Tag Archives: Iron Ore

article 3 months old

Material Matters: China, Iron Ore, G7 On Steel & Aluminium, BHP, Nickel And Oz Gold Miners

-Buying opportunity in iron ore?
-G7 strategies re steel, aluminium likely
-More value in shrinking BHP?
-Nickel deficit looms but price capped
-AUD drift down to support Oz gold miners
 

By Eva Brocklehurst

China Outlook

UBS observes real demand is improving in China, just as speculative and re-stocking demand reverses its first quarter momentum. Still, the broker's contacts expect sequential growth to slow through the second half.

Steel prices are expected to fall as supply is re-commissioned and outweighs demand. This, in turn, is expected to compress mill margins and suppress iron ore and metallurgical (coking) coal prices.

The broker observes neutral copper price risks relative to current forecasts, while aluminium and alumina are in deficit with production re-starts likely to cap prices in the near term. Meanwhile, zircon and titanium demand is lifting, but UBS does not observe any pricing tension returning as yet.

Iron Ore

Iron ore prices are back at levels not seen since February and Macquarie observes falling rebar prices in China have clearly put it under pressure. The likelihood is that both steel and iron ore could overshoot on the downside in the near term.

The broker observes steel production rose 0.5% in April and supply has responded to improved margins. Inventory build-up in steel appears to be pushed by supply, rather than any re-stocking demand. Prices should, fundamentally, be sustainable at US$50/t for iron ore, with US$60/t a cap to prices given the sensitivity of supply to re-starts, the broker maintains.

Macquarie suspects the current softness in iron ore pricing could present a buying opportunity for the iron ore miners. Port data suggests Fortescue Metals ((FMG)) is shipping ahead of forecasts while BHP Billiton ((BHP)) is lagging and could miss FY16 guidance.

Rio Tinto ((RIO)), meanwhile is running in line with forecasts. The broker's latest port data has separated shipments for Roy Hill berths for the first time. Roy Hill's shipments have been running at close to 30mtpa for the past four weeks. The broker's preference in the sector lies with Fortescue Metals and Rio Tinto.

Steel & Aluminium at G7

The G7 is in discussions around potential solutions to global industrial over-capacity. Macquarie believes steel and aluminium will be at the forefront of the talks, given the scale of excess supply, high Chinese exports and the interest generated among the G7 constituency.

While the US is likely to lead the lobbying call, the broker observes it is actually the smaller G7 manufacturing oriented countries such as France, Italy and the UK which have suffered the most.

While steel exports tend to hit the headlines, Maquarie notes China's output has dropped more rapidly than its peers in the past three years. In contrast, aluminium has been steadily ramping up, meaning 55% of global output now originates in China.

Macquarie suspects that, like it or not, what happens in China will govern these industries over coming years and, from a G7 perspective, they should accept these industries are lost. Hence, the G7 discussions are expected to be about strategies to protect areas where the next battle lines are likely to be drawn, namely capital goods.

BHP Billiton

Citi suspects BHP is suffering an identity crisis. Its diversity during the “super cycle” was expected to help its dividend policy weather any downturn but the deterioration in commodity prices has proved this incorrect.

Now the broker observes there is nothing in the company's proposed minerals development pipeline defined as greenfield discoveries while oil exploration has been more successful in that regard. While de-merging South32 ((S32)) was viewed as, partly, a recognition that more complex operations do not suit the company's profile, Citi believes there is more work to be done at core operations to be best in class in terms of operating performance.

The broker also observes a reluctance at BHP to trade low margin third party material more aggressively and suggests failed tilts at Rio Tinto and Potash Corp indicate M&A is not the company's forte either. To value the stock the broker notes the main issue is increased volatility around earnings and dividends, and further analysis suggests the company could deliver greater shareholder value by shrinking the business further.

Nickel

Macquarie finds increasing signs the nickel market is moving to deficit, amid a significant tightening of the global physical market. Production cuts have so far been larger in nickel than for any other base metal. Macquarie forecasts a deficit of over 70,000 tonnes this year.

Nickel use has surprised the market, with a sudden rise in Chinese stainless steel production. Macquarie observes March production rose 50% month on month. The surge is a consequence of the fiscal and monetary stimulus enacted by the Chinese government, with a real consumption impact in construction and infrastructure.

While this is expected to unwind gradually in the second half of the year it should still leave usage higher than previously envisaged. Macquarie also observes a tightening in supplies of secondary nickel. If the nickel scrap shortage turns out to be more serious than assumed, and nickel ore supplies from the Philippines do not accelerate sharply, the broker suspects the deficit into 2017 could even be larger.

While history suggests high inventories do not stop prices rising when the market moves to deficit, Macquarie believes high stocks will restrict, but not prevent, upside in nickel prices over the next 18 months.

Gold Miners

Gold prices are likely to rebound to over US$1,400/oz by mid 2019, driven by investment demand, inflation and global negative real rates, Macquarie contends. In this case the broker's revamped, lower-for-longer, Australian dollar forecasts translate to a 1-6% increase in forecasts for the Australian dollar gold price.

In the near term, however, Macquarie believes weakness in gold is not helped by the Australian currency and expects Australian dollar spot gold to trend down to $1,670/oz. Marking to market the gold price has driven modest upgrades to all producers, with the broker noting Alacer Gold ((AQG)) and Saracen Minerals ((SAR) feature larger percentage upgrades because of modest earnings forecasts in the current year.

Key near-term beneficiaries of the broker's lower currency estimates are Evolution Mining ((EVN)) and St Barbara ((SBM)). As a result of the strong appreciation in the share prices the broker has downgraded Evolution Mining to Neutral from Outperform and Regis Resources ((RRL)) to Underperform from Neutral.
 

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article 3 months old

The Monday Report

By Greg Peel

New High

In recent trade the ASX200 has had a couple of goes at breaching 5400, only to find profit-takers lined up in readiness. The push higher has been helped along by Wall Street, which has also been working its way back toward its highs. But whereas traders have dismissed the rally on Wall Street as a temporary short squeeze, short positions in Australia have recently been historically low.

Which suggests genuine buying is behind the local rally, with shorter term traders happy to call 5400 an appropriate level to cash in. But on Friday the index shot straight through 5400 from the open and reached as high as 5427 by mid-morning. This would suggest traders who had been riding the rally from under 5000, particularly in the likes of the big resource stocks and banks, have now squared up.

The index meandered its way in the afternoon, Friday-style, to a close of 5405 which, although below the high of the day, represents the first close above 5400 since the index plunged through that level in the China scare last August.

A half percent gain for the banks was the primary driver, while Wesfarmers managed to find some buyers having previously been knocked down on its write-offs. Consumer staples led the gains with 1.0%. For once the resource sectors sat it out, while buyers continue to look to the yield-payers of telcos and utilities in the face of likely ongoing RBA rate cuts.

The SPI futures closed up 23 points on Saturday morning, suggesting we should be set to go on with it today. But Wall Street is closed tonight, as is the UK, and it’s a very big week for local economic data releases, including March Quarter GDP.

More Yellen

All eyes were on Janet Yellen on Friday in the US as the Fed chair spoke at Harvard University. Given the apparent step-up in hawkishness emanating from her FOMC colleagues of late, Wall Street was keen to hear whether the typically more dovish chair would yet again pour cold water on the debate.

In the end, Yellen didn’t really say anything to fuel either the June hike or no June hike arguments. If the US economy continues to show signs of recovery, according to the data, then another rate hike sometime in the next few months would be appropriate, she said. And caution will be required.

While the US indices typically wobbled on the news, as the computers tried to interpret Yellen’s words, it was a case of a small down before a rapid recovery. Perhaps the take-away is that Yellen said nothing that suggests there will not be a rate hike in June. This was enough to see US bank stocks continue their interest rate-driven rally, while the US dollar index and US ten-year bond yield also rallied, implying rate hike expectations.

Or at least improving odds of a rate hike. The Fed futures market is presently only pricing in about a 33% chance of June hike. Perhaps those odds might tighten if the Brexit polls in the UK continue to trend further toward the “stay” vote, albeit many still believe the Fed will not consider moving until July just in case.

With regard the Fed’s “data dependence”, Friday night saw the first estimate of March quarter GDP revised up to 0.8% from a previous 0.5%, largely in line with expectation. Additional growth came from housing construction and warehouse stocking. We recall that the first estimate is always an extrapolation of the first month of the quarter – in this case January – and the first revision adds in the second month before the final revision adds in the third. Mid-winter is always the slowest period.

We’re about to enter June so the March quarter seems a long way away, but the positive revision was nevertheless seen as a positive by the markets, rather than generating a rate hike scare. As has been the Fed’s intention for some time, markets are now relatively well prepared for a rate hike.

Commodities

The US dollar index was 0.6% higher on Saturday morning at 95.70 as it continues to price in a rate hike or at least the underlying reason for a rate hike, being an improving US economy. It is the improving US economy that is providing reason for commodity prices to hold their ground, despite the mathematical drag of the stronger dollar.

Signs of Chinese restocking also supported base metal prices on Friday night, with the LME closing ahead of Yellen’s Harvard visit. Lead and zinc rose 1% while the other metals saw smallish gains. The LME is closed tonight.

West Texas crude is US14c higher at US$49.54/bbl.

Having looked a bit vulnerable under US$50, iron ore rallied back US$1.00 to US$50.90/t.

More beholden to the inverse relationship with the greenback is of course gold, which fell for the eighth straight session on Friday to US$1212.80/oz, down US$6.70.

The Aussie was 0.5% weaker on Friday morning at US$0.7185.

The SPI Overnight closed up 23 points or 0.4%.

The Week Ahead

It is a very big week for data this week.

Wednesday is the first of the month, which means manufacturing PMIs around the globe, followed by services PMIs on Friday.

After the holiday tonight, the US will see personal income & spending, including the Fed’s preferred PCE inflation gauge, consumer confidence, Case-Shiller house prices and the Chicago PMI tomorrow night. Wednesday it’s construction spending, vehicle sales, the Fed Beige Book and the ADP private sector jobs number for May.

Thursday it’s chain store sales, while Friday brings factory orders and the last set of non-farm payroll numbers before the June Fed meeting.

The ECB holds a policy meeting on Thursday.

Australia can also strap in.

In terms of monthly data, we have building approvals and private sector credit tomorrow, house prices and the manufacturing PMI on Wednesday, retail sales and the trade balance on Thursday, and the services PMI on Friday.

In terms of March quarter numbers we have company profits and inventories today, the current account, including the terms of trade, tomorrow, and the GDP on Wednesday.

The data is hotting up just as the corporate news begins to wind down ahead of books-close, notwithstanding any more profit warnings that may surprise during this “confession session” period.

ALS ((ALQ)) will release earnings numbers today and hold an investor day tomorrow. FlexiGroup ((FXL)) will hold a strategy day tomorrow, and Challenger ((CGF)) an investor day on Thursday.

Rudi will Skype-link with Sky Business on Tuesday morning, 11.15am, to discuss broker calls. On Wednesday he'll present Your Money, Your Call Equities while the masses will be watching State of Origin. On Thursday he'll re-appear 12.30-2.30pm and again between 7-8pm for the Switzer Report. On Friday he'll repeat the Skype-link, probably around 11.05am.
 

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

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article 3 months old

The Overnight Report: Consolidation

By Greg Peel

The Dow closed down 23 points or 0.1% while the S&P was flat at 2090 and the Nasdaq rose 0.1%.

Resistance

After another strong session on Wall Street, the ASX200 shot up 30 points from the bell yesterday, hit a brick wall at 5400, and promptly tumbled just as quickly to be down on the day. After dusting itself off, the index again staged a rally before running into the weak capex numbers.

Again we were in the negative. But ultimately the market grafted its way back to a close of 5388, once again eyeing off the 5400 barrier.

It was a mixed bag among the sectors yesterday. Energy (2.0%) and materials (1.7%) again led the charge to the upside with the banks providing only limited support, while the selling continued in Wesfarmers ((WES)) following prior announced impairments. Hence consumer staples fell 2.1%. Telcos and utilities also came under some pressure.

The headlines have all been typically sensationalist over a weaker than expected March quarter capex result but in fact the numbers weren’t as bad as they looked, if one considers that there are two sets of numbers. There is the “what was” of actual capital expenditure over the period and there is the “what will be” of capex intentions for the next financial year.

“What was” fell a larger than expected 5.2% and will have economists trimming their March quarter GDP forecasts. Mining fell 12% and non-mining rose 0.4%. We can take some solace in the fact the “mining” number must eventually stop falling, although we still have to get past the ramp-up (and subsequent end to capex) of the big LNG projects. Meanwhile, non-mining is just not gaining enough traction to make the difference.

If we look at the “what will be”, the second estimate of FY17 capex intentions came in at a better than expected $89.2bn, up 6.3% higher than the first estimate a quarter ago. Of that $89.2bn, mining accounts for $36.0bn and non-mining $53.2bn. That would seem a step in the right direction.

While the RBA will be keen to have learned just how the Australian economy really did fare in the March quarter, it is capex intentions that inform monetary policy going forward.

Meanwhile, the market still gives the impression it really wants to break through 5400. Perhaps once the profit-taking is exhausted, it might. But today is a Friday, there is no support from Wall Street for another sortie, and this weekend is also a long one in the US, providing cause for traders to square up.

Happy Birthday

The Dow turned 120 years old last night.

While the Dow Jones company was keen for a celebration, Wall Street had no plans to turn on an exciting session. After two solid days of rallying, the Dow took a breather. While going nowhere does not provide much opportunity to make money, traders were nevertheless pleased to see the indices hold their ground in consolidation rather than sharply fall back again, as is often the case.

In economic news, US durable goods orders rose 3.4% in April but stripping out the lumpy transport component left a more modest 0.4% gain. The core capital goods component, which is seen as a proxy for business investment, fell 0.8%, and has fallen in five of the past six months.

So not a particularly rosy picture there. By contrast, the US housing market continues to surge along, with pending home sales jumping in April to their highest level since February 2006. The pending home sales numbers match very strong new and existing home sales numbers released earlier in the week, as well as an ongoing rise in house prices.

The other important driver of Wall Street at present – oil – saw an initial rally last night to push WTI over the 50 mark, but 50 is to oil what 5400 is to the ASX200 at the moment, and this morning oil prices are down slightly from the day before.

It is a full session in US equity markets tonight but the tumbleweeds will be rolling through the NYSE after lunch as Wall Street is evacuated for the Memorial Day long weekend – the unofficial start of summer.

Commodities

West Texas crude is down US34c at US$49.40/bbl and Brent is down US43c at US$49.47/bbl. I think it is now fair to say WTI has regained its place as the global oil benchmark from Brent, now that the spread is negligible and US oil production is the swing factor in global supply. To that end, Brent prices will continue to appear on the FNArena website but I’ll only mention it here from now on if something strange happens.

When WTI breached 50 last night, LME traders decided enough selling had been seen and piled into base metals, sparking a short-covering scramble. When oil retreated again, so did metal prices, but while copper and nickel only managed gains of around 0.5%, aluminium rose 1%, zinc 2.5% and lead 3%.

Metal prices were also supported by another dip for the US dollar index, down 0.3% to 95.15.

Speaking of magic 50 marks, iron ore fell US10c to US$49.90/t.

Despite the weaker greenback, gold is down US$4.50 at US$1219.50/oz and because of the weaker greenback, the Aussie is up 0.3% at US$0.7223.

Today

The SPI Overnight closed up 5 points.

The US March quarter GDP result will be revised tonight and Fed chair Janet Yellen will speak, potentially sparking some volatility that might otherwise be absent on a pre-long weekend Friday.

Locally, Fisher & Paykel Healthcare ((FPH)) has released its earnings report this morning.

Rudi has returned from his up-close evening with FNArena subscribers in good spirits and he will Skype-link with Sky Business at around 11.05am this morning to discuss broker calls.
 

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article 3 months old

Wesfarmers Dividend Under Threat?

-Returns should improve with re-base
-Dividend yield appealing
-Yet will the dividend be re-based?
 

By Eva Brocklehurst

Wesfarmers ((WES)) has bitten the bullet on retailer Target and its Curragh coal mine, outlining large impairments which will be taken in FY16. The charges do not provide new information, Deutsche Bank maintains, given these two businesses have been operationally weak for some time. While not a positive development, the broker notes the perverse side effect is that returns will improve and profit will lift as a result of a smaller capital base.

Wesfarmers has suggested the impairments will not impact on the company's debt covenants nor the calculation of the final dividend.

Target will make a $50m loss in FY16 from clearance activity and lower gross margins. Restructuring costs of $145m will be incurred, relating to head office, supply chain and inventory. Target will take an impairment of $1.1-1.3bn on its books in FY16. Curragh will incur an impairment charge of $600-850m, driven by a slower-than-forecast recovery in long-term export coal prices and FX.

Otherwise, the medium-term group outlook is considered robust, supported by Bunnings and Coles. Ord Minnett believes these two businesses form the more attractive features of the conglomerate's offering, as well as the company's skilled cash management and a focus on returns. Valuation support is considered modest but the dividend yield and underlying earnings growth are appealing, given the few attractive investment options around.

While larger than expected, Ord Minnett was not surprised by the charges, but raises its rating to Hold from Lighten now the challenges facing resources and Target are well accounted for in the FY16 results. The broker notes early indications of the plan to turn Target around were provided and the discount department store industry is expected to remain aggressive in its clearance activity, adding downside risk to the sector.

Morgan Stanley suspects the next step will be a reduction in Wesfarmers' dividend. The dividend has grown each year since it was re-based to $1.10 in FY09 but the broker expects the weaker resources and Target earnings, as well as the relatively high FY15 pay-out, suggest it may be re-based in FY16. A dividend of $1.80 is forecast, reduced from the $2.00 delivered in FY15.

The broker lowers FY16 earnings estimates by 7.0% to reflect weaker resources earnings and the re-base of Target. Despite this, Morgan Stanley notes the relatively strong outlook for Coles and Bunnings, which now contribute around 80% of group profits. A suspicion that the dividend will be cut is doing the rounds at Citi as well. The broker also suggests the group may be due a downgrade in its credit rating, given funds from operations versus total debt are not improving quickly enough. Citi retains a Sell rating.

Credit Suisse makes no changes to its dividend assumptions and expects Wesfarmers to retain a pay-out ratio close to 100% for FY16. The broker observes most of the charges for Target are associated with the clearance of excess inventory and, therefore, have no negative implications for the business performance in FY17.

Credit Suisse assumes a one-year pay-back on staff redundancy and three-year pay-back on head office closures, implying $40m in cost reductions. There are also no cash flow implications from writing down the carrying value of Curragh and the broker suggests that a change in internal valuation might make for an easier divestment decision.

The performance of Target is disappointing but Macquarie notes the expected loss will be less than 1.5% of FY16 group earnings. The broker observes a positive sales trend across the main retail businesses of Coles, Bunnings and Kmart and retains an Outperform rating.

UBS lauds the company's strategy and market share gains but wonders just how much stronger the top line can grow in a slowing market, and believes it will be increasingly difficult for the company to maintain profitable top line momentum in Coles. The choice management faces, in the broker's opinion, is whether to focus on margin or top line growth in a competitive and deflationary trading environment.

On FNArena's database there is one Buy rating, six Hold and one Sell. The consensus target is $40.58, signalling 1.0% downside to the last share price. Targets range from $37.30 (Citi) to $42.61 (Macquarie). The dividend yield on FY16 and FY17 estimates is 4.8% and 5.1% respectively.
 

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article 3 months old

The Overnight Report: Encore

By Greg Peel

The Dow closed up 145 points or 0.8% while the S&P rose 0.7% to 2090 and the Nasdaq gained 0.7%.

Green on Screen

After two wavering and nervous-looking sessions for the ASX200 on Monday and Tuesday, yesterday saw a return to the type of buying we saw last Friday – index wide. Thanks to a sudden return to exuberance in Europe and on Wall Street, Australia joined in the risk-on flurry.

As oil prices push up towards the 50 mark, energy led the charge with a 2.7% gain. At the other end of the scale, the defensives of utilities and consumer staples dragged the chain somewhat, only managing gains of around half a percent. Every other sector posted uniform gains of around 1.5%, and thus so did the ASX200 by the close.

There was a slight fade at the end – the index almost raised its bat to the crowd around lunchtime before settling up 76 – but otherwise yesterday’s “rally” mimicked that on Wall Street in being a step-jump from the opening bell and thus not much of a “rally” per se.

However while Wall Street traders were suggesting on Tuesday night it was all about a short squeeze and little else, Australia’s level of short positions are as low as they’ve been for a long time. And shorts in the Big Caps are minimal. Thus we can’t call yesterday a short squeeze downunder. We may, nevertheless, call it jumping on the bandwagon.

The volume of construction work in Australia declined by 2.6% in the March quarter, yesterday’s data revealed – worse than the 1.5% decline forecast. Engineering construction fell 4.2% to be down 13.7% year on year, balanced by a rise in residential construction of 1.5%, up 5.7% year on year. The housing boom is not finding the support elsewhere to overcome rapidly declining resource sector investment. The Australian economy is struggling in its transition.

Not that anyone cared yesterday. And besides, Glenn’s got our backs.

The construction data feed into today’s more influential capex numbers. Could they take the wind out of the sails?

Same Again

On Tuesday night global markets were encouraged by easing Brexit fears. We recall that the tag “Brexit” had its origins in something we all used to worry sick about in previous years – a possible “Grexit”.

Last night eurozone finance ministers agreed to release E10.3bn of bail-out funds to the still-struggling member, despite Germany’s opposition, two days after the Greek parliament voted to enact a further round of spending cuts and tax increases. The ministers also agreed to offer Greece further relief in 2018 if required.

While not in the class of a Brexit in terms of possible global turmoil, staving off renewed Grexit fears is still a mild positive for the risk-on players. And we won’t have to all go on and on about it again.

Otherwise another day of rallying on Wall Street was simply a follow-on from Tuesday. And while volumes were a little better last night than the night before, they still weren’t the stuff of buyer conviction. Again traders declared the rally to be driven by little more than short-covering, and advised their clients to sell into to it.

Last night’s monthly trade data released in the US showed an increase in both exports and imports, further fuelling a sudden belief the US economy is actually doing pretty well. Positive data continue to feed into June rate hike expectations, and thus into strength in the US financial sector. Tonight all eyes will be on durable goods. Another gain for oil prices, almost to the 50 mark, also helped drive a second session of market gains.

On Monday night, Wall Street barely moved, uncertain as to what might transpire with the UK and with Fed policy. Since then, the Dow is up 358 points.

Commodities

West Texas crude is up US63c at US$49.74/bbl and Brent is up US77c at US$49.90/bbl.

Aside from playing off supply numbers, oil is looking at stronger US data as a positive sign. The trade-off is a stronger US dollar a Fed rate rise implies. Base metal markets should also see stronger data as a positive, but are more fearful of the greenback at present and unsure over demand-supply, given China is yet to show any real rebound.

The US dollar index has slipped 0.2% to 95.40 but aluminium, lead and nickel are down 0.5-1.5%. Copper is up a percent.

Iron ore fell US20c to US$50.00/t.

Stability in the greenback means gold has also stabilised at US$1224.00/oz.

The Aussie is 0.2% higher at US$0.7199.

Today

The SPI Overnight closed up 34 points or 0.6%.

If accurate, that would take the ASX200 over the 5400 mark. The question is as to whether we will see profit-takers come in at that level, or whether a breach will bring in fresh buying.

As noted, the US sees durable goods data tonight but before that, the local release of March quarter private capex and capex intentions numbers today will be very closely watched by the RBA.

Aristocrat Leisure ((ALL)) will post its earnings result today.

Rudi will make his weekly appearance on Sky Business, 12.30-2.30pm and tonight he shall entertain a small group of subscribers who signed up for the Sydney "An Evening With Rudi" event.
 

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

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

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

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article 3 months old

The Overnight Report: Oh Won’t You Stay

By Greg Peel

The Dow closed up 213 points or 1.2% while the S&P gained 1.4% to 20176 and the Nasdaq jumped 2.0%.

Reprieve

Had I been writing this Report yesterday evening I would have suggested the local market looked very vulnerable. Last Friday we saw a market looking very much like it wanted to go up, supported by recent developments in monetary policy. On Monday we plunged from the open but immediately the technical buyers stepped in.

But that rebound faded in the afternoon. Yesterday we saw another attempt to recover from early sogginess before a sharp fall towards the closing bell. That drop ensured a close under 5300, and that is technically weak. Markets that want to go up but can’t find support tend to swiftly become markets that go down.

Had the Dow been down two hundred points this morning it would have been Goodnight Irene. But the Dow is up two hundred points so the local market is in for a reprieve. The futures are up 75 points this morning.

Yesterday saw only healthcare and utilities hold up against a tide of weakness elsewhere. Energy saw the biggest fall of 1.3% on a lower oil price, but oil is strong this morning. Materials responded to a weaker iron ore price and that was weak again overnight, albeit the two big miners rallied in London.

The telcos finally caved with a 1.0% fall and it's surprising that hadn’t happened earlier, given Telstra’s outage woes.

All of the above will prove academic today.

More enduring is RBA governor Glenn Stevens’ suggestion in a Q&A yesterday that inflation in Australia is too low, and that RBA still wants to see it back above 2%. This implies another rate cut is on the cards, and as such the index did jump higher, briefly, at lunchtime yesterday, before selling again overwhelmed.

The Aussie also dutifully dropped on Stevens’ comments, despite the fact the market has already baked in another rate cut and that’s what had us down at 72 in the first place. Strength in the greenback overnight had the Aussie falling as low as 71.4 before it stabilised, down 0.6% over 24 hours at US$0.7184.

Risk On

There’s been a lot of concern of late about the upcoming Brexit vote, much Chicken Little commentary and speculation the Fed will remain on hold until after the referendum just in case the world goes to hell in a handcart. Polling, up to now, has favoured the “stay” vote, but inconclusively so.

The latest poll released last night has inspired confidence in there being no Brexit. It showed “stay” at 55% and “go” at 42% -- the widest margin to date. Importantly, the poll only recorded the intentions of those who definitely plan to vote, and for the first time the “stay” vote outweighed the “go” vote in the over-65 cohort.

The fear has been that the “goers” would be more likely to come out to vote than the “stayers”, and that there would be a greater nationalistic fervour among older Britons. Last night’s poll eased those fears.

And subsequently eased market fears, both in London and across the Channel. The FTSE jumped 1.4%, the German DAX 2.2% and the French CAC 2.5%.

That sense of relief then flowed across the Pond. But if that wasn’t enough, data released before the opening bell on Wall Street revealed US new home sales jumped 16.6% in April, the biggest monthly jump in 24 years.

(Keep an eye on those Aussie stocks with a finger in the US building materials pie today.)

For US home building stocks, it was off to the races. And for the rest of the market, the result was the same. But hang on…surely the strong home sales numbers give the Fed more reason to hike in June, and an easing of Brexit fears removes that particular barrier? Shouldn’t Wall Street crumble on rate hike fears?

Many believe this will likely still occur in the short term, were the Fed to hike next month. But in the wider scheme of things, such a solid new homes sales result suggests the US economy is actually at lot stronger than many had assumed – particularly those who up to now could see no economic reason why the Fed should feel the need to hike. And on a global scale, if there is to be no Brexit then that takes out a major concern that would otherwise have investors hiding on the sidelines.

Two sectors stood out last night – banks and tech. Rate hikes are good for banks. Tech represents the epitome of the “risk on” trade, being for the most part very speculative. But “tech” includes names like Apple, and when the biggest stock in the market rallies hard, there’s a big impact on the indices.

Yet it wasn’t really a “rally”, per se. The Dow shot up 200 points from the opening bell and stayed there all day. Volumes were not particularly heavy. It is thus most likely, commentators agreed, that last night was more about short-covering than anything else.

Commodities

It also didn’t hurt that West Texas is up US$1.00 or 2% after a couple of soggy sessions, to US$49.11/bbl, and Brent is up US76c at US$49.13/bbl – as good as parity. The strong home sales data feeds back to expectations of stronger oil demand.

Base metal prices could fare no better than mixed in London nevertheless. Copper and nickel are up around half a percent and aluminium, lead and zinc are down around half a percent.

Iron ore fell another US$2.50 to US$50.20/t.

The US dollar index is up 0.4% to 95.59 on rate hike expectations, thus gold is down US$21.30 at US$1226.90/oz.

Today

The SPI Overnight closed up 75 points or 1.4%.

Locally we’ll welcome the numbers for March quarter construction work done today, which feed into tomorrow’s capex data. Otherwise, it’s quite a busy day on the local stock front.

Programmed Maintenance ((PRG)) will release its earnings result. Investor days will be held by all of Boral ((BLD)), Suncorp ((SUN)) and WorleyParsons ((WOR)), while Perpetural ((PPT)) will provide an update on its investment division.

Adelaide Brighton ((ABC)) and G8 Education ((GEM)) are among a handful of companies hosting AGMs today.
 

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article 3 months old

BlueScope May Have Peaked

-Steel prices likely peaking
-More cost cutting to come?
-Positives seen mostly priced in
 

By Eva Brocklehurst

BlueScope Steel ((BSL)) has raised its guidance for the second half of FY16 by 29%, reflecting higher steel and iron ore prices, stronger domestic volumes and earlier realisation of cost savings.

Steel prices rallied in the first half of the year as global demand fundamentals improved, particularly in China, underpinning the stock. Nevertheless, broker views diverge as to how much further upside exists. BlueScope has also signalled North Star has resumed full production after an outage on May 7, with the costs in line with guidance of $5m.

The improvement in the second half largely stems from the pull-forward of cost reduction initiatives and better-than-expected volumes in the domestic business in a traditionally seasonally weaker period. Of note, UBS observes the improvement in steel spreads and commodity prices, around 20-30% since February, has only contributed to some of the guidance upgrade, which paves the way for further improvements in the first half of FY17.

Steel spreads have turned positive since November, with mills generating a positive cash margin since March. Yet UBS believes the bias from here is to the downside, in the absence of a sustained turnaround in demand. Hence, with most of the positives priced into the stock, the broker downgrades to Neutral from Buy.

Ord Minnett also takes the opportunity to downgrade to Hold from Accumulate, suspecting regional steel spreads have peaked. Chinese government support is weighted to the first half and increased production is likely to dampen pricing, the broker adds. While updated guidance provides relative certainty regarding near-term earnings, Ord Minnett finds no catalysts that could readily lead to a positive surprise.

In contrast, Goldman Sachs reiterates a positive view and believes the FY17 earnings outlook continues to strengthen. The broker calculates the recent steel price rally, cost reductions, new product initiatives and NZ restructuring all combine to deliver a 30% year-on-year rise in FY17 estimates.

Goldman, not one of the eight stockbrokers monitored daily on the FNArena database, recommends buying into weakness and retains a Buy rating with an $8.10 target. Nevertheless, in the near term, the broker suspects the stock will remain volatile as the market evaluates the exposure to falling East Asian steel prices amid a positive outlook for FY17.

Citi, too, welcomes the upgrade and expects momentum will last into the next financial year. The broker prefers the steel output exposure of BlueScope to that of inputs such as iron ore, base metals and coal. The revised guidance is also 17% above Credit Suisse's forecasts, with six weeks of exposure to stronger spreads factored in compared with prior guidance.

The broker suggests that while the quantum of targeted cost cutting has not been revised, this early success could indicate there is more to come. Credit Suisse also assumes a $60/t contraction in the steel spread from the current spot spread and expects a lower iron ore price will affect NZ earnings. Still, the broker believes earnings forecasts already take account of these lower spreads and maintains an Outperform rating.

Trends in commodity prices could act as a headwind in the months ahead, Macquarie contends. The broker considers the stock is comparatively inexpensive, while there remains some prospect of upside to cost reduction targets, and suspects the prospect for further improvement on this front stems principally from the gains associated with a revised enterprise agreement at Port Kembla.

Deutsche Bank is nonchalant about the upgrade, suggesting  consensus forecasts were 9.0% ahead of the prior guidance already, and retains a Hold rating. The broker also notes some moderation in the recovery in East Asian hot rolled coil spot spreads over the past month, declining $59/t to $336/t since April 25.

There are four Buy ratings on FNArena's database, where there were six back in February, with three Hold. The consensus target is $7.08, suggesting 15% upside to the last share price. Targets range from $6.09 (Deutsche Bank) to $7.67 (Citi).
 

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article 3 months old

The Overnight Report: Waiting Game

By Greg Peel

The Dow closed down 8 points while the S&P lost 0.2% to 2048 and the Nasdaq fell 0.1%.

Contrast

What a difference a weekend makes. On Friday local investors steadily pushed the ASX200 up 0.5% to the close in a mostly straight line, with all sectors faring relatively equally. The session smacked of index buying. Yesterday, in stark contrast, was a rock’n’roll affair.

The index opened slightly higher before promptly falling 54 points to late morning. It then rallied to be back in the positive by 2pm before falling away again to the close, down 32 points. For the most part, the sector moves up on Friday were all largely reversed.

The exceptions were telcos, which held their ground, and energy, which dropped 2.0%. Analysts are quite happy with Oil Search’s ((OSH)) complex bid for InterOil but investors sold the stock down 3%. Individual company issues which were absent on Friday were back in force yesterday. Beyond Oil Search, we had a profit warning from Flight Centre ((FLT)), the fourth most shorted stock on the market, which fell 9%, and a profit upgrade from BlueScope Steel ((BSL)), which jumped 7%.

On Friday the focus appeared to be on the potential for ever lower rates from the RBA, despite a reasonable economy, and the benefits that might bring. Yesterday investors appeared concerned about commodity prices once again, as oil fails to push through 50 and iron ore futures took a tumble yesterday afternoon. Spot iron ore fell 5% overnight.

With macro fundamentals a difficult beast to grasp at present, the market seems unsure just what it should be doing. The bounce off the low yesterday before a rally back to square occurred when the index hit the 5300 mark, suggesting technical buying. With Wall Street flat overnight and equally unsure of direction, we may well be stuck in a range now for a while, notwithstanding any left of field developments.

June Looms

Brexit risk is increasingly on everyone’s minds. At this stage the polls favour the “stay” vote winning on June 23 but not by any clear margin. Given the referendum is not compulsory, “stay” supporters are concerned it benefits those with a more nationalist bent who may make a point of voting while the status quo-types may not be so committed. Whatever the case, it is as yet too close to call.

The Fed releases its June policy statement one week earlier. Wall Street generally believes the FOMC would not be inclined to cause potential turmoil with a rate hike if a week later a whole new round of turmoil manifests. If a rate hike is otherwise on the cards, it may come down to what the polls are saying as we get closer to the event.

Either way, Wall Street has swung from not expecting a rate hike until at least December to suddenly having to contemplate a hike as early as next month, with potentially more to follow. Yet not a helluva lot has changed in the interim. Wall Street is confused, and cautious.

Janet Yellen will speak on Friday night. It’s a full week away, but already in last night’s session talk is of the market not wanting to do anything bold until Yellen has her say. Recent Fedspeak has been decidedly hawkish but Yellen has a track record of appearing far more dovish than her voting members, seemingly always being the one to pour cold water on rate hike expectations.

We note also that the June Fed meeting is a quarterly, meaning updated economic forecasts and a press conference with the Chair. Often it is the conference and accompanying Q&A that sends markets off in a new direction, rather than the policy statement itself.

Commodities

West Texas crude rolled over into the July delivery front month last night and in so doing, closed the gap on Brent to a negligible amount. WTI is down US30c at US$48.11/bbl and Brent is down US50c at US$48.37. Hard to believe that spread was once US$27, although prices were a lot higher then.

The US dollar index is again steady at 95.24 and thus having no impact on commodity prices. LME traders remain just as cautious as everyone else and devoid of direction. Last night aluminium rose 1% while lead and zinc fell 1% and nickel fell 2%.

Iron ore fell US$3.00 to US$52.70/t.

Gold is down US$3.70 at US$1248.20/oz.

The Aussie is also steady, at US$0.7224.

Today

The SPI Overnight closed down one point.

As central bankers continue to dominate the markets they were once upon a time silent witnesses to, Glenn Stevens will speak today and take a Q&A.

Technology One ((TNE)) will issue an earnings result.

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

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

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

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

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article 3 months old

The Monday Report

By Greg Peel

Buying Mode

There’s really not a lot to say about Friday’s action on the local market. The index rose relatively consistently throughout the session ahead of a bit of Friday-like afternoon profit-taking, while still closing on a robust 0.5% gain.

Every sector finished in the green. The only sectors not to rise at least 0.5% were financials, on 0.4%, and healthcare, on 0.3%, while at 1.3%, tiny info tech was the only sector to exceed 1.0%. Every other sector fell evenly between those two, suggesting Friday’s action was more about index buying than about individual company movements.

And why not? one might ask. What’s the alternative? A term deposit paying 2.5%? A government bond paying much the same over ten years? Both of which are taxable. While eight years down the track investors still shudder at the memory of their GFC experience, and still carry historically high levels of cash, the dividends available in the stock market -- many tax free -- are just too attractive to ignore.

And the latest game in town is How Low Can We Go? Most local economists had been for some time predicting the RBA would need to cut, but even they were taken by surprise by the May move. Now the race is on to predict further cuts, be it one, two or maybe three, down to 1.00%. Those dividends are looking even better.

The ASX200 finished the week at 5350, which is basically the technical target chartists have held onto for months, even as we stared into the abyss at 4800. We are at the “where to now” point and continue to consolidate. The upside must still be favoured, baring anything out of left field, ranging from a sudden retreat in the oil price to a Brexit “yes” vote.

This week will be critical to determining whether market confidence is supported by economic reality. Glenn Stevens will conduct a Q&A tomorrow, where no doubt the one percent question will be raised. On Wednesday we have March quarter construction numbers and on Thursday, private sector capex and capex intentions. That latter number is forward-looking and very closely watched by the RBA.

And on the other side of the world…

Flip everything over, and we have the situation in the US. Having decided only a month a go there was no way the Fed was going to raise again this year, suddenly Wall Street is worried they might. Twice. Maybe even three times.

And the market, many a commentator is suggesting, is not prepared for it. The market is still pricing in the chance of maybe one hike, later in the year. Many believe the Fed will not risk acting ahead of the Brexit vote next month. Many believe the Fed will not risk acting ahead of presidential election in November (despite there being no precedent of holding back in election years). But recent Fedspeak is leaning very much the other way. The Fed is trying to get Wall Street to prepare.

The Dow was up over a hundred points mid-session on Friday night before wavering towards the close. It was a Friday nonetheless, and it was also expiry day for May S&P500 options, which often has an impact. Wall Street finished down for the week but the question going forward is as to whether one should be scared by the possibility of a Fed rate hike, or two, or happy that the impetus behind a Fed hike is a stronger US economy.

In both 2014 and 2015, the US economy bounced hard out of a March quarter slump. In 2016, GDP grew by an anaemic 0.5% in the March quarter. CNBC’s daily GDP tracker, based on rolling data releases, is currently predicting 2.5% for the June quarter. That’s rate hike-worthy on anyone’s terms. The first official estimate of June quarter GDP will not, however, have been released when the Fed meets in June.

The Dow closed up 65 points or 0.4% on Friday night. The S&P gained 0.6% to 2052 as the Nasdaq reversed its recent trend and shot up 1.2%. This was due to a Street-beating earnings result from chip-maker Applied Materials, which sparked a 13% share price jump and a lift for all chip stocks.

The economic data point of the day was April existing home sales, which rose a better than expected 1.7%. Inventory for existing homes for sale is tight, particularly at the affordable end of the market, which is a positive for the economy.

Commodities

All talk on oil markets at present is of supply outages. In particular, production is still down in Canada due to the fires and in Nigeria due to rebels bombing pipelines. The WTI price is hanging around just under, but not yet game to breach, the 50 mark. Lost Canadian production is expected to resume in a couple of weeks, while Nigeria is more ongoing. Rebels bomb pipelines every other week in that troubled land.

The concern is that 50 is a magic level that once surpassed will spark a new round of hedging (forward-selling) from oil producers. This could prove self-defeating. On Friday night West Texas closed down US49c at US$47.75/bbl while Brent was steady at US$48.87/bbl.

The US dollar index was steady at 95.27 but base metals prices were mostly weaker, with copper down 0.5% and nickel and lead down 1%.

Iron ore is unchanged at US$55.70/t.

Gold is off a tad at US$1251.90/oz and the Aussie is steady at US$0.7218.

The SPI Overnight closed up three points on Saturday morning.

The Week Ahead

A revision of the US March quarter GDP result is out on Friday, but those numbers are starting to get a bit stale. Of more interest during the week will be a flash estimate of manufacturing PMI tonight, new home sales and the Richmond Fed index tomorrow, and house prices, new home sales and a flash services PMI on Wednesday.

On Thursday it's durable goods and pending home sales, and on Friday consumer sentiment.

As noted, Australia’s week will be dominated by March quarter construction and capex numbers ahead of next week’s GDP result. And all ears will be on Glenn Stevens tomorrow.

On the local stock front, we’ll see earnings results from Technology One ((TNE)) tomorrow, Programmed Maintenance ((PRG)) on Wednesday, Aristocrat Leisure ((ALL)) on Thursday, and Fisher & Paykel Healthcare ((FPH)) on Friday.

Perpetual ((PPT)) will provide earnings numbers for its investment company on Wednesday, which will also see investor days being held by Boral ((BLD)), Suncorp ((SUN)) and WorleyParsons ((WOR)).

And there are a few more AGMs to get through.

Rudi will Skype-linkup with Sky Business on Tuesday morning, 11.15am, to discuss broker calls. He'll appear on the Sky Business channel on Thursday, 12.30-2.30pm and does the Skype-link again on Friday morning, around 11.05am.

This is also the week a select group of paid subscribers gets to spend a whole evening with Rudi. Should be both fun and interesting.
 

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

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article 3 months old

The Overnight Report: Fedspeak

By Greg Peel

The Dow closed down 91 points or 0.5% while the S&P lost 0.45 to 2040 and the Nasdaq fell 0.6%.

Jobs Conundrum

Having held their ground on Wednesday, while other sectors responded to the prospect of a Fed rate hike, yesterday the resources sectors gave way. It was nothing about commodity prices on the day, it was about where commodity prices might end up if the US dollar rises on Fed tightening. The offset of the weaker Aussie made no difference, it would seem.

These sectors have run very hard these past couple of months on the commodity price rebound, so it looks like profits are being taken. Materials fell 2.6% yesterday and energy 2.0%, to provide the bulk of market weakness.

Yield sectors – telcos, utilities and supermarkets – continued to be sold, while the banks, healthcare and consumer discretionary all moved little on the session. Yesterday’s jobs numbers showed an unchanged unemployment rate, and appeared to have no exogenous effect on the market.

The jobs data showed an increase of 10,800 in April, roughly in line with expectations. But the aggregate represents a 20,200 rise in part-time jobs and a 9,300 fall in full-time jobs. This has been the trend in recent months.

The March quarter wage price index, released earlier in the week, revealed the weakest wages growth in decades. Dragging on wages growth is hours worked, which fell 1.1% in April to be down 0.5% year on year – the first negative number since May 2013. The fall in hours worked can be explained by the ongoing rise in part-time work and loss of full-time work.

Overall jobs growth over the past four months has averaged only 6,500, Commonwealth Bank’s economists note, which should be sufficient to send the unemployment rate higher on the balance of population growth. But the unemployment rate, steady at 5.7% in April, has been held down by a falling participation rate – fewer people looking for work.

“Digging below the surface shows that today’s employment report is softer than the headline numbers imply,” says CBA.

We might recall this from the RBA’s April policy statement:

“Over the period ahead, new information should allow the Board to assess the outlook for inflation and whether the improvement in labour market conditions evident last year is continuing.”

The outlook for inflation weakened, hence the RBA cut in May. The May statement suggested “Labour market indicators have been more mixed of late”. The subsequent April data look even more mixed. Cleary yesterday’s jobs number only serves to strengthen the case for another RBA rate cut.

Would the RBA go again as early as June? Unlikely. The Fed meets later in June and presumably the RBA would prefer to wait to see if it can score a rate cut by default if the Fed chooses to hike. Mind you, the Aussie, which is holding steady at US$0.7227, has already priced in a second RBA cut.

More Fedspeak

As long as the US economy continues to perform to the expectations of New York Fed president William Dudley, then “I think a tightening in the summer, the June, July timeframe is a reasonable expectation,” Dudley said last night. The Dow subsequently fell another 200 points.

The Dow managed to claw back a hundred points over the course of the afternoon but the theme remains the same – all of a sudden the Fed rate hike no one was expecting in June is now a possibility. Not a strong possibility, despite Fedhead jawboning – the market is currently pricing in a 26% chance – but a possibility nevertheless.

It is assumed, however, that if the Fed does not end up hiking in June or July, the purpose of recent more hawkish commentary and insistence June is “live” is more about making sure markets prepare for when there is a rate hike, maybe later in the year, and not be caught out by one, prompting undue volatility.

After a string of very poor earnings results from US major chain stores, the tide has turned a little as the earnings season draws to a close. Good results were posted last night by a couple of specialist apparel chains, and Wal-Mart surprised and enjoyed a 9% rally, which went a long way to buffering the Dow.

It is more likely, nonetheless, that this is a response to a result that was not as bad as had been feared following earlier shockers from major chains, which had investors dumping Wal-Mart in the lead-up.

A close of 2040 on the S&P500 last night means a breach of the 2043 level, which is technically significant for the simple reason it is the “flat on year” point. Traders have been suggesting a breach of this level could set in trend to a more pronounced down-move.

Commodities

A report suggesting a solid rise in US oil demand last week helped keep prices supported last night. West Texas crude is up US36c at US$48.24/bbl and Brent is up US32c at US$48.86/bbl.

The US dollar index is slightly higher over the period, up 0.1% at 95.30.

Given the LME was closing just as the Fed minutes were released the night before, last night’s price action is more indicative of a response. Aluminium fell 0.5%, copper, lead and nickel 1% and tin and zinc 1.5%.

Iron ore fell US20c to US$55.70/t.

Gold is down US$3.30 at US$1254.70/oz.

Today

The SPI Overnight closed down 6 points.

The shares of the big miners were weak again in London last night, but it’s a case of who is following who.

Woodside Petroleum ((WPL)) holds its AGM today.

It is Rudi's intention to link up with Sky Business through Skype this morning but election coverage might throw a spanner. If the plan goes ahead he should appear around 11.05am.
 

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

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

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

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