By Greg Peel

The Dow closed down 12 points or 0.1% while the S&P lost 0.1% to 1852 and the Nasdaq fell 0.4%.

Bank Bashing

Commonwealth Bank ((CBA)) will release its first half earnings results today. While subsequent headlines will focus on the bank’s profit number, under particular scrutiny will be its capital ratio. The same will be true when ANZ Bank ((ANZ)) and National Bank ((NAB)) provide quarterly updates next week.

Yesterday the Australian financials index, which is completely dominated in market cap by the Big Four banks, fell 4.1%, representing by far the biggest fall of any sector on the session. There has been nothing occurring locally to spark such a trashing – it’s all about a rolling global fear that has its centre in Europe.

The European banks are undercapitalised in relation to new international rules which will require domestic systemically important banks (D-SIB, better known as “too big to fail”) to hold more substantial levels of tier one capital. The market is questioning just how these banks are going to reach their required capital levels when they are carrying significant loans to the energy sector and to emerging markets (China, Russia) while facing negligible to negative interest rates across the continent, even out to ten years.

European bank stocks have been sold down heavily and this has flowed across the Atlantic to US banks, prompting many a call of “overdone” given US banks are very well capitalised and at the D-SIB end of the range, have only minimal exposure to energy sector lending.

Australian banks have been under pressure for a while now but yesterday the rolling fear reached across the Pacific. While better capitalised than they have been for many years, Australian banks still face the prospect of requiring additional tier one capital above and beyond international requirements given they punch above their weight in a much smaller economy. On top of that, higher risk weightings on mortgage lending in order to prevent a housing bubble (although that job by now seems to be done).

The bottom line is Australian banks are a chance to cut dividends and may yet need to raise further capital in the equity market. But we knew that. We knew that last year, and bank share prices have been adjusting ever since. The question is: If Deutsche Bank is sneezing, does it mean CBA must catch pneumonia?

Energy (-3.1%) was the next worst performer yesterday while underwater investors looked to raise cash from selling the two best performing sectors of late, healthcare (-2.6%) and consumer discretionary (-2.5%). The “outperformers” on the day were yet again, in times of trouble, utilities (-1.1%) and telcos (-1.1%).

Despite all that transpired in January (China, oil), Australian businesses have remained mildly confident. NAB’s business confidence index yesterday showed a result of plus 2, unchanged from December, but below the long-run average of plus 5.

Bargain Hunting

Deutche Bank shares were on another slide last night on the German bourse when the bank announced it would look to buy back bonds on issue, which had been trading at around 80 cents in the dollar. This turned around Deutsche’s share price and had the same effect to some extent on US bank stocks.

If Deutsche has the capital capacity to retire debt, one wonders just what the problem is beyond a lack of earnings opportunity. That’s probably while one commentator described Deutsche as “rock solid” last night, in defiance of market panic.

The Deutsche announcement was one driver of what proved a choppy session on Wall Street, featuring several ups and downs including 145 points down on the open and 100 points up in the last hour. Outside of financials, oil was again a focus.

Oil prices had begun the day to the upside when the International Energy Agency issued a report suggesting global demand would slow in 2016 just as Iran re-enters the market as a major producer. West Texas crude subsequently fell 5%. Late in the session US energy company Anadarko announced it would cut its dividend to very little. Anadarko’s announcement follows that of ConocoPhillips last week, but Wall Street has been preparing itself for dividend cuts in the energy sector so there was little surprise.

Outside of both banks and oil, Wall Street was likely looking to square up last night ahead of Janet Yellen’s testimony to the House Financial Committee tonight. There is much disagreement from economists over the Fed’s rate hike plans, with the forecast number of hikes in 2016 ranging from zero to four. As to whether Yellen will throw any light on the subject remains to be seen.

Commodities

West Texas crude is down US$1.53 or 5.1% at US$28.40/bbl. Brent is down US$2.14 or 6.5% at US$30.78/bbl.

The falls in oil defied a weaker US dollar, which is down 0.5% on its index at 96.12.

The LME continues to suffer thin trading and enhanced volatility in the absence of China and thus there were not a lot of buyers around last night when Goldman Sachs decided to cut its base metal price forecasts. Aluminium and nickel fell 1.5% and copper and zinc fell 2.5%.

Iron ore is unchanged at US$44.70/t.

After a solid run, gold stalled last night despite the weaker greenback. It’s down US$3.40 at US$1189.50/oz.

The Aussie has also defied the greenback, aided by yesterday’s stock market rout. It’s down 0.4% at US$0.7057 but traded under 70 during yesterday’s session.

Today

The SPI Overnight closed up 3 points.

Westpac will release its monthly consumer confidence survey today while all eyes will be on Janet Yellen’s testimony tonight.

Earnings season today features results from CBA, as noted, along with AGL ((AGL)), Boral ((BLD)), Carsales.com ((CAR)), Cimic ((CIM)), Computershare ((CPU)) and OZ Minerals ((OZL)).
 

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By Greg Peel

The Dow closed down 177 points or 1.1% while the S&P lost 1.4% to 1853 and the Nasdaq fell 1.8%.

Stoic

For the second session in a row yesterday, the ASX200 opened sharply lower and traded back to square by the close. The only difference between Friday and yesterday is that the turn came on Friday in the afternoon, while yesterday the opening plunge of 50 points, in line with the overnight futures price, was immediately reversed. By lunchtime we were square.

Bargain hunters continue to find value in the beaten-down miners, with the materials sector up another 1.2% yesterday. Materials were pipped only by utilities which, as was often the case in late 2015, followed up a down-day with a 1.3% rebound. Outside of tiny info tech (-1.3%), the biggest and most influential loser on the day were the banks, down 0.5%.

Weakness in financial stocks has become a common global theme in 2016.

There was some positive economic news yesterday, with ANZ’s job ads series showing a 1.0% increase in January following a slight fall in December. The series is up 10.8% annualised, maintaining a positive trend that began in 2014, corroborating what for many has been surprising strength in Australian employment.

The trend has eased off slightly over the past six months but still suggests the current rate of unemployment will at least remain steady, ANZ suggests.

But back to the banks.

The Mighty Are Falling

European bank stocks were on a flyer late in 2015 on the promise of increased stimulus from the ECB and rising rates in the US. Rising rates are good for banks and thus US banks were similarly sought after when the world assumed the Fed was now on a steady tightening cycle.

But then came the collapse of the Chinese stock market, reflecting a weaker Chinese economy, and the collapse of oil prices. Market commentators, as I have noted here before, have simply got it wrong with regard the positive benefits of lower oil. If only through sheer fear of a global recession, investors world-wide have turned on the banks. They have flooded into fixed interest in Europe, sending short-end rates negative.

This has impacted on European bank stocks, as has risk of energy sector loan defaults and the fact the big European banks have been much slower to restructure and write down assets since the GFC than their US counterparts. They are undertaking that difficult process now, and in the meantime the likes of Deutsche Bank, Credit Suisse and UBS, for example, have seen their stock prices slammed.

No more so than last night, as the German stock index fell 3.3%, led by the banks. The German ten-year yield has fallen to a mere 0.2% while the fives and twos are both negative. The French and UK stock markets suffered similar falls.

And the mood travelled across the pond.

Fightback

Energy is not the worst performing US sector in 2016, the financials are. To a large degree this reflects a reversal of gains made late in 2015 when a Fed tightening cycle was being priced in, but general concern over a global recession has exacerbated falls.

Around 2pm in New York, the Dow was down 400 points. The banks were leading the way but there was also further pain in energy, as the oil price again fell, and further pain in the “momentum” stocks – those high flying new world names of which I spoke yesterday.

Many a commentator has been quick to point out that it is wrong to rope US banks in with European banks and their various problems. US bank balance sheets are currently very strong after significant deleveraging was undertaken post the GFC. Loan quality is much higher than it was before the GFC given a tightening of lending standards. The US banks are sitting on piles of cash and while hampered by a potential stalling in the Fed tightening cycle, are not in any great danger.

Perhaps this difference was enough to spark the bargain hunters into action late in the session on Wall Street, as the Dow rebounded to close down only 177.

There was also a technical element, given the S&P500 last night opened below its strong support level of 1870. This would have immediately triggered technical selling and served to exacerbate early falls.

There is otherwise no denying a flight to safety among those not bold enough to play stock market bargain hunter. The US ten-year yield fell 11 basis points to 1.74%, and is now down 54 basis points in 2016. Gold has been rallying for the past few sessions, and as the US dollar index fell another 0.4% to 96.61 last night, gold is up another US$19.90 at US$1192.90/oz.

Commodities

Beyond gold, there were also some sharp rallies in base metal prices over night. News of heavy rain shutting down tin mines in Indonesia saw that metal jump 3.5%, while warehouse inventory numbers helped lead and zinc to similar gains. Traders were quick to point out that with the Chinese absent, markets are very thin and subject to volatility.

Meanwhile, aluminium, copper and nickel were all relatively steady.

Iron ore is unchanged at US$44.70/t.

The oil markets have begun to concede that any talk of coordinated OPEC and non-OPEC production cuts was just that. And likely a simple ploy to try to push up prices. In the meantime, US production levels are simply not falling. One reason is that costs are falling, implying breakeven earnings levels are now much lower alongside lower prices.

It’s one reason many a marginal US oil producer remains determined to hold on through the price cycle. For many, the cost of turning off a rig and then turning it back on again exceeds the incremental loss on current barrels of production, so it’s worth trying to stick it out. Of course, this strategy is merely self-defeating. Until production falls, oil prices will not rise.

West Texas is down US94c at US$29.93/bbl and Brent is down US$1.09 at US$32.92/bbl.

The Aussie is up 0.2% at US$0.7085.

Today

The SPI Overnight closed down 64 points or 1.3%. Can we see a third successive fightback?

NAB will release its January survey of local business confidence today.

Shopping Centres Australasia ((SCP)) is among a handful of companies reporting earnings today, while ResMed ((RMD)) and Tabcorp ((TAH)) go ex-div.
 

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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