Tag Archives: Iron Ore

article 3 months old

The Overnight Report: Road To Nowhere

By Greg Peel

The Dow closed down 12 points or 0.1% while the S&P gained 0.25 to 1923 and the Nasdaq rose 0.2%.

Cherry Picking

Yesterday’s session on Bridge Street was a game played in two halves.

The ASX200 opened the session, the month and the December quarter with a 40 point gain, suggesting Wednesday’s window-dressed session did indeed include an element of buying for other purposes, most likely technical. The index previously returned to the original correction low and then rebounded back above the solid support level of 5000, which is all very positive.

There the market stalled as traders awaited the midday release of the all-important Chinese purchasing managers’ indices (PMI).

In less than half an hour following those releases we were up another 40 points, and by the close we were up 90 points in total. The impetus for a second burst of strength came no doubt from the fact Beijing’s official September manufacturing PMI ticked up slightly, to 49.8 from August’s 49.7.

It’s hardly an increase to write home about, and indeed 49.8 implies China’s manufacturing sector remains in contraction (<50). But it was an increase, and not a decrease, which suggests, potentially, that the manufacturing decline in China we’ve seen these past few months may now have bottomed out on the back of Beijing’s various stimulus measures.

In fact, even an unchanged number would have been positive in that sense. And that was actually the case for China’s now larger services sector, for which Beijing’s PMI came in at 53.4, in line with August.

However…

Independent surveyor Caixin’s picture looks very different. Caixin’s manufacturing PMI, weighted more towards small and medium enterprises, fell to 47.2 from 47.3. Caixin’s services PMI fell to 50.5 from 51.5. We recall that it was Caixin’s flash estimate of August manufacturing PMI that sent the ASX200, and global markets, tumbling in the first place.

So it would appear the market has cherry-picked the stronger result. Admittedly, Caixin’s flash estimate of September manufacturing came in at 47.0 last week, so 47.2 is actually an improvement in a sense. It appears Bridge Street was happy to run with the numbers on the smaller Chinese manufacturing sector as sufficient reason to push on with the technical rebound from the lows.

In sector terms, it makes sense that energy (+2.5%) and materials (+1.9%) should see solid gains on an improved Chinese PMI, but it was otherwise a very mixed game. Industrials should be supported on a cyclical basis, and they rose 2.0%, but were outpaced by defensive utilities, which saw a 2.3% gain. Telcos were up 1.9%. Consumer staples were up 1.9%. Banks were up 1.8%.

No clear intent is evident there.

For the record, what’s left of Australia’s manufacturing sector saw its PMI rise to 52.1 from 51.7. Lower Aussie kicking in? Japan fell to 51.0 from 51.7.

Confusing

The UK manufacturing PMI fell to 51.5 from 51.6. London’s stock market was largely flat. The eurozone PMI was unchanged at 52.0, while Germany in particular fell to 52.3 from 53.3. The German stock market fell 1.6%.

The flat close on the Dow last night belies the fact the mood in Germany carried across the pond and indeed the Dow was down over 200 points mid-session. It then rallied all the way back.

So why was it down? Did Beijing’s data not ease some of those global growth fears?

Well, not initially. The US manufacturing PMI fell to 50.2 from 51.2 to mark its slowest pace of growth since November 2012. Here, it is the strong dollar being blamed. But on the other hand, a record 18 million new vehicles were sold in the US in September, causing veteran auto-watchers to shake their heads in disbelief.

It is apparent that Americans are now less fearful about jobs and the economy, and as such are confident enough to replace the now ten year-old cars they’ve had since before the GFC. Fuel is cheap, and finance is cheaper.

Nevertheless, the 200 point Dow fall possibly was a simple offset of the 200 point gain the night before, which was seen as pure window-dressing. When the buyers came in, they started buying the materials and energy sectors which does seem to be more like a response to China.

Except that base metal prices actually fell in London overnight. Oil jumped initially, on news of Russian airstrikes in Syria, but quickly fell back again as traders decided there wasn’t really much to be scared about. So the Dow fell when oil went up and rallied back when oil came back down – the reverse of what has been true these past months.

So all a bit strange, and, in the end, a flat close to kick off the start of the December quarter with no directional indicators at this stage. But it’s jobs night tonight, which will likely set the tone.

On that score we should note the US ten-year yield fell as low as 2.00% last night when the stock market was at its low, before rallying back in tandem to be down two basis points on the session at 2.04%. Given the ten-year hit 2.50% at the height of Fed rate rise expectations earlier in the year, we might suggest the bond market does not see a rate rise in 2015, despite the Fed’s insistence.

Commodities

Base metal prices did initially rally on the LME on the Chinese data but fell back in the afternoon, with all metals finishing in the red. Copper and lead, down 1.5%, and nickel, down 2.4%, were the standouts. The Chinese themselves were absent.

Iron ore rose US10c to US$54.50/t.

West Texas was up as much as US$1.75 at its height last night before falling to be down US33c at US$45.02/bbl. Brent is down US57c at US$47.95/bbl.

With the US dollar index flat at 96.16, gold is relatively steady at US$1113.50/oz.

The Aussie is up at US$0.7028 having traded as high as .7080 yesterday following the Chinese data release.

Today

The SPI Overnight closed down 18 points or 0.4%.

Australia’s August retail sales numbers are out this morning. China remains closed.

US jobs numbers are due tonight.

This weekend is a long weekend for most of Australia, including NSW, but the ASX will be open on Monday. Broker research will nevertheless be mostly absent so while The Monday Report will be published as usual, FNArena’s full service will be abbreviated on the day.

Clocks go forward on Sunday morning so as of Tuesday morning, the NYSE will close at 7am Sydney time.
 

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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: Commodity Price And Miner Revisions, Tin, Lead And Steel

-AUD weakness supportive
-Value in counter-cyclicals
-Questions over Indonesian tin
-Lead deficit in 2016?
-Heightened competition in steel
 

By Eva Brocklehurst

Price And Miner Revisions

Weak demand and a lack of meaningful supply reductions, amid no sign of a turnaround in China, have led to Deutsche Bank revising down forecasts for copper, aluminium, nickel and coal prices by over 10%. The broker expects no material recovery in commodity prices until 2017.

Morgan Stanley, too, stepping from its traditional end-of-year review, marks down forecasts for iron ore, alumina, copper and thermal coal substantially. Morgan Stanley remains constructive but concludes that a slower price recovery means more downgrade than upgrades to forecasts at this point in time.

Both brokers expect that in Australian dollar terms, most commodity prices will actually increase as the local currency falls further. Deutsche Bank expects US63c by 2017. Morgan Stanley's downgrade to Australian dollar forecasts more than offsets the US dollar commodity price reductions, in terms of base metals and coal. The broker's US dollar gold price forecasts are largely unchanged while Australian dollar gold price forecasts increase 7-14% over the medium to long term.

Deutsche Bank singles out several stocks which differ, as they are positioned to create value by investing counter-cyclically at this point. These stocks have strong cash flows and balance sheets. Rio Tinto ((RIO)) is one. It is buying back US$2bn in stock and should soon approve the Oyu Tolgoi underground and South Embley projects.

Iluka Resources ((ILU)) has upside pending from synergies from the Kenmare acquisition. Independence Group ((IGO)) is developing the Nova nickel deposit and spending on highly prospective exploration. Evolution Mining ((EVN)) is buying gold assets off the majors. Sandfire Resources ((SFR)) is adding value via exploration and Mineral Resources ((MIN)) is winning new crushing contracts and investing in light rail.

Deutsche Bank also likes Alumina Ltd ((AWC)) and South32 ((S32)) on valuation and strong cash flow. Both operate low-cost alumina refineries. In light of the review Deutsche Bank upgrades OceanaGold ((OGC)) to Buy from Hold and downgrades Whitehaven Coal ((WHC)) to Hold from Buy.

Morgan Stanley's preference is for Australian operations and miners which have too many negative concerns priced in. The broker downgrades South32, Iluka Resources and Alumina Ltd to Equal-weight from Overweight on a relative preference basis.

The broker's order of preference is Whitehaven Coal, Western Areas ((WSA)), Independence Group, Fortescue Metals ((FMG)), Rio Tinto and OZ Minerals ((OZL)). Morgan Stanley prefers Fortescue and Whitehaven as there is potential for their debt loads to be reduced, in contrast to market concerns regarding price and margins. Rio Tinto is also better placed to cover its progressive dividend.

Morgan Stanley makes Evolution Mining its preferred gold miner, although retains an Equal-weight rating on limited upside. The company is the largest beneficiary of the new price deck because it has substantial leverage to the AUD/USD cross rate.

On this basis Alacer Gold ((AQG)) is moved to Equal-weight from Overweight as this stock receives no benefit from a weaker Australian dollar. Medusa Mining ((MML)) and Panoramic Resources ((PAN)) are both downgraded to Underweight from Equal-weight. This is a relative call, given a lack of cushioning from FX and tight balance sheet in the case of Medusa Mining and a short mine life and weak nickel prices in the case of Panoramic Resources.

Tin

Frequently tin, the smallest of the base metals market, misses out on attention. Macquarie observes the price performance in the year to date has been poor, down 21%. There have been insufficient supply reductions in a surplus market for a re-balancing to occur. Exports have now fallen from key suppliers such as Myanmar and Indonesia and the broker has reason to believe this may not be a temporary situation.

Still, demand conditions have also softened. Macquarie has reduced 2015 global demand growth assumptions to around 1.0%. This brings into sharp focus the need for meaningful supply adjustments. Myanmar has grown to 10% of global supply in just five years and this is helping to offset any shortfalls in Chinese domestic output.

Indonesia, the largest tin exporter, has implemented new regulations which led to nothing being exported in August so total exports are now down 13% over the year to date. However, Macquarie believes the market needs a sign that actual production cuts are materialising and that illegal mining is being tackled.

Lead

Lead has experienced the least price erosion among the base metals in the year to date, down 9.4%. Lead, like iron ore, took a hit early in the commodity downturn. Still, Macquarie does not believe the outlook is particularly rosy.

Mine output has been falling in China as more stringent environmental controls are applied and the scrap battery market, a source of 53% of total refined supply, appears tighter, although this is largely because of over-capacity in the secondary smelting sector.

The broker expects lead prices should be well supported into the year end with weak mine output driving a small deficit in 2016. Still, demand is weak and prices are not expected to retain much buoyancy. The broker also expects the recent reversal of the lead-zinc spread to be short lived.

Steel

Weak global demand, excess capacity and supply remain a weight on the steel sector. The World Steel Association's crude steel production estimates for August were down 3.0% on August 2014, with declines evident among all major steel producers.

Credit Suisse believes depressed price and a flood of cheap billet from China have also weighted on ferrous scrap demand. Prices are also under extreme pressure from the low cost of substitute pig iron and continued high competition among metals recyclers.

Credit Suisse notes Arrium ((ARI)) is the worst performer in the year to date in the sector.
 

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article 3 months old

The Overnight Report: Nice Windows

By Greg Peel

The Dow closed up 235 points or 1.5% while the S&P gained 1.9% as the Nasdaq jumped 2.3%.

All Dressed Up

Question: if the Dow is up 1.5% overnight, why are the SPI futures only up a single point this morning?

The answer is because futures traders are likely writing off last night’s rally on Wall Street as end-of-quarter window-dressing and short-covering, just as was the case in Australia yesterday.

While we might argue that having reclaimed the correction low, and Wall Street not falling out of bed on Tuesday night, the local market was ripe for a rally. But if we note that the sectors that led the charge yesterday were all the sectors that have been beaten up over the past three months, we can’t really read much into yesterday’s performance as far as October is concerned.

The ASX200 finished the quarter down 8%, and down 20% from the June quarter high. Yesterday saw the banks, telco, materials and consumer staples all posting near equivalent 2.5% rallies while all the other sectors posted lesser performances. We would have likely seen energy joining in as well were it not for Origin Energy’s ((ORG)) announced capital raising.

Technically, it was interesting to note yesterday that the ASX200 did jump sharply from the open, but came a cropper at the familiar level of 5000. It appeared that previous solid support was now going to revert to resistance. We came all the way back to 4950 by midday.

The buying nevertheless then resumed, possibly with assistance from news of a surprise jump in Westpac’s China consumer sentiment index. It rose to 118.2 from 116.5 in August to mark the highest level in over a year, at only 1.7% below the long-run average. Interestingly, only 11% of those surveyed were invested in the stock market.

Aside from confirming the minimal connection between the Chinese stock market and the Chinese economy, the survey does suggest Chinese consumers are heartened by Beijing’s various stimulus and reform measures.

The ASX200 began to drift back up through the afternoon but it was the three o’clock wave that took the index back through 5000 without a hitch on the second attempt. To be back above that support level is technically positive, but we can now tear off the sheet that was the September quarter and start with a fresh page for October. Apart from October carrying its typical stigma, today sees the release of China’s PMIs and they will likely determine whether this scary month starts off with a bang or a whimper. Then China goes on holiday for a week.

Job Countdown

Wall Street similarly enjoyed a window-dressed session last night after posting around 7% falls for the major indices over the quarter. There was some good news, nonetheless, for fans of the “Just Do It” brigade.

ADP announced the addition of 200,000 new private sector jobs in the US in September when economists had forecast 190,000. While not always a strong correlation, Wall Street is setting itself for a similarly positive non-farm payrolls number tomorrow night.

So we could say there was an element of “good news is good news” in Wall Street’s rally last night.

Over in Europe, QE rules, which means “bad news is good news” still prevails. Last night’s flash estimate of the eurozone’s September CPI showed headline inflation has fallen back into deflation, at an annual minus 0.1%. Economists had expected a drop to 0.0% from August’s plus 0.1%.

The drop in inflation reflects oil prices, and indeed the eurozone’s core inflation measure is steady at 0.9%, but Mario Draghi has insisted the ECB will do whatever it takes to revive the European economy and deflation suggests he will be extending the central bank’s QE program in due course. The euro thus fell last night, and the European stock markets were all off to the races.

This sentiment flowed over the pond, and ensured a positive start in New York. Like the Australian market yesterday, the US indices lost steam mid-session but powered home in the last couple of hours. Of particular note was the biotech sector, which has been creamed this past week or more. It rallied back strongly, no doubt helped by short-covering, and hence the Nasdaq posted a 2.3% recovery.

Commodities

The same game was evident in London. But for LME traders, there was an added incentive to square up ahead of the week-long Chinese holiday. If the LME were Wall Street then copper would be the biotechs, and it rallied back 3.4% last night. Nickel is another metal that’s been hit particularly hard, and it jumped back 4.6%, while zinc has also had a tough time of late, and it put on 1.5%.

There were no such shenanigans in Singapore, where iron ore fell US30c to US$54.40/t.

The oils each jumped just over US50c, to US$45.35/bbl for West Texas and US$48.52/bbl for Brent. WTI began the quarter at US$60 so it’s had a 25% hammering, although the price has been stuck like glue to the US$45 level for all of September, but for some sharp ups and downs.

That strong ADP jobs number is another nail in the coffin for gold, if a Fed rate rise is what will kill off the yellow metal. Gold is down US$12.40 at US$1115.30/oz.

The US dollar index is up 0.3% to 96.23 on euro weakness but the Aussie is also up, by 0.4% to US$0.7013.

Today

As noted, the SPI Overnight is up a whole one point. Bridge Street will probably do very little this morning ahead of the Chinese PMI releases around midday.

Otherwise, China is now closed until next Wednesday for Golden Week.

China’s is not the only manufacturing PMI we’ll see over the next 24 hours, with Australia, Japan, the eurozone, UK and US all reporting, but it’s the only one that matters at this point.

Rudi will make his usual appearance on Sky Business' Lunch Money today, midday until 1pm.
 

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: Holding Firm

By Greg Peel

The Dow closed up 47 points or 0.3% while the S&P rose 0.1% to 1884 as the Nasdaq fell 0.6%.

Technical

The interesting point to note about yesterday’s 3.8% rout on Bridge Street is that it did not represent a selling stampede. When the bell rang at 10am, there were simply no buyers to be found. Half an hour later, following the opening rotation, the buyers were found 150 points lower.

And that’s where everything stopped, all the way to 3pm. Late selling then took the index down another 50 points. It seems strange to say, but it was actually a very in-volatile day. Calm, almost.

If we subtract the very weird 71 point rally posted on Monday, against the tide of the rest of the world, then the ASX200 was realistically down 124 points yesterday. The open took us immediately down through the solid 5000 support level to stop at 4966, where we still were at 3pm. But staring the market in the face was the previous intraday low of the correction at 4928, hit back in August. Technically, markets like to retest previous lows on a second leg of a correction before it can be said a bottom is in place.

And so we tested it, closing at 4918. Technicians have been suggesting a breach of 5000 would see 4800 as the next support level. But since we are set for a rebound, most likely, today, given Wall Street is up, commodity prices are mostly up (except iron ore), and the SPI Overnight closed up 43 points, it might be that we have now “passed” the test.

Or we could still go lower. It’s not like sentiment has suddenly improved overnight. And Wall Street is yet to retest its own correction low, at 1867 in the S&P500. That’s still 17 points, or 0.9%, away.

Taking out the previous low is actually a source relief for the market from a technical perspective.

It is also interesting to note the Aussie did not go with the stock market yesterday. It’s steady at US$0.6987.

The brunt of yesterday’s fall was taken by energy, down 6.7%, and materials, down 5.0%. These are the “China fear” sectors. The related fear is one of debt held by the big miners and gas players. Talk of global mining giant Glencore (down 30% on Monday night) potentially going to the wall does not help sentiment for the likes of BHP and Rio, who both carry debt on their balance sheets. But not to any extent of bankruptcy fear.

The banks dropped 3.6%, in line with the index. But then the banks are the clearest proxy for the index on a cap-weighted basis. The other fall of note was telcos, down 4.5%. Here we might suggest that while Telstra is also a mega-cap in Australian index terms, that strange session on Monday failed to take account of the fact the M&A going on among the juniors in the sector is actually creating a fourth viable competitor to Telstra, Optus and TPG Telecom in the broadband stakes. Vocus-Amcom-M2 will be a powerful force, increasing competition in that market place, and for Telstra in particular.

Why did we sell-off yesterday? Is it directly “China fear”, which is hardly a new fashion trend, or because of the technical action on Wall Street on Monday night which saw “Death Crosses” across the indices? If Wall Street’s gonna go, local traders thought yesterday, we’d better get the hell out now.

While one session is not enough to call the chicken entrails wrong on this one, it is nevertheless noteworthy that last night Wall Street put in a quiet and largely dull session, meandering to a vague gain. Hardly what one might expect as a result of staring technical Hades in the face. The Nasdaq closed down another 0.6%, but that was all about the ongoing biotech clear-out, which commentators are suggesting has now likely run its course.

Breather

The US biotech sell-off has now taken PEs in the sector down from lofty, bubble highs to multiples more in line with the current market average.

That’s good news, and Wall Street was also greeted with good news last night in the form of the Conference Board monthly consumer confidence survey. It unexpectedly rose to 103.0 from 101.1 in August, to mark the second highest level since the GFC bottom (January saw the highest). And while I hate to bring it up this far out (anyone spotted tinsel yet?), such a reading is positive heading into “the holidays” as Americans like to call them.

In further news, it seems the US housing recovery is hanging in there. The Case-Shiller house 20-city house price index for July showed a 4.7% year on year gain, up from 4.5% in June.

Tonight brings the ADP private sector jobs report, a precursor to Friday’s non-farm payrolls report, which is a pre-cursor to a Fed rate rise. Despite the New York Fed president’s suggestion on Monday night that October is a possibility, the market is only ascribing a 10% chance. December is the firm favourite at this point.

Before we get to US jobs on Friday, we have to get through Chinese PMI day tomorrow. The official and Caixin readings for China’s September manufacturing and service sector PMIs will all be released.

And today locally, and tonight in the US, is the end of the quarter. “Window dressing” seems a bit hollow after a 200 point drop the day before, but the indications are positive going into today’s session. As October begins, so will both Bridge Street and Wall Street be poised – ready for the data that will likely determine whether we are reaching a bottom or whether there is another serious leg down yet to come.

Commodities

Base metal prices consolidated last night ahead of this raft of important data. Tin dipped slightly, but every other metal posted a small rally ranging from a slight tick-up for lead to a 1.7% gain for zinc.

Iron ore fell US$1.30 to US$54.70/t. With Glencore shares having rebounded 17% in London overnight, helping BHP Billiton ((BHP)) up 1.6% in London and Rio Tinto ((RIO)) up 1.8%, one presumes this drop in the iron ore price will not force the big miners lower again today after yesterday’s efforts.

West Texas crude rose US83c to US$44.84/bbl and Brent rose US64c to US$48.00/bbl.

Gold slipped another US$4.90 to US$1127.70/oz, possibly presuming that last night’s unexpectedly positive read on US consumer confidence only plays into the rate rise camp.

The US dollar index is steady at 95.92.

Today

As noted, the SPI Overnight closed up 43 points or 0.9%.

Australian building approval numbers are out today. Japan will release industrial production and retail sales data.

Tonight sees a flash reading on eurozone September CPI, which will be closely watched by Mario Draghi. As noted, the US private sector jobs report is due.

And it is the end of the quarter. Thank God that’s over, one might say. Except that tomorrow, it’s October.
 

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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: Commodity Outlook, Bulks, Base Metals, Oil, Platinum And Grains

-Low US rates prolong volatility
-Bulks hardest hit from China slowdown
-Emerging markets not taking up slack
-Issue for oil is looming Iran supply
-Profitable arbitrage in sorghum, barley

 

By Eva Brocklehurst

Outlook

Energy, industrial metals and agricultural products remain oversupplied, Citi observes, because of a sluggish world economy as well as the over-investment in developing new supply in the last decade. The broker expects Chinese economic stimulus will lift growth by the end of the year and this should have a positive impact on energy, industrial commodities and bulks, with the exception of iron ore, where new supplies are likely to continue to dampen prices even if steel demand rises.

Nevertheless, a continuation of very low interest rates in the US, which has caused a significant amount of the commodity price volatility in the past two years, as capital flees in the search for yield, should also prolong that volatility. Chinese growth prospects, and the extent of any downturn, remain the key to the outlook.

If the world's second largest economy weakens then demand could fall further and pull prices down. The bullish potential for prices, other than a Chinese rebound, lies in supply disruptions in oil from Iraq, Nigeria or Venezuela and the unfolding El Nino impact on crop production.

Few commodities, if any, have escaped the recent rout. Citi observes, even if China contagion fears are overdone and a global recession does not evolve, growth in China will not continue at its former robust pace and no other emerging market is likely to take up the slack. Moreover, the US Federal Reserve surprised the market with its dovish tone in September, heightening expectations that rates would not begin to rise until 2016.

Citi expects bulk commodities will be hit the hardest by the weaker demand from China followed by base metals. International steel, aluminium and petroleum product markets should remain under pressure as China continues to export its surplus. Macquarie concurs. In many markets there has simply not been enough pain inflicted to accommodate the drop in demand and break the cycle where prices continue to grind lower.

Macquarie, for the first time since 2013, is slightly more comfortable that Chinese demand may have hit a cyclical low. Nevertheless, ex China, the emerging markets are becoming a larger concern, following currency moves and the flight of capital.

Another analyst. Another bear. ANZ analysts suggest that while prices did recover modestly in September, this may only be a short-term reprieve. Most emerging market economies are seen moderating from high rates of growth and financial risks are rising after a period of rapid leverage. Brazil and Russia are in recession and China's growth is expected to slow to 6.0% over the next two years.

The rate of Chines infrastructure spending is also behind schedule with only 30% of the target spent in the year to date. While some more expenditure is expected as the year draws to a close, the analysts observe after a visit to China, that the private sector, where a higher-than-normal level of investment is being channelled, appears to be finding little reason to proceed quickly.

Bulks

Macquarie has lowered forecasts across the board to reflect current market conditions, lower energy prices and new FX estimates. Long term prices for half the commodities the broker covers have been downgraded, particularly nickel, steel and iron ore.

Iron ore, manganese ore and the coals - thermal and coking (metallurgical) - appear set to sustain many years of sufficient supply and Macquarie lowers forecasts by 10-20%. The ANZ analysts suspect iron ore prices could test US$50/t with Chinese steel output slowing at a time of rising seaborne supply and are likely to remain flat for the next two years.They expect some price relief in thermal coal towards the end of the year as the northern winter sets in.

Base Metals

Macquarie observes that nickel is the prime example of a base metal suffering from the weakness in demand, with high inventories and weakness in stainless steel. Supply cuts in aluminium are occurring but the broker finds minimal potential for a recovery in the price over this decade. Copper and zinc are sustaining lower future mine supply but, given current market conditions, are also unlikely to recover much ground.

The ANZ analysts suspect that in the case of copper, prices may have formed a base after Glencore decided to close 400,000 tonnes of capacity in Africa. Aluminium exports from China have eased but volumes remain at elevated levels.

Oil

The oil outlook is bearish and the return of Iran to the market early next year will add to the supply. US production may be falling, particularly shale, but OPEC production is rising and non-OPEC remains strong as well. Citi expects prices to grind lower in the fourth quarter and the broker's economists have added a bearish risk to the mix by putting the odds of a global growth recession at over 50%.

A balanced market in oil is considered unlikely until the end of 2016. ANZ's analysts also expect oil to stay lower for longer. The surplus is expected to continue for the next 18 months although the severity of the oversupply is gradually declining. In terms of Iran, they note that opposition to the deal in the US is strong and this may mean any relief to sanctions could be pared back.

Platinum

The scandal involving Volkswagen and the fiddling with pollution controls on its cars could affect the platinum group metals, which are used heavily in emissions control systems. Brokers believe, while it is too early to tell the extent of the implications, the longer-term impact on diesel engines could be significant. Macquarie expects further pressure on the platinum price as a result of the scandal.

Grains

ANZ analysts observe that Chinese grain prices have been at elevated levels compared with global prices, providing an opportunity to import grain at the expense of domestic supply. Import quotas for corn, wheat and rice are controlled, which prevents any leakage of China's price support to the global market. This is not the case in the unregulated feed markets of sorghum and barley.

The analysts highlight the profitable arbitrage in this markets has meant imports have jumped sharply. Feed grain stocks are already high in China and government losses are increasing, with reports of storage and quality constraints. However, a repeat of the surge in imports - in the last 12 months Chinese imports of Australian barley rose sharply - is unlikely over the next year and China is not expected to have the same influence on prices as it did in 2014.
 

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article 3 months old

The Overnight Report: Harbingers Of Death

By Greg Peel

The Dow closed down 312 points or 1.9% while the S&P lost 2.6% to 1881 as the Nasdaq fell 3.0%.

Oops

Yesterday’s action on Bridge Street just goes to underscore the fact the market is being run by a bunch of Nervous Nellies at present, who can become equally as nervous about missing out on the upside as they can about getting out on the down.

The lead-in of a flat session on Wall Street and lower commodity prices – base metals were net lower, iron ore and gold were lower and the oils were only a tick up – ensured the ASX200 went nowhere for the first half hour but suddenly the announcement of a planned merger between fibre cable company Vocus ((VOC)), which had recently swallowed up peer company Amcom, and junior telco M2 Group ((MTU)), which had lost a battle for iiNet with TPG Telecom ((TPM)), set the world on fire.

At any other time we might assume M&A in the telco sector would do little more than fire up the telco sector but yesterday we saw a flood of buying across the board. Leading the charge was energy, with a 2.2% gain, possibly because if there is any sector for which analysts anticipate a round of consolidation, its Australia’s gas industry. Why consolidation among telcos would imply the same in LNG is by the by.

The somewhat astounding aspect to yesterday’s close on the high for the ASX200, up 71 points, was nevertheless that the bad news out of China released around midday caused no more than a brief dip in the rally.

Australia is supposed to be the China proxy. The Aussie is down 0.5% to US$0.6990 but in stock market terms it was left to Japan, down 1.3% yesterday and London, down 2.5%, Germany, down 2.1% and France, down 2.8% last night to provide a China-based response. There followed a 2.6% plunge on Wall Street.

Red faces today? Yesterday’s data showed Chinese major industrial companies saw their profits fall 9% year on year in August, marking the fastest decline in four years.

Yesterday BHP Billiton ((BHP)) rose 1% and overnight in London the shares are down 6%.

Oops indeed.

One might argue that August was the month Beijing really brought out the big guns of stimulus – including the currency devaluations – and they have to be given time to have an impact. We note China’s own stock market actually closed up 0.3% yesterday. Admittedly there was more to last night’s Europe/US sell-off than just Chinese profits, given a couple of Fedheads got involved. But the fact the SPI Overnight has closed down 104 points this morning might be taken as proof the local market got it rather a lot wrong yesterday.

October?

Wall Street opened lower on the flow-on from Europe and an undertone of further China slowdown fears. Then along came New York Fed president William Dudley who, speaking to the Wall Street Journal, reiterated Janet Yellen’s insistence that the Fed was still on track for a rate rise in 2015, and went as far as to suggest it could come as early as the October meeting.

Now, I have been noting since the Fed’s non-decision earlier this month that Wall Street has swung around in sentiment from being negative about a rate rise to being positive, on an “end the uncertainty” basis. So why did the Dow drop 300 points last night?

Three reasons, basically. Firstly, the sell-off in biotechs that began on Friday night turned into a flood last night, sending the Nasdaq down 3%. Biotechs are both a momentum trade and an anti-beneficiary of higher rates.

Secondly, commodity prices were already weaker overnight, with copper, iron ore and oil all down on the China data. Higher US rates mean a stronger US dollar, and even if that implies a stronger US economy, it also mathematically implies pressure on commodity prices. The materials sector was among the hardest hit on Wall Street last night, although ironically, the US dollar index is actually 0.3% lower this morning at 95.97.

The third reason is technical. Ever since Wall Street bottomed out from its correction in late August and attempted to recover, trader after trader has suggested the market needs to go back down to test the August 24 intraday lows before a true bottom can be called. And even if it gets down there, it could go further to test the October 2014 bottom.

On August 24 the Dow opened down 1000 points and reached 15,370. That’s another 4% down from here. The S&P500 on the day hit 1867, but the 2014 bottom was 1831. If ever there was a precursor to such bottom retesting as far as technicians are concerned, last night the Dow, S&P, Nasdaq and Russell 2000 all simultaneously posted a “Death Cross” (50-day moving average crosses down through 200-day moving average) for the first time since…you guessed it…August 24.

So drag out the Ouija board and dust off the crystal ball – it could all be about to get spooky.

Even Chicago Fed president Charles Evans’ suggestion later in the afternoon that the Fed should be in no hurry to raise interest rates failed to stop Wall Street continuing its slide last night. The only ray of hope is that the Dow did venture below 16,000 briefly before jumping back at the close to 16,001.

So the conclusion is that while Wall Street really does want to get this rate hike over and done with, the implications for the likes of biotechs and commodities is in the meantime enough to force a clear-out, and the technicals will likely feed on themselves.

Interestingly, the US ten-year yield fell 7 basis points last night to 2.10% when a rate hike would imply the opposite. Is the bond market remembering that China held back the Fed this month, so ever weaker Chinese data should ensure a further delay?

Commodities

Tin bucked the trend in rising 2% on the LME last night and zinc and lead were steady, but aluminium, copper and nickel all fell over 1%.

Iron ore fell US20c to US$56.00/t.

West Texas crude fell US87c to US$44.47/bbl and Brent fell US$1.24 to US$47.36/bbl.

Despite a dip in the US dollar, gold fell US$13.70 to US$1132.60/oz on renewed rate rise expectations.

Today

As noted, the SPI Overnight closed down 104 points or 2.0%. If accurate, that would take the ASX200 back down to very familiar territory just above 5000, for about the umpteenth time. If the Dow is going to crack through 16,000 because it is foretold in the chicken entrails, then presumably the local index will breach 5000, and then it’s next stop 4800 according to the local technicians.

House prices and consumer confidence will be on show in the US tonight.

Locally, as Australia struggles to emerge from what has been a particularly long winter, Kathmandu ((KMD)) will report its FY15 result today.
 

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article 3 months old

Is It Time To Be Bullish On Iron Ore?

-Buoyant prices not linked to demand
-China's steel metrics confusing
-Prices could still move down again


By Eva Brocklehurst

Iron ore is at an interesting point in its cycle. Why have prices been so resilient in the face of ongoing displacement of production and demand in a downtrend? Is the recent rally in the iron ore price a temporary respite?

Responding to client questions and assessing feedback, Morgan Stanley concludes that the stability of the seaborne price is underpinned by other factors such as the futures market, inventories and trade flows. China's domestic ore production is giving way increasingly to expanding imports. At the other end of the process, China's steel making industry is now loss making and unable to expand exports, with anti-dumping pressure growing, and local steel-intensive projects are facing queries over their likely returns. Morgan Stanley suspects that any slowdown in steel demand growth would likely prompt cost cutting and reduced purchases of raw materials.

There are some bullish signals such as China's port inventories being at the lowest level since 2013, despite a 20% increase in monthly average import flows, and official data suggests raw ore production is down 13% year on year. Moreover, the major miners - Rio Tinto ((RIO)), Vale and BHP Billiton ((BHP)) all believe demand is solid. Morgan Stanley suspects this optimism is centred on the stability of the ore price, rather than the actual price level.

The broker warns clients that this is the time of year when the steel mills pull back and there is usually a correction. Still, the degree to which the seasonal shifts affect prices depends on a number of factors such as credit conditions, inventories and demand. Morgan Stanley also warns about becoming too comfortable with US$60/t iron ore prices, comparing this to a fashion trend - its appeal may wear thin and you may regret it. Of note, while prices appear buoyant and the bulls are becoming twitchy, some Hong Kong traders have suggested recent transactions were index-linked and there is no change in actual physical demand.

Macquarie also observes iron ore has defied expectations of further downside, acknowledging the features of the current market do not stack up. Steel mill holdings appear relatively low and trader-held inventories have been falling. There is a general view that the major producers control the market and, in times of weak conditions, supply discipline has helped at the margin, Macquarie notes. Hence, the 55mtpa Roy Hill project, which is about to start pumping iron ore into the market in decent volumes in 2016, will be an interesting development to watch.

Another observation the broker makes is that the displacement of tonnage from the smaller producers has been remarkably efficient. Countries such as Swaziland, Honduras, Mexico, Malaysia and Sierra Leone, all which became consistent suppliers of iron ore to China, have had their volumes priced out and quickly idled operations.

Confusion stems from China's domestic production. Macquarie suspects there has been a substantial slump in output, by at least 100mtpa from the 2014 peak. Still, there remains some missing factors. While it is possible an inventory build up has occurred of which the market is unaware, this would be contrary to both sentiment and credit conditions. Maybe there is some under-reporting of pig iron production.

In the end, Macquarie would not be surprised to witness cuts to steel demand in October and, in tandem, the mills taking less iron ore onto their books. Pricing could move back towards, or even below, US$50/t CFR China. Through to 2017 the broker expects a cap at around $US$60/t and a floor of US$40/t. Macquarie has reduced long-run iron ore price forecasts to US$65/t CFR China from US$80/t previously.

Weak fundamentals suggest to ANZ Bank's analysts that the rally in the price is overdone. Strong supply growth has re-emerged from Brazil, while the upcoming holidays in China will negatively affect steel production and iron ore demand. Any upside in prices is likely to be limited and the analysts take a short position, with a view prices will test US$50/t.

So, how do Australia's mid-cap producers fare in this scenario? Macquarie has made material reductions to iron ore price forecasts, cutting them by 3% for FY16 and 10% for FY17. When factoring in a lower Australian dollar, the impact is far less severe. Indeed, on this basis iron ore forecasts for FY16 are upgraded by 4% and FY17 reductions are lowered to 3%. Australia's major producers will continue to generate strong returns.

Among the mid caps BC Iron ((BCI)) remains the brokers preferred stock, with an Outperform rating. After factoring in Iron Valley earnings, Macquarie estimates the company is cash-flow positive at spot prices. Grange Resources ((GRR)) benefits from a pellet premium which has been relatively firm and the company is also fully cash-backed, although lacking the potential of BC Iron. Hence, a Neutral rating. Mt Gibson Iron ((MGX)) also attracts a Neutral rating. Its future remains uncertain because Extension Hill is the primary source of earnings and output at Koolan Island is winding down. An acquisition could provide some clarity on the outlook, Macquarie contends.
 

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article 3 months old

The Monday Report

By Greg Peel

Indecision

Friday proved to be a volatile day on Bridge Street, albeit in a tighter range than we’ve suffered recently. The ups and downs were almost a microcosm of the week itself. Early buy orders sent the index tumbling into an upward hole before the sellers quickly moved in to slap the market back into shape.

Thus the ASX200 was up 45 points from the open and down 35 at lunchtime, before rallying back into the green at 3pm and finishing with a thud on late selling, down 29 points at the close.

Not that any of it means that much at this point. Sector moves were inconsistent, with the consumer sectors and materials positing the only rallies while energy and the banks ensured a negative index close. The important point from a technical perspective is that at 5042, we still closed above 5000.

Swoosh

The strong opening on Bridge Street was attributed to supposedly positive commentary just before kick-off from Janet Yellen. A weak finish suggested perhaps Janet Yellen really didn’t say anything new.

Which she didn’t, as far as I’m concerned. The Fed still favours a rate rise before year-end and that’s what Fedheads have been consistently saying now for months. The only point of argument is that in reaffirming this stance, Yellen went some way to easing the global growth fears that heightened when the Fed did not chose to raise at the September meeting.

At least, that’s the way they took it in the northern hemisphere. London jumped 2.5%, Germany 2.8% and France 3.1%. Wall Street, which had closed on Thursday evening before Yellen spoke, jumped from the open and was up 260 Dow points at lunchtime.

Aiding the mood was an earnings report from Dow component Nike, which trashed expectations. The “beat” came down to an unexpected 30% increase in sales to…guess where -- China. Thus within the space of two sessions we had one US multinational – Caterpillar – issuing a profit warning due to the impact of weaker Chinese demand and another going the other way on increased Chinese demand.

Are rumours of China’s death premature? The difference is that Caterpillar indirectly feeds China’s export economy – Tonka trucks for mining the raw materials imported by China’s manufacturing sector for example – while Nike feeds a Chinese domestic consumer economy obsessed with all things Western, such as overpriced sandshoes. On the basis of these two US corporate results, one might be prepared to believe Beijing’s economic policies are working.

Wall Street would also have been heartened on Friday night by another revision to the June quarter GDP result, which saw the number lifted to 3.9% from a previous 3.7%. Surely this puts more pressure on the Fed to move, and as we know, Wall Street is now pro-rate rise rather than anti, as it was for most of 2015 to date.

Friday’s rally didn’t last through the afternoon, as a rate rise is still not good news for the volatile US biotech sector. This sector remains the best performing over twelve months but is sensitive to interest rates, given valuations are based on long dated earnings potential and every little tick up in the short end rate is amplified through discounted cash flow valuation from the long end.

It’s also a momentum traders’ sector, thus once it begins to move in either direction it usually gathers pace. Thus when biotechs started to drop on Friday, the selling accelerated through the afternoon. Hence we saw the Nasdaq close down 0.9% even as the Dow closed up 0.7% or 113 points, 68 of which represent a 9% jump for Nike, and the S&P split the difference closing flat at 1931.

The US ten-year bond rate rose 5 basis points to 2.17%.

Commodities

The oils also had another up-day, which is typically positive for Wall Street, but only to the tune of US27c for each of WTI and Brent. West Texas is at US$45.43/bbl and Brent at US$48.60/bbl.

While the US dollar index only rose 0.2% to 96.26, LME traders saw a stronger for longer dollar on Fed tightening and sold all base metals bar nickel, albeit modestly. Zinc copped the worst of it with a 2.7% fall.

Iron ore fell US60c to US$58.20/t.

Gold jumped up on Yellen’s supposed dovishness at her post-meeting press conference last week, and has slipped back again since Thursday night’s lift in hawkishness. It’s down US$7.80 at US$1146.30/oz.

The Aussie is up 0.3% at US$0.7024.

Given the local futures market takes the S&P500 as the Wall Street lead and not the Dow, the SPI Overnight closed down 4 points on Saturday morning.

The Week Ahead

We’re in for a busy week ahead, as locally we head towards a long weekend and the start of summer time. And of course the big match on the weekend – Australia v. England. Apparently some other trivial domestic tournaments will be held as well.

The two big events of next week are the US non-farm payrolls report for September due on Friday, in reference to all of the above, and the beginning of Golden Week in China, which sees the country close down from Thursday through to Wednesday.

While Golden Week is not quite as disruptive as the week-long Chinese New Year holiday, it can still play havoc with China’s non-seasonally adjusted data.

Thursday is the first of the month and that means manufacturing PMI day across the globe, including the numbers from Beijing and Caixin. Both parties now post both their manufacturing and services PMIs together, whereas everyone else spreads them out.

In the lead-in to the jobs report the US will see pending home sales and personal income & spending tonight, which includes an August reading for the Fed’s preferred PCE inflation measure, and Case-Shiller house prices and the Conference Board consumer confidence index on Tuesday.

Wednesday it’s the ADP private sector jobs report and the Chicago PMI, Thursday construction spending, vehicle sales and the manufacturing PMI, and Friday factory orders and jobs.

Japan will report industrial production, retail sales and jobs data across the week, as well as the quarterly Tankan Survey.

In Australia we’ll see building approvals on Wednesday and the manufacturing PMI on Thursday, followed by retail sales on Friday.

On the local stock front we’re still working through a handful of ex-divs, while Kathmandu ((KMD)) will post its FY15 result tomorrow. AGL Energy ((AGL)) and ASX ((ASX)) will both hold AGMs tomorrow, ahead of what becomes a flood of AGMs through October.

Rudi will only appear on Sky Business once this week and it'll be on Thursday at noon.
 

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

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article 3 months old

The Overnight Report: Starving Caterpillar

By Greg Peel

The Dow closed down 78 points or 0.5% while the S&P lost 0.3% to 1932 and the Nasdaq fell 0.4%.

As I write, Janet Yellen is droning on in the background as she delivers a speech to the University of Massachusetts entitled “Inflation Dynamics and Monetary Policy”, which is proving every bit as riveting as the title suggests.

There is no Q&A session following, and while Wall Street arguably squared up last night in anticipation Yellen might say something significant regarding the first rate hike, all we have learnt is that the FOMC is still anticipating a rise this year.

So nothing new there.

Yield

Another day, another big market move on Bridge Street, and yesterday it was the turn of the upside. While we might argue that the failure of Wall Street to fall out of bed on the Chinese PMI news, and a bit of a rebound in VW-hit Europe, was enough to provide relief, realistically we simply bounced off 5000 for the fifth time.

I’m happy to call Tuesday’s actual 4998 close to be close enough to 5000.

And it appears we still have plenty of investors lined up to buy yield when the opportunity presents. The smart move is to stay out on the really crazy days when the resource sectors are going nuts and also to give the banks a wide berth because they’ve now become a trader’s plaything.

The best performing sectors in yesterday’s 1.5% rally for the ASX200 were consumer staples (2.2%), utilities (2.0%) and the telco (1.8%). The banks only managed 1.5% and the resources sectors rebounded only modestly.

No one would argue that reliable yield is very attractive in this market at present, given China fears have sunk all boats. “Reliable” at this point does not include the likes of a Woodside (fixed payout but falling earnings), a BHP (progressive dividend but on falling earnings) or even a bank (heyday over, payouts likely to be cut). “Reliable” is supermarket free cash flow, broadband usage, gas pipelines et cetera.

And as we have seen quite glaringly this year, companies offering yields that don’t look spectacular now but offer significant growth are outperforming across certain sectors.

But still we are beholden to volatility, which must yet work its way out of the system. Next Thursday the market is set to enter that uncomfortable seasonal period traders typically refer to as “October”.

Trouble In Tonka Toy Town

European stock markets took a dive again last night as the beast that is the VW scandal grew another head. Government authorities across Europe, including in the two big automaker economies of Germany and Italy, announced they will be testing all diesel vehicles, V-dubs or otherwise, for emissions irregularities.

In another development, Auto Bild magazine last night accused BMW diesel engines of producing greater than the regulated level of emissions, fuelling the fire of “Omigod, they’re all doing it”. BMW nevertheless strenuously denied the accusation and Auto Bild subsequently admitted they might actually have had it wrong.

This is a scandal that won’t go away any time soon. It will take a long time for VW to recover and a long time for Germany’s manufacturing reputation to be restored. Elon Musk will be loving it.

Speaking of things diesel, leading heavy equipment manufacturer Caterpillar last night issued a profit warning ahead of next month’s US result season, slashing its revenue forecast and announcing job cuts of up to 10,000 over the next couple of years. Like virtually every company in the resource sector and resource service sector globally, Caterpillar is being forced to restructure and refocus.

Aside from the 7% plunge in Caterpillar shares being worth around 30 Dow points alone, the profit warning served to rekindle global growth fears once more. Within the first hour, the Dow was down 260 points.

The global picture overwhelmed the domestic picture, given last night’s US data releases were not too bad. US new home sales rose 5.7% in August, beating forecasts, and while durable goods orders fell 2.0%, this was all lumpy aircraft orders and met expectations.

As an aside, the German IFO business sentiment indicator showed an unexpected rise last night. It is a pre-VW measure so has to be seen in that context, but suggested to IFO that global growth fears have not hit German sentiment as much as one might assume.  

Wall Street did not linger long at the low, and steadily rallied back to regain most of the opening loss by the close. A turnaround in oil prices proved supportive, and there was a suggestion of squaring up before Yellen said anything earth-moving, but also it was a case of the Dow approaching the psychological 16,000 mark at the depths and the S&P500 simultaneously eying off 1900.

Like 5000 in Australia, these round numbers are often where buy/sell orders are placed against the trend.

In the end, Wall Street, like Bridge Street, is simply banging around without a lot of conviction as the post-correction consolidation phase continues.

Commodities

Base metal markets are also attempting to consolidate. Aluminium, copper and lead all saw small moves to the upside last night while nickel, tin and zinc all rose 1.5-2%.

Iron ore is unchanged at US$56.80/t.

West Texas crude is up US38c to US$45.07/bbl and Brent is up US52c to US$48.33/bbl.

The big mover on the night was gold, which is up US$23.80 at US$1154.10/oz, despite the US dollar index being reasonably steady at 96.10. Given the move came pretty much all in one hit, rather than throughout the night, we can conclude that the trigger was a rate cut from the Norwegian Central bank to 0.75% from 1.00%, which sent the krone to a 13-year low.

The Aussie is steady just above US$0.70 despite another nostalgic wander into the swinging sixties yesterday.

Today

The SPI Overnight is up 2 points. Last Friday on Bridge Street was a wild ride of intense intra-day volatility. Maybe today will be more “Friday”.

Japan will release CPI data today and tonight a second revision of the US June quarter GDP result will be released.

Could be interesting if it’s an increase on the last revision of 3.7%.


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article 3 months old

The Overnight Report: Taken In Stride

By Greg Peel

The Dow closed down 50 points or 0.3% while the S&P lost 0.2% to 1938 and the Nasdaq fell 0.1%.

Teetering

Tuesday night’s sell-off in copper provided a sufficient trigger to send the jitters through the local market yesterday morning, with China fears at the forefront of sentiment. The big miners, in particular, were clobbered, and just before midday the ASX200 was down 50 points.

As to what happened next was all going to come down to Caixin’s flash estimate of its Chinese manufacturing PMI. The manufacturing sector in China has now been outgrown by the service sector, but Australian raw materials don’t feed into services. And we recall that it was Caixin’s weak August estimate that set this recent correction in train.

August’s confirmed result was 47.3, and economists were forecasting a tick up to 47.5 in September on the support of Beijing’s various stimulus measures. Thus when the number came in at 47.0, all of Asia groaned.

The big miners were clobbered once more, sending the materials sector down 3.0% for the session. Resource partner energy copped a 2.2% sell-off. But most influential in the index’s final fall of 2.1% was a 2.5% carting for the banks.

Yet again the problem for the Australian market is shown up in such volatility for a sector that should be among the less volatile of any stock market. The Big Four are just too big a chunk of ASX200 capitalisation that by default they become a proxy for the Australian economy in general via the stock market. Thus “Sell Australia” means sell the banks.

There is not otherwise a lot of direct connection between Australian banks and Chinese manufacturing. Although we can make a connection via the RBA. If China’s economic slowdown forces the RBA to cut its rate again, that’s not good news for the banks. Banks like rising interest rates and a brighter economic outlook to raise longer date yields and provide greater net interest margins on lending.

Either way, the latest plunge on the local market took the ASX200 to a close of 4998. I have been suggesting for a while now that 5000 is the solid level of support which, if breached on a closing basis, would likely signal another down-leg through the previous intraday low of this correction (4928). So strictly, we’re there.

However…the good news is we did not close on the low of the session. That was 4988, at around quarter to three. In the context of a hundred point drop, a ten point recovery right at the death seems trivial, but what it showed was that the index was trying to get back over 5000. Indeed, three more little points, or maybe five more minutes of trading, and we may have been having a different conversation.

So, does 4998 mean a breach? I suggest it is not a “meaningful” breach, and today will tell. The SPI Overnight closed up 11 points so we may just be in for a reprieve. Despite a slight drop on Wall Street, most northern markets were stronger last night and seemingly less concerned over this latest weak Chinese data point.

Herby Rides Again

The Volkswagen scandal that rocked the car industry and the German and EU economies these past couple of days subsided somewhat last night on news the CEO of VW had fallen on his sword, taking the rap for the emissions fraud he insists he had no knowledge of. VW shares bounced 5% after having lost around a third of their value.

All German carmaker stocks bounced, as fear subsided that perhaps they’re all in on the game. Surely the likes of Merc and BMW can’t also be so mendacious? The relief rally filtered through to the European indices in general, and ECB president Mario Draghi also provided some confidence.

In light of heightened China fears and the subsequent decision by the Fed not to raise rates, Draghi told members of the European parliament last night the ECB stood ready to pump in more QE if deemed necessary, although not at this stage. Ultimately the German and French markets posted small gains, while London rebounded a full 1.6%.

Clearly Europe was not focused on, or at least as worried as Asian markets were yesterday about the weak Chinese PMI. Indeed, a flash estimate of the eurozone’s manufacturing PMI released last night also showed a weaker number, albeit the drop to 53.9 from 54.3 still keeps the sector in comfortable expansion territory.

Oil-Based

Similarly, a flash estimate of a US manufacturing PMI showed an unchanged 53.0. And similarly, Wall Street did not seem too perturbed about the China number, with the indices opening only a little bit lower and doing not much early in the session. It was Yom Kippur, and volumes were thin.

It wasn’t long before the Dow was down over 100 point nonetheless, but this was all to do with another 3.6% drop for WTI crude. Oil fell on the Chinese PMI, so in theory Wall Street did too, indirectly, but the afternoon saw a gradual rebound to a less intimidating close.

Wall Street has nevertheless done nothing but fall since the Fed made its non-decision last week. While it is easy to point to China, and the Fed’s highlighting of the China problem, the bulk of traders speaking on US business television suggest it is not China, but disappointment with the Fed that is reflected in the weakness.

The Fed’s October meeting looms large. Has the US central bank (a) been surprised by the quite visceral backlash to their indecision, and (b) surprised Wall Street did not rally on the news? Would a tweet from the likes of superstar bond trader Bill Gross suggesting “Get off zero now!” be enough to unsettle the FOMC? Or could the members point to yesterday’s Chinese PMI and say “See!”?

That meeting is not due till the end of October, so it’s just as well October’s not a scary month.

And just to top things off, the US government may once again shut down on October first, not due to budget wrangling, but due to deadlock over an abortion bill. How does one resolve such an issue?

Commodities

Base metal traders all but pre-empted the Chinese PMI on Tuesday night and in so doing, cleared out the stop losses and shook out the commodity funds. Thus while copper did fall again last night, it was only by 0.3%. Mario Draghi’s comments would have helped, and they also pushed up the euro and thus sent the US dollar index down 0.1% to 96.21.

Aluminium also dropped a little, but the other metals all rallied up to 1.5%.

Oil prices definitely fell on China fears, but given recent volatility, any little trigger will do. West Texas is down US$1.67 to US$44.69/bbl for the new November delivery front month and Brent, already November, is down US$1.18 to US$47.81//bbl. The recent range remains well and truly intact.

Iron ore fell US30c to US$56.80/t and has also been going nowhere fast of late.

Gold took the lower dollar and ECB QE talk as reason to rise US$5.60 to US$1130.30/oz.

The Australian stock market was not the only victim of China yesterday. The Aussie is down 1.2% to just over US$0.70.

Today

As noted, the SPI Overnight closed up 11 points, which would take us just a little back above 5000 in the index if accurate.

Japan is back on board today after a three day break, so it will be interesting to see how the Nikkei responds to the past three days’ global activity. Japan will also see a flash PMI of its own today.

Germany’s IFO business sentiment survey for September is out tonight, but I assume the survey was conducted before the VW scandal exploded.

Wall Street will see durable goods and new home sales.

Locally, Brickworks ((BKW)) will release its FY15 result today.

Rudi will make his weekly appearance on Sky Business, at noon (Lunch Money) and re-appear between 7-8pm on Switzer TV.
 

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