.

Microsoft (Dow) was the talk of the Street last night after having posted an earnings beat in Tuesday night’s aftermarket and a 5% gain in last night’s session. Traders were most excited about one particular element of Microsoft’s result, being its suddenly popular cloud business. A successful move into the cloud shifts the tech stalwart more into “new tech” territory from its “old tech” status.

Microsoft’s result spurred a fresh round of tech stock buying on Wall Street last night, as evidenced by Nasdaq outperformance.

Morgan Stanley rounded out the bank sector results with a solid beat, just as each US bank has largely done. MS shares rose 2%.

After the bell this morning, we note Dow stocks Intel and American Express are seeing post-result selling, down 3% and 1.5% respectively as I write. EBay, on the other hand, is up 6%.

We’re still only now getting into the meaty part of the US results season but so far the beats are clearly outweighing the misses. It must be taken into consideration nevertheless – and here the banks are a case in point – that most of the “beats” reflect not-as-bad-as-expected profit declines rather than profit growth.

Yet Wall Street is creating new highs every day.

There is also a growing concern that the VIX volatility index on the S&P500 has fallen to 11, which is typically the bottom of the range and often the contrarian signal for volatility to come. In theory, 11 suggests over-complacency. In practice, it means fewer investors feeling the need to buy downside protection for their portfolios.

While 11 is about as low as it goes, the VIX can hang around the lows for long periods of time. I’d also wager that the current low level is a result of so many investors being burnt on protection they took against a Brexit disaster that lasted all of five minutes, they are wary of making the same mistake twice.

One doesn’t need one’s own put options. The central banks have that covered.

Commodities

It was weekly US oil inventory night last night and for the ninth week in a row, crude inventories fell. Last week’s drop was greater than expected so West Texas is up US37c at US$44.94/bbl.

The US dollar index continues to tick higher, and is up another 0.1% at 97.14 this morning. While the strong dollar is acting as a headwind for commodity prices it’s not yet causing any major dramas. Base metal prices were once again mixed on small moves last night in London, other than a 1.5% fall for aluminium.

Iron ore is unchanged at US$55.10/t.

It’s a different story for gold. Are those assuming EU turmoil, BoJ shock & awe and a timid Fed starting to lose their conviction? Gold is down US$16.40 at US$1315.30/oz.

Today

The SPI Overnight closed up 20 points or 0.4%, matching the S&P500. That would take the ASX200 past the 5500 level.

The ECB holds a policy meeting tonight. There should not be any great surprise if the central bank does nothing, given the world has shaken off Brexit altogether and the euro is lower, which is exactly what the doctor ordered.

It’s a busy night for US data tonight, including existing home sales, house prices, the Philly Fed index, the Chicago Fed national index and leading economic indicators.

NAB will publish a June quarter summary of its business confidence survey today.

Woodside Petroleum ((WPL)), South32 ((S32)) and Evolution Mining ((EVN)) will post production reports today.

Rudi will appear on Sky Business from 12.30pm until 2.30pm 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: Greenback Worries

By Greg Peel

The Dow closed up 25 points or 0.1% while the S&P lost 0.1% to 2163 as the Nasdaq fell 0.4%.

Not the Whole Nine

The minutes of the July RBA board meeting revealed the board’s opinion that “the transition of economic activity to the non-resources sector was now well advanced and recent data suggested that growth had continued at a moderate pace in the June quarter”. However, recent data has also suggested that the labour market has been “more mixed of late”, inflation is expected to remain “quite low for some time”, the housing market has become “somewhat mixed” and the stronger Aussie continues to “complicate” policy.

The board now awaits upcoming data on inflation, labour and housing due before the August meeting. “This information would allow the Board to refine its assessment of the outlook for growth and inflation and to make any adjustment to the stance of policy that may be appropriate”.

In other words, economists are still expecting an August rate cut.

It was around the time of the release of the minutes yesterday the ASX200 began to slide into the negative, not that they likely had any influence, killing off hopes of a ninth straight day of gains. At the index level, a fall of 7 points is hardly momentous nonetheless. The higher markets rise in a single run the bigger the inevitable pullback is going to be.

A minimal move for the index nevertheless belied some largish sector moves. The loser on the day was materials, down 1.8% on a lower iron ore price and otherwise profit-taking after a solid run. Materials was the negative that cancelled out decent moves up for energy and the consumer sectors but the star on the day was utilities, up 1.7%.

How crowded can the yield trade become?

Having broken up through 5400 resistance, the index is now looking a little hesitant at 5450. Once again there has been no lead from Wall Street overnight, and the futures are again up just the one point this morning.

The good news is the Aussie has dropped a percent to US$0.7504 on a combination of yesterday’s RBA minutes and a further surge in the greenback overnight. Attention is now firmly back on the Fed, which meets next week. The US dollar is adjusting for Brexit-related pound and euro weakness and assumed policy action from the BoJ to cap the yen on the one hand, and improving US data on the other.

In other words, rate hike talk is back. It would be interesting if the Fed were to hike next week as that might act as a proxy for an RBA cut, at least in terms of the currency. But September is considered more likely for the Fed, if at all, hence the RBA will have to make its decision first.

Stalled

Wall Street continued to go nowhere last night although the Dow did manage to notch up a sixth straight gain into further blue sky. The offset for the broad market S&P500 can be seen in the Nasdaq, which was dragged down by a 14% fall for Netflix following its disappointing result and a subsequent market reassessment of streaming businesses.

On the other side of the coin, plodding old consumer staple Johnson & Johnson (Dow) posted an earnings beat and provided upbeat September quarter guidance. Goldman Sachs (Dow) matched its bank peers with an earnings beat but its shares were off on the day, likely because the market repriced the banks last week following JP Morgan’s strong result.

On the data front, US housing starts rose a better than expected 4.8% in June. It was this release that helped the US dollar index rise to a four-month high, up half a percent to 97.03.

The greenback was the big talking point of the day on Wall Street. Much was made last year of the currency drag on US multinational earnings as the dollar surged in the December quarter ahead of the Fed rate hike. At that time the index just pipped 100, before the early 2016 commodity slide brought it back to earth once more and killed off further Fed rate hike expectations.

When the index crossed back over 97 last night it was a trigger for renewed concern. The age-old Catch-22 for any market is that a strengthening economy is good, but a strengthening currency is not so good if you are an exporter.

Commodities

Materials and energy were among the sectors in the red on Wall Street last night as a result of the stronger greenback. West Texas crude fell US63c to US$44.57 to drop below the low end of the recent range at 45.

For base metals it was not necessarily a case of blindly responding to the US dollar, nonetheless. Trading was relatively quiet on the LME ahead of Thursday night’s ECB meeting but there was a nod to the strong US housing starts number, which was the cause of dollar strength. Copper and zinc rose 1%, aluminium fell 0.5% and the others were flat.

Iron ore fell by another US$1.10 to US$55.10/t.

Gold is not blindly responding to the dollar either, but if the dollar continues to rise the headwinds will blow stronger. Immediate Brexit fears may now have passed but there is no reason to assume there will be no fallout whatsoever, which is likely what’s keeping investors in the safe haven for the time being. Gold is up US$3.20 to US$1331.70/oz.

Today

The SPI Overnight closed up one point.

Yesterday’s production report from Rio Tinto ((RIO)) was more “okay” than great but on a weaker iron ore price, profit-taking in the sector was always on the cards. The iron ore price is down again, and BHP Billiton ((BHP)) has just reported today.

Woodside Petroleum ((WPL)) also posts its production report today, Cimic ((CIM)) already jumped the gun with a pre-season earnings result yesterday, and yield lovers will be glued to Sydney Airports’ ((SYD)) June traffic stats.
 

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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