Tag Archives: Iron Ore

article 3 months old

The Overnight Report: False Dawn

By Greg Peel

The Dow closed down 109 points or 0.6% while the S&P lost 1.1% to 1979 as the Nasdaq fell 1.3%.

Worst Since 2009

Yesterday’s Chinese trade data showed a 25.4% year on year fall in exports in February when economists had expected 12.5%. Imports fell 13.8% when 10.0% was forecast. The fall in exports is the steepest since 2009.

Suffice to say, the news was not well received in the Australian stock market. If nothing else, the bad news provided good enough reason for traders to take profits on resource sectors positions they’ve done rather well out of these past few sessions. Energy fell 1.1% and materials 0.8%, while the banks, which have also been rallying strongly, joined in with a 1.0% fall.

Of course, as is the case every year, we can point to the Lunar New Year disruption when it comes to the Chinese numbers. Beijing does not smooth its data to account for the one week break, which this year happened to be early in the solar calendar. But that is not to suggest the numbers would have looked at all healthy if so adjusted.

It is of no great surprise the ASX200 saw a pullback yesterday after having powered back from around 4800 to pass through 5000 yet again, and almost to 5200. The news did not get much better overnight.

Meanwhile, if there is anything troubling the Australian business community at present you’d never know it. Yesterday’s NAB business confidence survey for February showed a jump in the confidence index to 3.4 from 2.5 in January and a surge in the conditions index to 8.3 from 5.4.

Commodities

Last night both Goldman Sachs and Citi issued reports suggesting the market is kidding itself if it believes there is a balance returning to oil and metal markets. The short-covering rallies witnessed on oil markets and on the LME will prove but a false dawn, they suggest, as was the case last year.

While there have been some positive signs of a reduction in US crude output, tonight’s weekly inventory numbers are forecast to show another big jump in stockpiles. Meanwhile, more OPEC chatter flowed last night, with Kuwait’s oil minister declaring Kuwait would only freeze production if Iran did. Iran’s not going to, so that’s that.

West Texas crude is down US$1.69 or 4.5% at US$36.24/bbl and Brent is down US$1.33 or 3.4% at US$39.45/bbl.

Base metal prices had already appeared to be overcooked heading into yesterday’s Chinese data and last night’s investment bank analysis. Aluminium, copper and lead fell 2%, last night, zinc fell 3%, tin 5% and nickel 8%.

So what’s going on in iron ore? It’s up another US70c at US$63.30/t.

The US dollar index is up 0.1% at 97.19 and gold is down US$5.90 at US$1260.10/oz.

The Aussie has retreated on the Chinese data. It’s down 0.5% at US$74.36.

Resistance

The Australian market had a good run of it lately so profit-taking was no surprise yesterday. The Dow and S&P500 recently hit psychological levels of 17,000 and 2000 respectively so they, too, were due some consolidation.

A fall in the oil price is always a good excuse for Wall Street to follow suit, and so it did last night. The combination of weak Chinese data and the Goldman and Citi reports had US traders similarly bailing out of the energy and materials sectors and back into defensives, and also back into bonds. The US ten-year yield fell 7 basis points to 1.83.

It’s a week largely devoid of US economic data releases so Fed-talk has been off the table this week, allowing markets to concentrate on the commodities story. But tonight the ECB will hold a policy meeting and the expectation is Mario Draghi will announce some further extension to stimulus.

So the market has also readied itself in case of disappointment.

Today

The SPI Overnight down 26 points or 0.5%.

Westpac will release its monthly consumer confidence survey today and local housing finance numbers are due.

There is another solid block of stocks going ex-div today.


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article 3 months old

Material Matters: Exploration, Metals, Zinc, Steel And Contractors

-Explorers becoming more picky
-Metals rally but demand needs to lift
-Zinc signals a supply shock
-Steel mills enjoying margin uptick
-Expectations for contractors more realistic
 

By Eva Brocklehurst

World Exploration Trends

A report from SNL Metals & Mining on world exploration trends suggests a 19% decline in budgets in 2015. The mining sector's aggregate market capitalisation is now at levels not seen since early 2009. Another statistic: the mining industry's estimated total budget for non-ferrous metals exploration in 2015 was US$9.2bn, less than half the record of US$21.2bn budgeted in 2012.

The report notes more junior players are moving out of the sector and seeking opportunities in non-mining industries, and it could be some time before those junior players still in the market derive any benefit from an eventual upturn.

Despite the junior troubles, the number of active projects with drilling activity is stable and significant results are well above the levels reported in 2008-09. The report also notes that over the last 15 years, budgets have moved away from grass roots work upon which new discoveries largely depend.

With risk aversion continuing to plague the sector, companies are intent on developing existing or well defined projects to ensure an adequate level of reserves to support production. The report envisages a 15% decline in exploration budgets in 2016.

Metals

To Ord Minnett, the rebound in metals prices in the face of flat or deteriorating fundamental conditions means the pricing is probably the result of short covering, the positive influence of a more stable US dollar, a rally in oil and a fresh round of Chinese monetary policy easing.

The broker believes the correlation between equity markets, oil and now metals is due to a global search for yield from riskier assets. While Chinese policy makers have exacerbated the loose monetary conditions, Ord Minnett believes the subsequent rallies in the price of metals are only justifiable if the new policies have the potential to lift demand.

In sum, the broker continues to expect cost deflation, a relative resilience in supply, particularly in copper, and weak demand growth globally. Ord Minnett remains bearish on the fundamentals but from a tactical trade perspective is moving towards a more neutral stance on base metals, given momentum and volatility.

If prices appreciate around 10% from current levels the broker would find value in re-establishing short positions. Unless the fundamentals turn more positive.

Zinc

Zinc is the best performer on price in the base metals complex, with Morgan Stanley observing it is now up 15% over the year to date. This is mainly a result of mine curtailments since the downstream market remains well supplied. The broker notes there has been a surge in China's metal imports in December-January which has been bullish for the metal.

China appears to being offsetting a lack of concentrates by lifting metal imports. Hence, the broker suspects zinc is the first to report a supply shock as, in response to a low price, the sell-off in preceding years has prompted mines to curtail supply and a shortage developed. This has happened despite weak demand.

Nevertheless, the broker believes the market is ignoring the downstream signals in the current rally, which reveal adequate, or rising, inventories and weak end-user demand. Around 50% of zinc is used in steel galvanising.

Steel

Macquarie observes some bullishness around steel demand. There has been a sharp turn-up in end-user orders, profitability and production expectations. The broker believes the evidence suggests the market is experiencing a recovery that goes beyond seasonality.

In February, five of the six sectors the broker tracks reported better steel orders, with automotive the only exception. Sure, orders from construction and infrastructure usually go up after January but for white goods and machinery this is not the case. As the latter industries are also large users of copper, Macquarie will be interested to find out if the strength of their steel orders spreads to copper in March.

Macquarie notes a dramatic improvement in steel mill profitability since November. The time lag suggests this is because most mills are enjoying cheap raw materials purchased previously, which means after inventories are exhausted the mills will find it hard to improve margins unless prices for steel are raised.

Contractors

Resource sector contractors appear to be stabilising. Ord Minnett notes margins may level off and a more disciplined approach to tendering follow the recent downturn. The market appears to be starting to re-rate the likes of NRW Holdings ((NWH)), WorleyParsons ((WOR)), Ausdrill ((ASL)), UGL ((UGL)) and Mineral Resources ((MIN)). The broker observes all theses stocks are up more than 50% over the past three weeks.

While FY16 earnings are still likely to be soft, contract wins announced in 2015 were ahead of 2014 by 25%, a strong leading indicator that signals revenue has found a base. Recent M&A is also likely to be a catalyst for re-rating, the broker contends. The market often buys ahead of the worst of the bad news and it may have reached that point.

Ord Minnett cautions against owning stocks identified with low quality results, as the chances of a negative earnings surprise is much higher. The broker also emphasises that an earnings recovery is not occurring, rather the sector is being re-rated but forward expectations are now looking more realistic.

In the short term, Ord Minnett believes the safest way to play the market at present is via Service Stream ((SSM)), RCR Tomlinson ((RCR)) and Mineral Resources.
 

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article 3 months old

The Overnight Report: Commodity Chasers

By Greg Peel

The Dow closed up 67 points or 0.4% while the S&P rose 0.1% to 2001 and the Nasdaq fell 0.2%.

Big Three

Another day, another 1% rally for the ASX200. But it’s all in three sectors. Those most oversold this year are now those most sought after.

Improving prices for oil, iron ore, copper and other metals saw the local energy sector up 2.2% and materials up 3.1%, including an astonishing 24% jump for Fortescue Metals ((FMG)) as the iron ore futures price began to surge. A rebound in commodity prices implies more confidence in the Australian economy, and yesterday the banks rose another 1.2%.

Today will be interesting. Iron ore is up 19% for reasons unknown.

Consumer staples is another sector that has seen hard times, and it was up 0.5% yesterday, but clearly in order to rotate positioning into the star sectors du jour, investors are creaming off everything else. All other sectors finished slightly in the red yesterday, including the defensives of healthcare, telcos and utilities.

Of course, there has to be a flipside, and for the Australian market that is the Aussie dollar. It’s up another 0.6% at US$0.7471, driven by commodity price strength.

Meanwhile, Australia’s construction sector continues to contract at pace. The construction PMI fell to 46.1 in February from 46.3 in January to mark the fastest pace of contraction in twelve months. In the sub-sectors, single housing construction has slowed but apartment construction is still firing along. Commercial construction expanded but engineering (call it mining construction) contracted for the 20th straight month.

The good news is the pace of engineering contraction slowed. Economists are expecting the apartment bubble to soon burst, and the housing market in general to ease off in 2016. These are the non-mining drivers the Australian economy needs to offset the mining decline. But if the slowdown in mining investment is beginning to see an end in sight, then the non-mining sectors may not have to work so hard.

Mining is one sector in which worker lay-offs have been substantial. Yesterday’s ANZ job ads series showed a 1.2% fall in February. ANZ’s economists note the strong pace of job ad growth evident in 2015 – which is a reliable indicator of employment – has eased off this past six months. That said, ANZ is not among those expecting Australia’s unemployment rate to climb back through 6% this year.

Oil Switch

Last night the UAE energy minister suggested current oil prices are now forcing OPEC members to freeze production. Not to reduce production, but not to increase it further in a desperate attempt to generate cash. Only so much oil can be produced at a commercial loss.

While we’ve learnt to take anything an OPEC spokesman says with a grain of salt, the UAE minister is not spinning the now hackneyed line of “We’re all going to meet and agree to production cuts/freezes”. He’s simply saying “It’s happening anyway”.

Until this last rebound in the oil price, each previous rebound has been sparked by production cut talk from OPEC and Russia, which the market finally came to realise was just a ploy. But this latest rally has more to do with evidence of falling US production, which actually gets to the heart of the matter. If OPEC is actually freezing production levels as well, because it has no choice, then all the better.

Last night oil prices jumped over 5%. WTI settled at its highest level in 2016 and Brent hit US$40/bbl for the first time since Christmas.

Which should translate into a big rally for the US stock markets, given the near 99% correlation to the oil price witnessed over the past two months. But the Dow is up only 0.4% points, and the S&P 0.1% because the Nasdaq is down 0.2%.

Like Australia, the US market is responding to what appears to be a rebound in commodity prices that suggests bottoms are now in place. And like those in Australia, US investors are selling out of other profitable sectors to fund the switch back into energy and materials. The high flyers in the US have been the FANG stocks (although that should now be FANA) – Facebook, Amazon, Netflix and Google (now called Alphabet). All these four saw significant selling last night.

Having rallied from its nadir at the bottom of the oil price, Wall Street is now back in what traders are suggesting is short-term overbought territory. The twin “big figures” of 17,000 in the Dow and 2000 in the S&P are providing a level at which to take a breather.

Commodities

West Texas crude is up US$1.94 or 5.4% at US$37.93/bbl. Brent is up US$2.06 or 5.3% at US$40.78/bbl.

Nickel and tin continued their rallies on the LME last night, with 1.5% and 2% gains respectively. Aluminium edged up another 0.7% as copper took a breather, while zinc just can’t seem to win any friends and fell 2%.

Iron ore is up 19%. No that’s not a typo. A US$10.20 gain puts spot at US$62.60/t.

The US dollar index is down 0.2% at 97.09 while gold remains relatively steady at US$1266.00/oz.

Today

The SPI Overnight closed up 36 points or 0.6%.

The NAB survey of local business confidence in February is due today.

China will release February trade numbers.

Several local stocks go ex-div today, including Oil Search ((OSH)).

Rudi will connect with Sky Business through Skype around 11.15am today to talk about broker ratings.
 

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

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

Material Matters: Metals & Miners, Base Metals, Zinc, Tin And Indonesia’s Export Ban

-Debt burden may force action from miners
-Issue with base metal inventories
-Zinc demand starting to improve
-Risk of tin supply cuts reversing
-Indonesia would add supply options
 

By Eva Brocklehurst

Metals And Miners

Miners are traditionally poor at self-regulating supply, Goldman Sachs observes. During four of the past five price downturns supply actually went up. The broker believes low commodity prices and low cash flows are increasing the debt burden on the sector. Debt as a percentage of sector value in 2016 is 27%, the highest this century. Hence, the greater debt burden may force more action on loss-making supply this time around.

Nevertheless, the focus is squarely on China. Given China's proportion of global supply of most major commodities has doubled since the last downturn, any significant action taken in that region will be important in bringing the markets back to balance, especially for coal and aluminium.

Goldman Sachs expects the rate of mine closures in China may increase this year, but ultimately supply-side restraint is not expected to be enough the balance the market. Hence, the broker believes commodity prices will remain under pressure. In particular there are downside risks to price envisaged for iron ore, copper and the coal complex, absent a recovery in demand.

Base Metals

Base metal prices did not keep up with iron ore and steel, which sustained small rallies after Chinese New Year. Steel and iron ore have adjusted to oversupply with sharp production cuts and few players in the supply chain have the working capital to hold much inventory. Macquarie suspects the malaise in base metals is caused by inventory levels.

With the exception of lead, which already had a rally ahead of the New Year based on inventory, the broker believes it will be hard for base metals to rally. Positive trends are forming but at the moment the market does not seem to be looking at a real shortage of refined metal. The broker will be looking for a draw down in zinc and nickel inventories in coming months, which should be supportive of prices through this year.

Zinc

After attending the International Zinc Association conference, Macquarie notes the tight market for concentrates continues. On the metal side the story is less comforting. There was no major annual term contract settled at the conference. Demand is not exciting the broker, although it appears to be better than this time in 2015, with improvements noted from both Europe and the US in the autumn.

Hence, Macquarie suspects recent price strength is likely to fade until there is real tightness in supply. The most positive aspect of the conference was that treatment charges in the concentrates market remain under pressure.

Given a closure of two exhausted mines, Macquarie continues to believe in an ultimate return to a deficit and the right signals over the next few months should produce a sustainable rally in the price. The broker maintains a forecast for prices to achieve US$1,900/t and US$2,050/t as averages for September and December quarters respectively.

Tin

The smallest base metal market has also been one of the best performers this year, Macquarie contends, although tin has slipped below the radar relative to zinc. Production cuts - China’s nine major producers reduced output in January by 17,000 tonnes - and low exchange inventories have meant prices have risen 12% in the year to date.

Indonesian supply has been disrupted as well. Still, supply is running strongly from Myanmar and global demand remains weak. Moreover, the broker suspects, with the market generally trading out of the cost curve, there is a risk that some of the supply cuts will be reversed.

Many of the supply reductions are easily reversible in a higher price environment. Hence, the recent price rally is not likely to be sustained. Liquidity remains an issue and speculators have had little interest in tin, although Macquarie observes money managers' net length has increased with the price rally and there are yet-to-be-answered questions regarding what is driving the rebound.

Indonesia

As the possibility emerges that Indonesia may reverse its ban on exports of unprocessed minerals, Morgan Stanley takes a look at the new risks to existing commodity trade flows. Resuming exports would help the country's weakened economy and boost tax revenue. Its key exports are bauxite, nickel, tin and copper.

The broker observes, as the country implemented the ban in January 2014 to force change, investment in capacity elsewhere was also slowing. A lack of incentives and the fact that China was obtaining supply elsewhere in the region -- bauxite from Malaysia and nickel from the Philippines -- meant Indonesia's goals of achieving increased investment appeared even more unlikely.

If exports return to pre-2014 levels Morgan Stanley suspects China would probably prefer Indonesia's bauxite and nickel-bearing laterites. Assuming no change to demand growth, and given the diversity of supply options, the broker expects downward pressure would build on global bauxite and nickel prices. However, actual downside is probably limited, Morgan Stanley adds, given the current lows in prices.
 

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article 3 months old

The Monday Report

By Greg Peel

Risk On

As expected, it was a relatively quiet day on the local bourse on Friday ahead of the US jobs report and following a strong recovery week. However sector moves were not all that quiet.

The banks only posted a 0.2% gain following a very strong run over the week, but apparent recovery in oil and iron ore prices, along with strength in base metals prices, saw the energy sector up another 0.4% and materials 1.4%. Investors appear to be undertaking a “risk-on” sector switch, drawing on the defensive sectors of healthcare (-1.2%) and utilities (-1.2%) for funds.

Normally telcos would be included in that group but Telstra has been trading more like a cyclical of late. Having taken quite a hit recently, the telcos were up 1.1% on Friday and similarly consumer staples posted a 0.7% gain. The downer was consumer discretionary, which lost 1.0% due to a disappointing January retail sales result.

Retail sales grew 0.3% in January, short of 0.4% expectation. This follows the strong December quarter GDP result for the consumer spending component, and at 4.0% annual growth, spending looks reasonable compared to last year’s 3.5% and the decade average 4.5%. Bear in mind that 4.5% includes a couple of pre-GFC years of growth around the 6% mark.

Still, the market didn’t like Friday’s result. Aside from an unsurprising trend of the non-mining states spending more than the mining states, the other takeaway of note is that we are spending a lot more on services than we are on goods.

Something for Everyone

The US added 240,000 jobs in February, beating 190,000 expectations and continuing a trend of surprising strength in the US labour market. This might be a concern for those fearing the Fed may yet look to hike again in March, but there is always more to a US jobs report than just the headline number.

The unemployment rate remained steady at 4.9%, implying the participation rate fell. But most importantly, after a very strong burst of wages growth in January which heightened Fed rate rise fears at the time, wages fell back 0.1%. Annualised wage growth is running at a below-trend 2.2% -- healthy enough considering lingering recession fears, but not enough to force the Fed into action next week.

June remains the current target date for the next Fed move.

Wall Street initially dipped on the jobs report release on Friday night but quickly resumed its rally once more. Simultaneously, the Dow crossed over the 17,000 mark and the S&P500 crossed over the 2000 mark. These numbers offer resistance merely on a “round number” psychological basis, and as such the sellers moved in. But a late rally at the death ensured another assault.

The Dow closed up 62 points or 0.4% at 17,006, the S&P gained 0.3% to close on 2000, and the Nasdaq rose 0.2%.

Proving further support, and risk-on confidence for Wall Street, was yet another rise in oil prices. A 4% gain for WTI meant the second consecutive weekly 6% gain for the global benchmark. Friday’s strength was driven by another drop in the weekly US rig count, suggesting next week’s weekly crude data may show a third week of falling production.

Commodities

West Texas crude rose US$1.37 to US$35.99/bbl and Brent rose US$1.62 to US$38.72/bbl.

Australia’s May budget is beginning to look a lot healthier. It will be interesting to see whether Scott Morrison does the right thing, and warns that a smaller deficit must be treated with caution given forecasters are not convinced the recent rally in the iron ore price will last, or plays the idiot politician, and gloats.

Iron ore was up another US70c to US$52.40/t on Friday.

The “risk-on” trade is now well and truly on show in base metal markets. When prices were heading towards their lows, commodity funds were bailing out rapidly. Now that the supply-demand balance across many a commodity is looking a little healthier – including global production cuts for base metals, particularly in China – the commodity funds are piling back in again, lest they be left behind.

Copper, nickel and tin all rose 3% on Friday night. Aluminium managed 0.7% and zinc was a wood duck.

Gold was relatively steady at US$1262.30/oz with the US dollar index down 0.2% at 97.36.

There’s no stopping the Aussie at present, which may be reaching a short-covering crescendo. It was up 1% on Saturday morning at US$0.7427.

The SPI Overnight closed up 36 points or 0.7% on Saturday morning.

The Week Ahead

The US goes into a bit of a data vacuum this week so the focus this week will be on the ECB, which holds a policy meeting on Thursday night. December’s extension to ECB QE has made little impression on the eurozone economy, which has also had to fight a pullback in the US dollar (ie stronger euro) as Fed rate rise expectations have been tempered.

The market is expecting something from Mario Draghi this week, but it’s not quite sure what.

China will be in the frame this week. Economists were disappointed with the Chinese government’s performance at the weekend’s national conference, at which it appeared Beijing’s focus is now back on reviving growth rather than addressing debt and further reforms. That should mean further stimulus from the PBoC, but Beijing has lowered its 2016 GDP growth target to 6.5-7.0% from 2015’s 7.0%.

The 2015 result was 6.9%. Perhaps by switching to a range rather than a single figure, Beijing is making it easier for its number crunchers to orchestrate an expected result.

This week China will release trade numbers tomorrow, inflation numbers on Thursday, and results for retail sales, industrial production and fixed asset investment on Saturday.

Australia will see ANZ job ads today, NAB business confidence tomorrow and Westpac consumer confidence on Wednesday. We’ll also see the construction PMI today and housing finance numbers on Wednesday.

As the ASX200 appears set to push further away from the gravitational pull of 5000 as the week begins, from tomorrow it will be fighting a large number of ex-divs throughout the week. These include BHP Billiton’s ((BHP)) dividend on Thursday, what there is of it.

Rudi will appear on Sky Business via Skype-link on Tuesday, 11.15am, to discuss broker calls. Next he'll appear twice on Thursday, from 12.20-2..30pm and between 7-8pm for the Switzer Report. On Friday he'll repeat the Skype-link performance at 11.15am.
 

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

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article 3 months old

Weekly Broker Wrap: Queensland Coal, Equity Strategies, Focus Lists And Real Estate

-Who will buy Anglo American's assets?
-Large caps drag on headline growth
-Appeal still found in domestic cyclicals
-New real estate listings growth on positive trend
 

By Eva Brocklehurst

Queensland Coal

The Australian assets of Anglo American which have been put up for sale include Moranbah and Grosvenor, the most valuable parts of the disposal program. Yet, Deutsche Bank notes the commodity, coal, is one that few are excited about. Achieving an acceptable valuation for shareholders may prove challenging.

The two logical buyers are Rio Tinto ((RIO)) and BHP Billiton ((BHP)) as both can extract operating synergies. The broker also suspects Japanese trading houses may take a look. From BHP's standpoint the acquisition of Anglo coal assets would provide operational synergies around Goonyella and Caval Ridge.

Furthermore, with only around 10% of production from underground the company may be tempted to add more capacity. On the other hand, regulators may investigate any acquisition as it would increase the company's controlled production to 80mtpa in the 225mtpa seaborne hard coking coal market. BHP has also stated its preferred area of investment is copper and oil.

Rio Tinto expressed interest some time ago in increasing its metallurgical coal exposure and the two Anglo American assets would raise its production to 18mtpa from 7-8mtpa, making Rio Tinto a significant producer. The question Deutsche Bank asks is: Does Rio Tinto want to assist in Anglo American's balance sheet repair or does it envisage other assets may be up for grabs if the environment deteriorates further?

Equity Strategies

Equities continued to be weak in February, falling a further 2.5% on top of the 5.5% decline in January, Macquarie observes. Volatility remains elevated in the equity market and, while the reporting season was slightly better than the broker expected, expectations had been lowered substantially in the lead-up to the results. Approximately 70% of companies reported in line or results above expectations.

The broker notes domestic cyclicals were solid and materials in line while health care was mixed. Large caps underperformed versus small caps. Improving commodity prices helped underpin energy stocks as oil rallied strongly over the month while banks were hit hard by fears of tightening credit markets.

In the materials space Newcrest Mining ((NCM)), Alumina ((AWC)), South32 ((S32)) and Iluka Resources ((ILU)) stood out for Macquarie.

UBS suspects the Australian equity market is on track for its second successive year of negative earnings growth. Growth ex resources is better but still an anaemic 3-4%. The broker notes earnings trends for a “typical” company remain reasonable but headline growth is being dragged down by the large-cap end of the market.

The broker remains overweight on banks and underweight mining while neutral on energy. While the broker is concerned about the high price of growth in a range of stocks there are still some appealing defensive ones. Sandfire Resources ((SFR)) and Iluka Resources are removed from the model portfolio while Heathscope ((HSO)) is added.

The broker continues to hold some selected domestically exposed stocks on a mix of relative valuation appeal. Defensive growth stocks held include Aristocrat Leisure ((ALL )), CSL ((CSL)), Healthscope and Transurban ((TCL)) as well as Estia Health ((EHE)), Virtus Health ((VRT)0 and G8 Education ((GEM)) in small caps.

Some growth is also envisaged for those exposed to US dollar earnings such as Aristocrat Leisure, CSL, Incitec Pivot ((IPL)) and Macquarie Group ((MQG)) and are held on this basis.

Small & Mid Caps

Goldman Sachs removes 3P Learning ((3PL)) and Sirtex Medical ((SRX)) from its Small & Mid Cap Focus List. In February the list was down 12.3% while the ASX Small Ordinaries Accumulation index was up 0.9%, implying 13.2% underperformance.

Over the year to February the list was up 10.5% while the ASX comparable was down 3.6%, implying 14% outperformance.

Best performers in February were Austbrokers ((AUB)), Sky City Entertainment ((SKC)) and Fisher & Paykel Healthcare ((FPH)), outperforming 2.5%, 2.6% and 2.7% respectively. The key detractors on the list were amaysim ((AYS)), Blackmores ((BKL)) and 3P Learning, underperforming 37.9%, 17.6% and 17.0% respectively.

Real Estate Classifieds

New listings in the Australian property market grew 6.0% year on year in February, indicating solid trading conditions in the second half to date. Deutsche Bank considers the February data, showing lower growth than January, as a more reliable indicator of market trends.

New listings growth in the capitals showed a similar trend to the national numbers. Sydney volumes turned around and Melbourne also produced solid growth in the month. The broker views these two markets as most important for online classifieds and for premium listings, likely contributing well over 50% of revenues.

The broker expects volumes to grow for the remainder of the second half and this will benefit the earnings of REA Group ((REA)) and the Fairfax Media ((FXJ)) Domain business.
 

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article 3 months old

The Overnight Report: Bring On Jobs

By Greg Peel

The Dow closed up 44 points or 0.3% while the S&P rose 0.4% to 1993 and the Nasdaq gained 0.1%.

More of the same

The major drivers of Wednesday’s big rally on Bridge Street were the banks, then daylight, then the resource sectors. Having pushed through 5000 for the umpteenth time, the green light is now on for the market to at least take a shot at 5200, if not the 5400 level chartists are flagging.

Yesterday simply saw more of the same. The banks led the charge again with a 1.8% gain, materials backed up with a 2.0% gain, with a little help from a stronger iron ore price (note the banks are now relatively a much bigger cap weight), and energy chimed in with 1.2% as, increasingly, it looks like the oil price might have stabilised.

There was little to speak of happening in other sectors. The banks and resources led us down, so it stands to reason they should lead us back up again.

Oil price stability, if that’s what we’re seeing, is important for LNG exporting. The iron ore price is holding above US$50/t on Chinese restocking but that must soon reach a conclusion. It is important to recognise the lag time between export prices pre-determined for cargoes delivered and spot pricing in relevant markets. Ditto the impact of the falling Aussie. This lag was apparent in yesterday’s January trade data.

Wednesday’s strong December quarter GDP result featured a surge in consumer spending to more than offset weakness in commodities exports. The bad news was a decline in volumes of exports as well as declining prices. Yesterday’s January trade data nevertheless showed a 1.2% increase in exports following the three months of declines over the December quarter. Exports are still reflecting the worst of commodity prices, but the weaker Aussie is starting to have an impact on AUD pricing.

The weaker Aussie is now also having the opposite effect on imports, which fell 1.1% in January. Foreign goods are becoming more expensive. The December quarter GDP was driven by consumer spending. If this now backs off in 2016, due to rising prices, and a predicted slowing in the housing boom, is there enough in non-mining to overcome weakness in mining going forward?

What we can place some hope in is that things do not look like they can get much worse for mining (and energy is included in the “mining” tag here). A rebound in commodity prices would be nice, but even stability of prices would be comforting such that, alongside the benefits of the weaker currency, mining at least stops dragging on the GDP.

The lower Aussie is also having an impact on Australia’s service sector, it would seem. The services PMI flipped back into expansion at 51.8 in February, up from January’s 48.4. Australians are shifting back to domestic services from overseas services (eg travel) due to the price.

The only problem, in the shorter term, is that the Aussie’s currently on a bit of a tear. Following Wednesday’s big jump, the Aussie is up another 0.9% at US$0.7356 thanks to a narrower trade deficit and strength in the services sector. There is no doubt an element of short-covering involved, given everyone was expecting the Aussie to be at 65 by now.

Around the Grounds

China’s service sector continues to expand, but the pace of that expansion continues to slow. Caixin’s independent China services PMI came in at 51.2, down from 52.4, and largely mirroring Beijing’s official number released on Tuesday.

China’s manufacturing sector continues to contract and keeps the world up at night, but the Chinese government is sleeping easy because contraction is the intention. Not so services, which is meant to take the baton. If investors want to worry about China’s economy, they should fret about the slowing pace of service sector growth and ignore manufacturing.

Japan’s services PMI rose to 52.4 from 51.5. The eurozone saw a fall to a 13-month low of 53.3, down from 53.6. The UK saw a fall to a near three-year low at 52.7, down from 55.6.

The US saw a fall to 53.4 from 53.5.

Waiting for Jobs

Wall Street took the services PMI as a good result, given economists had forecast worse. The oil market simply saw a weaker number, and sold off. The sell-off was probably due to some trigger happy day-traders, as oil came right back again to finish the session little changed, probably driven by those who see an improving trend (ie falling production).

The Dow was down 76 points on weak oil and rallied back to a stronger close, with oil. But volumes were low and volatility minimal as Wall Street awaits tonight’s all important non-farm payrolls report, the last jobs number ahead of the March Fed rate meeting.

That aside, last night’s January factory orders release showed a pleasing gain of 1.6% following two months of declines.

Commodities

LME traders noted indications of global base metal production cuts in sending prices higher for yet another session. Aluminium bucked the trend with a 1% fall, but copper, lead and tin were up 1%, zinc 2% and nickel 3%. Price rises were aided by a weaker US dollar, which fell 0.7% on its index to 97.55.

The dollar fell because of the weak US service sector PMI, despite similar weakness in the PMIs of Europe and the UK. The US service sector is far, far bigger than the US manufacturing sector.

If the US data continue to weaken then perhaps the Fed will adopt a more dovish tone at the March meeting. The greenback fall suggests this, and gold is up US$25.50 to US$1264.70/oz.

Iron ore rose US10c to US$51.70/t.

West Texas crude is steady at US$34.62/bbl and Brent is up a tad at US$37.10/bbl.

Today

The SPI Overnight closed up 5 points.

It would make sense that Bridge Street will also have a quieter session today, given two days of strong rallies, it’s Friday, and US jobs numbers are out tonight.

We will nevertheless see local January retail sales numbers today.

Medibank Private ((MPL)) is among a handful of stocks going ex-div today, and S&P/ASX will announce quarterly changes to index constituents, which will come in effect in two weeks’ time.

Rudi will appear twice on Sky Business today. First via Skype-link around 11.15am to discuss broker ratings and later, from 7-8pm, as guest on Mark Todd's Your Money, Your Call Fixed Interest.
 

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article 3 months old

The Overnight Report: Hanging In There

By Greg Peel

The Dow closed up 34 points or 0.2% while the S&P gained 0.2% to 1981 and the Nasdaq was flat.

Slowdown? What Slowdown?

Relax said the night man, we are programmed to receive. And whaddya know? We’re back at 5000 again.

The local market was already off to a flier from the opening bell yesterday, courtesy of the big rally on Wall Street. The 5000 level for the ASX200 hove into view. But the kicker came with the mid-morning release of the December quarter GDP result.

Quarter on quarter growth of 0.6% clearly beat forecasts of 0.4%. The September quarter result was also revised upward, leaving 3.0% growth for 2015 when 2.7% had been predicted.

Non-mining growth overcame the drag from resource sector contraction, led out by the housing market but specifically surprising on consumer spending. The good news is that the decline in resource sector spending is reaching its nadir, and it appears we may be seeing a bottoming out of commodity prices.

On the bad news side, the question is one of just how much longer support from the housing market can last. Housing has started 2016 with another flurry, but many an analyst is expecting a cooling as the year progresses, following such a bubbly run. Looking at this season’s earnings reports from relevant retail outlets, a lot of consumer spending has been housing-related. If the housing market softens presumably this area of spending will too.

And given a lack of any notable wage growth, consumer spending has been driven by a reduction in household savings. Consumers have recently begun to emerge from behind the couch where they’ve been hiding since 2008, and pulled out their wallets once more. But unless wages pick up, there is a limit to how far into the savings built up since the GFC consumers are prepared to dip.

Strength in employment suggests wages must eventually grow, but can employment remain strong? Retrenchments continue in the resource sectors and are soon to hit peak levels in retail (Dick Smith, Masters), for example. Strength in employment over the past twelve months has surprised everyone from economists to the RBA, and there are those who suggest it’s just a misleading head-fake up to now.

As is suggested by the move in the Aussie dollar over the past 24 hours, an RBA rate cut now looks like a distant hope. Having already spiked up on Tuesday when the RBA offered no fresh hint of a rate cut – and sensibly so it would now seem – the Aussie is up another 1.6% at US$0.7293. Rate cuts are bad for banks, and hey, if the March quarter GDP looks just a strong, we’ll be talking rate hike once more.

The banks were up 3.0% yesterday. There’s the bulk of your hundred points in the index right there. Energy was up 3.8% despite little movement in oil prices overnight, but like the banks, the energy names are among the most beaten-down. A jump in the iron ore price helped materials to a 1.9% gain, and having now gone ex-div, even the telco was back in favour.

It appears investors dipped into utilities to fund their cyclical purchases, while mixed individual stock moves kept the diverse industrials sector at bay. Ex-divs would have had an impact.

Is it happening?

After rallying 350 Dow points on Tuesday night with no real impetus from the oil price, it was not surprising Wall Street opened lower last night. But it was a case of the oil story re-emerging once more.

US weekly crude inventories rose by more than expected last week, it was revealed. Down went WTI, by as much as 2%, and down went the Dow, by a hundred points.

But wait!

The same data release showed US weekly US crude production fell again, as it did last week. The supply is still building ahead of short term demand but if production continues to fall, so, eventually, will excess inventories. WTI spun around and rallied, to be up just slightly on the session.

It looks like we might finally be seeing the impact of low oil prices on the marginal US oil industry. But it is a balancing act. If prices keep rising because production keeps falling, then higher prices may well bring production back on line. Realistically, oil needs to stay around US$30/bbl for as long as possible to ensure US$50/bbl can ever be seen again.

Meanwhile, last night’s ADP private sector jobs report showed 214,000 new jobs added when economists had forecast 185,000. But January’s number was revised down to 193,000 from 205,000, so there was some trade-off.

The Fed’s Beige Book noted activity continued to expand in most districts over January-February but conditions “varied considerably” across those districts. These are not words the Fed has used in recent times. The points of drag are nevertheless obvious – oil production states are hurting and those with a concentration of manufacturing are finding the stronger US dollar a headwind.

Perhaps Janet Yellen should get on the phone to Glenn Stevens for advice about monetary policy management in a “two-speed” economy, or a “multi-speed” economy, as Australia’s has oft been referred to in recent years. Divergent pockets of economic strength and weakness will make the Fed’s one-rate-for-all policy decision even more complex.

Commodities

West Texas crude is up US23c at US$34.63/bbl and Brent is up US10c at US$36.91/bbl.

Base metals, one LME trader remarked last night, are having “a nice little mini-bull run”. Prices kicked on last night after Tuesday night’s gains, with all metals bar nickel rising roughly 1-2%. Nickel managed 0.5%.

Iron ore is on a tear, it would seem. It’s up US$1.20 to US$51.60/t.

The US dollar index has fallen back 0.2% to 98.19, so gold is up US$4.30 at US$1239.20/oz.

Today

The SPI Overnight closed up 25 points or 0.5%. Have we now entered yet another period of attempting to pull away from 5000 to the upside?

It’s service sector PMI day across the globe, including Caixin’s Chinese number.

Australia will also see January trade numbers.

There are only a couple of ex-divs today.

Rudi will appear on Sky Business today, first time under the new programming, and he'll stay from 12.30 till 2.30pm.
 

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article 3 months old

The Overnight Report: Forward March

By Greg Peel

The Dow closed up 348 points or 2.1% while the S&P gained 2.4% to 1978 as the Nasdaq surged 2.9%.

Bank on it

It appears there were two particular drivers of yesterday’s rally in the local market which ultimately led the ASX200 to a 0.9% gain: stimulus in China, and no stimulus in Australia.

We can draw this conclusion from looking at yesterday’s sector movements. Commodity prices had a relatively quiet overnight session and yesterday’s local December quarter trade data were nothing to be happy about, ditto the Chinese PMIs, but materials rose 1.9% and energy 1.8%. The banks rose 1.6%, providing the bulk of the index gain.

Moreover, the index rally would have been a lot stronger if not for Telstra going ex-div, sending the telco sector down 4.4%.

It was still a choppy session nonetheless, in which we actually reached the day’s closing level in the morning before twice stumbling back to square ahead of a final rally back again, which took us almost to 4925 resistance.

The PBoC cut its bank reserve ratio requirement by 50 basis points overnight, suggesting Beijing is still ready and willing to provide more stimulus beyond renminbi devaluation. That’s good news for the local resource sectors.

But during the morning we saw the local December quarter current account numbers, including the terms of trade. The trade deficit widened further in the quarter as the value of exports fell. This was not a shock, given the falls in commodity prices over the period. But as commodity prices fell through 2015, it was always notable that the volume of exports of iron ore and coal continued to grow.

Not so in the December quarter. We saw both value and volumes down.

By late morning we saw China’s PMI data. Beijing’s official manufacturing PMI fell to 49.0 in February from 49.4 in January to mark the seventh consecutive month of contraction. Caixin’s independent equivalent measure fell to 48.0 from 48.4. Beijing’s official service sector PMI fell to 52.7 from 53.5.

Both the local export data and the Chinese PMI numbers were enough to cause individual stumbles in trading yesterday on the way to a final rally. It appears prior Chinese stimulus ultimately trumped all.

It was the 1.6% rally in the banks that really drove the index. The market went very quiet at 2.30pm yesterday, and then kicked on to the close. While no one was expecting the RBA to cut its cash rate, there was clearly expectation the language of Glenn Stevens’ statement could well be more dovish, given local data releases over the month (note that building approvals fell 7.5% in January) and a fears of a global recession.

As it was, the March statement was as good as identical to the February statement. The RBA believes the current rate is appropriate, but given low inflation there is scope for more easing if needed. This will likely be determined by the labour market, were recent strength to evaporate.

No cut on the horizon then. Rate cuts are bad for banks, as they squeeze net interest margins, particularly when we’re down at such low numbers. Ergo, no dovishness on the RBA’s part is good news for banks, and for the Aussie, which is up 0.6% at US$0.7176 for the same reason.

Around the Grounds

Incidentally, Australia’s manufacturing PMI showed a healthy gain to 53.5 from 51.5, marking the eight consecutive month of growth. This would be great news were Australia’s manufacturing sector not a mere shadow of its former self.

The Australian result was actually a global stand-out. Beyond China, Japan’s manufacturing PMI fell to 50.1 from 52.3, the eurozone fell to 52.1 from 52.3, and the UK dropped ominously to 50.8 from 52.9. It was left to the US to provide some good news, which it did with a big gain to 49.5 from 48.2. But that’s still contraction.

New Month

I suggested yesterday that the weak session on Wall Street overnight was more about end of month squaring than much else, particularly given it flew in the face of the entrenched oil price correlation. Well last night the Dow jumped 350 points and while WTI crude was stronger, it was only modestly so.

There were, admittedly, some stronger US economic data releases last night. One was the aforementioned manufacturing PMI which, while still indicating contraction, at least indicated a solid slowing in the rate of contraction. There was also a positive reading on construction. The better the data, the more chance of the Fed raising again.

And if the Fed raises rates, that’s good for the banks, as discussed earlier. So last night the US banks led the strong rally on Wall Street.

But wait! Aren’t we meant to be in “good news is bad news’ mode? Well in the case of last night, apparently not. The banks led out all the cyclical sectors with strong gains, while the underperforming sectors were the defensives such as utilities and telcos. Such a spread is emphatically indicative of a “risk-on” rally.

And why, suddenly, should Wall Street be “risk-on”? Well it’s a new month, the bad news is largely baked in – to date – China is stimulating and once the S&P500 breached 1950 to the upside, it was technically on for young and old. A close above 1975 was also going to be technically bullish, and the broad index closed at 1978.

Confirming the ‘risk-on” play was a 9 basis point jump in the US ten-year bond yield to 1.83%, and a 14% drop in the VIX volatility index to a confident 17.7.

Commodities

West Texas crude is up US65c at US$34.40/bbl and Brent is little changed at US$35.96/bbl.

Chinese stimulus and better US data were good for base metals, and they all rose 0.5-1.5%.

Iron ore jumped US$1.50 to US$50.40/t.

All of the above came despite a 0.2% gain in the US dollar index to 98.39. Gold fell a tad, to US$1234.90/oz.

Today

The SPI Overnight closed up 92 points or 1.9%, so strap in. While there are several stocks going ex-div today, there are no Telstra-style biggies.

It’s GDP day today. We’re looking for 2.6% annual, up from 2.5% in the September quarter.

February private sector jobs numbers are due tonight in the US, and the Fed will release its Beige Book.


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article 3 months old

The Overnight Report: Month End Blues

By Greg Peel

The Dow closed down 123 points or 0.7% while the S&P lost 0.8% to 1932 and the Nasdaq fell 0.7%.

Flat Finish

It was another choppy session on Bridge Street yesterday as the result season drew to a close. Being the end of month, there was no doubt attempts at window dressing from fund managers, which would explain why we were up 45 points at the peak around midday. That took us to 4925 on the ASX200 which happens to be a technical resistance level.

And it worked. Back down we came for a flat close. All sectors finished mildly positive on the session bar financials and consumer staples, both of which were impacted by stocks going ex-dividend.

Today is a new month.

Yesterday’s January private sector credit data showed assumptions of a slowdown in housing in 2016 are yet to manifest. Certainly in Sydney. The only difference is it is now the owner-occupiers driving the housing market as the investors back off following tighter lending parameters imposed last year.

Housing is particularly important as it is the one true sign of strength in an Australian economy still reeling from the pace of collapse of commodity prices. But for how long can the housing market continue to grow?

The good news in the credit data is that business lending continued to grow a-pace in January. The bad news is that last week’s December quarter private sector capex intentions measure pointed to a significant slowing of expenditure, which would translate to softer demand for credit.

Yesterday’s December quarter data showed corporate profits coming in weaker than expected, dragged down by mining but also disappointing in the non-mining segment. Wages growth remains tepid, which belies apparent strength in the employment numbers.

Soft wages in the face of resilient employment may yet provide the scope the RBA needs to cut its cash rate once more. The board meets today but no change is expected at this stage.

Non-Core Promises

At the G20 finance ministers meeting held over the weekend in Shanghai, the Chinese delegate assured those present China was not about to join in a mutually destructive global war of currency devaluation, otherwise known as “the race to the bottom”. Yesterday the PBoC pegged the renminbi lower for the fifth straight session.

It was in August last year when the PBoC sent the world into a tailspin by suddenly floating the renminbi against a basket of global currencies, amounting to a hefty devaluation no one saw coming. It was all about the renminbi being included in the IMF’s basket of reserve currencies. Having achieved inclusion, the PBoC is back to pegging against the US dollar once more.

Yesterday the PBoC also cut the bank reserve ratio requirement by a further 50 basis points. This is a more typical monetary easing tool China has deployed over past years, alongside occasional interest rate cuts. China may deny any attempt to join the race to the bottom, but it’s in stimulus mode nonetheless.

Being will release February manufacturing and service sector PMIs today, and Caixin will release its independent manufacturing PMI.

Decouple

It must have been the last day of the month. Oil rallied and US stocks indices fell. It’s been a positive month on Wall Street, having bottomed out at 1810 in the S&P500 and rallied all the way back to meet 1950 resistance. Last night’s selling was likely related to end of month profit-taking.

Last night it was Nigeria’s turn to talk up the possibility of an OPEC production freeze. Oil prices dutifully rallied, but one wonders whether much was made of further OPEC rhetoric. Last week’s US rig count showed the tenth straight week of rig declines and this week’s production data will be closely watched. Oil markets also applauded China’s RRR cut in rising a couple of percent.

In US economic news last night, pending home sales fell 2.5% in January, but weakness was partly attributed to the east coast’s Snowzilla blizzard.

Having leapt up solidly in January, the Chicago PMI – a measure of economic activity in the Chicago area – crashed back again into contraction in February, at 47.6. The underlying trend suggests contraction for the past three months.

The Fed remains data dependent, but the data are not painting a very clear picture at present.

Commodities

West Texas crude is up US79c at US$33.75/bbl while Brent is up US66c at US$36.01/bbl.

It was a quiet session on the LME for once, with a 1% gain for lead the only movement worthy of mention among the base metals.

Iron ore fell US10c to US$48.90/t.

The US dollar index is relatively steady at 98.19 but gold is up US$14.50 at US$1238.10/oz.

The Aussie is steady at US$0.7136.

Today

The SPI Overnight closed down 12 points or 0.3%.

The world will release manufacturing PMIs today, including those for Australia and China as noted.

Locally we’ll also see monthly building approval and house price numbers while the December quarter current account will be released, including the terms of trade.

The RBA will meet today.

There’s another sizeable round of ex-divs today, including AMP ((AMP)), Bendigo & Adelaide Bank ((BEN)), and the mother of all dividends, Telstra ((TLS)).

Rudi will make a brief appearance on Sky Business today at around 11.15am through Skype-link to discuss broker ratings.
 

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

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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