By Greg Peel

The Dow closed down 295 points or 1.8% while the S&P lost 1.9% to 1903 and the Nasdaq fell 2.2%.

The Lucky Country

The euphoria generated by the drop in Japan’s cash rate into the negative, representing boosted stimulus, has clearly worn off. Global investors have perhaps realised that while stimulus has seemed like a saving grace since the GFC, one might just want to focus on why the BoJ was forced to take such a drastic measure.

Meanwhile, China continues to slide, particularly if one focuses on manufacturing, the numbers out of Europe have proven disappointing despite beefed up ECB stimulus, and the US growth rate fell to 0.7% from 3.9% over the last six months of 2015.

It’s not a rosy picture. And one would assume that the flow-on of above problems into Australia would prove rather dire, given the important trading partnerships involved. But…

“In Australia,” noted RBA governor Glenn Stevens in his monetary policy statement yesterday, “the available information suggests that the expansion in the non-mining parts of the economy strengthened during 2015 even as the contraction in spending in mining investment continued. Surveys of business conditions moved to above average levels, employment growth picked up and the unemployment rate declined in the second half of the year, even though measured GDP growth was below average. The pace of lending to businesses also picked up.”

That statement was worth over 30 ASX200 points to the downside last yesterday. The market had opened lower but by 2pm was steadying and perhaps looking for a reason to rally. Any hopes of the RBA joining in a monetary race to the bottom in order to further stimulate the Australian economy have been dashed, at least for the time being.

But at least inflation remains low, as the governor noted. Thus there remains “scope for easier policy”, should that become appropriate.

In the market proper it was another tough day for the resource sectors. The overnight plunge in oil prices unsurprisingly sent the energy sector down 3.2%, while any hopes of a positive day for materials thanks to a dollar jump in the iron ore price gave way to the news Standard & Poor’s had downgraded the credit rating of BHP Billiton ((BHP)) and put the company on negative watch.

Oh how the mighty have fallen.

Getting it Wrong

US forecasters made two major calls at the beginning of 2015. One was that lower oil prices will boost consumer spending. The other was that the US ten-year bond yield will run up towards 3% as the Fed begins to raise its cash rate.

US consumer spending remains tepid at best. Last night the US ten-year yield fell 10 basis points to 1.86%. It’s a far cry from the 2.30% seen around the time Fed rate rise speculation was at its peak. Forecasters have underestimated the impact of an oil price that is 70% lower over two years. The impact is not just on oil producer bottom lines but on the many and various industries that service the vast US energy sector, and on the thousands of jobs therein, and, quite simply, on sentiment.

Last night two of the biggest energy names – Exxon and BP – posted earnings result shockers. And announced mass lay-offs. Independently, West Texas crude fell another 5% last night. Global supply cuts? Forget it. And for the second session in a row, the US natural gas price fell 6%.

Those incorrect forecasts have weighed heavily on the US financial sector. Wealth management divisions (and the issue is the same in Australia) are having a very rough time of it. Banks make money when interest rates rise, and late last year investors piled into the US financial sector on the expectation of higher rates, courtesy of the Fed. In 2016 to date, the US financial sector has actually performed worse than the energy sector.

Last night Goldman Sachs also posted a shocker of an earnings result.

Weakness has been exacerbated by selling from sovereign wealth funds across the globe. The funds of oil producing nations, in particular, have been rapidly seeking cash. Even Australia’s Future Fund has shifted to a record level of cash. Such weight of capital is hard to fight against.

The low US bond rate reflects not only a weaker US economy in isolation, but the differentials between major global economies. The benchmark German bond rate is heading south again. Japan’s cash rate is now negative. It’s no wonder Australian economists are assuming the RBA will simply have to cut eventually. But clearly, not soon.

If there is good news, it would be that the liquidation underway will be finite and take global stocks down to levels of greater perceived value. In other words, the dip-buyers will be on the lookout. In the meantime, talk of a global recession is growing in popularity on Wall Street.

Commodities

West Texas crude is down US$1.47 or 4.7% at US$29.96/bbl. Brent is down US$1.433 or 3.9% at US$32.71/bbl.

LME movements continue to be mixed ahead of the Chinese New Year break. Last night aluminium, copper, nickel and tin were down 0.5-1.5% while lead and zinc rose 0.5-1.0%.

[Did you watch Catalyst on the ABC last night? Zinc might be an interesting call for the future.]

Iron was higher once more, up US60c to US$43.10/t. Again, we need to take the New Year effect into account before getting too excited.

Gold is steady at US$1128.40/oz with the US dollar index down 0.2% at 98.82.

The interesting move over the past 24 hours has been in the Aussie. One would assume Glenn Stevens’ rather hawkish monetary policy statement would have sent the Aussie higher on the assumption any rate cut is a while off. Indeed, the Aussie did spike up at 2.30pm yesterday, but only for a blink. It then proceeded to fall sharply and is now down 0.8% at US$0.7049.

Perhaps the forex market has focused on “…new information should allow the board to judge…whether the recent financial turbulence portends weaker global and domestic demand. Continued low inflation may provide scope for easier policy, should that be appropriate to lend support to demand”, in the last paragraph of yesterday’s statement.

Perhaps the forex market is saying “Yes it will”.

Today

The SPI Overnight closed down 68 points or 1.4%.

It’s service sector PMI day across the globe today, including Caixin’s read on China’s number.

Australia will also see building approvals and trade numbers.

In the US, the ADP private sector jobs report will be closely watched ahead of Friday’s non-farm payrolls release.

Rudi will make his first appearance for the year on Sky Business tonight, hosting Your Money, Your Call Equities, 8-9.30pm. He's bringing along a special guest.
 

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By Greg Peel

The Dow closed up 125 points or 0.8% while the S&P gained 0.6% to 1893 and the Nasdaq rose 0.9%.

We Shall Overcome

There must be a few bruised futures traders out there in the local market. On Wednesday morning they called the ASX200 up 54 points and we closed down 60, and yesterday morning they called it down 45 and we closed up 29. In each case the SPI went with Wall Street and in each case that was the wrong call.

I did note in the latter part of 2015 that the typical correlation we’ve come to assume between Wall Street and the Australian market had become blurry. And fair enough too. Energy is, or at least was, a very big chunk of US indices and thus more exposed to the oil price. Talk was of the Fed raising rates and the RBA cutting. Australia is more directly exposed to China. Wall Street boasts a new world big-tech sector led by FANG (Facebook, Amazon, Netflix, Google) that Australia lacks. US investors are excited over 2% dividend yields, here we like at least 6%, fully franked.

The other feature of late 2015 was that whenever the ASX200 dipped below 5000, it didn’t stay there very long. The biggest threat to this near certainty came earlier this month when we dropped below 4900 on the oil price scare, but yesterday we finished back at 4976 after a defiant rally and yet oil is ten bucks lower now than in December. Or 25%.

So clearly there was some technical trading going on yesterday, and perhaps a belief that we do not simply have to follow Wall Street in lockstep. Wednesday night was all about Fed speculation and the heightened volatility that always features on Fed statement days.

Meanwhile, another feature of 2015 was a local market split in two – the big caps of mining, energy, banks and the telco which were bleeding, and a raft of high-flying small caps cashing in on a 21^st century world and/or the rise of middle class China. Blackmores comes to mind, the suite of milk/cheese stocks, anything to do with the ageing population, and also bling peddler Lovisa ((LOV)). Yesterday Lovisa pre-released slightly disappointed first half numbers and was carted 35%.

Caveat emptor.

Back to Oil

Statistics might prove me wrong but I would hazard a guess and say Wall Street more often than not moves in the opposite direction on the day after a Fed statement release than it did on the day. Typically the market, or perhaps more realistically the computers, overreact in those last two hours of trade.

Once the dust of fierce debate over just what the implications of yesterday’s Fed statement really settled, one might conclude the implication was that there may be another hike in March, or maybe not. That’s not news, so back to business. Wednesday night was the first session in 2016 that Wall Street did not trade in direct correlation to the oil price. The oil price rallied strongly on Wednesday night, and rallied again last night.

So there we have two reasons Wall Street was up last night, and we can throw in a strong rally from Facebook after a Street-beating earnings result. The night before Apple did the opposite, and as I write Amazon has just released its report and has disappointed.

Rumours continue that OPEC and non-OPEC are ready to hook up for a co-operative cut in oil production. Last night’s suggestion was that Saudi Arabia and Russia were in talks to do just that. That rumour has since been denied. And seriously, can you see Vlad cutting Russia’s prime source of revenue, when the country’s economy is bleeding, when it is US production that is the global swing factor?

The denial did bring what had been soaring oil prices back down to earth in the session but West Texas is still trading 5% higher as we speak.

Back in the real world, Wall Street had forecast US durable goods orders to have fallen 0.6% in December but they fell 5.1%. Taking out lumpy transport, orders fell 1.2% when 0.1% was expected. Economists are now reeling in their expectations for tonight’s first estimate of US December GDP. But Wall Street didn’t seem too fussed.

Commodities

West Texas is up US$1.71 at US$33.59/bbl and Brent is up US$1.35 at US$34.03/bbl.

January is the month in which Australian resource sector companies post their December quarter production and sales reports and this week has seen a late rush. So amidst all the commodity price horrors, actual numbers have influenced the recent ups and downs of those beaten-down resource names. Yesterday Fortescue Metals ((FMG)) jumped 4%, for example.

We shall soon be seeing those same companies' half or full-year earnings reports, so February may again bring share price movements not specifically related to overnight commodity price shifts.

In the meantime, the US durable goods orders shock weighed on the LME, turning base metal prices around after a couple of days of rallies. Lead was relatively unchanged but aluminium, copper and nickel fell just under 1% and tin and zinc lost over 2%.

Iron ore rose US20c to US$41.50/t.

Gold’s little run, steeped in Fed speculation, came to an end last night. It’s down US$12.50 at US$1115.00/oz despite the US dollar index being down 0.4% at 98.56.

If the Fed doesn’t raise in March, the Aussie carry trade will remain more valuable. The Aussie is up 0.8% at US$0.7084.

Today

The SPI Overnight closed up 14 points or 0.3%. On recent form, this would suggest we’ll be down today, but it is the last trading day of a very bad month so I’d suggest a close above 5000 on that basis alone.

Australia’s December quarter wholesale inflation numbers are out today along with monthly private sector credit. All eyes will be on the Bank of Japan’s policy meeting today – the first since the Fed rate hike.

And Wall Street will hold its breath for the first estimate of US December quarter GDP. The market is tipping 0.7% growth, down from 2.0% in the September quarter.

On the local bourse, Origin Energy ((ORG)) will lead out another bunch of resource sector production reports while Orica ((ORI)) will hold its AGM.
 

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By Greg Peel

The Dow closed down 222 points or 1.4% while the S&P fell 1.1% and the Nasdaq dropped 2.2% thanks to Apple’s weak result.

Central Bank One

The futures market clearly got it very wrong yesterday morning, calling the local market up 54 points. It was no doubt a call based on the oil rebound and Wall Street’s subsequent rally, but after the ASX200 put on 90 points in thin trade on Monday, it did seem ambitious.

As it was Bridge Street simply opened lower from the bell and was down 40 points mid-morning. Bold traders stepped in to send the index back up to be only around 15 points down on the session, but then the CPI result was released.

Australia’s headline CPI rose 0.4% in the December quarter to a 1.7% annual rate, beating 0.3% expectations. Underlying (core) inflation rose 0.5% to 2.0%, to sit at the bottom end of the RBA’s comfort zone. At the headline, a 5.7% fall in the oil price, tempered by the lower Aussie, was balanced out by higher import prices, driven by the lower Aussie.

The fact the ASX200 spent the afternoon falling steadily to be down 60 points at the close suggests the market was disappointed with stronger inflation numbers, which imply the RBA will be in no hurry to implement another rate cut despite the obvious impact of lower commodity prices on the Australian economy. Falls were relatively uniform across the major sectors except for one clear stand-out – energy – which fell 2.3% against the market’s 1.2%.

It’s not often oil goes up 5% overnight and the local energy sector falls 2%, but it was all about a disappointing quarterly production and sales report from gas major Oil Search ((OSH)), arguably the best of the bad bunch when one looks at Australia’s LNG hopefuls. Oil Search fell 4.6%.

The Aussie dollar jumped up as high as 70.8 on the CPI results, which is also discouraging for large parts of the market, but it has since fallen overnight to be only up 0.2% over 24 hours at US$0.7027.

Economists have now pushed their consensus forecast for the next RBA rate cut out to August from June.

Central Bank Two

There’s a strong argument to suggest the Fed would never, in isolation, have raised its cash rate in December, given prevailing economic conditions, but for the fact it had been talking about a hike for so, so long and the markets had become so, so frustrated with the central bank’s procrastination. Just get it over and done with, the markets screamed. And so it was.

The Fed had upset Wall Street by holding off in September following an August sell-off sparked by a collapsing Chinese stock market and falling commodity prices. The Fed raised in December, and what has happened since?

The implication when the Fed made its move is that a tightening cycle had begun that would see subsequent hikes in 2016. Typically these would be quarterly, although the Fed was at pains to point out the cycle would be “gradual”. Gradual or not, Wall Street debate turned to whether or not there will be a second rate rise in March. Given what has occurred in January, the market was looking to last night’s statement for clarification on the Fed’s rate rise timing.

Of course the one thing you will never get from a central bank is something called “clarification”. Last night’s statement did not say “We will not hike in March”. Therefore, it was left to the market to read between the lines of the rhetoric and attempt to gauge the Fed’s thinking. And guess what – there is complete disagreement.

The Fed statement was balanced between pointing out just how strong the US labour market is, and just how worrying just about everything else is. The US economy clearly slowed in the December quarter (first GDP result out tomorrow night). The global economy is slowing (China). The Fed is no longer so confident inflation will rise as was expected (oil). Markets are volatile. All up, the FOMC no longer believes the risks are “balanced”. This, in itself, should imply no March rate rise. If only if it wasn’t for that very strong assessment of the labour market.

So we might conclude the statement was on the “dovish” side, but with a caveat. In other words, the Fed will decide whether to raise in March in March, not in late January.

Why did Wall Street fall? Was it (a) because the Fed did not assure there would be no March rate rise; (b) because the Fed now seems quite worried for the US economy; or maybe even (c) Wall Street wants a rate rise and may not get one. All three arguments were being bandied about last night.

Two days back and it's 2015 all over again. Shoot me.

Commodities

Last night proved to be the first night in 2016 the US stock markets did not move in lockstep with the oil price. Oil prices rose ahead of the Fed statement release and fell back somewhat thereafter, but West Texas is still up US62c or 2% at US$31.88/bbl and Brent is up US$1.05 or 3% at US$32.68/bbl.

The US dollar fell on the supposedly “dovish” statement, but only by an inclusive 0.1% on the index to 98.91. (We note the US ten-year yield is also as good as unmoved at 2.00%).

LME traders were anticipating a dovish statement, and thus a weaker greenback, in again buying up base metals ahead of the release. Nickel missed out, tin rose 3%, and all others rose 1-2%. Fed statement releases always occur just after the LME closes.

To confuse the issue, last night was the last night of trade before the LME moves buildings, suggesting some squaring up of positions, and there were rumours a Chinese commodity fund that had been shorting copper last year was back in covering.

Iron ore rose US50c to US$41.30/t.

Gold rose US$5.30 to US$1127.50/oz.

Today

As usual, we really need to wait until tonight’s trade on Wall Street to gauge the true response to the Fed, given the “smart money” tends to stay out of the typically volatile last afternoon on Fed days. US durable goods data are also due.

It’s a busy day on the local bourse today, featuring a raft of resource sector production reports, with Fortescue Metals ((FMG)) the highlight, and earnings reports from Credit Corp ((CCP)) and Energy Resources of Australia ((ERA)) to remind us the February earnings season is nigh.
 

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(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author's and not by association FNArena's - see disclaimer on the website)

All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.

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