Tag Archives: Energy

article 3 months old

The Overnight Report: Terror Returns

By Greg Peel

The Dow closed down 41 points or 0.2% while the S&P fell 0.1% to 2049 and the Nasdaq rose 0.3%.

As a Tack

“Unless you think that the commodity price trend now is different and we are headed back to a world of considerably higher prices for an extended period and we think that the Fed is never going to lift rates, it’s not clear that the situation will warrant a much higher exchange rate than this and there is a risk actually that the currency may be getting a bit ahead of itself.”

In other words, RBA governor Glenn Stevens is not overly concerned about the recent bounce in the Aussie, implying it’s likely not to last. In his speech yesterday, Stevens talked up the Australian economy, noting the data suggest a “respectable” pace of growth in the second half of 2015. But when it came to the Q&A, there was only one topic covered by questioners – the Aussie.

As Jan Brady would say, Aussie, Aussie, Aussie…

The Aussie is incidentally 0.5% higher this morning over 24 hours at US$0.7617. The currency took quite a dip ahead of Stevens’ speech as traders no doubt squared any longs, expecting a bout of so-called “jawboning” intended to talk the Aussie down. The lack of any real mandible from the RBA governor was thus worth a more substantial bounce.

Meanwhile over on Bridge Street, nothing happened. With the ASX200 closing on a 0.00% move -- something you don’t see too often – one would be forgiven for thinking everyone has already left for the Easter break. But there was some movement amongst sectors.

Telcos were the star on the day with a 1.7% rise following a well-received earnings result from TPG Telecom ((TPM)), a subsequent 7% share price jump, and a floating of all telco boats including Telstra ((TLS)), which was up 1.4%. That move was countered by the banks, which fell 0.5%.

Energy predictably rose 0.5% on a stronger oil price while materials unpredictably fell 0.6% on a stronger iron ore price. At some point some of the gloss must come off iron ore’s price rebound following a currency conversion.

Muted Response

It’s a sad reality that global financial markets have become increasingly inured to terrorist attacks but the truth is, the world will go on. Last year’s attacks in Paris did spark a flight to safety – including stock market selling – but only briefly. The attacks last night in Brussels are no less significant but have not evoked any financial panic. The US dollar is slightly stronger, gold is relatively steady, the French stock market closed flat, the German market a little higher and the London market a little lower. There was some initial movement on the early news reports but that proved short-lived. Oil prices are also relatively flat.

The Dow opened down 80-odd points but was immediately bought. Wall Street looked set for a flat close before some selling emerged late in the session, but presumably not on a terror basis. The weaker close did, nevertheless, bring to an end what had been a seven-day winning streak.

Commodities

West Texas crude has now rolled into the May delivery front month contract, and in so doing has gained a couple of dollars and come right into line with Brent. The May contract is actually down US8c but that takes it to US$41.44/bbl thanks to the contango existing on the forward curve, which is driven by excessive near-term supply. Brent, which is already trading May delivery, rose US22c to US$41.84.

It was another mixed session for base metals in London. Aluminium and lead fell over half a percent while tin rose a percent and copper and zinc ticked up slightly.

Iron ore fell US10c to US$57.90/t.

The US dollar index is up 0.3% at 95.66 and gold is up US$3.80 at US$1246.80/oz.

Today

The SPI Overnight closed up 7 points.

With Glenn Steven’s speech now out of the way, and the Brussels attacks evoking no more than a sigh, it is difficult to see any major movement ahead for the local market ahead of the weekend. Most players will disappear from tomorrow lunchtime.

Today is the quarterly expiry of stock options on the ASX.

Brickworks ((BKW)) and Nufarm ((NUF)) will each provide earnings reports. CSL ((CSL)) is among a handful of stocks going ex today.
 

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article 3 months old

A Primer On OPEC And Other Key Oil Producers

By John Kicklighter, chief currency strategist, and James Joseph, FXCM

  • The largest oil producers in the world are Saudi Arabia, the US and Russia
  • OPEC is a conglomerate of large energy producers that can set production goals
  • With a rise in new oil producers recently, supply-demand imbalances have arisen

From its highs in 2014, US crude oil prices have dropped as much as 75 percent. One of the main reasons for the tumble is the persistent oversupply of the commodity. Amidst a slowing global economy, demand has dropped significantly. And yet, despite demand clearly falling well below the level of supply - roughly 1.6-2 million barrels per day according to the EIA (US Energy Information Administration) - oil producers have not made a concerted effort to cut back on the output. One reason for this reticence is the fight for market share by the major OPEC producers.

OPEC is not as big as it once was. Despite still accounting for 34% of global production (OPEC), there are other countries which are moving up the ranks for output. Currently the top 5 oil producers are Saudi Arabia, USA, Russia, Iraq, and Iran in descending order (Jodi Data). That means 3 of the top 5 producers are OPEC members, showing that OPEC still holds a major influence in the oil market.

Although OPEC still holds considerable influence over the energy market, they no doubt realize they are facing a more saturated market for oil and the market seems to appreciate this. OPEC was once the dominant force in the global oil market. Although they still are the biggest aggregate player now, the margin is not as wide as it used to be. In addition, coordination between member countries has grown contentious further changing the dynamics in the oil markets. As prices continue to flounder at multi-year lows amid the vast supply-demand imbalance, the interplay between OPEC efforts and the group’s largest counterparts become even more important.

Below is a brief description of the energy impact on each of the 13 OPEC members along with a comparison to their largest non-OPEC counterparts. Use this guide as a reference for tracking the fundamental implications for supply and demand in the energy market going forward.

 

OPEC Members

Saudi Arabia:

Daily Production: 10.1 million barrels

Percentage of GDP from oil: 45%

State of the Economy: Currently the largest producer of oil in the world, Saudi Arabia’s economy is highly dependent on oil. Saudi Arabia’s oil fields are located at very shallow levels, enabling them to pump oil at lower costs. Despite the competitive advantage in oil production, the recent slump in oil prices has caused the government to operate at a deficit. In addition, conflicts with surrounding countries are requiring the government to increase its defense spending, further building the deficit. Conditions seem to be severe enough that the government is considering selling state-owned Aramco to public interests. Also, forex reserves have fallen as a side effect of the energy revenue pinch.

Iraq:

Daily Production: 4.1 million barrels

Percentage of GDP from oil: 60% (estimated)

State of the Economy: Iraq is perhaps the most dependent on oil revenue for GDP of all the OPEC members. It has been estimated that at least 60% of its GDP comes from oil – though there are not official statistics to confirm this. Political and national security issues are adding another layer of trouble for Iraq as the government is also having troubles with ISIS and conflicts with neighboring states. Thus, it seems Iraq is currently very unstable.

Iran:

Daily Production: 3.4 million barrels

Percentage of GDP from oil: (data not available)

State of the Economy: Iran is in a unique position as some sanctions against the country has been lifted. Oil revenues represent a distinct buoy to national coffers even in the recent slump in global market prices and Iran is eager to regain some of its lost market share. That has made the country reticent to agree to production deals with other OPEC members. Nevertheless, Iran’s oil industry is also one of its main sources of GDP. With some political unrest and a still-strained relationship with the west, Iran is an unsure player in the world energy markets

Kuwait:

Daily Production: 2.9 million barrels

Percentage of GDP from oil: 45%

State of the Economy: Kuwait is seen as one of the more stable member country amongst OPEC Members. However, its dependence on oil has caused Kuwait to operate at a deficit. Even though the deficit can be troublesome, Kuwait looks promising as government is seriously pursuing economic reforms in an attempt to diversify the economy. Moreover, Kuwait has a very stable banking system, lending itself to drawing foreign investment during strong global conditions. With these factors in mind Kuwait is better positioned to weather the pain from low oil prices.

UAE:

Daily Production: 2.8 million barrels

Percentage of GDP from oil: 21%

State of the Economy: The UAE is still very reliant on oil despite a rather diverse economy. The recent slump in oil prices have hit government balance sheets and as a result led rating agency Moody’s to warn the country that it may lower its ratings depending on how well the government further diversifies the economy. As a political risk, the UAE are considered very stable with a developed economy, which should reduce its threat of forcing OPEC-wide changes.

Venezuela:

Daily Production: 2.6 million barrels

Percentage of GDP from oil: 24%

State of the Economy: Low oil prices have significantly impacted the Venezuelan government’s ability to spend on the economy. Venezuela’s primary export is oil which has hit the economy’s coffers. Fiscal deficits are growing and the economy has grown dangerously unstable. Under intense pressure, the government was forced to hike gasoline prices for the first time in nearly two decades. Among OPEC members, Venezuela is likely to be among the most motivated to seek production agreements to help lift energy prices.

Nigeria:

Daily Production: 2.1 million barrels

Percentage of GDP from oil: 15%

State of the Economy: Nigeria is a middle income economy with a rather diverse economy. Unlike the other OPEC members, Nigeria is not solely dependent on oil, although it is a sizable portion of their GDP. However, the government has acknowledged the need for reform in its oil sector. Instances of corruption and other illegal activity associated with oil production have made the news.

Angola:

Daily Production: 1.7 million barrels

Percentage of GDP from oil: 35%

State of the Economy: Angola’s GDP has fallen sharply because of low oil prices. The low oil prices have also pushed the government to operate at a fiscal deficit. Capital expenditure has suffered due to the loss of financial liquidity. However, Angola’s government is relatively stable, with a keen interest in austerity measures in order to boost its economic conditions.

Algeria:

Daily Production: 1.2 million barrels

Percentage of GDP from oil: 20%

State of the Economy: Algeria has less political instability compared to some of the OPEC members, but nevertheless remains a concern. The government has very strict and complex regulations that make it difficult for foreign investment, which in turn slow growth. Through the oil price tumble of 2014 and 2015, the country’s deficit has risen considerably. The rising deficit is mainly due to low oil prices as oil is a big part of their economy.

Indonesia:

Daily Production: 0.8 million barrels

Percentage of GDP from oil: 2%

State of the Economy: As the 4th most populated country in the world, Indonesia’s economy seems to be heading in the right direction. Oil counts for a modest 2% of the economy’s GDP, reducing the pain of stymied energy revenues. However, Indonesia’s energy and agriculture industries are heavily dependent on government subsidies. With the current president (Joko Widodo) campaigning against corruption, some of those industries that operate with the aid of the government may be affected. President Widodo has emphasized his interest in opening up the economy and make Indonesia a more stable economy.

Qatar:

Daily Production: 0.6 million barrels

Percentage of GDP from oil: 23%

State of the Economy: Like some other Middle Eastern peers, Qatar is an OPEC member that is more heavily dependent on oil revenue. In fact, most of the nation’s export income comes from oil. Despite the slide in oil prices, credit rating agency Standard & Poor’s expects the country’s economy to remain resilient. Considering the country enjoys the highest GDP per capita in the world, Qatar is seen weathering the energy slump better than many.

Libya:

Daily Production: 0.5 million barrels

Percentage of GDP from oil: over 50%

State of the Economy: Libya is a country heavily dependent on oil for revenue. However, the political state of the country is troubled. The country is still trying to find its footing after former dictator Gaddafi was deposed after 40 years of rule. In addition certain regions within the country are fighting over oil revenues. This puts Libya in a very uncertain situation, as both conflict and inexperienced government try to manage their most profitable commodity.

Ecuador:

Daily Production: 0.5 million barrels

Percentage of GDP from oil: 15%

State of the Economy: Ecuador is not as heavily dependent on oil compared to some other OPEC members. Therefore, low oil prices haven’t had such a severe impact on the economy. Despite its perhaps reduced exposure to oil revenues, the economy has steadily sunk back into recession. Encouragingly though, the government has committed to investment in improving the energy sector, infrastructure, and education.
 

 


Key Non-OPEC Producers

Russia:

Daily Production: 10 million barrels

Percentage of GDP from oil: 14%

State of the Economy: As the second largest oil producer in the world, low oil prices are forcing Russia to reduce government spending in various sector. Economic pressures are also at all-time highs. Middle class incomes have been weighed, standards of living fallen, and the general economy faces recession. Alongside these issues are the international trade conflicts arising from Russia’s support of Syria. There have been rumors to let some state owned corporations be sold to private parties, however, Russia still maintains considerable central power over the economy, business and the energy sector.
 


United States:

Daily Production: 9.2 million barrels

Percentage of GDP from oil: 1%

State of the Economy: As the largest economy in the world, the US has a well-diversified economy where the majority of its output comes from the services sector. The US also exports a very small amount of its production of oil, consuming most of the oil it pumps. All in all Moody’s gave the US government AAA further emphasizing the stability of the government. However, low oil prices are beginning to take a toll on US producers unable to compete with the more cost effective Saudis. As with the rest of the world, debt tied up to the quickly growing energy sector poses a financial risk.
 


Canada:

Daily Production: 2.9 million barrels

Percentage of GDP from oil: 4%

State of the Economy: Canada has a large economy that is mainly service based with a few important industries, one of which is oil. Canada exports much of its oil to the US, and has a strong economic and political relationship with the US. However, recent economic data shown an increase in unemployment and pressure in other areas. Canada has also taken a stronger stance against carbon emissions which may affect the oil industry going forward.

Brazil:

Daily Production: 2.4 million barrels

Percentage of GDP from oil: 2.3%

State of the Economy: Currently the 8th largest economy in the world (when the Eurozone is considered), 76% of Brazil’s GDP comes from services. Despite being the face of emerging markets the past few years, Brazil has recently fallen into economic crisis. GDP in 2015 dropped a painful 3.8% and is seen heading for its worst recession in over a century while political instability grows. Headlines of corruption connected to important energy firm Petrobras have connected oil, growth and politics. These issues make Brazil a risky international player and a likely advocate for joint efforts to bolster oil prices.

Mexico:

Daily Production: 2.3 million barrels

Percentage of GDP from oil: 6.1%

State of the Economy: Mexico has one of the more stable governments and economies compared its neighbors to the south. Industrial and service industries are on the rise and consumer spending has proven resilient. Mexico is generally an export-oriented economy, and is currently showing measured growth despite the pressure of low oil prices and slower global trends.
 

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article 3 months old

The Overnight Report: Where To Now?

By Greg Peel

The Dow closed up 21 points or 0.1% while the S&P gained 0.1% to 2051 and the Nasdaq rose 0.3%.

Bring It On

There is likely a level of fiscal nervousness creeping into the Australian stock market now that the government has pulled the double dissolution trigger and brought forward the budget release to allow for an early election. We have Easter this weekend and then we head into April – so often a peak month for the market ahead of the old “Sell in May” period.

The healthcare sector has been suffering from fiscal nervousness for some time given the number of government reviews underway of various elements of the country’s healthcare system. But at this stage of the game, the government’s May budget is still a bit of a mystery. Tax reform looms as a potential issue for the superannuation industry. Thereafter, well, we just don’t know yet.

Commodity prices have stabilised for now and we are still in the vacuum left behind from the February results season. Market news and research is very thin on the ground. Glenn Stevens is set to speak today and the market will be very interested to hear what he has to say, summed up by the one question: Is an interest rate cut now likely in response to global developments?” Just suggesting the Aussie is “too high” probably ain’t gonna cut it.

The overnight futures market signalled another strong day for the local market yesterday but it never happened. Energy was down a percent on a lower oil price but otherwise most sectors appeared to be hit with a bit of profit-taking, with one exception being healthcare, having suffered enough of late.

There is no doubt also some nervousness with regard Wall Street, which as of last night has posted its longest winning streak since December 2014, marking seven consecutive up-days and a 13% rally from the February low for the S&P500. What will drive it higher from here?

Hanging On

That will probably come down to US earnings reports, which will begin to flow next month. Meanwhile, there’s Easter and then end-of-quarter and plenty of profits to be locked in following the 13% run. Stock markets do not keep going up forever and hence there must be a pullback around the corner.

The oil correlation appears to have faded for now given consolidation in the oil price, but that’s not to say Wall Street wouldn’t tumble in a heartbeat if oil were to suffer another dip. Many believe it will, although there are tentative signs emerging of US production finally responding to low oil prices.

There are always more economic data releases to consider of course. Last night it was revealed US existing home sales plunged 7.1% in February, more than economists expected. But then economists did not forecast December’s record jump in sales and incorrectly suggested January would see some give-back. Existing home sales numbers can be volatile.

The Chicago Fed national activity index fell to minus 2.9 in February from plus 0.41 in January. January was actually a surprise blip. The index has fallen five months out of six.

WTI crude did close a little higher last night but given it was the expiry of the April delivery contract, there’s not much to be read into it. More interesting is that after surging all the way up to 2050 at the quadruple witching expiry on Friday night, last night the S&P500 held on for a 2051 close when no one would have been surprised by a pullback.

Volumes were nevertheless minimal last night following the biggest numbers for the year on Friday’s expiry/rebalance day. There were a couple of merger announcements to excite the market, but not much else.

Of course the problem with markets that can no longer find a reason to go up is that they inevitably go down instead.

Commodities

West Texas crude is up US58c at US$39.91/bbl and Brent is up US16c at US$41.62/bbl.

Base metal markets have found themselves in a similar position to stock markets, and with a four-day break coming up for the LME there’s likely to be some squaring. With the US dollar index ticking back further overnight with 0.4% gain to 95.37, metal prices were mixed. Copper was steady, aluminium and tin fell 0.5% and lead, nickel and zinc rose 1%.

The fun and games continued in iron ore nonetheless. Analysts have been scratching their heads as to exactly why iron ore has found such renewed strength, outside of seasonal restocking, and thus the warning stands that strength will likely be fleeting.

Last week it looked as if we might have begun the pullback but no – iron ore has turned around again and last night rose US$1.70 to US$58.00/t.

While the slight recovery for the US dollar following its Fed-related plunge last week is not having a lot of impact on consumable commodities, last night gold fell US$12.10 to US$1243.00/oz.

The Aussie is down 0.3% at US$0.7580.

Today

The SPI Overnight closed up 11 points or 0.2%.

All ears will be on the RBA governor when he speaks today.

Kathmandu ((KMD)) and TPG Telecom ((TPM)) post earnings results today.

Rudi will Skype-link up with Sky Business today at around 11.15am to talk broker calls and tonight from 8-9.30pm he will host Your Money, Your Call Equities. Nigel has not been invited.
 

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article 3 months old

The Monday Report

By Greg Peel

Consolidation

The ASX200 surged almost 50 points early in the session on Friday but eased back by lunchtime ahead of a quiet afternoon. Stronger commodities prices again supported the resources sectors but the banks were flat, and we’re beginning to see evidence of the damage caused by a suddenly much stronger Aussie.

Materials closed up 1.7% and energy 0.8% but healthcare fell 1.1% as offshore exposure and ongoing fears surrounding the upcoming federal budget continue to weigh.

It's Easter this weekend providing for short weeks this week and next, plus next week also sees the end of the March quarter before we then shift into a school holiday period in April. As excitement over the Fed’s more measured policy stance dies down, we should now see a period of consolidation following the solid bounce up to 5200 from 4800 for the index.

The subject du jour is of course commodity prices, and whether they can hold up at these rebound levels. The banks have returned from what were considered oversold levels and as yet there is no expectation of a rate cut from the RBA anytime soon.

That might possibly change tomorrow when Glenn Stevens makes a speech and takes a Q&A, given all that has transpired in central bank and currency land since the March RBA meeting.

Start Again

Wall Street posted its fifth straight week of gains last week and the Dow rallied six sessions in a row for the first time since October. After Friday’s rally, which was really just more of the same from Thursday post-Fed, both the Dow and S&P500 are in positive territory for the year.

The Dow closed up 120 points or 0.7% while the S&P gained 0.4% to 2049 and the Nasdaq added 0.4%.

The major driver of the stock index rebound has been the commodity price rebound and the weaker US dollar, driven by abating Fed hike fears. The lower greenback also feeds into stronger commodity prices. Commodity prices may be back where they began the year but there has not been any change to the outlook for the Chinese economy, which supposedly was one of the scare factors that took Wall Street down in the first place.

That puts the focus squarely back on central bank policy as the provider of stock market stimulus.

Michigan Uni reported on Friday night that its fortnightly US consumer sentiment gauge had fallen to a five-month low 90.0 from 91.7. US consumers are apparently now worried that the US economy is not going to grow as fast as early assumed and that on the rebound in the oil price, gasoline prices will begin to rise ahead of the summer driving season.

The WTI price fell 2% on Friday night because for the first time in 13 weeks, the domestic rig count rose. The bounce was in the order of…drum roll…one rig, but no doubt it had the market wondering whether reductions have now reached their limit.

Nevertheless, the total rig count, which includes Gulf oil that has recently taken a back seat to domestic shale oil, fell by four rigs to 476 last week to a new record low. Since a year ago, 593 rigs have ceased operation. One would think that such a massive shutdown of supply would have to suggest oil prices have seen their lows and should go higher form here but the problem is one of a self-defeating feedback loop. Modern shale oil rigs can be switched back on again in a heartbeat and if oil prices remain supported, many probably will.

And that’s likely why the addition of one lonely domestic rig tipped oil prices over.

It’s also interesting to note, once more, that the correlation between the oil price and Wall Street was negative on Friday night.

It was actually the biggest volume day of 2016, but that’s understandable given the March quarter quadruple witching expiry and the closing bell rebalancing of S&P500 weightings. Given the S&P closed just a tad under 2050, one presumes this strike price was influential in Wall Street’s move on Friday night.

So we’ll see what happens tonight.

Commodities

West Texas crude fell US79c to US$39.33/bbl and Brent rose US12c to US$41.46/bbl.

After falling solidly in the wake of the Fed meeting, the US dollar index rebounded slightly on Friday night, up 0.3% to 95.01. This was a sufficient trigger to spark some profit-taking in base metals prices that have been enjoying the benefits of the weaker greenback up to now. Aluminium and copper fell 0.5%, lead and tin fell 1%, nickel fell 2.5% and zinc was steady.

Iron ore rose US90c to US$56.30/t.

The bounce in the greenback helped the Aussie down 0.5% to US$0.7604 on Saturday morning but gold held its ground, steady at US$1255.10/oz.

The SPI Overnight closed up 29 points or 0.6% on Saturday morning.

The Week Ahead

US data releases this week include the Chicago Fed national activity index and existing home sales tonight, FHFA house prices and the Richmond Fed index on Tuesday, and new home sales on Wednesday. Thursday it’s durable goods, and Friday another revision of December quarter GDP.

Which reminds us the Good Friday is not actually a national public holiday in the US despite markets being closed. And Wall Street opens on Easter Monday. Markets are closed on Friday in Australia, New Zealand, the UK and Europe.

Thursday also sees a flash estimate of March manufacturing PMI in the US, as well as in Japan and the eurozone. The eurozone also sees the release of both the ZEW investor sentiment and IFO German business sentiment indices on Tuesday night.

Australia is devoid of major economic data this week, although as noted, Glenn Stevens’ speech tomorrow will be a must-see event.

On the local stock front, there are still a handful of stocks left to go ex-div this week while out of cycle earnings reports will be forthcoming from Kathmandu ((KMD)) and TPG Telecom ((TPM)) tomorrow and Brickworks ((BKW)) and Nufarm ((NUF)) on Wednesday. Westpac ((WBC)) will provide a strategy update on Thursday.

Rudi will appear on Sky Business on Tuesday morning (11.15am) via Skype-link, then later on Tuesday he'll host Your Money, Your Call (8-9.30pm). On Thursday Rudi re-appears at noon and again between 7-8pm for the Switzer Report.
 

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: The Day After

By Greg Peel

The Dow closed up 155 points or 0.9% while the S&P gained 0.7% to 2040 as the Nasdaq rose 0.2%.

Odd Jobs

Congratulations to the three hundred Australians who managed to find a job last month. Commiserations to the far greater number who abandoned hope of finding a job in Australia’s currently difficult economy.

The market saw a fall in Australia’s unemployment rate to 5.8% from 6.0% as reason to believe there is no way the RBA can cut its cash rate further. The Aussie had already spiked overnight as the US dollar fell on the Fed’s policy pullback, and kicked again yesterday on that 5.8% number. It’s kicked even further overnight on ongoing greenback weakness to be up 1.1% over 24 hours at US$76.43, up around two cents from pre-Fed.

Yet economists had forecast an addition of 13,500 jobs in February and the result was a mere 300. Not that economist forecasts ever get anywhere near the complete lottery that is the monthly ABS jobs data. The fall in the unemployment rate was due to a sharp fall in the participation rate. In September, October and November, Australia added a net 124,700 jobs. In December, January and February, Australia has lost a net 6,600 jobs.

It is not unusual for jobs growth to ease back after such a spurt, but we are reminded that in his March monetary policy statement, the RBA governor suggested, in relation to policy setting, “Over the period ahead, new information should allow the Board to judge whether the improvement in labour market conditions is continuing”. Well, it’s not.

But along with the currency, the Australian stock market kicked higher on the release of the unemployment number. Just prior, the opening Wall Street-inspired rally had begun to fade. There was a sharp jump up to 50 points higher on the session for the ASX200, and that’s pretty much where we stayed for the rest of the day.

The rally was led out by energy (+2.8%) and materials (+2.3%) which is understandable given the jump in commodity prices provided by the weaker US dollar. But the real clout came from a 1.1% gain for the banks. I noted yesterday that US bank stocks had fallen in defiance of the rest of the market post-Fed on Wednesday night because banks need higher rates, and subsequently suggested the local banks might come under pressure yesterday if the Fed had opened the door for an RBA cut. But 5.8% unemployment! No cut, the market has decided.

The RBA’s April statement is going to make for interesting reading.

All is forgiven

I note every time there is a Fed meeting that the smart money tends to let the headless chooks run around for the couple of hours post-release and instead take a night to think about it before making a more studied investment decision the next day. Wall Street did rally post-Fed, but the more thoughtful investors decided to push on with it more emphatically last night.

The two main drivers were a US dollar which has fallen another 0.9% overnight to 94.77 on its index and the WTI crude price, which has retaken US$40/bbl. WTI fell through 40 last December and began its rapid slide down to 26 in February, sending global stock markets into a spiral, not the least Wall Street. Well with oil now back at 40, the Dow last night turned positive for the year. The S&P traded positive for the year but eased a little toward the close.

The indices were led out by the energy and materials sectors once more, but the weaker greenback also provided support for the significant number of multinational industrials. Stocks like Dow component Caterpillar, which is not only tied to commodity prices but derives more than half of its revenue offshore, are making a comeback.

Meanwhile, the star performer in the broader market last night was FedEx, which shot up 10% on its earnings result release. FedEx is a direct beneficiary of the rapidly growing on-line shopping business, but it is also a company for which lower oil (and while we may be back at 40 that’s still a long way from 100) means lower costs.

It would appear that if the US economy can find a sweet spot of balance between an oil price that is low enough to force supply curtailment and provide a boost to oil consuming companies and households, but not so low as to threaten economic meltdown, there is cause for optimism. And the Fed is being supportive by keeping a lid on the US dollar.

Commodities

West Texas crude is up US$1.61 or 4.2% at US$40.12/bbl and Brent is up US$1.05 or 2.6% at US$41.34/bbl.

The LME had its first chance to respond to the Fed last night having closed on Wednesday night just before the statement release. The US dollar index is down 2% in that time, so no surprise that copper is up 1.5%, lead and tin up 2%, nickel up 2.5% and zinc up 4%. Only aluminium struggled, up a mere 0.3%.

Iron ore rose US$2.90 to US$55.40/t.

Gold, on the other hand, has not been able to push to new 2016 highs despite another 1% fall in the greenback overnight. It’s down US$4.90 at US$1256.40/oz.

Today

Yesterday was expiry day for the SPI and the new June front month contract closed up 24 points or 0.5% overnight.

Today will see the changes to the components of the ASX/S&P indices announced two weeks ago become effective.

Tonight will see an equivalent rebalancing of the S&P500 in the US, along with the quarterly quadrupled witching expiry of equity derivatives. There could thus be some heightened volatility, particularly at the close.

Premier Investments ((PMV)) will release its earnings report today.

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

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article 3 months old

The Overnight Report: The Fed Meets The Market

By Greg Peel

The Dow closed up 74 points or 0.4% while the S&P gained 0.6% to 2027 and the Nasdaq rose 0.8%.

Nothing to see

The ASX200 opened lower yesterday on overnight falls in commodity prices but quickly recovered to spend the rest of the pre-Fed session chopping around the flat line.

Ultimately energy finished up 0.4% while the big fall in the iron ore price saw materials down 0.7%. Consumer staples was also down 0.7% but balance was provided by a modest recovery for the banks after Tuesday’s fall, up 0.5%.

The world then awaited the Fed.

Global Game

When the Fed made its first post-GFC rate hike in December, the expectation from both the FOMC and the market was that another four rate hikes would follow in 2016 at each of the quarterly meetings. Then the bottom fell out of the oil price.

The fall in oil had reverberations around the globe and forced a reduction in 2016 global growth expectations. While it seemed logical to assume that lower oil prices would feed increased consumer spending and provide a boost to industry through lower fuel costs, the market initially underestimated the impact of lower oil on the global energy sector itself and particularly on global oil producing nations. Meanwhile, China’s painful process of reform and subsequent slowing growth added to the angst.

Pretty quickly the market trimmed back its Fed rate expectations to two hikes in 2016 from four. Last night the Fed left its funds rate on hold at 0.25-0.50% as expected, taking one rate hike off the table. The Fed statement also lowered the central bank’s expectations to two rates hikes in 2016 rather than the previous four.

The Fed met the market.

The two main reasons provided for the downward revision were ongoing labour market slack, which is a nod to low wages growth and thus limited inflation pressure, and, in simple terms, the rest of the world. Since December, Japan has gone to negative rates, China, is upping the stimulus and the ECB has gone to zero and pumped up QE. If we consider the global economy as a closed shop, the Fed has actually achieved a March rate rise relative to the rest of the developed world without actually doing anything.

While the Fed statement could be considered neither more dovish nor more hawkish than the market expected, the US dollar index still tanked 1.1%, to 95.65. The greenback fell against the euro, yen, pound and Swissy and therefore only served to frustrate the central banks of those economies who are all trying to lower their currencies relative to each other.

The predicted two Fed rate rises are not set in stone, Janet Yellen was quick to point out. The Fed statement actually omitted the long-standing "we are data dependent" line this time around, but I think we can take "not set in stone" to mean unless things change, and change is usually evident in data.

Prior to the Fed release last night the US February CPI data were published. Headline inflation fell 0.2% due almost entirely to cheaper gasoline. The year on year headline rate has fallen to 1.0% from 1.4% in January. Stripping out energy and food, the core CPI rose 0.3% to be up 2.3% year on year.

The Fed’s inflation target is 2%, but not for the CPI. The Fed wants to see the personal consumption & expenditure (PCE) measure at 2% and that’s currently at 1.7%, and Fed forecasting does not have the PCE hitting 2% in 2016.

While the Fed acknowledges strong US jobs growth it also recognises a recovery in job seeking (participation rate), which is providing the drag on wage growth given there are still plenty of candidates ready to fill positions. The resultant lack of wage inflation is holding back overall inflation, and thus providing the Fed with the scope to be “prudent” in its policy.

While Wall Street clearly welcomed the Fed statement, a 74 point rally for the Dow is nothing reminiscent of the days of yore when hints of no rate rise would send Wall Street skyrocketing on the old “bad news is good news” theme. Indeed, the major drivers of last night’s post-Fed rally in US stocks were the materials and energy sectors, which were boosted by the weaker US dollar and the assumption the greenback will stay that way given the Fed has pulled back its hiking timetable.

Commodities

West Texas crude is up US$2.06 or 5.7% at US$38.51/bbl and Brent is up US$1.52 or 3.9% at US$40.29/bbl. Aside from the currency boost, oil rallied last night due to two other factors.

The weekly US crude inventory data showed that stockpiles continued to rise but at a lower rate than expected. Weekly production once again fell.

Qatar’s energy minister announced OPEC, Russia and other non-OPEC oil producers will meet in Doha on April 17 to negotiate an agreement to limit output.

As to why anyone can be excited about that last one is anyone’s guess. Readers may have noticed I’ve had an OPEC/non-OPEC meeting in Moscow pencilled in to the FNArena calendar this Sunday because that was the schedule set at the beginning of this month. I’ve been waiting to take it out and now I have, moving it to April 17. I will not be the least surprised if I end up moving it again.

Iran will not come to the party. End of story. If Iran’s not at the party then Saudi Arabia’s not joining in either. End of story. Investors need to focus on the weekly US oil data, including the above and each Friday’s rig count number, and on the number of defaults among marginal US producers. That’s where the oil story lies. OPEC meetings are a myth.

Gold is up US$28.20 at US$1261.30/oz which is no great surprise with the greenback down a percent. This jump nevertheless does not fully reinstate gold to where it was at the beginning of the week before nervous holders decided to square up ahead of the Fed meeting.

The LME always closes just as the Fed releases its policy statements so we have to wait until tonight to gauge the reaction for base metal markets. Last night all metals bar tin edged up a bit in anticipation.

After crashing back to earth, iron ore is up US80c at US$52.50/t.

And, of course, the flipside of the weaker greenback is a stronger Aussie, which is up 1.3% and back at US$0.7557.

Today

The SPI Overnight closed up 36 points or 0.7%.

If this proves accurate it will be the resource sectors leading the way today. The counterbalance may be the banks. US banks were among the worst performers on Wall Street last night given banks earn more with higher rates. The April RBA meeting will be interesting. With the Fed confirming a slower pace of raising, and central banks around the globe further easing since the March RBA meeting, what will our central bank want to do about that Aussie?

Australia’s February jobs numbers are out today. There’s some more fodder.

The Bank of England will hold a policy meeting tonight, but no one seems to care.

Myer ((MYR)) and OrotonGroup ((ORL)) will post earnings results today. Keep an eye on Myer. At 21% it’s the most shorted stock on the ASX. A better than expected result could spark a very sharp rally.

But that would require a better than expected result.

Rudi will appear on Sky Business today between 12.20-2.30pm.
 

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article 3 months old

The Overnight Report: Over To Janet

By Greg Peel

The Dow closed up 22 points or 0.1% while the S&P lost 0.2% to 2015 as the Nasdaq fell 0.5%.

Just a Head Fake?

“Members judged that there were reasonable prospects for continued growth in the economy and that it was appropriate to leave the cash rate unchanged at an accommodative setting.”

So said the minutes of the March RBA meeting, released yesterday. With that, the local market tumbled.

As to whether we can blame the minutes is nevertheless questionable. At two weeks old, they might as well have been two years old given what has transpired in the interim, including the surprisingly strong local GDP result, the rebound in commodity prices and, subsequently, the Aussie dollar, and shock and awe from the ECB. Two weeks ago Glenn Stevens’ policy statement was near word for word a repeat of his February statement. But things have now changed.

So it would have been naïve to be have been disappointed that there was no hint of an RBA rate cut in the minutes. And given the banks fell 1.4% yesterday to provide the greatest impact on the ASX200, and banks don’t like lower rates, it seems more a case of a sudden burst of uncertainty in the local market.

There has been much talk of late of the commodity price rebounds, particularly in oil and iron ore, being unsustainable blips. Oil has simply seen a short-covering snap-back. Iron ore has simply jumped on hurried Chinese restocking that will shortly end. With falls in the prices of both overnight, it was no shock that yesterday saw the energy sector down 3.6% and materials down 2.4% following their recent sharp recoveries.

But the selling was market-wide, with only the telcos holding their ground. I suggested yesterday that the local market had reached a point of indecision, as there appeared to be nothing in the near term to justify ongoing upside. And when markets can’t find a reason to go up, you can always count on them going down instead, until a new pathway is established.

Regarding commodity prices, Goldman Sachs has recently articulated that which I have been implying in this Report for a while, in that the only catalyst for higher oil prices is lower oil prices. Things won’t get better unless they get worse first, and stay that way for a while. Oversupply in all commodities must lead to capitulation and closures among miners/drillers. That requires a prolonged period of pain at lower prices. Only when supply is actually abandoned, and not simply put on hold, can prices rise once more.

Meanwhile there was no surprise yesterday when the Bank of Japan held its cash rate steady at minus 0.1%, while nevertheless tempering its view on Japan’s economy. There was some surprise that the BoJ statement this month omitted the line suggesting further cuts if necessary that had been present in previous statements. It would appear the central bank is not prepared to go more negative.

Low Volume

The oil rally appears now to have fizzled out as hopes fade – if there really were any in the first place – of production freezes from OPEC and non-OPEC producers. WTI fell 2.3% overnight and initially took Wall Street with it, with the Dow falling by a hundred points at its low.

Also driving weakness was a disappointing US February retail sales result. Not only did February sales fall 0.1%, January’s tepid 0.2% gain was revised down to a whopping 0.4% fall.

(And we always joke about Chinese data.)

Retail sales represent around 25% of all US consumer spending, and these numbers are setting the scene for another disappointing March quarter GDP number this year, despite the lack of weather impact this time around. But elsewhere the US housing sentiment index held steady at a slightly optimistic 58, and the Empire State activity index has flipped over to plus 0.6 in March from minus 16.6 in February, so not all is doom and gloom.

How does a data-dependent Fed see the US economy? Well that we will find out tonight. With the combination of Fed statement, revised forecasts and Janet Yellen press conference all having the potential to move the markets sharply tonight, traders decided to square up positions last night and took the indices back towards flat. Volumes, however, were anaemic, suggesting most of the world is on the sidelines.

Commodities

West Texas crude is down US84c at US$36.45/bbl and Brent is down US82c at US$38.77/bbl.

The iron ore retreat has gathered pace. Spot iron ore down US$3.80 to US$51.70/t. We’ve now taken out that ridiculous jump last week.

LME traders chose to prepare for the Fed meeting with some selling of their own. Copper was little changed but nickel fell 1%, aluminium 1.5%, zinc 2% and lead 3%.

Gold is steady at US$1233.10/oz.

The US dollar index is steady at 96.63 but as commodity prices retreat, so does the Aussie. It’s down 0.7% at US$0.7458.

Today

The SPI Overnight closed down 6 points.

Fed meeting tonight. Enough said.

Sigma Pharmaceuticals ((SIP)) will deliver its earnings result today.
 

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article 3 months old

Oil Recovery? Likely Just A Flicker

-US production stubbornly high
-Recent rally not lifting all oil stocks
-Some supply outages only temporary
 

By Eva Brocklehurst

Oils ain't oils. Today, this obscure phrase from an old advertisement is a reminder that the recent rebound in the oil price is not necessarily a prelude to a recovery.

The current oil price, as Deutsche Bank envisages it, may represent a compromise between the threat of market intervention from producers below US$30/bbl and a premature incentivising of US supply at a 2018 forward price of US$62/bbl.

The strength in prices over the past week has been accompanied by a pick-up in both US distillate and gasoline demand, a below average US commercial crude inventory build-up and new lows for the year in the US dollar trade-weighted average.

Yet the fact US production levels are unchanged raises a cautionary note from Deutsche Bank. A renewed boost in oil in floating storage threatens to dampen the market once it is withdrawn. The broker believes these deferred surpluses will enter the market in a matter of months.

Goldman Sachs considers the outlook, further ahead, is more promising. Sure, a fall in non-OPEC supply is needed for the recovery in oil prices to gain traction but such supply is expected to be lower in 2016. US supply is expected to fall by 725,000 barrels per day in 2016 as a result of a sharp fall in rig count and capex budgets.

The broker envisages a West Texas Intermediate (WTI) price in the US$55-60/bbl range in 2017. Yet this is predicated on a modest creep upward in oil prices over 2016 and prices still need to remain sufficiently low so producers do not change their current capital expenditure or production trajectory.

Goldman emphasises that any change in US producer behaviour could delay the impact of a more meaningful recovery in prices and create another self-defeating rally.

Moreover, the broker does not believe the recent rally, or even the improved 2017 outlook, will be positive for all oil equities. For one, it does not sufficiently solve some producer balance sheet problems or address competitiveness. The characteristics the broker is looking for in owning oil stocks are shale productivity gains, resource upside, under-appreciated cash flow and emerging technology.

Stock prices for most Australian oil equities appear to fully factor in a significant recovery in oil prices and, as such, signal a disproportionate risk to the downside, UBS believes. The market remains intent on tracking US oil production. The broker acknowledges a sustained decline may be an indicator that supplies globally are re-balancing, but also notes US production has remained stubbornly high in the face of a falling rig count.

Currently underpinning the oil price are expectations of future stimulus from China, output disruption in Iraq and Nigeria, and key exporters potentially agreeing to a freeze on output. The International Energy Agency also reported declining non-OPEC production. This positive news, the broker maintains, is supporting the oil price above US$40/bbl.

UBS calculates that, including discretionary expenditure, Woodside Petroleum ((WPL)) has the lowest break-even cash flow at US$30.79/bbl while for Oil Search ((OSH)) it is US$33.56/bbl and Santos ((STO)) US$47.09/bbl.

Crude may be becoming overbought, in Morgan Stanley's opinion. There is risk of more hedging, especially by sovereigns, and the broker's FX analysts envisage more strength ahead for the US dollar. Declines in supply may also be overstated, especially if prices rally.

The broker points to several supply outages that may have underpinned the oil price in recent weeks but that are largely temporary. Meanwhile, Iran continues to lift production and US imports from Canada are quietly ramping up.

Morgan Stanley suspects that hedging and storage may cap the upside for WTI in the low to mid US$40/bbl range. Macro fund and short covering are lifting the front of the curve but producer hedging is limiting the rally in deferred prices. High inventories in the US suggest a contango – where the near-term price is lower than the longer-dated price – should remain in place.

Therefore, Morgan Stanley believes the longer-term price outlook will limit to the ability of the short-term price to rally far. The broker envisages WTI capped at US$50/bbl in 2017 and, hence, the price will struggle to break above US$45/bbl this year. While oversupply continues, Morgan Stanley expects WTI to trade in a US$25-45/bbl range.

Another item worth watching is motor vehicle sales in China. Figures for January and February signal a number of disappointing indicators for Chinese gasoline demand, the broker contends. Comparables are particularly worrisome because the current period involved fiscal stimulus that was not present at the same time last year.

Morgan Stanley acknowledges vehicle sales and gasoline demand are not well correlated but believes these weak growth numbers do not augur well, and any deceleration in China or emerging market demand is critical in terms of global balances and the timing of a recovery in the oil price.
 

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article 3 months old

Material Matters: Commodity Outlook, Electricity, Iron Ore And Nickel

-Market less bearish but not bullish
-Diversity in China's grid gaining pace
-Steel, iron ore prices not reflecting demand
-More new low-cost iron ore output ahead
-Oz iron ore output eases in Jan-Feb
-Nickel prices remain depressed
 

By Eva Brocklehurst

Commodity Prices

The worst may be over in terms of the downside risk to commodity prices, ANZ analysts contend. Sentiment has improved and, technically, many markets are bouncing off support levels. The stronger US dollar and volatility in equity markets may also be subsiding.

Nevertheless, the analysts are not completely convinced there is no more weakness to come. Chinese PMI data in February suggests manufacturing activity is unlikely to bounce in the short term.

In some areas further supply growth could to push markets into surplus but the analysts note the speed at which each market is adjusting is varied. Supply growth in industrial metals is slowing while the analysts observe the financial pressures on US oil producers are encouraging a sizeable reduction in output. Bulk commodities are expected to sustain a long drawn out re-balancing process.

In summary, the analysts believe this more a market becoming less bearish rather than one that is fundamentally being driven higher. For the fundamentals to be better, economic data in emerging markets needs to stabilise.

Electricity in China

New data from China's electricity sector shows consumption was up 0.3% in the January-February period, coal imports fell 10.2% and coal production declined 6.4%. Thermal power generation (coal and gas) was down 4.3% and hydro electricity production was up 22.6% to a new record high.

All this suggests to Tim Buckley, at the Institute for Energy Economics and Financial Analysis, that slowing economic growth and reduced energy intensity in China, as well as a rapid diversification towards renewables, nuclear and hydro generation, are unwinding the country's historical dependence on coal.

Two trends are in evidence, he maintains. Electricity consumption has decoupled from economic activity, as the Chinese economy moves towards greater reliance on less electricity-intensive service sectors. Secondly, a record 32 gigawatts (GW) of wind installations and 18GW of solar installations in 2016 alone are showing that attempts to diversify the grid are gaining momentum.

Iron Ore

Several questions come to the fore for Goldman Sachs as iron ore prices rebound strongly from their recent lows. The current rally and a period of mine closures and production reductions suggests a closer look is required at steel prices. These should reflect the cost of raw materials and level of industry profitability, but instead the broker notes the causal relationship is currently reversed.

Goldman Sachs believes steel prices have rallied because the market was in deficit and better margins were required to increase production ahead of the peak demand season. This is a key indicator to watch as higher steel prices encourage idled blast furnaces to start up again.

Macquarie notes extensive short covering in iron ore was largely propelled by expectations for better steel demand in China and near term, the market appears well supported by seasonal factors and improved sentiment.

Still, the broker remains bearish on iron ore and expects the current rally to be short-lived in the absence of a material lift in Chinese steel demand, and raw materials should once gain drive steel prices rather than the other way around. Production cuts are expected to return in the months ahead.

The broker remains nervous with iron ore prices above its forecasts of US$50/t , at around US$55.50/t, suspecting there is little upside to be had. The broker reiterates a view that, while 2016 appears fundamentally well supported, the industry is still facing challenges and more new low-cost supply needs to be absorbed by the market.

The broker lifts expectations for iron ore supply from Australian juniors and India in response to the recent price performance and expects seaborne iron ore supply to decline by 11mt this year as opposed to previous forecasts of a decline around 20mt.

The broker's Indian materials analyst has signalled that India has turned into a net exporter of iron ore since October 2015. Higher prices may push Indian exports up to 15-20mt this year, the analyst suspects. While Macquarie has a forecast for iron ore prices that is ahead of consensus, the upside is considered capped by the potential return of Chinese mines, and the risk of stronger export volumes from India.

Structural issues are expected to remain large in 2017 and 2018. The broker continues to expect iron ore prices will fall back to US$45/t in 2017, as this is the level that is considered low enough to force the required supply to exit from China.

Meanwhile, Australian iron ore shipments hit a peak of 830mtpa ex Western Australia in late 2015, Macquarie notes. The most recent data suggests a decline of an average 50mtpa this year versus the second half 2015 average. The wet season has had an impact on production rates for BHP Billiton ((BHP)) and Rio Tinto ((RIO)) despite the weather being relatively benign.

Macquarie notes a material decline in WA shipping rates and the loss of the Samarco product is the key contributor to the recent rise in iron ore price. The broker expects BHP will miss its target of 270mt per annum and downgrades expectations to 260mtpa.

Rio Tinto, meanwhile, has run down stockpiles and is now the number one global shipper of iron ore. Still, in the last two months the Pilbara shipping rate has fallen to around 310mtpa, 5-10mtpa below Macquarie's previous expectations. In comparison Fortescue Metals ((FMG)) has consistently shipped at a 160-165mtpa rate and the broker expects another solid result which may even beat its 165mtpa guidance range.

Nickel

Macquarie observes the nickel market is moving into deficit with global nickel supply expected to fall by 6.5% this year. Price rises will be limited by a large inventory overhang, nonetheless. The analysts estimate Chinese stainless steel production will fall further this year, driven by lower exports and weaker demand.

On a global basis, Macquarie assumes no growth in nickel usage in 2016. A significant deficit is expected as the year progresses. The broker expects a deficit of around 80,000t this year and a further 65,000t deficit in 2017. At current nickel prices, around US$9.000/t, 70% of supply is loss making and the broker believes price will have to move above US$10,000/t or else mine closures will continue.

Pricing upside will be limited for a number of years, given the inventory levels. One aspect of the outlook that may jeopardise an eventual price recovery would be if the Indonesia government lifted its ban on exports.

Macquarie suspects any easing of the ban would actually be partial and its impact limited at current prices, as Chinese nickel pig iron producers would remain loss making even with access to higher grade ore from Indonesia.
 

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article 3 months old

The Overnight Report: Central Bank Watch

By Greg Peel

The Dow closed up 15 points or 0.1% while the S&P fell 0.1% to 2019 and the Nasdaq was flat.

Out of Gas

The local market tried to get excited about ECB-inspired rallies in the northern hemisphere on Friday night in driving up the ASX200 by close to 50 points in the morning. The index stuck its head above 5200 but there the momentum faded.

With Victoria enjoying a long weekend yesterday, volumes were always going to be lower, and with today’s Bank of Japan policy meeting and Wednesday night’s Fed statement looming it appeared to be a good opportunity to square up.

Energy followed oil up with a 1.4% gain, the banks found some more support and rallied 0.6%, and telcos posted a solid 2.0% gain. Thereafter, sectors exchanged small ups and downs.

Having rallied back strongly from 4800 to 5200 on the back of commodity price rebounds and a realisation the banks were not about to go to the wall, the local market has run out of reasons to push forward and on to 5400. The iron ore price is now falling back, the oil price has largely stabilised and the gloss seems to have come off gold. Indeed, Aussie dollar gold has taken a bit of a tumble on strength in the currency.

The next move in either direction will likely be central bank driven. The Bank of Japan may feel the need to counter the ECB today although typically when everyone expects the BoJ to act it doesn’t, and vice versa. While no one expects a rate hike from the Fed the world will be closely scrutinising FOMC forecasting for clues as to whether and when there might be another rate hike.

Caution

The story is the same in the US where the S&P500 is now only 100 points shy of its all-time high despite the turmoil of early 2016. There are also a lot of US data releases due as the week progresses but none of note last night, ensuring a quiet session as Wall Street waits to see what, if anything, the BoJ might do today.

I suggested yesterday that the strong correlation between US stock indices and the oil price has begun to fade as the oil price finds some stability near the US$40/bbl mark. Last night WTI fell 3% but the stock markets weren’t interested.

At least we’re now seeing more moves of 3% or less for oil when 6% plus had become the norm in the past couple of months. And despite the volatility, we’re not really going anywhere at the moment.

Last night’s fall in oil stemmed from Iran declaring that it would not consider freezing its production until a target rate of 4 million barrels per day has been achieved. The rate is currently around 2 million. OPEC members have suggested they would agree to production freezes as long as it’s one in, all in. If Iran’s not in, then no freeze. Not that it makes much difference to global supply if the likes of Saudi Arabia freezes production at record levels.

The oil price did not plummet on Iran’s defiance, as it may have done a month or so ago, because data suggest other OPEC members actually are cutting production to stem financial losses and that US production may well be now on a downturn.

With commodity price rebounds now accounted for, what can drive Wall Street all the way back to all-time highs? It won’t be the economy, because that’s a tit for tat consideration – good numbers raise Fed rate hike expectations and bad numbers ease Fed rate hike expectations. It will probably have to come down to earnings, which were weak in the December quarter.

Interestingly, this year’s March quarter, earnings from which will be reported next month, was the first in two years without a major weather impact in the US. There was “Snowzilla”, but it was an isolated incident compared to the snowbound slowdowns of the March quarters of 2015 and 2014. In other words, year on year earnings “comparables” should look pretty good this time.

Commodities

West Texas crude is down US$1.21 at US$37.29/bbl and Brent is down US77c at US$39.59/bbl.

LME traders had the first opportunity last night to respond to the weekend’s data out of China and indeed these evoked some weakness, but with the Fed meeting coming up there was no rush to over-sell. Aluminium, nickel and zinc each lost a percent while copper stood still.

Iron ore fell another US60c to US$55.50/t.

After a solid run-up for gold recently, it appears traders are not too keen to run the gauntlet of central bank meetings this week without locking in some profits. Following Friday night’s fall, gold is down another US$17.00 at US$1234.70/oz.

The US dollar helped, rising 0.4% on its index to 96.59. That also promoted a 0.7% fall in the Aussie to US$0.7507 but I did flag yesterday that the Aussie’s short-covering rally would likely run out of steam.

Now it just depends on what the Fed comes up with.

Today

The SPI Overnight closed up 4 points.

The RBA will release the minutes of its last policy meeting, held two weeks ago, today, but I would suggest rallies in commodity prices and the Aussie and action by the ECB in the interim render those minutes a bit behind the times, notwithstanding what else happens this week.

The Bank of Japan meets today.

Wall Street will cop a dump of retail sales, inventories, wholesale inflation and housing sentiment numbers tonight along with the Empire State activity index.

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

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