Tag Archives: Energy

article 3 months old

The Monday Report

By Greg Peel

Uncertainty

The local market began strongly on Friday, spurred on by the sudden turnaround in offshore markets as a result of an apparent swing back to the “stay” vote in Britain. But the rally was short-lived, to the point the index was slapped back down almost to square again by midday.

While “stay” may have been looking more likely on Thursday night, the reality is one poll does not a conclusion make. There is talk that the suspension of campaigning until Monday in deference to murdered MP Jo Cox will most likely hurt the “go” camp, which had previously been gaining some momentum. There is also a suggestion the murder may swing voters towards “stay” given Cox was a “stay” campaigner.

The bottom line is it’s still too close for anyone to call. Unless the polls between now and Thursday all line up to predict a definitive result one way or the other, it is likely global markets will swing back and forth on every apparent shift. But if nothing is at all clear, it is most likely investors will remain on the sidelines, having set their hedges, counting down the hours.

It could be a long four days.

Sector moves were mixed on the local market on Friday. The sector most damaged to date by Brexit fears – the banks – managed a 0.7% rebound to mark the biggest sector move of the session. Otherwise it was small moves up or down, with a rare quiet day for the resource sectors.

Fed Shock

It was only a month ago the Fed was talking up its rate hike expectations, surprising Wall Street by hanging onto the concept of perhaps three hikes in the remainder of 2016. Then last week the mood changed, with only one rate now the apparent expectation. On Friday night, St Louis Fed president James Bullard went one surprising step further.

Yes, Bullard said, there will be one rate hike in 2016. But that will be it until 2018, he added.

Come again?

Once upon a time such a comment may have sent Wall Street reeling, in one direction or another – up if the response is “Thank God, the Fed will continue to support the market” or down if the mood is “Omigod, the US economy must be in worse shape than we thought”. But in actual fact, Bullard’s comments had very little impact whatsoever, for two reasons.

One is Brexit – that is dominating all thinking at present. The other is sheer exasperation. The Fed’s credibility has already been brought to question thanks to its apparent flip-flopping all through the year, and what makes Bullard’s comments even more outlandish is the fact he was previously among the most hawkish of FOMC members.

To that end, Bullard managed only to cause a lot of bemusement. And eye rolling.

Indeed, the US ten-year bond rate went up 5 basis points to 1.62% when one would have expected the opposite on such a dovish suggestion. The US dollar index did duly fall 0.5% to 94.15 but both moves are a reflection of faith growing in a “stay” vote in Britain and not anything that happened to come out of a Fedhead’s mouth.

The same was true with oil, which having fallen back from the 50 mark through the week due to rising “go” fears, rebounded 5% on Friday night.

Once upon a time a 5% jump in the oil price would have had US stock indices surging. Not anymore. A period of relative stability for the oil price has meant the close correlation that existed earlier in the year is no longer evident. And no one was going to go on a buying spree before next Thursday.

To that end, Wall Street was quiet on Friday. Closing volumes were enormous due to the quadruple witching expiry and quarterly stock index rebalancing but volatility was lacking. The Dow closed down 57 points or 0.3%, the S&P lost 0.3% to 2071 and the Nasdaq fell 0.9%.

Commodities

West Texas crude rose US$2.21 to US$48.26/bbl.

The weaker greenback may have helped a little but that was not at all apparent on the LME. Nickel decided to have a 2% jump but the other base metals closed mixed on insubstantial moves.

Iron ore rose US50c to US$50.70/t.

Gold dropped back on Thursday night when a UK poll showed a swing towards “stay” but on Friday night the lack of any predictable result was evident in gold rallying back US$20.10 to US$1298.0/oz.

The fall in the greenback means the Aussie was 0.4% higher on Saturday morning at US$0.7394.

The SPI Overnight closed flat.

The Week Ahead

While there’s a lot more going on than just the Brexit vote next week, unfortunately nothing else will matter until Friday morning when, presumably, we’ll know the result.

Please God let it not be so close as to take days to confirm.

Three polls over the weekend all suggest “stay”, but still as a close call.

Janet Yellen will provide a scheduled testimony to the US Senate Banking Committee on Tuesday night. The world will be very interested in what she has to say, particularly following Bullard’s comments on Friday night.

With regard data, the US will see existing home sales and house prices on Wednesday, new home sales, the Chicago Fed national activity index and a flash estimate of the June manufacturing PMI on Thursday, and durable goods and fortnightly consumer sentiment on Friday.

Japan and the eurozone will also flash PMI estimates on Thursday.

Normally the eurozone’s ZEW investor sentiment survey, due Tuesday, and Germany’s IFO business sentiment survey, due Friday, would be closely watched, but given the world might change on Thursday the results are irrelevant.

In Australia, March quarter house prices are due tomorrow along with the minutes of this month’s RBA meeting. Is the RBA really “on hold” or could we yet see further rate cuts? Maybe the minutes might hold some clues.

On the local stock front, Metcash ((MTS)) will release its earnings result today, BHP Billiton ((BHP)) will host an investor day in London tomorrow night and Wesfarmers will hold a strategy day on Wednesday.

Rudi will appear on Sky Business on Tuesday, via Skype-link, to discuss broker calls around 11.15am. On Thursday he'll appear for his weekly slot between 12.30-2.30pm and on Friday he'll repeat the Skype-linkup 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: Swing Factor

By Greg Peel

The Dow closed up 93 points or 0.5% while the S&P gained 0.3% to 2077 and the Nasdaq rose 0.2%.

Ups and Downs

There were several factors at play in the local market yesterday, belied by a flat close. Brexit, central bank policy and the derivatives expiry were all potentially influential.

The index shot up from the opening bell to be 50 points higher at around 11am, peaking just under 5200. Thereafter the session played out as a slow sell, all the way to be as good as unchanged by the closing bell.

The decision by the Fed overnight not to raise its cash rate came as no surprise, but what did surprise is the apparent capitulation form the central bank after having talked up rates rather hawkishly since April. Janet Yellen has decided, about five years after everyone else, that low interest rates may now be “the new normal”. Was it one bad jobs number? Was it zero rates in Germany? Whatever the case, the FOMC has swung from suggesting three rate cuts to come this year to suggesting one, maybe.

If Fed dovishness is now actually entrenched, the pressure is back on the RBA to cut. US rate hikes would drive the US dollar higher and thus the Aussie lower, but now the Aussie is potentially under threat of rising again in its role as a safe haven, high-yield currency.

Thoughts of another cut may have been derailed by the better than expected addition of 17.900 new jobs in Australia last month, if it not for the fact they were all part-time. Not a soul was given a new full-time job last month, according to the ABS. The unemployment rate remains steady at 5.7% but means little, given the year to May has seen net jobs growth of 1.9% made up of 0.8% full-time and 4.4% part-time.

Employment is supposed to put money in consumers’ pockets. Part-time employment puts in far less. If we were able to add together the part-time hours to make a full-time job, how many new “jobs” would the numbers really show?

Thus it was no surprise the Aussie actually fell yesterday on the release of the employment report, rather than rising as a “beat” might otherwise have suggested. The drill-down is supportive of further rate cuts.

And while on the subject of central banks, the Bank of Japan surprised yesterday by doing nothing. The BoJ’s experimental drop into negative rates has had the opposite effect of that the central bank would have hoped for, actually sending the yen higher. Markets anticipated at least a bump-up of QE yesterday, if not a further foray into the negative. But nothing transpired, so the yen shot up again.

It has become apparent, over time, that the BoJ only acts when no one is expecting it and not when everyone is.

Whatever impact central bank shenanigans had on the local market yesterday, the Brexit cloud still hung, and market protection in the form of ASX index options, SPI futures and futures options all expired. Assuming investors are keen to remain protected, positions had to be rolled over by the close yesterday, if they hadn’t been already, putting downward pressure on the market.

The wash-up at the closing bell was a very mixed bag of sector moves. The defensives of telcos and utilities found support but the biggest move up came in consumer discretionary, thanks to the announced Crown Resorts ((CWN)) restructure and subsequent 13% pop. A bounce in base metal prices had materials in the green but a fall in the oil price had energy in the red, and the banks were lower again.

But today is a new day, with expiry now over and overnight developments to consider on a Friday.

Big Ups and Downs

Europe went back into selling mode last night as stock markets and the euro fell, supposedly on ongoing Brexit fear, a lack of any BoJ action and let’s face it – the sort of confusion that tends to keep investors out. The mood carried over onto Wall Street where the Dow fell 170 points from the open.

Euro and pound weakness allowed the US dollar index to surge despite the stronger yen, and as every man and his dog talks up gold, the safe haven traded up to US$1315/oz despite dollar strength. Oil tanked 4%.

There was further confusion on the news a British pro-stay MP had been shot and killed while campaigning, prompting Prime Minister Cameron to call a halt to all Brexit campaigning. Did this mean the vote itself would be delayed? It appears not.

But then another poll was released. It was not quite a week ago the world went into a tailspin on a poll showing 55% of Britons intended to vote “go”. Last night’s poll suggested 65% now want to stay. There’s only one poll that matters of course, as any polly will tell you if they’re behind, but at the very least it now appears a Brexit is a long way from a done deal.

The Dow rallied back to be up a hundred just before the close. The US dollar index came right back to flat at 94.63. Gold crashed back down to be down US$13.50 over 24 hours at US$1278.00/oz. Oil rebounded, but is still down 3%.

Throughout all the confusion, the German ten-year yield is now officially negative at minus 0.02% and the US ten-year has fallen to 1.56%.

And to top things off, tonight is quadruple witching in the US, with June representing the biggest derivative expiry volumes of the year.

The Brexit vote is five more trading sessions away.

Commodities

West Texas crude is down US$1.44 at US$46.05/bbl.

The LME closed with the US dollar at its peak, thus all base metals bar lead are 1-2% lower.

Iron ore is unchanged at US$50.20/t.

The Aussie is down 0.6% at US$0.7362.

Today

The new September expiry SPI Overnight closed up 35 points or 0.7%. Those wondering why the actual price of the futures has suddenly dropped sharply from the June contract must appreciate the futures now need to discount a full three months of carry.

There is very little of note on the global calendar over the next 24 hours, with quadruple witching on Wall Street the highlight at this time of heightened concern.

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

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article 3 months old

The Overnight Report: Hawkish Yesterday, Dovish Today

By Greg Peel

The Dow closed down 34 points or 0.2% while the S&P lost 0.2% to 2071 and the Nasdaq lost 0.2%.

More of the Same

The change of mood was still evident yesterday morning in the wake of Tuesday’s hundred point capitulation as the index opened lower once more. Last week Brexit was a date on the calendar, this week it’s a looming potential catastrophe.

The market did nevertheless decide mid-morning that perhaps enough is enough. Brexit is by no means a given at this stage, and if the result is to stay, one presumes an almighty rebound. If it is to go, well a lot of that risk has already been priced in.

But after managing to hold its ground into the afternoon, the index conceded to selling late in the session to ensure the market closed on its lows. That selling may not, however, be specifically Brexit related. Today sees the expiry of June quarter ASX index options, SPI futures and futures options. If investors are rolling over protection, as is sensible to do before the potentially volatile expiry day, protection sellers are selling stocks to hedge.

The same thing happened on Wall Street last night. More on that in a moment.

While all sectors again finished in the red yesterday, this times the banks (-1.4%) were a particular stand-out. The biggest impact of a Brexit will be felt by the global banking industry, as reflected in the ongoing shift down in global interest rates.

Materials also fell 1.4% on the lower iron ore price and on hedge selling of large caps, which also ensured telcos were down another 1.1%, Thereafter, the magnitude of sector drops tailed off.

As was the case with Tuesday’s NAB business confidence survey, yesterday’s Westpac consumer confidence survey was never going to have much of an impact on a market worried about other things. As it was, it was a pretty solid result.

The confidence index fell 1.0% in June to 102.2. But given it jumped 8.5% in May following the RBA rate cut, economists suggest that to only slip back a percent is a sign of lingering confidence. And numbers over a hundred represent optimism. It’s also not a bad result given election uncertainty. The result pre-dates the sudden rearing of Brexit’s ugly head, but one wonders just how long the average consumer lays awake at night worrying about such matters.

Loss of Credibility

Before last night’s Fed statement release and Janet Yellen’s press conference in the afternoon, there were a couple of significant data releases in the morning.

The US producer price index rose 0.4% in May, beating 0.3% expectations, but it was all about oil prices. Take out oil and food, and the core PPI actually fell 0.1%. Nothing to suggest a rush to hike rates there.

Industrial production fell 0.4% to market the seventh decline in nine months. See above.

Yet according to the afternoon’s Fed statement, and despite a very low March quarter GDP result, the US economy is actually looking better now than it was in April when the last FOMC meeting was held. Back in April, it was the strong US labour market that was driving Fed thinking, and expectation of rising inflation. But now, the Fed sees the labour market slowing.

One bad apple don’t spoil the whole bunch girl. Maybe Donny Osmond should be Fed chairman. The Fed may be data dependent, but the FOMC will be a bit red-faced if the weak May jobs number does prove to be a one-off as many expect.

Whatever the case, the FOMC chose not to raise its cash rate last night. It was a unanimous decision, meaning prior hawks on the committee have now pulled their heads in. More importantly, the infamous “dot plots” showed the FOMC members have all reduced their rate expectations through to 2018. The Brexit vote may have held the Fed up this month, but it would seem a July hike just flew out the window.

Indeed, it appears the Fed may now only be looking at one rate hike this year, down from four after hiking in December. The market thinks even one is becoming unlikely. What has everyone frustrated is that in April the Fed suddenly swung to be quite hawkish, leading markets to prepare for a June rate hike that seemed inevitable. Then came one bad jobs number. Now the Fed is back to being dovish again.

The market had always been dovish. The Fed has come back to meet the market. Who is influencing who?

There is also general feeling, Brexit fears aside, that the Fed simply cannot risk a rate hike when Japan is negative, half of Europe is negative and Germany is on the cusp of negative. The gap may be too much for global markets to handle. Not that global markets are supposed to be the US Federal Reserve’s responsibility.

The fact that the Fed has come back to meet the market was reflected in stock index movements over the session. Indices were a little higher in the morning thanks to rebounds in Europe, and typically quiet ahead of the statement release. On the statement release they did very little at all, which is most unusual. The Dow sat at around 50 points up all through Yellen’s press conference and beyond.

The fact the Dow closed down 34 points, representing a sharp late sell-off, has been attributed to Friday night’s “quadruple witching” equity derivatives expiry – the equivalent of what the Australian market will see today only of a much greater magnitude. The June quarter always represents the biggest expiry volumes, and typically the market starts to roll over positions a couple of days ahead. With protection still being sought at this time of uncertainty, rollovers translate into stock selling.

Commodities

West Texas crude is down another US41c at US$47.49/bbl.

Whatever’s going on in base metals at present, no one’s quite sure. The LME always closes just as the Fed statement is being released, which usually means little movement until the night after. But last night copper jumped 2.7%, following a couple of weak sessions. Aluminium rose 0.5% and nickel and zinc both around 1%, while lead stood still. Short covering was cited.

Iron ore fell US60c to US$50.20/t.

The US dollar index is down 0.4% to 94.59, but that’s all post-Fed. Gold is up US$6.00 at US$1291.50/oz, having briefly kissed 1300 post-Fed.

The Aussie is up 0.8% at US$0.7408 but that is not a Fed-related spike. The Aussie has steadily been climbing over the past 24 hours, possibly as the world comes to realise Australia’s is one of the few developed economies left offering reasonably positive rates. Even at 1.75%.

Today

The SPI Overnight closed up one point. Have we seen the end of the pre-Brexit vote selling? Today, as noted, is expiry day, so anything might happen.

And to that end we note the Bank of Japan will hold a policy meeting today, no doubt very relieved the Fed has backed off.

Locally we also see the May jobs numbers today.

Goodman Group ((GMG)) and Graincorp ((GNC)) will host investor days.

Rudi will make his weekly appearance on Sky Business, 12.30-2.30pm, only to return again between 7-8pm for an interview on Switzer TV.


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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

Near Term Risk For Oil


Bottom Line 14/06/16

Daily Trend: Down
Weekly Trend: Up
Monthly Trend: Up
Support Levels: 47.26 / 43.19 / 39.69 / 35.00
Resistance Levels: 51.65 / 57.81 / 60.89

Technical Discussion

Regardless of the rise higher we have been witnessing , oversupply continues to remain a concern. Last week it was also reported that the number of rigs drilling for Oil in the U.S has been on the rise again. This tends to reinforce that higher prices have encouraged more drilling to come on line which is going to do nothing for the supply situation as we head into the second half of the calendar year. And so the balancing act continues. Lower Oil prices are unprofitable for many producer yet as soon as they rise, many are back online which means the market gets flooded again. Above resistance circa 60.89 is where the bulls start coming back into play.

 Reasons to stay neutral below 60.89:
→ surplus conditions globally continue to weigh on price
→ demand / supply potentially starting to balance
→ OPEC surplus intervention could start creating a price floor
→ price action starting to look good yet it's still only early days

The expected wave equality point was achieved when recent price action tagged 49.56. Price has headed a little higher since yet has started to struggle a little at these levels, and especially with the Type-A bearish divergence continuing to linger. Our view is that this divergence is now getting very close to fully triggering and this could easily see a price drop down to the 43.00 - 45.00 price zone for a retest of the breakout zone. Bigger picture though we continue to like the potential of the larger reverse head and shoulders pattern, as annotated on our chart tonight. It would mean price heading up toward the 60.00 price zone (neckline) over the coming months, then taking a decent breather before pushing higher again to trigger the pattern. The high probability target via this scenario would be up towards 88.00, so certainly one for the medium term watchlist for later on in the year. Would love to see our immediate trade hang in there as part of this process, yet basis the technical view forwarded in this review, such an outcome appears unlikely. Not for this trade anyway.

Trading Strategy

We remain long at 40.15 with our stops now managed up to 47.74. It's been a solid outcome on such a big and volatile contract yet the pivot points to the downside have held strong via a series of higher lows locking in, and these have provided us with strategic areas to trail our stop position to. With potential head winds coming into play now though, we have our stop about as tight as we could possibly have it, so nothing further to do regarding the risk management side of things.
 

Re-published with permission of the publisher. www.thechartist.com.au All copyright remains with the publisher. The above views expressed are not by association FNArena's (see our disclaimer).

Risk Disclosure Statement

THE RISK OF LOSS IN TRADING SECURITIES AND LEVERAGED INSTRUMENTS I.E. DERIVATIVES, SUCH AS FUTURES, OPTIONS AND CONTRACTS FOR DIFFERENCE CAN BE SUBSTANTIAL. YOU SHOULD THEREFORE CAREFULLY CONSIDER YOUR OBJECTIVES, FINANCIAL SITUATION, NEEDS AND ANY OTHER RELEVANT PERSONAL CIRCUMSTANCES TO DETERMINE WHETHER SUCH TRADING IS SUITABLE FOR YOU. THE HIGH DEGREE OF LEVERAGE THAT IS OFTEN OBTAINABLE IN FUTURES, OPTIONS AND CONTRACTS FOR DIFFERENCE TRADING CAN WORK AGAINST YOU AS WELL AS FOR YOU. THE USE OF LEVERAGE CAN LEAD TO LARGE LOSSES AS WELL AS GAINS. THIS BRIEF STATEMENT CANNOT DISCLOSE ALL OF THE RISKS AND OTHER SIGNIFICANT ASPECTS OF SECURITIES AND DERIVATIVES MARKETS. THEREFORE, YOU SHOULD CONSULT YOUR FINANCIAL ADVISOR OR ACCOUNTANT TO DETERMINE WHETHER TRADING IN SECURITES AND DERIVATIVES PRODUCTS IS APPROPRIATE FOR YOU IN LIGHT OF YOUR FINANCIAL CIRCUMSTANCES.

Technical limitations If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.

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article 3 months old

The Overnight Report: Will I Stay Or Will I Go Now

By Greg Peel

The Dow closed down 57 points or 0.3% while the S&P lost 0.2% to 2075 and the Nasdaq fell 0.1%.

Market-Wide

There is not a lot to say about yesterday’s sell-off on the ASX, which simply echoed global fears that have built since Friday night with regard a possible Brexit. The public holiday in Australia meant some catching up was needed.

All sectors were hammered yesterday, and those involving larger caps more so.

Energy led the charge with a 3.9% fall, exacerbated by the lower oil price. The banks had the biggest impact with a 2.2% drop. Healthcare, which has exposure to Europe, fell 2.9%. Telcos, which might otherwise be a defensive but for mega-cap Telstra, fell 2.0%, and ditto the supermarkets, which fell 1.8%.

The true defensive – utilities – was the outperformer on the day in falling only 0.6%.

The index suffered technical damage in falling through 5225 to rest at 5200, which offers up the potential of a move back to 4800. However what we are dealing with here is a binary risk event. Either Britain will vote stay or go. Markets are currently building in “go” risk and if the polls keep swinging that way over the next few days, there may be more such risk to build in. But then the result may be “stay”, which is still the bookies’ tip to date.

“Stay” would take us all the way back again, presumably. And it is possible “go” will have less of an impact now markets have begun to adjust.

Taking a back seat yesterday was NAB’s business confidence survey for May, which was conducted after the federal budget but before anyone started worrying about a Brexit.

Business conditions continued to improve in May, to 10.1 on the index from 9.7 in April. This bodes well for Australia’s economic transition and employment prospects. But business confidence fell, to 2.7 from 5.3, suggesting concern about the future.

This time last year, confidence surged following the Abbott government’s small business friendly budget. This year’s Turnbull government budget is also business friendly, but it would appear there is concern as to whether there will still be a Turnbull government after July, or worst still, some unworkable hung parliament.

Trader’s Market

What is most notable about Wall Street’s response to sudden Brexit paranoia is a lack of major stock market volatility despite a spike in the VIX volatility index. That index is not measuring volatility based on daily market movement, it is measuring volatility implied by the cost of put option protection. Wall Street is covering its backside, but not bailing out in any mad panic.

Having already fallen substantially on Monday night, last night stock markets were down 2.0% in London, 2.3% in France and 1.4% in Germany. The German ten-year bond yield traded into the negative before settling at 0.00%.

Stock market selling rolled across the pond to send the Dow down 130 point in the morning, accompanied by bond buying that saw the ten-year yield heading towards 1.50%. But once Europe closed, Wall Street turned around. The fact the S&P500 closed down only 0.2% when all about were losing their heads suggests US traders believe the panic is overdone and/or if Europe is about to suffer upheaval, the US is a much safer place to be.

The US ten-year yield ultimately returned to 1.61%.

Adding to the confusion was a 0.5% jump in US retail sales in May, beating 0.3% forecasts. While Brexit is dominating the current market psyche, we must not forget the Fed will release a policy statement tonight. If, as many believe, the May jobs number turns out to be a statistical blip, then the positive retail sales number plays back into Fed rate hike possibility.

But not tonight. Maybe next month, after the Brexit result is known.

Commodities

West Texas is down another US$1.36 at US$47.90/bbl. Of all commodities, oil is most closely linked to the global economy as a whole.

Less so are base metals, which continue to play individual games dependent on actual supply-demand balances, inventories, China and currency moves. The US dollar index has risen 0.6% to 94.93 and copper and lead fell 1.5% and zinc 3%, but aluminium and nickel held steady.

Iron ore fell US$1.00 to US$50.80/t.

Gold is steady at US$1285.50/oz.

Reflecting the stronger greenback, the Aussie is down 0.6% at US$0.7346.

Today

The SPI Overnight closed down 9 points.

Was yesterday’s hundred point wipe-out enough to price in the Brexit factor, ahead of next week’s actual outcome? We are poised at 5200.

Today sees the Westpac confidence survey for June.

Tonight the Fed will release a policy statement, and update its forecasts, and Janet Yellen will hold a press conference.

Nib Holdings ((NHF)) will host an investor day 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 Monday Report (On Tuesday)

By Greg Peel

Friday

The SPI futures suggested a 27 point opening to the downside on Friday morning but instead the ASX200 dropped 50 points in the first half hour, which again looked like computers gone mad. This assumption was backed up by an immediate attempt to rally back such that within the subsequent half hour, the index was only down 30.

But this time what might otherwise have been another session of grafting back towards square turned into a “just sell and get out of here by lunchtime” session. The index declined again to be down 50 points once more by midday and there it stayed all afternoon as offices emptied for the long weekend.

Word is a couple of large lines were sold in the futures market early in the session, so maybe it wasn’t all the computers’ fault this time.

Aside from the desire to square up ahead of a holiday, we may also point to the fact the index had tried on about three occasions now to break up through 5400, without success. Typically if markets find they just can’t go up, they go down instead. Friday did look like a bit of a capitulation on that front.

And as it transpired, a prescient one.

Commodity price weakness and accusations against BHP Billiton had materials falling 2.3% on Friday but a 1.0% fall for the banks was the standout, and did the bulk of the index damage. Energy dropped 1.3% but thereafter, sector falls were not as significant.

If a proprietary desk made the market for the lines of futures and was hit on the bid, that desk then has to sell “the index” of stocks to hedge their position. One need only slap the big caps – even just the top ten – to have the bulk of the market cap covered. The first thing one thus does is hit the banks, the big miners and so on.

It may have been that come this morning, the market would be ready to regain some of Friday’s lost ground on a bargain hunting basis, assuming nothing came out of left field overseas on the weekend.

But it did.

Friday Night

A new poll was published on Friday night suggesting – for the first time – that more British are in favour of leaving the EU than staying. Prior polls have indicated the opposite balance but Friday night’s poll showed not just a slight bias, but a 55/45 leave/stay split.

The London FTSE fell 1.9%, the French CAC 2.2% and the German DAX 2.4%. Hardest hit were the British and European bank stocks. However, by the time the UK and European markets were closed on Friday night, that Brexit poll result had not yet been published.

Weakness was a reflection of the rolling tide of bond buying in Europe, ahead of next week’s Fed meeting and the following week’s Brexit vote, turning into a torrent. The German ten-year yield traded as low as 0.01%. Ahead of the weekend, European investors were getting out of risky stocks and into safe haven bonds.

Wall Street opened lower as a result but was beginning another familiar graft back again when the poll news hit the wires. The Dow subsequently closed down 119 points or 0.7%, having been down as many as 173 points. The S&P closed down 0.9% at 2096 and the riskier Nasdaq fell 1.3%.

The British pound fell 1.4% against the greenback on the poll news, sending the US dollar index up 0.6% to 94.65.

The US ten-year bond yield closed down 4 basis points at 1.64%.

In the US, it was also the banks that suffered most on the day. The US banks had previously been leading Wall Street back to all-time highs on Fed rate hike expectations, but then along came that May jobs numbers, and now this.

The LME had already closed on Friday night before the Brexit news and greenback rally, and moves among base metal prices were minimal.

Oil was still open nonetheless, and West Texas crude fell US92c to US$49.53/bbl. Aside from the impact of the stronger greenback, the weekly US rig count showed another slight tick up.

Despite the stronger greenback, gold rose $3.80 to US$1273.30/oz as a safe haven.

The SPI Overnight closed down 61 points or 1.2% on Saturday morning.

Sunday

May data released by Beijing on Sunday showed Chinese industrial production rose 6.0% year on year as expected, and retail sales rose 10.0% as expected. The concerning result was fixed asset investment, which fell to a growth rate of 9.5% in the year to May, down from 10.5% in the year to April. Economists had forecast 10.5%.

Within that fixed asset number, private sector investment rose only 3.9% compared to 22.3% growth from the state. This is the figure that has economists worried, as it suggests China’s economy is almost solely been driven by government stimulus at present.

It is nonetheless assumed Beijing will need to bump up that stimulus to offset a weak private sector if year-end GDP growth targets are to be met.

Monday Night

While Orlando provided the shock, the focus of attention for markets across the globe was still the Brexit poll. While there is more than one poll being conducted on a regular basis, and others have a much closer outcome at this stage, suddenly the world is realising the vote is only ten days away and the result is unclear. Previously the “stay” vote was winning in the polls, leading to a level of complacency.

That has now changed.

Having already closed to the downside on Friday night before the latest poll was published, the London FTSE fell another 1.2% last night, while the French CAC fell 1.9% and the German DAX 1.8%.

Wall Street attempted a recovery from the open, prompted by news Microsoft had made a takeover bid for LinkedIn. The bid sent LinkedIn shares soaring 50% and floated all similar boats, while Microsoft (Dow) shares came off around 2%. But it wasn’t long before the mood returned to Brexit concerns.

There is also, of course, a Fed meeting and press conference this week, and meetings for the Banks of Japan and England.

While no one expects a Fed rate hike, the market is simply unsure now whether the Fed will be back in dovish mode or remaining in hawkish mode since the May jobs numbers were released. The Fed is also even less likely now to do anything ahead of the Brexit vote and on that score, nor is the BoE.

It could be a different story for the BoJ nevertheless, who again through no fault of its own is being faced with a surging yen. Seen as a “safe haven” currency, then yen has risen on the poll news as carry trades are reversed in the face of increased volatility. Will this force the BoJ to move further into the negative, or at least step up QE?

That volatility was reflected in the VIX index on the S&P500 last night, which rose 23% to 21 as investors moved to hedge their positions. The sidelines seemed a safer place to be, resulting in the Dow closing down another 132 points or 0.7% last night, the S&P falling 0.8% to 2079 and the Nasdaq dropping 0.9%.

It is going to be an interesting two weeks.

The US dollar index actually managed to slip back a bit last night as the yen became flavour of the month, down 0.3% to 94.38 despite ongoing weakness in the pound and euro. There was therefore no reason not to buy the other safe haven – gold – which is up US$10.50 to US$1283.80/oz.

Having been quiet on Friday night, base metals were mixed last night. Copper rose 0.7% and aluminium and lead both rose 1.5% but nickel and zinc slipped slightly.

Iron ore is down US30c at US$51.80/t.

West Texas crude is down US97c at US$48.56/bbl.

The SPI Overnight closed down 40 points or 0.8% this morning. That equates to a net 101 points down since the ASX closed on Friday for the long weekend.

The Week Ahead

The Fed statement and press conference are due on Wednesday night. The BoE and BoJ meet on Thursday night.

The US will see retail sales and business inventories tonight, industrial production, the PPI and Empire State activity index on Wednesday and the CPI, housing sentiment and the Philadelphia Fed activity index on Thursday.

On Friday it's housing starts and if there were not enough volatility on offer this week already, Friday is the quadruple witching derivatives expiry for the June quarter.

In Australia we’ll see the NAB business confidence survey today and the Westpac consumer confidence survey tomorrow. On Thursday the May jobs numbers are due.

Investor days will be held this week by nib Holdings ((NHF)) tomorrow and Goodman Group ((GMG)) and Graincorp ((GNC)) on Thursday.

Rudi will appear on Sky Business today, via Skype, to discuss broker calls around 11.15am. He'll return on Thursday, twice. First from 12.30-2.30pm and then again, between 7-8pm, for an interview on Switzer TV. On Friday he'll Skype-link again to discuss broker calls 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: Slow Grind

By Greg Peel

The Dow closed up 66 points or 0.4% at 18,005 while the S&P gained 0.3% to 2119 and the Nasdaq rose 0.3%.

Flat

The ASX200 yet again suffered one of its first-half-hour plunges yesterday before immediately being bought back up again, to be only down slightly by midday. The futures only signalled down 18 on the open, so the rest was up to the computers.

The morning saw the release of the local housing finance numbers for April.

While the number of loans to owner-occupiers increased in April to be 4.6% higher year on year, the net value of those loans fell 1.8% to be 4.4% lower year on year. Meanwhile, loans to investors fell 5.0% in the month to be down 20.8% from a year ago, cycling a comparable reading ahead of the RBA/APRA clamp-down on investor lending mid-2015.

This is the housing market that has been offsetting the impact of weak commodity prices. Just as well commodity prices have rebounded, and China is buying greater volumes to offset the impact of weaker prices.

China’s net imports nevertheless fell 0.4% in May year on year but this was a better result than the 6.0% drop forecast, and the 10.9% fall in April. Exports fell 4.1% -- more than the 3.6% forecast and worse than the 1.8% April decline.

It was a mixed result which saw the ASX200 take another stumble at midday before grafting back again in the afternoon to a flat close.

Higher oil prices ensured a 2.1% gain for the energy sector yesterday so there needed to be an offset to square up the index. The banks were only a little weaker so it required materials to fall 0.6% due to weaker base metal prices, and despite a stronger iron ore price, and telcos to fall 0.9%.

Two sectors that have really been bouncing back and forth for no major reason these past few sessions have been telcos and consumer staples – both sectors one would normally expect to be plodders. Seems no one can make up their mind.

The index is poised at 5370, a number which is neither here nor there on a technical basis. We’re heading into a long weekend locally.

Muted Cheers

The Dow chopped around last night in an insignificant range before finally closing above 18,000 for the first time since April. But no corks were popped. The S&P 500 is within 0.6% of its all-time high, but no one is particularly excited.

It has been described as the unloved rally – a slow graft higher without any real impetus beyond the rebound in oil prices, which may yet fade, and central bank policy. A lot of attention is being focused on Europe at present, where the German ten-year yield (0.06%) continues to fall to reflect a step-up in corporate bond issuance. That step-up is all about the ECB.

The ECB’s latest QE upgrade included the addition of corporate bond purchases, on top of purchases of government bonds issued by eurozone members. Corporate Europe knows it has a willing buyer, and rates have never been so low. Why not borrow, even to buy back shares, as has been all the rage in the US. Deutsche Bank did it recently and in so doing, halted its share price slide and turned all European banks around.

Meanwhile on Wall Street, all discussion is about the Fed. Occasionally there is mention of actual corporate earnings, but they’re just a sub-text. The markets are being controlled by the central banks. In such an environment, the only real explanation many can come up with for the stock market rally on Wall Street is the TINA trade – there is no alternative investment one can make to provide any sort of positive real return.

At this rate the S&P will likely hit a new all-time high next week, possibly when the Fed puts out its statement on Wednesday night and no sign of the next rate hike is provided.

But there will likely be little excitement. An interesting element of last night’s trade was that oil rallied again, but the energy sector actually closed weaker.

Commodities

Amongst those Chinese May trade numbers was an indication of increased oil imports. US crude inventories fell again last week. There has been another pipeline attack in Nigeria. The US dollar index is down 0.3% at 93.56.

Add it all up and West Texas crude is up US$1.10 at US$51.53/bbl.

China was also importing buying base metals in May. Seems like the commodity funds picked the wrong day to bail out on Tuesday. In a session smacking of short-covering, lead rose 1%, aluminium 2%, zinc 3% and nickel 4%. Only copper stood still.

Iron ore fell US20c to US$52.10/t.

Having stalled for three days, gold appears to have decided the dip in the US dollar last night was enough reason to buy once more. It’s up US$19.30 at US$1262.50/oz.

The Aussie is up 0.4% at US$0.7485.

Today

The SPI Overnight closed up 9 points.

Presumably yesterday’s selling in the materials sector will turn into buying today on base metal and gold strength.

Chinese inflation numbers for May are due today.

ECB president Mario Draghi will speak tonight.

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

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article 3 months old

The Overnight Report: Bridge Too Far

By Greg Peel

The Dow closed up 17 points or 0.1% while the S&P gained 0.1% to 2112 and the Nasdaq fell 0.1%.

Policy Shock

In his April policy statement, RBA governor Glenn Stevens concluded: “Continued low inflation would provide scope for easier policy, should that be appropriate to lend support to demand.” Inflation proved to indeed be low, so the RBA cut in May to 1.75%.

So low was inflation, as evidenced by the March quarter CPI numbers, that economists immediately pencilled in further rate cuts. August was assumed as the next move, with potentially as many as two more into 2017. Nobody expected a follow-up June cut, so yesterday economists were simply looking for confirmation that the RBA remained in an easing mode. But this was the conclusion of yesterday’s statement:

“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.”

The RBA is not in an easing mode at all. Having cut once, it has returned to a “holding stance”.

That is why the Aussie dollar shot up a cent yesterday at 2.30pm. This morning the Aussie is 1.2% higher over 24 hours at US$0.7458.

It’s also why the ASX200, having peaked at 32 points up on the day around lunchtime yesterday, was back to square by 3.20pm. A slight recovery thereafter left a close of up 10 points.

Among those sectors suddenly turning tail were the banks, although they still managed to close with a sufficient gain to offset further insurance company selling in the financials sector. Utilities managed a flat close, while telcos fell 0.4% and consumer staples 1.0% as yield-plays lost some of their gloss. Although the flipside is the benefit of the Fed supposedly not raising.

The Fed not raising implies less strength in the greenback, so the resources sectors were able to lead the gains yesterday to offset the losses in other sectors, thanks to higher commodity prices. Materials rose 1.1% and energy 1.7%.

But for local investors, it’s back to square one. If the ASX200 was to push up through 5400 as the technicals have been suggesting, it would require a combination of a lower local interest rate and a subsequently weaker Aussie dollar to provide support. That doesn’t look like happening now, so we have to look forward past the June Fed meeting, the Brexit vote and the local federal election towards the August result season before – left field events notwithstanding – this market finds a new impetus.

Perhaps that impetus could come from rising commodity prices – oil closed above 50 last night and iron ore is up another 3% -- but just how far can these rallies run when capacity is idled?

Getting High

WTI crude rallied 1.4% last night to its first close above US$50/bbl in ten months. Disruptions in Nigerian supply aside, the oil market has begun to focus more on rising global demand.

The energy sector drove Wall Street higher last night, backed up by an ongoing feeling of relief following the Fed’s apparent back-down on a summer rate hike. Having closed above 2100 on Monday night, the S&P500 was also supported by the technicals, with traders beginning to eye off the all-time high of 2134.

But while the S&P500 is the traders’ preferred indicator, being a broad market, cap-weighted index, the antiquated Dow average still has lingering power. When the Dow hit 18,000 last night, the sellers moved in.

Round numbers are always difficult to breach in one go. The S&P is still sitting above 2100, but clearly more work will need to be done to get to the Dow all-time high of 18,188.

Next week’s June Fed meeting is no longer as critical as it was a week ago, given no one is expecting a rate hike. Then there’s the Brexit vote, which is the big unknown for markets. Perhaps new all-time highs on Wall Street will have to wait until a Brexit outcome is clear.

Then there’s the small matter of a looming presidential election, which many believe will also serve to keep the Fed at bay. Rate hike expectations have shifted away from the summer and towards year-end, with September a chance but December now preferred. By December, the Fed will know who will be controlling fiscal policy for the next four years.

Commodities

West Texas crude is up US71c at US$50.43/bbl. Many are assuming 50 is the line in the sand for the recovery rally, given it is a sufficient price to trigger the restart of idled production. The US Energy Information Administration nevertheless begs to differ.

“Low oil prices continue to cut into domestic oil production, with US monthly oil output not expected to start steadily increasing until the end of 2017,” said an EIA statement last night. This implies oil prices still have further upside on increasing demand.

The Fed-inspired base metals rally of the past few days came to an abrupt halt last night as commodity funds decided a weaker US dollar is not in itself enough to suggest higher prices. Copper was slapped 2.7% in London, while lead fell 2% and nickel and zinc 1%. Only aluminium was spared, with a 0.5% gain.

Iron ore rose US$1.70 to US$52.30/bbl.

The US dollar index is down 0.2% at 93.84 but gold remains steady at US$1243.20/oz.

Today

The SPI Overnight closed down 18 points or 0.3%. The RBA statement has taken the wind out of the sails.

Locally we’ll see housing finance numbers out today, while much attention will be paid to the release of China’s May trade data.

Vicinity Centres ((VCX)) will host an investor day today.
 

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article 3 months old

Crude’s Hestitation Around US$50 Could End Soon

By Fawad Razaqzada, Market Analyst, FOREX.com

Oil prices were trading noticeably higher this morning. A barrel of oil cost $50.80 in London while the US contract was trading at $49.85. Brent was thus just shy of this year’s high of about $50.85 hit last week, while WTI was not too far off its own 2016 high of $50.20 achieved a couple of weeks ago. However at the time of this writing, both contracts eased off their highs as fresh remarks from Janet Yellen was met with a bit of a “risk-off” response in the markets as equities and oil both eased off their highs and the dollar turned volatile. In a nutshell, the Fed’s chairwoman kept alive the idea of a summer rate increase but her acknowledgement of the poor jobs data in May and the consequences of a Brexit on US monetary policy led to speculation that a rate increase could be delayed further out. Sure enough, US equities were quick to bounce back and the dollar gave up its initial gains made in the immediate aftermath of Yellen’s comments.

But despite the late selling, both oil contracts were still just about holding in the positive territory for the day as we went to press. Oil prices have been finding support from various sources of late. Obviously we can’t ignore the temporary influence of supply disruptions in places such as Nigeria, as well as the indirect impact of an overall weaker US dollar on the buck-denominated commodity. But these factors play second fiddle to growing expectations of a tighter oil market later this year which remains the primary driver behind oil prices at the moment. Although Baker Hughes reported the biggest rise in the US oil rig count this year, namely nine rigs, this could just be a one off or an outlier rather than the start of a new trend. But more important is how resilient crude has been to this and other oil-bearish news, such as the inaction from the OPEC last week. To us, the refusal of oil prices to go down on bad news suggests that it may be just a matter of time before WTI prices climb decisively above $50 a barrel again. That being said, we don’t expect to see oil prices rise more than $70 a barrel this year as shale producers could simply step back in and flood the market with more oil in this competitive market. 

The key risk to the above bullish scenario is if US oil production stops declining now that the rig counts there have increased once again. A small and sustained rise in US oil production, if seen, could turn sentiment sour very quickly for the rest of the major oil producers are pumping oil near record levels and Iran is continuing to increase its market share. The weekly oil data from the American Petroleum Institute and the US Department of Energy will be released on Tuesday and Wednesday respectively.

From a technical perspective, WTI’s tight consolidation just below the psychologically-important $50 hurdle suggests that a breakout above this level may be imminent. The hesitation here has allowed the RSI momentum indicator to unwind from “overbought” levels of 70 mainly through time than price action, which is bullish. The RSI is also holding above its own bullish trend line, suggesting the bullish momentum remains strong. But for oil to make a decisive move higher, $50 needs to be cleared soon, otherwise a deeper correction may be required in order to encourage buying interest. Generally speaking, the outlook on WTI remains bullish for as long as it remains within the bullish channel.



 
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article 3 months old

The Overnight Report: Flip Flop

By Greg Peel

The Dow rose 113 points or 0.6% while the S&P gained 0.5% to 2109 and the Nasdaq added 0.5%.

Interest Rate Tango

Three factors impacted on the local market yesterday: Friday night’s weak US jobs number; yesterday’s weak local inflation gauge; and the storms wreaking havoc on Australia’s east coast.

While Wall Street would have been surprised if the Fed chose to hike again as early as this month, Friday night’s shockingly weak US jobs number left markets in no doubt it’s not going to happen. Janet Yellen has since implied as much overnight. This has two implications for Australian stocks.

Firstly, the resultant plunge in the US dollar lifted commodity prices and in particular the gold price, lighting a fire under the materials sector yesterday. While gold stocks rallied hard, 4% gains for both BHP Billiton ((BHP) and Rio Tinto ((RIO)), thanks to stronger iron ore and copper prices, helped drive the materials sector up 3.8% to be the clear winner on the day.

Secondly, a move up in US rates makes Australian yield stocks incrementally less attractive to US investors, hence the fact the weak jobs number has killed that off for now provided incentive to buy the yield-payers, being the banks, utilities, consumer staples and to some extent, BHP and Rio. Telcos should also be in that group, but they stayed put yesterday, probably because of weekend outages due to the storm.

The flipside of no US rate hike being positive for yield-payers is an RBA rate cut also being positive for yield-payers. From May into June we’ve seen expectations of further RBA rate cuts leap up on the weak March quarter CPI result and fall back again on the strong March quarter GDP result. Yesterday the Melbourne Institute’s monthly inflation gauge showed a 0.2% fall in headline inflation in May.

That follows April’s 0.1% gain, and takes annual inflation to 1.0%, down from 1.2% in April. That’s the lowest annual reading ever in the history of the gauge. Result? The market is now back to expecting further RBA rate cuts – not today, but probably in August and beyond.

So yesterday the yield-payers were more attractive on two counts. At 0.3%, yesterday’s rise in the financials sector reflected a balance between bank buying and insurance company selling, thanks to the storm. Consumer discretionary missed out, likely due to the impact on retail trade, albeit this sector often sees benefits down the track as affected households look to replace damaged furniture, whitegoods et al.

Add it all up and we saw a 0.8% gain for the ASX200 to 5360. The lead-in is positive again overnight, suggesting further upside today. Technically, if the market holds above 5350 the trend remains to the upside.

Coming Months?

Wall Street opened higher last night before settling down to await a speech by Fed chair Janet Yellen which by coincidence happened to be scheduled for one trading day after the weak jobs number.

In her speech, Yellen echoed the view of many in the market that one should not read too much into one strange looking data release, ie the surprisingly weak May jobs number, but instead concentrate on the trend. Assuming the trend remains intact, the Fed still intends to raise interest rates.

Yellen also confirmed the view of many in the market that the next hike will not be this month, ahead of the Brexit vote. The Fed chair made specific mention of the potential of this event to impact heavily on market sentiment. July would then tighten in the odds, but for one rather glaring omission.

In her previous speech, Yellen had underscored the more hawkish views of her FOMC colleagues in suggesting the next rate hike would occur in “the coming months”. Now, while in theory every month is “coming”, hence this hardly nails down the date, Wall Street took this to mean quite possibly June/July. But last night, all of a sudden, the “coming months” suggestion was gone from Yellen’s rhetoric.

Thus while Wall Street had already assumed the weak jobs number took both June and July off the table, Yellen’s comments, or lack thereof, have now reinforced that view.

This was enough to kick Wall Street on last night to its strongest closing level in 2016.

Commodities

A decent jump in the oil price also contributed to Wall Street strength. Oil did not participate in the post jobs number commodity price rally on Friday night because of the first jump in the US rig count in eleven months. But with Yellen’s effective confirmation, and further pipeline attacks in Nigeria, last night West Texas crude rose US82c to US$49.72/bbl.

Copper was the star base metal on Friday night while the others were caught in the headlights, but last night aluminium and lead rose over half a percent, and nickel and zinc both rose around two percent. Copper had a rest.

Iron ore is up another US$1.10 at US$50.60/t – back above the psychologically critical 50 mark.

Gold had its big move on Friday night and is steady at US$1244.70/oz, thanks to the US dollar index ticking back up 0.2% to 94.04.

The Aussie is steady at US$0.7365.

Today

The SPI Overnight closed up 15 points or 0.3%.

We saw 4% gains for BHP and Rio on the local market yesterday, and in London overnight the big miners each gained 6%. While there’ll be an element of double-counting, gains in iron ore and oil last night should ensure further strength today.

At 2.30pm the RBA will release a policy statement that will leave the cash rate unchanged, so the market will be very eager to read between Glenn Stevens’ lines to gauge whether an August rate cut is still a likelihood.

Meanwhile, as the storm rages on through Tasmania and damage begins to be assessed in Queensland and NSW, the scramble is on amongst analysts to figure out which of the insurers will be hardest hit and by how much, and which have sufficient reserves set aside.

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

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