By Greg Peel

The Dow closed down 85 points or 0.5% while the S&P lost 0.5% to 2050 and the Nasdaq fell 0.2%.

Resilient

The ASX200 moved sharply lower from the open yesterday, down 30 points at its nadir, before grafting steadily back to a flat close. The open did seem somewhat of an overreaction to a mildly weak session on Wall Street.

With much of the country on school holidays, volumes are currently on the light side. Aside from some strength in the resource sectors, much of yesterday’s ultimate action centred on individual stock stories.

Wealth Manager Henderson Group ((HGG)) enjoyed a 12% pop after announcing a merger while mining service company Bradken ((BKN)) leapt 31% on a takeover bid. A strike by Border Force had yield darling Sydney Airport ((SYD)) dropping 2%, ensuring utilities was the worst performing sector on the day.

There was a little bit of a retreat in the index late afternoon following the RBA’s decision to leave its cash rate on hold. No one expected any different but there are always some dreamers. Those hoping Philip Lowe might prove to be a little more dovish than Glenn Stevens would have been disappointed in a statement that pretty much came off Stevens’ Roneo machine. The 1% fall for the utilities sector no doubt reflected this disappointment.

Lowe did give a nod to the flood of new apartments set to hit the eastern cities and to that end we note that building approvals were down by a less than expected 1.8% in August. Apartment approvals were down 3.6%. But net approvals are still up 10% year on year and apartment approvals are up 26%.

Taper Talk

Do you remember that before we spent endless, tedious months debating whether or not the Fed would hike for a second time, we spent endless, tedious months debating whether the Fed would taper QE, when and by how much? Well now we can relive those hazy, crazy days all over again with the ECB.

Having spent years telling us he would do “whatever it takes” to prop up the eurozone economy, it appears Mario Draghi has now begun to wonder whether he’s not part of the problem rather than part of the solution. With Deutsche Bank being only the most prominent of European banks in trouble – Italian banks being race leaders – it is clear keeping rates in the negative will only be a burden on banks and not a boost.

To that end, the ECB suggested last night it may begin to taper its extensive bond buying program (QE) a month earlier than the current March timetable.

Last night also had Richmond Fed president Jeffrey Lacker warning that in order to stay ahead of a sudden spike in inflation, the Fed needs to raise sooner rather than later.

Lacker is not an FOMC member but despite not hiking last month, Fedspeak remains very much to the hawkish side, suggesting a December rate hike may already be booked. In the wake of the BoJ not cutting further into the negative, the Fed seemingly anxious to hike and now ECB taper talk, it would seem major central banks have begun to question whether extraordinary and unprecedented policy measures are really the right way to go.

Which, by implication, means the wrong way to go is gold. Having tenuously held above US$1305/oz support recently, last night a break of that level sent gold into a tailspin. The greenback rose, the euro rose, and caught in the crossfire was the pound, as markets continue to contemplate Brexit implications. Gold has plunged US$44.00 to US$1269.00/oz.

Cleary the impact was felt in the US materials sector last night, and the dividend paying sectors were also hit once more on the threat of tighter global policy. The US ten-year bond yield jumped 6 basis points to 1.68%. But rate rises are good for a financials sector struggling with fresh Lehman talk. So in the wash-up it was a mixed bag for Wall Street last night.

The S&P500 closed right on 2150 support.

Commodities

Oil prices managed to hold up in the face of the stronger greenback, as traders consider the potential impact of Hurricane Matthew on Gulf production. West Texas crude is down US5c at US$48.63/bbl.

Base metals were all weaker nonetheless. Aluminium and copper fell 0.5%, lead and zinc 1% and nickel 2.5%.

Iron ore fell US10c to US$55.00/t.

The US dollar index is up 0.4% at 96.12 but Philip Lowe will be happy to see the Aussie down 0.7% at US$0.7625.

Today

The SPI Overnight closed down 31 points or 0.6%. Prepare for carnage in the overbought gold sector today.

Local August retail sales numbers are due today along with the service sector PMI, and services PMIs are due across the globe tonight as well. Tonight also sees the release of the US private sector jobs report for September.

BHP Billiton ((BHP)) will hold an investor briefing today.
 

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By Greg Peel

The Dow closed down 53 points or 0.3% while the S&P lost 0.3% to 2161 and the Nasdaq fell 0.2%.

As You Were

The ASX200 recovered the losses posted on Friday in the opening half hour yesterday and in low volume trade, did little more for the rest of the session. With half the country enjoying a public holiday it was always going to be a quiet day.

Friday’s 0.7% fall for the index was led by a 1% fall in the financials sector due to fears over Deutsch Bank’s survival. Deutsche shares rebounded 15% on Friday night following a rumour the US Department of Justice was prepared to reassess the US$14bn fine it was imposing on Deutsche. Yesterday saw the Australian financial sector rebound 1.2%.

Friday was also the end of the September quarter and such sessions can always be marred by misrepresentative volatility. As yesterday was also a long weekend in NSW and other states, Friday was a good day to square positions. With the new quarter up and running yesterday, most of went down on Friday came back up again.

Improvement in China’s manufacturing and service sector PMIs also provided support to commodity prices and as such, the local resources sectors put in strong performances.

There was also some positive news on Australia’s manufacturing sector, albeit the local PMI is so wild as to be questionable. It rose to 49.8 in September form 47.6 in August – still in contraction but only just.

And Japan enjoyed a turnaround in its manufacturing sector, with the PMI rising back into expansion at 50.4 from 49.5 in August.

Remember Brexit?

Given the Brexit drama back in July proved to be somewhat of a 2016 version of Y2K, global markets have since become complacent and all but forgotten that reality is yet to bite. The UK economy has in the interim proven more than resilient and outside of unrelated bank issues, Europe has not seen any notable effects yet either.

The UK’s September manufacturing PMI rose to 55.4 from 53.4 and the eurozone PMI rose to 52.6 from 51.7.

But last night the British prime minister announced the government intended to pull the Brexit trigger by March, and that the process would then begin for a “hard” Brexit to be achieved by 2019. “Hard” does not mean difficult, but rather a complete and inexorable separation from the EU with no lingering ties.

The announcement prompted a fresh tumble in the pound.

It also caused some angst on Wall Street. But as the US enters the fourth quarter, there is much to consider.

Firstly, the fourth quarter is traditionally positive for stocks and most are expecting tradition to be maintained this time around. First we have to get through October of course, and October is traditionally the month of scary plunges. In 2016, there is concern Deutsche Bank could be the trigger this time.

Irrespective of whether or not the US DoJ reduces Deutsche’s fine, the bank remains in possible need of assistance. The ECB is obliged to provide liquidity back up but liquidity is not the issue for Deutsche, it is capital. On that front, German politicians have been railing against the concept of any government support. Deutsche is not out of the woods just yet.

Then there’s the Fed. The market now expects the Fed to hike in December so if that proves the case, there should be little surprise. We do have a lot of data to flow beforehand nonetheless, so Wall Street will remain on edge. The US manufacturing PMI showed a relieving rebound to 51.5 from August’s surprise plunge into contraction at 49.4. But there is still an element of the market recoiling at positive data.

Then there’s earnings. September earnings reports will begin to flow from next week and once again the market expects a net contraction across S&P500 companies.

And there’s OPEC. Will November bring confirmed production cuts as are now suggested, or not?

Put it all together and while the fourth quarter is expected to once again be positive for US stocks, it’s hard to find a particular reason why it would be. One thing is now pretty certain – the low volatility trade is being replaced by the high volatility trade. With the Fed expected to move in December, investors are switching out of plodding dividend payers and into higher risk cyclicals, particularly technology stocks. Financials are also being favoured given they benefit from rising rates, but then the banking sector clearly has its own threats to deal with at present.

With much to consider, the Dow was down a hundred points early in last night’s session, before grafting back half that loss.

Commodities

The oil price continues its graft higher, with West Texas crude rising US65c to US$48.68/bbl.

Base metals continue to suffer from a return to volatility. Last night saw aluminium up 0.5% and zinc 1%, while copper fell 1%, lead 1.5% and nickel 2.5%.

Iron ore fell US10c to US$55.10/t. There is likely to be little to no movement in the iron ore price for the rest of the week with China closed for Golden Week.

The US dollar index is 0.3% higher on the drop in the pound and gold is down US$2.90 to US$1313.00/oz.

The Aussie is slightly higher at US$0.7675.

Today

The SPI Overnight closed down 22 points or 0.4%, suggesting the to-ing and fro-ing is set to continue as half the country returns from its long weekend.

ANZ will release its local job ads series for September today and building approval numbers are also due. The RBA will meet this afternoon and in Philip Lowe’s first statement he will explain why rates remain on hold.
 

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By Greg Peel

The Dow closed down 195 points or 1.1% while the S&P lost 0.9% to 2151 and the Nasdaq fell 0.9%.

Energised

One doesn’t have to look very far to see why the ASX200 was up 1.1% yesterday. On the supposed agreement reached by OPEC to instigate a production freeze/cut, the local energy sector was up 6.3%.

The materials sector chimed in with 2.8%, bearing in mind that aside from stronger base metal prices overnight, BHP Billiton ((BHP)) is an oil crossover.

We then drop a long way down to industrials, which rose 1.2% because that’s where oil sector service companies reside. Beyond that, sector moves where insubstantial. Of yesterday’s Top Ten movers to the upside, positions one through seven were all oil & gas or oil & gas services companies.

Oil & gas producer BHP rose 4.7% yesterday, which is unsurprising, but iron ore rival Rio Tinto ((RIO)) rose 3.7% despite being an oil consumer, not producer. Overnight in London, BHP is up 6.5% and Rio 4.5%.

The potential OPEC freeze is as much symbolic as it is fundamental. It underscores a groundswell of belief that has been building this past month or two, that February 2016 marked the bottom of the commodity price cycle.

Oil has stabilised in the 40s when earlier there were warnings of it heading towards the 20s. Iron ore has stabilised in the 50s when analysts were assuming a fall back through the 40s. The world had all but written off coal as a commodity but thermal coal has rallied back strongly and met coal has gone through the roof. Mine closures are driving nickel higher. Even copper has finally found a bit of strength.

The OPEC deal is, symbolically, almost a sign of confirmation. The early movers have already been switching out of first half 2016 plays – yield stocks, which had become overvalued – and back into cyclical plays. The biggest cyclical play of them all is commodities.

Another sector that has seen money withdrawn in favour of such switching is financials. Today is going to be a different day on Bridge Street.

Too Many Memories

Wall Street was bugling along doing very little last night up until around midday. The European stock markets were closed when Bloomberg reported ten hedge funds had withdrawn their capital positions with the Deutsche Bank prime brokerage. Hedge funds lodge capital with their prime broker, and in many cases a number of brokers, as a slush fund from which trades can be made and/or as collateral against risk positions in derivatives and other instruments.

The withdrawals suggest the hedge funds have reduced, or eliminated, their counterparty risk with Deutsche. The bottom line is, were Deutsche to go under, that capital would never be seen again. The volume and price of Deutsche credit default swaps is also rising, either as an outright trade or as a hedge against collateral held. As soon as “CDS” creeps back into the discussion, minds are jolted back to 2008.

If one were to do a word-count of everything uttered on business television this morning, both in the US and locally, the most used word would be “Lehman”.

Which poses a problem in itself. The world would probably be less concerned over the state of Deutsche’s capital and liquidity positions if 2008 had never happened. But it did, and investors are starting to play it safe lest the September of US election year 2016 starts to look like the September of US election year 2008. And next week it’s October.

Deutsche Bank shares fell 7% on the NYSE last night. Angela Merkel has said it will not provide the bank with any assistance in paying the US$14bn fine owed to the US Department of Justice. However, the German government cannot stand back and watch Deutsche go under. In Germany, Deutsche is Australia’s Big Four all wrapped into one. In the world, Deutsche is the biggest holder of financial derivatives.

Deutsche Bank cannot, nevertheless, be bailed out with taxpayer money under rules introduced by the ECB since the GFC. It can only be “bailed in”, meaning first the shareholders lose their money, then the bondholders lose their money, then depositors lose their money above the government guarantee level. We saw this in Cyprus in 2013.

That is not to say Deutsche is Lehman and 2016 is indeed 2008. Commentators have been quick to point out much is different. But if hedge funds start pulling their capital, it can’t be long before shareholders really start to head for the exits. If that happens, depositors won’t be far behind.

Wall Street did not close on its lows last night but it wasn’t far off. It was all about the banks.

Meanwhile, the US June quarter GDP result was revised to 1.4% growth last night, up from 1.2%. No one much noticed.

Commodities

West Texas crude gained another 1.2% in rising US58c to US$47.74/bbl.

Lead leapt 3.4% on the LME last night while ever volatile nickel fell 2.5%. Zinc rose 1.5% and copper and aluminium rose 0.5%.

Iron ore rose US20c to US$56.10/t.

The US dollar index is up slightly at 95.49 and gold is down slightly at US$1319.90/oz. One might expect a rush into the safe haven of gold if the word “Lehman” is being bandied about, whether justifiably or not, but 2008 reminds us that when stocks are plummeting and margins are being called, investors have to throw their gold overboard.

The Aussie jumped up the night before on the strong oil price and last night came right back down, falling 0.7% to US$0.7634.

Today

The SPI Overnight closed down 34 points or 0.6%.

It will be an interesting day on the local bourse. On the one hand we have building strength in the resource sector, underscored by last night’s big moves up for BHP and Rio, and on the other we have the banks, which are no doubt the thinking behind weakness in the futures this morning.

There’s one helluva long list of local and global economic releases on the calendar today.

In Australia we see private sector credit and new homes sales.

Japan will provide a monthly data dump of inflation, production and unemployment numbers.

Caixin will jump in early with its China manufacturing PMI for September because next week in China is Golden Week. The country will shut down this evening and not reopen until October 10. Beijing will release its official September manufacturing and service sector PMIs tomorrow.

The US will see the Chicago PMI tonight along with consumer sentiment and personal income & spending, including the all-important PCE measure of inflation.

Monday is a public holiday in NSW, the ACT, Queensland and South Australia. The ASX is open, but few banks and brokers will be. There will be no research to speak of. FNArena will thus publish a Monday Report but that will be all we can provide.

On Sunday night summer time begins in relevant states in Australia. This means come Tuesday morning, the NYSE will close at 7am Sydney time.

Rudi will link up with Sky Business this morning, through Skype, to discuss broker calls around 11.05am. Later he will appear in the studio for Your Money, Your Call Fixed Interest, 7-8pm.
 

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By Greg Peel

The Dow closed up 133 points or 0.7% while the S&P gained 0.6% to 2159 and the Nasdaq rose 0.9%.

Ebb and Flow

The ASX200 plunged 60 points on the opening rotation last night, as the computers went wild on the possibility of a European bank going to the wall. As is so often the case in today’s trading environment, humans then stepped in to steady the ship. But there was not a lot of enthusiasm to start buying ahead of what was arguably the most anticipated presidential candidate debate in history.

The debate kicked off at 11am Sydney time and immediately the ASX200 began to rally. The index then flattened through the course of the one and a half hour ordeal (can you imagine having to sit through Turnbull/Shorten for a full 90 minutes?) and thereafter rallied in a second wave. The opinion is Clinton emerged a victor, or more realistically, an under-prepared Trump was a clear loser.

The rally back did not so much represent the opinion of Australian investors on the matter but rather what was going on in offshore markets at the time. The Dow futures rallied, suggesting a stronger session for Wall Street last night. The Mexican peso soared, suggesting forex traders had clearly given the debate to Trump.

What we can conclude from last night’s action is that global financial markets want a Clinton victory. By default, market capitalists are typically Republican supporters. But The Donald is not your average Republican and even if his fiscal policies are more appealing to Wall Street, the thought of Trump holding the launch codes is just too frightening. Hillary Clinton has very few fans on Wall Street, but it’s better the devil you know.

So yesterday afternoon the European banking crisis was put aside. The local financials sector ultimately closed down 0.8% nonetheless to provide the biggest market cap influence in the final 0.5% market loss. What we didn’t see was an offset from the energy sector which we might have assumed given the oil price had rebounded. But again, our own time zone came into play.

With the OPEC meeting yet to be held, Iran declared it had no interest in freezing production. Hardly a surprise, given Iran has said all along it will only consider a freeze once it has returned to pre-sanction production levels. So the meeting will again be a dud, but there is scope for an agreement to be reached at the regular OPEC meeting at the end of the year, assuming that by then Iranian production will have reached the target.

Oil futures fell on the news and as a result, the local energy sector closed down 0.8%. All sectors finished in the red yesterday bar healthcare, which jumped 1.3% thanks to ever popular CSL.

Status Quo

As all commentators are noting, there are two more presidential debates yet to be held and a vice presidential debate to boot before America goes to the polls. History suggests many an undecided American voter makes up their mind after the first debate, but history also shows winners of the first debate do not always become president.

Few on Wall Street like Obamacare, Dodd-Frank or the TPP but The Donald is just too much of an unknown factor and the greatest enemy of markets is uncertainty. A Democrat victory implies maintenance of the status quo, and while not encouraging, it’s better than the alternative. So sayeth the market.

Realistically, last night’s rally on Wall Street occurred before the market opened. The Dow futures had rallied 0.6% on the debate and the Dow closed up 0.7%. There was a bit of a stumble early given the drop in the oil price, also already in place thanks to electronic trading. But oil did manage to come back from a fall closer to 3% to this morning be down only 1.5%.

Wall Street also saw data early in the session that showed the Conference Board’s monthly consumer confidence index had risen to 104.1 to represent the highest level of confidence since August 2007, just before the world started to fall apart. This news had a double impact.

Firstly, strong consumer confidence is very good news for an economy 70% reliant on domestic consumption. Secondly, history shows that strong consumer confidence numbers heading into an election typically signal a return of the incumbent party. This makes logical sense.

The morning session was still affected by lingering bank fears nonetheless, until a US Department of Justice official came out to say Deutsche Bank could have its US$14bn mortgage-related fine reduced if it is prepared to cooperate with the authorities. Deutsche Bank shares didn’t exactly rebound on the news but they did steady, allowing Wall Street to focus more specifically on domestic politics.

The US ten-year bond yield nevertheless continued to slide, down 3 basis point to 1.56% last night, in line with ongoing weakness in the German equivalent as this latest bank crisis plays out.

Commodities

The Donald, it appears, is a risk factor. Aside from US bond yields which are playing a different game, last night saw Wall Street up, the US dollar up, the Aussie dollar (perceived as a risk currency) up, and gold, the main sovereign risk indicator, down. In other words, it was ‘risk off” all round last night on Clinton’s perceived victory.

The US dollar index is up 0.2% at 95.47, the Aussie is up 0.4% at US$0.7667, and gold is down US$10.90 at US$1327.00/oz.

West Texas crude is down US69c at US$44.94/bbl.

It was another mixed bag for base metals, with nickel, lead and zinc all up 1% and copper and aluminium down 1%.

Iron ore fell US20c to US$56.20/t.

Today

The SPI Overnight closed down 6 points. We can interpret the mild weakness as a suggestion Wall Street’s debate-related rally last night was already reflected in yesterday’s comeback for the ASX200 from opening lows, and that oil price weakness had already been assumed.

OPEC will meet tonight but nothing is expected.

Janet Yellen will make a bi-annual testimony before the House financial committee tonight, and US durable goods orders numbers will be released.

AGL Energy ((AGL)) and ASX ((ASX)) will hold AGMs today and there are a handful of ex-divs, including Myer ((MYR)).

Rudi has swapped his usual Thursday appearance on Sky Business and thus will make his appearance today, 12.30-2.30pm.
 

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available in the FNArena Cockpit.  Click here. (Subscribers can access prices in the Cockpit.)

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

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

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