Tag Archives: Iron Ore

article 3 months old

The Overnight Report: Marking Time

By Greg Peel

The Dow closed down 49 points or 0.3% while the S&P lost 0.7% as the Nasdaq fell 0.9%.

China Factor

At the beginning of the month we saw Chinese PMI numbers that were inconclusive. The market hung on to a reduction in the pace of manufacturing contraction according to the official data, preferring to ignore the independent Caixin result of accelerated contraction, and ignore reduced expansion in the now larger Chinese service sector.

Yesterday’s Chinese trade numbers can be similarly assessed with either a glass half full or empty approach. Exports fell year on year by 3.7% in September and imports fell 20.4%. Those numbers look bad in anyone’s book. But the export number is an improvement from the 5.5% yoy decrease marked in August, and is not as bad as was forecast. Hence, we might say that’s an encouraging result.

Imports, nevertheless, fell 13.8% in August so 20.4% looks rather alarming for an economy attempting to transition to domestic consumption-based.

How did Bridge Street respond?

Well the resource sectors took us down from the bell, responding to lower oil prices in particular, but ahead of the Chinese numbers the ASX200 was only down around 12 points. The sellers piled in once the numbers were known just prior to midday and by around 2pm the index was down 60 points. Clearly the Chinese numbers were a concern. But from there we rallied back to halve that loss, down only 30 points at the close.

If the resource sectors were weak to begin with, then these trade numbers were never going to help. Energy closed down 2.8% on the session and materials 2.0%. Next worst was consumer discretionary with 1.0%, where sales to China are a factor. But domestic-oriented sectors such as consumer staples and healthcare finished higher on the day, and a 0.7% rise for industrials was very healthy against a backdrop of yet another resource sector plunge. The banks were only down 0.4%, so there was no “Sell Australia” going on.

At least not in the stock market. The Aussie is this morning over a cent lower at US$0.7252 despite the US dollar index dipping 0.1% to 94.74. The short-covering rebound in the currency has clearly now run its course.

The domestic economic news of the day centred around NAB’s monthly business survey. There were no surprises when the September confidence measure jumped to plus 5 from plus 1 in August given Turnbull had seized the reins two weeks prior to the survey. However it must be noted that August was a month dominated by a plunging Chinese stock market and much subsequent wailing and gnashing of teeth, so we would expect an easing in that arena to have provided for some return to confidence.

Conditions remained unchanged at an elevated plus 9, reflecting solid local employment and profitability measures, ANZ’s economists suggest.

We also had RBA deputy governor Philip Lowe suggesting yesterday business conditions appear to be okay and firms are willing to hire, but as to whether this would convert into a much needed boost in non-mining capex to offset the resource sector decline he was not so sure.

There is also a lot of talk coming from stock analysts and from the central bank that the local housing boom may now have peaked, and to date it’s really only been housing that has provided the offset against the impact of low commodity prices on the Australian economy. It’s time now to see the lagged flow-through of the much lower currency start to make an impact on the numbers in other industries. We may recall that a decade or so ago, tourism, for example, was Australia’s second biggest contributor to GDP.

Mixed

Leading US bank and Dow component JP Morgan had always reported its earnings at the opening bell, but of this reporting season has now decided to do so after the closing bell. With Intel (Dow) an aftermarket reporter as well last night, Wall Street was set for another meandering session of quiet trade until these important results were known.

Wall Street did see the numbers from Johnson & Johnson (Dow), which came out as a mixed bag of earnings beat, revenue miss and guidance beat. But beat or not, J&J’s earnings were down sharply year on year thanks to what the company measured as a 16% currency impact, that being the strong US dollar. J&J shares closed down 0.6%, but in a market that had already opened weaker on the Chinese trade data.

After the bell, Intel beat on both earnings and revenues but traders did not like the report otherwise and Intel shares are down 2% in the aftermarket. Rail freight company CSX, a major coal hauler a la Aurizon/Asciano, also beat top and bottom and its shares are up 1%, but only after having fallen 2% in the session on the China numbers. CSX also posted a fairly dim outlook for coal, but no surprises there.

Forecasts for JP Morgan’s result had been so knocked down ahead of the result traders were prepared to back an easy beat, but alas the leading bank posted a miss on both the top and bottom lines. JPM shares are down 1.2% in the aftermarket.

All things being equal these results do not bode well for a positive start on Wall Street tonight, albeit one session’s results do not an earnings season make. Traders are holding out for at least a full week of numbers which feature more big banks and other significant Dow names before beginning to draw any conclusions.

Commodities

Responses in commodity markets to the China data were predictable. On the LME, only aluminium was little changed as all other metals fell around 1-1.5%.

Iron ore fell US80c to US$54.90/t.

After Monday night’s OPEC disappointment, the oils were once again weaker. West Texas fell US79c to US$46.75//bbl and Brent fell US$1.05 to US$49.17/bbl.

As noted, the US dollar was steady, but gold rose US$5.50 to US$1168.00/oz.

Today

The SPI Overnight closed down 30 points or 0.6% which would put us back at yesterday’s post-China low.

Today Beijing will report September inflation numbers.

Westpac will follow up locally today with its monthly consumer confidence report.

September retail sales numbers will be closely watched in the US tonight as the earnings results flow in, including those of Bank of America.
 

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article 3 months old

Material Matters: Commodity Outlook, Steel, Coking Coal, Gold And Base Metals

-Is Chinese demand improving?
-Some turnaround signals emerging
-Coking coal price could fall further
-Gold price stabilising
-More nickel closures needed
-Zinc closures doing the job
 

By Eva Brocklehurst

Commodity Outlook

Morgan Stanley envisages better cyclical demand for commodities on the way and historically attractive valuations should turn the tide for resources. The broker has raised its industry view on the sector to Attractive from In-Line and upgraded Rio Tinto ((RIO)) and BHP Billiton ((BHP)) to Overweight.

The basis for the broker's more upbeat outlook is more stable data emanating from China, and a potential uplift form recent financial and administrative policies. The broker is more convinced of a commodity price uplift of 19% by 2017. Morgan Stanley's analysis of outperforming European metals and mining equities before the super cycle began shows the current valuations are very near those periods.

In the next few months Morgan Stanley expects perceptions around Chinese demand will improve. Ahead of the northern winter metal  processing industries de-stock in September and October and this seasonal headwind could mask some of the underlying improvements that are developing to support a recovery in commodity prices.

Iron ore remains a critical cash-flow driver and Morgan Stanley expects seaborne iron ore supply growth will exceed growth in China's steel consumption. To mitigate the impact of the risks the broker's Overweight-rated stocks have either strong balance sheets or continue to generate free cash flow at spot commodity prices.

Fundamentals are not enough to drive equity outperformance and supply discipline is critical to support rising commodity prices but Morgan Stanley expects discipline will be maintained. The broker does not believe all cost savings made to date will be sustainable and expects a partial reversal in cost reductions to further support supply discipline. 

The sector is in need of momentum, Citi maintains. Arguably the large miners are now pricing in an earnings recovery when comparing spot earnings against price/earnings ratios.

The broker notes Rio Tinto is an exception, where consensus earnings are below spot and have been flat-lining for the past five months. Citi suspects this is because of bearish forecasts for iron ore in particular, relative to the spot price. The broker expects that resources share prices have tracked profitability closely and a recovery in earnings could lead to share prices performing more positively.

This is the fourth year of the current downturn and this phase of the cycle has been frustratingly slow, in Morgans' view. There has been a delay in re-balancing of supply because of too much optimism and cost and currency buffers, as well as the rise of China's influence on the supply side.

The broker's analysis suggests that mining equities are pricing in no tangible upside to commodity prices, but considers this is overly bearish. Yet, the broker concedes investors need to witness at least some reversal in current commodity trends to price in recovery scenarios.

A pick-up in cash acquisitions is the strongest positive signal Morgans has observed so far. The broker is not calling the next upturn with any precision but recognises market signals are on the way to confirming the cycle has turned.

There may be further wash-up from the downturn, but equity markets are quite likely to re-rate resources ahead of a slower moving recovery in fundamentals and Morgans is watching closely for those signals to appear.

UBS suspects a bottom may be forming in the market. Year to date the sector is down 8.0% versus the ASX200 which is down 4.0%, and the broker expects a slightly better performance in the final quarter of 2015. The sector continues to focus on cost control but this is getting harder to achieve. Meanwhile, prices may yet go lower before they rebound.

Chinese Steel

New steel export orders fell substantially in September. There were forced closures at steel mills for military celebrations but, even so, ANZ Bank analysts suspect the fall was excessive. October output will also be limited by national holidays. This pre-empts lower export volumes for the month.

Excess steel supply in China should mean lower domestic steel and seaborne iron ore prices, the analysts contend. However, domestic demand is weak and steel output inelastic. The mills continue to max production just to pay substantial debt obligations.

Metallurgical Coal

The price of hard coking (metallurgical) coal is down 28% in the year to date and Macquarie notes it has underperformed thermal coal, which has been historically less attractive. One of the main issues has been a lack of efficient supply adjustment, the broker maintains. Oversupply remains stubbornly high and need to be 10-15mtpa lower than current run rates to achieve a more balanced market.

The broker notes Chinese coking coal imports are subject to protection and have not fallen as much has thermal coal imports.

A more balanced market may be achieved through long-run US exports falling back to levels of the mid 2000's. The upshot is that Macquarie suspects prices have further to fall in 2016. The most likely upside risk at this stage is weather, or labour-related, supply disruption in Queensland, which is the source of around 55% of the world's seaborne trade in metallurgical coal.

Gold

UBS maintains gold price forecasts for 2016 and 2017 at US$1,250/oz, expecting the precious metal to eventually recover. The potential for US real rates to settle lower than in previous cycles could mean a friendlier environment for gold than what is currently being priced in.

The broker expects the Australian gold sector to continue to perform well, benefitting from a lift in the Australian dollar gold prices as well as ongoing improvements in operating costs and, for a few, some well timed acquisitions. The broker upgrades OceanaGold ((OGC)) to Neutral from Sell following a recent share price re-rating.

Base Metals

UBS has cut both copper and nickel price forecasts for 2016 and 2017. Copper forecasts are US$2.50/lb for 2016, reduced by 11%, and US$2.60/lb in 2017, reduced by 13%. While there is some evidence of support from a decline in scrap supply and some acceleration in China's consumption from higher spending on its grid, there is a risk that China's consumption pace remains sluggish. The broker downgrades OZ Minerals ((OZL)) to Neutral from Buy, given the recent share price re-rating.

The broker's revisions to nickel are more substantial. Nickel prices forecasts are downgraded by 31% to US$5.50/lb for 2016 and by 15% to US$6.40/lb for 2017. The broker expects it will take time to achieve the required reductions in production to balance the market. With half the industry loss making production shut-downs are needed.

Exacerbating this is demand growth, which has been soft as a result of weak end-markets for stainless steel. Nickel prices may be languishing at multi-year lows but, if a nadir is indeed emerging, then the broker believes Western Areas ((WSA)) should be on investor radars.

A total of 500,000 tonnes per annum of zinc and 100,000tpa of lead are being idled to preserve the value of Glencore's reserves in the ground, UBS observes. The Century mine is also around 4.0% of mine supply and, having closed, will finish processing stockpiles in the first quarter of 2016.

Price-driven temporary shut-downs are not necessarily a a sustainable driver of price upside but in this case UBS considers the prices of zinc and lead are oversold on the back of speculative factors and the mine closures underpin this view. UBS expects the zinc price will lift to US95c/lb in 2016 from US74c/lb.
 

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article 3 months old

The Overnight Report: Looking For The New World

By Greg Peel

The Dow closed up 47 points or 0.3% while the S&P gained 0.1% to 2017 and the Nasdaq added 0.2%.

Oiled Out

We recall that over a week ago, the head of OPEC suggested two things. Firstly, that he expected the oil market to return to balance in 2016 as rising global demand met falling non-OPEC supply, specifically reduced US shale production. Secondly, that he was prepared to discuss the state of the oil market with the US.

The latter comment sparked hopes OPEC may finally be prepared to look at production cuts, perhaps having expected that by now, oil prices may have recovered above levels that have left most OPEC producers, including Saudi Arabia, underwater on their fiscal obligations. But this is not to be the case. Speaking on Sunday at a conference in Kuwait City, El-Badri reiterated his expectation of a rebalance in 2016 but made no mention of any production cuts.

It was left to the Kuwaiti oil minister to suggest at the conference that leaving OPEC’s output target at 30mbpd was the “ideal solution” to rebalance the market and support prices.

We had to wait until last night to see oil prices respond, and they fell 4%. Having made a couple of attempts to close over the US$50/bbl mark, WTI has now slipped back to the 47s once more. Australian investors did not wait yesterday to see what oil prices would do last night. They sold the energy sector down 2.3% in yesterday’s session.

It was the perfect trigger for a day of profit-taking across the board following five days of rally which had taken the ASX200 from a new post-correction low to a breach of the previous trading range to the upside. While energy led the charge, all sectors were sold off for no other particular reason. While materials suffered the least with only a 0.4% fall, it’s not often we see the materials sector trading lower when iron ore has a good gain and base metals put in a flyer, including zinc up 10%.

Both energy and materials have seen very solid gains in this recent rebound having been the most beaten down on China fears. But yesterday also some of the recent small cap high-flyers copping solid profit-taking hits for no other reason as well.

All up it is exactly what one might expect given the performance of the past week – a bit of consolidation following a solid bounce off the low. We also have China trade data out today, and squaring up ahead of what recently have been some market-crunching data releases out of Beijing makes a lot of sense.

We also have US September quarter earnings season beginning in earnest tonight, with all eyes on the likes of Dow stocks JP Morgan and Intel.

Earnings Angst

Consensus forecast for S&P500 net earnings in the September quarter is for a 5.3% year on year decline. If this forecast rings true, it would be the first negative quarter of earnings for the US market since the GFC rebound began.

Which begs the question, why has Wall Street rallied for seven consecutive sessions ahead of what is expected to be the worst earnings season in several years?

Well firstly, while Wall Street has rallied it has rallied back from a solid fall on the China story, boosted by a shift in expectations that there will not indeed be a Fed rate rise this year, to regain about half of what had been lost. The weak earnings forecast has a lot to do with expectations of lower revenues offshore due to both a stronger US dollar and weaker demand in the likes of China in particular. So we might suggest a reduction in earnings is priced in.

Secondly, ahead of both the March and June quarter earnings seasons, consensus was also for reduction in net S&P500 earnings. In both cases net earnings surprised to the upside to produce basically flat results. Are we about to see the same story play out a third time? The only difference this time, it has been noted, is that in the previous two quarters, net forecasts had been revised up slightly to be less negative just ahead of the results season. That has not happened this time.

Last night was Columbus Day in the US for which banks and the bond market were closed. Stock markets were open but the Dow posted its least volatile session since the China-based turmoil began back in July. Volumes were thin, and all is in readiness for a barrage of earnings reports beginning tonight.

While the energy sector was weak on the day, the usual impact the oil price has on the wider US market was not evident.

Commodities

West Texas is down US$2.06 or 4% at US$47.44/bbl and Brent is down US$2.22 or 4% at US$50.22/bbl.

After very solid gains posted on Friday night thanks to Glencore’s announced production cuts, base metal markets also took a breather last night. Given it’s LME week this week trading can often be thin with most of the market in conferences or at the bar.

Lead still managed to rise another 1% having risen 6% on Friday night, following the Glencore announcement. Zinc only came back 0.6% after jumping 10%. Copper is steady, aluminium down 1%, and the others posted slight dips.

Iron ore rose US20c to US$55.70/t.

The US dollar index is steady at 94.84 and gold has ticked a little higher to US$1162.50/oz.

The short-covering rally in the Aussie dollar has continued despite the easing back in commodity prices and a steady greenback. The Aussie is 0.4% higher at US$0.7359.

Today

The SPI Overnight closed down 16 points or 0.3%. It will be interesting to see if the energy sector goes on with it today, selling once more on confirmation of a drop in oil prices.

RBA deputy governor Philip Lowe will make a speech today and he often has something to say that catches the attention of forex markets. NAB will release its September business confidence and conditions survey, covering the first full month of the new Turnbull government.

Beijing will release Chinese September trade data around midday today. The last round of PMIs were a little more promising, if not mixed, and with China having been shut down for a week, markets have had nothing to be particularly scared about. So today’s data will be interesting.

Tonight in Europe sees the release of the ZEW investor sentiment survey for the eurozone, which will be the first measure since the VW scandal hit its heights.

Telstra ((TLS)) will hold its AGM today and Energy Resources of Australia ((ERA)) will release its quarterly production report.
 

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article 3 months old

The Monday Report

By Greg Peel

Bottom?

It was just over a week ago that the ASX200 closed at a new low for the correction from 6000, at 4918. The close “took out” the previous intraday low of 4928 after having breached what had been solid support at 5000. Technically, were the index to bounce from that level we could start to believe perhaps the bottom had been seen.

And it did, back over 5000. It briefly consolidated and then commenced a five-day rally. On Thursday the ASX200 closed above solid resistance at the top of the recent range at 5200. Technically this was another green light. On Friday we rallied again, to close above 5300.

All very positive, but of course nothing is certain in financial markets. Looking at Friday’s sector moves it is nevertheless clear the rally from the bottom is being driven by commodities.

When rumours emerged last week that heavily indebted global resource giant Glencore was potentially about to go under, Lehman-style, we saw capitulation selling in local mining names that took the likes of BHP down to prices long forgotten. Glencore dismissed the suggestion, and sparked a rebound in resource sector stocks. At the same time, commodity analysts have for a while now been suggesting that prices may have fallen about as low as they can go in this cycle. Already there have been big moves afoot to cut production and trim back mining and drilling activity.

In other words, China may yet disappoint further and the prices of some commodities may yet slip lower but in reality, there is unlikely to be a lot of downside left if mining companies continue to pursue a supply-side response. If there are to be casualties yet to come, they will be at the smaller end of the spectrum, and may well be consolidated through M&A rather than left to perish. Bigger companies in tenable financial positions should survive without issue, to eventually benefit from such curtailment and consolidation activity.

On Friday the local materials and energy sectors led the 1.3% index rally with 2.3% gains each. It was a long way back to banks and consumer staples with 1.2%. The big resource sector names have now rebounded very substantially from their Glencore-related bottoms. And on Friday night Glencore set metals markets on fire.

Commodities

Last night metal producers and traders converged on London for LME Week, hosted annually by the London Metals Exchange. In what has been considered a shrewd move ahead of the gathering, Glencore announced on Friday night it is responding to weak conditions to cut 100,000tpa of lead production and 500,000tpa of zinc production. The announcement is expected to promote further talk of supply curtailment over cocktails in London, and generally revive some enthusiasm in the industry.

In response, lead jumped 6.3% on the LME on Friday night. Zinc jumped over 10%, its biggest session move in decades. Meanwhile, as expectations of a Fed rate hike in 2015 continue to fade, the US dollar index dropped 0.5% to 94.87, further supporting commodity prices.

On anticipation Glencore’s announcement will not be the last we’ll hear across the metals spectrum, aluminium and copper jumped 3% on Friday night and nickel 4%. Tin, up 1%, proved the laggard, but tin had already rallied strongly last week on news of an Indonesian ban on tin exports.

The news came as markets absorbed what had been a disappointing earnings result from Alcoa, announced after-market on Thursday night, but Alcoa is also planning to break up its business and sell-off a chunk, which is all part of the consolidation process going on in the sector. While Alcoa is considered first cab off the rank for each US quarterly earnings season, it is no longer looked to as a bellwether for the season.

The weaker greenback again encouraged West Texas crude to trade over the US$50 mark on Friday night, but again it fell back by the end of the day, to close up US13c at US$49.50/bbl. At present, talk of oil having seen the bottom is also bubbling, and the greenback is supportive, but geopolitical considerations are also playing a part as tensions heighten over Syria.

There seems to be some work yet to do to break through US$50. Brent rose US80c to US$52.44/bbl.

Iron ore rose US70c to US$55.50/t.

Gold used to be the safe haven to run to whenever geopolitical tensions emerged, but not so much these past few years. A weaker US dollar is nevertheless supportive, hence gold jumped US$17.80 on Friday night to US$1157.70/oz.

Is the Aussie a commodity currency? On Saturday morning the Aussie was up a cent at US$0.7327 and is hanging in there so far this morning.

Wall Street

Unsurprisingly, the US materials sector led Wall Street higher on Friday night, with energy in tow. In the wider market it was a more sluggish session nonetheless, suggesting that while the rally marked its sixth day, things were beginning to look a little tired. The Dow closed up 33 points or 0.2% and the S&P managed just under a 0.1% gain to 2014 to notch up its best weekly performance of 2015. The Nasdaq rose 0.4%.

Atlanta Fed president Dennis Lockhart was still beating the 2015 rate rise drum on Friday night, insisting that December was still a possibility and October could not be ruled out either. But it’s starting to look like the Fed is simply trying to keep up appearances. No one believes an October rate rise is going to happen. The market is now favouring March over December.

Thus it is unlikely Lockhart’s hawkish spin had much of an impact on trading on Friday. With earnings season beginning in earnest this week, traders squared up after a week of solid gains. With Fed speculation now shifting to the background for the time being, the next month in the US will be all about earnings.

The Week Ahead

Of particular interest will be reports from the big US banks, which hit the wires this week, along with a raft of other Dow names.

Meanwhile, the SPI Overnight was down 18 points or 0.4% on Saturday morning, which seems out of line with the big rally in metals. Perhaps traders have decided the big rally in metals simply provides confirmation of the rallies on resource stocks all week long.

The mood might change, nevertheless, when the market realises that China was only on a one-week break and is now back to scare everyone to death. China releases trade data tomorrow and inflation data on Wednesday.

Tonight is Columbus Day in the US, which is a convoluted holiday that sees US banks and the bond market closed but commodity and stock markets open, but likely thin in volume.

Wall Street may have shifted its focus away from an immediate Fed rate hike but the data upon which the central bank is dependent continues to roll in. Wednesday sees retail sales, inventories, the PPI and the Fed Beige Book. Thursday it’s the CPI and both the Empire State and Philly Fed activity indices. Friday it’s industrial production and fortnightly consumer sentiment.

The eurozone will see the influential ZEW investor sentiment index out tomorrow night – the first since the VW scandal. Friday night sees eurozone trade and inflation data which will be closely watched as expectations of a second wave of ECB QE gather steam.

Japan is closed today.

In Australia, tomorrow brings the monthly NAB business confidence survey and Wednesday the Westpac consumer equivalent. The September jobs numbers are belatedly due on Thursday. The RBA’s deputy governor will speak tomorrow and on Friday the RBA will publish a Financial Stability Review.

On the local stock front, this week sees a step-up in the number of AGM’s and resource sector quarterly production reports. In the former camp, Telstra ((TLS)) tomorrow and CSL ((CSL)) on Wednesday offer highlights. In the latter camp, Fortescue Metals ((FMG)) and Woodside Petroleum ((WPL)) on Thursday and Rio Tinto ((RIO)) on Friday are the big names.

Rudi will appear on Sky Business on Thursday at noon.
 

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article 3 months old

The Overnight Report: Release The Doves

By Greg Peel

The Dow closed up 138 points or 0.8% while the S&P gained 0.9% to 2013 and the Nasdaq rose 0.4%.

Hesitating

My apologies for suggesting yesterday that Australia’s September jobs report was due. It seems the ABS has moved the date on me, shifting the release to next Thursday, which is a week later than has always otherwise been the case. Perhaps I missed an announcement.

Following strong leads from overseas, the ASX200 rocketed out of the blocks yesterday to jump 59 points from the bell, charging through the 5200 support level to above 5250. The breach of that support is a bullish sign, but often markets have to work hard at establishing what is finally a breach confirmation.

As it was, the index began to waver through the morning, and there was much anticipation regarding the opening of the Shanghai Exchange after China’s week-long break – a week which has seen a very strong global market recovery. The Shanghai index duly opened up 3%, and largely remained there for the rest of the session.

Not enough? The ASX200 suddenly plunged at lunchtime before wobbling its way to a close of up 12 points. At 5210, the index has held the 5200 previous resistance level, but it appears more needs to be done to convincingly push higher. Given the SPI Overnight is up 62 points this morning, it may be the case today.

If China was a disappointment then we would not have seen the best performers on the index yesterday being materials (+1.7%) and energy (+1.3%), offset by a 1.0% drop for industrials and a 0.9% fall for the telco. This looks like more of a switch trade. Calls of commodities and therefore resource sector stocks having now seen their lows have become stronger, and there’s a lot of potential recovering to do.

Backflip

Last night Wall Street did a whole lotta nothing ahead of the release of the minutes of the September Fed meeting at 2pm. Then the Dow rallied over 100 points.

It had been assumed that the Fed’s decision not to raise in September had been a close-run thing. The FOMC may well have been ready to pull the trigger, but at the last minute members were spooked by the level of market volatility in August on growing concerns for Chinese, and global, growth. They thus decided to hold off, but suggested a 2015 hike was still the likely outcome.

Well the minutes revealed that the decision was not as close-run as assumed. The FOMC really was quite worried about China, its inexorable connection to the US economy in today’s world, and the drag a weaker China would likely have on US inflation. Members were not concerned about market volatility, and indeed they shouldn’t be or no policy decisions would ever be made. Market volatility was due to the same China concerns held by the FOMC, so to be concerned about volatility per se would be to double up.

Members were also hesitant over US jobs. Clearly the slack in the US labour market had been overcome if one takes a “normalised’ unemployment rate as the guide. But wage growth remains minimal, and that’s not what one would otherwise expect. Without wage growth, inflation is not likely to push back above the Fed’s 2% target anytime soon. Put these two inflation-related considerations together, and the FOMC decided to wait.

The irony is that the rally we’ve seen this past week, beginning from an initial Wall Street plunge on the shock September jobs number, has taken the S&P500 back to where it was just before the September Fed meeting. On that day, when the Fed didn’t raise, Wall Street tanked, suggesting the market really wanted a rate rise. Last night, on the release of the minutes of that meeting which suggest the Fed was even further away from a rate rise than assumed, Wall Street rallied.

The S&P500 has now reconquered the 2000 mark.

It just goes to show that above all else, markets do not like uncertainty. Clearly Wall Street is buoyed by lower-for-longer monetary policy, as has been the case since the GFC, but when it looked like the Fed was set to raise, Wall Street said please just get this out of the way and end the speculation. Disappointment thus followed. Since the weak jobs report, and now greater insight from the release of the minutes (of the meeting held before the jobs numbers were released), Wall Street sees the uncertainty as having been nipped in the bud for now.

Interestingly, on the above scenario one would expect US bonds to be bought alongside stocks, on implication of lower for longer. But the US ten-year yield jumped 5 basis points last night to 2.11%, just to add some confusion.

Commentators suggest that the minutes were not so influential last night, and rather the bond market is focussing on a steepening of the yield curve, implying short-end bonds are indeed being bought but the long-end is being sold. This, it is suggested, represents foreign central bank selling from those countries looking to bolster their own finances, such as China and Japan.

Commodities

While LME traders have been keenly awaiting the return of the Chinese to metal markets, it seems no one was very keen to do anything radical last night ahead of the release of the Fed minutes, by which time the exchange was closed. Yet there was still disappointment the Chinese did not come barrelling in.

Hence aluminium, copper and zinc fell 1%, with other metals seeing smaller, mixed moves.

Iron ore rose US40c to US$54.80/t.

The oil markets were back in buying mode last night, and again WTI had a shot at US$50/bbl. But once again this proved a bridge too far for now. The oils still managed 3% gains on the session, with West Texas up US$1.48 to US$49.63/bbl and Brent up US$1.55 to US$53.24/bbl.

Last night it was not about supply/demand balances but about good old geopolitics. To date, oil markets have not paid too much attention to the war in Syria because Syria is not an oil mover and shaker, but now that Russia’s in on the game the mood is changing. Reports last night that Russian missiles aimed at Syria had strayed into rural Iran were unsettling.

The US dollar index is down 0.2% on the impact of the minutes at 95.31, but gold fell back US$6.10 to US$1139.90/oz.

If Fed policy is set to remain lower for longer, then pressure on the Aussie dollar is eased. The Aussie is up another half a cent at US$0.7258 and looks like, for now at least, the swinging sixties will have to wait.

Today

The SPI Overnight, as noted, closed up 62 points or 1.2%.

Australia will see August housing finance details today (I hope), which will provide more colour to an emerging picture of weaker building approvals and a clear drop-off in apartment building and sales.
 

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article 3 months old

Is Aurizon Becoming A Yield Play?

-Growth mainly from cost cutting
-Challenges for West Pilbara
-Yield becoming valuation driver
 

By Eva Brocklehurst

Bulk haulage and rail network operator, Aurizon Holdings ((AZJ)), has found further opportunities to reduce costs, updating investors on its transformation plans and providing more detail to underpin its targets.

The cost savings program is expected to deliver $310-380m in additional reductions by FY18. The target margin of 30% in FY18 is unchanged. JP Morgan observes a 20-25% improvement in labour productivity and 15-20% improvement in locomotive utilisation are two of the areas where the benefits of reform are being demonstrated.

Further detail was provided on the West Pilbara project development. Currently, in terms of the infrastructure, this is expected to be comprised of 60% Aurizon, 20% Baosteel and 20% others. JP Morgan notes that Baosteel is motivated by growing demand for flat steel products and the need for certainty, which requires it to self supply iron ore above current levels around 7.0%.

Aurizon may lack revenue growth but its cost focus should deliver earnings growth in the next three years, Macquarie contends. The broker acknowledges that the prospect of spending in excess of $1.1bn developing the West Pilbara project will unsettle investors in the current iron ore market. The critical point in time will be April 2016 and Macquarie suspects there is a low probability of it proceeding.

In the current environment, Deutsche Bank is questioning what the project's long-term iron ore price assumptions are, given the current price is around the same level as the indicative operating cost. Investors need to be comfortable that given the mine life is just 16 years, that other producers will use the infrastructure. Citi asserts the necessary level of confidence remains a key hurdle in the current market.

The company does not believe the Wiggins Island rail project industrial dispute is the start of a trend and does not expect other stakeholders will try and negotiate better terms. JP Morgan highlights the comment that around 11% of the company's coal customers are cash-flow negative at current prices, which is a significant improvement compared with July 2014, when that percentage was 30%.

UBS was underwhelmed by the forecast of an average return on investment capital of 10.5% over the next three years as it compares with the 10.4% achieved in FY15. The broker believes this is symptomatic of the $500m in capital expenditure that is being used to achieve the cost savings. The broker envisages a number of earnings headwinds which will neutralised the $70-90m in earnings from the Wiggins Island ramp up so cost cutting, therefore, becomes the only real driver of earnings growth.

Moreover, there are risks associated with the West Pilbara iron ore project. UBS maintains the potential $1-1.5bn equity requirement that has been flagged taints the rating of the stock and is likely to remain an undercurrent until at least late 2016.

On a positive note, the company recently raised its pay-out ratio to 70-100% and although UBS can envisage Aurizon generating just 5.0% earnings growth per annum for the three years to FY19, the broker's forecast dividend in FY16 of 26c equates to a 5.0% yield which should grow at 9.0% over the three years.

There is also potential for re-gearing beyond this time frame but unlocking that relies on the West Pilbara project not proceeding and a more lenient view by ratings agencies, given the reliance on its network for cash flow. Meanwhile, UBS observes a low share capital balance limits the tax effectiveness of a large buy-back.

Citi also contends the downside risk to earnings is not alleviated, given the challenging environment. Management's cost savings are key to its 30% earnings margin forecast for FY18 and the broker wants to witness further confidence in the growth projects, or an acceleration of revenue, to rule in further valuation upside. On the other hand, Morgan Stanley concedes organic growth remains a challenge but considers consensus expectations are already low and execution on the cost front should be supportive.

There is little wriggle room in the margin target but the extra cost cutting has removed Morgan Stanley's concern that the market was becoming too optimistic. Given the company's track record, Morgan Stanley believes the margin profile is fair. The broker continues to believe Aurizon is progressing towards a yield play which will become a key driver of valuation, outweighing weak organic sentiment. Assuming an 85% pay-out ratio from the guidance, the broker expects the dividend yield to grow to 6.0% in FY16.

Aside from the cost savings benefits, Macquarie observes the company has $1bn in property assets and an estimated $400-500m in surplus real estate which can be realised. There would be little impact on earnings but the broker envisages it could fund an extended buy-back for investors. The real issue is that there are few alternative uses for the properties, given their location, and there is unlikely to be significant profit on the sale.

There are four Buy ratings and four Hold on FNArena's database. The consensus target is $5.55, signalling 7.2% upside to the last share price. Targets range from $5.30 (UBS) to $5.93 (Macquarie). The dividend yield on FY16 and FY17 forecasts is 5.1% and 5.6% respectively.
 

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article 3 months old

The Overnight Report: Top Of The Range

By Greg Peel

The Dow closed up 122 points or 0.7% while the S&P rose 0.8% as the Nasdaq gained 0.9%.

Energized

Yesterday on Bridge Street was all about investors piling back into beaten-down energy stocks, following 5% gains in oil prices overnight on news OPEC may be prepared to discuss the global oil situation with the US. While materials is another sector in which investors are looking for bargains (it rose 1.6% yesterday) and utilities continue to experience bizarre volatility (up 1.2%), yesterday’s gain for the ASX200 was all about a 6.7% rally for energy.

Nothing else moved much, and for some reason those buying energy stocks decided to wait until around 11am to begin doing so. Perhaps they were still strapping on their boots. The index fell sharply from the open to be down 30 points at 11am probably on profit-taking on this latest rebound and due to the buyers not yet being ready.

Thus realistically the big oil stock buying spree was worth 60 ASX200 points.

Yesterday’s economic news reinforced the notion the Australian economy is currently dealing with a double-edged sword. Australia’s September construction PMI actually fell back to 51.9 from 53.8 in August but in not falling back into contraction (<50), the PMI posted its first back-to-back expansion in twelve months.

It’s all about residential construction, the sub-PMI for which increased by 2.4 points to 56.8, and residential construction is all about apartments, the sub-sub-PMI for which increased by 4.5 points to a breakneck 64.9. The sub-PMI for non-residential construction slid 6.5 points into contraction at 48.1.

The housing boom continues – that’s great news for Australia’s non-mining economy. But it’s also about the only thing driving Australia’s economy at present, as we await the slow moving beneficial impact of the lower Aussie. And how long can it last?

Australian new home sales jumped 2.3% in August, according to HIA. For months the trend of increasing sales has been driven by apartments, with sales of houses lagging behind. But in August, house sales rose 3.5% to offset a decline in apartment sales of 1.7%.

Last week the ABS reported building approvals were down 6.9% in August, and that approvals for apartment blocks were down 8.5% from their peak in May. The apartment boom, it would appear, has experienced a blow-off top.

How will this impact on Australia’s non-mining economy going forward? At least detached house sales are picking up, and houses require more building materials per dwelling than apartments.

Oil Dominates

It was another rollercoaster ride on US stocks markets last night and that mostly came down to a bit of a rollercoaster for oil prices. Following on from Tuesday night’s gains, West Texas crude rallied again for the open last night to almost reach the US$50/bbl mark, but then the sellers moved in.

The issue was the weekly US production and inventory numbers published by the Energy Information Administration. They showed an increase in both last week, and indicated that US production is currently in a rising trend yet again, not a falling trend as higher oil prices would suggest and as everyone might expect.

As oil prices fell back again last night, the Dow turned a 170 point opening rally into unchanged on the session. But as oil prices stabilised, investors turned their attention to other sectors. There were some big moves up in metal prices last night, so materials sector stocks were bought. Big healthcare names have been sold down recently along with the biotechs, on price regulation threats and the implications of the TPP trade agreement, so bargain hunters moved in there. And talk of big M&A moves afoot in the beer market attracted some attention.

The other point to note is that at the peak of Wall Street’s opening rally last night, the S&P500 hit 1999. It was only last Friday night that the S&P hit 1900 on an opening jobs-related plunge, before this latest Fed-related Wall Street surge began. Traders had always assumed 2000 in the S&P would provide a short-term cap, and so it proved to be. But on the afternoon rally back again, the S&P made it back up to 1995.

So traders may now be eying a breach of that level.

Commodities

Activity on the LME has been fairly quiet this week with China on holiday, but China has missed quite a lot in its absence. In particular, that the Fed won’t be raising anytime soon, and hence that the US dollar is not about to surge further and weigh on commodity prices, and that global stock markets have rallied strongly ever since.

So last night base metal traders decided it was not a good idea to be short ahead of China’s return today. Subsequently, aluminium and tin rose over 1%, nickel and zinc rose over 2% and lead rose 3% last night. Copper had already been stronger over the week, and managed only a 0.4% gain.

The US dollar did not have any impact. It is up 0.1% at 95.54.

For the third day running, iron ore is stuck on US$54.00/t, awaiting the return of the Chinese.

As noted, the oils had an up and down session last night. West Texas is down US54c to US$48.15/bbl having flirted with 50 and Brent is down US33c to US$51.69/bbl.

Gold is a tad lower at US$1146.00/oz.

The short-covering rebound in the Aussie continues, on a combination of no rate rise expected from the Fed soon, as was not previously the case, and no rate cut forthcoming from the RBA, even though no one expected one. The Aussie is up half a cent at US$0.7207.

Today

The SPI Overnight closed up 32 points or 0.6%, suggesting the index is set for another assault on the 5200 resistance level today.

Australia’s September jobs numbers are out today. Will Scott Morrison follow in Joe Hockey’s footsteps and spin the results such that a positive number is all down to Coalition brilliance and a negative number is all down Labor ineptness, or will he say something intelligent?

The minutes of the September Fed meeting are out tonight. These will be pored over for clues of just how close the FOMC was to pulling the trigger last month, but are now rendered somewhat outdated by last week’s shock US jobs report.

Bank of Queensland ((BOQ)) will report FY15 earnings today.

Rudi will appear on Sky Business at noon (Lunch Money) and later again on Switzer TV, between 7-8pm.
 

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: Where To Next?

By Greg Peel

The Dow closed up 13 points or 0.1% while the S&P lost 0.4% to 1979 as the Nasdaq fell 0.7%.

Hitting the Roof

It was of no surprise that the ASX200 was once again off to the races yesterday morning, on the back of a 300 point rally in the Dow. From the opening bell the index pierced through the top of the recent range to hit 5214, before falling back to what is now a resistance level at 5200. The troops reassembled and another raid took us to 5220 at 11am.

And that was it for the session. Stocks drifted back again, another less convincing attempt to penetrate was made at midday, but when the third attempt failed it became clear to day-traders it wasn’t going to be the day. Profits were duly taken and by the closing bell a 70 point rally had become a 16 point topping on Monday’s 100 point rally.

Typically, it takes more than one session to break a stiff resistance level.

There was also the economy to think about yesterday, but fundamentals are not the major driver at present. Australia’s August trade data showed a bigger than expected blow-out in the deficit, but was really no surprise given weak commodity prices. Export volumes are still strong – indeed, iron ore exports hit a record in August, believe it or not – but prices remain the issue.

The lower Aussie dollar is quietly working to offset weaker prices, and is also starting to make an impact in tourism, which is an export, as has been anticipated.

The other local economic event yesterday was the RBA meeting. Yet again no one expected the central bank to cut its cash rate and yet again the forex market acted as if completely dumfounded by the decision not to. The Aussie jumped around half a cent on the news, and is higher still this morning, up 1.2% over 24 hours at US$0.7169, given an overnight fall in the greenback.

One needed a microscope to find any difference in Glenn Stevens’ statement yesterday from the previous statement. The only difference is that in September, Sydney house prices were a worry and “The Bank is working with other regulators to assess and contain risks that may arise from the housing market”. In October, both Sydney and Melbourne house prices are a worry but “Regulatory measures are helping to contain risks that may arise from the housing market”.

Otherwise, the RBA remains on data-watch.

A lack of rate cut made little difference to the afternoon performance of the stock market yesterday. Having failed to break 5200, the index was always going to retreat to regroup.

Breather

The other news that continues to resonate downunder is of course the Trans-Pacific Partnership trade agreement. And last night it was resonating for another signatory.

As has been well documented, pharma had proved a potential stumbling block for the entire agreement before the Americans relented on the time limit before generic versions of new drugs could be sold. They wanted eight years, we (and partners) wanted five, and we won.

Subsequently, US biotech stocks took another tumble last night on Wall Street. Indeed, the moving averages on the biotech index completed a frightening Death Cross and there was much wailing and gnashing of teeth.

We might recall that last week, all the major US indices posted Death Crosses, the sky was expected to fall in, and then the Dow rallied 750 points in two sessions. If those who believe in Death Crosses were to learn that Santa rallies are not caused by an actual Santa Claus, they’d be shattered.

So hush.

The end result was nevertheless a 0.7% fall for the Nasdaq. The Dow managed a 0.1% gain thanks to DuPont shares jumping 8% on the news the longstanding CEO is to retire. Thanks for coming. The S&P split the difference. Otherwise, a blow-out in the US August trade deficit highlighted the ongoing impact of a stronger dollar on US exports.

But when said and done, last night on Wall Street was really only a breather after solid rallies post the end, for now, of Fed rate rise speculation. The question now is: where to next? No doubt US earnings season, which begins at the end of this week, will have a say in the matter.

Commodities

Today is the last day of the Chinese Golden Week holiday, and last night trading on the LME was deathly quiet. Tin managed a 1% gain, but all other metal price moves were negligible.

Iron ore was again unchanged at US$54.00/t.

It was left to oil markets to provide some action.

The big news on oil markets is that OPEC looks like it might finally be about to buckle. Speaking in London overnight, the OPEC chief suggested oil prices are set to rebound due to steep reductions in oil investment globally. This in itself is not new news, but Mr el-Badri also suggested he is open to discussing the current oil market turmoil with the US.

Amidst the tantalising possibility of oil market peace talks, last night also saw the US Energy Information Agency report a 120,000bpd cut in US production in September from August and forecast a continuation of production reduction all the way through to next August.

Subsequently, West Texas crude is US$2.35 or 5% higher at US$48.69/bbl and Brent is US$2.64 or 5% higher at US$52.02/bbl.

Oil prices were also supported by a weaker US dollar, which was weaker due to the US trade deficit blow-out, which was caused by a stronger dollar. Funny old world. The greenback nevertheless continues to come under pressure as emerging market currencies continue to recover post the time-out for Fed speculation. The dollar index is down 0.7% at US$95.42.

The weaker dollar helped gold up US$11.80 to US$1147.60/oz.

Today

The SPI Overnight closed up 6 points.

Australia’s construction PMI is out today, along with new home sales numbers. China remains closed for one last day and the Bank of Japan will hold a policy meeting, although no changes are anticipated.

Aurizon ((AZJ)) will hold an investor day today.

Rudi will appear on Sky Business' Market Moves, 5.30-6pm.
 

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: Back To The Future

By Greg Peel

The Dow closed up 304 points or 1.9% while the S&P gained 1.7% to 1987 and the Nasdaq rose 1.6%.

A week is a long time

Most of Australia was enjoying a long weekend yesterday but that didn’t deter those who saw an opportunity to buy into a beaten-down stock market. It’s amazing to think that less than a week ago we were staring at a possible second leg down in the correction to maybe 4800 or lower, and today we will potentially hit and even breach the top of the recent range at 5200, in which case the second leg bets are all but off.

What changed in the meantime?

The Fed story, that’s what. As painful as it is to admit it, it looks like we’ll now be debating the will they/won’t they question on the first rate rise right through until March. At least, that’s where the US markets have now determined the greatest probability lies. Last Friday’s jobs report changed everything.

For most of 2015 Wall Street had been trading on a bad news is good news theme with respect to Fed policy, rising every time it appeared the Fed would keep rates lower for longer. But when it became clear the Fed was getting very close to making the first move, Wall Street switched around to a “just do it” attitude, increasingly frustrated with the uncertainty the central bank was perpetuating. Bad news became bad news.

But Friday’s shocker of a September US jobs report, including a downward revision to an already weak August and also to July has put Wall Street right back in its box. The uncertainty has ended, for the time being – not the way we expected, with the first rate rise, but due to the data, upon which the Fed is dependent, suggesting it’s simply too early right now.

That postponement of uncertainty led to the big reversal on Wall Street on Friday night, from 250 Dow points down to 200 points up at the close. The Dow spun on 16,000 and the S&P on 1900, and in technical terms it was a “key reversal day” having hit a lower low but closing at a higher high than the day before.

Everything bad is good again. And last night Wall Street carried on with that theme.

Yesterday it was a case of “buy everything” on Bridge Street. The most beaten-down sectors were more heavily favoured, such as materials, up 3.5%, and energy, up 2.9%, bit otherwise every sector put in gains of 1.5 to 2%.

There were some positive data releases out yesterday locally, but realistically they didn’t make much difference. The ASX200 opened strongly and had established its rally for the day within the first hour, largely drifting from there all the way to the close.

ANZ’s job ads series showed a strong 3.9% gain in September, following 1.3% in August, to suggest a monthly trend of 1.0%. “Growth since mid year now appears a little stronger than previously,” said ANZ.

A 0.3% rise in TD Securities’ inflation gauge in September takes us to 1.9% annual and the strongest pace since November last. The core rate remains at 1.6% annual, still below the RBA’s 2-3% comfort zone.

So no rate rise today. And no cut either.

Australia’s service sector PMI fell to 52.3 in September from 55.7 in August but at least remains above 50, suggesting expansion, and it’s the service sector providing the bulk of ANZ’s job ads trend.

News that the Trans-Pacific Partnership trade agreement had been settled was also likely a positive for the market yesterday, but as I suggested, I don’t think any of the above mattered that much.

As you were

The US service sector PMI fell to 56.9 from 59.0. Hooray! Everything bad is good again.

The eurozone services PMI fell to 53.6 from 54.3. Bravo! More QE from the ECB is on the cards. The German stock market was up 2.7% and the French up 3.5% last night. The UK PMI fell to 53.3 from 55.6. Ra Ra! The Bank of England won’t be raising anytime soon. The London market was up 2.8%.

The mood carried over to the US, where Wall Street opened higher and continued to rally all session, closing pretty much on its highs. The 300 gain for the Dow makes it 750-odd points from the initial negative reaction to Friday’s jobs report.

It wasn’t that long ago 750 points would represent a solid year.

Emerging markets also enjoyed strong sessions yesterday, given the threat of an accelerated currency crisis due to a Fed rate rise was killed off on Friday night. China remains on holiday, but a downgrade of Chinese GDP expectations for 2015 to 6.9% from 7.1% by the World Bank suggests more stimulus will be forthcoming from Beijing as well.

It seems only in Australia are we looking for good news to be good news, given we’d rather not see our economy going down the gurgler as many have feared. And we, too, may see some stimulus shortly – of the fiscal kind. It is expected the new government will have more foresight on such matters.

Commodities

The Chinese holiday has ensured quiet sessions on the LME this week. Base metals traded back and forth on low volume last night and closed mixed, with copper up 0.8% but lead, nickel and zinc all down 2%.

The US dollar index is up 0.2% at 96.09, mainly because the euro is weaker on expectations of extended QE.

Iron ore is unchanged at US$54.00/t.

The oils were stronger again last night, but still not really going anywhere. West Texas is up US68c at US$46.84/bbl and Brent is up US$1.11 at US$49.38/bbl.

Having rallied strongly on Friday night, gold is off US$3.50 at US$1135.80/oz.

The Aussie is up 0.5% at US$0.7085, with a Fed rate rise now less likely this year.

Today

The SPI Overnight closed up 66 points or 1.3%, If accurate, this would take us up through the top of the recent trading range at 5200.

Australia’s August trade balance data is out today, and this afternoon the RBA will meet and leave its rate on hold.

China remains closed today.

Rudi will appear on Sky Business three times this week. First on Wednesday, 5.30-6pm (Market Moves), then on Thursday at noon (Lunch Money) and again later that day on Switzer TV (between 7-8pm).
 

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

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

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

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article 3 months old

The Monday Report

By Greg Peel

Madness

Utilities were down 2.0% on the ASX on Friday. They were up 2.3% on Thursday. The telcos were down 1.7%, having been up 1.9%. The banks were down 1.5%, after being up 1.8%. The ASX200 fell 60 points having rallied 90.

If someone could explain to me exactly what changed between Thursday and Friday, I’d love to hear it.

Perhaps the computers have taken over the asylum. It is typical to see volatility in a consolidation phase following a 20% correction and ups and downs can be explained by uncertainty over whether we’ve put in a bottom or are just bracing for the next leg down. But these 1-2% moves every day, in opposite directions, is the stuff of madness and really should be avoided by longer term investors.

Squaring up ahead of Friday night’s US jobs report? Who knows.

Shocker

Wall Street expected 200,000 jobs to have been added in the US in September. The number was 142,000. August’s 173,000 was bad enough, and that was revised down by 59,000. The unemployment rate remained steady at 5.1%, but only because the participation rate fell. Wage growth in the month was a big fat zero.

Suddenly Janet Yellen looks like a gifted seer.

The response from economists was that we can definitely rule out an October Fed rate rise. Goldman Sachs, who had insisted on a December call ahead of the September meeting, is sticking with that call, as is JP Morgan, albeit “with less conviction”. Others say January. Others say “well into 2016”.

Others are simply exasperated that the debate is now set to go on, and on.

The Dow plunged 259 points on the open on the news, as one might expect from a market now seeing bad news as bad news and desperately wanting to end policy uncertainty. But there was no volume to speak of – no conviction or panic. As the Dow neared 16,000 the S&P500 fell under 1900. These levels are merely psychological, but they’re technically important on that basis anyway.

When traders realised there was no momentum in the sell-off, they knew the weakness wouldn’t last. Those looking to buy the dips saw an opportunity. And no doubt there remain those in the market who see “lower for longer” interest rates as a positive.

The Dow closed up 200 points, or 1.2%. This 450 point down to up reversal is the biggest on Wall Street in four years. The S&P closed up 1.4% at 1951 and the Nasdaq leapt 1.7%.

The Nasdaq jumped because everyone saw an opportunity to go piling back in to beaten down biotechs. Elsewhere, big US multinationals were being highly sought at the bottom, given the US dollar plunged a full percent on the jobs report release. But when Wall Street rallied back, so did the dollar, to be down only 0.3% at 95.91.

The US ten-year yield fell from 2.04% to 1.91% before it, too, recovered, to be down 5 basis points on the day at 1.99%.

Gold is up US$25.80 to US$1139.30/oz, having held its gains through to the end of the session. Silver jumped a whopping 5%.

And what is the end result of it all? Nothing. We’re no closer to knowing whether the market wants to go up or down, or to knowing what the Fed is going to do. 

Commodities

Base metal traders were torn between the weak economic signal provided by the US jobs report, and the fall in the US dollar. In the end, all metals closed slightly higher, with only copper posting a gain of greater than 1%.

Iron ore fell US50c to US$54.00/t.

The oils were slightly stronger, with West Texas up US64c to US$45.66/bbl and Brent up US32c to US$48.27/bbl.

The Aussie dollar rose to match the US dollar’s fall, by 0.4% to US$0.7053.

And the SPI Overnight closed up 67 points, or 1.3%, on Saturday morning. So wouldn’t you know, we’ll be heading up again today.

The Week Ahead

The only impediment is the fact most of the country is enjoying a long weekend today. Volumes will thus be thin, so it will come down to just how many people actually want to play.

ANZ will release its job ads series today and TD Securities its monthly inflation gauge. We’ll also see the local service sector PMI, as we will for Japan, the eurozone, UK and US.

Tomorrow it’s the trade balance, and an RBA meeting at which nothing much will happen. Wednesday it’s the construction PMI, Thursday it’s our own jobs report, and Friday sees housing finance data.

The Bank of Japan will hold a policy meeting on Wednesday and the Bank of England on Thursday.

China remains closed until Thursday.

A quieter data week in the US sees the services PMI tonight, trade balance tomorrow, consumer credit on Wednesday and chain store sales on Thursday. Thursday also brings the release of the minutes of the last Fed meeting, although they have probably now been rendered redundant by the weak jobs report.

Wall Street is preparing for the September quarter earnings season about to begin.

On the local stock front, we’re in a bit of a lull this week before AGM season really starts to ramp up next week, and resource sector production reports start to flow. Ansell ((ANN)) will hold its AGM on Wednesday and Aurizon ((AZJ)) will hold an investor day, while Bank of Queensland ((BOQ)) reports its FY15 result on Thursday.

Most broker analyst desks are closed today and only skeletons are manning the phones. Today’s FNArena service will be abbreviated as a result.

Rudi will appear on Sky Business on Wednesday at 5.30pm and on Thursday at noon and again between 7-8pm for the Switzer Report.
 

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

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