Tag Archives: Europe & UK

article 3 months old

The Overnight Report: Fed Focus

By Greg Peel

The Dow closed down 22 points or 0.1% while the S&P lost 0.1% to 2097 and the Nasdaq rose 0.4%.

Inevitable

There is much talk at present on US business television of the runaway performance of the S&P500 utilities sector over the past two years, in which downstream energy companies for example can offer, heavens above, yields in excess of 4%! And inevitably there is also much talk of this sector, and to a lesser extent the similar telco sector, being overpriced and a dangerous space to be buying into right now.

The Australian utilities sector can offer yields of 7% or more, particularly from infrastructure funds, when the differential on the US-Australian cash rate is only 1.5%. Thus it is no surprise the local utilities sector has also outperformed, and very much outperformed in the latest round of plummeting global interest rates post Brexit.

Yesterday saw a choppy session in the local market but ultimately every sector finished in the green. Except, that is, for utilities, which fell 0.9%. Telcos rose 0.5% but unlike the S&P500, in which telcos are not a big market cap, the gorilla that is Telstra is a must-have for any index fund and any offshore “Buy Australia” trade.

It was a good day for the banks, resource sectors and consumer sectors yesterday. Unfortunately it may not be so today. Late yesterday, ratings agency S&P put the country and the big four banks on negative watch implying, in the case of the country, the possible loss of a coveted AAA rating.

S&P has banks across the globe in the spotlight post-Brexit so no surprise there. These fools are geniuses when it comes to telling companies the risks have increased after the risks have increased. Pre-GFC, a brown envelope would have sorted the issue. In the case of the country, it’s all about political uncertainty post-election. There was likely some influence in yesterday’s rally from the ongoing improvement in the Coalition’s seat-count, and the increasing possibility of a majority government.

So not that much to worry about. The Aussie took a dive on the news but has since recovered to only be down 0.5% over 24 hours at US$0.7478, with the US dollar index up 0.2% at 96.24.

As to how investors respond to the banks today is another matter, if capital raising fears return. Meanwhile, a near 6% plunge in the oil price overnight does not bode well for energy today, which was yesterday’s outperformer with a 1.6% gain. Metals prices are also lower this morning, including that of gold.

Wall Street may have closed a little weaker but a 0.4% drop in the futures hints of greater weakness locally.

All About Jobs

With the pound now trading below 1.30 to the US dollar, the FTSE 100 continues to rally. It was up another 1.1% last night. It is also hoped that the weaker euro can help overcome both Brexit-inspired risk in the EU and last night’s news German industrial production took a dive in May, pre-Brexit. The German market still managed at 0.5% rally.

Wall Street opened to the upside last night, sending the S&P500 clearly through the 2100 resistance level. But then the weekly US oil inventory numbers came out.

US oil inventory numbers are a strange thing. Every week, early in the week, the American Petroleum Institute publishes its assumption on inventory changes from the week before. Then later in the week, the Energy Information Agency publishes what are considered to be the official numbers. And rarely, if ever, do the two correlate. Indeed often the results are wildly different.

On Thursday night the WTI price rallied on the expectation of a bigger than expected drawdown last week, which makes sense at the height of the summer driving season. Last night the EIA numbers indicated that the drawdown was only about average – in other words, a lot less than the market had priced in. Thus WTI plunged, it is currently down US$2.72 or 5.7% at US$45.19/bbl.

Week on week numbers may be influential but the reality the oil market is facing is that when WTI trades up to 50, some of those rigs that were shut down over the past year are fired up again.

On the back of the oil price, the Dow fell from being up 66 to being down a hundred. But then it quietly made its way back.

The ADP private sector jobs number for June came in at 172,000 when 158,000 was expected. The forecast for tonight’s non-farm payrolls number is 210,000, which is a big step up from May’s shock 38,000. Not only will the June number be very much in focus tonight, but so too will be the inevitable revision to the May number. Revisions of US data can often be very substantial given the rush to get some sort of early guesstimate out as quickly as possible.

If it is a big number, and big revision, tonight, do we go back to expecting a September Fed rate rise? Or has Brexit put the kybosh on that concept now for the foreseeable future?

That is the question no one can answer right now. Tonight’s market response will indeed be interesting.

Commodities

As noted, West Texas crude is down US$2.72 or 5.7% at US$45.19/bbl.

Base metal prices were all weaker in London, with copper leading the way down 1.6%.

Iron ore fell US60c to US$55.20/t.

Gold finally had a down day, but only by US$3.40 to US$1359.80/oz.

Today

The SPI Overnight closed down 21 points or 0.4%.

The world once again awaits the US jobs numbers.

Beijing will publish Chinese inflation data on the weekend.
 

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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article 3 months old

The Overnight Report: Turnaround

By Greg Peel

The Dow closed up 78 points or 0.4% while the S&P rose 0.5% to 2099 and the Nasdaq gained 0.8%.

Finding Support

The local market traded down from the opening bell yesterday in line with offshore markets. Banks are in the frame once more – both globally as a result of Italian bank fears and domestically through ongoing talk of a Royal Commission – while dips in commodity prices saw pullbacks for both the materials and energies sector.

At midday the ASX200 was down 80 points and it looked like we may be in for another nasty capitulation session but at the support level on the charts of 5150, the buyers decided to move in.

Large caps were in favour as falls in the banks and resource sectors were pared, leaving financials down 0.8% on the day, materials down 1.1% and energy down 1.8%. But it was otherwise clear what investors were looking for.

In a world of record low interest rates, including negative ten-year bond rates in Japan and Germany, a new record low ten-year yield in the US, and in Switzerland, a fifty-year bond rate that has dipped into negative, the search for yield has become ever more inspired.

Yesterday saw only three sectors finish in the green on the local bourse – utilities, telcos and consumer staples.

There was also a growing indication, as the afternoon wore on yesterday, that the coalition is clearly leading the count to determine the undecided seats and there is a slim chance it may even get over the line for an actual majority. If it doesn’t quite make it, there may only be the need to bring a couple of cross-benchers onside and thus avoid having to deal with the left-leaning members. The Kat in the Hat is one candidate, and Mr X is a reasonable man. The chance of an unworkable government and ongoing uncertainty has reduced.

And that’s a relief for the stock market, even if it were Labor in the same position.

The buyers were confident to take the index back to the 5200 level yesterday, and with Wall Street turning around for a positive close last night, the futures are pointing up 35 points this morning.

Don’t Panic

The bank story and Brexit flow-on story was not getting any less alarming last night as the London stock market fell 1.2%, Germany 1.7% and France 1.9%. As is typically the case, such selling carried over the Pond.

The Dow was duly down 127 points around 11am. But at that point a Dutch EU official suggested that there should not be any problem in Italy citing exemption rules in order for the Italian government/central bank to bail out troubled Italian banks with liquidity injections. Interestingly, the Netherlands is one EU member that has already seen the prosecution of new “bail-in” rules with regard Dutch entities.

We recall from yesterday that Germany had suggested Italy cannot call an exemption and Italian banks would be forced into “bail-in” measures to avoid going under, which would have left mum & dad investors with haircuts on the bond holdings and fire up more EU unrest. Brexit, Germany believes, is not a “systemic event”. It seems not all agree.

At the point at which the Dow was down 127 points the US ten-year yield hit another new record low, down 5 more basis points at 1.32%. But the Italy news turned the US stock market around in a flash – driven by the banks – and at the same time the ten-year yield rebounded to close up 2bps on the session at 1.38%.

Not long ago it was oil, now it’s bond yields.

Oil actually did have a solid session nonetheless, recovering 2% on weekly data showing a bigger inventory drawdown than forecast, and on a slightly weaker greenback. The greenback also reversed on the Italy news and as such is down 0.2% over 24 hours at 96.00.

The other news of the day was the release of the minutes of the June Fed meeting. They revealed a split committee, but at the end of day the doves won over the hawks by suggesting it was not the time to raise US rates when rates across the rest of the world were heading the other way. And we recall that the June meeting was held pre-Brexit vote, when the US ten-year traded as high as 1.75%.

So if low global rates were a reason not to move higher in June, lower global rates surely prevent any hike late this month or perhaps in 2016 altogether. But tomorrow night sees non-farm payrolls, which could well throw the cat amongst the pigeons once more with regard the strength or lack thereof of the US economy.

On that note, Wall Street was heartened by the June services PMI number, which showed a much bigger than expected jump to 56.5, reversing apparent weakness in May.

We note the S&P500 is back at its favourite pivot level of 2100.

Commodities

West Texas crude is up US$1.05 or 2.2% at US$47.91/bbl.

The nickel price has been flying all over the shop of late, with volatility centred on whether the new Philippines government will force the closure of some smelters. Last night saw nickel jump 3% in an otherwise mildly weaker session for base metals.

Iron ore is unchanged at US$55.80/t.

The pressure may have eased on Italian banks but the incremental climb in the gold price continues. It’s up US$7.00 at US$1363.20/oz.

The Australian stock market bounced off its lows yesterday and the Aussie also began a rebound from the previous session’s falls which carried on offshore. It’s up 0.8% over 24 hours at US$0.7518.

Today

The SPI Overnight closed up 35 points or 0.7%.

The local construction sector PMI is out today and in the US, the ADP private sector jobs report for June will provide a precursor for Friday night’s non-farm payrolls.
 

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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article 3 months old

The Overnight Report: Italeave?

By Greg Peel

Hitting Home

The concluding paragraph of the RBA’s monetary policy statement last month read:

“Taking account of the available information, and having eased monetary policy at its May meeting, the Board judged that holding the stance of policy unchanged at this meeting would be consistent with sustainable growth in the economy and inflation returning to target over time.”

Yesterday’s new statement made the following statement with regard Brexit…

“Any effects of the referendum outcome on global economic activity remain to be seen and, outside the effects on the UK economy itself, may be hard to discern.”

…and then concluded as such:

“Taking account of the available information, the Board judged that holding monetary policy steady would be prudent at this meeting. Over the period ahead, further information should allow the Board to refine its assessment of the outlook for growth and inflation and to make any adjustment to the stance of policy that may be appropriate.”

This conclusion points more to the possibility of an August rate cut than the June statement did. Glenn Stevens, like everyone else, has no idea how Brexit will play out but the central bank is ready to respond. The RBA statement did not, however, offer any joy to the local market yesterday.

On Monday the local market appeared to shrug off the possibility of a hung parliament and focus more on stronger commodity prices. Yesterday saw a sharp reversal however, which may reflect the possibility of fiscal stalemate hitting home in a delayed reaction, but I’d hazard a guess and suggest what we saw was foreign selling following the US long weekend.

Selling was relatively even across sectors, with the banks understandably among the leaders with a 1.3% fall while 0.5% for materials reflected an offset from stronger iron ore and gold prices. Utilities was the only sector not to fall, given its attraction as a bond proxy, while the leading 1.9% fall for consumer discretionary had an additional local feel to it.

The ASX200 fell steadily in the morning and had basically reached its closing level by midday, with no late cavalry appearing. No RBA rate cut had been expected, so there was no response to the statement release in the afternoon. The Aussie saw a choppy session before offshore movements took over last night.

There is little doubt the Australian economy is facing a new source of uncertainty in the form of a non-government, but that’s nothing compared to ongoing uncertainty in Europe.

Banking Crisis

The Bank of England last night relaxed regulatory requirements on the UK banking sector and thus effectively released 150bn pounds of new lending to businesses and households. But this did nothing to stem the ongoing fall in UK bank shares. The FTSE 100 actually closed 0.4% higher last night but as is now oft noted, the 100 contains big multinationals such as mining & energy and pharma stocks, as well as banks, and these benefit from the lower pound.

Bank shares fell again on news overwhelming cash outflows from UK commercial property REITs had forced the suspension of redemptions from some funds. But the focus was not just on the UK, but on Italy.

Big falls in EU banks stocks post Brexit have brought into focus the parlous state of the Italian banking system, where non-performing loans are running at some 17% -- ten times more than in the US. The world’s oldest bank, Monte dei Paschi, has stuck its hand up for a bail-out but there is a problem.

As of this year, new “bail-in” rules have been in place in the EU. These prevent any direct EU injection of bail-out funds ahead of bank bondholders taking a haircut on the value of their holdings, thus reducing the bank’s interest cost as an inside form of bail-out, or “bail-in”. But the issue here is that most of the bondholders of the likes of Monte dei Paschi are mum & dad investors, not global hedge funds or sovereign wealth funds.

Italy is thus calling for exemption rules to be triggered with regard bail-in, as is allowed in the case of a “systemic event”. Is the Brexit vote a “systemic event? Germany says no. Forget about the Netherlands being the next in line. Talk is now of “Italeave”. No doubt freelance exit consultant Nigel Farage will stick his hand up as an advisor.

The Italian bank sector is down 50% post-Brexit. Last night the French stock market fell 1.7% and Germany 1.8%.

European selling flowed into Wall Street as US traders also dealt with a 4% drop in the oil price. If Brexit jitters are not alone sufficient to spook the oil market, ongoing falls in the pound and euro had the US dollar index up last night by 0.8% to 96.22, and there is renewed concern of US supply ramping up again now WTI has seen US50/bbl once more.

Wall Street has seen a complete Brexit rebound, so last night traders were suggesting a hundred point drop for the Dow is hardly surprising given uncertainty still reigns and is there is little reason to suggest this won’t impact on the US, albeit the US looks ever more like a safer place to invest.

On that note, last night the US ten-year bond yield fell 9 basis points last night to a new record low of 1.37%.

Commodities

West Texas crude is down US$1.87 or 3.8% at US$46.86/bbl.

Uncertainty and the stronger greenback hit base metal prices, with copper and lead down 1% and nickel plunging 5%.

Iron ore fell US10c to US$55.80/t.

Gold is up US$5.60 at US$1356.20/oz. While few disagree gold is the safe haven du jour, in US dollar terms it is fighting a very strong headwind.

The good news is the Aussie is down 1% at US$0.7462.

Today

The SPI Overnight closed down 19 points or 0.4%. There is likely some consideration here that yesterday’s trade on Bridge Street was ahead of last night’s trade offshore.

The minutes of the June Fed meeting are out tonight, which will include a nod to Brexit risk being a reason not to raise. But as the meeting was held pre-Brexit, relevance will be limited.

Rudi will be presenting in Melbourne today, plus participating in the first Evening With Rudi with local FNArena subscribers.
 

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

article 3 months old

The Overnight Report: As You Were

By Greg Peel

The Dow closed up 235 points or 1.3% while the S&P rose 1.4% to 2098 and the Nasdaq gained 1.3%.

Wet Sail

The US broad market index last night traded back almost to 2100 last night which is roughly where it was before the Brexit vote. The FTSE rose yet another 2.3% to put it well above its pre-Brexit level. Yesterday the ASX200 made it back to 5233 which is still short of the 5280 close on the Thursday before Brexit.

The futures are indicating up 49 this morning which would imply a complete recovery, but there are other factors to consider.

Firstly, a big chunk of dividends went out on Wednesday, so add that back and we’re close anyway. But secondly, yesterday was end of financial year so we have to consider just how much of the 91 point rally was genuine buying and how much was fund manager window-dressing. Today might be the tell-tale, but then today is a Friday, and Fridays will often bring profit-taking after solid gains for the week. Monday is July 4, meaning no Wall Street, just to provide more reason to square up and enjoy the weekend.

Healthcare was the biggest mover yesterday with a 3.4% gain. Healthcare was initially hit hard by Brexit given UK/EU exposure so it makes sense some ground might be recovered, but a 28% jump by Mayne Pharma ((MYX)) following an announced US drug deal and capital raising also helped.

Elsewhere the moves were more even but what did catch my eye is the 1.4% gain for telcos and 2.3% gain for utilities. These two sectors mostly held their ground as defensives during the brief Brexit panic, so why do they need to come surging back? This is where window-dressing may be apparent.

It is also possible the market was further assisted by the latest election polls, which suggest the coalition is fairly safe. Stock markets are not particularly biased towards either party but do prefer status quo over uncertainty.

There is also an Australian economy actually still ticking along in the background, which we now perhaps can refocus on.

Private sector credit rose by 0.4% in May to be 6.5% higher year on year. Housing credit rose 0.5% for 6.9%, down from 7.0% in April and below last year’s 7.5% peak. Within that figure, investment housing credit rose 0.4% for 6.0%, down from 6.5% in April and 11.5% a year ago. Business credit rose 0.3% for 7.1%.

The numbers indicate overall credit is rising modestly, and housing credit is slowly losing pace. Business credit growth is not yet outperforming to offset this decline. There is nothing here to prevent another RBA rate cut.

Back to the Fed

The London stock market rose another 2.3% last night while France gained 1.0% and Germany 0.7%. The continental markets are still well below their pre-Brexit peaks but the FTSE 100 is now above its peak. The explanation is as straightforward as the much lower pound. Britain’s GDP is roughly 80% weighted to the export of goods and services.

But London’s broader market FTSE 250 has not found its way back. This index encompasses more of the smaller companies that will be hit by a slower UK economy, if that is to be the case. The BoE thinks it will be the case, hence last night guvna Mark Carney all but confirmed monetary easing sooner rather than later, which provided another boost for stocks.

So, we’re back to being under the spell of central banks. And that brings the focus back on the Fed. Brexit, so far, has not resulted in global meltdown. As to whether it might ultimately set in train total EU disintegration will be a longer term story. Is the Fed now comfortable enough to raise in the Brexit wake?

Despite many on Wall Street assuming no further hikes this year or next, it will still come down to next Friday’s June US jobs number. If that shows a big reversal from the May shocker, talk of a possible September hike will reignite. However if the Fed decides it needs to wait for the actual Brexit lever to be pulled by whoever is the new British prime minister -- and it won’t be Boris -- and assess what transpires, then December is more likely, if at all.

It was also end of quarter/half on Wall Street last night and as such commentators were suggesting the rally back to the pre-Brexit level also no doubt involved an element of window-dressing. And because it’s a Friday before a long weekend tonight, the chances of profit-taking are high.

Commodities

There was certainly end of quarter profit-taking in oil last night, according to oil traders. West Texas crude suddenly took a dip just ahead of the day’s official close and is currently down US$1.14 at US$48.40/bbl.

Base metals were all higher in London, but none by as much as 1%.

Iron ore rose US80c to US$54.20/t.

Stock markets continue to rally but gold is hanging in there, up US$3.40 to US$1321.70/oz despite the US dollar index being up 0.25 at 95.88.

The Aussie is steady at US$0.7442.

Today

The SPI Overnight closed up 49 points or 1.0%.

Remember China? Today sees June manufacturing and service sector PMIs from Beijing, and manufacturing PMIs from across the globe.

Locally we’ll also see June house prices today, and tomorrow all the pain and suffering will finally come to an end with a sausage sizzle.

Happy New Year.

Rudi will Skype-link with Sky Business around 11.05am to discuss broker calls.


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

article 3 months old

The Overnight Report: What Brexit?

By Greg Peel

The Dow closed up 284 points or 1.6% while the S&P rose 1.7% to 2070 and the Nasdaq gained 1.9%.

Solid

When the ASX200 rose 53 points on the opening rotation yesterday morning, it looked for all the world like the 84 point jump priced in the by the futures  beforehand may prove accurate. But as now is becoming more the rule rather than the exception, the market completely reversed the opening rotation move in the second half hour, which in this case took the index back to only up 20.

We’ve reached the stage at which it is probably advisable for investors, rather than intra-day traders, to stay out of the market before 11am lest they be whiplashed. From 11am yesterday the market resumed its rally, in a slightly more measured fashion. And if a close of up 39 still looks disappointing against the futures’ 84 point call, we must acknowledge that some 60 stocks went ex-dividend yesterday.

Virtually all of those stocks are in the property/infra fund or utility space, ie, big dividend payers. We note that the only sector to post a fall yesterday was utilities, by 0.8%, which would all be dividends. Industrials was the second worst performer, with a 0.2% gain, and that’s where infra funds sit. Financials managed a 0.6% gain despite being where REITs sit.

Otherwise the bigger movers were materials, energy and telcos, with a solid gain also seen in consumer discretionary.

So realistically yesterday saw a bigger move up for the ASX200 than it would appear. With offshore markets posting a second night of solid rallies, the futures this morning are up 73 points. Only a couple of stocks go ex-div today.

But it is the last day of the financial year, so anything could happen, from last minute tax selling to rampant window-dressing. We really need to get today out of the way to see where the local market really stands.

Had a love affair with Tina

There was nothing new to report on the Brexit front last night, other than the fact the London market rallied back another 3.6%, France 2.6% and Germany 1.9%. Hands up those who predicted last Friday that the FTSE would be back where it was by the Wednesday.

The individual sectors within the FTSE are nevertheless looking a bit different compared to Friday. The banks are still shattered, as are any sectors impacted by the lower pound. The resource sectors have helped make up the difference, as have any sectors benefitting from the lower pound.

The pound has come back a-ways, but at 1.34 to the USD is still well below the 1.50 peak of last Thursday. Last night gold, which one might have expected to continue to pull back as panic subsides, rose US$6.80 to US$1318.30/oz. The US ten-year bond yield rose 2 basis points, but at 1.48% is still a long way down from the pre-Brexit 1.75% level.

In other words, the safe havens are still retaining their safe haven status, yet the risk assets that are stocks have wiped out a lot of the Brexit fall. Europe still has some catching up to do, but the UK is back and the S&P500, having fallen from 2100 to 2000, is back at 2070. And having fallen another 11% last night, the VIX volatility index is back below where it was on Thursday, suggesting investors in US stocks no longer feel they need downside protection.

So why is one asset class suggesting risk is now back off but others imply risk is still very much on?

Well firstly, risk must still be elevated because we still don’t know what’s going to transpire vis a vis Brexit, so uncertainty still prevails. Opinions on that matter range from perfect storm to storm in a tea cup. Secondly, central banks across the globe have vowed to provide whatever liquidity injections are required to prevent calamity. It is expected the Bank of England will be forced to ease, it is expected the Bank of Japan will have no choice but to ease, it is expected Mario Draghi’s “whatever it takes” may need further beefing up, and it is now expected the Fed will remain on the sidelines for months, if not years.

If we are to enter a new round of global central bank stimulus, then all of gold, bonds and stocks are places to be. For stocks, central bank support is the “free put”, or safety net. And when yields are even lower now than they were, where else can anyone make a return than in the stock market, particularly the dividend-paying stock market?

There is no alternative. TINA.

And as an aside, one presumes a fresh round of global easing only strengthens the case for another RBA rate cut. Or two.

On the subject of the Fed, last night’s US personal income & spending data for May showed a 0.4% rise in consumption on only a 0.2% rise in income. This is a positive for the US GDP, which is currently forecast to have risen 3% in the June quarter following March’s 1.1%. But the personal consumption & expenditure (PCE) measure of inflation rose 0.2% to take core PCE inflation to 0.9% over 12 months, down from 1.1% in April.

In other words, the US economy may have a healthier quarter but there is no incentive in the Fed’s preferred measure of inflation to raise rates.

Commodities

The drawdown on weekly US crude inventories was indeed substantial last week, while so far the rig count has not risen much at all. This is helping to support oil, West Texas is up US$1.43 or 3% to US$49.54/bbl.

The US dollar index continued to pull back last night, down 0.2% to 95.71. Base metal prices again moved up, slightly, except for lead which jumped 2%.

Iron ore was unchanged at US$53.40/t.

The Aussie is following up commodity prices, rising 1.3% to US$0.7447.

Today

The SPI Overnight closed up 73 points or 1.4%.

Australian private sector credit numbers are due today.

The final revision of the UK’s March quarter GDP is due tonight, over which, presumably, the Poms will ultimately reminisce.

Rudi will make his weekly appearance on Sky Business today, 12.30-2.30pm, and again between 7-8pm on Switzer TV, same channel.
 

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

article 3 months old

Are You Brexhausted Yet?

In this week's Weekly Analysis: Special post-Brexit Edition!

Are You Brexhausted Yet?

By Rudi Filapek-Vandyck, Editor FNArena

"The impact of BREXIT is so vast that we may never fully understand its effect"
[Technology writer Shelley Palmer]

"From now onwards I'll write aluminum, color, lift and gasoline. That'll teach them!"
[One of many popular jokes emerging in continental Europe post-Brexit]

Internet traffic received a significant boost over the past three-four days and it had nothing to do with s_x, g_mbling, celebrity escapades or a popular sporting event.

At first, the world wanted to know how the population in the United Kingdom had voted. Next a global scramble ensued because nobody was genuinely prepared for an overwhelming yes to Brexit.

They did what?!? Now what?

Many thousands of pages have been downloaded and forwarded in PDF reports about potential scenarios and consequences post Brexit. There should be no doubt: Brexit is a seismic event. One that is going to change the world, but predominantly in Europe.

For investors in Australia, key potential impact can be established through three separate, but interconnected factors:

- A retreat in global risk appetite
- Sharp movements in FX crosses
- Downward pressure on global growth

All three factors already had significant impact on financial assets and investment portfolios since Friday. Let's investigate each of them with a little more detail.

Global Risk Appetite Takes It On The Chin

Absolutely flabbergasted was I in the week leading into the vote. Having completely ignored the referendum and its possible outcome up until that point, global investors had a sudden panic attack first, then decided bookies know best, so let's just trust them and instigate a rally in the days leading into the vote.

Complacency all around. No matter the fact polls about voting intentions continued to show a tight race and possible victory for the Leave campaign. Ah well, Harry Hindsight... Markets do NOT always know best. You can bet I'll be referring to Brexit a lot in the years ahead.





Is Brexit of the same magnitude as once upon a time the fall of the Berlin Wall, the collapse of LTCM or Lehman Brothers' demise? It all depends on what follows next. Take 2008 as an example, the last time things really went pear shaped around the world. Investors did not need to push crude oil futures prices to US$147/bbl in a hurry. The Reserve Bank of Australia did not need to hike domestic interest rates. Authorities in the USA did not need to allow Lehman Brothers to fall by the wayside.

In the same vein, it's not what happened on Friday that is going to determine what comes next for the world and for financial markets. That'll be dependent on actions and effects in the aftermath of Friday's historical outcome. Because there are so many unknowns and so many potential negatives, it's but logical for investors to look for safety and shift to a more cautious outlook.

Strategists at Credit Suisse for example, previously among the uber-bulls in Australia and forecasting the ASX200 would be revisiting 6000 by year-end, have now re-adjusted their December 2016 target to 5500. If you think that's not fair, Credit Suisse's new target for the S&P500 is 2000, which is below where the US equities index sits on Monday.

Market strategists at Morgan Stanley, who very much represent the bear camp in Australia, suggest a gradual de-rating for equities might be on the cards now that Brexit is going to highlight the lack of growth and persistent deflation to shaken investors globally. It only requires a few more adverse events from here, suggest these strategists, for their year-end target of 4800 (unchanged) for the ASX200 to be breached to the downside.

Global Growth Takes Yet Another Knock

The underlying message of all of the above is: don't rely on what you thought was going to happen pre-Friday. Scenarios for the remainder of 2016 and following years will need to be re-written. Assuming Ireland and Scotland stay with the Brits, separating the United Kingdom from the European Union is going to weigh on consumer sentiment and on investing and spending intentions of businesses. Not to mention the government's new workload. Apparently a grand total of 80,000 pages in regulations and deals with the European Union need to be revised and renegotiated. This is why many economists are now -base case- predicting an economic recession within 12-18 months.

One logical prediction to make is London's financial hub is going to shrink with Dublin (?) and Frankfurt seen as potential beneficiaries. Europe will not allow its financial centre to be located outside its own boundaries and legal and physical control. The UK is predominantly a provider of services to the continent, of which finance is a major component.

The UK also runs a trade deficit with Europe. It is the second largest member-economy, after Germany, but bigger than France and Italy, and it is a major financial contributor, so there will be a knock-on effect for the continent too.

Luckily, for the rest of the world, Europe might be the world's largest economic region, its contribution to global growth has been marginal at best. Even if Chinese exports were to take a hit, with flow-on effects for demand for natural resources, authorities in Beijing won't hesitate to launch yet another domestic stimulus program, if need be.

Up until now multinational corporations saw the UK as the gateway into Europe. From here onwards staff and offices shall relocate to the continent. The regional government for Wallonie, in Belgium, is already offering sweeteners to businesses considering their options. Morgan Stanley announced it is moving 2000 staff to Dublin and Frankfurt, though the decision was apparently made before Friday's outcome. London's financial hub represents 7% of the UK economy. Some 700,000 people work in the city's banking and finance related industries.

Of more worry is whether there will be a knock-on effect on London's property prices with many a property owner up until the eyeballs in debt.

Time Will Be The Ultimate Judge

Ultimately, the process of divorcing the UK from the European Union will be a lengthy and arduous process. If you're tired of hearing the term Brexit, get ready for its successor: Brexhaustion.

Oddly enough, this might be the saving grace for financial assets and for investor sentiment. Nobody likes to be held back indefinitely by scenarios of doom and gloom that may, or may not, happen sometime into the future. It is well possible that once the dust settles, and everybody gets comfortable with the process taking place, that risk appetite and financial assets recover quicker than anyone dares to predict today.

Then again, Friday's shock has weakened the global economic and financial constituency and it would only take one negative follow-up event to pull financial markets into a negative spiral once again. Back in 2007 investors and policy makers thought all the pain was concentrated in Bear Stearns and a handful of cavalier hedge funds. Turned out there was much more brewing underneath the surface of the US mortgage industry. We don't know yet who has been caught out, what is the damage and whether anyone is fighting for survival after Friday's shock event.

Article 50 of the Lisbon Treaty, only put in place since 2009, determines the UK and the European Union have up to two years to negotiate the intended separation. Time starts when the UK government sends in a formal request, but the current government and its current leader seem in no hurry to do this. Apart from this, nobody believes a separation of this complexity and magnitude can be achieved in only two years. Then there's the realisation sinking in of what it all means. A new referendum to right the wrong? Don't laugh. I grew up in Europe. I have seen crazier things happen.

Ultimately, I believe, the long-winded nature of this saga is likely to assist in the return of risk appetite, exact timing unknown. As said, this is on the assumption no follow-through events are on the horizon.

Meanwhile, spare a thought for central bankers in London, in Frankfurt, in Tokyo, in Beijing, in Washington, and possibly also at Martin Place in Sydney. Models are being updated, revised and re-adjusted as I write these sentences. Maybe there won't be one single rate hike from the US Fed in 2016 after all.

This is why gold (finally) breaking through resistance at US$1300/oz could prove to be one of the pivotal financial events of calendar 2016. (Again: one's exposure should be reverse correlated to the level of comfort with the world post-GFC).

View From Australia

As expected, the three factors mentioned at the beginning of this assessment have done noticeable damage to the Australian dollar and the Australian share market. For investors it now becomes crucial to determine what is the main source behind the retreat in share prices?

If it was purely risk aversion/investor sentiment related, then one should not worry too much. In fact, if that's the sole reason why a good stock has been sold, one might consider snapping up some extra shares, turning the portfolio into a beneficiary of Friday's shock event.

Things are worse if a company has substantial operations or sales in either the UK or Europe, or both. Already, weakness has gripped the British Pound and it is not inconceivable both GBP and euro might be noticeably weaker in months to come. But if translating weaker GBP/euro revenues into AUD remains the core issue, any damage should be short-lived. Investors tend to focus more on underlying operations instead of taking full guidance from FX fluctuations.

Ask yourself, for example, whether weaker currencies are the main game that's going to determine the outlook for Ramsay Health Care's ((RHC)) private hospital operations in the UK and France? Are Amcor's ((AMC)) flexible packaging services for food, beverages, medicines and tobacco products now doomed? Are the utilities in Europe using Hansen Technologies' ((HSN)) software and support facing a lasting downturn in energy demand and prices?

While the overall risk profile for these companies has unmistakably risen, it remains yet to be seen whether there will be any medium term impact outside of FX-related conversion. Regardless, it is probably fair to assume investors will adopt a more cautious approach until a much clearer picture emerges. Apart from the companies mentioned, I think a sizable number of Australian multinationals and exporters find themselves in this position today, including CSL ((CSL)), ResMed ((RMD)), Cochlear ((COH)), Brambles ((BXB)), Domino's Pizza ((DMP)) and Treasury Wines ((TWE)).

At this point in time, I wouldn't worry too much about the small exposures at Wesfarmers ((WES)) and Harvey Norman ((HVN)). Investors will be closely monitoring property markets and prices in the UK to gauge any backlash for the likes of Goodman Group ((GMG)) and Lend Lease ((LLC)).

Things might be more tricky when sales are dependent on consumer sentiment or business and government spending. I'd be a lot less sanguine on potential impact for Flight Centre ((FLT)), for McMillan Shakespeare ((MML)), for Ansell ((ANN)), for SAI Global ((SAI)), and for ex-NAB offshoot Clydesdale ((CYB)), among others. Given the August result season is only weeks away, it might take a while before investors obtain a reliable insight into what goes on inside these operations post-Brexit.

Qantas ((QAN)) flies to both Europe and the UK where weaker currencies might put a lid on overseas travel plans.

And then there are companies whose operations are closely linked to European financial markets. For them, short term expectations may have to reset at a lower level medium term. Such companies include Henderson Group ((HHG)), BT Investment ((BTT)), QBE Insurance ((QBE)), Insurance Australia Group ((IAG)), Westfield ((WFD)), Computershare ((CPU)), Iress ((IRE)), Macquarie Group ((MQG)), among others. Potential impact for these companies can be nothing short of "large" in the short to medium term and investors have exactly taken this view with share prices for these companies yet to show any sign of recovery.

Whatever happens in July, investors will have a new point of focus when companies report in August: what's the impact of Brexit on offshore sales and operations?

Rudi On Tour

I will be presenting:

- To Melbourne chapter of the Australian Shareholders' Association (ASA) on 6 July

- To a Selected Group of FNArena Subscribers, "An Evening With Rudi", in Melbourne, 6 July (sold out)

- To a Selected Group of FNArena Subscribers, "An Evening With Rudi", in Melbourne, 7 July (almost sold out)

- To Gold Coast chapter of Australian Shareholders' Association (ASA) on Tuesday 12th  July at Robina Community Centre, commencing at 9:30am

- To Brisbane chapter of Australian Shareholders' Association (ASA)  on Wednesday 13th July  at the Wesley House, 140 Ann St, Brisbane, commencing at 11:00am

- To a Selected Group of FNArena Subscribers, "An Evening With Rudi", Gold Coast, Wednesday 13 July (tickets still available)

- At the Australian Investors' Association's (AIA) National Conference in August on Queensland's Gold Coast.

- To Chatswood chapter of Australian Investors' Association (AIA) on September 7, 7pm, Chatswood RSL

- To Perth chapters of Australian Investors' Association (AIA) and Australian Shareholders' Association (ASA) on 7 February 2017

Nothing Ever Changes, Or Does It?

Yes, of course, investing in the share market is never really different and best working strategies today are the same that worked pre-GFC. Seriously. I tell you, seriously.



Now that we had a good laugh about it, let's get straight to business. This is a low growth environment. Has been since 2010 (it was masked at the time because of the V-shaped recovery from the global recession) and it is not likely to change fundamentally in the near term. I wrote a book about this (see below). This means investment strategies must adapt. You'll be turning your portfolio into a wish list for dinosaurs otherwise (and your returns will be a reflection of it).

Those not afraid to contemplate "this time is different" can subscribe to FNArena and read all about it in our bonus eBooklets 'Make Risk Your Friend' (free with a paid 6 or 12 months subscription) plus the freshly published eBook 'Change. Investing in a low growth world' (equally free with subscription, or available through Amazon and other online distributors).

Here's the link to Amazon: http://www.amazon.com/Change-Investing-Low-Growth-World-ebook/dp/B0196NL3KW/ref=sr_1_1?s=digital-text&ie=UTF8&qid=1454908593&sr=1-1&keywords=change.investing+in+a+low+growth+world

See also further below.

Rudi On TV

- On Tuesday, around 11.15am, on Sky Business, I shall make a brief appearance through Skype-link to discuss broker ratings for less than ten minutes
- I will be appearing as guest on Sky Business, 12.30-2.30pm, on Thursday
- Later on the same day I will also make an appearance on Switzer TV, Sky Business, between 7-8pm
- On Friday, around 11.05am, on Sky Business, I shall make a brief appearance through Skype-link to discuss broker ratings for less than ten minutes

(This story was written on Monday 27th June 2016. It was published on the day in the form of an email to paying subscribers at FNArena).

(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views are mine and not by association FNArena's - see disclaimer on the website.

In addition, since FNArena runs a Model Portfolio based upon my research on All-Weather Performers it is more than likely that stocks mentioned are included in this Model Portfolio. For all questions about this: info@fnarena.com or via Editor Direct on the website).

****

BONUS PUBLICATIONS FOR FNARENA SUBSCRIBERS

Paid subscribers to FNArena receive several bonus publications, at no extra cost, including:

- The AUD and the Australian Share Market (which stocks benefit from a weaker AUD, and which ones don't?)
- Make Risk Your Friend. Finding All-Weather Performers, January 2013 (The rationale behind investing in stocks that perform irrespective of the overall investment climate)
- Make Risk Your Friend. Finding All-Weather Performers, December 2014 (The follow-up that accounts for an ever changing world and updated stock selection)
- Change. Investing in a Low Growth World. eBook that sells through Amazon and other channels. Tackles the main issues impacting on investment strategies today and the world of tomorrow. This book should transform your views and your investment strategies. Can you afford not to read it?

Subscriptions cost $380 for twelve months or $210 for six and can be purchased here (depending on your status, a subscription to FNArena might be tax deductible): https://www.fnarena.com/index2.cfm?type=dsp_signup

FNArena has reformatted its monthly price tracker file for All-Weather Performers. Last updated until May 31st. (Next update before next Monday). Paying subscribers can request a copy at info@fnarena.com 

article 3 months old

The Overnight Report: Relief Rally

By Greg Peel

The Dow closed up 269 points or 1.6% while the S&P gained 1.8% to 2036 and the Nasdaq jumped 2.1%.

Consolidation

The local market opened with steep falls yesterday, sending the index down 86 points. But as so often has occurred recently, regardless of Brexit, as soon as the opening rotation was complete there was a sharp reversal.

There followed a stumbling rally back throughout the session to finish the day down 33 points. Interestingly, the index turned on 5050 – representing the low end of the technical support range – before closing at 5100 – being both the centre of the technical support range and basically where we closed last Friday after the initial Brexit drop.

Three sessions have given us a big fall, a slight recovery, and then a loss of that recovery. With the SPI futures showing up 83 points this morning, we should now recover some of that initial, panicked drop.

At the final bell the selling on the session was relatively even among sectors, unlike Monday’s recovery which featured mixed moves. The stand-outs yesterday were nevertheless utilities, which didn’t move and have remained steady throughout the turmoil, and, funnily enough, the banks, which have copped the brunt of the selling to now. Other than the connection via global interest rates, is there a reason Australia’s banks should suffer from a Brexit?

The question now, as we assume a solid rebound today, is whether or not rebounds across the globe last night represent a simple snap-back from oversold conditions, driven by short term traders looking for quick profits, or genuine buying, driven by investors believing there is value to be had at these lower levels.

It is pretty much a given volatility is not about to go away. Last night David Cameron met, no doubt rather uncomfortably, with EU counterparts. The issue for the EU is to get things rolling asap; to get Britain to clear its desk and leave the building quickly so as to avoid a lingering departure that only provides time for further nationalistic rumblings to fester on the continent.

Fair enough.

The issue for Cameron is to mitigate the fallout and promote stability in the UK before the next step is taken, lest further turmoil result. He will do so as leader until a new prime minister is chosen to take Britain forward.

Fair enough.

Cameron is doing the honourable thing. He’s probably also doing the sensible thing. But the EU is not happy. In theory it could be three months before Article 50 is invoked to set the exit wheels in motion. The EU has said it will not negotiate anything until this happens.

Therefore, we are reminded of those hazy, crazy days of Grexit fears over the past few years. The story that just kept on giving. So many in the market just wanted Greece to go and go now because the endless to-ing and fro-ing and uncertainty kept rekindling volatility and driving everyone insane.

Welcome to Brexit.

How’s the Cat?

The pound stabilised last night and finally recovered a little. The London stock market snapped back by 2.6%, France by 2.6% and Germany by 1.9%.

There was not any initial selling on Wall Street for a typical “Turnaround Tuesday”. Instead the indices opened up and hovered for a while, before a big “program trade” – basically meaning buy the index – gave Wall Street a kicker in the afternoon.

As is always the case, the question was asked as to whether the rebound is genuine or just the sort of “dead cat bounce” that is often seen in such circumstances and proves unsustainable.

Typically a dead cat bounce would feature a violent snap-back on low volumes, suggesting the bulk of investor money is still hiding on the sidelines. But last night volumes were solid on Wall Street. The VIX volatility index on the S&P500 fell 21% to 18.75, leaving it almost back where it was last Thursday when everyone assumed the vote would be “stay”. This implies the protection hastily bought last Friday has now been unwound as it is no longer necessary.

These factors point to it not being a dead cat bounce but a more sustainable consolidation. However, all agree that the volatility is far from over, so it’s not time to breathe a comfortable sigh of relief.

The US ten-year bond yield did not reverse – it’s unchanged on the session at 1.46%.

What did support the Wall Street rebound was oil. Having fallen fairly sharply since Friday, WTI rebounded 3% last night. There were also strong moves up in base metal prices, and safe haven gold gave back US$12.60 to be trading at US$1311.60/oz.

No one paid much attention to the final revision of the US March quarter GDP last night. It came in at 1.1%, up from a prior 0.8%, in line with expectation. Not only is March now a long time ago, the world has changed somewhat in the meantime.

Commodities

West Texas crude rose US$1.50 or 3.2% to US$48.11/bbl. Aside from being a recovery rebound, expectations are for tonight’s weekly US inventory numbers to show a big drawdown.

The US dollar index finally ticked back last night, by 0.2% to 96.11, which would have provided some support for commodities (ex-gold, which is playing a different game at the moment). Indeed on the LME, aluminium, copper and lead all rose 2% and nickel and zinc jumped 4%. What is interesting here as that the Brexit-related falls in base metal prices had been relatively muted in the first place.

Iron ore rose US20c to US$53.40/t.

The Aussie is relatively steady at US$0.7354.

Today

The SPI Overnight closed up 83 points or 1.7%.

The US will see personal income and spending numbers tonight and the Fed’s preferred PCE measure of inflation. But when Janet Yellen coincidentally speaks tonight, there will likely be a different focus of attention than US inflation.

Australia will see new homes sales data today.

We now have two more sessions before the curtain comes down on FY16. That in itself can promote a level of volatility. Fund managers will have welcomed the overnight bounce in markets as a chance to at least recover some returns to put in their marketing material. Others will be last minute tax-selling.

Today sees a huge number of local stocks go ex-dividend. Most of them are REITs or utility/infra funds, meaning some decent cash going out of the market as a downward adjustment from the opening bell.
 

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

article 3 months old

The Overnight Report: Day Two

By Greg Peel

The Dow closed down 260 points or 1.5% while the S&P fell 1.8% to 2000 as the Nasdaq dropped 2.4%.

Pause for Thought

It may have been panic selling from those who were caught in the headlights on Friday or maybe the computers were just up to their usual tricks yesterday morning when the ASX200 plunged 62 points on the open. Whatever the case, it didn’t last. In the second half hour we were back to square.

There began a stumbling attempt at a rally through to lunchtime before the market largely decided it had now set itself for the day, ready for what might transpire overnight on Day Two for the post-Brexit world.

The biggest movers up on the session were materials, telcos and utilities, which all put in 2% gains. The defensives of telcos and utilities were among the least sold off on Friday and with time to reflect over the weekend, investors likely decided these sectors offer safer harbours for the time being. For materials, which are the opposite of defensive, there may have been expectation on Friday metals prices would tank on Friday night but they didn’t.

Oil dropped 5%, but in the scheme of things that was nothing too dramatic. Energy was flat on the local bourse yesterday. Outside of insignificant info technology (in terms of market cap), a further 0.2% fall for the banks kept a lid on the bounce-back rally.

It wasn’t much of a bounce-back, more a squaring up on the possibility Friday and Friday night saw typical overreaction. Investors also had the weekend to consider what the real implications for Australian stocks were. Outside of some select direct exposures, there is not a great deal of crossover into the UK and Europe compared to exposure to Asia and the US. An FTA with the UK could no doubt be conjured up in a weekend. The only issue is whether possible recession in the UK could flow through for some companies.

Whatever the case, if local traders were hoping for a snap-back or at least some stability offshore after Friday night’s carnage, they got that wrong. The SPI Overnight is down 67 points.

Trading elders on Wall Street have pointed out that such financial storms typically result in selling on the Friday, because no one wants to risk carrying positions over a weekend, followed by selling on the Monday, because there are always those who were slow to move in the first place, then selling on Tuesday from the open, because things are starting to snowball, before the start of the bounce mid Tuesday morning, when the traders move in on oversold opportunity.

Pounded

As to whether that scenario plays out remains to be seen. Meanwhile, last night S&P cut its credit rating for the UK to AA from AAA. The pound duly plunged once more, trading below 1.32 against the greenback at a thirty-year low. That’s a 12% devaluation from the 1.50 peak on Thursday.

Perversely, the UK ten-year bond yield fell to below 1%, for the first time in history. The credit rating was cut and investors piled into the bonds. If it was Spain, it would be the other way around. But when risk assets are crashing around your head, government bonds still offer security, particularly gilts. It is also now assumed the BoE will have to cut its cash rate.

The 3%-odd fall in the FTSE on Friday night appeared quite tame under the circumstances, and nothing when one considers the futures were suggesting an 8% plunge. European stock markets crashed but then they do have a habit of doing so. The measured fall in London may be one reason the Australian market paused cautiously yesterday.

But last night the FTSE fell another 2.6%. Germany and France both fell another 3%. The bulk of the selling was again in the banks, which for the second session running saw falls of 10-20% for UK and European banks, which translated across the pond to further 5-7% falls for US banks.

Oil fell another 2%, thus the banks and energy led down Wall Street along with high-risk technology sectors, as reflected in a 2.4% fall for the Nasdaq. Utilities, telcos and consumer staples all finished in the green, but do not have the market cap clout to overcome selling in the bigger sectors. The Dow did nevertheless recover from a 350 drop to close with a 260 point drop.

Interestingly, the VIX volatility index on the S&P500 fell by 7%. It had jumped up 50% to 25 on Friday night as those caught out by the Brexit shock piled into put option protection. Last night it appears some who had sought protection – possibly as a hedge prior to the shock – decided to cash in their positions. This suggests a feeling a bottom may be nigh, once the panic subsides.

And that harks back to the aforementioned Tuesday turnaround tradition.

The S&P500 initially plunged through, but ultimately recovered back to, the psychological 2000 level. On Thursday it was above 2100, which had been proving resistance. It would be rather neat, one presumes, if 2000 proves the level that supports the rebound.

All speculation of course, for who knows what’s going to happen next? The UK Labour party leader is struggling on with several knives sticking out of his back, the Tories have yet to begin a leadership battle that Boris will probably win, the Scots have all painted their faces blue and are lining up along Hadrian’s Wall, seeking assistance from the Jacobites in Paris, while the leaders of France, Germany and Italy are refusing to negotiate anything with London until the actual exit lever is officially pulled.

Donald Trump clearly made no bonny friends when he hailed the Brexit as a great thing while teeing off at St Andrews. We now have that election ahead of us.

Which is one reason many on Wall Street are assuming no Fed rate hikes in 2016, despite what Janet Yellen might say. There is nevertheless some grudging respect that in offering up Brexit risk as a reason not to hike this month, Yellen has actually got it very right.

The US ten-year yield fell another 12 basis points last night to 1.46%. Last week it hit 1.75%.

Commodities

Gold’s inevitable rally continued last night, but gold still has to plough into the fierce headwind of a surging US dollar. The dollar index is up another 0.8% at 96.24 and gold is up US$8.50 at US$1324.10/oz.

West Texas crude is down US$1.03 at US$46.61/bbl.

London base metal traders are likely still trying to figure out where this Brexit business leaves the demand-supply equation. Given that mostly swings on China, probably little changed. There is still the matter of the stronger greenback, but while aluminium, lead, nickel and zinc all fell 0.5-1% last night, copper rose 0.9%.

Which brings us neatly to iron ore. It has jumped US$1.80 to US$53.20/t.

Once again the Aussie has been caught in the cross-rates, reflecting US dollar strength rather than sort of commodity price risk we normally associate with Aussie weakness. It’s down another 1.7% at US$0.7347, which of course is not a bad thing.

Today

The SPI Overnight closed down 67 points or 1.3%. If accurate, that will take the index into the middle of the 5050-5100 range that chartists are suggesting is support that must hold, lest we head back down through 5000 once more.

The final revision of US March quarter GDP is out tonight.

Collins Foods ((CKF)) will post its earnings result today.

Rudi will Skype-link with Sky Business at around 11.15am today to discuss broker calls and later tonight, from 8-9.30pm, he will host Your Money, Your Call on the channel.


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

article 3 months old

The Monday Report

By Greg Peel

Swing Low

Now what?

That is the question on everybody’s lips, and even among those who believe they have an idea, there is no agreement.

The situation remains fluid, thus uncertainty prevails. When uncertainty prevails, volatility thrives. A common call from global commentators on Friday night, with regard stock markets, was “buying opportunity”. But not right now. Right now there remains further downside risk and as such longer term investors are being told to stand aside for the time being until the fallout from this unprecedented event is more clear.

It is typical for markets to sell first and ask questions later. But we can perhaps take some heart in the fact that when the dust settled after 24 hours of trading on Friday, the reaction was not quite as bad as had been predicted by, for example, futures markets heading into the open of the UK and US stock exchanges.

In Australia the index fell 167 points or 3.6% on Friday but closed 33 points off its lows. We’re sitting just above 5100 – a level last seen in April on the way back from the February commodity crunch. We recall how hard the index had to work to finally move away from the 5000 resistance level. We’re still a hundred points above what will now be solid support.

In London the stock index futures were indicating a fall of 8% heading into the open. Ultimately the FTSE only closed down 3.2%. The Dow futures were showing close to an 800 point fall before the bell. Ultimately the Dow fell 617 points or 3.4%. The S&P fell 3.6% to 2037, and the riskier Nasdaq fell 4.1%.

The real damage was done in Europe, where the German market fell 6.8% and the French market 8.0%. Bank stocks were the main target, falling up to 20% across the UK and Europe. The Australian financials index fell 3.8%.

What happened to the pound over the course of Friday is already the stuff of legend. But the wild gyrations and ultimate collapse of the pound remind us that on Thursday, and as late as Friday morning, markets had rallied back hard on the assumption “stay” was winning. So we first had to give that rally back as we fell on Friday.

As both the pound and the euro tanked, the US dollar index was up a whopping 2.6% on Saturday morning at 95.54, despite carry trade-reversal also sending the “safe haven” yen surging. Caught in the cross-rates, the Aussie fell 2% to US$0.7476.

The US dollar was a headwind for gold, which still managed to shoot up US$59.30 to US$1315.60/oz in its safe haven capacity.

The strong greenback should have been a major headwind for commodity prices, notwithstanding the impact on prices of global uncertainty, so when we look at the 5% drop in West Texas crude, taking it back to US$47.64/bbl, and the one to two percent falls in base metal prices in London, we might conclude it’s not that bad.

Iron ore fell US30c to US$51.40/t.

An adjustment was made across the globe on Friday. In Australia, the SPI Overnight closed up 3 points on Saturday morning, suggesting we will probably now hit a wait and see period, given a bout of vu-deja – the eerie feeling nothing like this has ever happened before.

Politics

It is also important to remember this is not 2008. This is not Lehman. While uncertainty may prevail, there is no credit freeze going on due to financial organisations fearing their counter parties may go under. Global banks are no less capitalised this morning than they were on Friday morning. It’s simply the value of their shares that has suffered. The Bank of England, for one, has pledged to pump hundreds of billions of pounds of liquidity into the system to maintain stability.

Other central banks are preparing to do whatever they may have to do. One has to feel for the Bank of Japan, which just can’t catch a break in trying to rein in the yen, and the ECB, which has fought hard to promote even the slightest of economic growth in the eurozone.

Presumably the Fed will now not raise in July, if ever there were an actual possibility. But with a US dollar now rocketing once more, the Fed is in an even more difficult position. The Aussie dollar appears somewhat caught between its US dollar denomination and the fact Australia has been seen as a form of safe haven at times in these post-GFC years, offering high yields in a well-regulated environment. The RBA will be watching closely, but obviously has plenty of fire power left in the form of rate cuts.

Interestingly, it was the May rate cut which allowed the ASX200 to finally break away from 5000 and find new resistance at 5400.

David Cameron has resigned. It looks like the Labour Party leader will either go or be pushed. There is already a call for a second referendum in Britain. There is already a call for a second vote on Scottish independence, given Scotland voted overwhelmingly to remain in the EU.  To that end, there is talk Scotland will attempt to veto Brexit legislation.

And when does the actual “Brexit” begin? Cameron says he’ll hang around for three months and then the new prime minister can pull the lever which begins a supposed two-year process. Boris Johnson, arguably prime minister in waiting, has urged even less urgency.

Angela Merkel has said take your time. EU bureaucrats have, on the other hand, spitefully insisted the process is overdone with swiftly. They fear the dominoes. Which brings us to the question…

Is this the beginning of the end of the EU?

Europe is littered with euro-sceptics. Nationalist and far right parties have been on the upswing. The talk is a Nexit, Dexit and even Frexit might be on the cards. Over the weekend Spain held a general election.

There was a surge in support for the ruling conservatives, opting for the status quo, ie “stay”.

The Week Ahead

The week ahead will no doubt be an interesting one. As noted, the local market is poised with the futures up 3 points. At least we won’t be flying around on every little shift in bookie odds.

Thursday is nevertheless end of financial year, which can in itself provoke last minute volatility. Obviously portfolio returns are looking a little less flash than they were a week ago.

The final revision of the US March quarter GDP result is due tomorrow night. Tomorrow also sees Case-Shiller house prices, Conference Board consumer confidence and the Richmond Fed index. Wednesday it’s pending home sales, personal income & spending and the PCE inflation measure. Janet Yellen will be speaking yet again on Wednesday night.

Thursday it’s the Chicago PMI and Friday the manufacturing PMI, construction spending and vehicle sales.

Friday is the first of the month, hence manufacturing PMIs from around the globe and both manufacturing and service sector PMIs from Beijing.

In Australia we’ll see new home sales on Wednesday, private sector credit on Thursday, and house prices and the manufacturing PMI on Friday. And just to add more spice to the curry, we have the election on Saturday.

On the local stock front, Collins Foods ((CKF)) will post its earnings result tomorrow.

One fact that caught my attention over the weekend was this one…

In order for Britain to leave the EU, a “qualified” 72% majority of the remaining 27 member states must approve, representing a simple majority of at least 65% of the EU population. I’m not sure what the “qualifications” are, but presumably this means the EU has the power to say “No, you’re staying”.

We live in interesting times.

Rudi will appear on Sky Business on Tuesday, via Skype-link to discuss broker calls around 11.15am, then again on Thursday at noon and again between 7-8pm for the Switzer Report and lastly on Friday, via another Skype-link up to discuss broker calls at around 11.05am.

SPECIAL NOTE: FNArena's Weekly Insights will be a special edition dedicated to Brexit. Watch your inbox later today.
 

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

Well…it’s white knuckle stuff.

When I wrote the Overnight Report this morning it looked reasonably safe the UK would remain in the EU, as far as global markets were concerned, but now the result is unclear at best. It’s early days, so no point in me speculating. Brexit outcome notwithstanding, this is what we can look forward to next week…

Tonight in the US, durable goods orders.

Next week, trade, the Richmond Fed index, house prices, consumer confidence, pending home sales and the Chicago PMI. Wednesday sees personal income & spending, along with the Fed’s preferred PCE measure of inflation. Coincidentally, Yellen will speak on Wednesday.

Tuesday sees the final revision of US March quarter GDP before the first estimate for the June quarter comes along.

Friday is the first of the month, meaning manufacturing PMIs from across the globe and both manufacturing and service sector PMIs from China.

Late in the week we see a raft of data out of Japan, including unemployment, industrial production and inflation. The BoJ will no doubt be on a knife’s edge right now watching the Brexit vote, given a vote to leave will send the yen surging to further derail monetary policy impact.

In Australia we’ll see new home sales and house prices along with the manufacturing PMI.

Thursday is the end of financial year, which can mean a deal of volatility in isolation as fund managers and traders play argie-bargie on the local bourse.

But of course the world could possibly look very different net week.

Over to you London…
 

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