Tag Archives: Energy

The Monday Report

By Greg Peel

Resilient

There was every reason to expect profits to be taken on the local bourse on Friday following a very sharp and solid rally for the index over the week, but it was not to be. While there was no great enthusiasm from the buyers early in the session, potential sellers were also thin on the ground.

By day’s end the index posted a mild gain to cap a consistent up-week, led by the banks, which posted a 0.6% gain to offset oil price-inspired weakness in energy (-1.1%). Materials (+0.2%) held up despite another slide in the iron ore price, struggling to fall further from the BHP-driven lows already posted.

Nor does there seem to be a lot of concern at this stage that the Aussie dollar has staged a bit of a comeback. The market had assumed that were the Fed to go ahead with its first rate rise in December, the Aussie must surely fall into the sixties and stay there this time. But that rate rise is now priced in and attention has turned to expectations of a very slow tightening cycle from the US central bank thereafter.

This realisation has sparked selling the US dollar, although downside for the greenback is limited when there is a race to the bottom among other currencies, particularly the euro. Having fallen sharply on Thursday night, Friday night saw the US dollar index bounce back again by 0.7% to 99.63. By rights the Aussie should counter with a fall, but it was up another 0.6% on Saturday morning at US$0.7237.

Clearly the shorts are still being cleared out.

As You Were

The Dow was up as many as 180 points during Wall Street’s session on Friday but the afternoon did bring in the sellers, likely taking the profits Bridge Street seemed content to leave alone after a strong week. In fact it was the best week on Wall Street in almost a year.

But the week before was one of the worst, so over two weeks Wall Street has gone nowhere.

It makes more sense that traders should take profits ahead of this week given Thursday is Thanksgiving in the US, which closes all markets and ensures half-day sessions on either side of the holiday. For many it would simply be a holiday week.

At the closing bell on Friday the Dow was up 91 points or 0.5% while the S&P had gained 0.4% to 2089 and the Nasdaq had risen 0.6%.

Leading the charge on Friday was teen fashion, with apparel retailer Abercrombie & Fitch stunning the market with its earnings result and enjoying a 25% share price hike in response, while Nike announced a 14% increase in dividend and share buy-back to ensure its position as best performer in the Dow over 2015 to date.

The 0.7% rise in the US dollar index came about primarily because of a tale of two central banks. On Friday night ECB president Mario Draghi reaffirmed his commitment to extensive stimulus measures to combat low inflation. Meanwhile, St Louis Fed president James Bullard suggested the US rate of inflation will soon rise to the Fed’s 2% target, further cementing expectations of a December hike.

Commodities

A stronger US dollar is as always, a drag on commodity prices. But right now the currency conversion is not the biggest issue. On Friday night nickel fell over 3% in London to its lowest level since 2003.

That’s lower than the 2008 GFC sell-off. Yet not so long ago nickel was the darling of the base metals thanks to Indonesian export bans. It just goes to show what oversupply will do. Meanwhile, news that a group of Chinese zinc smelters had agreed to lower production next year helped zinc to a 1.5% gain. Similar curtailments have previously been announced by the likes of Glencore and others.

Copper and aluminium would be best served by curtailments as well. They were both down 1% on Friday night.

Iron ore fell US10c to US$45.00/t.

The oils were mixed on small moves, complicated by the rollover of West Texas into the new January delivery front month. The two majors are now aligned on delivery, and a fall for WTI of US15c to US$41.57/bbl was offset by a US21c rise in Brent to US$44.46/bbl.

Gold had jumped ten dollars the night before on a fall in the greenback, so it was back down US$5.30 on Friday night to US$1076.60/oz.

The SPI Overnight closed down 5 points on Saturday morning.

The Week Ahead

As noted, it’s Thanksgiving in the US on Thursday, closing all US markets. The NYSE will close at 1pm on Wednesday and on Friday. From Wednesday lunchtime, Wall Street will quickly be emptied.

There are nevertheless a lot of data releases crammed into the first three days of the week.

Tonight sees existing home sales, the Chicago Fed national activity index and a flash estimate of November manufacturing PMI. The eurozone will also flash tonight, while Japan will wait to tomorrow given a public holiday today. Caixin no longer provides a China flash.

Tuesday in the US sees Case-Shiller house prices, monthly consumer confidence, the Richmond Fed activity index and the first revision of the September quarter GDP result. Economists are expecting an upgrade to a 1.9% annual rate from the initial estimate of 1.5%.

Wednesday brings durable goods, FHFA house prices, new home sales, personal income & spending, fortnightly consumer sentiment and a flash estimate of the services PMI. And that’s it for the week.

Locally, RBA governor Glenn Stevens will make a speech tomorrow night while attention turns to September quarter data in the lead-up to next week’s GDP result. Wednesday sees construction work done and Thursday private sector capex.

This week brings the last big rush of corporate AGMs before December meetings slow to a trickle. This week’s highlight will no doubt be Woolworths ((WOW)) on Thursday.

TechnologyOne ((TNE)) posts its FY15 result tomorrow and Fisher & Paykal Healthcare ((FPH)) posts its interim on Friday.

Rudi will appear twice on Sky Business on Thursday. First at noon and again from 6.30-7pm.

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

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided. www.fnarena.com

The Overnight Report: Softly Softly

By Greg Peel

The Dow closed down 4 points while the S&P lost 0.1% to 2081 and the Nasdaq closed flat.

Buy Australia

If the Fed decides to hesitate yet again in December it would be very ugly for global markets. Less than one month out from the next meeting, the world is baking in a Fed rate rise. But why is this a positive development?

It’s not about a strong US economy, as the US economy is far from strong. Keating would call it a rate rise the Fed has to have, just to have somewhere to cut from were it to become necessary down the track, and also to restore credibility in a central bank that has seem to have lost its rudder. And the “just get it over with” mantra from the markets is very robust.

Once it’s over with, attention then turns to the next Fed rate rise. While the minutes of the October meeting may have been hawkish in the sense a majority of FOMC members are now in the December hike camp, it was also more dovish on the wider picture as the Fed is even more emphatic that the tightening cycle to come will probably be the slowest ever seen in history.

That’s why the US dollar index is down 0.7%, to 98.97, over the past 24 hours. Forex markets have been pricing in a tightening cycle far more aggressive than the Fed is intending. And while a US rate hike means Australian stocks are less attractive to US investors on a narrower yield spread, a slower than expected subsequent tightening cycle means that first 25 basis points is neither here nor there. So if rates remain lower for longer and the US dollar is set for a correction, what do you buy?

How about a high-yield stock market in a safe jurisdiction offering the potential for a currency rebound on the back of a greenback correction.

Yesterday’s 2.1% jump for the ASX200 was indiscriminate. Every sector was up on relatively equal terms. Forget commodity prices, yesterday simply saw index buying – Buy Australia.

The Aussie dollar rose steadily at the same time, suggesting those buying stocks were acquiring the necessary local currency first. The Aussie’s rally continued through last night as the US dollar fell, taking the Battler up a full 1.3% over 24 hours to US$0.7196.

The ASX200 is up 5% in a mere three sessions. If you make 10% in a year on your portfolio you have a happy Christmas. Being Friday today, and given Wall Street was flat overnight, we’ll probably see some profits locked in. But was that a bloke in a red suit I saw down in Bridge Street watching the ticker yesterday?

Sun Rising

It was a session downunder in which no one was ever really going to care what the Bank of Japan did or didn’t do, except maybe the forex cowboys. The BoJ did nothing and surprised no one, given the market has now given away the idea of any tit-for-tat QE expansion from a central bank already expanded up to its eyeballs.

Having downgraded its economic growth and inflation expectations at its October meeting, and having since seen Japan fall into “technical” recession, the BoJ declared yesterday that the outlook for Japan in the December quarter is actually very rosy. Or cherry blossomy perhaps.

Never mind that Japan’s October trade data was very weak. Either way, the yen rallied last night as traders came to the conclusion there is simply not going to be any further easing in Japan. The rally played into the US dollar’s pullback.

Ill Health

US healthcare sector stocks were slammed last night on Wall Street. It is not an issue investors in Australian healthcare stocks – and there are many of those – should be concerned about, as the trigger is very much US-centric.

Major insurer and Dow component United Health last night suggested it might pull out of Obamacare. Now, I don’t pretend to fully understand Obamacare because US public health policy is so far removed from that we thank Gough for every day in Australia it might as well be on another planet. But I do understand that from the outset of the introduction of a policy which is as close to “universal health” as America is ever likely to get, it was assumed health insurers would greatly benefit on their bottom lines. But last night United Health issued a profit warning, and blamed the downgrade on lower than expected Obamacare-related earnings.

Hence last night the premium built into to the US healthcare sector started to unravel in a hurry, making the sector by far the worst performer on the day. The energy sector also had another weak session as the WTI price again traded below 40, albeit it has snuck back above that level once more. Otherwise, almost all other S&P500 sectors finished in the green last night to balance out for a flat overall result.

The best performer was utilities. In the face of an upcoming rate rise? Yes, because subsequent rate rises will be a long time coming.

There was actually a positive US data release last night as well, which, outside jobs, have been few and far between of late. After two months in negative territory the Philadelphia Fed activity index swung back into the positive (expansion) at plus 1.9 points.

Commodities

The weekly US inventory report released last night showed yet another big build in crude, and also a big build in natural gas in storage. West Texas dipped below the 40 mark once more but once more recovered, albeit expiry day for the December contract will have come into play. WTI is trading at US$40.49/bbl, down US40c, while Brent is steady at US$44.25/bbl.

The US natural gas price fell 3% to US$2.28/mmbtu.

Typically a 0.7% drop in the US dollar would be positive for metals prices, but keen buyers are thin on the ground in London at present. Base metals closed mixed on minimal moves last night.

After a brief respite iron ore continued its slide again, down US70c to US$45.10/t.

Gold is far more closely linked to currency moves, hence it’s up US$10.00 to US$1081.90/oz.

Today

The SPI overnight closed up 4 points.

This looks ambitious on a Friday after a 5% rally with some mixed commodity price moves overnight, but then the index does seem to be in a bit of a mood.

There are, unusually, no major economic data releases at home or abroad today.

There are still more AGMs to plough through locally nonetheless.

Rudi will appear on Sky Business Your Money, Your Call - Bonds tonight, 7-8pm.

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.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided. www.fnarena.com

Oil Price Risk To The Downside

By Tyler Yell, CMT, forex trading instructor, FXCM

Crude Oil Technical Strategy: Focus on Testing YTD Lows of $37.73
Price Broke below Monday’s Bullish Candle
Big Miss on EIA Inventories Wasn’t Able to Boost Oil Price

Today, Oil [WTI] broke below $40bbl to print the lowest price since late August. This break of $40 temporarily negates the late Monday bounce off key support and, therefore, bullish outside day. The catalyst for the recent drop was two-fold. First, the prolonged strength of the US dollar continues to put pressure on dollar-denominated commodities. Second, producers’ output swelled global inventories to a record. The stockpiles rose to 487.3 million barrels last week as per the EIA data today [last night Australian time], which was the highest for this time of year since 1930 per government data. As Oil inventories continue to grow, so does the disparity between abundant supply and reduced demand.

Price continues to travel within the price range of an extreme day. Today, the low in Crude Oil was $39.89, which remains within the August 24th range of $40.45 and the YTD low in oil (and many other assets) of $37.73. Price did attempt a rally off the lows late in the session due to a weakening USD on the uncertainty of the Fed minutes that still left the door open for a no-hike in December that could weaken the USD and prop up commodities. Today’s low of also aligned with a key level as per Fibonacci ratio analysis of the Fibonacci Expansion from October & November extremes on WTI / Crude Oil at 40.00. The short-term resistance of $42.22, which is the opening range high for the week. This resistance is followed closely by $42.57, the October 27th low followed by $43.11, the 38.2% Fibonacci resistance level of the November range.

The US Dollar would need to turn aggressively lower to give Oil bulls a ray of light given the imbalance of supply to demand. Therefore, a hold above key support on US Dollar would likely continue keep US Oil around the $40 handle or lower. Focal levels of support currently sit around Pivot support of $38.92 followed by a retest of the August low of $37.73.

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

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

For real time news and analysis, please visit http://www.dailyfx.com/real_time_news

DailyFX provides forex news on the economic reports and political events that influence the currency market. Learn currency trading with a free practice account and charts from FXCM.

www.dailyfx.com

Disclaimer

Forex Capital Markets is headquartered at Financial Square 32 Old Slip, 10th Floor, New York, NY 10005 USA.

Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before you decide to trade the foreign exchange products offered by Forex Capital Markets, LLC, Forex Capital Markets Limited, inclusive of all EU branches, FXCM Asia Limited, or FXCM Australia Limited, any affiliates of aforementioned firms, or other firms under the FXCM group of companies [collectively “FXCM Group”] you should carefully consider your objectives, financial situation, needs and level of experience. If you decide to trade foreign exchange products offered by FXCM Australia Limited you must read and understand the Financial Services Guide and the Product Disclosure Statement. FXCM Group may provide general market information and commentary which is not intended to be investment advice and the content of this email must not be construed as personal advice. By trading, you could sustain a total loss of your deposited funds and therefore, you should not speculate with capital that you cannot afford to lose. You should be aware of all the risks associated with trading in foreign exchange products. Foreign exchange products are only suitable for those customers who fully understand the market risk. FXCM recommends you seek advice from a separate financial advisor.

FXCM Group assumes no liability for errors, inaccuracies or omissions in these materials and does not warrant the accuracy or completeness of the information, text, graphics, links or other items contained within these materials. FXCM Group shall not be liable for any special, indirect, incidental, or consequential damages, including without limitation losses, lost revenues, or lost profits that may result from these materials. This email is not a solicitation to buy or sell currency. All information contained in this e-mail is strictly confidential and is only intended for use by the recipient. All e-mail sent to or from this address will be received by the FXCM corporate e-mail system and is subject to archival and review by someone other than the recipient.”

Technical limitations

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

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

The Overnight Report: Bring On December

By Greg Peel

The Dow rose 247 points or 1.4% while the S&P gained 1.6% to 2083 and the Nasdaq added 1.8%.

Put Options

The futures were right on the money in calling the local index down 37 points yesterday morning, based no doubt on falls in commodity prices overnight, as that’s pretty much where we were at from the bell. We then staggered through the morning but from midday, the buyers returned.

It would appear that yield is what they were after. The push towards a positive close was led by the banks, telco and utilities, all with gains of around 0.7-0.9%. Materials was the drag with a 1.5% drop following big falls in iron ore and base metal prices but energy managed to sneak into the green despite a pullback for oil prices.

The yield case was likely revisited following the last morning release of Australia’s September quarter wage price index. It rose 0.6% for the quarter to leave annual growth unchanged at 2.3% -- the lowest rate since data began being kept.

The numbers came in as economists had forecast and supported the RBA’s view that spare capacity in the labour market will continue to hold back wage growth and thus inflation for a while yet, even as the unemployment rate falls. While “lowest in history” seems significant, never in history have we seen the RBA’s cash rate so low or rates as low as they are across the globe, including zero in the US. Inflation is running at 1.5% locally, thus real wage growth remains positive at 0.8%.

The implication from the data is that while the minutes of the November RBA meeting, released this week, provided a cautiously upbeat assessment of the progress of Australia’s economic transition, thus ruling out a December rate cut, the board noted that the low inflation environment continued to provide “scope” for a rate cut if deemed necessary.

Were we to have another rate cut it would act as counter to a Fed rate hike for foreign investors, thus maintaining the value of local yield stocks. With the index buying we’ve seen this week, particularly on Tuesday, it is also likely foreign investors are eyeing off an Aussie near 70c now when not so long ago it was over the dollar. The Aussie is reflecting weakness in commodity prices and if one assumes commodity prices can’t fall by too much more, and that the Aussie will likely only fall into the high sixties from here at worst, then now is a good time to invest in Australia from offshore.

So locally, as I suggested yesterday, investors have a “put option” in the form of “scope” for the RBA to cut if it has to, while investing in the “moderate economic expansion” the RBA currently perceives. Foreign investors have a put option in the form of a currency that is at the lower end of its historic range.

No Choice

“Most participants” believed that conditions for beginning to raise interest rates “could well be met by the time of the next meeting”.

So said the minutes of the October Fed meeting, at which, it appears, the number of FOMC members now happy to go next month has shifted into majority. And since that meeting was held, the runaway October jobs numbers were released.

But for a lot of observers around the globe it’s now a case of the Fed hiking in December not because US economic data are positive, but because the central bank has come under enormous criticism for its hesitation and lack of decisiveness. The Fed should have pulled the trigger 18 months ago, many suggest. At least in June. And why not in September? Now it looks like they have simply backed themselves into a corner and have no choice but to get this rate rise out of the way.

Previously the Fed was worried a rate rise might spark volatility in markets. Now they are likely worried the opposite would be true. Yet aside from jobs, recent US data have been weak at best. As one commentator put it, if the cash rate was 3% and not zero, a very good case could be made right now for a rate cut. But the Fed can’t cut, because the rate is zero, It has missed the opportunity to provide itself with the sort of leverage the RBA is currently enjoying. Therefore December is likely to bring a rate hike simply for the sake of having a rate hike.

It is never quite clear which way Wall Street is going to run on the cut/no cut argument, given the response seems to vary. But a 250-point Dow rally last night with no other real incentive (the day’s economic data release was an 11% drop in housing starts) suggests Wall Street is looking forward to getting it all over and done with.

There was little response in forex and bond markets nonetheless. The US dollar index is steady at 99.62 and the US ten-year yield rose a point last night to 2.27%. Both markets have already moved to a position which suggests a December rate hike is now baked in. It is the stock market that remains fickle.

Commodities

The Fed minutes had not been released when the LME closed last night, so that response will have to wait till tonight. But weak US housing starts were matched by data yesterday showing an easing of house price growth in China, and talk at an industry gathering in Shanghai was of copper prices remaining weak for at least another two years.

Copper was down 1.5% last night, as was zinc, and nickel fell 1%.

Iron ore was thankfully unchanged at US$45.80/t following Tuesday night’s big fall.

West Texas crude had another look at the 39 mark last night, briefly, before recovering to be up US16c at US$40.89/bbl. Brent is up US75c at US$44.32/bbl on the new January delivery contract.

As the greenback is steady, so too is gold at US$1071.90/oz.

The Aussie is off 0.2% at US$0.7107.

Today

The SPI Overnight is up 58 points or 1.1%. Did someone mention Santa?

The Bank of Japan will hold a policy meeting today.The BoJ seems to be accomplished in changing monetary policy just when no one was expecting it to and then not changing policy when everyone expects it will. Markets had thought there was a chance the BoJ would extend QE to counter the ECB and Chinese stimulus at both of the past two meetings, with no result. Thus no one is now expecting any change today, but in the wake of Japan’s “recession” GDP result, who knows?

On the local market the AGM bandwagon rolls – today’s highlight being BHP Billiton ((BHP)) -- while James Hardie ((JHX)) released its interim result (profit warning) and Stockland ((SGP)) hosts an investor day.

Rudi will make his weekly appearance on Sky Business's Lunch Money, noon-1pm, and then again between 7-8pm on Switzer TV.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided. www.fnarena.com

The Overnight Report: Caution

By Greg Peel

The Dow closed up 6 points while the S&P lost 0.1% to 2050 and the Nasdaq was flat.

Optimistic

It was an extraordinary day on Bridge Street yesterday considering just how weak markets were locally, and globally, heading into last weekend. It would be easy to say the 2.3% surge was a typical rebound out of the prior terror-related panic sell-off, but there was no such sell-off. The ASX200 traded down on Monday but recovered the 5000 technical level by day’s end.

There followed flat markets in Europe and a strong session on Wall Street and somehow the Paris attacks have acted counter-intuitively – as a reason to buy. But yesterday was not just one simple surge on the open for the ASX200. There was an opening pop but thereafter it was a steady upward trajectory throughout the session, aided by a round of local economic optimism.

The minutes of the November RBA meeting, released yesterday, were decidedly, if not cautiously, upbeat. “Moderate economic expansion had continued,” the board noted, and “the prospects for an improvement in economic conditions had firmed a little over recent months”.

The board also seems now quite content that the housing bubble has subsided but did give a nod to the “relatively high unemployment rate” as suggesting spare capacity in the economy would linger. The meeting was of course held before the release of the startling October jobs numbers.

The hawkishness contained in the minutes would appear to put paid to any rate cut speculation, although the board did reiterate that the inflation outlook still offered “some scope for further easing”. Call that the put option that provides the downside hedge for an upside trade on the Australian economy.

At Commonwealth Bank’s AGM, held yesterday, the CBA chairman declared the bank was optimistic about the transition away from the mining investment boom, albeit acknowledging it would take some time. ANZ’s chief economist weighed in, on the release of the weekly ANZ-Roy Morgan consumer confidence survey, suggesting that the recent trend provided “a good sign ahead of the critical Christmas season”.

And of course overnight, oil prices had rebounded strongly. There was thus a little bit for everyone yesterday – energy rallied 3.7% (although oil prices were right back down again last night), the banks rallied 2.3% and consumer discretionary rallied 2.7%. But gains were solid across all sectors nonetheless. It was a session in which the most popular stocks were the least popular of the previous weeks and months – the likes of BHP, Santos, Woolies and Telstra.

While there was an Australia-specific element to yesterday’s local surge, the macro influence of post-Paris buying nevertheless underscored and flowed across the globe. The Japanese and Hong Kong markets were both up 1.2%. London was up 2.0%, Germany 2.4% and France, the centre of attention, jumped 2.8%.

In Europe there is no doubt an expectation that if the ECB had harboured any doubt about extending QE, Paris snuffed those out. News of French fighter planes launching an all-out attack on IS, with Russia now also redirecting its attention to IS, is also likely a source of revenge-fuelled optimism.

Jittery

But none of the above means Europe, and the world, is not on edge. Wall Street opened strongly again last night, buoyed by a positive CPI reading, but when the Dow was up over 100 points news came through after the close of the European markets that a football stadium in Hanover, where Germany and the Netherlands were set to play a friendly in front of Angela Merkel, had been evacuated and the game cancelled.

It was all about a suspicious suitcase and came to nought, but it was enough to turn Wall Street around and send the indices back to flat closes. Oil prices fell back again, which also helped to sour the mood.

The US CPI rose in October for the first time in three months, up 0.2%. The annual rate remains a paltry 0.2% but that’s all about oil prices. The core CPI, ex food &energy, also rose 0.2% in the month but is up 1.9% annually, just shy of the Fed’s 2% target.

There is nothing in these numbers that would stop the Fed raising next month.

Wall Street was also surprised by some very strong earnings results from Dow components Wal-Mart and Home Depot. We might say Wal-Mart is a supermarket on steroids and Home Depot is Bunnings on steroids, and given the sort of crowds one sees at such hardware-houses on weekends we could arguably call both consumer “staples”.

The 4% share price jumps both stocks enjoyed would reflect some return to confidence in the US consumer in the wake of shocking results from US department stores, representing consumer “discretionary”, but also representing “obsolete model”.

Overhanging Wall Street is nevertheless the rising US dollar, which was up another 0.2% last night to 99.59 on its index as the euro continued its fall.

Commodities

It appears the geopolitical element which sparked a rally in oil prices on Monday night was no more than a short-covering snap-back. Last night oil markets were back to worrying about just what the upcoming weekly US inventory data would reveal and prices fell all the way back from where they had bounced to. West Texas is down US$1.33 or 3.2% to US$40.73/bbl and Brent is down US$1.29 or 2.9% to US$43.58/bbl.

The US CPI data did nothing to gladden the hearts of metals traders, given Fed rate rise and strong greenback implications. On the LME, only aluminium was spared last night as copper, lead and tin fell around half a percent while nickel fell 2% and zinc fell 3%.

Iron ore fell 3% as well, down US$1.50 to US$45.80/t.

Gold fell US$10.30 to US$1071.60/oz.

The Aussie did not much move during yesterday’s session, so its 0.4% increase from this time yesterday to US$0.7119 is not about the RBA minutes and is in defiance of the stronger US dollar. Maybe offshore forex traders took over the RBA trade.

Today

The SPI Overnight closed down 24 points or 0.5% which is to be expected given yesterday’s surge and the fall in commodity prices overnight.

Locally we’ll see September quarter wage price data today in the lead-up to our GDP result in early December. Tonight it’s the Fed’s turn to release minutes.

Orica ((ORI)) will release its FY15 result today amidst a very busy day of AGMs.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided. www.fnarena.com

The Monday Report

By Greg Peel

Central Bank Tango

Wall Street was upset on Thursday night that Janet Yellen did not take the opportunity in a speech to provide more clarity on a December Fed rate hike in the wake of the very strong US jobs numbers. So stock markets were sold off on uncertainty and frustration.

But commodity markets are more certain and see a real threat in the dichotomy that is opening up across the globe regarding monetary policy. Commodities are traded in US dollars, and the Fed is set to raise, thus boosting the US dollar. With the exception of the UK, where the BoE is still holding back on a rate rise, every other major economy is looking at further stimulus. The eurozone will extend QE in December, China will continue ongoing stimulus measures and the BoJ is expected to be forced into extending QE anytime soon.

Thus we have the problem of commodity prices falling both on weaker demand from struggling economies, a rising US dollar, and on overriding global oversupply issues.

Falling commodity prices were always going to be the factor for the local resource sectors on Friday and so it was materials fell 2.2% and energy 3.5%. Within those sectors we also have the individual issues of BHP, the tragedy in Brazil and its share price being front page news, and Santos, its balance sheet issues and just what the company is planning to do.

A stronger US dollar means a lower Aussie dollar and that is good news for the Australian economy but not for offshore investors in the near term. If the Fed does start raising then the Aussie is destined to head into the sixties. As US investors lose on the falling currency, they are best to get out now and get back in when the currency has adjusted and yields are even more attractive.

Every sector took a beating on Friday.

Euro Woes

The attacks in Paris were yet to occur when the first estimate of eurozone September quarter GDP was released on Friday night. It showed a slowdown in the pace of growth to 0.3% from 0.4% in June, missing expectations of a steady 0.4%. Year on year growth is 1.2%.

The “miss” was blamed on Germany, which posted the same 0.3% growth when 0.4% was expected. France managed 0.3%, as expected. For major exporter Germany, the slowing Chinese economy is having a significant impact.

Expectations that the ECB will announce an extension to QE in December are already largely baked in, and this GDP result only serves to underscore that assumption. The euro did fall on Friday, pushing the US dollar index up 0.3% to 98.93, and most believe the falls will continue toward parity.

European stock markets were also weaker on Friday night as the whole world adjusts to monetary policy imbalances, but as noted, the terrorist attacks in Paris were yet to come. European markets will have their first chance to respond tonight.

Retail Woes

The problem for the Fed is that the data in the US, outside of jobs, are not looking flash.

Retail sales grew only 0.1% in October when economists had forecast 0.4%. Lower oil prices were a factor, as were a drop-off in auto sale value from the month before, suggesting discounting. Ex of autos and energy, sales rose 0.3%.

Within the sector, the death of bricks & mortar retail continues. In the wake of an earlier poor result from Macy’s, Friday night saw a similarly weak result from JC Penney and a profit warning from Nordstrom, sending both share prices down 15% each.

US producer prices fell 0.4% in October when a 0.3% gain was expected. The core PPI, ex of food & energy, fell 0.1%.

Looking at these numbers in isolation, one would not be expecting the central bank to be considering tightening policy. Yet in contrast, the Michigan Uni fortnightly consumer sentiment index showed a rise to 93.1 from a previous 90.0.

Retail and resources led Wall Street lower on Friday night, in a continuation of the US dollar-related selling across the week. The Dow fell 202 points or 1.2% while the S&P lost 1.1% to 2023 and the Nasdaq fell 1.5%.

The broad market S&P500 has broken down through its 200-day moving average – a bearish signal – as Wall Street posted its worst week since early September. The S&P is now back to being down for the year.

Commodities

On Friday night the International Energy Agency published a forecast for global oil demand growth of 1.2m barrels per day in 2016, down from the 1.8mbpd run rate for 2015 to date. This year’s demand growth actually represents a five-year high, which just goes to show the impact of oversupply.

On that note, the US rig count rose by 2 last week, to 574. Doesn’t seem earth-shattering, but it is the first time in eleven weeks the count had risen rather than fallen. With oil markets already suffering weakness, it was no surprise that Friday night saw West Texas fall another US92c to US$40.77/bbl and Brent fall US66c to US$43.61/bbl.

WTI’s 8% price fall over the week is the biggest since March.

The LME opened on Friday night with yet more selling. If Chinese weakness and prospects of a rising US dollar aren’t enough, weak US retail sales and inflation numbers didn’t help either. But base metal prices have fallen low enough for some to start risking the contrarian trade. Prices recovered from session lows by the end of the day. Aluminium, copper and lead still closed mildly weaker but nickel, tin and zinc posted modest gains.

The slight tick-up in the iron ore price on Thursday night proved but a blip. Iron ore fell US40c to US$47.40/t on Friday night.

Gold was relatively steady at US$1182.50/oz.

The Aussie was also steady at US$0.7125 on Saturday morning.

The SPI Overnight closed down 37 points or 0.7% on Saturday morning.

The Week Ahead

Then came Paris.

The G20 leaders may be steeling their resolve in Turkey but the next 24 hours will indicate just what dent to global confidence the attacks will precipitate. On the 37-point SPI fall alone pre-attacks, the ASX200 will be looking closely at the psychological 5000 support level.

Japan will release its September quarter GDP result today. The Bank of Japan will hold a policy meeting on Thursday and the world is still assuming an extension to QE must be a possibility as a counter to Europe and China, with a Fed rate hike being the swing factor.

The US will see the Empire State activity index tonight, housing sentiment and industrial production tomorrow night, and housing starts on Wednesday. The minutes of the October Fed meeting will also be closely scrutinised on Wednesday, ahead of the Philadelphia Fed activity index and Conference Board leading economic index on Thursday.

Australia sees vehicle sales today followed by the minutes of the Cup Day RBA meeting tomorrow. At that point the ridiculously strong October jobs numbers were yet to be released.

On Wednesday the September quarter wage price index will be released, commencing the countdown to our own GDP result due in early December.

The AGM season sees a second big wave this week, with meetings to be held by the likes of Commonwealth Bank ((CBA)) and a shell-shocked BHP Billiton ((BHP)), along with a struggling Myer ((MYR)) and a whole lot of others to boot.

AusNet Services ((AST)) will report interim earnings tomorrow, Orica ((ORI)) releases full-year earnings on Wednesday followed by interims for James Hardie ((JHX)) and Programmed Maintenance ((PRG)) on Thursday.

Rudi will appear on Sky Business on Thursday at noon and again between 7-8pm for the Switzer Report, and potentially again on Friday's Your Money, Your Call - Bonds (not confirmed as yet).

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

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided. www.fnarena.com

The Overnight Report: Clueless

By Greg Peel

The Dow fell 254 points or 1.4% while the S&P lost 1.4% to 2045 and the Nasdaq dropped 1.2%.

Seriously?

There are lies, damned lies and statistics. Economists are not quite sure which category yesterday’s local October jobs numbers fit into.

“While a positive update on the labour market is welcomed,” said ANZ, “we are very cautious about taking this month’s number at face value”.

“We are always wary of reading too much into the monthly labour force ‘lottery’,” said Westpac, “but even looking through the noise it’s hard not to conclude that current labour market conditions in Australia are strong”.

“Believe it or not,” said CBA.

The ABS suggests 58,600 new jobs were added last month, which would make it one of the biggest monthly job increases since Federation. Economists are being polite, but really the mood is one of this result being about as likely as a rank outsider winning the Melbourne Cup with a girl in the saddle.

Oh wait…

CBA puts forward a largely consensus view that this big jump represents a statistical swing following a couple of months of weakness, and that if we smooth out the numbers we’ll find Australia’s job growth trend to running at around 17k-20k per month. The unemployment rate fell to 5.9% in October but CBA expects it to oscillate around the 6% mark for a while yet.

Either that, or five minutes into the job Scott Morrison has proven to be an absolute genius.

Skittish forex traders are always prepared to take anything at face value, nonetheless. The Aussie is up 0.9% at US$0.7125 on the assumption any notion of another RBA rate cut was put to the sword yesterday. They could just as quickly change their minds tomorrow.

Yesterday’s flat close for the ASX200 also reflected the same assumption. Utilities, telcos and consumer staples – all yield stocks – finished in the red. The banks were up because although they are yield stocks, banks benefit from rising rates. Elsewhere it was a bad day for resources, with energy capitulating 3.2% and materials down 1.1%.

The story for those two sectors did not get any better overnight.

Commodities

ECB president Mario Draghi last night told the European parliament he did not see eurozone inflation recovering to the central bank’s target zone in the time previously assumed. Markets took this comment as code for “We will be extending QE in December”.

By rights such a comment should spark weakness in the euro, but the euro has already largely adjusted for such an expectation and last night no less than five Fedheads were providing their two bob’s worth across the Pond. Of the five, two were hawkish, two were dovish and one said nothing at all about a December rate hike or otherwise.

That was Janet Yellen. Is it any wonder Wall Street is in a pique of frustration over a central bank that publically spouts disagreement or clams up when the world is expecting some guidance? The lack of commentary from Yellen was taken by the market as a sign that perhaps there won’t be a rate rise in December. At every other public outing recently, Yellen has reiterated her expectation of a rate rise “this year”.

Thus the US dollar index pulled back a bit last night, down 0.3% to 98.65. But whatever the timing of said rate rise, commodity markets know it will eventually come. They also know the ECB will ease further. Put the two together and they both mean a strong US dollar ahead, and that means that without any noticeable pick-up in global demand, commodity prices must go lower.

Zinc fell 1% on the LME last night, aluminium, copper and tin all fell around 1.5% and nickel fell 3%.

Iron ore actually rose US10c to US$47.80/t. There is likely some support being offered by the tragedy in Brazil and subsequent loss of production.

West Texas crude fell US$1.39 or 3.2% to US$41.69/bbl and Brent fell US$1.65 or 3.6% to US$44.27/bbl.

Gold has already taken the hit, so it’s only down another dollar to US$1083.50/oz.

Stay Out

Weakness in commodity prices, particularly oil, was a major driving force behind Wall Street’s fall last night. But so was the Fed.

Many a commentator has been perplexed of late as to why Wall Street has been going either up or down on rate rise/no rate rise speculation of late and simply not being consistent. Is good news bad news or is good news good news? The answer seems to be different each time.

The real answer is that Wall Street simply does not care about a paltry 25 bip hike. Good God Almighty, can they just make up their minds and end the uncertainty. Uncertainty is the enemy of stock markets. Commodities aside, that is why the Dow fell 250 points last night.

Today

The SPI Overnight closed down 69 points or 1.3%.

The eurozone will see a first estimate of September quarter GDP tonight.

Retail sales will be the major release in the US, along with consumer sentiment and the PPI.

Spare a thought for Santa, who one minute is packing all the presents in the sleigh and the next minute is taking them out again.

The original “Santa Rally”, when first coined, referred specifically to a tendency for Wall Street to rally after Christmas Day and into the new year. These days the Santa Rally seems to have been extended to begin in November. We’re certainly not getting one right now, but will we get one at all this year?

We recall that 2013 was a year in which Wall Street spent the whole time agonising over Fed tapering – when it would begin. Sound familiar? Many a commentator suggested in 2013 that the then long awaited Wall Street correction would surely come the day the Fed announced a start date.

Commentators have spent all of 2015 suggesting a correction would come when the Fed announced its first rate hike, but we had a correction anyway. The day in December 2013 when the Fed announced the commencement of tapering, Wall Street initially fell. The next day it started rocketing, and did not stop until early 2015.

Santa no doubt has a big circle around December 16 on his calendar. Let us only hope the Fed brings the egg nog.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided. www.fnarena.com

The Overnight Report: Armistice

By Greg Peel

The Dow closed down 55 points or 0.3% while the S&P fell 0.3% to 2075 and the Nasdaq lost 0.2%.

Confident

The local market opened yesterday on news Australian consumers are feeling rather confident. Westpac’s consumer confidence index for November showed a 3.9% lift to 101.7, the highest level since May.

Within the components of the index, the biggest rise came from expected economic conditions in the next five years. Is this the so-called Turnbull Factor at play? The weakest result was in family finances compared to a year ago, but this is likely the impact of the banks’ out-of-cycle mortgage rate increases.

Whatever the case, retailers will be relieved to know confidence is on the optimistic side of the ledger as we head into Christmas. The most relevant sector here is consumer discretionary, which we recall on Tuesday fell heavily following the apparent tip-over of housing finance growth numbers. Consumer discretionary was up 0.6% on the session but this was not a stand-out result, merely in line with the overall index movement.

It was a very choppy session on Bridge Street yesterday, highlighting indecision amongst investors as we head towards the summer break. Twice the index rallied before turning tail and threatening to go negative, until finally the buyers won on the day. The BHP factor still hangs over the materials sector, which was down 1%, but otherwise all other sectors posted roughly similar gains.

It should have been a session in which China’s monthly data dump played a part, but for some reason Beijing decided it would release those numbers not at midday, our time, as has always been the case, but at 4.30pm, after Bridge Street’s closing bell.

Tentative Signs

China’s October industrial production showed 5.6% year on year growth, down from 5.7% in September and missing expectations of 5.8%. Fixed asset investment rose 10.2% year to date, in line with September but below 10.3% forecasts.

That was the bad news, before a backdrop of Beijing’s stimulus measures to date.

The good news was 11.0% growth in retail sales, up from 10.9% in September and marking the fastest pace of growth since December 2014. It is no secret China’s industrial sector is still struggling from overcapacity that Beijing seems reluctant to address, but given Beijing’s goal of swinging the Chinese economy around into one of consumption, this retail sales number seems a positive step down that path.

Further evidence of the rise of the Chinese consumer was provided yesterday by much talked about “Singles Day” – a reference to the date, 11/11. Singles Day is an online shopping spree along the lines of Cyber Monday in the US when online retailers offer discounts on their products and shoppers go nuts. It was introduced by Alibaba, China’s eBay, in 2009, and the closest thing we can compare it to in Australia is the bricks & mortar Boxing Day frenzy.

Singles Day turned over US$14bn yesterday, up from US$9bn last year.

Thin

By contrast, US department store icon Macy’s posted its quarterly earnings result last night and missed on the revenue line, resulting in a 14% share price shellacking. The company blamed the strong US dollar for lower sales to tourists and an unseasonably warm autumn crimping winter-wear sales, but failed to acknowledge the slow demise of the bricks & mortar department store globally.

There is little likelihood the digital age will usher in the death of beer, so the positive news on the night was an agreement between Anheuser-Busch InBev and SABMiller, two of the world’s biggest brewers, to merge, no doubt pending approval from relevant competition regulators.

These were about the only talking points last night in a session where US banks and the bond market were closed for Veterans Day and stock and commodity market attendance became optional. There were no data releases to speak of, volumes were thin, and without any particular incentive at present, the indices drifted lower. Mostly on lack of interest.

Commodities

Oil markets are “surprised” every week by weekly US inventory data, and I think John D. Rockefeller was the last person to actually make a correct forecast. But last night two separate surveys had the oil markets expecting a 500,000 barrel increase in US crude supplies or a 1.1m barrel increase, so when the number came in at 6.3m barrels the only way for oil prices to go was down.

West Texas is down US$1.15 or 2.6% at US$43.08/bbl and Brent is down US$1.59 or 3.4% at US$45.92/bbl.

The oils fell despite some respite from the US dollar, which has pulled back 0.3% to 98.95 on its index.

The weaker dollar was welcomed on the LME, which was otherwise disappointed in the weak Chinese industrial production and fixed asset investment numbers. The market remains very short, so gains were actually seen in all bar lead, while zinc recovered a percent having fallen two percent the night before.

Iron ore is again unchanged at US$47.70/t.

A combination of the strong local consumer confidence numbers and a weaker greenback has the Aussie up 0.5% at US$0.7060.

Today

The SPI Overnight closed down 17 points or 0.3%.

The local October job numbers are out today, providing the first opportunity for new treasurer Scott Morrison to test out his spin credentials.

Amidst another flurry of AGMs, Graincorp ((GNC)) will release its full year result.

Rudi will make his weekly appearance on Sky Business, Lunch Money, noon-1pm.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided. www.fnarena.com

The Overnight Report: Deliberation

By Greg Peel

The Dow closed up 27 points or 0.2% while the S&P gained 0.2% to 2081 and the Nasdaq fell 0.2%.

House of Cards

Much has been made in the popular press of the OECD’s downgrade of its forecast GDP growth rate for Australia in 2016 to 2.6% from a previous 3.0%, reflecting slower Chinese growth. The reality is that organisations such as the OECD, IMF and World Bank tend to run a good six months behind the curve. Last week the RBA tightened its own forecast for FY16 to 2.25% from an earlier forecast band of 2.0-3.0%, and tightened its FY17 band to 2.75-3.75% from an earlier 2.5-4.0%.

Give it another six months and the OECD might catch up. Local economists are constantly reviewing their forecasts so the bottom line is yesterday’s OECD numbers would have had little impact on the market.

Critical to Australia’s GDP growth, ahead of the impact of the lower Aussie dollar finally flowing through to benefit non-mining sectors of the economy, is the housing construction boom. It alone has kept Australia out of recession over the past two years as mining investment and commodity prices have collapsed. Therefore yesterday’s housing finance numbers were something the market did pay close attention too.

The value of housing loans fell by 1.6% in September, to a lower annual rate of 12.4% growth. Owner occupier loans rose by 3.0% to be up 23.1% but the critical segment of investor loans fell by a whopping 8.5% to turn negative annually at minus 2.1%.

The party is over.

It is easy to point to tighter regulatory controls on investment lending, implemented by APRA, encouraged by the RBA and responded to by the banks with mortgage repricing, as the reason behind the peak in Australia’s investment housing boom. But realistically the tide was already turning, given property prices have been running away but rents have not been keeping pace. Mortgage repricing was just the straw that broke the camel.

Negative gearing might be the Holy Grail in Australia but it’s called “negative” because it simply means losing money. As the gap from rental yield to debt servicing obligation widens, the capital value increase required on the property to recover that negative cash flow becomes unrealistic. Either rents must rise (can you see the Chinese coming in and renting everything in Sydney?) or debt costs must fall (currently at historic lows, banks now in tightening cycle) or the investment is not economically viable at the price.

It is telling that the worst performing sector on the local market yesterday (outside a 2% fall for tiny info tech) was consumer discretionary, down 0.9%. The banks also came in for punishment, down 0.6%. The ASX200 did manage to stage a solid comeback on late buying, having been down 72 points mid-afternoon to close down only 20, but most of that buying was seen in the beaten-down resource, telco and consumer staples sectors. Consumer discretionary has very close links to Australia’s housing market.

It was a bumpy ride for the index yesterday, punctuated by the midday release of China’s October CPI. It fell to 1.3% annual from 1.6% in September, which had fallen from 2.0% in August. That’s bad news, but good news if bad news implies expectations of more concerted stimulus measures from Beijing. Bridge Street struggled to make up its mind over the implications, evidenced in index rocking and rolling through the afternoon but at least one big buy order late in the day reflected a mind made up.

The actual good news is Australian businesses otherwise believe conditions are very positive at present, thanks to low interest rates and a lower currency. NAB’s October business survey showed the conditions index steady at plus 9 – well above the long-run average of plus 1 and the best reading since the GFC. Confidence fell from the long-run average of plus 5 seen in September to plus 2.

Interestingly, the survey was conducted in the final week of October when substantial profit warnings were being issued by the likes of Dick Smith and Woolies, and the banks were posting disappointing earnings results and guidance. Home sales data was also released showing the first drop in however long. No wonder confidence was dented.

Yesterday’s late rally, which took us from an onerous looking 5050 back to a 5100 close, may indicate a willingness from buyers to pick up stocks above the 5000 level, but we’ve seen this movie before. Further weakness, and a drop through 5000, can take us down fast.

Whole lotta not much

There was not a lot going on on Wall Street last night beyond a few micro-specific issues. Traders are still trying to figure out if a December Fed rate hike is good or bad.

Lacking anything much else to focus on, traders were glued to the gripping saga that was McDonalds’ investor day. How is the all-day breakfast going? OMG, they’re going to change the recipe for the Egg McMuffin. (How does one fiddle an egg, and a muffin?) And they’re not going to spin off McDonalds’ property portfolio into a REIT, a la Woolies and Bunnings for example, downunder. Mickey D’s stock price went up and down all day with each new revelation.

Just goes to show what a lacklustre session it was. The other news was that Apple component suppliers were experiencing a slowing in demand. Apple shares thus kept a lid on the indices, despite this hardly being a surprise given aficionados always barrel in on Day One to buy new iThings, and sales always slow thereafter.

Tonight is promising to be even more lacklustre on The Street, given the Veterans Day quasi-holiday has US banks and the bond market closed and stock and commodity markets open.

Commodities

A technical breach was blamed for a sudden 2% price fall for zinc on the LME last night, while otherwise base metal movements were mixed and small. Copper fell half a percent and tin rose a percent.

Iron ore was unchanged at US$47.70/t.

The oils are both up US28c, to US$44.22/bbl for West Texas and to US$47.51/bbl for Brent.

The US dollar index is up 0.3% at 99.26 so gold is US$2.90 lower at US$1087.80/oz.

The Aussie is down 0.4% at US$0.7023, reflecting those weak housing loan numbers.

Today

The SPI Overnight closed up 3 points.

Westpac’s local consumer confidence survey is out today but around midday we will see Chinese industrial production, retail sales and fixed asset production numbers for October, which will likely determine the direction of afternoon trade.

As noted, it’s a quasi-holiday in the US tonight.

On the local stock front, there are quite a few AGMs booked in for today while DuluxGroup ((DLX)) will report full-year earnings and Westpac ((WBC)) goes ex.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided. www.fnarena.com

The Overnight Report: Rough Take-Off

By Greg Peel

The Dow closed down 179 points or 1.0% while the S&P fell 1.0% to 2078 and the Nasdaq fell 1.0%.

Tragedy

A dismal day on the local stock exchange was led out by BHP Billiton, which posted a 5.6% drop on news of a fatal disaster at a BHP-Vale-owned iron ore mine in Brazil. Early estimates suggest the mine may be closed for several years and cost US$1bn in clean-up and legal costs.

It was never set to be a good day for the materials sector anyway, as evidenced by falls in iron ore mining stocks across the board. The weekend’s Chinese trade data showed a big fall in imports in general and iron ore imports in particular. To date the sector has seemed not too concerned over the gradual fall in the iron ore price to below US$50/t as this has been largely anticipated and costs have been cut in preparation. But the weak Chinese numbers have crystallised the reality. The materials sector fell 3.7% yesterday.

The energy sector saw a 2.5% fall but elsewhere across the index, the other concern is that of rising US interest rates. Friday’s strong US jobs number has led to expectations the Fed will definitely raise in December, and attention now turns to just how fast the pace of subsequent hikes will be.

For years the Australian stock market has largely been a story of yield, given the fall in commodity prices. The banks, telco and utilities and any stock paying a solid dividend have been supported by those seeking a return in a low interest rate environment. Rates don’t get much lower than zero, hence Australian stocks have been very attractive to US investors. As the interest rate differential between Australia and the US begins to narrow, that attraction is incrementally eroded.

Yesterday saw the banks and telcos each down 1.6% and utilities down 2.2%. Only one sector managed to close flat on the session and that’s healthcare – defensive more so from its undeniable growth story than from its yield.

A US rate rise also alleviates some of the pressure on the RBA to cut its own rate, given the subsequent impact on the Aussie dollar, which will disappoint those sweating on further RBA support.

The ASX200 was technically damaged yesterday. The close below 5140 and the promise of further weakness today suggests, on the charts, that 4700 is the next target.

Adjustment Period

History tells us that a period of “normalisation” – lifting rates back to more normal levels – following a period of easing is typically accompanied by a stock market rally over the first four rate hikes. While normalisation implies the winding down of central bank support, that winding down is an indication the economy is growing again and, in normal circumstances, that is good for a stock market. But that does not mean the initial adjustment is not a difficult one.

It has been over ten years since the Fed commenced a tightening cycle – 2004, following the tech wreck and 9/11. Many commentators have alluded to the fact that not only is there a large cohort of younger market participants who can’t conceive that “social media” used to mean one landline telephone on the hall table, and who can’t read analogue time, they have never experienced a rate rise. Thus if the first move in a tightening cycle requires a bumpy period of portfolio adjustment and a rethinking of strategies, this time around that adjustment may be even more bumpy.

Throw in the fact that the UK is still hesitating on a wind-back of its QE program, Japan may yet increase its QE program, the eurozone is certain to extend its QE program in December, and China is all but certain to enact further stimulus measures, including a potential further devaluation of the renminbi, and there is only one way the US dollar can go.

The stronger US dollar is already impacting on large US multinationals, as this latest round of earnings reports confirms. The US manufacturing sector had been managing to get back on its feet post GFC but it is now faced with less competitive pricing power. In short, a Fed rate rise may imply a stronger US economy but a surging US dollar means the economy is dragging a heavy weight along with it.

Wall Street was somewhat stunned on Friday night by the shock jobs number, and its implications. With the weekend to think about it (and throw in the weak Chinese data), last night saw the Dow fall by as many as 243 points by midday. The combination of the stronger dollar (albeit last night the dollar index came back off a tad to 98.96) and further signs of weak Chinese demand sent all commodity prices lower again.

Stocks have managed to regain some ground to the close, falling an even 1% across the major indices. The S&P500 has broken support at 2100.

Santa? Please phone home.

There had been talk, in the wake of Wall Street’s 8% rebound out of the August depths, back to the level from which it had fallen, that perhaps this year the Santa rally came early. That rally was aided by a return to stability in Chinese markets, boosted by ECB QE, and confirmed by two weak US jobs reports for August and September that left Wall Street certain the Fed would not be raising in 2015.

Now that all has to be rethought. Once the difficult adjustment period is over, perhaps then can Santa hop back on the sleigh.

Commodities

The US dollar index was slightly lower last night but the weak Chinese trade data ensured falls across the board on the LME. Aluminium, lead, nickel and zinc were all down over 1% while copper and tin posted smaller falls.

A sad reality of the tragedy in Brazil is that prolonged closure of the mine reduces global iron ore supply, and hence is supportive for the iron ore price. Iron ore is up US30c to US$47.70/t.

Weakness in oil prices continued, with West Texas down US49c to US$43.94/bbl and Brent down US37c to US$47.23/bbl.

There was some respite for gold thanks to the dip in the greenback. It’s up US$3.40 to US$1090.70/oz.

The Aussie is relatively steady at US$0.7052.

Today

The SPI Overnight is down 52 points or 1.0%. If accurate this implies a fall through 5100 for the ASX200 and a move towards tenuous support at 5000.

Australian housing finance data – a hot topic at present – will be released today. NAB will publish its October business confidence survey.

Beijing will post China’s October inflation numbers later today.

The local market will see earnings reports from Incitec Pivot ((IPL)) and Eclipx ((ECX)).

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided. www.fnarena.com

Get 2 Weeks free trial

Sign Up

Member Login

Tag Archives: Energy

The Monday Report

The Overnight Report: Softly Softly

Oil Price Risk To The Downside

The Overnight Report: Bring On December

The Overnight Report: Caution

The Monday Report

The Overnight Report: Clueless

The Overnight Report: Armistice

The Overnight Report: Deliberation

The Overnight Report: Rough Take-Off