Tag Archives: Iron Ore

article 3 months old

The Overnight Report: Of Cars And Copper

By Greg Peel

The Dow closed down 179 points or 1.1% while the S&P lost 1.2% to 1942 and the Nasdaq fell 1.5%.

Hesitant

The ASX200 shot up 59 points out of the blocks yesterday in another bout of what has now become familiar whiplash volatility. It looked like we might be in for another one of our total reversal sessions following the drubbing on Monday, but this time it wasn’t to be so.

The index faded and faded as the day wore on, suggesting the opening rally was more about sellers backing off than buyers arriving in force. Just after 3pm, the index was up a mere 6 points. Then it looks like someone put in a sizeable late sell order, given a close of up 37 seemed to run counter to the mood over most of the day.

That buyer might be feeling a little sheepish this morning.

The ultimate close was a bit of a mixed bag on a sector basis. Yet another pop for the oil prices sent energy up 2.7%, while an unchanged iron ore price was enough to see a 0.3% fall in materials – the only sector to finish in the red. With utilities, the telco and consumer staples also closing up around 1.5% we might suggest yield was the story yesterday, albeit the banks only managed 0.6%.

Recent extreme volatility in bank share prices may well have scared off more conservative investors.

It will all be a different story today nonetheless, with northern markets copping a thumping overnight. I have been suggesting these past few days that weakness on Wall Street post-Fed has been more to do with the derivative expiry and Fed disappointment than it is to do with renewed China fears, given there’s nothing much new about China fears. Well, it looks like commodity traders have had a think about it, thanks to Janet Yellen’s highlighting of the issue, and decided to get out.

Commodities

The benchmark commodity for global economic growth is copper, and last night it fell 3.4% on the LME, having been down as much as 4.5% at the afternoon “close”. At just over US$5000/t copper is near its six-year low, but has not yet fallen back to its August low.

Commentators were scratching their heads as to why commodity prices suddenly decided to give way last night, but realistically we’d have to assume a bit of building angst since the Fed made the historical decision of allowing the rest of the world to dictate US monetary policy. Stop loss breaches and commodity fund selling did the rest (commodity funds much constantly buy and sell to maintain basket weights and in so doing feed volatility somewhat self-destructively).

The likely trigger was a report out from the Asian Development Bank which featured a downgrade to the bank’s 2015 China growth forecast to 6.8% from 7.4%. My only comment here is where on earth did 7.4% come from? Even Beijing’s target is 7.0%. And the rest of the world’s economists had already pencilled in numbers around 6.8% in January.

But that’s markets for you.

Beyond copper, the other base metals all fell around 1.5%.

Iron ore was again unchanged at US$57.10/t, but that hasn’t stopped BHP Billiton ((BHP)) being thumped 5% overnight, Rio Tinto ((RIO)) 3.5%, and London-based Glencore 10%.

West Texas crude is down, but only by US65c to US$45.83/bbl. And Brent is up US27c at US$48.99/bbl.

Commodity price falls have helped the Aussie down 0.6% to US$0.7089, and the Aussie, and commodities, were also under pressure from a 0.4% gain in the US dollar index to 96.32.

Gold is thus down US$8.70 at US$1124.70/oz, and silver fell 3%.

That was all about weakness in the euro, and that is all about cars.

Bugs in the system

What started as an embarrassment has now led to a major mea culpa as the number of vehicles Volkswagen will have to recall due to emissions fraud has risen to 11 million globally.

VW shares fell 15% in Germany last night and traders began to wonder whether the leading carmaker (briefly the biggest company in the world after the fall of Lehman) is alone in its software manipulation. When you think VW, Mercedes Benz, BMW, Audi and Porsche, you realise that auto-making is a significant contributor to Germany’s GDP.

The DAX thus fell 3.8% last night, dragging the rest of Europe and the UK down with it. Auto-makers were a target globally, including Ford, which fell 2.8%.

Thus on a combination of copper and cars, Wall Street was trashed on the open. The Dow was down close to 300 points by lunchtime.

However volume was light, which is in sharp contrast to near-record volumes recorded last Friday, expiry day, when last Wall Street tanked. It was more a case of no buyers than many sellers. Hence the indices did manage to recover some ground in the afternoon.

Bonds nevertheless became a safe haven once more, with the US ten-year yield falling 9 basis points to 2.12%.

It should also be acknowledged that the European car crisis, if we want to call it that, has come on top of ever-building migrant crisis. Last night EU countries agreed to resettle 120,000 Syrian refugees between them, to take the pressure off the landing destinations of Italy and Greece. It is a humanitarian crisis, but it also represents a heavy cost burden for EU countries struggling to reignite growth.

Today

The SPI Overnight closed down 66 points or 1.3%.

If accurate, we’ll be heading toward 5000 again, but we’d need another drop of over 100 points in the ASX200 to breach that level today. It is likely all going to depend on today’s release of Caixin’s flash estimate of its China manufacturing PMI for September, due around midday.

Caixin’s final August result was 47.1, and the forecast for September is 47.6. If this is accurate, then we may see some market relief, although sub-50 still means contraction. But improvement would go some way to suggesting Beijing’s desperate stimulus attempts might just be showing signs of effect.

Realistically, for earlier interest rate cuts and currency devaluations, it’s very early days for a flow-through impact.

Japanese markets will again be closed today, which is probably a blessing for the world’s other major auto-maker.

Locally, Nufarm ((NUF)) will release its FY15 result.

Rudi will appear on Sky Business twice today. First as guest between 5.30-6pm (Market Moves) then later as host on Your Money, Your Call Equities (8-9.30pm).
 

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article 3 months old

The Overnight Report: Not What You Think

By Greg Peel

The Dow closed up 125 points or 0.8% while the S&P gained 0.5% to 1966 and the Nasdaq closed flat.

Jumping at Shadows

There was nothing particularly remarkable about yesterday’s significant sell-off on Bridge Street. The market remains very jittery, and technical analysts continue to suggest the index needs to drop to a new low before the bull market can re-establish, both locally and on Wall Street.

The likely trigger for the panic, which saw the big name sectors of banks, energy and materials hardest hit but selling otherwise market-wide, was an assumption by investors the Fed’s decision not to raise suggests the global economy is in a more parlous state than already assumed, and specifically the Chinese economy. A near 300 point fall in the Dow on Friday night confirms this assumption.

Except that it doesn’t. There is no reason to believe the Fed knows anything more about the state of the Chinese economy than the market does. A global correction in stock indices of around 15% is already an adjustment to the China reality. Under pressure from the likes of the IMF, the Fed is vacillating, and moreover by being worried about market uncertainty, is simply fuelling that uncertainty with its timid indecision.

There are two main reasons Wall Street dropped sharply on Friday night, and China is not one of them. Last night’s rebound confirms to a great extent that Friday’s trade was about disappointment in the Fed and, more influentially, about volatility independently driven by the quadruple witching derivatives expiry.

The good news is that the ASX200 hit a low yesterday at 2pm of down 143 points before recovering 39 points to the close. This still left us with a 2% drop, but a secondary phase of a correction is more likely to begin with a panicked close on the lows of the day. The other good news, technically, is that the ASX200 once again approached the 5000 support level, got as far as 5027, and then retreated once more. We did not see a lower low.

Such volatility is consistent with any market correction. Markets never V-bounce out of major pullbacks, and W-bounces aren’t clear cut either. What tends to happen looks more like WW, representing a volatile period of consolidation. That’s not to say we can’t yet see a lower low, and a close below 5000 would no doubt ensure one. But few disagree a lower low would still provide a bottom of the correction, and not the beginning of a bear market.

Or we may not see a lower low. If 5000 continues to hold, eventually this market is going to come to believe we must have already seen the bottom.

Of course, Wall Street will have a lot to do with it. As will ongoing Chinese data releases (such as this week’s Caixin flash manufacturing PMI release).

Disappointment

Wall Street market commentators appear to have a consensus view in the wake of the Fed’s decision of “we didn’t think they would but we were really hoping they would”.

Last night the Dow opened with a near 200-point rally to late morning, most likely representing Friday’s expiry factor. It didn’t help that last night’s August existing home sales number showed a greater than expected fall of 4.8%, but economists were none too concerned – July marked a post-GFC high in existing home sales.

It was at that point however, that Hillary Clinton entered the game.

A US drug manufacturer had been accused of price gouging on a particular drug. Presidential candidate Clinton tweeted that she intends to attack price gouging in the drug industry and will tonight outline her plans. In response, US biotech stocks were crunched. These high momentum plays are very susceptible to volatility.

So down everything came, until lunchtime. It was then Fed president and FOMC voting member Dennis Lockhart suggested he remained very confident that there will indeed be a Fed rate hike this year. On that note, the Dow rallied back to be up 150 points, before fading slightly at the close.

Can you believe it? A Fedhead calls a rate hike and Wall Street rallies. So diametrically opposite to what would have happened in the first half of this year.

And evidence Wall Street is not as worried about the Chinese economy as Friday night’s drop might suggest.

Biotech stocks nevertheless did not join in the rebound. Hence while the Dow closed up 0.8%, the Nasdaq closed flat on the session. The S&P split the difference with a 0.5% gain.

Commodities

Underpinning last night’s rally in US stock indices was a rally in oil prices. However, one would have to think these monotonous inter-day swings of 3,4,5% are becoming so regular as to become meaningless. Friday’s weekly US rig count showed a drop, so oil prices jumped last night.

West Texas is up US$1.56 or 3.5% at US$46.48/bbl and Brent is up US98c or 2% to US$48.72/bbl. The West Texas October delivery contract is set to expire, so that would also feed the volatility.

Base metal prices were evenly up and down by not too significant amounts last night on the LME, suggesting nothing in particular.

Iron ore was unchanged at US$57.10/t.

The US dollar index is up another 0.8% to 95.92, spurred on by Lockhart’s comments. Thus gold is down US$6.50 to US$1133.40/oz.

And the short-covering rebound in the Aussie appears now to have lost steam. The Aussie is down 0.8% to US$0.7129.

Today

The SPI Overnight closed up 28 points or 0.6%.

A June quarter house price index will be released locally today, and Japan will again be closed.

TPG Telecom ((TPM)) will release its FY15 result today.
 

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article 3 months old

The Monday Report

By Greg Peel

Uncertainty

It was a wild old ride on Bridge Street on Friday – not very “Friday” at all. The ASX200 was down 50 from the open and then up 50 mid-session, before fading to close up 23. The only sector to finish in the red was energy, with a distinct 1.6% fall.

The volatility mimicked a similar response on Thursday on Wall Street to the Fed’s rate decision, or more accurately lack thereof. Wall Street ultimately closed lower on Thursday night but not with any great conviction, reflecting indecision about whether the Fed’s message was a good one (lower rates for longer supporting asset prices) or a bad one (US economy not strong enough, global growth concerns).

The ASX200 thus also opened lower, helped by weaker oil prices, but it seems the buyers thought “why do we need to go lower?” If it’s all about a slowing China well we’ve already adjusted for that issue. That’s why we’re holding above 5000 and not testing 6000 as we were earlier in the year. And the Aussie has come right back towards a more “fair value” level, offering long-awaited support for the Australian economy.

Which is exactly the way Glenn Stevens saw it as he testified before a parliamentary committee on Friday, which the RBA governor is obliged to do every six months (not quarterly, as I erroneously suggested last week). If Janet Yellen was playing up the China fear in her press conference, Glenn Stevens was playing it down. And between the US and Australia, it is Australia more directly linked to China’s economic performance.

The Australian economy is doing okay, Stevens implied, and we will eventually see the benefits of the weaker currency flowing through.

Frustration

The smart money had stood aside on Thursday night on Wall Street as the headless chooks ran around, and returned on Friday night to decide the response was to sell. While the reasons why it was a sell call are debatable, I think we can now finally put to bed the notion of “bad news is good news” for Wall Street. If that thematic were still the rule, the Dow would have been up 300 points on Friday night.

As it was, the Dow closed down 290 points or 1.7%. The S&P lost 1.6% to 1958 and the Nasdaq fell 1.4%.

The falls followed a lead-in from Europe of a 3% fall in Germany, 2.5% in France and 1.5% in the UK, which followed a 2% fall in Japan. Clearly the world was not enamoured with the Fed’s decision.

Why?

Is it because no rate rise implies the US economy is not strong enough? No. Apparently the FOMC’s decision was a very close run thing and thus the deciding factor was concerns over global growth, meaning China and emerging markets, and market volatility, which in theory is meant to be no concern of the Fed’s. So were markets down because if the Fed is worried about China, perhaps the world should be more worried about China than it previously has been?

There is certainly an argument here, and that’s the way commodity markets saw it on Friday night as well. But there’s also the argument that the volatility the Fed is worried about is just as much to do with Fed uncertainty as it is to do with China. In other words, the Fed has said “we won’t raise while the markets are volatile” yet by not raising it has assured that markets will remain volatile on ongoing uncertainty. Investors are frustrated, and have decided to sell rather than go through another tiresome round of “will they/won’t they?”

From Wall Street’s perspective, Friday night’s move was also clouded by the fact it was quadruple witching derivatives expiry, which can move markets substantially independent of any fundamental influences. Friday saw one of the heaviest volume days for the year on the NYSE, and that’s all about expiries. Thus if the selling was all about quadruple witching, we’ll have to wait to tonight to see what Wall Street really thinks.

The US ten-year yield lost another 9 basis points on Friday to 2.13%, so we’re back below the starting point of selling ahead of what the US bond market clearly assumed would be a rate rise. But there is also another influence on US bonds we should consider.

Someone out there holds more US bonds than anyone else, and is currently spending a lot of money propping up its economy and share market and thus needs some funds. Weakness in US yields has been attributed to the added element of Chinese sales.

Spooked by the 300 point Dow fall, the local SPI futures closed down 76 points on Saturday morning. That would take us back down to 5100, which is still 100 points above what has so far proven impenetrable support at 5000. If Friday was a buy, then today is a buy on the opening drop, assuming nobody’s changed their minds over the weekend.

And a weekend is a long time in markets.

The good news is that the weekend brought Alex Tsipras and his Syriza party re-election in Greece, with only a handful of seats lost. This suggests a vote to suffer the strict austerity regime placed upon Greece by its creditors, even though Syriza was first elected on exactly the opposite ticket.

The main opposition was pro-austerity anyway, so that wasn’t an issue. But with the majority of Greek voters now resigned to their lot, presumably the rumblings of discontent will subside and the word “Grexit” will be consigned to the shelf.

The IMF-EU-ECB will also be heartened that Greece’s ultimate submission has sent a message to any other eurozone anti-austerity groups that “you can’t fight the troika”.

Commodities

Oil was the main focus on Friday night, as West Texas once again plunged 4% or US$1.99 to US$44.92/bbl and Brent fell 3% or US$1.50 to US$47.74/bbl. The falls carried on from the immediate post-Fed response on Thursday night.

But WTI finished the week exactly where it had started. It was bid up all week on an expected Fed rate rise, and sold off when that didn’t happen. Had the Fed raised, it would have removed uncertainty and settled markets but also sent a message that global growth is not a worry. The opposite was true. So oil prices fell back, as did base metal prices.

LME prices had been largely stronger ahead of the Fed meeting, and on Friday night copper and zinc fell 3%, lead and nickel 2%, tin 1.5% and aluminium 0.5%.

The US dollar actually recovered on Friday night all it lost on Thursday night post the Fed’s non-decision. The dollar index rose 0.8% to 95.15. This would not have helped commodity prices.

Iron ore ticked up US30c to US$57.10/t.

And gold rose again, by US$7.70 to US$1139.90/oz. Call that a delayed response to no rate rise.

The Aussie is up 0.2% at US$0.7187, despite the US dollar gain. One wonders how long the short-covering support will last.

As noted, the SPI Overnight closed down 76 points or 1.5%.

The Week Ahead

It won’t just be the week ahead, but the quarter ahead, in which we’ll be debating whether the Fed might raise.

Shoot me now.

Is the Fed still “data-dependent”? And if so, whose data? America’s or China’s? On Wednesday we’ll see Caixin’s flash estimate of Chinese manufacturing PMI for September, and if you recall, it was Caixin’s August estimate that sent the proverbial hurtling into the fan a month ago.

Flashes will also come from the eurozone and US, with Japan a day later. Japan is closed until Thursday.

The US will also see existing home sales tonight, FHFA house prices and the Richmond Fed index tomorrow, new home sales, durable goods and the Chicago Fed national activity index on Thursday, and a flash services PMI estimate, fortnightly consumer confidence and another revision of June quarter GDP on Friday.

A quiet week economically for Australia sees a June quarter house price index tomorrow as the only highlight.

On the local stock front, TPG Telecom ((TPM)) will release its FY15 result tomorrow, Nufarm ((NUF)) on Wednesday and Brickworks ((BKW)) on Thursday.

The ex-div season starts to wind down with only a handful this week, but from now the AGM season starts to ramp up, with Suncorp ((SUN)) among the early birds this week. Telstra ((TLS)) will also begin a series of shareholder meetings across the country today.

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. On Wednesday night, 8-9.30pm, Rudi will host Your Money, Your Call Equities on the same channel.
 

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: Taking The Easy Road

By Greg Peel

The Dow closed down 65 points or 0.4% while the S&P lost 0.3% to 1990 and the Nasdaq rose 0.1%.

Expiry

There’s little to say about yesterday on Bridge Street given what has since transpired. Basically we saw the rally kick on thanks to a big rebound in oil prices and some support from base metal prices to ensure energy and materials led the charge from the opening bell.

From that point the magnetic force of index expiry day sucked the ASX200 towards the 5200 level in a big hurry, which has proven to be the top of the post-correction range of late. But given anything could have happened last night in the US and probably would, selling returned in the afternoon to square up positions.

It was still a positive finish by any measure and while it will be interesting to see which way we go today, the good news is the September expiry is now out of the way which means removing a good deal of potential intraday volatility from the equation.

No Go

Wall Street has to wait for tonight for its own expiry, and inherent volatility in the lead-in was evident in last night’s response to the Fed statement.

The Fed did not raise its funds rate. At 2pm, when the statement was released, the Dow was up 69. At 2.04, it was down 52. At 2.12, it was up 67. At 2.30, it was up 4. At 2.48 it was up 181 and half an hour later it was down 44. At 3.30 it was up 22 and at 4pm it closed down 65.

While the approaching expiry would have exacerbated volatility, the bottom line is the Fed managed to create its own volatility. I mentioned yesterday that half the market thought the Fed would raise and half didn’t, and that the market was split on whether stocks would plunge or rally on a yes, or plunge or rally on a no. Well, between 2pm and 4pm Wall Street pretty much did all of the above.

We can’t conclude by the Dow closing down on the session that Wall Street would have rallied on a rate hike, given two strong lead-in sessions and thus likely profit-taking last night. Tonight will be the better indicator, given the smart money typically stands aside from the volatile last two hours post Fed statement. But it’s also quadruple witching.

The Fed has two mandates of control: employment and inflation. The Fed’s two targets in that respect are 5.0-5.2% and 2%. August unemployment came in at 5.1%. Tick box A. Inflation, measured by core CPI, is 1.8%. Do not tick box B. Headline inflation which includes the influence of oil prices, is 0.2%. Go nowhere near box B.

One could say there’s the simple reason why the Fed didn’t raise, but only if it were that straightforward. Aside from suggesting in its statement that the FOMC would like to see higher inflation, the Fed also cited global uncertainty as a reason to remain cautious. Janet Yellen qualified “global uncertainty” at her press conference as meaning China and emerging markets. Three major global institutions – the IMF, World Bank and Bank for International Settlements – had pleaded with Yellen not to raise. Seems she listened.

“Global uncertainty” has unleashed a raging argument amongst Wall Street commentators. On one side, the angry mob is accusing the Fed of playing the role of global central bank when its mandates are simply US-centric. On the other, cooler heads note Yellen’s concern, as qualified in her press conference, is that global uncertainty has weighed on global inflation (in simple terms, weak China, falling commodity prices) and thus US inflation expectations.

The statement showed the net forecasts of all FOMC members for US inflation being lowered from the June meeting, and subsequently projections for the Fed funds rate. In June, four members voted to raise there and then, and last night, only two voted for a raise. It was stated that the majority of the FOMC still want, and expect, to raise in 2015. But it will depend on how global uncertainty plays out, and what the data say in between.

Ms Yellen, if I may have a word. Two major factors have driven global uncertainty all year. One is China. The other is not knowing what the Fed is going to do. And now we still don’t know. The next Fed meeting is in October – too soon. The following is in December, and we recall that in 2013, the Fed chose December to announce the taper.

To my mind it seems the longer the Fed waits to see how “global uncertainty” will play out, the longer the globe will remain uncertain. Thus strike out 2015. Strike out eternity.

Beyond US Stocks

So what were financial markets really expecting the Fed to do? The movements in the Dow, as noted above, underscore the fact the US stock market had no idea.

The US dollar index plunged 0.9% to 94.44. Rate rise expected. The US two-year bond yield has been rising sharply this week, and it fell 11 basis points to 0.70%. Rate rise expected. The ten-year yield fell 9bps to 2.22%. Ditto.

Gold responded to the US dollar plunge in rising US$12.60 to US$1132.20/oz.

The LME closed just as the Fed statement was being released, thus we have to wait until tonight to gauge the response in base metal prices. Nickel and tin dropped over a percent last night but everything else was little changed.

Iron ore pays no heed to such trivialities. It rose US80c to US$56.80/t.

Oil prices jumped about 5% on Wednesday night, so last night’s drop in the US dollar did not affect further gains. Instead, West Texas slipped back US22c to US$46.91//bbl and Brent fell US64c to US$49.24/bbl.

Where to now?

The SPI Overnight about sums it up. The most momentous rate decision in history, and the SPI closed down one whole point, on the new December contract. You can just see “Now what?” written all over futures traders’ faces.

Speaking of December, we now have three long, tedious months of more tiresome will they/won’t they unhelpful Fed rate discussion. If history plays out to typical trends, we’ll bungle our way through the rest of dangerous September and through scary October before November sees some hope returning and Santa starts putting in his buy orders.

By December we’ll have more US jobs and inflation data to consider. Perhaps we will also see the impact of the Chinese currency devaluation starting to flow through, and maybe Beijing will have implemented further stimulus measures. Maybe, as was the case in 2013, the Fed will see a safer environment in which to make its move.

Maybe the Fed was right not to raise just yet. But what we do know is the volatility commentators have been warning about all year that the first Fed rate rise will bring has now been dismissed as a concern. Were at rate rise to cause a Wall Street collapse, as many had warned (even after the recent correction), then by default no rate rise should have meant a big Wall Street rally. It didn’t.

I noted yesterday that in a CNBC survey of US economists, a total of 0% cited interest rates as the greatest threat to the US economy. The Fed had its chance to exploit such disinterest. History shows that central banks are always behind the curve.

Today

It is also interesting that of the same sample set of economists, 0% cited Europe as the biggest threat to the US economy. The Greeks – remember them? – go to the polls again on the weekend.

It’s quadruple witching on Wall Street tonight.

Glenn Stevens will testify before a parliamentary committee today, as he is scheduled to do each quarter.

The changes announced two weeks ago to the constituents of the S&P/ASX stock indices will become effective today.

Premier Investments ((PMV)) will release its FY15 result.

It’s Friday.
 

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article 3 months old

The Overnight Report: Here We Go

By Greg Peel

The Dow closed up 140 points or 0.8% while the S&P gained 0.9% to 1995 and the Nasdaq added 0.6%.

Trigger Happy

Well, everything that was a screaming sell on Tuesday was a screaming buy yesterday on Bridge Street, for reasons only the maniacal herd could probably explain. It was almost a mirror image reversal, not just in ASX200 points but in sector moves as well. What had changed?

Not much. Commodity prices were weak on Monday night and rebounded a little on Tuesday night except for iron ore, which fell sharply again. But the materials sector was up 1.5% yesterday. Oil recovered a little and yet energy jumped 2.6%. And commodities don’t have a lot to do with why the banks rallied 1.9% or the telco 1.8%, having done the opposite on Tuesday.

The only difference was that Wall Street was down on Monday night and up on Tuesday night. It was up again last night and what is really going on is not to do with sentiment driven by some distinct macro influence, but merely positioning, squaring up or just moving to the sidelines ahead of not only the Fed meeting tonight, but the quadruple witching September derivative expiry on Friday night.

On that last point, it should be noted that September SPI futures and options and ASX index options expire today, in a bit of local witching. This can go a long way to explaining the past two days of seemingly mindless movement. We are very near the critical 5000 mark where there are no doubt a lot of options positions struck. The market-makers who sold those options have to madly hedge as expiry approaches, selling into falls and buying into rallies.

Such action becomes increasingly self-perpetuating, and loss-making, as options hedging itself moves markets and by doing so ensures the need for more hedging, thus exacerbating volatility. The official term is that market-makers are “short gamma”. Market parlance calls it “Bad Greek”.

It should also be noted that Tuesday’s plunge took the ASX200 down to 5018 – close to the now well established support level of 5000. Each time the index has bounced off near-5000 levels, it has done so with air of “this is it!” in terms of calling the market bottom.

Amidst a down 80/up 80 couple of sessions we can still derive no implied response to a new prime minister, except perhaps in media stocks, but it’s fair to say the global macro far outweighs any domestic fiscal considerations at this time. All things being equal, we probably would have seen a positive stock market response on Tuesday, but things are far from equal at the moment.

There’s this one little factor called the Fed.

Coin Toss

Okay let’s get this out of the way. My tip: They raise, by 25 basis points to a 25-50bps range, Yellen’s press conference rhetoric is nevertheless dovish, emphasising a very gradual approach to normalising, and Wall Street rallies.

My only caveat is that having already rallied strongly for two days, we might see some “sell the fact” into an initially positive reaction.

But there are plenty on Wall Street who think that if they raise, Wall Street tanks. And there are plenty who emphatically believe they won’t raise.

CNBC surveyed US economists last night and the situation is beautifully summed up by two particular responses. On they will/they won’t, economists are as good as 50-50. When asked what is the greatest threat to the US economy at present, the percentage of those surveyed who believe it’s US interest rates came in at a grand total of – wait for it – zero. The greatest threat is global weakness, according to the largest percentage at 45%.

That will do for now. By this time tomorrow, we’ll know.

For those stuck in a year-long mindset, last night’s rally on Wall Street can be put down to a weak US August CPI reading, implying no rate rise. It’s rubbish.

The headline CPI fell 0.1% to an annual 0.2%, as expected, which is all down to oil prices. The core CPI, ex food & energy, remained at a steady 1.8% annual. The Fed is targeting 2%. And the Fed doesn’t really pay much attention to CPI as an underlying inflation measure.

If the market thought the CPI data would ensure no rate hike, then the US ten-year yield would not have jumped another 10 basis points to 2.28%.

Aside from the squaring up and positioning ahead of tonight following a solid market correction, and ahead of Friday’s expiry, Wall Street rallied again last night because oil rallied – at one point by 6%.

Commodities

It is interesting to note that the high mark for oil in 2008, at around US$157/bbl, was marked shortly after Goldman Sachs called 200 dollar oil. When earlier this week Goldman called 20 dollar oil, many a veteran Nymex trader smiled and thought “we’ve now seen the bottom”.

The oil market is short, so any little thing will trigger a short-covering, snap-back rally, as we have seen several times these past weeks. Last night it was lower than expected US weekly crude inventories, and news that after all this time, the US will have “boots on the ground” in Syria, albeit only in an “assist and advise” role.

Syria does not produce oil but is inexorably part of the whole Middle East geopolitical equation, although on any other day such news would not have sparked a 6% price jump. You need current volatility for that. Prices eased back for their highs so over 24 hours, West Texas is up US$1.98 or 4.4% to US$47.13/bbl and Brent is up US$2.13 of 4.5% to US$49.88/bbl.

It must be noted that Brent last night rolled into the November delivery front-month, so for the next week the WTI-Brent spread is impacted by a timing difference.

It was a very quiet session on the LME last night as traders squared up ahead of the Fed meeting. Copper rose 1% and lead 2%, with the others all making sub-1% moves.

Iron ore fell US40c to US$56.00/t.

Perhaps there were a few investors out there who decided whatever tonight brings, it might be safer just to shift into gold. Gold jumped US$14.90 to US$1119.60/oz last night, despite the US dollar index falling only 0.3% to 95.32.

The world is also short Aussie, so aside from Tuesday’s Malcolm rally another 0.8% gain over the past 24 hours to US$0.7195 is also likely pre-Fed square-up.

Today

The SPI Overnight closed up 35 points or 0.7%.

You know what’s happening tonight. If you’re really keen, 4am Sydney time.

Before we get there, New Zealand will release its June quarter GDP today (if only the Kiwis were as slow on Eden Park) and an RBA Bulletin will be released.

OrotonGroup ((ORL)) will release FY15 earnings today.

Futures and index options expire today.

Rudi will make his weekly appearance on Sky Business' Lunch Money, noon-12.45pm.
 

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.)

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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: Strategy, Coal, Manganese, Steel And Aluminium Scrap

-Time for more miner exposure?
-Coking coal tailwind to come
-Manganese upside limited
-Improved price traction in Oz steel
-Chinese aluminium scrap growing
 

By Eva Brocklehurst

Strategy

JP Morgan has been cautious for some time when it comes to commodity equities but is now advising to tactically add exposure, upgrading mining to Overweight and energy to Neutral. Bearishness on China has prevailed but there are some signs of improvement in the data, while a move on rates by the US Federal Reserve could act as a positive catalyst, providing clarity.

The broker believes the risk/reward is improving, as the mining sector has been the worst performer in the year to date. The iron ore price has picked up since July and is now 30% above its lows. JP Morgan expects commodity prices to be range-bound next year and as earnings downgrades in the sector have already been severe, the downside for equities is likely to be limited.

Commonwealth Bank strategists believe the primary driver of slowing Chinese commodity demand is the weak property sector. New construction activity in lower-tier cities has been hampered by poor demand. The strategists also question how much of China's infrastructure development will translate into incremental commodity demand. Activity in these lower-tier cities appears vital for a rebound in commodity prices.

Stimulus to date is not showing up in China's commodity-intensive sectors because Beijing is largely geared towards safeguarding and reforming the financial sector. As a result, the strategists downgrade commodity price estimates over the next three years, particularly for base metals, coal and energy.

Coking Coal

Metallurgical (coking) coal markets are into a price deflation cycle with prices now well into most cost curves. UBS does not expect prices to gap lower from here, although a gradual easing in US dollar prices is possible. This should be softened by lower producer currencies, which will translate to flat or higher local margins.

Metallurgical coal trade values are falling as China steps away from imports and marginal US and Canadian producers exit the market. A rebalancing of supply is needed in the presence of weak demand, UBS maintains, but falling costs and producer currencies are combining to keep more tonnage in the market for longer.

Still, with the downturn in global mine capex, UBS suspects the future supply pipeline could be dry in a year or two. Then, the coking coal market will capture a cyclical tailwind. Nonetheless, the broker warns, this is not imminent.

Manganese

Manganese ore is being used less intensively per tonne of steel output these days. Currently, 95% of demand for the ore is from the steel industry. Macquarie therefore expects little growth in demand over the next five years. Without meaningful cuts to supply, the broker believes the market will remain in surplus through 2017.

There are arguments that the market may re-balance more quickly than for coal or iron ore, given the prevalence of private miners, which are more constrained in terms of their balance sheet, in the top half of the cost curve. Still, Macquarie believes there is little reason to trade out of the cost curve and investors should limit any manganese exposure to those companies with top assets.

Steel

Goldman Sachs has become more constructive on the Australian steel industry following the restructuring announcements of the major producers, and feedback from recent channel checks. Domestic demand continues to deteriorate but price-led competitive intensity has eased. This results in improving price traction downstream.

The broker's preferred exposure is BlueScope Steel ((BSL)) as it plans to undertake $200m in cost reductions for Australian steel product. The company's exit from structural steel is seen as positive for profitability and this has helped consolidate the number of competing interests in the market.

A global surplus of seaborne steel has provided opportunities for traders to acquire large volume at deep discounts but many have now become wary of the anti-dumping investigations and the heightened risk of holding product when a ruling or investigation is announced.

Aluminium Scrap

On Macquarie's analysis, the returns from the aluminium scrap market are likely to have a significant impact on ingot and raw material consumption by the end of this decade. Usually, scrap tends to be an inelastic source of metal supply and, at least over the shorter timeframe, price sensitive. Benefits from recycling tend to be increased productivity and lower energy consumption in refined metal production.

This is particularly the case for aluminium, given the electricity-intensive nature of smelting. Macquarie believes aluminium scrap recovery now looks set to outpace demand growth. In the broker's view, Chinese aluminium scrap production is likely be one of the fastest growing areas of the global metals markets, with the resultant implications for primary consumption being both significant and under appreciated.
 

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article 3 months old

The Overnight Report: Bond Market Wakes

By Greg Peel

The Dow rose 228 points or 1.4% while the S&P gained 1.3% to 1978 and the Nasdaq added 1.1%.

Welcome Aboard

If Malcolm Turnbull is to restore confidence in the Australian market, as many a commentator has suggested, then he wasn’t exactly off to a flying start yesterday. But not even Malcolm has the power to turn back the tide of volatility still flowing through the local market as a result of global macro uncertainty.

We might again wonder what was going on in the market on Monday, before politics took the spotlight in the afternoon. The ASX200 opened up 60 points and yesterday closed down 78 points. Nothing (outside of politics) had changed in the interim, other than offshore markets had had a chance to respond to the weekend’s Chinese numbers which the Australian market didn’t seem to feel were a problem on Monday morning.

But while falls in the prices of oil, iron ore and base metals on Monday night showed up in falls in excess of 1% for the materials and energy sectors yesterday, every sector bar consumer staples fell at least 1%. This was thus another market sell-off, and simply another day of macro-related volatility. However there was a clear domestic bias to the final result, evoked by the minutes of the September RBA meeting, released yesterday.

While the board gave a nod to the China fears sweeping the globe at the meeting, it suggested the problems had “not impaired the functioning of other financial markets” and that Beijing’s stimulus measures had “not yet had their full effect”. But it was the domestic economic assessment that caused some ripples.

We note that the Shanghai index fell another 3.6% yesterday and was weaker when the ASX closed, adding fuel to the sell-off fire.

Only a month ago, at the August meeting, the RBA suggested: “Domestically, economic activity had generally been more positive over recent months”. But one month later: “Domestically, the national accounts were expected to show that output growth had been weak in the June quarter”. That’s quite a turnaround in a short space of time. June quarter growth was indeed weak, and we recall that the GDP result was released the day after the September RBA meeting.

So back in August, talk of another rate cut had subsided, and some economists were back to suggesting that it won’t be for a while, that the next move in rates will be up. On yesterday’s minutes we’re back to discussing just when the RBA might cut again. The impediment to a rate cut is nonetheless the soaring property market, but that barrier may now be in the process of being dismantled:

“There were indications that the measures implemented by APRA had slowed the growth in lending for investment housing.”

If the door is not yet fully ajar for another rate cut, it’s certainly not slammed shut.

So shouldn’t the stock market applaud the chance of another rate cut? Not if it is implicit of an Australian economy struggling not to slip backwards into contraction. The tenor of RBA rhetoric seemed to switch sharply from quietly confident to concerned from August to September, and there are many, the RBA itself included, who don’t believe another 25 basis points down from 2% would make the slightest bit of difference to business investment intentions.

If businesses aren’t investing for growth when cash is 2%, they’re not likely to suddenly all get up and cheer if it’s 1.75%.

But we needn’t despair. On Wall Street strength the SPI Overnight has closed up 56 points this morning.

Bonds Make A Move

Having hovered around the 2.18% mark for a few sessions lately, the US ten-year yield suddenly jumped 10 basis points to 2.28% last night. Does someone know something? The two-year yield jumped 7 basis points to 0.80% to mark its highest level in four years.

It certainly wasn’t anything to do with strikingly positive signs amongst last night’s US data releases. Industrial production fell 0.4% in August, albeit this was in line with expectations. Retail sales rose by only 0.2% but again that was in line with expectations. Not meeting expectations was the Empire State activity index, which only managed to tick up to minus 14.7 from August’s minus 14.9 when economists had forecast a return to zero.

No great incentive for a rate hike here, but then if the Fed is going to move, these late releases will not be the defining factor.

If the US bond market is suggesting the Fed is going to move, why did the US stock market rally? Shouldn’t a rate hike be “bad” news?

The two great uncertainties on Wall Street, for which there is no consensus view, are whether or not the Fed will hike on Thursday, and whether the US stock market will rise or fall on either outcome. Last night’s rally for US stocks suggests either that the stock market is in diametric disagreement with the bond market about a hike, or a hike will actually be positively received. Volumes were nevertheless light, thus most players are happy just to stand aside until the big announcement.

Which also means most commentators are trying not to read too much into last night’s stock rally and bond sell-off.

Commodities

The selling which gripped the LME on Monday night continued from the open last night before a square-up began, sparking some short-covering. Traders are basically jostling for position ahead of Thursday and only zinc finished lower, down 0.5%, while copper rose 0.7% and nickel rose 1.5%.

Alas, it had appeared only a few sessions ago that iron ore was setting to reclaim the 60-mark but last night saw another US$1.10 fall to US$56.40/t.

West Texas crude nevertheless rebounded, jumping US$1.00 to US$45.15/bbl, but again Brent exhibited dislocation in being barely changed at US$46.63/bbl. The spread is now under two dollars.

The US dollar index followed the lead from the bond market last night in rising 0.4% to 95.61, but commodity prices are not paying too much attention this week. Other than gold, which fell US$3.80 to US$1105.00/oz.

The Aussie is hanging on to its Turnbull adjustment and is steady at US$0.7139.

Today

As noted, the SPI Overnight closed up 56 points or 1.1%.

Tonight’s late mail for the Fed will be the US August CPI numbers, and the eurozone will also see inflation data. US housing sentiment will be in the frame as well.

There is another lump of stocks going ex-div on the local market today.

Rudi will make his usual appearance 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: Quietening Down

By Greg Peel

The Dow closed down 62 points or 0.4% while the S&P lost 0.4% to 1953 and the Nasdaq fell 0.3%.

Mal Content

Is it just me, or did that all seem to happen rather quickly?

There is little doubt yesterday’s rather bizarre trading pattern for the ASX200 included an overlay of domestic political uncertainty, although such intraday volatility is typical of a market attempting to consolidate after a correction. Commentary continues to point to “weak” Chinese data delivered over the weekend, but a 60 point opening rally for the Australian index might suggest otherwise.

As “weak” data goes, Sunday’s numbers were on the less disappointing side, given a slight “miss” on industrial production forecasts was offset by a slight “beat” on retail sales. But sixty points did seem a stretch, particularly when there are still those looking to sell out of investments for fear this correction is not necessarily over yet.

Thus we went back down again, and then up again, and then down into the red, briefly, before closing up 24 points, which on a close-to-close basis looks like a quiet day. But by the four o’clock bell, domestic uncertainty was rife.

As has oft been noted, stock markets are ambivalent to the political stripe of government – there is no correlation in Australia of market performance and Coalition or Labor governments – and presumably that stretches to who is actually in charge of the government. What markets fear is uncertainty, and this year constant talk of the prime minister being challenged and the treasurer being replaced has provided plenty of it at a time of global upheaval.

Last night the uncertainty ended. One presumes that unlike the prime minister he replaced, Abbott will not haunt the corridors and manage to muscle his way back in at the eleventh hour. Aside from ending the uncertainty, Turnbull brings to that table some distinct differences that should register as positives with the stock market: economic and business experience, widespread electoral popularity, oratorical eloquence (aiding policy justification) and climate change recognition. The latter might send some ripples through the fossil fuel industry, but when we consider many large energy companies are actually leading the alternate energy drive, up until now with a hostile government, the critics will find themselves a lonely collective.

But enough about politics, what’s done is done, and we still have to get past Thursday’s Fed rate decision, whatever that may be. Although it’s interesting to note the Aussie has done nothing but run up since the spill was announced, despite a steady US dollar.

Follow the Oil

If Bridge Street seemed unfazed about the Chinese data from yesterday’s opening bell, perhaps even seeing “not terrible” as “good”, the same cannot be said for commodity markets overnight. The weak August Chinese industrial production number was cited in the metals and oil exchanges as the reason for downside.

If there is an element of fear driven by the notion Beijing has been throwing everything bar the kitchen sink into stimulus and it has not worked, we should at least note that the sledge hammer of currency devaluation occurred in August and will take time to have an impact, and indeed the earlier interest rate and RRR cuts need, in theory, a good six months of run-time before their impact becomes evident.

The commodity markets are a hotbed of frayed nerves at present, and every little thing looks catastrophic. The oil markets are a case in point, and last night when WTI opened lower, so did Wall Street.

It was Rosh Hashana last night, ensuring trading volumes were light. While the Dow was down a hundred points at one stage before picking up towards the close, it was the least volatile session of intraday activity since August 18. Aside from the Jewish holiday, Wall Street probably would have banged along the flatline if it were not for oil. All anyone can talk about otherwise is the Fed, and no one knows what Thursday will bring.

Commodities

West Texas crude was down over 3% before kicking back up in electronic trading to be down only 1.4% over 24 hours, or US63c, to US$44.15/bbl. Interestingly, Brent did not rebound, and is down 3.2%, or US$1.56, to US$46.59/bbl.

This is interesting because it means the Brent-WTI spread is back at roughly two dollars. For a long time this was considered the “normal” spread and very infrequently would that gap move much one way or the other, except in the last decade, which has seen it blow out to as much as US$27. It’s taken that long to come back again, largely reflecting the gradual easing of storage and transport problems in the US.

Only tin managed to hold up against China-driven selling pressure on the LME last night. Aluminium, copper and lead all fell around 2% and nickel and zinc fell 4%.

Iron ore fell US$1.00 to US$57.50/t.

The falls had nothing to do with the US dollar, which was only a tad higher at 95.26 on its index. Gold, subsequently, is as good as steady at US$1108.80/oz.

The Aussie does pay attention to the US dollar, given it is the denominator of the exchange rate, so the 0.7% gain last night to US$0.7138 all came out of Canberra.

Today

The SPI Overnight closed down 29 points or 0.6%, which, in isolation, is simply a reverse of yesterday’s ASX200 close and a reflection of Wall Street’s and commodity markets’ responses to the China data. So if this is the starting point, we will then have to see whether the Turnbull factor in the currency can be replicated in the stock market.

The minutes of the September RBA meeting are out today, and it will be interesting to read what the board felt about China’s stimulus efforts and Fed speculation.

The Bank of Japan meets today but presumably will do nothing until that other central bank makes a decision, if anything was going to be done anyway.

There are some important US data releases due tonight, including August industrial production and retail sales. However, as I have suggested, it would be a flippant “data-dependent” Fed to wait for such late mail to inform Thursday night’s decision.
 

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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

The Monday Report

By Greg Peel

Friday

Investors would have been relieved by Friday’s trade on Bridge Street which did not see any wild swings either way for a change. It was volatile, but in a tighter range and without much conviction. The ASX200 was down 40 early on and up 20 at lunchtime before meandering to a close of down 24.

For the first time in the week the banks were not a significant feature of index movement. Energy, healthcare and the telco saw falls of over 1% but all other sector movements were benign. Once again it was very “Friday”, ahead of a weekend featuring another round of Chinese data possibly set to scare the world again and ahead of a critical Fed meeting.

Wall Street

Wall Street’s Friday session was not dissimilar, the difference being the Dow opened lower on a weak lead-in from Europe before rallying hesitantly throughout the day to be up 102 points or 0.6% on a late kick. The S&P closed up 0.5% at 1961 and the Nasdaq rose 0.6%.

Once again traders had their focus firmly fixed on the oil price, such that a wobble in WTI mid-session was reflected in a temporary drop back to the flatline for the stock indices.

Oil opened lower from the outset, until the weekly US rig count showed a reduction of ten rigs. This was enough to promote a rebound but just when oil looked like heading into the green, out came a note from Goldman Sachs.

In 2008, Goldman Sachs famously called WTI at US$200/bbl as the US dollar collapsed on emergency Fed rate cuts and geopolitical tensions underpinned. The price ultimately peaked near 157 intraday. Last night’s note from Goldman called oil at US$20/bbl.

It is not the investment bank’s “base case” scenario, and indeed the analysts ascribe only a 50% chance of 20 dollar oil. For a while now we’ve heard many a commentator suggest oil in the thirties is not out of the question but this is the first call in the twenties from a major house.

Goldman’s base case has oil trading at US$38/bbl in one month and US$45 in twelve months. The analysts’ previous forecasts had US$45/bbl in one month and US$60 in twelve. So if we dismiss the 20 call for the moment (no doubt Goldman’s trading desk is short oil) we are still looking at a sizeable downgrade from the major house. It is not a call based on lack of demand, but on oversupply.

To that end, an oil price recovery still requires an awful lot of marginal supply to be shut down, and/or small oil companies going to the wall. The latter scenario interestingly brings us back to the Fed.

Wall Street is concerned that were the Fed to raise this week, collateral damage may be significant in emerging market currencies and in bank loans to small oil companies. There is a significant level of loans in the industry that at the time required oil price hedges in place before banks would hand over the money. Those hedges were typically for twelve months, beyond which hedging starts to become overly expensive.

It is now over a year since oil prices began to plunge, thus hedges have been rolling off. We’re not talking GFC II, but there remains concern a move towards normalisation from the Fed may set off a mini-crisis among regional banks in particular.

We enter the final week with the US bond market still suggesting no September rate hike (the ten-year yield fell 4 basis points to 2.18% on Friday night and has been as high as 2.50% this year when rate rise expectation was most rife) and the Fed futures market giving September less than a 50% probability. Those suggesting the Fed will raise this week are mostly stock market players.

Three more sleeps.

Commodities

Between a US rig count reduction and Goldman’s new price targets, West Texas was down US95c to US$44.78 on Saturday morning. Brent was down US62 to US$48.15/bbl.

Base metal trading was mixed and mostly insignificant. Lead traded a 1% drop with a 1% gain for tin.

Singapore had a holiday on Friday so iron ore is unchanged at US$58.50/t.

The US dollar index fell 0.4% on Friday to 95.18 which helped the Aussie up 0.2% to Saturday morning at US$0.7091.

Gold is relatively steady at US$1107.70/oz.

The SPI Overnight closed up 25 points or 0.5% on Saturday morning.

China

Yesterday Beijing provided a data dump of August numbers.

Industrial production grew by 6.1% year on year, up from 6.0% in July but below 6.3% forecasts. Retail sales grew by 10.8%, up from 10.5% and above 10.6% forecasts. Fixed asset investment grew by 6.3% year to date, in line with July and in line with forecasts.

The global proxy for trading China’s economy is the Aussie dollar. On Saturday morning the Aussie was at US$0.7091 as northern hemisphere traders hit the showers and this morning it’s at US$0.7084 as southern hemisphere traders pull on their boots. It’s an insignificant difference, reflecting a set of Chinese data that for once did not materially disappoint on a net basis.

The Week Ahead

It’s a Jewish holiday in the US tonight which takes a lot of Wall Street out of the scene. Wednesday night brings the Fed rate decision and a quarterly press conference from Janet Yellen. One might safely assume global markets will be dead quiet in the run-up but that hasn’t always been the case ahead of critical Fed meetings.

On Wednesday morning the US CPI is released for August, and inflation is the other big factor for Fed policy outside jobs. However, one presumes the fate of the world will not hinge on such late mail, and besides, the Fed prefers the personal consumption and expenditure (PCE) inflation measure as its benchmark.

Other US data releases this week include industrial production, retail sales, business inventories and the Empire State activity index tomorrow night, housing sentiment on Wednesday, housing starts on Thursday and leading economic indicators on Friday.

Friday is also the September quarter quadruple witching expiry of stock market derivatives.

The eurozone will see industrial production, trade, unemployment and inflation data across the week as well as the ZEW sentiment index on Tuesday, just to remind us Europe is still there. The Bank of Japan will hold a policy meeting on Tuesday but is likely to be in wait-mode like the rest of us.

The minutes of the September RBA meeting are due on Tuesday, an RBA Bulletin will be released on Thursday and on Friday, Glenn Stevens will provide a scheduled testimony to a parliamentary committee.

Australian data are thin on the ground this week. In the stock market, Thursday sees the quarterly expiry of ASX futures and index options and on Friday the pre-announced quarterly index promotions & relegations will take effect.

This week brings earnings results from New Hope Coal ((NHC)) today, OrotonGroup ((ORL)) on Thursday and Premier Investments ((PMV)) on Friday.

There are still a few more ex-divs to work through.

Oh, and Greece will hold an election on Sunday. I’m sure it will all go smoothly.

Rudi will appear on Sky Business on Wednesday at 5.30pm and 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: Counting The Days

By Greg Peel

The Dow closed up 76 points or 0.5% while the S&P gained 0.5% to 1952 and the Nasdaq added 0.8%.

Back in your box

This week we have seen the ASX200 dip below 5000 on the open on Monday morning following weakness on Wall Street, but recover to close above that mark for the third time since the correction. This suggested 5000 is a floor, and it was thus no surprise the index took off on Tuesday.

But Tuesday also featured Woodside’s takeover bid for Oil Search, thus prompting outperformance for the energy sector. Meanwhile, investors decided that at these levels, the beaten-down banks looked attractive, particularly on a yield basis.

Having rallied over 2% on Tuesday, the banks rallied again by over 3% on Wednesday. The financials sector was far and away the major driver of the ASX200’s recovery to 5200. Then yesterday, the wheels fell off.

The biggest loss yesterday was reserved for the energy sector – the sector which had stuck its neck out a bit far earlier in the week. It fell 3.8%. Sure, the oil price fell again overnight, but while WTI has been to-ing and fro-ing of late with heightened volatility, it has really only oscillated around the mid-forty level without going anywhere much. Analysts do not expect Woodside’s bid to succeed but that matters not. Energy sector M&A has been anticipated for some time and the Genie is now out of the bottle.

Outside of energy, every sector copped a beating yesterday of 1.5 to 3% (excluding insignificant info tech). The banks lost 2.7%, but then the telco lost 3.0%. Materials fell 2.1% despite another tick-up in the ore price and stability in base metal prices. Yesterday was thus an index-selling day, rather than a sector-specific attack. The selling is thus not yet over, and it is likely the two dark clouds of China slowdown and Fed rate decision are ensuring enough fund managers are still not convinced the story has played out yet.

The good news is that yesterday took us back to just below 5100, and not all the way back down to 5000. While sell-on-close orders forced a late dip, the low of the day was actually just before midday, so we did not close on the low. If the index holds its ground today (SPI Overnight up 21 points), and being a Friday we should see less volatility, then we will have established a higher low. A positive sign, for now.

The Fed remains the swing factor. But one thing to remember is that the bottom of a correction is never immediately apparent at the time. More realistically, investors wake up one day to realise that the dust has settled and the market is actually moving up again.

Data

The ASX200 bottomed yesterday on the release of the local August jobs data. While the unemployment rate fell to 6.2% from 6.3% in July as expected, the actual jobs added figure was greater than expected. The jobs market is holding pretty steady for the time being.

The result sparked a big surge in the Aussie – unsurprising given everyone’s short. Market volatility and the China slowdown have recently heightened the possibility of another RBA rate hike, and this week’s RBNZ rate cut only served to further fuel that fire, but RBA rhetoric is suggesting nothing of the sort. The Aussie spiked on the release and kicked on overnight on a weaker greenback to be up 1.2% at US$0.7076 this morning.

Alongside the local jobs numbers yesterday we saw China’s August inflation data. The good news is China’s headline CPI jumped up to 2.0% annual growth from 1.6% in July. The bad news is most of that jump was due to a surge in volatile pork prices. Beijing does not publish a core (ex food & energy) inflation number so economists have to make their own calculations.

The other bad news is that the headline PPI fell for the 42nd consecutive month to be down 5.9% annually. That’s a drop from July’s 5.6% and the worst reading since September 2009’s minus 7% at the time commodity prices were crashing. The good news is this number will only encourage Beijing to steel its stimulus resolve.

Wall Street

Markets were weak across the Asian time zone yesterday and that weakness carried into Europe and the UK. But whereas this might typically prompt early weakness on Wall Street, instead the US stock indices rallied in the morning. The impetus for the rally was yet another volatile session for the oil price, which jumped 4%.

By 2pm the Dow was up around 190 points but that’s when the Nymex closed and oil trading went electronic. The WTI price drifted back a little, and so did US stocks, almost back to square. Late buying saved the day.

Fed, Fed, Fed – that’s all anyone can talk about. Until the September meeting is concluded next Wednesday night, we can’t expect any great market move beyond ongoing intraday volatility. Last night Goldman Sachs put out a note reiterating its call that the Fed will not raise in September, but in December. We might call this simply one view among many, except for the disturbing relationship Goldman has with the US Treasury and the Fed.

Last night the US ten-year bond yield rose 4 basis points to 2.20%.

Commodities

Latest prices have West Texas crude up US$1.60 or 3.6% at US$45.73/bbl. Brent is up US$1.27 or 2.7% at US$48.77/bbl.

Base metal trading was again subdued last night except for nickel and tin. Nickel decided to jump 4% and tin 2%.

Iron ore jumped US$1.60 to US$58.50/t.

The US dollar index fell 0.4% to 95.54 allowing gold to claw back US$4.90 to US$1110.30/oz.

Today

As noted, the SPI Overnight closed up 21 points or 0.4%.

It would not be surprising to see another very “Friday” session today, in which the week’s volatility wanes and no one wants to get excited either way ahead of the weekend.

On Sunday Beijing will release August industrial production, retail sales and fixed asset investment numbers.
 

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