Tag Archives: Iron Ore

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.
 

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article 3 months old

Material Matters: Brexit And The Commodity Outlook

-Brexit mostly about EU economic stability
-Fall in EU consumption could impact balances
-Some durable positives for gold
-Steel making, raw materials most vulnerable
 

By Eva Brocklehurst

Brexit

The response of commodity prices to the British decision to exit the EU suggests investors believe the region's industrial economy will decline. Placing initial price performances into perspective requires an understanding of the implications of the event and to do so Morgan Stanley splits the commodity exposure into three categories.

Firstly, uncertainty will prompt investors to protect capital. Hence, demand for precious metal lifts. Secondly, if regional economic activity is under threat this suggests demand for industrial & energy commodities will fall. The third aspect is that those markets which are mostly physical trades, as opposed to derivatives or synthetic trades, are likely to respond least to the event, such as steel raw materials.

While Britain's share of commodity demand, globally, is tiny, the decision threatens the economic stability of the EU, which Morgan Stanley observes consumes 10-25% of the world's commodities.

The broker estimates that a general 5% decline in the EU's rate of commodity consumption over the next 12-24 months would alter forecast balances for base metals markets by 20-40% and increase iron ore's forecast surplus by 10-20%. It would put coal markets into surplus, from being balanced to slightly in deficit. These are all potentially price-altering scenarios.

The broker does not change its view on oil, yet. Near term Morgan Stanley remains most concerned about product oversupply but the medium term trend towards market re-balancing appears intact, barring a recession. A relief rally in markets, or a pull back in the US dollar – potentially on central bank intervention, could lift oil prices.

Morgan Stanley does point to articles which incorrectly attribute a draw in Saudi Arabian crude oil stocks and stable oil exports to signs the market is rebounding. The broker contends product exports are increasingly augmenting crude oil, masking the oversupply. Tepid demand trends underscore the broker’s concerns, with Chinese demand slowing further in May.

Citi does not envisage the British vote, of itself, will de-rail a rebound in commodity prices heading into 2017. It does, nonetheless, add another complex layer of uncertainty to all markets, and will likely aggravate commodity investor outflows into the financial year end and in early July.

The broker believes investor sentiment for oil remains bullish for the medium term and price corrections are likely to be buying opportunities. Net copper short positions in Chicago may be pushed to new highs into the end of the quarter while gold should retain its status as a safe haven.

In beans and wheat, prices the broker envisages strong support for the market near current levels, with tight export markets and potential bullish risks heading into a major US agricultural release. To the extent the British pound continues to sell off this is expected to weigh on cocoa prices in New York and support London contracts.

Gold

Some of the gains made by gold in the wake of the British vote are likely to be knee-jerk reactions, Macquarie contends, but the consequences as a whole are positive for the yellow metal. The broker increases near-term price forecasts and maintains higher long-term forecasts.

Macquarie observes the impact of decision to leave the EU was magnified by market positioning, which had anticipated the opposite. The main asset affected was pound sterling but gold also retreated to US$1,251/oz ahead of the vote and then jumped to US$1,359/oz. Macquarie notes this was the largest intra-day range since gold prices slumped in April 2008.

The more durable positive aspect for gold is the increased economic uncertainty in the UK and Europe, which means central banks are likely to keep monetary policy looser for longer.

Macquarie expects gold to go higher in the September quarter, as the full ramifications of Brexit are felt, before dropping back in the fourth quarter after the US election and ahead of a likely hike from the US Federal Reserve. The broker's US economist suggests Brexit shifts the base case of a Fed rate hike to December from July.

Industrial metals and bulks

Macquarie considers the impact of Brexit is less apparent in industrial metals and bulks as direct consumption in the UK, or even the EU, is relatively minor on a global scale. Still, the broker agrees any de-stocking in the industrial chain, as uncertainty increases, could mean short-term demand is affected.

Overall, China remains the crucial element, Macquarie maintains, and a more commodity-intensive phase of growth, coupled with a delay in US rate hikes, could be supportive of prices, notably steel and iron ore.

Since China's economy has already resumed a downward trajectory and economic activity elsewhere is subdued, with Brexit adding its drag, Morgan Stanley suggests the US Fed's long-standing regard for the fragility of global growth is well founded.

Prices for steel-linked commodities have done well in 2016, spurred by seasonal re-stocking. Other metal prices have also responded to a recovery in oil and US dollar weakness but Morgan Stanley believes this buoyancy will be tested soon. The seasonal peak in trade flows, production rates and deployment has passed and the broker believes steel and its raw materials are the most vulnerable markets.
 

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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.


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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

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

Rocky Road Ahead For Sims Metal

-No improvement signalled in supply chain
-Reliant on cost reductions to drive growth
-Fairly valued trader of scrap?
 

By Eva Brocklehurst

Sims Metal Management ((SGM)) has surprised brokers with its updated guidance for FY16 but sentiment remains cautious, given the rocky road ahead for scrap metal prices. The company expects second half earnings to be $55-65m, with the majority earned in the fourth quarter because of higher ferrous metal prices, sales volumes and cost cutting. This guidance implies the company has exceeded its previously guided annualised earnings run rate of around $140m.

Yet Macquarie expects the good news to be short lived. US scrap prices have now subsided and this undermines incentives to collect supply. This is the issue for the broker, as the volatility in scrap pricing is not allowing any improvement in the material supply chain and this is an obstacle to a lasting recovery in Sims Metal throughput.

The broker notes there is only one bright spot for steel globally, and that is in the US. Yet scrap metal does not benefit from trade protection, such as flat and coated steel products, and feedback from a recent New York steel briefing signals to Macquarie there is no positive catalyst for scrap markets. The broker revises forecasts to reflect the adjusted guidance, with a slight upward change to FY17 estimates.

On UBS analysis, the volume leverage is critical. Sims Metal has re-set its break-even level to 7mtpa, from 13mtpa, over the last three years, lowering its fixed cost base to $920m after full realisation of cost reduction benefits. The broker calculates the company can achieve its targeted 10% return on invested capital in FY18 without the need for margin improvement, provided volumes can increase by 10% to 9.2mtpa.

But channel checks suggest 25-50% of the scrap price increase since the November lows has not resulted in a sustained recovery in volume, thus highlighting a need to deliver on cost reductions to drive earnings growth. Still, the recent under performance of the stock suggests a opportunity and UBS retains a Buy rating.

Credit Suisse concurs that break-even tonnage has been aggressively reduced but believes this lags the volume decline. The broker maintains current iron ore prices and falling Asian long product prices are not supporting a recovery in scrap, although resumed buying by Turkey, the world's largest ferrous scrap importer, should mean prices stabilise at current levels

Sims Metal is a large exporter of ferrous scrap to Turkey and this traditional market has contracted significantly. The broker also notes, while not explicitly updating on environmental recycling, the company implies this segment remains weak.

To Ord Minnett, the main catalyst is progress on cost savings and further evidence is required to bolster confidence in guidance and help re-rate the stock. The broker suspects consensus estimates may not incorporate the full potential of the re-setting of the company's base. Management's commentary indicated only a modest portion of its guidance upgrade came from cost savings. Higher scrap prices and volumes have delivered a margin benefit, which highlights for the broker the substantial leverage in the stock to macro conditions.

Sill, Ord Minnett remains cautious, given the reversal in scrap prices from the peak in April/May. The broker expects sales volumes in FY17 and FY18 to modestly improve, with volume benefits primarily offset by reduced cost cutting assumptions.

Citi, too, while welcoming the upgrade is aware of the volatility surrounding global steel and scrap prices. The broker had expected, given the April/May rally in scrap prices, that the company would have provided an even more positive update, but the cautious tone suggests Sims Metal did not fully participate in the price rally and momentum is not necessarily going to continue into FY17.

Talk of large scrap traders filling orders at low price points does nothing to inspire Citi regarding the state of the market. Over the longer term, the broker reiterates a view the risk to scrap volumes and prices is to the downside. Moreover, Citi views Sims Metal as a fairly valued trader of scrap and not a creator of value in industrial products.

While acknowledging the company is doing what it can to reduce costs, Deutsche Bank maintains that weakness relating to industry structure and competition is too difficult to offset and there is downside risk to FY17 earnings. The broker suspects the recent fall in scrap prices in the US will lead to a corresponding drop in volumes and a squeeze on Sims Metal margins.

FNArena's database has two Buy ratings and five Hold for Sims Metal. The consensus target is $8.23, suggesting 6.0% upside to the last share price. Targets range from $7.40 (Citi) to $8.75 (UBS).

See also Outlook Not Too Flash For Sims Metal on June 20 2016.
 

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article 3 months old

The Overnight Report: Global Markets Vote Stay

By Greg Peel

The Dow closed up 230 points or 1.3% while the S&P rose 1.3% to 2113 and the Nasdaq gained 1.6%.

Brexit

As I write, the polling stations are not long closed in Britain. I have no idea what the official result will be, but by the time you read this the first regional numbers may well be filtering through.

What I do know is that public exit polling was banned until polling stations were closed. The first exit poll since published suggested 52/48 to stay. Private exit polls were apparently being conducted over the day nonetheless, giving those prepared to pay for the privilege the inside running. Whatever the case, it appears the world decided last night that the “stay” vote would win, and wasn’t about to wait around for confirmation.

Such confidence was not the case in the southern hemisphere yesterday, thus the local market put in another “on hold” session. A 1.6% gain for the materials sector, thanks to a pop in the iron ore price, was about the only reason the index didn’t close completely flat.

Since the release this morning of that first public exit poll, the pound has jumped again, to US$1.49. When Brexit fear was at its peak a couple of weeks ago, the pound traded as low as 1.40.

Prior to the release of any public information, and with polling stations in full swing, the London stock market closed up 1.2%, Germany 1.9% and France 2.0%.

Wall Street then step-jumped higher on the open and largely held its ground for the session before kicking again at the death. The Dow closed above psychological resistance at 18,000. The S&P thundered through psychological resistance at 2100 to close at 2113 – only one percent below the all-time high.

The US dollar index is off another 0.5% at 93.15, on a combination of pound strength but also an unwinding of the safe haven trade. Brexit volatility is playing havoc with the Aussie, which is 1.5% higher at US$0.7632.

With commodity prices relatively stable of late and a belief the RBA may well cut its cash rate again in August still prevalent, the Aussie has managed to rise to 76 from 72 during this whole Brexit episode. Yet if Britain stays, nothing has changed.

And therein lies the rub. Assuming the “stay” vote wins, nothing will have changed. Yet Wall Street, for one, is now higher than it was before anxiety set in a couple of weeks ago. All agree that if by some miracle “go” gets over the line at the last minute, global markets would have apoplexy. But the prevailing view now is that “stay” is more than priced in, thus upside is limited. By tonight we may well be in for a “sell the fact” pullback.

But not on the local market today. The SPI Overnight closed up 60 points. That would take us to 5340 on the ASX200 and put 5400 resistance back in the sights. What could get us there? Global markets only started worrying about Brexit two weeks ago. There was plenty to keep us away from 5400 before then.

With Brexit out of the way, assuming “stay” indeed wins, one obstacle is removed for the Fed. If the June US jobs number is solid, we’ll be back talking Fed rate hikes again. This morning the results of the latest US bank stress tests will be released. Tonight will see the annual rebalancing of the small cap Russell index, which is expected to produce significant volumes and potential volatility.

Spain will hold a general election this weekend. If the UK vote is close, despite a “stay” victory, will this steel the resolve of other EU nations into pushing for an exit of their own? Euro-scepticism is growing across the continent and anti-EU parties are gaining traction.

And there’s that small matter of the presidential election in the US. And someone tells me Australia is also set to have an election in a couple of weeks.

There’s still plenty of fun to be had over the rest of 2016.

Commodities

West Texas crude is up US$1.13 or 2.13% at US$50.13/bbl.

Copper rose 1.7% in London, lead 1% and aluminium 0.5%. Nickel and zinc stood still.

Iron ore is unchanged at US$51.70/t.

Gold is down US$9.60 at US$1256.30/oz. Given the exuberance of other markets one might have expected the safe haven to have seen a lot more selling, but gold does tend to wait until the day after to make its move.

We do note the other safe haven benchmark – the US ten-year bond yield – is up 5 basis points at 1.74% (implying selling).

Today

As noted, the SPI Overnight closed up 60 points or 1.2%. I suspect this morning we will probably step-jump from the open and then hover at that new level at least until an official result is clear. As to whether we’ll then see some profit taking is not clear, but it is a Friday. Riding out the cold and wet with a steak and a good red after an anxious week does seem tempting.

Wall Street can go back to focusing on tonight’s durable goods orders number.

CSR ((CSR)) holds its AGM today.

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

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article 3 months old

Material Matters: Oil, Copper, Nickel And Electric Vehicles

-Pace and scale of oil rebound at issue
-Two more years of copper surplus likely
-Can a lid be kept on nickel supply?
-China's steel mills still struggling
-Magnis Resources advances graphite project
 

By Eva Brocklehurst

Oil

Supply outages and firm demand are re-balancing the oil market quicker than RBC Capital Markets had assumed. The analysts suggest the pace of recovery is a quarter earlier than expected and the price outlook for the second half of 2016 now has a higher base.

The analysts expect West Texas Intermediate to average US$55.50/bbl in the second half and US$64/bbl in 2017. RBC Capital Markets remains constructive over the medium term, and factors such as the elasticity of US production, pent-up producer hedging and record inventories remain central in determining both the pace and scale of near-term upside.

Morgan Stanley has increased its long-term oil price assumption to US$80/bbl, upgrading Woodside Petroleum ((WPL)) to Overweight , Santos ((STO)) and Origin Energy ((ORG)) to Equal-weight in the process.

The broker expects the oil recovery to be volatile and, near term, expects the price will be lower compared with current levels. Morgan Stanley agrees markets are slowly re-balancing and there is a risk that oil moves higher if there are further supply disruptions.

Copper

Deutsche Bank observes not all is going well for the copper price at present. The market is on track to register one of the lowest disruption allowances for the past 10 years. Disruptions are running at just under 500,000 tonnes on an annualised basis which is below the average of 900,000 to 1m tonnes.

The Chinese grid represents around 20% of global demand and, while the broker suspects spending on the grid will be higher this year, the focus is on UHV transmission and rural distribution where there is a lower intensity of copper usage. As a result, Deutsche Bank estimates there to be two more years of significant copper surplus in the market, with prices under pressure.

Refined copper imports into China have swelled this year, ahead of reasonable demand growth rates, and appear to the broker to be an extended re-stocking cycle. The risk is the second half of the year may start a de-stocking cycle.

Nickel

A strong Chinese stainless steel market has pushed nickel into deficit, Macquarie contends. This follows supply curtailments and stronger demand from the shift in grade in stainless, and lower secondary availability.

The broker notes this is the first time in five years a significant deficit has emerged. Global nickel refined production fell 0.9% in the fist four months of the year while use has grown by an estimated 3.4%. Macquarie projects a deficit of 31,000t in the first half of 2016, amid a long process of returning market inventories to normality.

The shortage of secondary nickel is a key factor. The price of nickel in scrap has risen to 90% of the London Metal Exchange price from around 70-75% at the start of 2015, the broker observes. This reflects lower scrap supply and also big reductions in Chinese nickel pig iron production and the rise in Chinese imports of nickel.

Macquarie considers the outlook for nickel the rest of 2016 hinges on whether the pace of recovery in China can be sustained. The broker assumes some slowing in demand in the second half but still envisages good growth this year. The other factor affecting the price is whether a lid can be kept on nickel supply, following recent production cuts.

Steel

Sentiment in China's domestic steel industry remains negative, Macquarie maintains. Steel mill orders fell dramatically over the last month, falling for the first time since February. The broker observes the decline in orders came from all major steel consuming industries, except infrastructure, which managed to hold up.

Macquarie also notes from its proprietary survey that, somewhat surprisingly, export orders also declined in June after a rebound in April, despite the increased attractiveness of export markets with the slump in domestic steel prices.

Given the steel mills are struggling with profitability and looking for lower production rates, demand for raw materials is expected to be muted in the near term.

Electric Vehicles

Electric vehicles suggest a renaissance for some commodities and Morgan Stanley reviews which commodities are most exposed to some upside. The main opportunity is in the large-scale battery production, although the broker's analysts suggest the world's electric vehicle battery production rate already exceeds demand by 75%.

Lithium is the broker's top pick, primarily because near-term barriers to entry are high. China's high spot prices should spur new supply but the broker expects the response to be slow because a majority of lithium output is priced on annually negotiated terms. Greenfield developments are also frustrated by poor licence policies, environmental regulations and funding issues.

Graphite reserves abound and, while there is excess production capacity for naturally occurring graphite, the broker observes the portion that can actually deliver battery-grade spherical graphite is small. Most spherical graphite is produced in China with North American producers soon to develop reserves.

Cobalt consumption is also set to rise with the EV battery demand but, being a by-product of copper and nickel mining, supply is considered to be largely unresponsive. Morgan Stanley suspects that if copper and nickel remain at relatively low prices, supply growth for all these commodities will slow or even shrink, regardless of the improving outlook for cobalt.

Copper is the fourth on the list, required to connect battery charging infrastructure to global grids. Morgan Stanley's analysis suggests that for China, to meet its 2020 targets for charging stations, that an extra 3.4mt of the metal will be required.

Magnis Resources

Magnis Resources ((MNS)) is advancing a graphite project, Nachu, in Tanzania. Bell Potter observes the company has progressed with obtaining port shipping capacity and adjacent land for concentrate storage. The project is backed by a specific development agreement defining and protecting the fiscal terms for 10 years.

Bell Potter has further confidence in the company's processing plans after a visit to the testing laboratories in Gosford, NSW. Exceptional purity levels have been demonstrated and the broker considers this a further factor in de-risking the project. The broker retains a Speculative Buy rating on the stock with a $1.45 target, upwardly revised from 83c.
 

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article 3 months old

The Overnight Report: Waiting

By Greg Peel

The Dow closed down 48 points or 0.3% while the S&P fell 0.2% to 2085 and the Nasdaq lost 0.2%.

Waiting

What can I say?

The local market was up and down yesterday before closing flat. Volumes were minimal.

Sector moves were also evenly spread across ups and downs and all were relatively benign. The biggest move was in consumer staples, which fell 0.9% following Wesfarmers' ((WES)) investor day.

And still we wait.

The most notable move on the day was in the Aussie, which is up 0.9% at US$0.7523. No doubt the RBA is frustrated. But currency moves across the globe this week have little to do with anything other than Brexit posturing. Safe havens are the popular parking spaces.

It is assumed a “go” vote in Britain would send the pound crashing, and the US dollar rising not just on the cross-rate, but as a global safe haven. The Aussie is also a popular safe haven at times of anxiety as long as commodity prices aren’t also crashing. A Brexit would send the AUD-GBP flying but the “Aussie”, being the AUD-USD, would likely fall on USD strength.

Conversely, were the Brexit to be defeated, the pound would not crash, nor probably rise too much given it is already leaning to the “stay” side. Presumably the Aussie would go back to pricing in the local economy, vis a vis the US.

But I could talk about this all day, and neither you nor I would be any the wiser.

Waiting

The US dollar index is down this morning, by 0.5% to 93.57, helping the Aussie higher. It was up by the same amount yesterday, and down by the same amount the day before.

The US dollar index is really not telling us anything, other than the polls are fluctuating. European stock markets closed modestly higher again last night, but after the close in Europe a new poll was released showing “go” ahead by a point. The bookies are still favouring “stay” nonetheless.

All we can reliably conclude is that the vote will go down to the wire, and will be determined by the one consistent cohort in every poll to date – the 10% undecided.

The Dow opened higher on the session last night before drifting to a lesser close. Volumes were minimal.

Janet Yellen testified before the House financial committee last night. Her Tuesday night testimony before the Senate banking committee focused on global risks, with Brexit being front and centre, whereas last night she concentrated on domestic issues, suggesting she was hopeful the US economy will have picked up in the June quarter.

No one paid much attention.

US existing home sales rose 1.8% in May to the highest level in almost ten years.

No one paid much attention.

The first regional results of the Brexit referendum are expected around 12.30am London time, which is 9.30am tomorrow morning Sydney time. If the outcome is a coin toss as the polls are suggesting, it may be several hours before a result is known.

Commodities

Weekly US inventory data had West Texas crude down US85c last night to US$49.00/bbl on the new August delivery front month.

The weaker greenback helped sustain base metal prices, but all gains were less than one percent.

Iron ore rose US$1.00 to US$51.70/t.

Gold is steady at US$1265.90/oz.

Today

The SPI Overnight closed down 16 points.

Japan, the eurozone and US will all provide flash estimates of June manufacturing PMIs over the next 24 hours.

Locally, June stock options expire on the ASX but little volatility is expected at this time.

One more sleep.

Rudi will make his weekly appearance on Sky Business today, 12.30-2.30pm.
 

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article 3 months old

The Overnight Report: The World Stalls

By Greg Peel

The Dow closed up 24 points or 0.1% while the S&P rose 0.3% to 2088 and the Nasdaq added 0.1%.

Take Your Positions

Spot the difference:

“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.”

“Given these developments, and following the reduction in the cash rate in May, the Board judged that leaving the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and inflation returning to target over time.”

Yep, you got it. The first quote, from the June RBA monetary policy statement, says “holding the stance unchanged” while the second quote, from the minutes of that meeting, says “leaving the stance unchanged”.

Is there a difference? Maybe it’s just semantics, but “holding” has more of an implication of “on hold” while “leaving” has more of an implication of “for the moment”. Or maybe I’m trying to read too much into it. Whatever the case, an RBA rate cut in August cannot, at this stage, be either ruled out or ruled in.

The Aussie barely moved at the time of yesterday’s minutes release, but did start rising late in the session to reach a peak over 75 after hours. It then proceeded to come back down again in the US session as the US dollar index rallied back 0.5% to 94.07, leaving the Aussie unchanged over 24 hours at US$0.7459.

Speculating about RBA policy is nevertheless something we’ll have to put off until next week. The local market pretty much stalled yesterday, beyond a bit of position shuffling ahead of Thursday night’s vote. The index rose early, fell back mid-session and then rose again at the close, but nothing was remarkable.

The energy sector dropped back, having posted the biggest gain the day before, and materials also retreated. The banks found further support and healthcare rallied, having missed out on Monday.

There are two more sessions to go.

Not Yellen, Yawnin’

The problem with trying to gauge the Brexit result at this late stage is that there are conflicting indicators. Three polls over the weekend indicated “stay” was in the ascendancy. A poll last night suggested “go” was coming back. Market commentators are ignoring the polls and looking to the betting market, in which bookies have “stay” as a firm favourite.

Global markets have factored in “stay”, with a dash of caution. Last night gold, which has an amazing track record of moving a day later than every other market, decided to fall US$22.30 to US$1267.70/oz. We recall that while all other markets were moving back towards a “stay” setting on Monday night, gold ended the session little changed.

Volumes on US stock markets last night were paltry. This is not something one usually associates with a session that includes a testimony from the Fed chair. Clearly Wall Street, too, is leaving central bank speculation for next week, but the reality is Janet Yellen was sufficiently vague in her testimony last night to the Senate banking committee as to provide no further insight on policy. Rate hikes are still in the offing, she suggested, before grains of salt were handed out.

We might note that the US ten-year bond yield rose 3 basis points last night to 1.70%. The yield fell from 1.70% prior to the Brexit scare to 1.60% at its height, only to now have returned back to 1.70% over a couple of sessions as the scare eases.

The fact that the scare has eased is a worry in itself. When markets were in full panic mode, the downside of a “go” vote was to some extent priced in. The upside was substantial. Now that “stay” appears to be winning, markets have returned to a more positive position. There is thus a risk the Brexit result could spark selling on either outcome – “stay” would be a relief, but to some extent is priced in, while “go” would be catastrophic.

Janet Yellen will testify before the House financial committee tonight. While lower house members are typically more aggressive than their upper house colleagues, no one is expecting any fresh revelations.

Commodities

Gold notwithstanding, given it’s not not really a commodity, commodity markets also went into quiet mode last night. The rise in the greenback had no specific impact.

The West Texas crude July contract expired down US35c at US$48.85/bbl but the August contract, which will be the new front month tomorrow, rose US44c to US$50.26/bbl.

Base metal moves were mixed in London and no move exceeded one percent.

Having fallen US10c on Monday night, iron or was up US10c last night at US$50.70/t.

Today

The SPI Overnight closed up 15 points or 0.3%.

Wesfarmers ((WES)) will hold a strategy day today.

Two more sleeps.
 

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article 3 months old

The Overnight Report: Poll Dancing

By Greg Peel

The Dow closed up 129 points or 0.7% while the S&P gained 0.6% to 2083 and the Nasdaq rose 0.8%.

What Goes Down

The scene was set for a positive session on the local market yesterday morning following the weekend’s Brexit polls, and perhaps more tellingly a clearer shift in the bookie odds towards a “stay” outcome. In particular, the 4% rebound in the oil price was set to have an impact.

The energy sector duly closed the day up 5.4%. The index had shot up from the open and wavered only slightly through lunch before finishing with positive momentum, up 1.8%. Not all sectors, however, participated.

But then we recall that not all sectors participated on the downside a week ago when it looked like the “go” vote was in the lead. Selling up to now has been concentrated in the big caps, the biggest of which are the banks, which are also supposedly the most vulnerable to a Brexit. Then there’s the big miners and oil names, supermarkets and the telco.

Energy may have jumped 5% but a 2.3% rebound for the banks was most influential. Materials rose 2.3% and the supermarkets rose 1.4% despite a significant drag from a 12% drop in Metcash ((MTS)), which posted its earnings result yesterday. Telcos rose 1%.

Thereafter the sector moves were less impressive. The mixed bag that is industrials rose only 0.5% and healthcare actually closed down 0.4%.

It was an “as you were” session, returning the ASX200 to the middle ground of the recent range at 5250. This could be a pivot point from which to move once the Brexit result is actually known, but for the fact we still have at least three more sessions to go and possibly more if the result is not immediately clear on Friday morning.

To that end, commodity prices were all stronger overnight, with oil up another 2%. Gold is off, but not by a lot. European stock markets surged and Wall Street closed higher. The SPI Overnight is up 24 points.

It all points to more of the same today, depending on to what extent the market sees yesterday’s session as pricing in last night’s offshore moves in anticipation. Australia’s was one of the first markets to respond to the Brexit polls yesterday. Do we go again today or will that suggest double-counting?

There are something like five more polls to be published between now and Thursday night. Presumably the global rebound can continue if those polls continue to suggest a win for the “stay” vote.

Calm Down

Wall Street is not yet ready to count its chickens.

The London stock market surged 3.0% last night, France rose 3.5% and Germany 3.4%. While the European markets have always been volatility-prone, it’s rare to see a move of such magnitude in the FTSE. The pound also surged further ahead, having risen to 1.47 against the US dollar from 1.40 late last week. Again – something you don’t see very often.

The US dollar index tumbled as a result, but that didn’t stop the safe haven of gold crashing to under US$1280 in the London session. The Dow opened up over 250 points from the bell. The S&P500 hit 2100.

But then calmer heads prevailed.

The 2100 level is significant resistance for the S&P. From that point the US indices began to drift back. Gold began to recover. By the close, US indices had given back half their initial gains. Gold is back at US$1290/oz, down US$8.10 from Saturday morning.

Wall Street isn’t quite ready to assume Britain stays in the EU when there’s a week of trading yet to go. Last night saw a shift towards a “stay” outcome, but not definitively so.

There’s also the small matter of Janet Yellen’s testimony to the Senate Banking Committee tonight. The way the Fed has been flip-flopping of late, heaven knows what might come out of the Fed chair’s mouth.

Commodities

Having surged on Friday night, last night the oils kicked on with another 2% gain. West Texas crude is up US94c at US$49.20/bbl. Brent is back over 50.

Commodity prices are mostly being supported via the currency, with the US dollar index down 0.5% at 93.64. Base metals were all 1-2% stronger on the LME.

Iron ore fell US10c to US$50.60/t. China is a world away from Britain.

Today

The SPI Overnight closed up 24 points or 0.5%.

The strong close on the ASX yesterday smacked of some late FOMO – fear of missing out. If the index opens up strongly again this morning there may be a few more initially hesitant investors coming out of the woodwork. Or we may take the lead from Wall Street in not yet getting too carried away.

The minutes of the June RBA meeting are out today. The question is one of whether “one and done” is the case, meaning the May rate cut will be it for the time being.

Yellen will speak tonight, but for the rest of the week global markets will be held captive by Brexit.

As I said yesterday, it’s going to be a long week.

Rudi will Skype-link with Sky Business at around 11.15am to discuss broker calls.
 

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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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