Tag Archives: Iron Ore

article 3 months old

Outlook Not Too Flash For Sims Metal

-Scrap prices ease into FY year end
-US scrap export constraints

By Eva Brocklehurst

Sims Metal Management ((SGM)) is between a rock and a hard place. Steel price strength in the US market is being supported by trade protection policies but the scrap market – and raw materials for that matter – is exposed to broader global supply/demand factors.

Deutsche Bank recently downgraded the stock to Hold from Buy, suggesting the scrap market is in stalemate. Some yards have closed but the broker believes there are still too many, and market rationalisation is taking too long. The broker accepts Sims Metal is doing what it can to improve its cost position, noting the balance sheet is still strong.

Deutsche Bank visited the US recently and notes US supply constraints remain in place, with limited ferrous volumes being exported to Turkey. Prior to a deep sea ferrous scrap deal in the first week of June, Turkish bulk scrap cargo exports have not occurred since early May. US ferrous scrap exports for January to April 2016 have declined 20% and the American Metal Market reports suggest the most recent cargo export was at a US$95/t discount to May 2016 prices.

Given the increase in scrap prices in April and May, the June quarter appeared to be more robust, but June prices have since retraced. Hence, the broker lowers forecasts for Sims Metal sharply for both FY16 and FY17. Macquarie also suspects the short-lived improvement in scrap prices is unlikely to have been enough to re-invigorate volume intake on a sustainable basis.

Credit Suisse calculates the company's intake is possibly sourced from peddlers, as opposed to dealers, by as much as 20-25%. Peddler volume is the most price-sensitive feed, with other sources being materially less volatile on the back of price gyrations.

The broker was disappointed by the company's May guidance, which appeared consistent with a bearish FY16 forecast and a recovery into FY17. The upswing in prices and volumes in the weeks leading up to the May presentation appear to have had no positive impact on the company's earnings expectations. Credit Suisse was suspicious at the time that this likely foreshadowed an adjustment in scrap prices in the last six weeks of the financial year.

The broker also observes the company's loss-making Central division is still to be divested and would be surprised if this accounted for any more than 3-5% of total first half annualised tonnage of 8.4mtpa. There are two Buy ratings and five Hold on FNArena's database for Sims Metal. The consensus target is $8.41, suggesting 9.9% upside to the last share price.
 

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.

article 3 months old

Giddy Heights For Mineral Resources

-Increased guidance lifts valuation
-Yet several consider stock fully valued
-Minimal new lithium supply in 2016
-Material catalyst in resource update?
 

By Eva Brocklehurst

The hot potential of lithium has caught up with Mineral Resources ((MIN)), resulting in two brokers downgrading the stock recently. The company has been spirited into the spotlight with the surge of interest in lithium and its use in battery storage. The stock is now seen straining at the leash.

Mineral Resources has announced a forecast of 400,000 tonnes of lithium concentrate per annum is set to be produced at the Mt Marion joint venture, WA, a 40% increase on prior guidance. First shipment is due in October and an aggressive ramp-up is expected.

The company recently exercised an option to increase its stake to 43.1% from 30% in the project and Deutsche Bank now values this stake at $247m, or $1.32 a share. This lifts the stock's valuation by 6% to $8.45. Despite this upgrade, Mineral Resources has rallied hard in recent weeks and the broker downgrades to Hold from Buy.

Mt Marion is expected to generate around $60m in earnings per annum for the company on the broker's US$550-600/t spodumene (lithium containing) price forecasts, with $330/t in unit costs. The project represents 14-20% of the company's earnings. Deutsche Bank forecasts 2016 lithium demand will reach 209,000t of lithium carbonate equivalent in 2016, a 14% increase on 2015.

While demand is growing there is minimal new supply coming on line at present besides the Orocobre ((ORE)) Olaroz project, and Chinese re-starts which the broker concludes are at high cost.

By the end of this year the first shipments from Mt Marion and the Galaxy Resources ((GXY))/General Mining ((GMM)) project at Mt Cattlin will arrive in China. These two assets are hardly expected to impact the market in 2016 but will increase supply by 30% as they ramp up early next year. Deutsche Bank forecasts lithium pricing will then fall from the September quarter 2017.

Macquarie is of a similar view, incorporating Mt Marion into earnings forecasts and lowering its recommendation on Mineral Resources to Underperform from Neutral. The broker believes the excitement surrounding lithium has been a key contributor to the share price performance this year and the market is currently capitalising a long-term lithium price that is too high into the stock.

The broker suspects the project could produce as much as 80% of the current shortfall in the market and values it at $1.10 per share, using a long-term spodumene price of US$600/t.

Yet, Mineral Resources is not all about lithium. Another driver of the share price was the spike in the iron ore price earlier in the year. Macquarie forecasts iron ore costs will fall again to $50/t in FY17, driven by the company's focus on cost and productivity. Using spot FX rates and iron ore prices suggests to the broker cash flow is close to zero.

Meanwhile, the company's mining services business has been proving it can withstand the tough external environment, with the broker noting crushing capacity continues to grow.

Macquarie finds no stock is strictly comparable, given the company's mix of mining services and mining, but compared with both mining services and mining peers it appears expensive on a relative basis. The broker recently raised its target to $8.30 from $5.35 with the inclusion of Mt Marion earnings being offset by lower iron ore price assumptions.

Commodity analysts at Macquarie are of the view that the lithium market will remain tight for 18 months but it does not have a capacity constraint and major producers are likely to be forced to lift output with the threat of new entrants, capping the price rally from late 2017 despite the compelling demand outlook.

Furthermore, as with many specialty metals, the market is relatively small and price mechanisms opaque. There is no exchange for trading the metal, with pricing determined by agreements between suppliers and consumers.

The upcoming resource update could could be a material catalyst, Ord Minnett contends. The broker also believes the company could surprise on the upside at its FY16 results. While headline multiples look full, this broker takes the view that the lithium assets are highly saleable and generate no earnings in FY16. On this basis, Ord Minnett believes there could still be significant upside for the stock.

The broker uses as 50:50 mix of discounted cash flow and enterprise value/earnings multiples to determine its valuation, referencing peer comparisons in mining services, lithium and iron ore. Morgan Stanley, too, likes the potential value accretion from the lithium asset rather than the exposure to the lithium price, retaining mining services and iron ore assets as the larger component in its base case valuation.

FNArena's database has two Buy ratings on Mineral Resources (Ord Minnett, Morgan Stanley), one Hold and one Sell. The consensus target is $9.01, suggesting 8.3% upside to the last share price. Targets range from $8.30 (Macquarie) to $10.33 (Ord Minnett).
 

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.

article 3 months old

The Monday Report

By Greg Peel

Uncertainty

The local market began strongly on Friday, spurred on by the sudden turnaround in offshore markets as a result of an apparent swing back to the “stay” vote in Britain. But the rally was short-lived, to the point the index was slapped back down almost to square again by midday.

While “stay” may have been looking more likely on Thursday night, the reality is one poll does not a conclusion make. There is talk that the suspension of campaigning until Monday in deference to murdered MP Jo Cox will most likely hurt the “go” camp, which had previously been gaining some momentum. There is also a suggestion the murder may swing voters towards “stay” given Cox was a “stay” campaigner.

The bottom line is it’s still too close for anyone to call. Unless the polls between now and Thursday all line up to predict a definitive result one way or the other, it is likely global markets will swing back and forth on every apparent shift. But if nothing is at all clear, it is most likely investors will remain on the sidelines, having set their hedges, counting down the hours.

It could be a long four days.

Sector moves were mixed on the local market on Friday. The sector most damaged to date by Brexit fears – the banks – managed a 0.7% rebound to mark the biggest sector move of the session. Otherwise it was small moves up or down, with a rare quiet day for the resource sectors.

Fed Shock

It was only a month ago the Fed was talking up its rate hike expectations, surprising Wall Street by hanging onto the concept of perhaps three hikes in the remainder of 2016. Then last week the mood changed, with only one rate now the apparent expectation. On Friday night, St Louis Fed president James Bullard went one surprising step further.

Yes, Bullard said, there will be one rate hike in 2016. But that will be it until 2018, he added.

Come again?

Once upon a time such a comment may have sent Wall Street reeling, in one direction or another – up if the response is “Thank God, the Fed will continue to support the market” or down if the mood is “Omigod, the US economy must be in worse shape than we thought”. But in actual fact, Bullard’s comments had very little impact whatsoever, for two reasons.

One is Brexit – that is dominating all thinking at present. The other is sheer exasperation. The Fed’s credibility has already been brought to question thanks to its apparent flip-flopping all through the year, and what makes Bullard’s comments even more outlandish is the fact he was previously among the most hawkish of FOMC members.

To that end, Bullard managed only to cause a lot of bemusement. And eye rolling.

Indeed, the US ten-year bond rate went up 5 basis points to 1.62% when one would have expected the opposite on such a dovish suggestion. The US dollar index did duly fall 0.5% to 94.15 but both moves are a reflection of faith growing in a “stay” vote in Britain and not anything that happened to come out of a Fedhead’s mouth.

The same was true with oil, which having fallen back from the 50 mark through the week due to rising “go” fears, rebounded 5% on Friday night.

Once upon a time a 5% jump in the oil price would have had US stock indices surging. Not anymore. A period of relative stability for the oil price has meant the close correlation that existed earlier in the year is no longer evident. And no one was going to go on a buying spree before next Thursday.

To that end, Wall Street was quiet on Friday. Closing volumes were enormous due to the quadruple witching expiry and quarterly stock index rebalancing but volatility was lacking. The Dow closed down 57 points or 0.3%, the S&P lost 0.3% to 2071 and the Nasdaq fell 0.9%.

Commodities

West Texas crude rose US$2.21 to US$48.26/bbl.

The weaker greenback may have helped a little but that was not at all apparent on the LME. Nickel decided to have a 2% jump but the other base metals closed mixed on insubstantial moves.

Iron ore rose US50c to US$50.70/t.

Gold dropped back on Thursday night when a UK poll showed a swing towards “stay” but on Friday night the lack of any predictable result was evident in gold rallying back US$20.10 to US$1298.0/oz.

The fall in the greenback means the Aussie was 0.4% higher on Saturday morning at US$0.7394.

The SPI Overnight closed flat.

The Week Ahead

While there’s a lot more going on than just the Brexit vote next week, unfortunately nothing else will matter until Friday morning when, presumably, we’ll know the result.

Please God let it not be so close as to take days to confirm.

Three polls over the weekend all suggest “stay”, but still as a close call.

Janet Yellen will provide a scheduled testimony to the US Senate Banking Committee on Tuesday night. The world will be very interested in what she has to say, particularly following Bullard’s comments on Friday night.

With regard data, the US will see existing home sales and house prices on Wednesday, new home sales, the Chicago Fed national activity index and a flash estimate of the June manufacturing PMI on Thursday, and durable goods and fortnightly consumer sentiment on Friday.

Japan and the eurozone will also flash PMI estimates on Thursday.

Normally the eurozone’s ZEW investor sentiment survey, due Tuesday, and Germany’s IFO business sentiment survey, due Friday, would be closely watched, but given the world might change on Thursday the results are irrelevant.

In Australia, March quarter house prices are due tomorrow along with the minutes of this month’s RBA meeting. Is the RBA really “on hold” or could we yet see further rate cuts? Maybe the minutes might hold some clues.

On the local stock front, Metcash ((MTS)) will release its earnings result today, BHP Billiton ((BHP)) will host an investor day in London tomorrow night and Wesfarmers will hold a strategy day on Wednesday.

Rudi will appear on Sky Business on Tuesday, via Skype-link, to discuss broker calls around 11.15am. On Thursday he'll appear for his weekly slot between 12.30-2.30pm and on Friday he'll repeat the Skype-linkup at around 11.05am.
 

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

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

Treasure Chest: ANZ Warns Of Commodity Price Volatility

By Greg Peel

Earlier in the year it appeared as if Beijing’s stimulus measures, both monetary and fiscal, may have been starting to have their desired impact on the Chinese economy. The data began to improve. Mind you, one always has to be wary of misleading Chinese data fluctuations before, during and after the Lunar New Year holiday.

China’s May data now suggest things have taken a turn for the worse once more. Commodity price rebounds out of the February dip have to a degree been driven by stronger Chinese demand for the likes of iron ore, oil, and to some extent, base metals. There have been fears of such demand simply reflecting a re-stocking phase which must eventually come to an end, but analysts have been surprised that this had not yet become apparent.

Reality bit last weekend when Beijing released a weak number for May fixed asset investment, which reflects infrastructure spending. Industrial production was also uninspiring. The weakness in China’s financing numbers for May released earlier this week was notable, ANZ’s commodity strategists point out.

Loan growth was stronger than expected but total social financing was quite subdued, ANZ notes, corroborating the fall in fixed asset investment growth. A decline in the money supply and aggregate finance suggests the Chinese economy has peaked. Yet the data is not so poor as to press the PBoC into more aggressive monetary easing. ANZ nevertheless believes the government will likely launch further fiscal policies and speed up infrastructure approvals.

While the Chinese story is an ongoing one, of more immediate threat to commodity prices is next week’s Brexit vote. A “go” vote will likely send stock and commodity (ex-gold) markets into a tailspin. The impact may only prove temporary, ANZ suggests, but losses could be steep.

Commodity prices should otherwise be supported on the downside now that the Fed has returned to a more dovish stance, in line with market perception. Three anticipated US rate hikes this year have now become one, and that’s not a given either. Rate hikes would have placed upward pressure on the US dollar and thus by default, downward pressure on commodity prices.

It is still likely a Brexit “go” vote will result in US dollar strength as a safe haven for funds following out of the UK and Europe, adding to downside pressure on commodity prices irrespective of general volatility.

The exception is gold, which is more currency than commodity and as a safe haven, can move independently of the US dollar if circumstances warrant. Gold has already challenged the US$1300/oz mark, which will no doubt be breached were the Brexit vote to throw the world into turmoil.

The latest polls have the “stay” vote in front. It will be a nervous week.


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.

article 3 months old

The Overnight Report: Swing Factor

By Greg Peel

The Dow closed up 93 points or 0.5% while the S&P gained 0.3% to 2077 and the Nasdaq rose 0.2%.

Ups and Downs

There were several factors at play in the local market yesterday, belied by a flat close. Brexit, central bank policy and the derivatives expiry were all potentially influential.

The index shot up from the opening bell to be 50 points higher at around 11am, peaking just under 5200. Thereafter the session played out as a slow sell, all the way to be as good as unchanged by the closing bell.

The decision by the Fed overnight not to raise its cash rate came as no surprise, but what did surprise is the apparent capitulation form the central bank after having talked up rates rather hawkishly since April. Janet Yellen has decided, about five years after everyone else, that low interest rates may now be “the new normal”. Was it one bad jobs number? Was it zero rates in Germany? Whatever the case, the FOMC has swung from suggesting three rate cuts to come this year to suggesting one, maybe.

If Fed dovishness is now actually entrenched, the pressure is back on the RBA to cut. US rate hikes would drive the US dollar higher and thus the Aussie lower, but now the Aussie is potentially under threat of rising again in its role as a safe haven, high-yield currency.

Thoughts of another cut may have been derailed by the better than expected addition of 17.900 new jobs in Australia last month, if it not for the fact they were all part-time. Not a soul was given a new full-time job last month, according to the ABS. The unemployment rate remains steady at 5.7% but means little, given the year to May has seen net jobs growth of 1.9% made up of 0.8% full-time and 4.4% part-time.

Employment is supposed to put money in consumers’ pockets. Part-time employment puts in far less. If we were able to add together the part-time hours to make a full-time job, how many new “jobs” would the numbers really show?

Thus it was no surprise the Aussie actually fell yesterday on the release of the employment report, rather than rising as a “beat” might otherwise have suggested. The drill-down is supportive of further rate cuts.

And while on the subject of central banks, the Bank of Japan surprised yesterday by doing nothing. The BoJ’s experimental drop into negative rates has had the opposite effect of that the central bank would have hoped for, actually sending the yen higher. Markets anticipated at least a bump-up of QE yesterday, if not a further foray into the negative. But nothing transpired, so the yen shot up again.

It has become apparent, over time, that the BoJ only acts when no one is expecting it and not when everyone is.

Whatever impact central bank shenanigans had on the local market yesterday, the Brexit cloud still hung, and market protection in the form of ASX index options, SPI futures and futures options all expired. Assuming investors are keen to remain protected, positions had to be rolled over by the close yesterday, if they hadn’t been already, putting downward pressure on the market.

The wash-up at the closing bell was a very mixed bag of sector moves. The defensives of telcos and utilities found support but the biggest move up came in consumer discretionary, thanks to the announced Crown Resorts ((CWN)) restructure and subsequent 13% pop. A bounce in base metal prices had materials in the green but a fall in the oil price had energy in the red, and the banks were lower again.

But today is a new day, with expiry now over and overnight developments to consider on a Friday.

Big Ups and Downs

Europe went back into selling mode last night as stock markets and the euro fell, supposedly on ongoing Brexit fear, a lack of any BoJ action and let’s face it – the sort of confusion that tends to keep investors out. The mood carried over onto Wall Street where the Dow fell 170 points from the open.

Euro and pound weakness allowed the US dollar index to surge despite the stronger yen, and as every man and his dog talks up gold, the safe haven traded up to US$1315/oz despite dollar strength. Oil tanked 4%.

There was further confusion on the news a British pro-stay MP had been shot and killed while campaigning, prompting Prime Minister Cameron to call a halt to all Brexit campaigning. Did this mean the vote itself would be delayed? It appears not.

But then another poll was released. It was not quite a week ago the world went into a tailspin on a poll showing 55% of Britons intended to vote “go”. Last night’s poll suggested 65% now want to stay. There’s only one poll that matters of course, as any polly will tell you if they’re behind, but at the very least it now appears a Brexit is a long way from a done deal.

The Dow rallied back to be up a hundred just before the close. The US dollar index came right back to flat at 94.63. Gold crashed back down to be down US$13.50 over 24 hours at US$1278.00/oz. Oil rebounded, but is still down 3%.

Throughout all the confusion, the German ten-year yield is now officially negative at minus 0.02% and the US ten-year has fallen to 1.56%.

And to top things off, tonight is quadruple witching in the US, with June representing the biggest derivative expiry volumes of the year.

The Brexit vote is five more trading sessions away.

Commodities

West Texas crude is down US$1.44 at US$46.05/bbl.

The LME closed with the US dollar at its peak, thus all base metals bar lead are 1-2% lower.

Iron ore is unchanged at US$50.20/t.

The Aussie is down 0.6% at US$0.7362.

Today

The new September expiry SPI Overnight closed up 35 points or 0.7%. Those wondering why the actual price of the futures has suddenly dropped sharply from the June contract must appreciate the futures now need to discount a full three months of carry.

There is very little of note on the global calendar over the next 24 hours, with quadruple witching on Wall Street the highlight at this time of heightened concern.

Rudi will Skype-link with Sky Business at around 11.05am today 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

Material Matters: Gold, Zinc, Copper, Thermal Coal and Steel

-Real US rates key to gold
-Global zinc deficit continues
-TGS offering leverage to copper
-Oil, LNG driving thermal coal
-Few positives seen for copper, aluminium
 

By Eva Brocklehurst

Gold

Prices for gold are surging, as a patch of bad economic data in the US is seen hampering the Federal Reserve's ability to tighten monetary policy. Macquarie envisages the near-term gains for gold are temporary as it does not believe the US is heading into recession.

The timing of a weak jobs report could not have been worse for the Fed, Macquarie contends. The broker believes the Fed was moving in the direction of raising rates again.

While gold does gain ground amidst Fed inaction, Macquarie notes it has not re-rated against US metrics such as interest rates and the currency. This is because the latest employment report, while poor, does not mean much more than a slightly longer wait for the Fed to hike. The broker's US economist does not find the jobs data indicative of overall trends and still envisages a high probability of a Fed funds hike at the next meeting in July or, if not then, September.

Still, Macquarie remains bullish in the medium term on gold, arguing for higher gold prices in 2017 and 2018, based on increasing inflationary pressures, and the fact the Fed may be reluctant to react compared with previous cycles because of its fear of causing another recession.

The appearance of weak economic data now and then is expected to embolden the Fed's doves and ensure real interest rates in the US remain low, and it is real interest rates that typically determine longer-run gold prices.

Zinc

The top performer among commodities in 2016 is zinc, given mine shortfalls and China-led demand growth, Morgan Stanley observes. The spot price is up 30% in the year to date and above US$2,000/t for the first time since July 2015 and the broker suggests it is close to a peak.

More than half of all zinc supply ends up on steel, as galvanising. So, as steel production rates lifted so did demand for zinc. Softer prices for steel in May reflect a slowing in local demand in China amid emerging anti-dumping constraints on its exports, the broker contends. Still, the growth outlook remains solid for 2016 and the broker continues to forecast a deficit for zinc in the global market in 2016-17.

Copper

Macquarie continues to be bearish on copper, decreasing its FY16 and FY17 copper price forecast by 4% and 9% to US$2.13/lb and US$2.17/lb respectively. Mid tier copper producers in the broker's coverage suffer downgrades to earnings estimates as a result.

Sandfire Resources ((SFR)) remains the preferred copper play, trading on a 2017 price/earnings ratio of 6 versus 11 and 12 for OZ Minerals ((OZL)) and Tiger Resources ((TGS)) respectively. The broker concludes that all three are currently fully valued. The broker also prefers Sandfire's exploration potential in the Doolgunna province over Oz Minerals' Gawler Craton tenements.

In an absolute sense, Tiger Resources offers the most leverage to a near-term improvement in copper prices. The stock is the only primary copper producer under coverage with material geographical risk, which the broker suggests may be discounting the current valuation.

Thermal Coal

Morgan Stanley observes it is over five years since the market was surprised by the seaborne thermal coal market, with prices down 50-60% since the 2010 peak. Since late April prices are up 2-10%, with the biggest moves in the top grades.

The reason the broker finds this rally surprising is the season. A lift might occur in November or December in the pre-northern winter re-stock but not in the middle of the year when the trade is well supplied.

The broker also suggests China's import regime is not the culprit, as it is not a driver of the thermal coal price now. Rather, ongoing strength in crude oil and gas prices are behind the latest rally. China faces a looming shortfall in supply to its coal-fired power grid and in the longer term Morgan Stanley suspects conditions are improving for seaborne thermal coal.

Steel & Iron Ore

The re-start of blast furnaces under higher steel prices seems muted to Credit Suisse. Lower output may reflect a decline in steel prices in mid May but also seasonality, as China's output typically peaks early in the second quarter of the year.

Meanwhile, as the northern slowdown of steel demand approaches, this is likely to keep iron ore demand subdued until mid August and the price appears to be in a holding pattern for the near term.

Credit Suisse expects steel demand will step up again in the December quarter as the infrastructure stimulus that China initiated early in the year comes into play. The broker also notes no building up of iron ore at ports, with China's domestic supply seen declining to balance the market.

China Outlook

Macquarie observes after a trip to China that a more cautious approach to demand is increasing. Most contacts suggested to Macquarie that a peak has already occurred in sequential economic growth for this mini-cycle. Yet none expect a imminent sharp decline. Concerns over structural problems have also started to re-emerge.

The broker's views were reinforced, with a belief that iron ore is well supported around current prices and the recovery in coal is likely to be limited. On the subject of base metals, besides zinc standing out in a tight market, there was little to make Macquarie more positive about copper or aluminium. Industry participants were more cautious about a recovery in nickel than the broker is currently.
 

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.

article 3 months old

The Overnight Report: Hawkish Yesterday, Dovish Today

By Greg Peel

The Dow closed down 34 points or 0.2% while the S&P lost 0.2% to 2071 and the Nasdaq lost 0.2%.

More of the Same

The change of mood was still evident yesterday morning in the wake of Tuesday’s hundred point capitulation as the index opened lower once more. Last week Brexit was a date on the calendar, this week it’s a looming potential catastrophe.

The market did nevertheless decide mid-morning that perhaps enough is enough. Brexit is by no means a given at this stage, and if the result is to stay, one presumes an almighty rebound. If it is to go, well a lot of that risk has already been priced in.

But after managing to hold its ground into the afternoon, the index conceded to selling late in the session to ensure the market closed on its lows. That selling may not, however, be specifically Brexit related. Today sees the expiry of June quarter ASX index options, SPI futures and futures options. If investors are rolling over protection, as is sensible to do before the potentially volatile expiry day, protection sellers are selling stocks to hedge.

The same thing happened on Wall Street last night. More on that in a moment.

While all sectors again finished in the red yesterday, this times the banks (-1.4%) were a particular stand-out. The biggest impact of a Brexit will be felt by the global banking industry, as reflected in the ongoing shift down in global interest rates.

Materials also fell 1.4% on the lower iron ore price and on hedge selling of large caps, which also ensured telcos were down another 1.1%, Thereafter, the magnitude of sector drops tailed off.

As was the case with Tuesday’s NAB business confidence survey, yesterday’s Westpac consumer confidence survey was never going to have much of an impact on a market worried about other things. As it was, it was a pretty solid result.

The confidence index fell 1.0% in June to 102.2. But given it jumped 8.5% in May following the RBA rate cut, economists suggest that to only slip back a percent is a sign of lingering confidence. And numbers over a hundred represent optimism. It’s also not a bad result given election uncertainty. The result pre-dates the sudden rearing of Brexit’s ugly head, but one wonders just how long the average consumer lays awake at night worrying about such matters.

Loss of Credibility

Before last night’s Fed statement release and Janet Yellen’s press conference in the afternoon, there were a couple of significant data releases in the morning.

The US producer price index rose 0.4% in May, beating 0.3% expectations, but it was all about oil prices. Take out oil and food, and the core PPI actually fell 0.1%. Nothing to suggest a rush to hike rates there.

Industrial production fell 0.4% to market the seventh decline in nine months. See above.

Yet according to the afternoon’s Fed statement, and despite a very low March quarter GDP result, the US economy is actually looking better now than it was in April when the last FOMC meeting was held. Back in April, it was the strong US labour market that was driving Fed thinking, and expectation of rising inflation. But now, the Fed sees the labour market slowing.

One bad apple don’t spoil the whole bunch girl. Maybe Donny Osmond should be Fed chairman. The Fed may be data dependent, but the FOMC will be a bit red-faced if the weak May jobs number does prove to be a one-off as many expect.

Whatever the case, the FOMC chose not to raise its cash rate last night. It was a unanimous decision, meaning prior hawks on the committee have now pulled their heads in. More importantly, the infamous “dot plots” showed the FOMC members have all reduced their rate expectations through to 2018. The Brexit vote may have held the Fed up this month, but it would seem a July hike just flew out the window.

Indeed, it appears the Fed may now only be looking at one rate hike this year, down from four after hiking in December. The market thinks even one is becoming unlikely. What has everyone frustrated is that in April the Fed suddenly swung to be quite hawkish, leading markets to prepare for a June rate hike that seemed inevitable. Then came one bad jobs number. Now the Fed is back to being dovish again.

The market had always been dovish. The Fed has come back to meet the market. Who is influencing who?

There is also general feeling, Brexit fears aside, that the Fed simply cannot risk a rate hike when Japan is negative, half of Europe is negative and Germany is on the cusp of negative. The gap may be too much for global markets to handle. Not that global markets are supposed to be the US Federal Reserve’s responsibility.

The fact that the Fed has come back to meet the market was reflected in stock index movements over the session. Indices were a little higher in the morning thanks to rebounds in Europe, and typically quiet ahead of the statement release. On the statement release they did very little at all, which is most unusual. The Dow sat at around 50 points up all through Yellen’s press conference and beyond.

The fact the Dow closed down 34 points, representing a sharp late sell-off, has been attributed to Friday night’s “quadruple witching” equity derivatives expiry – the equivalent of what the Australian market will see today only of a much greater magnitude. The June quarter always represents the biggest expiry volumes, and typically the market starts to roll over positions a couple of days ahead. With protection still being sought at this time of uncertainty, rollovers translate into stock selling.

Commodities

West Texas crude is down another US41c at US$47.49/bbl.

Whatever’s going on in base metals at present, no one’s quite sure. The LME always closes just as the Fed statement is being released, which usually means little movement until the night after. But last night copper jumped 2.7%, following a couple of weak sessions. Aluminium rose 0.5% and nickel and zinc both around 1%, while lead stood still. Short covering was cited.

Iron ore fell US60c to US$50.20/t.

The US dollar index is down 0.4% to 94.59, but that’s all post-Fed. Gold is up US$6.00 at US$1291.50/oz, having briefly kissed 1300 post-Fed.

The Aussie is up 0.8% at US$0.7408 but that is not a Fed-related spike. The Aussie has steadily been climbing over the past 24 hours, possibly as the world comes to realise Australia’s is one of the few developed economies left offering reasonably positive rates. Even at 1.75%.

Today

The SPI Overnight closed up one point. Have we seen the end of the pre-Brexit vote selling? Today, as noted, is expiry day, so anything might happen.

And to that end we note the Bank of Japan will hold a policy meeting today, no doubt very relieved the Fed has backed off.

Locally we also see the May jobs numbers today.

Goodman Group ((GMG)) and Graincorp ((GNC)) will host investor days.

Rudi will make his weekly appearance on Sky Business, 12.30-2.30pm, only to return again between 7-8pm for an interview on Switzer TV.


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: Will I Stay Or Will I Go Now

By Greg Peel

The Dow closed down 57 points or 0.3% while the S&P lost 0.2% to 2075 and the Nasdaq fell 0.1%.

Market-Wide

There is not a lot to say about yesterday’s sell-off on the ASX, which simply echoed global fears that have built since Friday night with regard a possible Brexit. The public holiday in Australia meant some catching up was needed.

All sectors were hammered yesterday, and those involving larger caps more so.

Energy led the charge with a 3.9% fall, exacerbated by the lower oil price. The banks had the biggest impact with a 2.2% drop. Healthcare, which has exposure to Europe, fell 2.9%. Telcos, which might otherwise be a defensive but for mega-cap Telstra, fell 2.0%, and ditto the supermarkets, which fell 1.8%.

The true defensive – utilities – was the outperformer on the day in falling only 0.6%.

The index suffered technical damage in falling through 5225 to rest at 5200, which offers up the potential of a move back to 4800. However what we are dealing with here is a binary risk event. Either Britain will vote stay or go. Markets are currently building in “go” risk and if the polls keep swinging that way over the next few days, there may be more such risk to build in. But then the result may be “stay”, which is still the bookies’ tip to date.

“Stay” would take us all the way back again, presumably. And it is possible “go” will have less of an impact now markets have begun to adjust.

Taking a back seat yesterday was NAB’s business confidence survey for May, which was conducted after the federal budget but before anyone started worrying about a Brexit.

Business conditions continued to improve in May, to 10.1 on the index from 9.7 in April. This bodes well for Australia’s economic transition and employment prospects. But business confidence fell, to 2.7 from 5.3, suggesting concern about the future.

This time last year, confidence surged following the Abbott government’s small business friendly budget. This year’s Turnbull government budget is also business friendly, but it would appear there is concern as to whether there will still be a Turnbull government after July, or worst still, some unworkable hung parliament.

Trader’s Market

What is most notable about Wall Street’s response to sudden Brexit paranoia is a lack of major stock market volatility despite a spike in the VIX volatility index. That index is not measuring volatility based on daily market movement, it is measuring volatility implied by the cost of put option protection. Wall Street is covering its backside, but not bailing out in any mad panic.

Having already fallen substantially on Monday night, last night stock markets were down 2.0% in London, 2.3% in France and 1.4% in Germany. The German ten-year bond yield traded into the negative before settling at 0.00%.

Stock market selling rolled across the pond to send the Dow down 130 point in the morning, accompanied by bond buying that saw the ten-year yield heading towards 1.50%. But once Europe closed, Wall Street turned around. The fact the S&P500 closed down only 0.2% when all about were losing their heads suggests US traders believe the panic is overdone and/or if Europe is about to suffer upheaval, the US is a much safer place to be.

The US ten-year yield ultimately returned to 1.61%.

Adding to the confusion was a 0.5% jump in US retail sales in May, beating 0.3% forecasts. While Brexit is dominating the current market psyche, we must not forget the Fed will release a policy statement tonight. If, as many believe, the May jobs number turns out to be a statistical blip, then the positive retail sales number plays back into Fed rate hike possibility.

But not tonight. Maybe next month, after the Brexit result is known.

Commodities

West Texas is down another US$1.36 at US$47.90/bbl. Of all commodities, oil is most closely linked to the global economy as a whole.

Less so are base metals, which continue to play individual games dependent on actual supply-demand balances, inventories, China and currency moves. The US dollar index has risen 0.6% to 94.93 and copper and lead fell 1.5% and zinc 3%, but aluminium and nickel held steady.

Iron ore fell US$1.00 to US$50.80/t.

Gold is steady at US$1285.50/oz.

Reflecting the stronger greenback, the Aussie is down 0.6% at US$0.7346.

Today

The SPI Overnight closed down 9 points.

Was yesterday’s hundred point wipe-out enough to price in the Brexit factor, ahead of next week’s actual outcome? We are poised at 5200.

Today sees the Westpac confidence survey for June.

Tonight the Fed will release a policy statement, and update its forecasts, and Janet Yellen will hold a press conference.

Nib Holdings ((NHF)) will host an investor day today.
 

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available in the FNArena Cockpit.  Click here. (Subscribers can access prices in the Cockpit.)

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

All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided. www.fnarena.com

article 3 months old

The Monday Report (On Tuesday)

By Greg Peel

Friday

The SPI futures suggested a 27 point opening to the downside on Friday morning but instead the ASX200 dropped 50 points in the first half hour, which again looked like computers gone mad. This assumption was backed up by an immediate attempt to rally back such that within the subsequent half hour, the index was only down 30.

But this time what might otherwise have been another session of grafting back towards square turned into a “just sell and get out of here by lunchtime” session. The index declined again to be down 50 points once more by midday and there it stayed all afternoon as offices emptied for the long weekend.

Word is a couple of large lines were sold in the futures market early in the session, so maybe it wasn’t all the computers’ fault this time.

Aside from the desire to square up ahead of a holiday, we may also point to the fact the index had tried on about three occasions now to break up through 5400, without success. Typically if markets find they just can’t go up, they go down instead. Friday did look like a bit of a capitulation on that front.

And as it transpired, a prescient one.

Commodity price weakness and accusations against BHP Billiton had materials falling 2.3% on Friday but a 1.0% fall for the banks was the standout, and did the bulk of the index damage. Energy dropped 1.3% but thereafter, sector falls were not as significant.

If a proprietary desk made the market for the lines of futures and was hit on the bid, that desk then has to sell “the index” of stocks to hedge their position. One need only slap the big caps – even just the top ten – to have the bulk of the market cap covered. The first thing one thus does is hit the banks, the big miners and so on.

It may have been that come this morning, the market would be ready to regain some of Friday’s lost ground on a bargain hunting basis, assuming nothing came out of left field overseas on the weekend.

But it did.

Friday Night

A new poll was published on Friday night suggesting – for the first time – that more British are in favour of leaving the EU than staying. Prior polls have indicated the opposite balance but Friday night’s poll showed not just a slight bias, but a 55/45 leave/stay split.

The London FTSE fell 1.9%, the French CAC 2.2% and the German DAX 2.4%. Hardest hit were the British and European bank stocks. However, by the time the UK and European markets were closed on Friday night, that Brexit poll result had not yet been published.

Weakness was a reflection of the rolling tide of bond buying in Europe, ahead of next week’s Fed meeting and the following week’s Brexit vote, turning into a torrent. The German ten-year yield traded as low as 0.01%. Ahead of the weekend, European investors were getting out of risky stocks and into safe haven bonds.

Wall Street opened lower as a result but was beginning another familiar graft back again when the poll news hit the wires. The Dow subsequently closed down 119 points or 0.7%, having been down as many as 173 points. The S&P closed down 0.9% at 2096 and the riskier Nasdaq fell 1.3%.

The British pound fell 1.4% against the greenback on the poll news, sending the US dollar index up 0.6% to 94.65.

The US ten-year bond yield closed down 4 basis points at 1.64%.

In the US, it was also the banks that suffered most on the day. The US banks had previously been leading Wall Street back to all-time highs on Fed rate hike expectations, but then along came that May jobs numbers, and now this.

The LME had already closed on Friday night before the Brexit news and greenback rally, and moves among base metal prices were minimal.

Oil was still open nonetheless, and West Texas crude fell US92c to US$49.53/bbl. Aside from the impact of the stronger greenback, the weekly US rig count showed another slight tick up.

Despite the stronger greenback, gold rose $3.80 to US$1273.30/oz as a safe haven.

The SPI Overnight closed down 61 points or 1.2% on Saturday morning.

Sunday

May data released by Beijing on Sunday showed Chinese industrial production rose 6.0% year on year as expected, and retail sales rose 10.0% as expected. The concerning result was fixed asset investment, which fell to a growth rate of 9.5% in the year to May, down from 10.5% in the year to April. Economists had forecast 10.5%.

Within that fixed asset number, private sector investment rose only 3.9% compared to 22.3% growth from the state. This is the figure that has economists worried, as it suggests China’s economy is almost solely been driven by government stimulus at present.

It is nonetheless assumed Beijing will need to bump up that stimulus to offset a weak private sector if year-end GDP growth targets are to be met.

Monday Night

While Orlando provided the shock, the focus of attention for markets across the globe was still the Brexit poll. While there is more than one poll being conducted on a regular basis, and others have a much closer outcome at this stage, suddenly the world is realising the vote is only ten days away and the result is unclear. Previously the “stay” vote was winning in the polls, leading to a level of complacency.

That has now changed.

Having already closed to the downside on Friday night before the latest poll was published, the London FTSE fell another 1.2% last night, while the French CAC fell 1.9% and the German DAX 1.8%.

Wall Street attempted a recovery from the open, prompted by news Microsoft had made a takeover bid for LinkedIn. The bid sent LinkedIn shares soaring 50% and floated all similar boats, while Microsoft (Dow) shares came off around 2%. But it wasn’t long before the mood returned to Brexit concerns.

There is also, of course, a Fed meeting and press conference this week, and meetings for the Banks of Japan and England.

While no one expects a Fed rate hike, the market is simply unsure now whether the Fed will be back in dovish mode or remaining in hawkish mode since the May jobs numbers were released. The Fed is also even less likely now to do anything ahead of the Brexit vote and on that score, nor is the BoE.

It could be a different story for the BoJ nevertheless, who again through no fault of its own is being faced with a surging yen. Seen as a “safe haven” currency, then yen has risen on the poll news as carry trades are reversed in the face of increased volatility. Will this force the BoJ to move further into the negative, or at least step up QE?

That volatility was reflected in the VIX index on the S&P500 last night, which rose 23% to 21 as investors moved to hedge their positions. The sidelines seemed a safer place to be, resulting in the Dow closing down another 132 points or 0.7% last night, the S&P falling 0.8% to 2079 and the Nasdaq dropping 0.9%.

It is going to be an interesting two weeks.

The US dollar index actually managed to slip back a bit last night as the yen became flavour of the month, down 0.3% to 94.38 despite ongoing weakness in the pound and euro. There was therefore no reason not to buy the other safe haven – gold – which is up US$10.50 to US$1283.80/oz.

Having been quiet on Friday night, base metals were mixed last night. Copper rose 0.7% and aluminium and lead both rose 1.5% but nickel and zinc slipped slightly.

Iron ore is down US30c at US$51.80/t.

West Texas crude is down US97c at US$48.56/bbl.

The SPI Overnight closed down 40 points or 0.8% this morning. That equates to a net 101 points down since the ASX closed on Friday for the long weekend.

The Week Ahead

The Fed statement and press conference are due on Wednesday night. The BoE and BoJ meet on Thursday night.

The US will see retail sales and business inventories tonight, industrial production, the PPI and Empire State activity index on Wednesday and the CPI, housing sentiment and the Philadelphia Fed activity index on Thursday.

On Friday it's housing starts and if there were not enough volatility on offer this week already, Friday is the quadruple witching derivatives expiry for the June quarter.

In Australia we’ll see the NAB business confidence survey today and the Westpac consumer confidence survey tomorrow. On Thursday the May jobs numbers are due.

Investor days will be held this week by nib Holdings ((NHF)) tomorrow and Goodman Group ((GMG)) and Graincorp ((GNC)) on Thursday.

Rudi will appear on Sky Business today, via Skype, to discuss broker calls around 11.15am. He'll return on Thursday, twice. First from 12.30-2.30pm and then again, between 7-8pm, for an interview on Switzer TV. On Friday he'll Skype-link again to discuss broker calls around 11.05am.
 

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

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: Nowhere To Run To

By Greg Peel

Do Not Pass Go

Up 18 points from the open, down 34 at lunchtime, down 8 at the close. That was the story for the ASX200 yesterday in what one would assume was a session packed full of conflicting reports and releases, sending investors hither and thither. But it wasn’t.

The only report of any note was a rare profit warning from ever reliable Amcor ((AMC)), confessing to a Venezuelan forex impact in its upcoming result. That stock lost 8% on the day.

The only release of any note was Chinese inflation for May. Annual CPI came in at 2.0%, slightly lower than 2.3% expectations, while the PPI printed minus 2.8%, better than minus 3.1% expectations. So nothing to cause any great anxiety there.

Not only did the index close almost flat, there were no stand-out performers among the sectors either. Telcos (-0.7%) and healthcare (-0.5%) were the worst performers on the day, while utilities, energy and consumer discretionary (all up 0.3%) were the best performers. The banks were off a tad and materials flat.

We still seem to be in Limbo Land, with no great incentive to break away in either direction. Today is a Friday before a long weekend and not a great deal has happened offshore overnight, although the futures are down 27 points this morning to suggest a weak open.

More Work Needed

The common trend on Wall Street at present is to open lower and spend all day grafting back again. This has occurred many times in the last several sessions. It happened again last night, with the Dow opening down to be off 90 points by lunchtime before recovering.

The Dow was sitting smack on 18,000 with only minutes to go, before sell-on-close orders ensured a slight down-day at the bell.

Again, there was not a lot of news to inspire conviction either way. Having shot up over 50, oil fell back a dollar to be just above 50 this morning. Oil’s fall helped Wall Street lower from the outset, but the direct correlation that existed in the March quarter has now all but disappeared in the June quarter.

It would appear Dow 18,000 has been selected by the market as the pivot point as we move towards next week’s Fed meeting and the following week’s Brexit vote. Brexit continues to dominate debate, and we’ve two more weeks to wait.

Commodities

West Texas crude is down US$1.08 at US$50.45/bbl. The selling can be attributed to nothing more than consolidation following the long awaited breach of the 50 mark, with traders now assuming longstanding resistance at 50 will now become support.

It might be interesting to make note at this point that as the price of oil has risen on falling US production, the price of natural gas in the US has also been on a run of late. This seems logical, other than natural gas did not collapse in January as oil did. Having hung around under the US$2/mmbtu mark for a very long time, the Henry Hub price is currently US$2.60, representing a substantial rise.

Not only has US oil production been curtailed, US gas production is being curtailed. The price rise belies the seasonal trend of demand falling off into summer.

While there is no direct correlation between the closed-shop US domestic gas price and the price at which Australia’s LNG producers can sell their product to the Chinese, it’s better to see higher US prices than lower, now that the US is moving towards export.

Having run hard on Wednesday night, last night aluminium fell back 1% and lead 2%. Copper did not run up on Wednesday and has fallen 1% overnight.

Iron ore is unchanged at US$52.10/t.

Gold is up another US$7.00 at US$1269.50/oz despite the US dollar index jumping 0.6% to 94.10.

That jump has helped the Aussie down 0.7% to US$0.7432.

Today

The SPI Overnight closed down 27 points or 0.5%.

Chinese markets are closed today.

Beijing will release May industrial production, retail sales and fixed asset investment numbers on Sunday.

The ASX will be closed on Monday, as will FNArena.

Rudi will Skype-link with Sky Business around 11.15am 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