Tag Archives: Iron Ore

article 3 months old

The Overnight Report: Dow 19,000

By Greg Peel

The Dow closed up 67 points or 0.4% at 19,023 while the S&P rose 0.2% to 2202 and the Nasdaq gained 0.3%.

Buy Everything

Surging commodity prices were the major trigger but new all-time highs on Wall Street also seemed to spur investors into diving back into the Australian stock market as a whole yesterday, given no sector finished in the red in a 1.2% rally for the ASX200. Rotation of any sort was not apparent, although not every sector performed equally.

Materials (up 2.8%) and energy (up 2.6%) led the charge on stronger base metal and oil prices, despite a weak overnight session for iron ore, and helped by little counter-movement in gold. Iron ore futures went the other way and traded “limit up” in the session, negating that offset. In contrast to trading over the past couple of months, the next best sector was utilities, up 2.1%.

It has been typical in recent times for resources and other cyclicals to trade inversely to yield stocks and defensives. Yesterday was different; seemingly more of a case of buying anything that looked sufficiently cheap. Not joining the party were the banks and telcos, up only 0.3% each.

Telstra ((TLS)) has been a volatile stock of late – not what you’d normally associate with a supposedly defensive telco. It seems talk of an NBN-related “earnings gap” ahead has investors thinking twice. And the lingering possibility of the banks having to raise new capital to meet new regulations, or at the least cut their dividends, may also have investors shying away from that sector.

Yesterday’s rally was not a step-jump but a classic case of moving steadily upward as the day progressed. This suggests “real” buying. In sights was the technical level of 5400 for the index which was surpassed late morning, sparking some brief profit-taking, but once the rally resumed it fed on itself.

If the index holds over 5400, chartists suggest then 5500 is in play.

Blue Sky

Donald Trump must be starting to think he’s a bit of a hero, if he didn’t already. The S&P500 has now posted a thirteen-day winning streak since Trump’s victory speech, to the tune of almost 3%. Nixon managed to spark a similar response, but Trump is still well behind Republican pin-up boy Ronny Ray Guns, whose election was worth over 8% in the same period.

The Dow has closed over 19,000 for the first time in history. The S&P has closed over 2200 for the first time in history. The Nasdaq and Russell small cap indices also hit new all-time highs last night, marking the second consecutive session of all four doing so – a feat not seen since 1998. The thirteen-day day winning streak for the S&P is the first since 1996.

Across Wall Street all talk is of just how far this rally can run on election promises (that are already being broken – “lock her up” is now off the table) which will take time to implement. Surely the honeymoon must fade at some point.  Tonight in the US is all about trains, planes and automobiles. A mass exodus will begin from lunch time. A good day to take profits ahead of the Thanksgiving holiday?


Recent volatility in bulks and base metal prices has had a lot to do with the Chinese government increasing margin requirements to curb rampant speculation, offsetting Trump euphoria. We’ve seen some sharp dips in iron ore and coal prices lately as a result. But is Beijing winning?

Iron ore is up US$4.00 or 5.7% at US$73.80/t. Thermal coal is up 6.2%.

There were some very big moves up for base metals on Monday night, with aluminium a smaller mover. Last night aluminium jumped 2% while copper, lead and nickel all added a further 1% and nickel fell 1%, having jumped over 5% in the prior session.

West Texas crude has now rolled into the January delivery contract and last night it fell US17c to US$48.07/bbl after Monday night’s big move.

The US dollar didn’t much come into play last night, ticking up less than 0.1% to 101.07.

Gold is flat at US$1211.70/oz.

The Aussie is up 0.5% at US$0.7399 despite the steady greenback, driven by commodity prices strength and, presumably, all this sudden talk of the next move in Australian interest rates being up. There are plenty of economists holding the opposite view.


The SPI Overnight closed up 9 points.

Locally we’ll see September quarter construction work done numbers today.

Japanese markets are closed.

Wall Street will see a big dump of data tonight, including the minutes of the November Fed meeting, before the evacuation begins.

Programmed Maintenance ((PRG)) will release its earnings report today while the centres of attention in another round of AGMs will likely be Estia Health ((EHE)), following its torrid few months, and one of the most volatile stocks on the market at present, lithium producer Orocobre ((ORE)).

Rudi will appear on Sky Business today, 12.30-2.30pm, instead of his usual Thursday appearance.

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article 3 months old

The Overnight Report: Commodity Price Surge

By Greg Peel

The Dow closed up 88 points or 0.5% while the S&P gained 0.8% to 2198 and the Nasdaq rose 0.9%.


It was a quiet session on the local bourse yesterday. Volume was weak as the ASX200 meandered its way in a minimal range to a soggy close. But again the lack of movement in the index belies what was going on underneath amongst the sectors.

It would seem investors are simply not sure how they should be positioned going into year-end. I have highlighted in the previous couple of sessions that it appeared the long sell-off of yield stocks and defensives was finding a bottom and the abrupt run-up in resource stocks was tipping over. But yesterday, we went back the other way once more.

On a tick-up in the oil price, energy was the best performer on the day with a 1.7% gain. It would seem traders were heartened by the WTI price rising back through the US$45/bbl mark on cautious confidence of an OPEC agreement being reached, rather than tanking down through 40. That buying will prove rather prescient today.

Materials chimed in with a 0.3% gain but other than a flat day for the banks, all other sectors finished in the red. Notably, consumer staples and healthcare each fell 1.3%, telcos fell 0.9% and utilities fell 0.5%. The theme of the previous couple of sessions was reversed. Perhaps the seemingly relentless rise of US bond yields is just too much.

The US bond yield stalled last night and the US dollar index dipped for the first time in several sessions. The door was opened for commodities to take centre stage.


APEC meetings are not what we’d normally think of as market movers but aside from the attention being drawn by it being President Obama’s final outing, the attendance in Peru of Vladimir Putin and Xi Jinping has provided us with some headlines.

The Russian president sees “a high probability” of an agreement being reached in Vienna on November 30, when OPEC tries to implement a production freeze. Russia will cooperate, Putin suggested, as a production freeze “is not an issue for us”.

Those comments were worth 4.2% for the West Texas crude price, which rose US$1.92 to US$47.49/bbl.

What is good for oil is seen as good for other commodities. Meanwhile, the Chinese president used his speech in Peru to confirm China’s support for a free trade area in the Asia-Pacific. The Chinese government is pushing for a Regional Comprehensive Economic Partnership of 16 countries. The now dead-in-the-water TPP was to involve 12 countries, including the big one, the US. We might presume China sees an opportunity to further step-up its global strength as the trade wall goes up around the United States.

Free trade offers up the possibility of increased Chinese imports of raw materials, including lead, up 1% on the LME last night, aluminium and zinc, up 1.5%, copper, up 2.5%, and nickel, up 5%.

Xi Jinping did not, however, manage to light a flame under the bulks, which few disagree have run too far, too fast. The thermal coal price was steady last night and iron ore plunged US$2.80 to US$69.80/t.

The 0.3% dip in the US dollar index to 100.97 provided a green light for those commodities that did rally to do so, and also allowed gold to tick back US$3.30 to US$1211.90/oz.

And the Aussie to tick back 0.3% to US$0.7361.

Quadruple Watching

The energy sector duly led Wall Street higher last night with materials trailing in its wake. But otherwise the positive mood was market-wide. The Dow, S&P and Nasdaq all simultaneously hit new all-time highs, for the first time since August. Back in August, US small caps were underperforming. Last night the Russell 2000 index also hit a new all-time high, marking a rare quadrella.

What’s good for M&M Enterprises is good for the country. Except in this case Milo Minderbinder is Donald Trump and no one can yet identify the Catch-22.

Outside of the commodity story there was no real new news to drive Wall Street higher last night. Only the dip in the greenback after a long run higher could be seen as any particular incentive. And the ten-year bond rate stalling.

Donald Trump continues to interview prospective cabinet members but there has been no new news on that front either. Either way, US business television currently features commentator after commentator suggesting a Trump presidency cannot be anything other than positive for the stock market. They just can’t see any other scenario.

The previous couple of sessions showed signs the Trump euphoria rally might be losing steam. Not so last night.


Fresh all-time highs on Wall Street and surging commodity prices. How will this affect the Australian market today? Forget iron ore, the SPI Overnight has closed up 40 points or 0.8%.

Earnings results are due out today from CYBG ((CYB)), Fisher & Paykel Healthcare ((FPH)) and Technology One ((TNE)). There is another round of AGMs to digest including another prominent Kiwi, The A2 Milk Company ((A2M)).

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article 3 months old

Material Matters: US Energy, Coal, Chrome, Steel And Oz Miners

Trump and US energy; coking coal's price surge; improved outlook for alumina, chrome and steel; positive trends for Oz miners.

-If Trump policies survive Raymond James estimates the US to have the lowest energy costs globally
-Supply response to higher coking coal prices not expected to impact until second half of 2017
-Macquarie more confident on upside case for alumina, chrome market remaining tight
-Credit Suisse envisages rapid de-gearing likely over 2017 for key Australian miners


by Eva Brocklehurst

US Energy

In assessing what a Donald Trump presidency and Republican-controlled Congress may mean for the US energy complex in coming years, researchers at Raymond James suspect the "attack dogs" that have waged war on the US oil and gas industry over the past years will be called off. This includes the Environmental Protection Agency, the Endangered Species Act, and numerous executive orders that have catered to the US environmental lobby.

Longer term, more access to federal lands and less government regulation should mean lower US energy costs. If these policies survive the next decade, the researchers expect the US to have the lowest energy costs in the world. Yet there are variables that influence short-term oil prices and who sits in the Oval Office, or controls Congress, is not one of them.

Given that one of Trump's hallmark issues is the Iranian nuclear deal there is the possibility that Iran's oil supply could be interrupted by a revival of US sanctions. That said, Raymond James observes this agreement was a multi-country arrangement and it may not matter if the US backs out. The sanction that impacted Iran the most was the European Union's oil embargo.

The researchers note Trump's deregulation agenda may prove to be a gusher for energy and petroleum companies. The possibility of a federal anti-fracking legislation is less likely and there are also other benefits that would trickle down from the relief of regulatory pressure on pipeline construction. Oilfield services also stand to benefit from more drilling activity.

The lower cost of production means that the market share gains in the US should increase versus the rest of the world as relative returns improve, and activity gains in the US are also likely to outpace those in offshore arenas. For the refiners a much more favourable regulatory environment is likely to emerge but quantifying this is difficult, the researchers assert.

Yet a return to substantial US oil and gas production growth over the medium term is likely to further cement the structural advantages of the US refining system. In terms of coal, its market share in the electricity mix has fallen to 33% in 2015 from 50% in 2005. Coal will see some relief from the lack of a federal de-carbonisation mandate, but Raymond James still expects coal to continue to lose share.

Cheap natural gas from fracking and increasingly cheaper wind and solar are expected to be too powerful for coal to go back to where it was a decade ago. In sum, the researchers believe the winners from Trump policies are the US economy, US consumers, US oil & gas companies, US oilfield services, US mid-stream companies, US coal, and US renewable power.

Coking Coal

Chinese policies on coal have prompted a significant surge in import demand at a time when the major exporters have been reluctant or unable to respond, resulting in a price spike. As a result, ANZ analysts upgrade coking (metallurgical) coal forecasts. The analyst expect contract prices to average US$178/t in 2017 and US$135/t in 2018.

Higher spot prices are expected to induce a global supply response, led by North America, but not until there is some sustainability in prices. The analysts do not expect this to occur until the second half of 2017 and do not envisage major exporters raising output immediately. Australian producers are already at capacity and are now being hampered by wet weather.

Chinese coking coal production is also expected to decline over the next two years and recent strength in steel production is unlikely to continue, which should help alleviate the tightness in coming years. The analysts suggest upgraded coking coal price forecasts have implications for the broader Australian economy. Their estimate of Australia's terms of trade is improved by 3% with a resulting small lift in nominal GDP.

India is expected to drive long-term demand for coking coal, with its government aiming to triple steel production by 2025. India's focus on infrastructure investment should underpin greater demand for coal imports for the remainder of 2016 and for 2017. Yet, the analysts observe a large fiscal deficit has restricted investment by the Indian government, while complicated project approval processes and land acquisition issues have made completing large-scale steel projects difficult.

As a result, they envisage only mild growth for Indian coking coal imports, rising to around 55mt by 2020, and accelerating more quickly after that. Australian metallurgical coal producers are likely to be the greatest beneficiaries of higher imports by India, with Australia supplying around 85% of that country's total import requirements.

Alumina, Chrome And Steel

Macquarie notes three commodities for which the price outlook in 2017 has improved markedly. The broker raises forecasts for alumina, ferrochrome and steel, upgrading alumina price estimates by 27% for 2017, ferrochrome contract prices by 33%, and steel prices an average of 17% for the next three quarters.

The broker has become more confident in the upside case for alumina as Chinese aluminium smelter re-starts are finally under way and this is resulting in accelerating growth in demand after a stagnant 2016. Meanwhile, Chinese alumina production re-starts are not keeping pace, hindered by environmental inspections and a shortage of caustic soda.

The issues may be transient but the broker still expects a Chinese market deficit in 2017 and 2018, a gap which will have to be filled by the international market. The broker reiterates its observation that significant ex-China supply is still coming to the market.

Macquarie notes rises in chrome ore pricing over October were most dramatic. Chrome is a clear raw material constraint in a market that relies heavily on South Africa for global supply and where China has no substantial domestic resource.

As stainless steel output continues to look strong in China, and growth in Indonesia is ramping up, tightness in the chrome market appears set to persist. With no chance of direct substitution in stainless steel, Macquarie is looking at an ever tighter chrome market in 2017 and beyond.

The broker notes steel makers are doing their best to offset the recent surge in raw material prices. Steel prices so far have not encompassed a full passing through of the cost push that has been exerted. Steel margins, therefore, remain under pressure, both in China and globally. While the expectation of strong infrastructure expenditure offers some hope for demand, the scale of over capacity in the steel industry signals to Macquarie that a sustained margin recovery will be difficult to achieve.

Oz Miners

Macquarie retains a positive stance on most of the bulk commodity producers. The broker envisages material upside to base case forecasts for coking coal, manganese, iron ore and thermal coal. Incorporating updated commodity price and exchange rate forecasts has translated into solid upgrades to earnings estimates for South 32 ((S32)), and Alumina Ltd ((AWC)) - upgraded to Neutral from Underperform - but more modest updates for most other stocks.

Marking to market the broker upgrades its iron ore price expectations for the December quarter, which leads to upgrades to FY17 forecasts for BHP Billiton ((BHP)), Fortescue Metals ((FMG)) and Mount Gibson ((MGX)), and to the 2016 forecasts for Rio Tinto ((RIO)).

Credit Suisse expects that commodity prices, led by coal, are unlikely to stay at current levels yet they may be materially higher than its current base-case forecasts suggest. This could have the effect of re-setting balance sheets and re-invigorating investor demand for capital management.

The broker is yet to revise its base case forecasts but envisages a rapid de-gearing in balance sheets and strong uplift to earnings. While South 32 is already under-geared, the broker envisages Rio Tinto, Whitehaven Coal ((WHC)) and BHP could all move to an under-geared position by the end of FY18.

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article 3 months old

Material Matters: Miners, Copper And Iron Ore

Conditions favouring bulk miners; copper's price surge; iron ore outlook.

-Chinese steel consumption expected to hold up, US infrastructure agenda supportive
-Copper makes sharp gains on improved fundamentals and likely US infrastructure spending
-Macquarie suspects iron ore prices have overshot and risk is to the downside


By Eva Brocklehurst


Morgan Stanley analysts have come away from their trip to China with the belief steel consumption could hold up, allowing higher metallurgical (coking) coal prices and necessitating the use of higher quality iron ore.

China's domestic iron ore supply is likely to be slow to respond to demand and, while there is a coal supply response under way after the relaxation of mining restrictions, it is not affecting the price yet because of re-stocking.

Hence, Morgan Stanley believes conditions are constructive and favours the bulk miners. While uncertainty remains high, the broker acknowledges, the agenda of infrastructure spending and tax reform in the US also underpins expectations and presents potential upside risk to demand growth.

The US share of major commodity demand is about half what it was back in 2000, so even conservative estimates for a stimulus plan may result in material upside to growth forecasts, Morgan Stanley asserts.

As the broker favours bulk miners, BHP Billiton ((BHP)), South32 ((S32)), and Iluka Resources ((ILU)) are in the top five. BHP is considered a nod to quality and longevity, while South32 has cash flow drivers and the broker envisages Iluka is leveraged to the US and Chinese property market.

The broker also includes gold names such as Evolution Mining ((EVN)) and Perseus Mining ((PRU)), as inflation and debt issuance associated with an infrastructure program should support gold, the risk being a US dollar bull scenario.


Macquarie upgrades copper price forecasts by 11-15% for the next four years. Spot copper prices have surged from a tight trading range and improving supply/demand fundamentals are expected to provide some support. This broker also suspects, given increased infrastructure demand in the US, there is little reason for prices to retreat back to the previous range.

Copper was the one big commodity to gain nothing in the year to date then rally sharply ahead of the US election, peaking at US$6025/t on November 11. The rally was unprecedented in recent copper history, Macquarie observes and, despite the later sell-off, the broker cannot envisage the price retracing to pre-November levels easily.

The election victory of Donald Trump was the major trigger, the broker believes, given US dollar weakness and expectations of increased stimulus in China and infrastructure spending in the US.

Copper was probably supported by a bearish skew among speculators, which provided a short stop-loss means for prices to climb. Also, China has cleared a lot of physical stock in the last few months, leaving it vulnerable to metal shortages, and this in turn, the broker notes, influences its huge futures trading sector.

While the impact of Donald Trump's election may have helped tighten the copper balance further Macquarie stresses that the major upgrade to its price forecasts is more heavily motivated by the realities of the price pushing to new levels. The broker envisages some oversupply in 2018/2019 which will moderate prices to below US$5000/t, before a deficit takes hold and puts prices back in the low US$6000/t region.

Incorporating the improved outlook, Macquarie upgrades earnings estimates for both Sandfire Resources ((SFR)) and OZ Minerals ((OZL )). Both are upgraded to Outperform from Neutral. Newcrest Mining's ((NCM)) outlook is enhanced by the upgrades to copper price forecasts but Macquarie retains a Neutral rating ahead of the company's investor seminar.

Improved copper prices have also translated to a material improvement for the short to medium term outlook for both BHP and Rio Tinto ((RIO)). Macquarie notes copper leverage is higher for Rio Tinto in the near term from an earnings perspective.

The upgrades to copper price forecasts have taken care of some of the upside risk to the broker's base case, but there is still material upside risk envisaged to its iron ore, coking coal, thermal coal, aluminium and alumina price forecasts.

Iron Ore

Iron ore prices have breached US$74/t for the first time since January 2015. Macquarie observes this move comes despite an apparent lack of fundamental support, and most market players are pointing to short covering. Meanwhile, in the physical market there is a widely disparity between grades. The demand for high grade fines and pellets is very strong as mills look to minimise the use of coking coal.

Earlier this year the Chinese government raised trading fees on the Dalian exchange and on the Shanghai futures exchange, which resulted in a sharp drop in trading volumes and prices. Recently the government took similar measures regarding speculators.

Macquarie is unsure whether these measures will lead to a reassessment of the recent bullish trading activity in bulk commodities in China, which has been driven by inflation expectations and concerns about depreciation of the renminbi.

Market fundamentals are unchanged and the broker continues to believe that prices have overshot and should ease back to trade in a fundamentally supported US$45-55/t range.

While Chinese steel demand has exceeded expectations, the broker still expects that seasonal and sequential steel output in China will fall in the months ahead. The broker observes iron ore supply is plentiful already and will continue to rise in the months ahead.

Citi suggests changes being called to the Western Australian iron ore royalty are a risk for both BHP Billiton and Rio Tinto. The changes being proposed are part of the long-standing tension over GST raised in WA being used to subsidise other Australian states.

The issue has been heightened by the pressure on WA's budget from infrastructure projects committed to during the mining boom, which have to be paid for when commodity prices are significantly lower.

There are two forms of royalty payments in WA, a royalty for ore and a 25c/t rental that applies after 15 years of production on a mining lease. The rental is what the WA National Party is looking to increase to $5/t and is currently only being paid by the former two miners and Cliffs' Koolyanobbing mine, although other producers are likely to be captured over time if they have production over 15 years.

In 2015 the tax collected $120m, affecting 470mt of BHP/RIO production and suggesting, in Citi's calculations, a cost of $2.2bn, with a net impact after minority interests/tax of US$500m for each company. This would lower net present value (NPV) and net profit by 4% at spot prices, increasing the risk that BHP and Rio Tinto would expand production by 20mt and 30mt respectively.

Fortescue Metals ((FMG)) is not liable to pay the tax for a number of years but such a scenario would also re-shape the cost curve, in the broker's view, making Vale the lowest cost producer.

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article 3 months old

Material Matters: Supply, Oz Miners, Aluminium, Coal And Mineral Sands

Outlook for metals; downside risks diminish for Oz miners; oversupply in aluminium; thermal coal set to weaken; strengthening in pigment markets.

-Macquarie not expecting resurgence in growth projects for metals in the near future
-Capital management potential opening up for Rio Tinto, inevitable at South32
-Increasing evidence suggests thermal coal price may be peaking
-Ord Minnett unable to identify positive catalyst for zircon


By Eva Brocklehurst

Commodity Supply

Macquarie believes prices for most metals and bulk commodities are now at a level where producers are making money, given the cost reductions that have occurred over the past year. In many cases current prices are near, or below, the broker's long-run forecasts, most notably base and precious metals. As a result Macquarie does not expect a resurgence in growth projects in the near future.

There are three major metals on which more than 10% of the market is still making losses. Even with the price moving back above US$5000/tonne, a proportion of copper supply does not break even, notably the smaller mines in Chile and Chinese domestic output.

In nickel, despite strong gains recently, a substantial portion of global output cannot cover cash costs, on the broker's analysis. Much of this is because the nickel price is being anchored by the cost of nickel pig iron production in China. Uranium, with the spot price moving below US$20/lb, is the only market where increased supply loses money now compared with back in January.

In bulks, coal and manganese prices are well above the level Macquarie would expect to incentivise new projects. Nickel, copper, uranium and platinum group metals, meanwhile, are below the broker's long-run expectations. Many others, including zinc and gold, are only just above. The broker notes marginal units of iron ore have come back into the market, with both Chinese domestic output and China's imports from small suppliers recovering.

The most spectacular turnaround story for 2016 is coal, Morgan Stanley notes. The broker believes the next few weeks are critical as trade flows typically leap 20-50% in November to December. Prices should then fall. Other price winners of the year include steel and most of its raw materials.

The broker notes China's credit-backed, steel-intensive infrastructure programs have pulled 40-50m tonnes more crude steel into the construction industry and the typical pull-back in September to October has been delayed.

Morgan Stanley still expects this pull-back to occur by mid winter but the impact will probably be mitigated by positioning for another year of stable steel production in China. The broker remains a bull on nickel and zinc because of tight supply and subdued about aluminium and copper, as global supply growth exceeds China's moderating demand.

Australian Miners

Credit Suisse observes, after China returned from its Golden Week holidays, there was a break out in iron ore, coal and nickel prices. The broker believes downside risks have diminished and there is a positive skew for Australian miners' earnings. While the bears will argue China has too much stimulus and there is a risk policy settings will now tighten too aggressively, the broker believes the balance of risks remains reasonable.

Credit Suisse also expected steel input prices would have eased by now, as production slows ahead of reduced construction in the Chinese winter. Instead prices are climbing as buyers readily accept higher prices, which the broker believes points to strong demand preventing a glut of materials. The rally in commodity prices is envisaged to be strong enough and last long enough to banish balance-sheet concerns for Australian mining names.

Valuations are considered to be around fair value, based on an average of the broker's base, upside and downside cases. The broker believes capital management possibilities are once again, opening up for Rio Tinto ((RIO)). Capital management also seems inevitable for South32 ((S32)).


National Australia bank analysts expect the aluminium market to be shaped by significant capacity additions in China's north-western region, where there is access to coal mines and lower cost electricity. This is despite the industry being singled out by the Chinese government in its new five-year plan for the non-ferrous metal sector as having severe over-capacity.

The analysts expect demand growth in China will continue to slow and growth in the rest of the world is unlikely to be fully offsetting over-supply. The run up in premiums has now reversed and the analysts note inventory levels at various London Metal Exchange locations have been on the decline. Premiums now more closely reflect underlying supply and demand factors.

They do flag some positive long-term trends for demand, such as increasing use of aluminium in car manufacturing and use of aluminium wire in preference to copper in the power sector. Overall, the analysts forecast a well-supplied market in 2016 and 2017, with prices averaging US$1595/t and US$1670/t respectively. In 2018 demand prospects may improve and a higher average price is forecast of US$1740/t.


Macquarie examines high-frequency port data which indicates thermal coal production run rates have increased materially. Rail deliveries into northern Chinese ports are now running at rates that are higher than when the 276-day rule was first implemented. The strength of the coal price over the past month has been underpinned by scepticism that the Chinese were actually raising production. The market is also suspicious that supply will be large enough to fill the entire deficit.

The broker has increasing evidence which suggests thermal coal prices may start to roll over. Any normalisation of coal markets will be determined by China, as its domestic market is 2.5 times the size of the whole seaborne market. While the data is not directly applicable to coking (metallurgical) coal, Macquarie continues to favour being long metallurgical coal versus short thermal coal exposure.

This is because the Chinese government appears to be more concerned about the effects of rising thermal coal prices than it is about steel-maker margins. Also, the seaborne thermal coal market is relatively more flexible in terms of supply compared with the seaborne coking coal market.

Mineral Sands

Ord Minnett observes strengthening pigment markets are likely to flow through to titanium dioxide while the prices for sulphate ilmenite have started to move higher. Commentary from the TZMI conference about zircon markets was more subdued than expected, with most participants expecting a surplus over the next two years. The broker has strengthened its view that titanium dioxide feedstock markets will improve.

The sulphate ilmenite market is observed to be moving into deficit from a surplus, with positive price momentum set to continue. Chinese domestic ilmenite tonnage has fallen and this is a key driver of the rise in domestic prices over the last six months and an opportunity, the broker envisages, for ilmenite importers such as Base Resources ((BSE)).

In zircon, half of the projects under development that were analysed by TZMI have an inducement price below US$1000/t, which indicates to the broker that long-term consensus zircon pricing could be optimistic. On the other hand, Iluka Resources ((ILU)) believes zircon demand may be underestimated. This is because some market participants are not factoring in the movement in inventories.

Illuka believes it holds over half the world's zircon inventory and does not plan to release this until market conditions are appropriate. At the conclusion of the conference, Ord Minnett came away positive about titanium feedstock prices the near-term, with miners exposed to sulphate ilmenite particularly likely to benefit. The broker was unable to identify a positive catalyst for zircon.

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article 3 months old

Material Matters: China And The Outlook For Steel Inputs

Outlook for Chinese demand for metals and steel inputs; Factors in coal price rise; what is underpinning iron ore prices?

-Upside risks for aluminium, steel and coal prices from China's supply-side reforms
-Coal price correction after the peak season may be mild
-Iron ore benefitting from depreciating Chinese currency


By Eva Brocklehurst

China Outlook

The rebound of the Chinese property market has been an important driver of the improvement in demand for most metals, Deutsche Bank observes. The measures to cool the market being introduced by the government are relatively mild compared with previous property cycles, according to the developers the broker met on its visit to China. The outlook for infrastructure construction is also robust.

The Chinese government appears serious about supply-side reform, the broker observes. The 276-day policy has instilled a belief in industries which are at over-capacity that supply discipline can improve profitability. Deutsche Bank is skeptical supply discipline will last forever - and in some cases the supply chain has been disrupted by logistics constraints - yet for now believes this poses upside risks for the aluminium, alumina, steel, thermal and coking (metallurgical) coal balances.

While Deutsche Bank expects Chinese domestic coal prices will remain elevated into the lunar new year, there are troubling signs the fundamentals have not kept pace with the price rise. The decline in European demand has outpaced the rise in Chinese import demand through the month of September.

Seaborne export prices have now risen in excess of the domestic Chinese price increase, suggesting Chinese demand should not rise much further. A supply response is expected to eventually be realised towards the end of the year from the government's looser restrictions on 789 mines, allowing them to produce up to the 330-day level. Higher output from export producers is likely to be limited, the broker asserts, as many are skeptical of the longevity of current prices.


Deutsche Bank has become more bullish on the near-term outlook for steel. Upside risk to the broker's 2017 steel demand forecasts in China is driven by increasing demand for infrastructure construction, aided by the increase in public-private partnership funding. Over the medium term, steel demand is still expected to ease, with long products most at risk.

The broker believes steel demand, driven by the property segment, may not decline as much as originally expected. Based on the broker's observations, 2017 steel demand forecasts are upgraded to be flat versus prior expectations of a 2.9% decline. Because of the upgrading of demand growth the broker believes the profitability of steel mills will be similar to 2016.

China Coal

The main message Deutsche Bank garnered from coal producers in China is that they cannot ramp up production very quickly, and only around 50% of the production that was shut can be re-started in the December quarter and March quarter of next year. Deutsche Bank also observes a reluctance by smaller coal companies to re-hire labour.

The expectation remains for coal prices to remain robust and possibly appreciate into the December quarter. Deutsche Bank's calculations imply year-end monthly coal production might be at a level that is still about 6-10% lower than in previous winters. The low inventory suggests to the broker the coal price correction after the peak season may be mild.

Macquarie notes, since China announced a relaxation of production controls on coal, spot Newcastle coal is up more than $20 a tonne and spot Australian hard coking coal is up $42/t. These price moves may be counter-intuitive but suggest to the broker the market is sceptical that production is actually increasing. Inventories remain at low levels and, even if a production increase did materialise, it may not bridge the entire supply gap.

As a result, Macquarie makes material upgrades to hard coking coal and thermal price forecasts for the next two to three quarters. The broker maintains a bearish trajectory in its forecasts, expecting a supply response will eventually materialise and put prices under pressure next year.

As a fair level for thermal coal, the broker makes reference to China's earlier guidance that it wants thermal coal prices to fall back towards RMB450/t during industry restructuring, which is a Newcastle price equivalent of $60–65/t. For metallurgical coal Macquarie assumes contract prices will fall back towards a fair level of $120/t, which is around the top of the seaborne cost curve.

Macquarie is also receiving questions on how the coal price rise is affecting the aluminium market. The broker reports that those buying grid power have witnessed no impact. Those that suffer from a competitive perspective are smelters that buy spot coal to generate their own power - around one-third of Chinese capacity.

Such smelters have seen costs rise by more than RMB2,500/t from the lows in the first quarter, although more than half of this relates to increasing gains on alumina prices. The main winners are those located close to coal production bases, such as in Xinjiang and Inner Mongolia. These are the regions Macquarie expects will make capacity additions in aluminium over the coming two years.

Manganese ore has been on a substantial bull run but Macquarie does not believe the gains are sustainable. Australia excluded, most global supply that shut down in early 2016 has now been re-instated.

Iron Ore

Goldman Sachs observes that since the Chinese market re-opened after holidays in October, ferrous prices have increased significantly. Iron ore is up 22% and rebar 15%. The broker believes growth expectations and supply/demand fundamentals are unlikely to be the explanation. Iron ore inventory has been building and shipments from Australia and Brazil have been rising.

Higher coal prices cannot explain the increase in iron ore either. Historical data suggests that higher coal prices should affect rebar and aluminium prices the most but have a negligible impact on iron ore.

Goldman Sachs believes a weaker Chinese currency maybe the most important driver of the iron ore price increase. The Chinese currency has resumed its depreciation against the US dollar, which has broken RMB6.7 for the first time since 2010 and is now approaching RMB6.8, pushing onshore investors to diversify into dollar-linked assets.

Iron ore may be the first in line to benefit from such investment flows. To the extent that a higher US dollar also leads to a weaker local currency on a trade-weighted basis, iron ore may benefit from higher Chinese steel exports. Additionally, rebar and iron ore are the most traded commodities in the onshore futures exchanges.

By the broker's estimates, about 60% of the iron ore price rally in October can be explained by the depreciation in the Chinese currency.

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article 3 months old

The Overnight Report: Bonds On The Move

By Greg Peel

The Dow closed down 29 points or 0.2% while the S&P lost 0.3% to 2133 and the Nasdaq fell 0.7%.

Sell Australia

It seemed as if we had found a bottom in the ASX200 at 5350 technical support yesterday as the index spent the morning holding its ground, following Wednesday’s surprisingly severe sell-off. But 5350 prove only a pivot point as there seemed no great desire to drive a rebound.

And sure enough, another wave of selling hit at midday, and down we went again. Reports suggest the selling has been futures-led, implying a large fund manager or fund managers have decided to “Sell Australia”. It only takes a small reallocation of a giant global portfolio to send little old Australia spiralling.

The quickest way to achieve a wholesale “Sell Australia” is to first sell the SPI futures on the ASX200. This locks in the exit, and fund managers can at a later date, when the dust settles, sell actual stock positions and buy back the futures at a lower level. When the futures are sold, those on the buy-side have the unenviable task of trying to cover by selling stocks into a falling market.

And it is unenviable at present because the local market is in a panicky mood anyway, sparked by a run of bad news coming out of AGMs and other matters. We can see the market-wide confirmation in the fact all sectors, bar one, fell in unison yesterday and the hardest hit were those where the large caps mostly reside. The top 20 will give you about an 80% or more replication of the whole 200 in market cap terms. Only info tech finished in the green, dominated by Computershare ((CPU)) which is being supported by rising US rates.

There were only a couple of notable up-movers bucking the trend otherwise – one being Ardent Leisure ((AAD)), which saw some bargain hunting despite a rather poor AGM performance. Challenger ((CGF)) has gone from strength to strength lately on the popularity of annuities, and it jumped another 4% after its AGM.

On the other side of the ledger, the biggest percentage moves down were reserved for resource sector stocks. Outside of an 11% drop for APN News & Media ((APN)) on capital raising dilution, eight of the other nine top ten down-movers were miners – the same miners who have been enjoying stellar runs lately on improved commodity prices (eg South32, Whitehaven) or futuristic over-exuberance (eg Orocobre, Syrah).

Clearly those investors having dined out lately on the outperformance of their mining-weighted portfolios were in a desperate race to lock in profits yesterday before the sky fell in.

The other big news was of course National Bank’s ((NAB)) decision not to cut its dividend, yet. NAB thus managed to fight back against solid bank selling.

Ticking Up

US monthly data flow of late has been fair to reasonable, positive but not shooting the lights out. Either way, not bad enough for the market to assume the Fed won’t hike in December. Tonight sees the more substantive first estimate of September quarter GDP, so any shock there might change the mood. But these days both the Atlanta and NY Feds publish continuous GDP run rates, thus expectations of around 2.5% growth have fairly solid evidence behind them.

As we move closer to December, the US ten-year yield is again starting to tick up. Last night it rose 5 basis points to 1.84%. We recall that 1.85% was the pre-Brexit vote high, hence traders assume that a break of 1.85% could mean a rush back to 2%. And it’s not just US Treasuries. Bunds, gilts, JGBs and others are all quietly on the move.

It’s not good news for bond-proxy stocks, hence an early one hundred point fall in the Dow last night was largely driven by telcos, utilities, REITs and the like. Yet as we have seen so often in past sessions, the early drop was met by a choppy recovery.

Choppiness can be put down to individual earnings results, which continue to be mixed but net positive, while fourth quarter guidance remains an area of concern. Among the Dow stocks, last night saw a miss from Ford and a 1% drop and a miss from Colgate-Palmolive and a 1% drop, while outside the Dow, ConocoPhillips was a winner and jumped 5%.

This morning’s major after-the-bell reports see Amazon down 5% and Dow component Alphabet (Google) up 1%.

The other big market influence at present is of course oil, and it found some support last night after Saudi Arabia actually came out with a number – a 4% production cut from those who can cop it. While the official meeting is not until the end of November, this weekend sees another gathering to further nut out possibilities.

Could it be that this time there really is a wolf?


West Texas crude is up US49c at US$49.60/bbl.

Base metal prices all rose around about 1%, except lead, which rose modestly.

Iron ore finally retreated, down US40c to US$62.30/oz.

The US dollar index is up 0.3% at 98.91 and gold is relatively steady at US$1269.00/oz.

The Aussie is down 0.7% at US$0.7588. This may give weight to the assumption stock market selling is coming from offshore.


The SPI Overnight is rather boldly up 28 points or 0.5%. This would suggest that maybe the selling has now been completed, or at least the market hopes it has. There should be some bargains on offer.

Locally we see the September quarter PPI and September new homes sales numbers today. Tonight the US GDP will be in focus.

Woolworths ((WOW)) will report September quarter sales today. Having seen what happened to its rival, they would want to be good.

Macquarie Group ((MQG)) releases first half earnings.

And there’s another handful of AGMs.

Rudi will connect with Sky Business today, via Skype, to discuss broker calls for about ten minutes, starting 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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article 3 months old

Soft Quarter Signalling More Weakness For Wesfarmers

Brokers raise the spectre of whether soft September quarter sales numbers for Wesfarmers, particularly at Coles, are a sign of more weakness to come.

-Main negative is the deceleration of sales growth at Coles as Woolworths steps up price investment
-Sales growth at Coles now more difficult to obtain and expected to be modest
-Resources business seen doing the heavy lifting for Wesfarmers at present
-Uncertainties also prevail in the fashion, hardware and resources


By Eva Brocklehurst

Brokers raise the spectre of whether soft September quarter sales numbers for Wesfarmers ((WES)) are a sign of more weakness to come. Sales were weak across the main divisions. Food and liquor grew 1.8%, which represents the worst growth in several years. Bunnings slowed to 5.5%, as a result of clearance activity at former competitor Masters and a softer market, which are acknowledged to be temporary factors. Target's like-for-like sales slumped 22% while Kmart was encouraging, growing sales 8.2%.

The main negative was the deceleration in sales growth at Coles supermarkets. Management suggested this was driven by slower market growth as well as intense competition. Deutsche Bank warns there are risks in calling one quarter a trend, but believes competitor Woolworths ((WOW)) is improving in an environment where deflation is constraining market growth, while Aldi continues to gain share.

The broker does not believe there was a sharp market-wide decline in consumption volumes, but looking at the three consecutive quarterly declines in like-for-like growth, suggests this does coincide with the improvements Woolworths has made, even if it just means Woolworths is now “less bad”.

Overall, the broker contends that the sustained run at Coles has been supported by a strong top line, which has enabled the supermarket to provide incremental value for customers and grow or, at the least, preserve margins. Sales growth is now likely to be difficult to obtain, which could undermine this value loop that has been crucial to the success of Coles. With Coles being the main driver of Deutsche Bank's valuation the broker's rating is downgraded to Sell from Hold.

Cash generation is sound for Wesfarmers overall, Ord Minnett asserts. Bunnings is able to continue to generate a strong return on capital through continued earnings growth and capital recycling. The value focus and cost reductions at Coles are expected to position it well to address a challenging competitive backdrop. Still, the broker expects only modest earnings growth in the near term.

Industrial and resources divisions are improving, although this carries some risk and weighs on the price/earnings multiple in Ord Minnett's calculations. While accepting that blaming the weather is a weak stance, Macquarie's recent channel checks confirm the comments from Wesfarmers that a cold and wet spring has adversely affected apparel, home improvement and supermarket sales.

Resources business is doing the heavy lifting for Wesfarmers at present but it, too, was affected by weather, with total production down 11.8% on the prior quarter. The lower production will delay the benefit of higher coking coal prices but the company is expecting to break even in the first half. The first half is lining up as a tough period the broker believes, with risks to earnings increasing, but the longer-term proposition of strong balance sheet, earnings growth and dividend yield remain intact.

Macquarie is one of the more optimistic regarding Coles, doubting the supermarket has ceded share at this stage, although acknowledging it will need to to do more to offset the increased aggression in the market in recent months.

The broker does not envisage Coles straying from a long-held strategy of leading the market on value, which implies price leadership will not be given up lightly, although it could be at the cost to margins over the medium term. Macquarie forecasting a 10 basis points EBIT (earnings before interest and tax) decline in food and liquor over FY17 and slower comparable store sales growth of 2.3%.

Target's turnaround remains uncertain as brokers note the chain exists in a tough fashion segment. Credit Suisse expects around a 10% re-basing of sales in FY17 and, if Target successfully moves more towards an EDLP (Every Day Low Prices) model, the sale price offset could feasibly be around a three percentage point fall in markdown and supplier costs over time.

Credit Suisse would like to scrutinise the Woolworths and Metcash ((MTS)) results to determine the extent to which the slowdown in Coles was competitively driven. Pricing behaviour in food appears rational, given that Woolworths has dropped a significant profit into rectifying a poor price position. That said, the risk is that Coles moves its focus to near-term profit requirements.

Based on a circa 10% decline in fuel volume, the Coles convenience business has probably dropped 5-10% in value due to the acquisition of Shell's business by Vitol, the broker estimates. A reduction in the decline in gross margin offsets the earning impact of lower sales volumes in Coles in Credit Suisse forecasts for FY17.

Morgan Stanley reduces profit forecast for Coles by 12% and, while the non-food retailing business have also slowed, these are less of a concern given strong market positions. The broker reduces margin estimates significantly, estimating 4.6% for FY17 margins versus Woolworths at 4.4%.

The main question for UBS is what Coles does in the face of the heightened competition, considering it is driving the structural shift in the industry, as well as the impact slower sales will have on margins. The broker forecasts Coles to grow market share at 12 basis points per annum over FY16-20, yet also considers it increasingly challenging for Wesfarmers to maintain current rates of momentum in both Coles and Kmart into FY17. UBS believes Wesfarmers is fairly priced at current levels, given uncertainty over housing (Bunnings), grocery (potential price war) and the resources business.

The consensus target for Wesfarmers on FNArena's database is $41.59, signalling 1.8% in upside to the last share price. Targets range from $38.00 (Deutsche Bank) to $45.00 (Ord Minnett). The dividend yield on FY17 and FY18 forecasts is 5.0% and 5.2% respectively. There is one Buy rating (Macquarie), five Hold, and two Sell.

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article 3 months old

The Overnight Report: Wild Ups And Downs

By Greg Peel

The Dow closed up 30 points or 0.2% while the S&P fell 0.2% to 2139 as the Nasdaq fell 0.6%.

Pent Up

For a month the ASX200 has been up and down in a range of 5400-5500, meeting bargain hunters at the bottom and profit-takers at the top. The topside has looked the least likely to be penetrated given uncertainty surrounding upcoming, very influential global events.

Which leaves us with the downside. We saw a bit of a hint of it on Monday, but on Tuesday the bargain hunters reappeared. They also reappeared yesterday when the index dropped immediately to 5400 on the open. They hung on for almost an hour but it was to no avail. There was just too much bad news about.

Yesterday’s bellwether trigger was Wesfarmers ((WES)), or more specifically Coles. Looks like the honeymoon’s finally over. Stoic investors have continued to back the big supermarkets because...well…of tradition mostly. Wesfarmers does not traditionally fall 6% but it did yesterday.

Then there’s the tragedy of Ardent Leisure ((AAD)), down another 15%, an ongoing exit from stocks reliant on the Chinese consumer, following Tuesday’s Bega Cheese ((BGA)) scare, and the other China story – Crown Resorts ((CWN)). And we have Healthscope ((HSO)). Having been sucked down in the vortex, peer Ramsay Health Care ((RHC)) issued the briefest of statements yesterday to allay fears of any similar problems. Ramsay shares managed only a very modest bounce after a solid fall.

When the levy broke at 5400 it was on for young and old – market-wide. Tuesday night saw a big jump in the iron ore price, solid moves up in base metals and a bit of a rebound for gold, yet the materials sector closed down 0.7% yesterday. It was at least an “outperformance”. The banks that had been bought up this week on the dividend play were dumped, down 1.3%, ahead of National Bank’s ((NAB)) earnings report today.

The big loser on the day was consumer staples, down 3.3% thanks to Wesfarmers, but consumer discretionary wasn’t far behind with a 2.5% fall. This sector is very much influenced by monetary policy, but it appears yesterday’s CPI release had little impact on a market already hell bent on heading south.

The media will always focus on the headline inflation rate, and it was up 0.7% in the September quarter for an annual rate of 1.3% when 0.5% and 1.1% were forecast. There goes your RBA rate hike, is the conclusion. But the core rate rose only 0.3% when 0.4% was expected for an annual 1.5% against 1.7% expectation.

The RBA focuses on the core rate, ex food & energy. Thus we can say inflation was actually weaker than expected. But not as weak as it was back in the March quarter, which prompted the last rate cut. So will we see a Cup Day cut next week?

CBA’s economists say yes, but with less conviction. St George says yes, but it’s a “line ball call”. ANZ believes the data increases the odds of a cut – next year. Others say no cut on Tuesday. Place your bets.

The immediate reaction in forex markets was no cut, given the Aussie jumped straight to 77, but then traders read further down the document, past the headline result, and by late evening the Aussie was back where it started. It is this morning unchanged over 24 hours at US$0.7643.

Did we see the shake-out in the stock market yesterday that we needed to see? The index held 5350, which is also an important technical level. Certainly some of the high-flying names for which analysts have been calling valuations overstretched have come back to earth somewhat. Buying opportunity?

Well we’ll probably have to get past Trump, OPEC and the Fed first. Santa is watching closely.

Motion Sickness

The Dow was down a hundred points from the open last night and then up 70 points before midday. The major underlying driver was oil.

US oil forecasting is a JOKE. Yesterday I noted weekly inventory forecasts are never right and in the past I’ve pointed out how numbers from the American Petroleum Institute and numbers from the Energy Information Agency are so often wildly different. Before the open on Wall Street last night, the API had predicted a weekly crude inventory build. The market was expecting a build, but not by as much.

Already looking nervous under US$50, particularly with the whole production freeze issue looking decidedly shaky, WTI plunged to below US$49/bbl from the open on Nymex. Then the EIA report came out indicating a small drawdown, and WTI shot back up over US$50. Hence we saw the Dow down a hundred and then up 70.

The oil price drifted back towards the close to be down US67c over 24 hours at US$49.15/bbl. The Dow closed up 30.

Outside of oil, we saw a weak result from Apple in Tuesday night’s aftermarket, mostly guidance related, send apple shares down over 2%. On the other hand, Boeing posted a very strong result which saw its shares up almost 5%. Both are Dow stocks, but only Apple is a Nasdaq stock. That’s why the Dow closed up 0.2% last night and the Nasdaq closed down 0.6%.

Some 40% of S&P500 companies have reported to date and the run-rate is 2.5% earnings growth. That should be good news, given a 2% fall had been predicted. And revenues are up 2.8%, which is very positive. Yet Wall Street is failing to respond in a positive fashion. One reason is aforementioned uncertainty with regard upcoming events. The other is disappointing December quarter guidance, despite strong September earnings results. But then a lot of that has been put down to uncertainty in the quarter, given upcoming events.


Oil has been noted.

After their strong session on Tuesday night, last night saw base metals moves return to being mixed and minimal. Zinc fell 1%.

Iron ore has kicked on, rising another US$1.10 to US$62.70/t.

Tuesday night’s gold rally proved fleeting as gold is down US$7.20 at US$1266.70/oz, despite the US dollar index slipping 0.1% to 98.63.


The SPI Overnight closed up 8 points. Not quite the stuff of rebounds after a day of carnage, but then Wall Street has not provided much impetus.

In a case of unfortunate timing, Ardent Leisure ((AAD)) will host is AGM today. Indeed it’s a very busy day on the AGM calendar.

But the greatest focus will be on NAB’s earnings result. And more specifically, its dividend. NAB did not cut, yet (?).

Rudi will appear on Sky Business, 12.20-2.30pm.

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: Ups And Downs

By Greg Peel

The Dow closed down 53 points or 0.3% while the S&P lost 0.4% to 2143 and the Nasdaq fell 0.5%.

Cheesed Off

The AGM season claimed another victim on the local market yesterday. Bega Cheese ((BGA)) shares fell 17%. Clearly the company was wrong in believing the Chinese market is insatiable.

Not content to continuing selling just its well-known cheese products, Bega had decided to hook up with Blackmores ((BKL)), which clearly was not content to only sell dietary supplements. The two took on the Chinese infant formula market, where already there are a crowd of A&NZ milk companies operating, and found it oversupplied.

Go figure.

The other big loser on the day is a tragic story. Ardent Leisure ((AAD)) fell 8% very late in the session so there may be more to come.

Otherwise, having surprised all and sundry by falling so heavily on Monday, the ASX200 again defied overnight futures trading in jumping back up 47 on the open before settling up 34. It was more of a step-jump than a rally, which again prompts the question what on earth was going on on Monday.

The banks clearly led the market up yesterday in what is a traditional seasonal pattern. The 0.8% sector gain reflects the fact there are three juicy dividends on offer (albeit maybe less than in previous years), and you need to get in now if you want a piece of the action. Then you sell in December and switch into CBA on the different cycle.

All sectors finished in the green yesterday bar consumer staples, thanks to Bega and friends, and energy, which dipped slightly on lower oil.

Having reset, the market will now look ahead to today’s September quarter CPI number, which will set the agenda for RBA policy and determine whether the Aussie goes higher or lower. Economists are looking for 0.5% headline growth for 1.1% year on year, and 0.4% core growth for 1.7% year on year.

Guidance Concerns

Russia is now apparently wavering on a production freeze agreement with OPEC. The WTI price thus slipped under US$50/bbl last night which was one source of weakness on Wall Street.

US consumer confidence has fallen to its lowest level since May, according to the Conference Board monthly measure. It’s not great news for retailers with the Thanksgiving shopping spree now only a month away. But it is typical of confidence to dip going into a presidential election, and the bizarre offering this time around is more reason to be cautious.

The main reason Wall Street was lower last night centred around earnings season. It is not third quarter earnings that are the issue, as they continue to point to the first positive result for the S&P500 in six quarters. It is fourth quarter guidance which, given all the uncertainty in the world at this time, has been disappointing in many cases.

Among the Dow stocks, consumer staple stalwart Proctor & Gamble has been a popular stock to hide one’s money in this year and it did not disappoint, rising 3%. But despite posting positive results, all of 3M, DuPont and Home Depot shares fell on underwhelming guidance.

Outside the Dow, Whirlpool went down one, falling 11% on weak, Brexit-impacted UK sales. General Motors suffered the same fate, and fell 4%. High flyer Under Armour fell 13% and had Wall Street wondering whether the “athleisure” bubble has now burst.

Add it all up and the Dow fell 50 points. On Monday night it rallied 70 points. With PEs looking stretched and December quarter earnings guidance failing to provide support, the upside currently appears limited. With funds managers lined up to swoop on any weakness so they can put money to work on a TINA basis, the downside appears limited.

As Gerry Rafferty would put it, here I am, stuck in the middle with you.


Forecasts this week are for a build in US crude inventories following a couple of weeks of surprise drawdowns.

Forecasts are never right.

Throw in doubt over Russia and West Texas crude is down US81c at US$49.82/bbl.

Between environmental shutdowns forced by the governments of China and the Philippines, and economy-based restrictions in Indonesia, the supply of bulks and base metals is expected to be constrained going forward. Yet there appears no constraint on Chinese demand, which is on the rise.

Last night lead and nickel rose over 1% and aluminium, copper and zinc rose over 2%.

Iron ore has jumped up US$2.90 or 5% to US$61.60/t.

We are entering one of the two holiday periods in which Indians typically exchange gifts of gold. Outside of monetary policy influences, such demand from India can be a real mover of the dial for the gold price. Last night gold rose US$9.40 to US$1273.40/oz.

The rally in gold, and indeed other commodities, may also lend itself to creeping belief the recent run-up in the US dollar has come to an end for now. The greenback has adjusted to the expectation of a December Fed rate hike and now must wait for confirmation. The dollar index has been flat for a few sessions in a row now, which suggests it might just be ready to tip over. It is little changed this morning at 98.73.

On commodity price strength, the Aussie is up 0.4% at US$0.7641.


The SPI Overnight closed down 12 points or 0.2%. Seems strange in the face of commodity price strength but the SPI’s been no sort of indicator these last few sessions.

The local CPI result is due late morning.

There’s another round of AGMs today and quarterly earnings results are due from Alacer Gold ((AQG)) and ResMed ((RMD)) and quarterly production numbers from Independence Group ((IGO)).

Wesfarmers ((WES)) will report quarterly sales figures. While Coles will be in focus as always, don’t forget Wesfarmers also produces coal.

Rudi will gear up in the afternoon to host Your Money, Your Call on Sky Business tonight, 8-9.30pm.

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