Tag Archives: Europe & UK

article 3 months old

The Overnight Report: Waiting Impatiently

By Greg Peel

The Dow closed down 128 points or 0.7% while the S&P fell 0.3% to 2074 as the Nasdaq managed a 0.2% gain.

Nuts of May

“Members noted that the current setting of monetary policy had been accommodative for some time and that the recent reduction in the cash rate would provide some further support to the economy. They also acknowledged that a lower exchange rate would help achieve balanced growth in the economy. Nonetheless, on the basis of the current forecasts for growth and inflation, members were of the view that a case to ease monetary policy further might emerge.”

And on that note, the ASX200 rallied 66 points yesterday, before settling up 44. All sectors finished in the green bar healthcare. To underscore the connection between the above “confirmation” the RBA will cut again, and the subsequent rush into yield, one need look no further than the energy sector. On Monday energy stocks fell heavily on lower oil prices. On Monday night, further falls in oil prices were even more dramatic, yet yesterday the energy sector was the second strongest performing sector with a 1.5% gain, with only the telco (up 1.7%) more highly sought after.

Why? Because energy stocks now pay dividends, and in the case of Woodside Petroleum, very solid dividends. Never mind that lower oil prices put those dividends at risk.

Interestingly nonetheless, forex traders appeared to focus on a different paragraph in the RBA minutes, released yesterday.

“In considering whether or not to reduce the cash rate further at this meeting, members saw benefit in allowing some time for the structure of interest rates and the economy to adjust to the earlier change.”

This statement sent the Aussie higher, as it dismisses any assumption of the next rate cut coming consecutively in April. The Aussie shot up on this news but clearly as a result of some short-covering, as pretty soon it was back again. Indeed, this morning it is 0.4% lower over 24 hours at US$0.7613. Economists had already assumed May was more likely for the RBA’s follow up than April, given CPI data will be released in between, and they have not changed their minds on the strength of yesterday’s minutes.

No Tit for Tat

The Bank of Japan made no changes in policy at yesterday’s meeting, despite the competition now provided by ECB QE. The BoJ still believes Japan’s inflation rate can rise to 2% over time, despite warning it will probably fall to zero in the months ahead.

The eurozone’s CPI for February showed minus 0.3% year on year, up from minus 0.6% in January. The unemployment rate fell to 11.2% from 11.3%. These numbers, while mildly encouraging, are pre-QE. The more up to date ZEW investor survey for March confirmed confidence remains elevated.

Wall Street Roundabout

In the twelve trading sessions of March to date, the Dow has moved by triple digits in nine of them – four up, and as of last night, five down. And always in opposite directions. No one quite knows why the Dow was down again last night having been up strongly on Monday night, other than the FOMC has now gone into the bunker and that’s as good a reason as any to square up.

Last night’s only major US data release was February housing starts and they were a little weak, but quickly blamed on February snow. Otherwise, the debate still rages as to whether the Fed will remove the word “patient” from its monetary policy statement, and 69% of respondents to a CNBC survey believe it will. As to what that means exactly, again, no one’s quite sure, but the same poll is tipping the first rate rise in August.

The US bond market seems none to perturbed, knocking 4 basis points off the ten-year yield last night to 2.04%. It is the ECB most impacting on US rates at present, not the Fed. The US dollar index is steady at 99.65.

Commodity Slump

The US move to summer time even as the snow still falls in some parts creates a brief window in which the LME is still open on the release of the Fed statement, before the UK also moves to summer time. But last night metal traders were not so concerned about monetary policy as they were about simple lack of demand. Base metals are finding it hard to hold up as oil falls.

Last night copper, lead, nickel and tin all fell 1% or more, with only aluminium offering some resistance.

Iron ore fell US50c to US$57.60/t.

The oils were down again, with West Texas falling US69c to US$43.13/bbl and Brent falling US43c to US$53.50/bbl for the new May delivery front month.

Gold is down US$6.00 at US$1148.70/oz.

Today

The SPI Overnight closed up one point.

This suggests Bridge Street will hang on to yesterday’s gains as we await tonight’s Fed decision, although further falls in the prices of oil and iron ore, and copper and gold, may apply some pressure beyond dreams of another RBA rate cut.

Woolworths ((WOW)) will go ex this morning, amongst a group of ex-ers.

Rudi will appear on Sky Business, 5.30-6.00pm and he will host Your Money, Your Call between 8-9pm tonight on the same channel.
 

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article 3 months old

The Overnight Report: New Low For Oil

By Greg Peel

The Dow rose 228 points or 1.3% while the S&P rose 1.4% to 2081 and the Nasdaq added 1.2%.

Bounce Back

Bridge Street tumbled on the open on Friday morning, initially adjusting to a slew of ex-dividends but going on with it on the back of a weak session on Wall Street. At 43 points down, it looked like it could be an ugly day for the ASX200. The energy sector copped a beating on another big fall in the oil price.

But the buyers appeared once more to force a recovery to only 16 points down by the close. Energy remained the hardest hit sector at 2% down but elsewhere the picture was inconsistent. Utilities and the telco were down 1%, suggesting ongoing concerns over valuations, but consumer discretionary was also down 1% amongst a mixed bag of sector moves.

There was potentially some impetus to buy following the wrap-up of China's People's Congress on the weekend at which the premier assured there were "plenty of tools in the toolbox" to turn around China's flagging economy. Yet the materials sector remained weak on a 0.8% fall.

Europe Surging

While Wall Street bemoans the impact of an ever rising US dollar, European markets continue to enjoy the benefits of the reason for the greenback's rise – the collapsing euro. The German stock index rose 2.2% last night to breach 12,000 for the first time and provided impetus for Wall Street to follow suit. The volatility continues in New York where the Dow has returned to the pattern seen earlier in the year, being triple digit moves in both directions day by day.

The uncertainty behind such volatility is clearly linked to the Fed, which will release its latest policy statement on Wednesday night. Will the word "patient" be dropped, or not? And what does it either mean or matter? No one is entirely sure. What is certain is that US economic data releases continue to disappoint outside of the monthly jobs numbers. Last night saw January industrial production up a weaker than expected 0.1%, while the Empire State activity index fell to 6.90 from 7.78 when an increase was forecast.

The oil price also continues to be a bone of contention.

New low for WTI

West Texas crude traded to a new six-year low last night before recovering slightly to US$43.82/bbl, down US$1.18 or 2.6%. Brent fell US$1.38 or 2.5% to US$53.17/bbl.

The plunge was contributed to ongoing concern over the International Energy Agency's warning last week that prices cannot rebound while the supply glut continues to work through the system.

Metals

LME traders are eagerly anticipating the outcome of the Fed meeting but in the meantime base metals prices are shuffling up and down without really going anywhere. Last night copper was steady, while tin gained 1% as nickel and lead each fell 1%.

Iron ore was unchanged at US$58.10/t.

Gold is down US$3.90 to US$1154.70/oz.

A mix of commodity price movements suggests little impact from a 0.5% fall in the US dollar index to 99.70. The Aussie is steady at US$0.7643.

Today

The SPI Overnight closed up 46 points or 0.8%.

The minutes of the March RBA meeting will be released today and the market will be looking for clues as to when the central bank may cut again.

The Bank of Japan will hold a policy meeting today. Will it be forced to counter the ECB's QE program?

The eurozone sees inflation and unemployment data tonight along with the ZEW investor sentiment survey.
 

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

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article 3 months old

The Monday Report

By Greg Peel

Uncertainty

Up 50 points one day, down 30 the next, as was the case with the ASX200 on Friday. The banks looked good on Thursday but not so much the next day. Friday’s selling was evenly spread across sectors nonetheless, and the session very much had a “Friday” feel about it, but it’s not often Wall Street rallies 1.5% and we respond with a 0.6% fall.

The bounce in the Aussie back over 77 may have had something to do with it, but if we weigh up the week the only conclusion one can draw is one of uncertainty. Will the Fed raise its interest rate this year, and soon? Or not? Will the RBA cut its interest rate next month, or in May, or not? In a market totally dominated by yield investment, with the resource sectors quietly fading into the sunset, these are important questions.

To which no one knows the answer, least of all the central banks themselves at this point.

Storage Wars

The news is not getting any better for the resource sectors either.

When the West Texas crude price bounced back out of the forties and into the fifties, there were plenty of traders prepared to call the bottom. But experienced commentators wouldn’t have it, warning that it mattered not how fast US oil companies could shut down rigs, an actual reduction in supply would take months to achieve. It is more likely, they said, that the oil price will go lower still before a bottom could be called.

Which is exactly what the International Energy Agency was pointing out on Friday night. “Behind the facade of stability, the rebalancing triggered by the price collapse has yet to run its course, and it might be overly optimistic to expect it to proceed smoothly,” an IEA report suggested.

The oversupply issue in North America has reached the point where storage has all but run out. If there’s nowhere to store the stuff, there is no option but to sell straight away. At whatever price. This reality saw the WTI price falling US$2.05 to US$45.00/bbl on Friday night, and Brent chimed in with a US$2.67 fall to US$54.55/bbl. Both falls represented around 4.5%.

Experienced commentators are now reiterating their calls that the oil price will probably fall into the thirties before a bottom is seen.

Wall Street had begun to become a little complacent this past month as the US oil price seemed to at least stabilise around 50. Attention focused on monetary policy instead, hence the big rally on Thursday night driven by the weak retail sales data. But oil companies represent a sizeable market cap of the S&P500, and the expected offset of increased consumer spending, thanks to lower fuel costs, has failed to materialise. US retail sales have declined three months in a row and Michigan Uni’s latest fortnightly consumer sentiment index, released on Friday, showed a fall to 91.2, down from 95.4 at the end of February, in contrast to consensus forecasts of a tick up to 95.5.

Currency Crisis

The US producer price index fell 0.5% in February on the headline rate, and on the core rate, ex food & energy. Economists had expected a 0.3% rise on the headline and a 0.1% rise on the core. The surprise drop has been blamed on the surging US dollar, which is pushing down import prices. While that might be beneficial, the opposite is being suffered by US exporters.

The Yanks are beginning to understand why Australia was frustrated by Fed QE for all those years. On Friday night the US dollar index hit the ton for the first time since 2003. The 0.9% rise to 100.18 was effectively the “wrong way”, based on weak US inflation and consumer sentiment data, but the euro’s fall into the 1.04s was the driving factor.

So having rallied strongly on Thursday night, on Friday night the Dow fell 145 points or 0.8%, the S&P500 fell 0.6% to 2053 and the Nasdaq lost 0.4%. The Nasdaq’s don’t-blink-or-you’ll-miss-it return to 5000 seems but a dream at 4871.

What does the Fed think about it all? We’ll find out on Wednesday night when the latest FOMC statement is released and Janet Yellen holds a press conference.

Metals Steady

The latest jump in the greenback would have done little to help oil’s cause, but the aforementioned Fed meeting kept base metal traders mostly on the sidelines on Friday night. A surprise jump in inventories saw lead fall 2.4%, but all other metals were a little stronger.

Iron ore rose US20c to US$58.10/t.

Gold rose US$5.60 to US$1158.60/oz.

The century mark for the dollar index killed off the brief short covering rally in the Aussie. It’s down 0.9% to US$0.7638.

The SPI Overnight fell 11 points or 0.2%.

The Week Ahead

There is a Fed statement due on Wednesday night. That’s pretty much all that matters this week.

There is, however, a raft of monthly US data due. Monday sees industrial production, housing sentiment and the Empire State manufacturing index. Tuesday it’s housing starts, and Thursday sees the Philadelphia Fed manufacturing index and the Conference Board leading economic indicators. Friday brings the quadruple witching derivatives expiry for US stock markets.

The Bank of Japan will meet on Tuesday and discuss what to do about the fact the ECB has upped the QE ante. The eurozone will see pre-QE unemployment, trade and inflation data next week but also the first ZEW investor sentiment index result since ECB bond purchases began and the euro collapsed.

New Zealand’s December quarter GDP result is due on Thursday.

Aside from vehicle sales data today, Australia’s economic week is all about the RBA. The minutes of the March policy meeting are due tomorrow, an RBA bulletin will be released on Thursday and Glenn Stevens will make a speech on Friday.

This week sees fewer stocks going ex-dividend than we saw last week but still quite a few, particularly today. Today’s exes include CSL ((CSL)) and Leighton Holdings ((LEI)), while Woolworths ((WOW)) is the biggie on Wednesday. Sigma Pharmaceutical ((SIP)) will release its full-year result on Thursday and Myer ))MYR)) will release its interim.

Thursday will also see the expiry of March SPI futures and index options.

Rudi will appear on Sky Business on Wednesday at 5.30pm and later that night, from 8-9pm, he will host another edition of Your Money, Your Call. He will re-appear on Thursday at noon.
 

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

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article 3 months old

Next Week At A Glance

For a more comprehensive preview of next week's events, please refer to "The Monday Report", published each Monday morning. For all economic data release dates, ex-div dates and times and other relevant information, please refer to the FNArena Calendar.


By Greg Peel

Next week will be dominated globally by the Fed policy meeting and release of the FOMC statement on Wednesday night. Fed chair Janet Yellen will also conduct her first quarterly press conference of 2015, on the anniversary of her infamous “six months, something like that” throwaway line of her debut conference.

Her we are twelve months later, and the “six months” call may well still apply with regard the timing of the first Fed rate hike.

The Fed’s decision is “data dependent” and next week’s US data releases include industrial production, housing sentiment and starts, the Empire State and Philly Fed manufacturing indices and the Conference Board’s leading economic indicators. Friday brings the quarterly quadruple witching derivatives expiry for US stock markets.

The Bank of Japan will hold a policy meeting next week, which may be interesting in light of the ECB’s thundering entry to the QE club. Will the BoJ resort to some tit for the ECB’s tat?

The eurozone will see monthly inflation and trade data next week and December quarter unemployment, all of which are ostensibly “pre-QE”. The ZEW investor sentiment survey should, on the other, provide an indication of how QE has been accepted.

The thinking behind the RBA’s decision not to cut again this month will be further explained with Tuesday’s release of the board meeting’s minutes, while Glenn Stevens will have an additional chance to provide colour when he makes a speech on Friday.

Thursday will see the expiry of quarterly futures and index options on the ASX.

There’ll be another round of local stocks going ex-dividend next week, mostly concentrated on Monday.
 

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article 3 months old

EURUSD: Will It Continue To Fall In A Straight Line?

By Kathleen Brooks, Research Director UK EMEA, FOREX.com

This time last week we said that the euro sell off may take a break that the pace of decline in the euro had to slow at some stage; however, we were well and truly wrong. Since last week's ECB meeting the EUR has fallen 600 pips, and is making fresh multi year lows on Wednesday. If we keep up this pace then we could reach parity by the end of this week…

Interestingly, over the same period the spread between German and US 2-year bond yields has only narrowed by 7 basis points, which hardly seems to justify a move of this magnitude. In this environment you can throw away the FX rule book that currencies should move with yield spreads. The FX market loves a trend and the rapid decline in the EUR is evidence of this. The break through 1.0600 this morning suggests that we continue to see more people happy to sell into weakness, rather than waiting for a bounce, which is adding fuel to the EUR decline.

So why the decline in the EUR today? 

  •          Draghi was talking this morning and said that he supported the current ECB policy, which is weakening the EUR, saying that it supports the Eurozone recovery.
  •          After today's speech it does not appear that Draghi is willing to help prop up the EUR, which the market may see as another reason to sell the single currency.
  •          An article in the Wall Street Journal by influential journalist Jon Hilsenrath said that the Fed is likely to drop the term "patience" in regards to the timing of the next rate hike, which could get the market excited about an early summer hike, potentially in June.
  •          It's also worth noting that we have seen the Citigroup economic surprise index tick down for the currency bloc, and tick up for the US, even though US economic data, on balance, continues to surprise on the downside.

As you can see, from a fundamental perspective the decline in the EUR looks like it has gone too far too fast, but that doesn't take into account momentum, a powerful downward force for the single currency right now. If the spread between 2-year German and US bond yields falls by another 7 basis points in the lead up to next week's FOMC meeting, then can we expect a break through parity, maybe beyond?

One thing is for sure, when this rally does pause for breath there could be an almighty short squeeze that could see the EUR claw back some recent losses, especially if the WSJ has got it wrong about the Fed meeting next week (unlikely, in my view). But between now and next week's Fed meeting the path of least resistance is a weaker single currency.

EURUSD: the technical view, potential for a short-term bounce

The break through strong support at 1.0765 is a bearish development, below here support lies at 1.05 – a key psychological level – then 1.0336, the low from 31st March 2003. If we do get a short term bounce, as it looks like we might, then hourly resistance includes 1.0717 – today's intra-day high. As long as we stay below 1.0765 then we expect to see further downside.

From a technical perspective, any strength in this pair will be short-lived, and we continue to expect to see parity. What EURUSD does when it gets to parity could be interesting. One would expect some hovering around such an important and symbolic level before the market makes up its mind whether to clear it completely or bounce from there. We will write about life after parity in another note, for now the EUR still looks toxic.

Takeaway: 

  •          The path of least resistance continues to be lower for the EUR.
  •          The fundamentals may not justify such a big move, but it takes a brave trader to stand in the way of this wave of EUR selling, especially with the Fed meeting only a week away.
  •          The market seems to be pricing in the prospect of the Fed dropping the term patience in next week's statement in relation to the timing of rate rises.
  •          From a technical perspective, the break below 1.0765 is a bearish development that opens the way to 1.05, then 1.0336 – a 12 year low.
  •          Parity is still on the cards and we continue to expect any strength in EUR to be short term in nature.

 
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article 3 months old

The Overnight Report: Patiently Waiting

By Greg Peel

The Dow closed down 25 points or 0.2% while the S&P lost 0.2% to 2040 and the Nasdaq dropped 0.2%.

Volatility

BHP went ex yesterday, which explains the bulk of yesterday’s 2.6% fall for the materials sector and indeed the 0.5% fall for the ASX200. But irrespective of this adjustment, Bridge Street went on a rollercoaster ride yesterday, down 76 points from the open on Wall Street weakness, down only 20 points at lunchtime as the bargain hunters moved swiftly, and down 31 points on the close.

The bargain hunters sought yield, as is evident from a 0.7% gain for utilities and a 0.3% gain for the telco. The consumer sectors were nevertheless down again in the wake of Westpac’s consumer confidence survey, which confirmed the gloom evident in Tuesday’s NAB business confidence survey.

Despite lower petrol prices and an RBA rate cut, consumer confidence has fallen 1.2% this month to be unchanged over a year. Fears of growing unemployment and uncertainty over the federal budget were the major contributing factors.

Housing finance dipped in January, supporting analyst views that some heat might finally be coming out of a previously red hot market. The value of all loans fell 1.0% in the month to be up 7.1% year on year, and the value of investor loans – the driving force – fell 0.1% but are 22.1% higher. These are January numbers, pre-rate cut, so perhaps not an up to date guide, but any cooling in the property market will perhaps have the stock market wondering whether another RBA rate cut really is a given.

Perhaps today’s unemployment numbers hold the key.

China Slows

Halfway through yesterday’s local session, Chinese data for January-February were released. Industrial production growth slowed to 6.8% over the first two months, which is the slowest rate of growth since the GFC and the slowest rate otherwise since data began being kept in 1995.

Retail sales growth slowed to 10.9% over the period from December’s 11.9%, and fixed asset investment slowed to 13.9% from 15.7%. The Jan-Feb data are combined given the New Year holiday and once again, we have to acknowledge the disruption to the data that holiday causes every year. But there’s no hidden silver lining in this cloud. China’s economy is slowing.

Economic growth, analysts note, appears to be markedly weaker than the improved February PMI data, released last week, might indicate.

Greenback Surges

The US dollar index surged again last night, up 1.1% to 99.68 as the slide in the euro accelerated. The euro is now in the US$1.05s and no one sees any reprieve before parity, and likely beyond. Meanwhile, talk continues that the Fed will remove the word “patient” from its FOMC statement next week. While across the market commentators are laughing despite themselves at how everyone is so hung up on semantics, it matters.

Having fallen sharply on Tuesday night, last night Wall Street chopped around without any conviction either way. The market did nevertheless open stronger and close weaker. The countdown is now on to that statement release, due a week from now, and the accompanying quarterly press conference with Fed chair Janet Yellen, her first for the year.

Thus Wall Street may clam up until then, barring any left of field developments, but meanwhile the Germans are saying if it worked for the US, presumably it will work for us too. As the euro keeps falling the German stock index keeps rising. The DAX was up 2.7% last night and is up over 20% in 2015. The same thing occurred in Japan in 2013-14 until fiscal policy changes killed off the excitement.

Any pending fiscal policy changes in Europe would likely be more accommodative rather than restrictive, or shall we say, less “austere”.

Commodity Pressure

The surging US dollar continues to damage commodity prices. All base metal prices were down again in London last night between 0.5-2.0%, with copper down 0.6%.

Tuesday’s bounce proved short-lived for iron ore, which is down US80c to US$57.70/t.

Gold is down US$7.10 to US$1154.70/oz.

Last night’s weekly US crude inventory data showed yet another build to record levels, sending West Texas down US32c to US$48.33/bbl. Greater attention is now being given to the supply balance between WTI and Brent crude, that latter of which is not in oversupply and is more susceptible to geopolitical disruptions. Brent thus rose US$1.32 to US$57.88/bbl last night to re-establish a more realistic spread.

The good news, if there is any, is that all those commentators calling fair value for the Aussie at 75 when we were up over parity are now seeing their chickens come home. A fall over the past 24 hours of 0.4% has taken us to US$0.7598.

Today

The SPI Overnight closed up 5 points.

February unemployment data are out today in Australia. They will be considered critical for the RBA’s next policy decision.

In the US, retail sales data will be tonight’s highlight.
 

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article 3 months old

The Overnight Report: Dollar Demons

By Greg Peel

The Dow fell 332 points or 1.9% while the S&P dropped 1.7% to 2044 and the Nasdaq lost 1.7%.

Turnaround

There was a distinct change of tone on Bridge Street yesterday. Whereas the past month or so has seen buyers always fronting up on any dip, looking specifically for any perceived bargains in yield stocks, yesterday saw the sellers kill off a come-back rally. The ASX200 was up 35 points at midday, only to close flat.

Worrying markets at that time was a surprise jump in China’s CPI, suggesting the PBoC may not have the scope assumed to provide for further stimulus. Headline inflation jumped to an annualised 1.4% in February from January’s 0.8%. However economists were quick to point out that the jump was mostly to do with food prices, which typically see price rises ahead of the New Year holiday, before swinging back the other way thereafter.

Moreover, China’s PPI hit minus 4.8% in February, down from minus 4.3%. Wholesale disinflation is entrenched.

Lack of Confidence

But the real killer of yesterday’s recovery rally on Bridge Street was NAB’s February business confidence survey. Confidence was expected to rebound from its low level thanks to the RBA’s rate cut, but this has not been the case. Confidence fell to zero on NAB’s index from plus 3 in January to mark its lowest level since the federal election.

A lack of confidence in the resource sector is understandable and has a lot to do with the weak number. However the retail sector also expressed its concern, and that sector should have been a clear beneficiary of the rate cut. In general terms, instability in Canberra is weighing on business confidence, and inhibiting the transition towards non-mining capex growth.

I have said it before in this Report – ultimately stock markets care not who’s in power, but investment does need to be underpinned by policy certainty.

The sector breakdown of yesterday’s flat index close told the story. The materials and energy sectors were down on lower commodity prices but consumer discretionary was the worst performer, with consumer staples also in the red.

Earnings Fears

US markets are now in a conundrum. Wall Street had come to accept that while one could argue all day over the specific timing, a Fed rate rise was inevitable eventually. But that’s okay, because it means the US economy is recovering. The Dow and S&P hit new all-time highs and the Nasdaq regained 5000. The US dollar was creeping up in anticipation, but a strong dollar means a strong America.

Unless that dollar is too strong. The ECB’s introduction of shock and awe QE has sent the euro spiralling, and subsequently the US dollar index soaring. Last night that index rose another 1% to 98.62. In late 2014 analysts were predicting 8.0% net earnings growth for the S&P500 in 2015. That figure has now been slashed to 0.8%, and may yet turn negative, as the offshore earnings of US-based global enterprises are whittled away by the ever rising greenback.

Thus when the latest US jobs numbers were much stronger than expected, Wall Street got the jitters. A rate rise may be inevitable but not right now please. Rumour has it the Fed is set to remove the word “patient” from the next FOMC statement, in theory starting the countdown clock for the policy shift. But the dollar is no longer rising on simple rate rise anticipation. It is rising because currencies around the globe are falling.

Bond Strength

A rise in the Fed funds rate should by rights mean a rise in US bond yields, and indeed we did see the ten-year yield spike on last week’s jobs numbers. But whereas last Friday night’s sell-off in stocks was accompanied by a sell-off in bonds, last night’s stock market rout was matched by bond buying. The US ten-year yield fell 7 basis points to 2.13%.

To understand why, one need look no further than the German ten-year, which has fallen to 0.28% (the German five-year is at minus 0.16%), or the French at 0.52%, or the Netherlands at 0.28%. The yields on Italian, Spanish and Portuguese bonds are much lower than the US. Whose economy would you rather back?

It has been suggested that there may not even be enough eurozone bond issuance to meet the intended size of Mario Draghi’s bond buying program, particularly given he won’t buy anything at below the ECB deposit rate of minus 0.2%.

Commodities Carted

Supply-side issues may have provided some sudden strength in copper prices on Monday night but last night all commodity prices were forced to bow to the strength of the greenback. All base metals prices fell 1-2%.

Spot iron ore always marches to its own drummer. It rose US50c to US$58.50/t, which might offer some relief.

West Texas crude dropped US$1.35 to US$48.65/bbl and Brent dropped US$1.96 to US$56.56.

Gold lost US$4.70 to US$1161.70/oz, having suffered its big plunge last Friday night.

Today

The good news is the Aussie’s down a percent to US$0.7625 on US dollar strength. The bad news is the SPI Overnight is down 47 points, or 0.8%, on Wall Street weakness. However, the lower global bond yields fall, the more attractive are Australian yield stocks.

The ASX200 will open with a notable handicap today in the form of BHP Billiton ((BHP)) going ex, along with a few others. Although we probably won’t notice at all.

Westpac’s consumer confidence survey is due out today and if we saw the consumer sectors plunge on disappointing business confidence, it may not be pretty if the more direct consumer survey echoes the same sentiment. We’ll also see housing finance numbers today, to bring the focus back on another RBA rate cut, or not.

China will provide February industrial production, retail sales and fixed asset investment data today.

Rudi will make his weekly appearance on Market Moves, Sky Business, 5.30-6pm and later present to members of the Chatswood chapter of the Australian Investors' Association (AIA), in Chatswood (starts at 7.30pm at Chatswood Club, Help Street).


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article 3 months old

The Overnight Report: Correction Debate Returns

By Greg Peel

The Dow rose 138 points or 0.8% while the S&P gained 0.4% to 2079 and the Nasdaq added 0.3%.

Local Carnage

Bridge Street endured a fairly predictable down-day yesterday, triggered by Friday night’s better than expected US jobs number. The headline on the nightly news was of iron ore stocks leading the market down but this was a mere side show to the real event. The materials sector did indeed fall 1.7% on a new low for iron ore prices, and energy dropped 1.6% on another fall in the oil price, but these were not the big moves.

The big moves were in utilities, down 3.0%, and the telco, down 2.2%. The banks chimed in with a 1.1% fall but industrials also saw a 1.7% drop. The hardest hit industrials were those falling into the same category as all of the above – the yield payers. And we can throw in the REITs, and indeed we can throw in the two big miners and the LNG producers as well.

Yesterday’s drop was not about commodity prices, it was about interest rate differentials. We will likely see another rate cut in Australia but Friday night’s US jobs number suggests we may soon see the first US rate rise. The universal theme of the reporting season just past was overvaluation of yield stocks. A three to one ratio of ratings downgrades to upgrades from brokers is testament. If US rates begin to rise, yield stocks both in the US and elsewhere are less valuable.

Not that the end is nigh and the sky is about to fall. Yesterday was more of a slap on the face to wake the market up from its blind chase for yield. One interest rate rise in the US is not going to kill the goose, given low global interest rates will provide support to the yield story for a long time yet. But there is a point at which prices become just too rich.

Euro Bond Crash

And on the subject of low global interest rates, the ECB began buying eurozone sovereign bonds last night as part of its new QE program and despite yields having fallen a long way, they tumbled a lot further last night. The German ten-year fell 9 basis points to 0.312% and shorter maturities are all in the negative.

Yields across all of the larger eurozone economies were hit, while those of the peripheral basket cases were less impacted. The euro is now trading at a 12-year low at US$1.08, and the assumption is that parity is not far off. European funds will flow out of the continent in search of yield elsewhere, including Australia and the US. The US ten-year yield last night fell back 4 basis points to 2.20%.

Happy Birthday Rally

Renewed buying in the US bond market following Friday night’s big sell-off was matched by a turnaround in US stock markets following Friday night’s jobs-related plunge. While not a specific impetus for the bounce-back, much attention was paid last night to the fact it was the sixth anniversary of the post-GFC rally, with the Dow and S&P500 having hit their closing price nadirs on March 9, 2009.

The rally is now entering its seventh year, encouraging technicians to point out that while six-year bull markets have occurred before, seven-year runs are rare. And the anniversary also reminded Wall Street that we have still not seen a 10% correction since late 2011, and that’s also very rare. We spent an awful lot of time arguing this point a year ago, until the argument quietly fizzled out. While a US market PE of 17x is not a blow-out, it is on the expensive side of history, and that is encouraging the punters to talk correction once more.

Friday night’s response to Fed rate rise fears may have offered a precursor, but they were back in buying stocks again last night. Those debunking the historical arguments over too-long rallies and overdue corrections point out never before in history had the market been supported by QE. This time it’s different. And while the Fed may shortly lift it cash rate for the first time since the GFC, rates will still be historically very low.

Whatever the case may be, it is clear the market is just starting to get a little jittery.

Metal Bounce

Iron ore is down another US20c to US$58.00/t. While 20c is not much, the fact the iron ore price now has a 5 in front of it has the mining community rather concerned. Junior players are trading under water. It seems like a lifetime ago analysts were warning a break of US$120/t would be damaging, but it’s only been a year.

Base metals, on the other hand, staged a bounce last night. The US dollar index was steady at 97.64 but news from Chilean copper miner Antofagasta that it was forced to shut down production due to protesters – locals criticising the mines excessive water consumption – was enough to send the copper price up 2%. This supply-side disruption comes hot on the heels of BHP Billiton’s announced problems at Olympic Dam.

The copper bounce floated all base metal boats last night, albeit only mildly. Lead and zinc each gained 1%. Gold is steady at US$1166.40/oz.

China’s trade numbers, released on the weekend, showed a strong increase in crude imports which provided support for West Texas prices last night, even as ECB bond buying hit Brent. WTI is up US40c to US$50.00/bbl, even though the US does not export oil to China, yet, while Brent fell US$1.27 to US$58.52/bbl.

Today

A little stability may return to Bridge Street today given Wall Street did not go on with the selling last night. The SPI Overnight is up 12 points or 0.2%. Perhaps the bargain hunters will be lurking, particularly given yesterday saw half the country on holiday.

The NAB business confidence survey will be out today and one might predict that political instability will weigh on the numbers. China will release February inflation data today, and probably boost hopes of further PBoC easing measures.
 

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article 3 months old

Draghin The Euro Lower

By Kathleen Brooks, Research Director UK EMEA, FOREX.com

Finally, a good news story for Mario Draghi. A fairly uneventful ECB meeting, apart from one irate local journalist in Nicosia, saw Draghi and co. announce no new monetary measures, instead the focus was on the details of the QE programme, as we had expected. But Draghi also received a boost from the latest round of ECB staff forecasts:

The key points from this month's press conference: 

  •          The ECB QE programme will begin on 9th March.
  •          Draghi confirmed that purchases will be EUR 60 bn per month.
  •          Purchases will be carried out through to September 2016; however, they will continue to buy assets until the inflation rate is close to 2%.
  •          Draghi said that the Eurozone economy has already benefitted from the positive effects of QE.
  •          QE and negative yields: since so many European bond yields are now in negative territory, Draghi confirmed how low the ECB will go. Basically, it will buy bonds with yields that are no lower than -0.2%, the same level as the deposit rate.
  •          ECB staff forecasts for GDP: 2015: 1.5%, 2016: 1.9%, 2017: 2.1%. The forecasts for 2015 and 2016 were revised higher.
  •          ECB staff forecasts for inflation: 2015: 0%, 2016: 1.5%, 2017: 1.8%. The forecast for 2015 was revised lower, while the forecast for 2016 was revised higher.
  •          Draghi said that these upbeat forecasts "is no grounds for complacency" and the Eurozone still has a lot of work to do to get its economy back on track.

The interesting things to note from this press conference:

  •          The ECB remains committed to the QE programme it announced in January. There was no watering down of the proposals, it will still be EUR 60 bn a month, and the programme is essentially open-ended until the inflation rate gets back to close to 2%, currently it is -0.3%.
  •          The staff forecasts seem fairly optimistic for 2016 and beyond. The ECB is hoping that growth will bounce back this year and inflation will also pick up. While inflation could get a boost from the second half of this year as the 2014 decline in the oil price drops out of the index, growth could take longer to pick up to a more normal rate. It took the US five years, and multiple rounds of QE, before the unemployment rate dropped back to 2008 levels. Since the Eurozone economy is coming from an even lower base than the US, it could take a longer period of time and further support from the ECB down the line.
  •          However, because the ECB sees inflation returning to target over the medium-term 2 –year horizon, it takes the pressure off announcing any fresh monetary policy measures or boosting the size of its QE programme by the ECB in the coming months.
  •          Things may look rosy for the ECB today, but it may not stay that way.

The implications for the EUR

Draghi's commitment to QE weighed on the EUR, which made a fresh 11-year low during Thursday's press conference. After some whipsaw action, which saw EURUSD rise to a high of 1.1114, before falling to a fresh low at 1.1005, it closed the European session around 1.1040. Draghi's soothing talk also helped to give European bonds a boost, with yields falling across the periphery and the core. Even Greek bond yields fell back on Thursday.

The longer term outlook for the EUR remains bleak, as relative monetary policy continues to favour a weaker EUR, as European bond yields sink at the same time as US yields continue to extend gains above 2.1%.  We continue to think that a break below 1.10 is on the cards, which would open the way for a move back to 1.08.

However, we would urge some caution. The euro has seen no benefit from the better tone to the economic data of late, while the dollar is surging even though US economic data has been faltering in recent weeks. Thus, we are at risk from an overshoot to the downside for EURUSD, particularly if we get a strong US payrolls number on Friday. If this happens, then we could see short squeeze for the EUR at the start of next week.

The Jack Frost effect:

Winter Nonfarm Payroll numbers are never straightforward. We have the usual statistical errors to deal with alongside the weather effects, with vast swathes of the US covered in snow last month keeping people from finding a job, or employers from advertising. Thus, the bigger risk to the EUR in the next 24 hours could be to the upside for EURUSD, especially if payrolls miss expectations, which are currently an optimistic 235k, according to Bloomberg.

If that happens then we could see a short-term pullback, with key resistance for EURUSD coming in at 1.1241 – the high of the month so far – then 1.1679 – the high from 21st Jan. We continue to think that any strength will be temporary in nature.

Conclusion:

  •          Draghi and co. sounded more upbeat this month as the ECB staff's growth and inflation forecasts were revised higher, however they remain committed to QE.
  •          This weighed on the EUR, boosted European stocks and also helped European bond yields fall across the core and the periphery.
  •          The EUR looks weak, and EURUSD could make a break below 1.10.
  •          However, there is a risk that EURUSD could overshoot to the downside, especially if we get a strong payrolls number on Friday. If this happens then we could get a short squeeze.
  •          Even so, we think that EURUSD could break 1.10 and target 1.08 in the coming weeks, and any period of strength will be temporary.

 
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article 3 months old

The Overnight Report: Euros Leave The Building

By Greg Peel

The Dow closed up 38 points or 0.2% while the S&P gained 0.1% to 2101 and the Nasdaq added 0.3%.

Local Market

The ASX200 spent most of yesterday down between 20-30 points until kicking late in the session to a flat close. We must remember that just about every day this month the index will start the session with a handicap, depending on the number and size of ex-dividends on the day.

No sector stood out much yesterday other than consumer staples, which belied a weak retail sales result for food retailing. The bargain hunters are chasing Woolies.

January retail sales came in at a solid 0.4% growth, ahead of 2014’s monthly average 0.2%. Food retailing was down, down 0.7% while in what has become an entrenched trend, cafes & restaurants took the blue ribbon with 3.6% growth. This includes fast food, which thanks to FTAs and global demand for Australian produce, is much cheaper to buy than fresh food at supermarkets. If Joe wants to wave around his intergenerational frighteners, what about the growing cost to the taxpayer of unchecked obesity?

January’s trade balance data were a clear indication of the impact of the lower Aussie. The trade deficit blew out because the dollar value of imports rose 3.0% while exports rose only 1.3%. The lower Aussie is making imports more expensive while providing a buffer for exports in the face of lower commodity prices.

RBA Deputy Governor Lowe made a speech yesterday confirming the central bank’s easing bias, although he did point out the board did not see a deterioration in activity, rather a lack of recovery. Meanwhile the Chinese premier opened the parliamentary session for the new year with a 2015 GDP growth target of 7.0%, down from 2014’s target of 7.5% and result of 7.4%.

After a burst of short-covering following Tuesday’s lack of RBA rate cut, yesterday’s Chinese news was enough to send the Aussie back down to US$0.7772, or 0.7% lower. However the 7.0% target will not come as a shock to economists, many of whom have to date been forecasting numbers in the sixes for 2015, notwithstanding expected PBoC stimulus initiatives over the year.

Euro Plunges

Mario Draghi outlined his plans for eurozone QE last night as expected but his press conference was upbeat, revealing that the ECB had upgraded its zone economic growth forecasts to 1.5%, 1.9% and 2.1% in 2015-17 given more encouraging recent data. The euro initially rallied on this news but it was the Q&A session which sent the currency plunging to a twelve-year low against the US dollar.

Draghi indicated that the QE bond buying program would not include bonds with yields lower than the central bank’s own deposit rate of minus 0.2%. As a lot of shorter end eurozone bonds are already trading below this level, the ECB will have to go further out the maturity curve with its purchases. This will force down longer rates, and force Europeans to look offshore for longer term yield, implying the sale of euros.

The US dollar index jumped another 0.5% last night to 96.39.

Wall Street Waits

Heavy snow in New York may also have played a part but volumes were very low on the US exchanges last night ahead of tonight’s US jobs numbers. While economists are expecting a solid 238,000 jobs added there’s now talk the February snow may ensure a weaker number, albeit this would correct down the track.

US factory orders data were released last night and showed a 0.2% drop in January to mark six consecutive months of drops. While jobs are a key measure for the Fed, Wall Street is looking at other not so encouraging data releases of late and looking at the surging US dollar, courtesy of monetary easing all over the rest of the world, and worrying about the implications for globally-oriented US stocks.

Iron Ore has a 5

The new Chinese growth forecast of 7.0% has not inspired confidence in the iron ore market. The spot price has fallen US$2.80 or 4.5% to US$59.30/t.

LME traders appeared to be more encouraged by the upgraded eurozone growth forecasts than they were by the Chinese downgrade, with lead, nickel and tin all rallying around 1.5%, while the others were flat.

It was a quieter night in oil markets. Having shot up on Wednesday night for dubious reasons, last night West Texas fell back US87c to US$50.81/bbl while Brent was little changed at US$60.65/bbl.

Gold is also little changed, at US$1199.40/oz.

Today

The SPI Overnight closed up 4 points.

Australia’s construction PMI is out today and over the weekend, China will release February trade data.

The eurozone will offer a revision of its initial December quarter GDP estimate tonight but the biggie will, as always, be US non-farm payrolls.

With the snow tumbling down in the north east, the US will move into summer time over the weekend so as of Tuesday morning, the NYSE will close at 7am Sydney time.
 

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