By Greg Peel

Float on By

Perhaps we can blame the IMF, which told Beijing recently, in rejecting China’s application for the renminbi to be included in the fund’s basket of global reserve currencies, that Beijing must first let the renminbi float. A PBoC devaluation is not a float, but the intention is to take a step towards such a goal. Yesterday the PBoC followed up Tuesday’s 1.9% renminbi devaluation with a further 1.6%.

The central bank did so because that’s where the market was indicating the renminbi should be. The Chinese currency is pegged only to the US dollar, and in revaluing the currency over the past several years against the greenback alone, the PBoC has failed to account for large valuation variances against other major currencies, such as the yen and euro. In devaluing, the PBoC is trying to find the right overall level.

The problem yesterday was that the PBoC responded to the market but then the market went again, selling the renminbi down further in what threatened to become a self-feeding spiral. Thus on the close of trade in China (long after the close on Bridge Street) the central bank intervened to stabilise the currency.

This is not a sinister response – every central bank, including the RBA, intervenes on occasion to prevent excessive currency volatility.

But it does show that Beijing is nervous, and highlights that the Chinese government is rather new to this game. The stock market debacle of last month was enough to give them the willies and so yesterday they got a little jumpy again. The issue for the rest of the world is one of just how bad is the Chinese economy right now? While the currency devaluation may have come at the IMF’s behest, there’s no masking the fact this is Beijing’s “shock & awe” stimulus tactic.

But as opposed to Beijing’s massive fiscal stimulus package of 2008, this form of stimulus is linked directly into the global financial market system. There is now great concern what the impact will be on Other Asia, which is so closely tied to the Chinese economy, and to emerging market colleagues such as Brazil, which is already struggling, and to the economies of China’s major export competitors such as Japan and Germany, who now see their respective QE measures – to date showing relative signs of success – undermined.

And what does it mean for Australia?

Delayed Reaction

I can admit now Tuesday’s action on Bridge Street had left me somewhat confused. In the wake of the first renminbi devaluation, why did the materials and energy sectors stubbornly rise 1% on the day, when all other sectors fell, as if the previous night’s jump in metal prices was all that mattered? Was a 1.5% plunge in the Aussie in sympathy really enough to negate the impact?

Looking at yesterday’s action I can only assume Bridge Street did not know how to respond. By yesterday morning, following big overnight falls in commodity prices and on Wall Street, it was clear. The materials and energy sectors both plunged over 3%.

It was a perfect storm. Chinese currency aside, we saw poorly received earnings reports from the likes of Computershare ((CPU)), CSL ((CSL)), Carsales.com ((CAR)) and REA Group ((REA)). And in opening lower from the bell, the ASX200 broke down out of its longstanding trading range. From there we could throw in the technical trade. First stop 5380, next stop 5100.

And where did we stop? 5380.

Bear in mind also that the biggest stock on the market – Commonwealth Bank ((CBA)) – was in a trading halt, having announced a 10% discounted $5bn rights issue.

Rebound

Mario Draghi must be shaking his head in despair. The QE package he introduced earlier in the year had, in the background of the whole Greek farce, been quietly working. Major export economy Germany, along with France and others, had begun to see economic improvement. And now this.

The German and French stock markets dropped over 2% each on Tuesday night, and another 3% plus each last night. When Wall Street opened, mid-session in Europe, the selling flowed across the pond.  In the first hour of trade in New York the Dow was down 277 points on heavy volume. But at the same time, the S&P500 reached the bottom of its 2015 trading range.

The selling suddenly stopped. On lower volume, Wall Street began to turnaround. Whether it be bargain hunting, short covering or both, the indices ran all the way back to square.

One consideration is that the renminbi devaluation may once and for all take September off the table as the Fed’s lift-off date. Maybe 2015 altogether. Although there is still debate. Whatever the case, the US dollar index fell 0.9% last night to 96.31, suggesting a delay is now the pervading expectation.

The US ten-year bond yield had seen its big fall the day before, and last night was only down another point to 2.13%.

The plunge in the greenback is not good news for the Australian economy. Having fallen a cent on the first renminbi devaluation, the Aussie fell another half a cent on yesterday’s second devaluation. If the Aussie could keep roughly in step with the renminbi, then the AUD-RMB trade impact would be negated. But alas, on the fall in the greenback the Aussie is this morning 0.8 of a cent higher than it was 24 hours ago, and about 1.3 cents higher than its nadir following the second devaluation. It is less than half a cent lower than where it was when the first devaluation was announced.

Commodities

Base metal prices fell again from the open on the LME last night, having plunged on Tuesday night, but then the buyers arrived. Aluminium, nickel and tin still closed lower on the day but copper rebounded 0.7%, lead 1.6% and zinc 1.8%.

Volumes were heavy, as at least some traders were prepared to “look through” the immediate impact of the renminbi devaluation to its intended goal – to stimulate China’s flagging export economy. Growth in exports means growth in raw material demand, albeit at a higher implicit price for the Chinese.

The oils also stabilised, with West Texas closing up US12c to US$43.33/bbl and Brent closing up US35c to US$49.76/bbl.

Iron ore ticked down US10c to US$55.80/t.

The US dollar drop finally sparked some life into gold, implicit of the Fed delaying its rate hike. Gold is up US$16.80 to US$1125.50/oz.

Today

The SPI Overnight closed up 24 points or 0.4%, suggesting that at this stage, the 5380 technical support level in the physical might hold.

Reporting highlights today include Crown Resorts ((CWN)), Fairfax Media ((FXJ)), Mirvac Group ((MGR)), Tabcorp ((TAH)) and the biggie, Telstra ((TLS)).
 

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

By Greg Peel

Soggy

An unspectacular session on Bridge Street yesterday saw the ASX200 drift away from the 5700 yet again, led by weakness in the materials and energy sectors. Utilities and the telco were also out of favour on the day, but may well be popular tomorrow if recent volatility is any guide.

There were plenty of local data points to consume yesterday, but nothing to rock the boat.

ANZ job ads series showed a fall of 0.3% in July but remains up 9.3% year on year. TD Securities’ inflation gauge showed a 0.2% increase in July for a headline annual rate of 1.6% and a core rate of 1.5%, well below the RBA’s 2-3% target.

Home prices leapt again in July, at least in Sydney and Melbourne, and new home sales rose 0.5% in June. The interesting detail here is that detached house sales rose 1.7% while apartment sales fell 2.9%. June building approval numbers, previously released, showed a big drop in apartment block approvals, thus economists are now warning that after a stellar run, the apartment investment boom may have peaked.

The Australia manufacturing PMI “surged” into expansion at 50.2 in July, up from June’s 44.6, but given this series is the most volatile on the planet, and August could just as easily see a “surge” back again, we’ll call it meaningless.

By contrast, the Caixin measure of China’s manufacturing PMI does not appear to lack credibility, and it fell to 47.8 from 49.4. This implies a greater rate of contraction than Beijing’s official numbers.

Japan’s PMI rose to 51.2 from 50.1. The eurozone saw a slight tick down to 52.4 from 52.5 which included a 30.2 reading from Greece, which is not so much contraction but implosion. The UK rose to 51.9 from 51.4.

Deflation Worries

The US manufacturing PMI fell to 52.7 from 53.5, but that was not what caused the most concern on Wall Street last night. Personal spending rose only 0.2% in June despite a 0.4% rise in incomes, and the personal consumption & expenditure (PCE) measure of inflation – the Fed’s preferred gauge -- showed only 1.3% annual compared to the Fed’s 2% target.

And these are June numbers. In July, oil prices began to weaken again, and last night saw another big drop. West Texas crude fell US$1.51 to US$45.30/bbl to mark its lowest level since March, and Brent fell US$2.20 to US$49.65/bbl to breach the psychological 50 barrier.

Weak consumer spending growth combined with falling oil prices create the conundrum facing Wall Street at present. Why have lower fuel prices not encouraged higher spending over 2015? The combination is not only keeping US inflation low but suggesting the potential for a return to disinflation, meaning a lower rate of inflation, at a time the Fed is desperate to lock away its first rate rise.

It’s becoming clear what the US bond market thinks about the September rate rise odds, or even 2015 rate rise odds. The US ten-year yield fell another 5 basis points last night to 2.15%.

The US stock market fell from the open and continued lower through the morning, sending the Dow down almost 200 points by early afternoon. A rebound ensued when the Dow hit the 17,500 mark, but the close was hardly inspiring.

The US dollar index managed to rise nevertheless, by 0.3% to 97.50, but only because the euro fell as the Greek stock market opened for the first time in five weeks. At 20% down on the open it looked ominous, at 30% down mid-session it looked catastrophic, but at 16% down by the close it looked not too bad considering all that has transpired.

There is also the ongoing US earnings season to consider, and with 75% of S&P500 stocks having now reported, the scorecard is not so flash. Some 70% of stocks have beaten on earnings, and net earnings are up 3%, but concern still lies with weak revenue growth. Net revenue has fallen 3% and quite frankly has been falling since the GFC. There are only so many costs that can be cut.

Commodities

The stronger greenback was of no help to commodities, including oil, but just when you thought iron ore might be set to “do an oil” it rose US$2.40 to US$55.30/t last night.

Copper continues to wane, falling another 0.6% last night as all base metals bar lead were again in the negative.  Nickel fell 2.8%.

Gold lost US$9.10 to drop back to US$1086.10/oz on the disinflation play.

The Aussie is 0.3% lower at US$0.7284.

Today

The SPI Overnight closed unchanged, which seems ambitious.

The local focus today will be on June retail sales and trade numbers and, of course, on the RBA statement due this afternoon. While there will be no rate cut, it’s always interesting to read what the board has to say.

On the local stock front, Suncorp ((SUN)) releases its full year earnings result today.
 

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

By Greg Peel

The Dow closed up 13 points or 0.1% while the S&P gained 0.1% to 2128 and the Nasdaq rose 0.2%.

Greece

Greece is no longer in default, having paid the money owed to the IMF, and to the ECB, from the emergency bridging loan provided by the EU in the wake of Greece’s acceptance of the creditors’ reform package.

Last night Greek banks reopened but capital controls remain. Having spent three weeks queuing to withdraw E60 per day, from last night Greeks could withdraw E300 per week and from Saturday E420 per week. Major transfers to foreign banks remain banned, thus the costly disruption to Greece’s economy and capacity to trade continues. From last night, Greeks were hit with widespread price hikes thanks to a VAT increase to 23% from 13%.

How’s our 15% GST hike looking?

For the first time in months, representatives of the EU, ECB and IMF are expected in Athens in the coming week to assess the state of the economy. But the fat lady is still yet to sing this time around. On Wednesday night the Greek parliament will need to pass a second wave of required reforms, which will likely prove the make or break session for Alexis Tsipras.

At last week’s vote, only 123 MPs of the coalition’s 162 seat majority voted in favour of the initial reform package, with 120 required to sustain a minority government. Another round of MP defections could see Tsipras out in the cold, forcing his resignation and ultimately a fresh Greek general election.

It was a general election that got us to this point in the first place.

Now What?

Global stock markets have now reached a state of post-trauma calm and are wondering what exactly to do next. The Chinese stock market has stabilised, for now, and a Grexit appears off the table, for now. The Australian market is currently sitting in the doldrums ahead of the storm that is August result season, although a trickle of outlier reports are due from as early as this Thursday.

Yesterday saw another quiet session on Bridge Street, featuring a modest gain for the index. The energy and materials sectors were the poor performers in an otherwise sector-wide rally. The ASX200 is sitting in between its two important levels of 5600 and 5700, and one assumes upcoming earnings reports will be the catalyst to affect a breach of either.

The Aussie has also stalled, at US$0.7370.

European stock markets were mildly higher again last night, but without any major economic data releases or big-name corporate earnings reports to focus on, Wall Street meandered through its session lacking any conviction. The Nasdaq continued its run of new all-time highs, but with only a minor gain last night.

The Dow and the S&P500 are not yet back at all-time highs but they are back at levels over 18,000 and 2100 respectively, thus once again commentators are suggesting full valuation. There are plenty more earnings reports due yet in the US quarterly reporting season to stir the pot, but we may be in for a quiet time until September when the Fed may (hopefully, to get it over and done with) make its move.

Commodities

An impending Fed rate hike and subsequent strength in the US dollar have not been supportive of the US dollar gold price, and nor is a subsidence global risk. Gold held up but did not manage to rally during this latest Greek crisis, and had to weather the storm of Chinese selling to pay for margin calls on stock positions.

If gold was not going to go up then the only possible direction when the storm subsided was down. Gold had already fallen quietly for seven straight sessions before last night, and was looking vulnerable ahead of the release of Chinese gold reserve data. They came in at half of what the market had assumed, and it was goodnight Irene.

Gold is down US$36.50/oz to US$1096.80/oz to mark a five-year low, despite the US dollar index ticking up only 0.1% to 98.06.

For base metals, the end of Greek and Chinese trauma has coincided with the northern summer shutdown period, in which industrial activity slows to a crawl and buying support fades. Nickel was the only base metal to manage a rally last night (2%) while all the other metals drifted lower once more.

A flip-flopping iron ore price is keeping Twiggy awake at night, but last night saw a flip with a US$1.90 gain to US$51.90/t.

Today

The SPI Overnight closed up 10 points or 0.2%.

The minutes of the July RBA meeting are due tonight, but are unlikely to offer anything new given the June quarter CPI is out tomorrow.

Oil Search ((OSH)) and OZ Minerals ((OZL)) are among the quarterly production reporters today, while Macquarie Atlas Roads ((MQA)) will provide a quarterly update.
 

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