Tag Archives: Energy

article 3 months old

The Monday Report

By Greg Peel

Manipulation

It looked like a worrying start to the June quarter for the local market on Friday but really it was a reversal of the solid end to the March quarter on Thursday. On Thursday, fund managers bought up the market in general to fool you into thinking they’d actually generated better returns when in fact they were clueless. On Friday they simply sold back those trades.

So for all intents and purposes, the June quarter starts today. And where from? Well, 5000 of course. Prisoners of our own device.

Economic data were never going to matter on Friday. On any other day, news that China’s official manufacturing PMI swung back into expansion in March for the first time in eight months would have been met with cheers. Beijing’s index rose to 50.2 from 49.0 in February. Caixin’s independent measure did not quite make expansion but a move up to 49.7 from 48.0 at least corroborates the trend.

More important than China’s manufacturing sector is its services sector, which Beijing is supporting in favour of over-capacitated manufacturing. The government’s services PMI rose to 53.8 from 52.7, which also reversed the weak trend of the last couple of months.

And for the record, what’s left of Australia’s own manufacturing industry posted a PMI increase to a breakneck 58.1, up from 53.8. That’s the fastest pace of expansion since April 2004.

March is often a vacuum month for Australian corporates coming, as it does, in the wake of the February results season. Quite often not a lot happens to generate any market news and this year has been no exception. April features school holidays, which we’ve already had in Victoria and Queensland and are about to have in NSW, just to increase the potential for quieter markets.

But we do see the corporate news begin to ramp back up again in April, beginning with resource sector quarterly production reports and then moving on the ever increasing number of quarterly reports provided by the rest of the market. We are ever so quietly moving towards a US-style quarterly reporting calendar. If only we could adopt the US practice of providing homogenous EPS results for clear comparison rather than Australia’s antiquated obsession with this thing called “profit”, which is often misleading.

Around the Grounds

There may not be much left of Australia’s manufacturing industry but in Japan, manufacturing is the economy’s primary driver. It will thus be concerning for the Abe government that Japan’s manufacturing PMI fell to 49.0 from 50.2, representing the first move into contraction in eleven months.

It was steady as she goes on the other side of the world, with the eurozone’s PMI inching up to 51.6 from 51.2 and the UK similarly to 51.0 from 50.8.

Wall Street was relieved to see the US manufacturing PMI flip back into expansion at a better than expected 51.8, up from 49.5.

And suddenly, no one cared

The US added 215,000 jobs in March, although you’d have been hard-pressed to find that out on Saturday morning. The unemployment rate ticked back up to 5.0% from 4.9% but that was because the participation rate reached its highest level in two years.

As late as last year the US monthly non-farm payrolls report releases drew audience numbers exceeded only by the World Series and Super Bowl, but now the data have become relatively consistent across past months and Janet Yellen has emphatically set a dovish policy agenda, it really wasn’t going to matter what the jobs outcome was on Friday night.

If anything, a June Fed rate hike cannot be ruled out, but that does not represent a change in market view. The most important number within the data suite – wage growth – showed a better than expected 0.3% increase following a disappointing 0.1% drop in February. This is the inflation indicator Fed-watchers are targeting, but the flip-over hints at statistical noise.

On the strength of both better than expected jobs numbers and manufacturing numbers, Wall Street rallied on Friday. The Dow closed up 107 points or 0.6% while the S&P gained 0.6% to 2072 and the Nasdaq rose 0.9%.

The most interesting point to note about the rally is that it came in direct defiance of a fall in the oil price.

Oil fell 4% on Friday night and as a result, the Dow opened down over a hundred points. But traders who made the assumption the near perfect correlation still stands were in for a rude shock. Oil fell because Saudi Arabia suggested that Doha meeting or not, if Iran does not agree to a production freeze then Saudi Arabia will not agree to a production freeze.

If the near 50% rebound in the WTI price from its February low is all about hopes of co-operation between OPEC and non-OPEC producers in a concerted effort to reduce supply and support prices, then either oil traders are very stupid or the rally actually has nothing to do with such speculation. The rally is all about a market that became very oversold on panic and a subsequent short-covering scramble.

Throw in some early signs of falling US production, despite still rising inventories, lower US rig counts and a growing number of marginal producers falling by the wayside and we have sufficient reason for a rebound in oil. We can also cite a lack of major financial disaster in the US banking industry stemming from oil producer defaults and bankruptcies, as was at one point feared, as easing concerns.

The oil price had stabilised over March, but with nothing new going on, and short-covering now exhausted, it is of no surprise oil should fall back again. Perhaps Saudi Arabia was an excuse rather than a source of great angst but either way, oil is not going back to US$50/bbl until the trends noted above become more entrenched.

The fact Wall Street turned around and closed on a high note on Friday is testament to waning fear of another plunge in the WTI price to an even lower low.

Commodities

West Texas crude was down US$1.48 or 3.9% at US$36.68/bbl on Saturday morning and Brent was down US$1.65 or 4.1% at US$38.68/bbl.

Normally we would see positive results for both Chinese and US manufacturing provide a boost to base metal prices but the LME appears to be suffering from a bout of schizophrenia of late, suggesting price moves are more about metal-specific production and inventory levels than they are about the macro-economic picture.

On Friday night, with the US dollar index as good as steady at 94.58, tin rose 0.5%, aluminium 1%, lead 2% and zinc 3% while copper fell 1% and nickel fell 2%.

Iron ore rose US80c to US$54.00/t.

The solid US data helped gold down US$9.20 to US$1221.90/oz.

The Aussie rose 0.3% to US$0.7684.

With the Thursday-Friday shenanigans out of the way, the SPI Overnight closed up 23 points or 0.5%.

The Week Ahead

That Aussie will no doubt be a focus of attention when the RBA meets tomorrow. A rate cut is not expected but the market will be looking for hints the board might be prepared to act, or at least talk down the currency.

Ahead of the meeting we see local retail sales and building approvals numbers today along with ANZ job ads and the TD Securities inflation gauge. Tomorrow brings the trade numbers and the services PMI and on Thursday it’s the construction PMI.

Service sector PMIs will be posted across the globe on Tuesday, including Caixin’s China number.

In the US it’s factory orders tonight, trade on Tuesday along with the PMI, and chain store sales on Thursday. The minutes of the March Fed meeting will be published on Wednesday but they have already been trumped by Yellen’s speech last week. Yellen speaks again this week, on Thursday.

There’s a late trickle of ex-divs in the local market this week and Bank of Queensland ((BOQ)) will report earnings on Thursday. On Friday, both Dexus Group ((DXS)) and Investa Office ((IOF)) will hold EGMs to vote on the proposed portfolio management takeover.

Rudi will appear on Sky Business on Tuesday, via Skype-link, 11.15am and again twice on Thursday (Trading Day 12.30-2.30pm & Switzer TV between 7-8pm), and via Skype-link at around 11.10am on Friday.
 

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article 3 months old

Crude Oil: Sitting At A Crucial Polarity Point

By Tyler Yell, forex trading instructor, FXCM

  • Crude Oil Technical Strategy: About to Test Key Support
  • US Dollar weakness is helping commodities & Commodity FX
  • Sentimental trading system warns of further weakness

[Note: All prices quoted in USD]

A sustainable uptrend is proven by how it recovers from corrective moves. WTI Crude Oil is seeing its first key retracement as we’ve moved from a high of ~$42/bbl down to $37.55/bbl as of Thursday morning for a 10+% drop. In addition to the ~10% drop has been the first approach of the ~$37/bbl area as support for the first time since August. All other times between then and now, that level has acted as rather firm resistance.

As we currently stand, the US Dollar is set to end Q1 marking its worst performance in a quarter since 2010. The poor performance was cemented on the back of a Janet Yellen speech to the Economic Club of New York where she mentioned US Oil and the need for gradual hikes when they come from the Federal Reserve. Now, it appears as though the Federal Reserve (or, at least, their chief) is looking at Oil as a systemic risk, the way they were looking at banks. If that’s the case, we could see a shift to a weak US Dollar focuses, which not only continues to help equities, but also energy.

The 200-Day Moving Average Has Been A Formidable Foe For WTI Crude Oil Since July 2014.

Key Support Levels from Here

As of Thursday, the 200-day moving average sits below $42 per barrel at $41.23. Given the fortitude of the moving average and its central focus among investors and traders, there is little resistance outside of this level that matters.

Turning our focus to support, where I believe we should spend our attention, the zones that catch my attention are the recent corrective low and the 38.2% retracement at $35.94/bbl and the 21-day moving average, currently at $38.25 per barrel. Should these levels hold the support, we could soon see a rise that would test and potentially break the 200-day moving average for the first time since Q2 2014.

It may also be helpful to watch the RSI (5) below the chart, because if we break back above into the upper half of the 0-100 range, a bull market may be well in force in Oil. In a bull market or a sustained uptrend, RSI can often find support in the ‘40’ level region. If we push higher from here, we could then see a break above the 200-DMA as a potential tipping point higher in the Oil market. If we fail to hold the ‘40’ level, and the 200-DMA does act as resistance, then we could then look for a resumption of the recently dead US-Dollar uptrend to pick back up, and thwart the Fed’s hopes.

Contrarian System Warns of a Test of Key Support Lower

In addition to the technical focus around the 200-DMA resistance and RSI (5) ‘40’ zone support, we should keep an eye on retail trader sentiment, who is wanting to see US Oil take on and break above the 200-DMA. However, a further push lower would align with our Speculative Sentiment Indicator or SSI.

Our internal readings of US Oil show an SSI reading at 1.60 as 62% of traders are long. We use our SSI as a contrarian indicator to price action, and the fact that the majority of traders are long provides a signal that the US Oil may continue lower. The trading crowd has grown further net-long from yesterday and last week. The combination of current sentiment and recent changes gives a further bearish trading bias. If the reading were to turn negative again, and the price breaks above the 200-DMA resistance, we might well be on our way back to $50/bbl. Until then, we’ll respect the 200-DMA as WTI Crude Oil has since August 2014.
 

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

The views expressed are not by association FNArena's (see our disclaimer).

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article 3 months old

The Overnight Report: Wild Quarter

By Greg Peel

The Dow closed down 31 points or 0.2% while the S&P lost 0.2% to 2059 and the Nasdaq was flat.

Delayed Reaction

Yesterday’s rally on Bridge Street was basically what I thought we might see on Wednesday in the wake of the Fed chair’s dovish speech. The ASX200 sold down by a similar percentage on Tuesday, possibly in fear of a more hawkish stance from Janet Yellen, so when the opposite proved true, it made sense that the index would recover.

The index tried to rally hard from the open on Wednesday but was immediately slapped down for a flat close. Nothing changed in the meantime, but yesterday we saw a rally equivalent to Tuesday’s plunge – not only in percentage move but in breath of sectors. Yesterday all sectors finished in the green by fairly similar amounts.

Buy Australia.

As to why the extra day was required is unclear. One can only assume end of quarter shenanigans played a part. Despite the benefits of a continually supportive Fed, the Aussie remains unsettlingly high. There was also some interesting local data out yesterday, but it doesn’t appear the market was going to pay much attention.

Australia’s housing market is cooling. Overall private sector credit rose 0.6% in February to provide a stable 6.6% annual growth rate. Housing credit rose by 0.5% for a 7.3% rate, down from 7.5% in late 2015. Investor housing credit rose by 0.6% for 7.6%, down from 11.0% in mid-2015.

New home sales plunged 5.3% in February. Analysts have been warning for some time of a bubble in apartment construction. Detached house sales fell 3.9% while apartment sales fell 10.9%. Oversupply in apartments is meeting tighter APRA lending rules and repriced bank mortgage rates.

Housing growth has been the major combatant against the plunge in resource sector investment over the past couple of years. While no one is expecting a housing crash, Australia’s economy will require the decline in mining investment to bottom out and commodity prices to stabilise if housing is not going to provide the same counterbalance it has to date. The good news is business credit rose 0.7% in February to a solid rate of 6.5% annual growth. As the CBA economists put it yesterday, “Firmer growth in non-resources related investment is the missing ingredient to broader-based growth outcomes”.

What a Quarter

The US indices may have closed with a whimper at the end of the March quarter last night but investors will be relieved to see the back of it. The S&P500 closed up 1.1% for the quarter which seems pretty ho-hum, until one notes that it had to rally almost 13% from the mid-February low to get there. March alone saw a 6.8% gain.

What drove that rally? Well we need look no further than the 17% gain for the energy sector and 20% gain for materials off their late January lows as commodity prices bottomed and short-covering rallies ensued. Assisting both commodity prices and the US export economy in general was a topping out of the US dollar, and further weakness from mid-March following the dovish Fed policy statement.

Did you know that US dollar gold posted its best quarter since …wait for it…1986?

Gold’s rally is indicative of what we might conclude really drove the rebound in world stock markets over the quarter. The BoJ moved to negative rates, the ECB pumped up its QE to shock & awe levels, the PBoC provided further stimulus and the Fed has now hinted that in retrospect, the December rate hike was not a good idea and there won’t be another one any time soon.

Central banks rule!

Commodities

Oil prices were little moved last night but at US$38.16/bbl, West Texas crude is trading 46% above its February low. Brent is up slightly overnight at US$39.60/bbl.

Over the course of the wild quarter, base metal prices have struggled to settle into any sort of pattern. The same was true again last night as nickel rose 0.5%, zinc 1% and aluminium 1.5%, while copper fell 0.5%, lead 1% and tin 1.5%.

With the US dollar index down 0.2% at 94.63, gold is up US$6.40 at US$1231.10/oz.

The Aussie is steady at US$0.7663.

Today

After yesterday’s surge, the SPI Overnight closed down 20 points or 0.4%.

Tonight sees the March US jobs report. While this monthly release has often been the source of much angst in recent years, Wall Street is now becoming increasingly ambivalent. The jobs number will come in around 200,000 and the unemployment rate – which no one believes – will come in at or under 5%. Yeah, yeah. The wage growth number will be scrutinised but Janet Yellen has already set the policy agenda, so inflation implications will also be met with disinterest.

There may also be a lack of volatility forthcoming from today’s Chinese PMIs. If they’re bad, the world will assume stepped-up stimulus from Beijing. If they’re good, well that’s good.

Australia, Japan, the eurozone, UK and US will also release manufacturing PMIs today/night.

Note that relevant Australian states go off summer time this weekend, so as of Tuesday morning, the NYSE will close at 6am Sydney time.

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

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article 3 months old

Material Matters: Crude Oil, Copper And Aluminium

-Short term risks returning to crude
-But security issues pose oil supply threat
-Copper rally stalls but will it sell off?
-Slow re-start to China's aluminium smelters
 

By Eva Brocklehurst

Crude Oil

What will it take for crude to become fashionable again? Macquarie believes oil prices should correct back to the mid to low US$30/bbl range soon. The broker remains constructive over the medium to longer term, expecting West Texas Intermediate will return to US$70/bbl in 2018, but believes the current rally does not stack up against the fundamentals.

West Texas Intermediate has rallied 5.1% since early February, likely kicked off by a combination of institutional and retail capital flows, the broker maintains, accelerated by short covering. Some bullish fundamentals underpinned this rally but Macquarie finds the numbers not compelling enough.

Meanwhile, short term risks are rising. Iran's exports are ahead of schedule, the broker observes. US crude imports are expected to stay at or above 7.5mmbopd and recent exchange traded fund outflows could accelerate if the rally stalls. US dollar weakness has slowed and reversed. Ceyhan and Forecados crude supplies are returning to the market.

RBC Capital Markets observes there are five sovereign producers on the cusp of a crisis in the current low oil price environment. The fragile five are Venezuela, Iraq, Libya, Algeria and Nigeria, where there is a struggle to fund state apparatus and provide essential services. Nigeria and Iraq are at the greatest risk.

In Nigeria, security related shut-ins pose a significant problem, with redeployment of troops to the southern oil region highlighting this risk. In Iraq, the Kurdish oil exports are at risk, given the problems on the border with Turkey. The analysts notes dysfunctional Iraqi politics and hostilities with Turkey post significant threats.

Returning to a long-term equilibrium price will be a drawn out process, the analysts maintain. The daily oversupply must be erased first and global inventories need to return to normal levels. The size and duration of potential outages in Nigeria and Iraq could accelerate the supply reduction if they were to materialise, the analysts contend.

Barclays observes that as crude has rallied so have US gas prices. As supply and demand fundamentals improve, stemming from increased export levels and domestic demand, the analysts believe ethane and propane are well positioned regardless of the direction of the oil price.

The analysts also note China's crude oil imports picked up in February, because of high refinery runs and lower domestic output. Saudi Arabia took further market share while Angola became the second largest supplier to China.

Copper

While the US dollar has been the central theme for copper in March, Barclays analysts expect the focus to return to China and actions from producers. Over coming weeks the analysts envisage three primary threats to the copper market, which may turn the stalled rally into a sell off.

These include the upcoming CESCO meeting in Chile, where major announcements will be tracked to garner a reading on the state of the copper market. If cuts to production are announced this may convey a short-term boost to prices, the analysts acknowledge.

China is also expected to release important data over the next few weeks which will provide the first clues to the post-holiday performance and indicate the strength or otherwise of the spring rebound in industrial activity.

The analysts expect the US dollar to fade in importance in determining the copper price trajectory but an unexpected tightening in US monetary policy would likely depress commodity prices including copper.

Aluminium

Aluminium has confounded analysts at Macquarie. The price on the London Metal Exchange has fallen by 2.2%, making it one of the worst performers, while the Shanghai price has risen 3.6%, making it the second strongest performer on that exchange.

Macquarie observes the rise in Shanghai has been in the wake of the Chinese New Year holidays and the main driver appears to be market sentiment regarding a temporary supply shortage in China. The broker suspects this is due to limited new capacity additions and a slow re-start to idled capacity this year.

Given the time lags in re-starting smelters and making physical deliveries, the Chinese domestic market can enjoy the benefit of the large-scale capacity cuts last quarter at the same time as downstream demand is picking up seasonally.

The broker also suspects the aluminium price benefited from an increase in the alumina price, which rose because of perceptions of tight supply and cost support. Extra alumina capacity is starting to come on line and the broker does not expect alumina price strength to last much longer.

For the overseas aluminium market the stronger Chinese price is expected to hold back Chinese exports as price arbitrage closes, but Macquarie still expects export pressures in China to return once the domestic balance changes.
 

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article 3 months old

The Overnight Report: Yellen Afterglow

By Greg Peel

The Dow closed up 83 points or 0.5% while the S&P gained 0.4% to 2063 and the Nasdaq rose 0.5%.

Struggling

Well the ASX200 was indeed off to the races yesterday, up 54 points from the opening bell, but very quickly it was not to last. If selling on Tuesday had anything to do with fears Janet Yellen was set to offer up a more hawkish Fed stance in her speech on Tuesday night, yesterday’s open supported that theory. But the sellers nipped everything in the bud.

By midday the index was back to square. Energy led the downside with a 1.5% drop thanks to lower oil prices while on the other side of the coin, healthcare rebounded 1.1% having had a hard time of it on Tuesday. Elsewhere, sectors traded off small moves up and down. The banks at the least managed to hold their ground.

The March quarter ends tomorrow and this must be taken into consideration in gauging market mood, given the pushing and shoving that can go on between traders squaring up and fund managers trying to window-dress returns. But we might also take into consideration that while lower for longer interest rates in the US might be good for the US, subsequent strength in the Aussie dollar acts as a brake on Australia’s export economy.

Earnings Loom

The UK and major European stock markets liked renewed Fed dovishness, as they all rose over 1.5% last night. Wall Street kicked on again from the opening bell to send the Dow up 157 points at its peak. But aside from the usual keeping half an eye on the oil price, momentum appeared to fade.

What will drive Wall Street higher from here?

The March quarter earnings season begins next month. The forecast is for a 6.9% net drop in S&P500 earnings and a 1.0% drop in revenues, which would mark the fourth consecutive quarter of negative earnings growth and fifth for revenues. It makes one wonder why Wall Street managed to run as high as it did ahead of the oil price collapse.

A big factor in that 6.9% is energy losses, with materials also chiming in. The banks have also had a tough quarter. The US dollar has only more recently retreated, so currency impact will be a big feature this season. As to why Wall Street can continue to rally on negative earnings growth, we may look no further than Fed influence.

Access to cheap funding has allowed US companies to borrow to buy back their own stock, thus increasing earnings per share not through increased earnings, but through a reduced number of shares. One day, somewhere down the line, the music will stop and so will the buybacks. But this will require Fed tightening, which in turn will require a more robust US and world economic outlook.

Meanwhile, it is typical for companies to suspend their buyback programs over earnings season. Buyback programs are supposed to be market agnostic, and a company would risk insider trading allegations if it were, for example, to suddenly step up its buying ahead of announcing a Street-beating result. This means that for the next month, Wall Street will lack buyback support.

If earnings results then come in net worse than expected, there is no safety net.

Ahead of earnings we have the March non-farm payrolls numbers tomorrow night. Last night the ADP private sector report showed the addition of 200,000 jobs, just a tick down from February’s 205,000 and in line with expectation. Forecasts for non-farm payrolls are for the addition of 205,000 jobs.

Wall Street will nevertheless not pay as much attention to the actual jobs number, assuming it falls within a reasonable band of expectation, as it will wage growth. This has been the missing link in the labour market story that has helped keep the Fed on hold, despite an unemployment rate considered to be near “full employment”. A jump in wage growth would bring a June Fed rate hike back into the frame.

Commodities

The oils were initially stronger during the session but fell back towards the close. West Texas crude is down US17c at US$38.27/bbl and Brent is own US10c at US$39.26/bbl.

Anticipation of Friday’s data, which includes not only US jobs but manufacturing PMIs from across the globe, and particularly China, is keeping LME traders on the sidelines. Base metals split up and down moves last night, none of them greater than one percent.

Is iron ore beginning to succumb to reality of lower Chinese steel production? It’s down US$1.50 at US$53.20/t.

The more interesting metal, nevertheless, is gold. Gold jumped up on Tuesday night, as one might expect, on increased Fed dovishness. But the US dollar index is down 0.3% to 94.84 overnight, and gold has given back most of Tuesday night’s gain. It’s down US$17.90 to US$1224.70/oz.

A couple of months ago it looked like gold was set to challenge 1300. Ahead of the March Fed statement release, gold sold off as traders took precautionary profits. The statement was dovish, so gold rebounded, but did not manage to return to its high. On Tuesday night Yellen was even more dovish, so gold shot up, but again it did not reach the previous high. Last night, despite dollar support, gold fell back again.

Markets that cannot go up do tend to go down instead.

The Aussie dollar is up 0.4% at US$0.7667.

Today

IT would seem futures traders are determined that if the ASX200 could not push away from the gravitational pull of 5000 yesterday, it can do it today. Despite the S&P500 being up only 0.4%, and oil, iron ore and gold prices being weaker overnight, the SPI Overnight closed up 42 points or 0.8%.

Locally we’ll see private sector credit data today along with new home sales.

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

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

Material Matters: China & The Commodity Outlook, Coal And Copper

-China's demand recovery slugglish
-Commodities rally still fragile
-Thermal coal oversupply looms
-Physical copper not yet tight


By Eva Brocklehurst

China And Commodities Outlook

Morgan Stanley has garnered information on revenue trends in China from the announcements by listed multinationals in terms of earnings and guidance. In aggregate, current conditions are deteriorating, as around 50% of the sample reported conditions as adverse in the fourth quarter earnings season compared with only 37% a year earlier.

The worst outlook is for industrials, IT, materials and staples companies. The most positive outlook is for pharmaceutical and discretionary product companies.

From a commodities perspective, much of the current enthusiasm appears to be relating to Chinese demand, which Macquarie observes has improved in February-March. Nevertheless, the broker still maintains that markets ex China appear to be leading the nascent recovery in industrial production.

The broker still believes the underlying demand improvement in China is a recovery to trend, which suggests 1-2% annual growth for base metals and slightly negative growth for bulks. Fundamentals have improved, Macquarie observes, to a lesser extent.

The most interesting finding in the broker's opinion is that future production expectations are now rising strongly and this creates a risk that the supply response quickly matches demand growth over coming months, thus curbing the current rally.

The first quarter rally in commodities came earlier than Deutsche Bank expected and propelled the asset class into the best performer year to date. The broker considers the rally is fragile in some cases, prematurely pricing in a balanced market.

Deutsche Bank is confident that the process of re-balancing in crude oil is under way although the strength of the rally may fade as surpluses remain sizeable in the second quarter. In natural gas, the outlook is for tight markets and a deficit for the balance of the year large enough to justify an expected narrowing of storage surplus and eventually higher spot prices.

The broker finds limited catalysts to push gold higher than its first quarter tops. The prevalence of negative interest rates and a more dovish US Federal Reserve also means gold is unlikely to go below US$1000/oz.

Base metals in the meantime appear well supplied. Investors perceive the downward currency-commodity deflationary spiral has ended but Deutsche Bank believes further supply cuts are required to balance markets or draw down inventories. The exception is zinc, where natural resource decline has assisted the supply reductions.

Coal

Metallurgical coal contract settlements for hard coking coal in the second quarter are reportedly being agreed at around $84/tonne free on board. If confirmed, this is in line with Macquarie's recent forecasts and represents the first increase in contract pricing since the fourth quarter of 2013.

Does this augur well? Macquarie observes the prices of steel making raw materials have increased year to date on the back of an improvement in Chinese sentiment. Steel orders from end users are up and profits are now positive for many mills. This impact has been amplified by low inventories.

Still, the broker suspects this is a seasonal phenomenon heading into peak second quarter demand. One way Macquarie describes the current scenario is that the market is simply moving back to trend. Moreover, the broker does not witness enough structural improvement to suggest the market is bottoming and suspects the rally may lose steam in the second half of the year.

Macquarie believes producers are ignoring the fundamentals in thermal (steaming) coal. Glencore, the world's largest thermal coal exporter, is currently attempting to secure a $60/t Newcastle FOB prices for the Japanese financial year, but spot prices for the coal have averaged around $50/t year to date.

Meanwhile, Peabody has flagged its current structure is unmanageable and the question is now more about when rather than if the business goes into Chapter 11, the broker maintains.

Macquarie expects four additional Australia projects, one greenfield and three brownfield, are either going ahead or being seriously considered, despite lacklustre market conditions. These include Salim Group's Mt Pleasant, Whitehaven Coal's ((WHC)) Maules Creek expansion, New Hope Coal's ((NHC)) New Acland stage 3 and Yancoal's ((YAL)) Moolarben underground stage 2.

The broker envisages more than 20mtpa, 10% of Australia's thermal coal exports, could be added in the next three years to an already oversupplied market, further depressing prices.

The broker retains a negative outlook for coal, particularly thermal coal, preferring Rio Tinto ((RIO)) over BHP Billiton ((BHP)) and South32 ((S32)) with further possible negatives expected for South32, New Hope and Whitehaven based on Australian dollar moves.

Copper

Speculative buying is contributing to the lift in copper prices in 2016, UBS notes, to US$2.30/lb. Optimism has increased regarding China's fiscal and monetary policy amid expectations for further easing to achieve economic growth aims. Sentiment has been helped by uniformly strong property data in January-February.

UBS notes the optimism has supported the copper price but the physical market is not yet reflecting a tightening market. Merchant premia have been falling in China, visible inventory is lifting and cancelled warrants are stable and low.

Trade flows appear strong but the broker suspects this may be driven by a lift in mine supply. The broker envisages downside risks from a copper surplus and deflating cost curves and forecasts US$1.95/lb for 2016.
 

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article 3 months old

The Overnight Report: Gradualism Rules, Eventually

By Greg Peel

The Dow closed up 97 points or 0.6% while the S&P gained 0.9% to 2055 as the Nasdaq jumped 1.7%.

Fed Scare?

Got the feeling you’re on a dark desert highway? Cool wind in your hair? Well, it’s probably because we’re back at 5000. Again.

On Thursday ANZ Bank ((ANZ)) announced a $100m top-up to its earlier guidance of an expected $800m of provisions to be taken against potential bad debts, with the difference specifically relating to resource sector loans. Westpac ((WBC)) chimed in with a $25m top-up against personal loans in the mining states. The market panicked and sent the bank sector down 2.5%.

After a four-day chocolate binge, the sellers were back into the banks again yesterday. In their reports, bank analysts suggested that while neither provision increase represented any material impact on earnings, they both sounded a warning bell, particularly if the commodity price rebound proved to be fleeting. The bank sector was down another 2.0% yesterday.

But was it all just about those provisions again? On Thursday, the fall in the bank sector was a stand-out. Other sectors finished comfortably in the green – healthcare and utilities fared well for example – which suggested sector rotation as bank share funds were redirected. Yesterday, however, the bank sector was merely another face in the crowd, as every sector finished in the red.

Healthcare was actually the biggest loser this time around, with a 2.6% fall. Consumer staples dropped 1.7%. The fall in telcos was more minor by comparison, but it appears more like yesterday was a day to sell Australia, which one does via the large caps resident in the likes of the banks, healthcare, supermarkets and materials (which fell 1.2%). There was no reason why sector-specific bank provisions should trigger selling in companies providing hospital beds and selling Corn Flakes.

So, bank issues aside, one might conclude that a certain level of caution was adopted ahead of last night’s speech from Fed chair Janet Yellen. Since the Fed statement was released earlier in the month and Yellen held her press conference suggesting two Fed rate hikes were now more likely in 2016 rather than the previous four touted, dissention has grown in the FOMC ranks. Even some former policy centrists had begun to push for a rate hike as soon as April.

Which suggested to the market that when Yellen spoke last night, she would likely qualify her previous musings and evoke a more hawkish stance than the Fed’s March statement had implied. Each incremental US rate increase incrementally undermines the carry trade to foreign markets with attractive rates, and the king of available yield is Australia.

So was yesterday just a square-up? Well we may find out today, given Yellen has subsequently confounded and gone completely the other way – further into the dovish corner. Technically, yesterday’s breach of 5050 for the ASX200 is a negative signal that could suggest another dip down towards 4800, but first we have to get through that concrete foundation of 5000. And the futures are up 33 points this morning.

Back in your box

Wall Street was also playing it safe ahead of Yellen’s speech. From the open, the Dow was down a hundred points.  Around half of that ground was recovered before Yellen hit the podium at 12.30pm at which point stock markets spiked, and ultimately the Dow closed up almost a hundred points. The S&P500’s gain was even more significant, pushing the index above 2050 resistance to its highest level so far for 2016.

Gradualism is the word. The Fed had been touting a gradual approach to policy normalisation all through the second half of last year before finally bowing to the market and hiking in December. Reading between the lines, it now appears Yellen wishes the Fed had never moved in December. Back then four 2016 rate hikes were suggested. Two weeks ago, that became two. After last night, it now looks like one.

Is the Fed actually in a tightening cycle, as was suggested in December, or have the chances increased that the next move in rates will actually be down again? Global risks appear to be Yellen’s main concern. And as has been noted, when every other major economy has cut its own interest rates, it is the equivalent of the US hiking anyway. Yellen is preaching caution, and on the local front, she does not believe inflation is a certainty to continue rising in the US.

That would seem to put to bed any notion of a rate rise in April, or even June. The dissenters have been silenced.

Easy policy is good for stocks. Yield stocks particularly, but not for banks. So it was that the 0.9% gain for the S&P last night was led out by the defensive yield plays, and in defiance of selling in the financial sector.

Wall Street is back to believing the only thing that matters is Fed support. This time around it’s not about extended QE but about not raising rates. With commodity prices showing some tentative signs of stabilising at these lower levels, Wall Street has now wiped out the panic of early 2016 and moved upwards once more.

Elsewhere, market moves were consistent with a more dovish Fed. The US dollar index is down 0.9% at 95.15. Gold is up US$22.70 to US$1242.70/oz. The US ten-year bond yield fell 6 basis points to 1.81%.

Only commodities bucked the trend.

Commodities

The LME reopened following the Easter break last night and official closing prices were already being marked for base metals before Janet Yellen hit the podium. The US dollar was higher at that point and trading volumes remained thin. While Yellen turned the greenback around, lacklustre interest ensured most base metals remained weak through to the kerb close.

Copper fell a percent and lead and nickel fell 1.5%. Tin fell 2.5%, while aluminium rose 1% and zinc was flat.

Iron ore fell US50c to US$54.70/t.

The oils copped 2.5% falls, which seems somewhat incongruous in the face of less chance of a Fed rate hike (which would impact on energy sector credit costs) and a weaker greenback. Oil fell because of preliminary weekly US data which showed another significant build in inventories. West Texas is down US97c to US$38.44/bbl and Brent is down US91c to US$39.36/bbl.

So much for the oil-US stock market correlation.

Today

The SPI Overnight closed up 33 points or 0.7%.

Will we spin around today, assuming yesterday’s cautious call has proven incorrect? A more dovish Fed does increase the possibility of the RBA having to resort to a rate cut. That would be good for the local market, and particularly those yield stocks, except for the banks.

In the meantime, the Aussie is up 1.2% at US$76.35, which is not good for healthcare and other sectors with high proportions of offshore earnings. Glenn Stevens is still expecting the Aussie to fall without prompting. Is he still so sure today?

Tonight in the US sees the March private sector jobs report, a precursor to Friday's non-farm payrolls release.
 

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

Opportunity in Santos?

By Michael Gable 

This week is a short one of course which is also light on news flow. The main economic data will be the US jobs numbers on Friday, with Bloomberg analysts forecasting further growth of 207,000 in non-farm employment for March. After that initial flurry of activity in early March, the market is just consolidating here and some profit taking is taking place. As long as we can stay in the 5000's, we would be building up for that move towards 5350 which we have been anticipating.

Today we have an update on how the Santos ((STO)) chart is tracking in light of the depressed oil price.

 


Using a monthly candlestick chart, STO it appears to have completed a neat 3-wave decline from the 2008 high, where wave “c” is 1.61 times wave “a”. This essentially means that this could be a low point for STO. It is also showing signs of slowing momentum, so much so that we are almost getting buy signals for the longer term with STO. Because of the problems with predicting when the oil price will bounce, we cannot tell if STO will bounce strongly here or not. But even if it tracks sideways for a while, that low seen in January this year will take quite a bit of bearishness to surpass.


Content included in this article is not by association the view of FNArena (see our disclaimer).
 
Michael Gable is managing Director of  Fairmont Equities (www.fairmontequities.com)

Michael assists investors to achieve their goals by providing advice ranging from short term trading to longer term portfolio management, deals in all ASX listed securities and specialises in covered call writing to help long term investors protect their share portfolios and generate additional income.

Michael is RG146 Accredited and holds the following formal qualifications:

• Bachelor of Engineering, Hons. (University of Sydney) 
• Bachelor of Commerce (University of Sydney) 
• Diploma of Mortgage Lending (Finsia) 
• Diploma of Financial Services [Financial Planning] (Finsia) 
• Completion of ASX Accredited Derivatives Adviser Levels 1 & 2

Disclaimer

Michael Gable is an Authorised Representative (No. 376892) and Fairmont Equities Pty Ltd is a Corporate Authorised Representative (No. 444397) of Novus Capital Limited (AFS Licence No. 238168). The information contained in this report is general information only and is copy write to Fairmont Equities. Fairmont Equities reserves all intellectual property rights. This report should not be interpreted as one that provides personal financial or investment advice. Any examples presented are for illustration purposes only. Past performance is not a reliable indicator of future performance. No person, persons or organisation should invest monies or take action on the reliance of the material contained in this report, but instead should satisfy themselves independently (whether by expert advice or others) of the appropriateness of any such action. Fairmont Equities, it directors and/or officers accept no responsibility for the accuracy, completeness or timeliness of the information contained in the report.

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article 3 months old

The Monday Report (On Tuesday)

By Greg Peel

Thursday

Weakness in metals prices sent the local materials sector south by 1.7% on Thursday, while energy managed to hold up despite a fall in the oil price. While oil continues to fluctuate, it has pretty much been jogging on the spot for the last couple of weeks.

Only one other sector fell on Thursday, but a 2.5% plunge in the banks represents a big hit to the ASX200. Reality has bitten, with ANZ Bank ((ANZ)) announcing it would take an additional $100m provision against potential bad loans to the energy sector, while Westpac is setting aside $25m to cover personal loans in the stressed mining states of Queensland and WA.

No doubt investors saw parallels with European banks, which have suffered significant share price falls this year due to exposure to energy as well as emerging markets. Throughout the year, analysts have assured their clients Australia’s banks are not onerously exposed to the resource sector, and nor are the US banks in terms of proportion of all loans. Were they wrong?

No. Panic may have emerged on Thursday but these provisions represent small numbers in the scheme of things. A provision of $25m would about cover Westpac’s board room lunch bill for the year, and even $100m for ANZ is still nothing major compared to the banks’ capital positions. All banks were nevertheless sold down on Thursday on suspicion. Provisions do, of course, reduce the earnings pool from which dividends are paid out on a ratio basis.

The sell-down for the index on Thursday was all about the banks and not a market-wide event. Sector rotation was evident, with the defensive sectors of healthcare and utilities among apparent recipients of liquidated bank shares.

Thursday Night

On Thursday night the Dow closed up 13 points while the S&P was flat at 2035 and the Nasdaq rose 0.1%.

Oil prices fell again early in the US session following Wednesday night’s data suggesting ever more increasing inventories, but relief was found in the weekly rig count, which posted another fall. The Dow was down 100 point at one stage and the US banks, too, suffered from energy market-related selling, but when oil turned, Wall Street returned to a flat close.

The S&P500 nevertheless closed down for the week after a five-week winning streak.

Adding to early weakness was an announced 2.8% fall in US new durable goods orders in February – the third decline in four months. While this was not actually as bad as the 2.9% decline economists had forecast, the breakdown of the data showed weakness in every major industrial sector except autos.

Having enjoyed a revival of sorts post-GFC, US manufacturing has more recently been battling against a stronger greenback, a slowing global economy and the fallout from the energy sector rout.

All of which is another reason to assume the Fed will not be raising its cash rate in April.

The US dollar index was flat at 96.11 on Thursday night and the Aussie was also little changed at US$0.7531.

West Texas crude closed down US24c at US$39.60/bbl and Brent was little changed at US$40.49/bbl.

Zinc has recently taken the mantle as the most volatile of base metals on the LME and it dropped 2.5%, while the pre-Easter session saw all other metals not much trouble the scorer.

Gold fell US$4.20 to US$1216.70/oz.

The SPI Overnight closed down 12 points or -0.2% on Friday morning.

Monday Night

Wall Street was open on Easter Monday but for many it is still a holiday period, coinciding with Spring Break. Europe was closed and trading on US exchanges was very quiet. US stocks indices meandered mildly higher during the session before a shooting incident at the Capitol building in Washington put a brief scare through the market an hour ahead of the close.

The Dow retreated to the flat line once more but as the incident was quickly contained, a modestly higher close was achieved. The Dow closed up 19 points or 0.1% while the S&P closed two points higher at 2037 and the Nasdaq lost 0.1%.

Fed chair Janet Yellen will be speaking tonight, which was another reason Wall Street was not interested in getting carried away last night. To that end, last night’s US data releases included consumer spending and inflation numbers.

Incomes rose 0.2% in February having risen 0.5% in January, while spending rose 0.1% having risen by 0.1% in January. The January spending figure was revised down from a 0.5% increase published a month ago. The personal consumption & expenditure (PCE) index fell to 1.0% year on year from 1.2% in January.

The core PCE, which is the Fed’s preferred inflation indicator, remained unchanged at 1.7% year on year, stubbornly below the Fed’s 2% target.

There is nothing in those numbers to suggest the push from a cohort of FOMC members to hike in April will gain any traction. The March jobs data are due out this Friday. When Yellen speaks tonight, Wall Street will be looking for some clarification on whether the Fed chair remains the head of the US central bank, or whether she now considers herself head of the World central bank.

In other words, there is much debate in US markets as to whether it is the Fed’s role to set policy based on the state of the world economy rather than just the US economy, as is the mandate.

Other data released last night included February pending home sales, which rose 3.5%.

Oil prices are only slightly weaker last night from Thursday night with West Texas down US19c at US$39.41/bbl and Brent down US22c at US$40.27/bbl.

The London Metals Exchange was closed last night.

Over two sessions since Thursday, the spot iron ore price is down US$2.10 to US$55.20/t.

The US dollar index is slightly lower at 95.99 and the Aussie is slightly higher at US$0.7544. Gold is up US$3.20 at US$1219.90/oz.

The SPI Overnight was closed last night, leaving Thursday night’s 12 point fall as the starting point this morning.

The Week Ahead

Not a lot is expected from markets across the globe until Janet Yellen makes her speech tonight. Thursday is the end of the quarter, so there may be some pushing and shoving going on this week ahead of books close.

Books close also comes ahead of the all-important US non-farm payrolls report due on Friday, being the first of the new month. That also means manufacturing PMI numbers from around the globe and both the manufacturing and services PMIs from China.

Other US data releases during the week include Case-Shiller house prices and the Conference Board’s monthly consumer confidence measure tonight, the ADP private sector jobs report tomorrow, Chicago PMI on Thursday and construction spending, vehicle sales and Michigan Uni’s fortnightly consumer sentiment measure on Friday, along with jobs and the manufacturing PMI.

Besides the manufacturing PMI release on Friday, Australia will see private sector credit data on Thursday along with new home sales, and house prices on Friday.

There are just a few more stocks going ex-dividend this week, across Wednesday and Thursday.

Rudi will appear on Sky Business  on Thursday (12.30-2.30pm) and again on Friday around 11.05am through Skype-link to discuss broker calls.
 

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

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article 3 months old

The Overnight Report: April Fools?

By Greg Peel

The Dow closed down 79 points or 0.5% while the S&P lost 0.6% to 2036 and the Nasdaq fell 1.1%.

Square Up

Talk of an April rate hike from the Fed actually emerged on Tuesday night but at the time seemed a little fanciful. It nevertheless appears such chatter has put some pressure on the Aussie dollar which over the past 24 hours has steadily declined a full 1.2% to US$0.7528 this morning. We might argue that having set itself short previously, the forex market has more recently set itself long.

There has been much talk of late that the rebound we’ve experienced in commodity prices has been overdone and has no ongoing substance, which no doubt has led to nervousness. And I have noted this past week that in the wake of last week’s central bank action, and/or lack thereof, and ahead of the US earnings season beginning next month, there has seemed little reason for stock markets to go up.

And when they can’t go up, they go down instead. Indeed, despite a slightly positive lead from the overnight futures, the ASX200 plunged 42 points pretty much from the open yesterday. All sectors were in the red and there were no particular stand-outs, suggesting market-wide selling. Possibly a Brussels reaction? Volumes are light heading into the Easter break and so there was a bit of a vacuum, but the buying interest that subsequently emerged seemed fairly half-hearted.

By the closing bell it was the resource sectors which had taken the biggest hit while the banks and healthcare suffered mild weakness. A balance was struck with some buying in consumer staples.

Expectations of a sideways drift into Easter on declining volumes can probably now be put aside. There is always an incentive to square up ahead of a four day break and the resource sectors have been the best performers these past couple of weeks. On last night’s commodity price moves, resource stocks will be looking vulnerable today.

The Inflation Argument

One Fedhead has posited that instead of holding off on a rate hike because inflation is still low, a rate hike should be implemented in order to drive inflation. It’s an upside down theory from an economics perspective, but then as they say, the first law of economists is that for every economist there is an equal and opposite economist, and the second law is that they’re both wrong.

It now appears as many as five FOMC members are agitating for an April rate hike. Janet Yellen did suggest at her press conference last week that April is still “live”, but that’s the standard line. On the strength of the Fed statement and the press conference, the bulk of the market shifted expectation to September as being the next rate hike meeting, away from June. But does the market seriously believe there could be a rate hike next month?

Well it’s better to be safe than sorry, and as I’ve noted, nervousness had crept into commodity markets over the sustainability of recent price rebounds. The US dollar index rose 0.4% last night and Wall Street started dumping resource sector stocks.

The selling was exacerbated by the release of the weekly US oil inventory data. It showed a crude stockpile addition three times larger than analysts had forecast, and the sixth straight week of stockpile increases. Gasoline stockpiles came in lower than forecast, which is positive from the demand side ahead of the US summer driving season, but on the supply side, there appears no sign of relief.

Oil probably didn’t need too much of an excuse to fall anyway. West Texas dropped 4% and US energy stocks went tumbling alongside US material stocks, which themselves were looking at hefty falls in base and precious metals prices.

So between Fed confusion, a possible peak in the commodity price rebound, a long weekend, next week’s quarter-end, and a lull before US earnings reports start to flow, Wall Street sold down last night. It was “risk-off”, as supported by the 1.1% fall in the Nasdaq, although a 79 point drop for the Dow is hardly dramatic in today’s context.

“Risk off” was also evident in the US bond market, where the ten-year bond yield fell 6 basis points to 1.88%. But hang on, if Wall Street really does believe there could be an April rate hike, the bonds have gone the wrong way.

Which probably sums up the true likelihood of an April rate hike.

Commodities

West Texas crude is down US$1.60 to US$39.84 and Brent is down US$1.31 at US$40.53/bbl.

In thin pre-Easter trade, all base metals fell 1.5-2%. Copper led out with a 2% fall and dropped through the psychological US$5000/t level.

Iron ore fell US60c to US$57.30/t.

Gold is down US$25.90 at US$1225.90/oz. I would wager that the gold bugs had expected more from the Fed’s supposedly increased dovishness last week, and have now bottled.

Today

The SPI Overnight closed down 34 points or 0.7%.

Back in the day, the ASX used to close at lunchtime on the Thursday before Easter. While that is no longer the case, no one ever told the financial community, so don’t expect anyone much to be around this afternoon.

Westpac ((WBC)) will provide a strategy update today.

Tonight in the US its’s durable goods orders. Note that while the ASX is not open on Monday, Wall Street is. Next week’s regular Monday Report will thus cover two Wall Street sessions, and will be published on Tuesday.

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.)

Rudi will make his weekly Thursday appearance on Sky Business from 12.20-2.30pm and re-appear tonight on Switzer TV between 7-8pm.

(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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