Tag Archives: Energy

Material Matters: Production, Mineral Sands, Lead And Oil

-Lift in bulk volumes expected
-Titanium dioxide feedstock price rising
-Lead buying likely relative to zinc
-Modest oil price rise seen for 2017

By Eva Brocklehurst

Production Preview

With the March quarter affected by seasonally-induced weather interruptions, UBS looks for a sequential lift in bulk volumes – iron ore, coal and manganese - in the June quarter. Channel checks among the three major Pilbara producers suggest an 8% lift in exports.

The broker also observes the Platts 62% iron ore price declined over May but did lift into the end of the June quarter, closing at US$55.66/dmt. This is around the same level it started the quarter, which implies relatively benign adjustments to realised prices for the quarter.

BHP Billiton's ((BHP)) Western Australian iron ore shipments are expected to recover, yet UBS forecasts shipments of 257mt, slightly short of the 260mt provided as guidance.

UBS also suspects Newcrest Mining ((NCM)) could beat on gold production guidance, given quarter on quarter strength. The broker looks for 628,000 ozs in the June quarter, taking full year production to 2.47m ozs and in line with guidance of 2.50m ozs.

On the other hand, OZ Minerals ((OZL)) incurred unplanned maintenance in the first two months of the quarter and this could lead to lower-than-expected production. UBS estimates for copper production are set at 32,000 tonnes. Gold producer Regis Resources ((RRL)) is also a possible suspect to beat forecasts, led by ongoing positive grade reconciliation at Rosemont, the broker maintains.

Mineral Sands

Ord Minnett upgrades rutile price expectations by 6% for 2017 and 2018 on the back of improving demand. Zircon price estimates are largely unchanged. The broker notes pigment producers have been increasing prices and sales in the last quarter, which should improve titanium dioxide feedstock consumption and provide confidence in re-stocking.

Against a backdrop of improving demand the broker expects the higher grade titanium dioxide feedstock market to tighten, increasing rutile prices to US$797/t in 2017 and US$843/t in 2018.

The broker notes evidence of price rises in lower grade feedstocks, with Base Resources ((BSE)) passing on a US$15/t rise for the September quarter. The broker retains a Hold rating on the stock and upgrades the price target to 24c from 5c.

Ord Minnett upgrades Iluka Resources ((ILU)) to Hold from Lighten given expectations of higher production levels from the Mining Area C, and resultant royalties for Iluka, as well as improved titanium dioxide feedstock pricing. The broker suspects the stock will remain range-bound as, despite the improving titanium dioxide market, zircon markets remain lacklustre.

Lead

Lead prices on the London Metal Exchange climbed 8.4% in the last week of June, second only to nickel in a week that Macquarie observes was strong for base metals all round. Whereas nickel benefitted from fears of mines closing in the Philippines there was no news story to account for the lead rally.

Demand is considered seasonally soft in the northern hemisphere summer and stocks have been flat. The broker ventures the view that, with zinc's strength being tempered recently, some of the profit taking or new short positions in the metal has been countered by buying of lead on a relative value trade.

Macquarie finds no clues in the physical market. On the supply side, recycled lead is tight after a mild winter but in certain regions there is over capacity at the second stage which means refined output from such sources is strong. Primary supply has been dented by zinc-lead mine closures and imports into China are down 20% year on year in May. Still, none of these factors can really be attributed to the rally.

Lead markets are not as big and important as other base metals, with over half of the market contained in the closed loop of battery recycling. Hence, Macquarie concludes that the rally in zinc was probably the most influential driver of lead prices, tempting relative value players with such wide spreads.

Energy

Deutsche Bank observes oil prices have firmed recently as supply disruptions start to tighten the market amid strong demand growth. The broker expects oil prices will pause after rallying in anticipation of the upcoming inventory drawdown. The price is expected to be broadly flat at US$50/bbl in the second half, before rising to US$57/bbl by the end of 2017 as the tightening supply becomes more entrenched.

The broker upgrades 2016 Brent forecasts by 6.8% to US$45/bbl. In 2017 the broker forecasts a more substantial deficit in the market and expects demand growth will exceed oil supply growth. Yet Deutsche Bank does not expect the inventory drawdown will be large enough to normalise inventories until 2018. A relatively modest price appreciation is expected in 2017, to an average of US$55/bbl.

The broker continues to favour Oil Search ((OSH)) among oil stocks for its high quality assets.

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Opportunity Emerging In Beach Energy

-Capital could be better spent
-Net cash by end 2016?
-Potential to re-start dividends

By Eva Brocklehurst

Several brokers believe opportunity may be opening up in Beach Energy ((BPT)). Credit Suisse is one. The broker believes the stock is a good way to play the cost cutting that is occurring in the Cooper Basin.

Beach Energy is a junior partner (21%) in the South Australian Cooper Basin (SACB) joint venture, with Santos ((STO)) as operator. Credit Suisse calculates that with every 10% reduction in capital or operating expenditure at the SACB JV, the net present value (NPV) of Beach Energy rises 6%. The broker considers 30% savings are not beyond the realms of possibility, which would lift NPV 18%.

Credit Suisse accepts that at current oil prices, selling a stake in the SACB JV is difficult. Nevertheless, if Santos could find a way to price up, or break, the Horizon contract and the costs can be taken out it would become a saleable asset for all parties.

One aspect of the situation the broker believes sell-side models never capture is the opportunity cost entailed with being stuck with poor capital allocation. Currently, two thirds of Beach Energy's entire capex budget is spent at the JV, much of which the broker suspects is below the weighted average cost of capital (WACC). Hence, freed up capital could be better spent on delivering economic returns.

Credit Suisse finds no logic in the current under performance of Beach stock and calculates the share price is factoring in a US$57/bbl oil price in perpetuity, or US$63/bbl on producing assets. The business could look profoundly different in 12-24 months time if merger or acquisition opportunities materialise, although the broker acknowledges this is hard to quantify.

Still, with a net cash balance and a relatively defensive, albeit leveraged, play on oil, the broker sticks with an Outperform rating. Citi recently upgraded to Neutral from Sell, also noting that there are cost cutting opportunities in the SACB JV as well as pointing out the company is net cash.

Following stronger-than-expected oil prices in the June quarter, helped by robust demand and some significant supply interruptions, UBS raises near-term forecasts. The broker expects Brent to average US$51/bbl in the second half and US$60/bbl in 2017. This has a modest impact on earnings and valuations, offset partly by the increase in the Australian dollar.

Still, after incorporating the updated outlook the broker also upgrades Beach Energy to Neutral from Sell. The combination of faster-than-expected recovery in oil prices and a lower share price means the stock is trading closer to fair value.

The broker estimates the market is factoring in US$63.8/bbl for Beach, and therefore a further recovery in oil prices. Near-term oil prices have a meaningful impact on the stock, the broker contends, given its front-ended Cooper Western Flank oil production profile. Beach Energy recently moved from CPI-linked to oil-linked gas prices for its Cooper Basin sales, so UBS believes these too will benefit from higher oil prices.

The broker sees the upside risks as further rapid oil price recovery or material exploration success. The downside risks centre on a faster-than-expected rate of oil decline from the Western Flank acreage.

UBS believes the long-awaited correction in oil markets is underway, given two consecutive years of reductions in global investment and a sharp drop in US rig activity. Meanwhile, Beach Energy's balance sheet is in the shape to survive three years of oil prices below US$40/bbl. In the absence of acquisitions, the broker estimates Beach Energy's net debt would fall below $70m after three years at the above-mentioned oil price.

On the subject of a reduction in capital and operating costs, UBS believes 20% is achievable. This would increase the broker's valuation by a further 5c per share, all else being equal. The recent merger with Drillsearch has consolidated the company's opportunities in the wet gas potential of the Cooper but the main challenge confronting Beach Energy at this stage is the imminent decline in Western Flank oil output, the broker contends.

Ord Minnett recently initiated coverage of the stock with an Accumulate rating and 68c target. The main reasons outlined for the positive view include the leverage to improving crude oil prices and limited LNG contract risk.

Beach Energy generates the majority of its revenue from crude sales. Ord Minnett is positive on the underlying commodity, with Brent prices expected to increase, driven by improving global demand and reduced high-cost supply. There is also the opportunity with Beach Energy for both acquisition-led growth and capital returns.

Beach Energy has a proven track record in reserve increases. While recent history is less positive, with the broker acknowledging reserves have declined 23% since FY13, this has coincided with falling oil prices, implying economic reserves were harder to find.

Hence, subsequent increases in the oil price could reinvigorate reserve development. Ord Minnett also envisages an opportunity for the reintroduction of dividends and believes this could be a value driver of the stock.

FNArena's database has two Buy ratings and five Hold for Beach Energy. The consensus target is 66c, suggesting 2.2% upside to the last share price.

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The Monday Report

By Greg Peel

Breather

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

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

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

Yer Kidding

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

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

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

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

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

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

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

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

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

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

Commodities

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

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

Iron ore was unchanged at US$55.20/t.

The Week Ahead

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

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

This week will bring China back into focus.

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

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

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

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

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

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

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

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

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The Overnight Report: Fed Focus

By Greg Peel

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

Inevitable

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

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

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

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

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

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

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

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

All About Jobs

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

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

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

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

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

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

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

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

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

Commodities

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

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

Iron ore fell US60c to US$55.20/t.

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

Today

The SPI Overnight closed down 21 points or 0.4%.

The world once again awaits the US jobs numbers.

Beijing will publish Chinese inflation data on the weekend.

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Material Matters: Drivers Of Commodity Outlook For FY17

-Gold main beneficiary from Brexit
-Zinc and tin stand out in base metals
-Demand growing but not strongly
-Supply being rationed
-But not enough to push up prices

By Eva Brocklehurst

Strategy and Outlook

Commonwealth Bank analysts suggest, as another disappointing year passes for mining and energy companies, that FY17 is shaping up for further falls in commodity prices, albeit not as severe. The analysts expect the slowing of China's commodity-intensive sectors will continue as government stimulus fades.

Construction, which accounts for 40% of China's steel demand, is the most important end-user demand segment and late last year, the analysts observe, property construction volumes were falling materially in year-on-year terms.

Lower production costs and rising US interest rates should also apply downward pressure to commodity prices. Some miners view the recovery in commodity prices as sustainable and this suggests supply will be more reluctant to exit the industry. Yet if the recovery is not sustainable, which the CBA analysts believe is the case, this behaviour will weigh on prices.

The analysts anticipate oil prices will lift modestly as the market appears to be re-balancing. Gold and other precious metals also look more promising. Among the base metals the analysts consider zinc to be the stand-out commodity, given mounting concerns about a deficit as London Metal Exchange inventories head lower.

The decision by the UK to leave the EU has created all sorts of fears, the analysts maintain. Commodity demand waxes and wanes with economic growth so the impact will be about the extent to which global economic growth slows.

Metals generally feel the affect of swings because their demand is most elastic, with energy somewhat less so and agriculture less so again. At this stage investors and currencies have felt the most impact, the analysts maintain.

They also suggest, for the most part, fundamentals will remain foremost in commodity markets. In terms of Brexit, the primary impact should be felt through a stronger US dollar, safe haven demand and falling commodity consumption in Europe. One effect that may be material is any disruption to global trade flows of goods and commodities.

The depth, maturity and liquidity of different commodity markets are also relevant. Copper, gold and oil may be prone to volatility. Equally, developing markets for coking and thermal coal and iron ore may be relatively immune, the analysts believe.

In aggregate, this suggests gold will perform the best. While other commodities are less appealing the analysts believe coal and oil are likely to outperform and nickel and aluminium to underperform. Iron ore could fare worse because of its strong inverse relationship with the US dollar.

In essence, the analysts believe the consequences of Brexit will emerge slowly and caution itself, as much as sentiment delays spending decisions, may be the biggest issue for commodity market for the rest of 2016.

Macquarie observes, overall, commodities have performed better than feared at the start of 2016. Much of the sequential price increases can be attributed to changes in China but the broker believes the industrial recovery is a global phenomenon. While the recovery remains modest, especially in comparison to how the sector was performing before the GFC, this is a positive development for commodity demand.

The broker notes headwinds for both metals and bulk commodities, such as US dollar strength and oil prices, have eased in the year to date and this will help to stall the multi-year cost deflation cycle moving into the second half of the year.

Macquarie agrees zinc has been the most conspicuous performer among the base metals this year but, half on half, tin was actually stronger and remains the only base metal up year on year in terms of its June average price. The broker struggles to find catalysts to move copper out of its current range but agrees the long-awaited deficit for nickel is finally emerging.

The main surprise in the six months to June has been stronger bulk prices. Macquarie has raised its 2016 demand forecasts across most commodities but does not expect this to be strong enough to create bottlenecks.

Given excess capacity in all markets, and with interest rates set to stay lower for longer, pricing is expected to be at a level where supply is suitably rationed. The broker expects gains in price are most likely to be a result of a cost-push from rising oil prices, with the exception of zinc.

One of the big themes in 2015 was the rebalancing of markets via a reduction in production, Morgan Stanley observes. These announcements declined sharply in the first quarter of 2016 and improved demand growth has meant some markets have tightened sufficiently to support prices. The broker cites zinc, iron ore and coal in this regard.

Nickel appears to be an exception as its supply-side response to the price fall in 2015 was quite modest, Morgan Stanley observes. The broker believes, with the nickel price still below half of the cost curve and inventories high at exchanges, more production closures are likely.

Recovering prices pose a new risk too, the broker maintains. This is the risk of operations restarting. This is most acute for alumina/aluminium where large operations which were closed late last year and early this year in China are now being re-opened. Estimates suggest around 500,000 tonnes per annum of aluminium smelting capacity was re-started in the first half and should lift in the second half.

The broker also notes the price upside for zinc is capped by the potential of a full return of Glencore's 500,000tpa, apparently removed from the market in October 2015. Re-starts elsewhere are considered unlikely as a seasonally quieter season looms for iron ore, copper and nickel.

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The Overnight Report: Turnaround

By Greg Peel

The Dow closed up 78 points or 0.4% while the S&P rose 0.5% to 2099 and the Nasdaq gained 0.8%.

Finding Support

The local market traded down from the opening bell yesterday in line with offshore markets. Banks are in the frame once more – both globally as a result of Italian bank fears and domestically through ongoing talk of a Royal Commission – while dips in commodity prices saw pullbacks for both the materials and energies sector.

At midday the ASX200 was down 80 points and it looked like we may be in for another nasty capitulation session but at the support level on the charts of 5150, the buyers decided to move in.

Large caps were in favour as falls in the banks and resource sectors were pared, leaving financials down 0.8% on the day, materials down 1.1% and energy down 1.8%. But it was otherwise clear what investors were looking for.

In a world of record low interest rates, including negative ten-year bond rates in Japan and Germany, a new record low ten-year yield in the US, and in Switzerland, a fifty-year bond rate that has dipped into negative, the search for yield has become ever more inspired.

Yesterday saw only three sectors finish in the green on the local bourse – utilities, telcos and consumer staples.

There was also a growing indication, as the afternoon wore on yesterday, that the coalition is clearly leading the count to determine the undecided seats and there is a slim chance it may even get over the line for an actual majority. If it doesn’t quite make it, there may only be the need to bring a couple of cross-benchers onside and thus avoid having to deal with the left-leaning members. The Kat in the Hat is one candidate, and Mr X is a reasonable man. The chance of an unworkable government and ongoing uncertainty has reduced.

And that’s a relief for the stock market, even if it were Labor in the same position.

The buyers were confident to take the index back to the 5200 level yesterday, and with Wall Street turning around for a positive close last night, the futures are pointing up 35 points this morning.

Don’t Panic

The bank story and Brexit flow-on story was not getting any less alarming last night as the London stock market fell 1.2%, Germany 1.7% and France 1.9%. As is typically the case, such selling carried over the Pond.

The Dow was duly down 127 points around 11am. But at that point a Dutch EU official suggested that there should not be any problem in Italy citing exemption rules in order for the Italian government/central bank to bail out troubled Italian banks with liquidity injections. Interestingly, the Netherlands is one EU member that has already seen the prosecution of new “bail-in” rules with regard Dutch entities.

We recall from yesterday that Germany had suggested Italy cannot call an exemption and Italian banks would be forced into “bail-in” measures to avoid going under, which would have left mum & dad investors with haircuts on the bond holdings and fire up more EU unrest. Brexit, Germany believes, is not a “systemic event”. It seems not all agree.

At the point at which the Dow was down 127 points the US ten-year yield hit another new record low, down 5 more basis points at 1.32%. But the Italy news turned the US stock market around in a flash – driven by the banks – and at the same time the ten-year yield rebounded to close up 2bps on the session at 1.38%.

Not long ago it was oil, now it’s bond yields.

Oil actually did have a solid session nonetheless, recovering 2% on weekly data showing a bigger inventory drawdown than forecast, and on a slightly weaker greenback. The greenback also reversed on the Italy news and as such is down 0.2% over 24 hours at 96.00.

The other news of the day was the release of the minutes of the June Fed meeting. They revealed a split committee, but at the end of day the doves won over the hawks by suggesting it was not the time to raise US rates when rates across the rest of the world were heading the other way. And we recall that the June meeting was held pre-Brexit vote, when the US ten-year traded as high as 1.75%.

So if low global rates were a reason not to move higher in June, lower global rates surely prevent any hike late this month or perhaps in 2016 altogether. But tomorrow night sees non-farm payrolls, which could well throw the cat amongst the pigeons once more with regard the strength or lack thereof of the US economy.

On that note, Wall Street was heartened by the June services PMI number, which showed a much bigger than expected jump to 56.5, reversing apparent weakness in May.

We note the S&P500 is back at its favourite pivot level of 2100.

Commodities

West Texas crude is up US$1.05 or 2.2% at US$47.91/bbl.

The nickel price has been flying all over the shop of late, with volatility centred on whether the new Philippines government will force the closure of some smelters. Last night saw nickel jump 3% in an otherwise mildly weaker session for base metals.

Iron ore is unchanged at US$55.80/t.

The pressure may have eased on Italian banks but the incremental climb in the gold price continues. It’s up US$7.00 at US$1363.20/oz.

The Australian stock market bounced off its lows yesterday and the Aussie also began a rebound from the previous session’s falls which carried on offshore. It’s up 0.8% over 24 hours at US$0.7518.

Today

The SPI Overnight closed up 35 points or 0.7%.

The local construction sector PMI is out today and in the US, the ADP private sector jobs report for June will provide a precursor for Friday night’s non-farm payrolls.

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The Overnight Report: Italeave?

By Greg Peel

Hitting Home

The concluding paragraph of the RBA’s monetary policy statement last month read:

“Taking account of the available information, and having eased monetary policy at its May meeting, the Board judged that holding the stance of policy unchanged at this meeting would be consistent with sustainable growth in the economy and inflation returning to target over time.”

Yesterday’s new statement made the following statement with regard Brexit…

“Any effects of the referendum outcome on global economic activity remain to be seen and, outside the effects on the UK economy itself, may be hard to discern.”

…and then concluded as such:

“Taking account of the available information, the Board judged that holding monetary policy steady would be prudent at this meeting. Over the period ahead, further information should 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.”

This conclusion points more to the possibility of an August rate cut than the June statement did. Glenn Stevens, like everyone else, has no idea how Brexit will play out but the central bank is ready to respond. The RBA statement did not, however, offer any joy to the local market yesterday.

On Monday the local market appeared to shrug off the possibility of a hung parliament and focus more on stronger commodity prices. Yesterday saw a sharp reversal however, which may reflect the possibility of fiscal stalemate hitting home in a delayed reaction, but I’d hazard a guess and suggest what we saw was foreign selling following the US long weekend.

Selling was relatively even across sectors, with the banks understandably among the leaders with a 1.3% fall while 0.5% for materials reflected an offset from stronger iron ore and gold prices. Utilities was the only sector not to fall, given its attraction as a bond proxy, while the leading 1.9% fall for consumer discretionary had an additional local feel to it.

The ASX200 fell steadily in the morning and had basically reached its closing level by midday, with no late cavalry appearing. No RBA rate cut had been expected, so there was no response to the statement release in the afternoon. The Aussie saw a choppy session before offshore movements took over last night.

There is little doubt the Australian economy is facing a new source of uncertainty in the form of a non-government, but that’s nothing compared to ongoing uncertainty in Europe.

Banking Crisis

The Bank of England last night relaxed regulatory requirements on the UK banking sector and thus effectively released 150bn pounds of new lending to businesses and households. But this did nothing to stem the ongoing fall in UK bank shares. The FTSE 100 actually closed 0.4% higher last night but as is now oft noted, the 100 contains big multinationals such as mining & energy and pharma stocks, as well as banks, and these benefit from the lower pound.

Bank shares fell again on news overwhelming cash outflows from UK commercial property REITs had forced the suspension of redemptions from some funds. But the focus was not just on the UK, but on Italy.

Big falls in EU banks stocks post Brexit have brought into focus the parlous state of the Italian banking system, where non-performing loans are running at some 17% -- ten times more than in the US. The world’s oldest bank, Monte dei Paschi, has stuck its hand up for a bail-out but there is a problem.

As of this year, new “bail-in” rules have been in place in the EU. These prevent any direct EU injection of bail-out funds ahead of bank bondholders taking a haircut on the value of their holdings, thus reducing the bank’s interest cost as an inside form of bail-out, or “bail-in”. But the issue here is that most of the bondholders of the likes of Monte dei Paschi are mum & dad investors, not global hedge funds or sovereign wealth funds.

Italy is thus calling for exemption rules to be triggered with regard bail-in, as is allowed in the case of a “systemic event”. Is the Brexit vote a “systemic event? Germany says no. Forget about the Netherlands being the next in line. Talk is now of “Italeave”. No doubt freelance exit consultant Nigel Farage will stick his hand up as an advisor.

The Italian bank sector is down 50% post-Brexit. Last night the French stock market fell 1.7% and Germany 1.8%.

European selling flowed into Wall Street as US traders also dealt with a 4% drop in the oil price. If Brexit jitters are not alone sufficient to spook the oil market, ongoing falls in the pound and euro had the US dollar index up last night by 0.8% to 96.22, and there is renewed concern of US supply ramping up again now WTI has seen US50/bbl once more.

Wall Street has seen a complete Brexit rebound, so last night traders were suggesting a hundred point drop for the Dow is hardly surprising given uncertainty still reigns and is there is little reason to suggest this won’t impact on the US, albeit the US looks ever more like a safer place to invest.

On that note, last night the US ten-year bond yield fell 9 basis points last night to a new record low of 1.37%.

Commodities

West Texas crude is down US$1.87 or 3.8% at US$46.86/bbl.

Uncertainty and the stronger greenback hit base metal prices, with copper and lead down 1% and nickel plunging 5%.

Iron ore fell US10c to US$55.80/t.

Gold is up US$5.60 at US$1356.20/oz. While few disagree gold is the safe haven du jour, in US dollar terms it is fighting a very strong headwind.

The good news is the Aussie is down 1% at US$0.7462.

Today

The SPI Overnight closed down 19 points or 0.4%. There is likely some consideration here that yesterday’s trade on Bridge Street was ahead of last night’s trade offshore.

The minutes of the June Fed meeting are out tonight, which will include a nod to Brexit risk being a reason not to raise. But as the meeting was held pre-Brexit, relevance will be limited.

Rudi will be presenting in Melbourne today, plus participating in the first Evening With Rudi with local FNArena subscribers.

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The Overnight Report: Uncertainty Home And Abroad

By Greg Peel

Groan

On Saturday morning futures traders had pushed the SPI Overnight up 32 points by the close, one hour before the first polling booths opened. Sure enough, the ASX200 closed up 35 points yesterday.

But it wasn’t cut and dried. The rise in the futures would largely have been driven by big gains on Friday night for metals prices and ongoing strength in gold. There was something new for the market to consider on the weekend nevertheless, when the election provided a no-result and a big win collectively for minor parties. The risk of either a Labor government being formed or a Coalition government being forced to bow to cross-bench wishes lifted the risk of an oft called for Royal Commission into the Australian banks.

So down went the banks from the opening bell yesterday, and down went the index, by 28 points. The selling did not last long, however, and fortunately for the banks APRA made a timely announcement in declaring it was satisfied Australia’s Big Four were carrying capital ratios that put them in the top 25% globally.

By day’s end the financials sector only lost 0.1% while the materials sector led the gain to the close with a 2.6% rally, backed up by energy on 1.4%.

While APRA’s announcement may take the pressure off the banks in the short term, vis a vis feared capital raisings, the banks are still awaiting the finalisation of international capital rules for banks deemed “too big to fail” domestically and APRA has yet to quantify its “unquestionably strong” requirement. The banks are not out of the woods just yet.

The Aussie dollar also took a tumble in early trade yesterday thanks to the election, given the ratings agencies wasted no time in warning Australia’s AAA rating will be under threat if the job of budget repair is undermined by whatever new multi-headed beast emerges as the country’s parliament. But the Aussie, too, turned around. Having traded as low as 74.6 the currency is currently up 0.5% over 24 hours at 75.3.

Helping the Aussie rebound, aside from commodity price strength, was the Melbourne Institute’s inflation gauge for June, which showed a larger than expected 0.6% gain following a 0.2% decline in May. Would this threaten an RBA rate cut in August?

Not likely. The annual headline pace on the MI’s measure is 1.5% and the core rate of inflation, which excludes a recent rise in petrol prices, rose only 0.2% to be up 1.2% annually, well below the RBA’s 2-3% target band.

More of an issue, therefore, is the local labour market.

ANZ reported a 0.5% rise in job ads in June for an annualised rate of 8.0%. June’s gain was down on May’s 2.2% surge but ANZ’s chief economist suggested: “The strength in labour demand over the past two months is consistent with robust business conditions and solid momentum in the domestic economy. This should support a healthy pace of employment growth in the near term”.

So inflation is still weak but jobs growth looks solid. How’s the housing market faring?

Building approvals fell 5.2% in May when 3.5% was expected, to be 9.1% lower than a year ago. This looks ominous, but the approvals are falling from quite a peak and we do have this big dichotomy in place between the states. The May RBA rate cut is yet to influence the numbers, thus economists are not sounding the warning bells just yet.

So how will the election turn out? Why do I get the feeling we’ve just been through all this? The bookies had the “stay” vote in Britain comfortably ahead and the bookies had decided the Coalition would cross the line locally. Let’s hope the bookies don’t have Clinton in front, or we’re all in trouble.

Stock markets do not like such uncertainty but ultimately just get on with it. When 2011 produced the hung parliament and eventual Gillard minority government the local index fell over 2% initially before rallying back fairly soon after. Yesterday we saw a dip and rebound all in one day.

Frustration is the more likely response to the mess rather than fear.

Commodities

After their big surges on Friday night, base metal prices pulled back a bit last night despite a 0.2% dip in the US dollar index to 95.48. Zinc fell 2% and copper 1%.

However, iron ore jumped US$1.90 to US$55.90/t. Helping iron ore was the announcement from BHP Billiton ((BHP)) it would shelve its African project that threatened to add to global oversupply, and concentrate on squeezing the most out of the Pilbara instead.

For an oil market missing US traders, we had Saudi Arabia on the one hand reiterating its forecast that the global market will return to demand-supply balance by year’s end, and Morgan Stanley on the other warning oil prices are set to take another dip.

In the end, West Texas crude has fallen US57c to US$48.73/bbl.

As uncertainty continues to reign across the globe – and we can throw in a major Italian bank that is in trouble – gold continues to find favour. It’s up another US$8.60 to US$1350.50/oz.

The Aussie is up 0.5% at US$0.7534.

Today

The SPI Overnight closed down 13 points.

Locally we’ll see retail sales numbers and the services PMI today before the RBA meets and decides to leave its rate on hold.

Caixin will publish its take on China’s services PMI as other countries around the globe follow suit.

Counting will recommence locally, but it’s going to be a long wait.

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The Monday Report

By Greg Peel

Playing to Script

Friday on Bridge Street played out as expected, despite it being the first day of the new year. The market opened higher in line with global momentum post-Brexit, traded sideways for a while and then at 2pm, the square-up bell was rung.

The index came most of the way back as traders took profits on a very solid week, ahead of a weekend, a long weekend in the US, and the local election, just in case something disturbing like a hung parliament should transpire.

On that note, we are reminded stock markets are usually ambivalent with regard which party is in power, but do not like uncertainty. And that’s exactly what we have this morning.

We also, of course, have a more elevated case of uncertainty over in the UK/EU. But whatever happens now, markets are convinced another wave of central bank easing is afoot. Central bank easing helps support stock markets but also directly supports commodity markets, and as such we saw some big moves up in commodity prices through Friday.

It it thus no surprise the materials sector was the stand-out performer locally on Friday with a 2% gain when every other sector closed as good as flat.

Investors were not fazed by the latest data out of China, which were far from encouraging. Beijing’s official manufacturing PMI fell to 50.0 in June from 50.1 in May, right on the cusp between expansion and contraction. Caixin’s independent equivalent showed a fall to 48.6 from 49.2 – the fastest decline in four months and the sixteenth consecutive month of contraction.

We can perhaps take some heart in the fact Beijing is trying to steer China away from reliance on manufacturing and export, and note the official service sector PMI rose to 53.7 from 53.1, although that doesn’t much help the sellers of rocks. What will help is government stimulus in the form of infrastructure investment, which is expected to be beefed up as China looks to its own favoured means of easing, beyond renminbi devaluations.

Who’d have thought?

Who’d have thought a week ago that Wall Street would post its best week since 2014? Both the Dow and S&P500 gained 3.2%. Friday’s trading nevertheless played to script as well, given both the week’s rally and the long weekend.

Afternoon selling wiped out initial gains, such that the Dow closed up 19 points or 0.1%, the S&P gained 0.2% to 2012 and the Nasdaq added 0.4%. Interestingly, the indices were back at the flat line just after 3pm before a late burst ensured the S&P closed above the psychological 2100 mark.

The US manufacturing PMI posted a much more encouraging rise to 53.2 from 51.2, beating expectations.

Traders have always been keen not to take positions home over weekends but weekends have become even more scary in this post-GFC world. Beijing likes to pull little tricks on a weekend and as we learned from the whole Grexit saga, weekends can often bring meetings between relevant parties that have particular ramifications the following week.

Nothing happened this weekend beyond the no-result Australian election, but the fact gold was up US$20.20 to US$1341.90/oz and the US ten-year bond yield fell back 3 basis points to 1.46% suggests investors were happy to top up their safe haven positions as a hedge against the “no alternative” equity rally.

Commodities

The UK has signalled monetary easing ahead, the EU is ready to do whatever it takes, Japan will probably be forced to do something and Beijing has already slipped in another renminbi devaluation. And on that basis, many do not see the Fed raising anytime soon. Put it all together and global stimulus is supportive of commodity prices.

The US dollar index fell a mere 0.3% to 95.64 on Friday but in London, aluminium rose 0.7%, copper 1.5%, zinc 2.5%, lead 3.5% and nickel 6%.

West Texas crude rose US90c to US$49.30/bbl.

Only iron ore bucked the trend, falling US20c to US$54.00/t.

The Aussie dollar was up 0.8% on Saturday morning at US$0.7499 as the sausages sizzled and the vanilla slices flew out the door, but in the cold hard light of Monday morning, has slipped to US$0.7465.

It was also Saturday morning when the SPI Overnight closed up 32 points or 0.6%.

The Week Ahead

Wall Street is closed tonight but there follows a big week for US releases, including the minutes of the June Fed meeting on Wednesday and the non-farm payrolls report for June on Friday.

Tuesday it’s the services PMI and factory orders, Wednesday the trade balance, and Thursday chain store sales and the ADP private sector jobs report.

In a rudderless, which unfortunately is not as positive as Rudd-less, Australia we’ll see ANZ job ads, the Melbourne Institute inflation gauge and building approvals today and retail sales and the services PMI tomorrow ahead of the RBA meeting. No rate change is expected, but the market will be interested to hear the board’s take on Brexit.

Thursday it’s the construction PMI.

Tuesday is services PMI day across the globe including Caixin’s take on China.

There is very little in the way of local corporate events or releases this first week on the new year but as of next week we start to see the first quarterly reports.

Rudi will be traveling to and presenting in Melbourne this week. Hence no live appearances from the Sky News studios in Macquarie Park.

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

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The Overnight Report: As You Were

By Greg Peel

The Dow closed up 235 points or 1.3% while the S&P rose 1.4% to 2098 and the Nasdaq gained 1.3%.

Wet Sail

The US broad market index last night traded back almost to 2100 last night which is roughly where it was before the Brexit vote. The FTSE rose yet another 2.3% to put it well above its pre-Brexit level. Yesterday the ASX200 made it back to 5233 which is still short of the 5280 close on the Thursday before Brexit.

The futures are indicating up 49 this morning which would imply a complete recovery, but there are other factors to consider.

Firstly, a big chunk of dividends went out on Wednesday, so add that back and we’re close anyway. But secondly, yesterday was end of financial year so we have to consider just how much of the 91 point rally was genuine buying and how much was fund manager window-dressing. Today might be the tell-tale, but then today is a Friday, and Fridays will often bring profit-taking after solid gains for the week. Monday is July 4, meaning no Wall Street, just to provide more reason to square up and enjoy the weekend.

Healthcare was the biggest mover yesterday with a 3.4% gain. Healthcare was initially hit hard by Brexit given UK/EU exposure so it makes sense some ground might be recovered, but a 28% jump by Mayne Pharma ((MYX)) following an announced US drug deal and capital raising also helped.

Elsewhere the moves were more even but what did catch my eye is the 1.4% gain for telcos and 2.3% gain for utilities. These two sectors mostly held their ground as defensives during the brief Brexit panic, so why do they need to come surging back? This is where window-dressing may be apparent.

It is also possible the market was further assisted by the latest election polls, which suggest the coalition is fairly safe. Stock markets are not particularly biased towards either party but do prefer status quo over uncertainty.

There is also an Australian economy actually still ticking along in the background, which we now perhaps can refocus on.

Private sector credit rose by 0.4% in May to be 6.5% higher year on year. Housing credit rose 0.5% for 6.9%, down from 7.0% in April and below last year’s 7.5% peak. Within that figure, investment housing credit rose 0.4% for 6.0%, down from 6.5% in April and 11.5% a year ago. Business credit rose 0.3% for 7.1%.

The numbers indicate overall credit is rising modestly, and housing credit is slowly losing pace. Business credit growth is not yet outperforming to offset this decline. There is nothing here to prevent another RBA rate cut.

Back to the Fed

The London stock market rose another 2.3% last night while France gained 1.0% and Germany 0.7%. The continental markets are still well below their pre-Brexit peaks but the FTSE 100 is now above its peak. The explanation is as straightforward as the much lower pound. Britain’s GDP is roughly 80% weighted to the export of goods and services.

But London’s broader market FTSE 250 has not found its way back. This index encompasses more of the smaller companies that will be hit by a slower UK economy, if that is to be the case. The BoE thinks it will be the case, hence last night guvna Mark Carney all but confirmed monetary easing sooner rather than later, which provided another boost for stocks.

So, we’re back to being under the spell of central banks. And that brings the focus back on the Fed. Brexit, so far, has not resulted in global meltdown. As to whether it might ultimately set in train total EU disintegration will be a longer term story. Is the Fed now comfortable enough to raise in the Brexit wake?

Despite many on Wall Street assuming no further hikes this year or next, it will still come down to next Friday’s June US jobs number. If that shows a big reversal from the May shocker, talk of a possible September hike will reignite. However if the Fed decides it needs to wait for the actual Brexit lever to be pulled by whoever is the new British prime minister -- and it won’t be Boris -- and assess what transpires, then December is more likely, if at all.

It was also end of quarter/half on Wall Street last night and as such commentators were suggesting the rally back to the pre-Brexit level also no doubt involved an element of window-dressing. And because it’s a Friday before a long weekend tonight, the chances of profit-taking are high.

Commodities

There was certainly end of quarter profit-taking in oil last night, according to oil traders. West Texas crude suddenly took a dip just ahead of the day’s official close and is currently down US$1.14 at US$48.40/bbl.

Base metals were all higher in London, but none by as much as 1%.

Iron ore rose US80c to US$54.20/t.

Stock markets continue to rally but gold is hanging in there, up US$3.40 to US$1321.70/oz despite the US dollar index being up 0.25 at 95.88.

The Aussie is steady at US$0.7442.

Today

The SPI Overnight closed up 49 points or 1.0%.

Remember China? Today sees June manufacturing and service sector PMIs from Beijing, and manufacturing PMIs from across the globe.

Locally we’ll also see June house prices today, and tomorrow all the pain and suffering will finally come to an end with a sausage sizzle.

Happy New Year.

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

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Tag Archives: Energy

Material Matters: Production, Mineral Sands, Lead And Oil

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The Monday Report

The Overnight Report: Fed Focus

Material Matters: Drivers Of Commodity Outlook For FY17

The Overnight Report: Turnaround

The Overnight Report: Italeave?

The Overnight Report: Uncertainty Home And Abroad

The Monday Report

The Overnight Report: As You Were