Tag Archives: Iron Ore

article 3 months old

Material Matters: Alumina, Nickel, Iron Ore, And Oil & Gas Equities

-Supply gap widens for aluminium
-No rush to buy nickel
-Steel contraction potential
-Bad news peaking for oil & gas
-But that does not mean a rally
 

By Eva Brocklehurst

Alumina and Aluminium

Can the alumina price recover in the next six months? This is the question Credit Suisse asks. If China's aluminium smelters ramp up as planned then the shortfall in alumina should peak in the December quarter and push up the price, attracting imports. On the other hand, the broker suspects aluminium smelters need to curtail output by 2.4mtpa this year, bringing forward the peak to the current quarter when prices are falling. If smelter reductions are forthcoming the broker finds little reason for alumina to recover.

The alumina price is at its lowest level since 2009. The fall reflects imbalances in the speed of the ramp-up in aluminium smelters and alumina refineries. In the first half of this year China faced a glut in alumina which drove down prices.

Alumina refineries have ramped up faster than aluminium smelters. Looking forward, aluminium smelter curtailments in China are a major near-term risk. China has a heavy aluminium surplus and will have to curtail smelting as exporting the surplus is no long economic. With smelter output being curtailed and alumina demand dropping a recovery is unlikely. Given prices are still heading lower, Credit Suisse cannot find any support for upside to alumina prices over the next six months.

Nickel

Demand is key to the nickel market as Macquarie continues to witness prices weakening despite a structural deficit looming. Until global growth prospects improve the analysts believe there is no rush to buy nickel. The June quarter was weaker than initially expected, not just in China, but Macquarie has become even more bearish about Chinese demand in the second half and no longer finds compelling evidence for a strong rebound.

A small surplus is now expected, rather than the emergence of deficits from 2016 onwards. The overhang of inventory in the market appears higher than previously projected. A more bullish pricing outcome is predicated on widespread closure of supply capacity and any rebound in stainless steel orders. However, growth in global industrial production has stalled in recent months, leading to a slowing in underlying consumption.

On a positive note, there has been a big fall in average operating costs, reflecting lower ore prices, power costs and transport costs, as well as currency weakness against the US dollar. The other positive is that the price of nickel in stainless steel scrap has risen sharply in Europe in recent months, reflecting higher production following anti-dumping duties on EU imports of stainless steel from China and Taiwan, as well as the sharp rise in Chinese imports of ferronickel.

Longer term, Macquarie retains a bullish stance on nickel. When short covering begins prices could move up very quickly although the broker believe time is running out for a significant rally in 2015.

Iron Ore

The surprise devaluation of the Chinese currency provides more proof the company's growth engines are cooling. The question for Goldman Sachs is how this will play out for the inputs to China's copious steel production. While significantly impacting coal, the effect on the iron ore market is likely to be more muted, in the broker's view. Imported coal must be priced competitively against China's domestic coal. In the case of iron ore, imports are expected to displace Chinese concentrate.

The potential increase in Chinese steel exports as a result of the devaluation could displace steel production elsewhere, while the introduction of tariffs and quotas should moderate the amount of cheap steel the rest of the world is willing to buy.

Goldman Sachs observes iron ore supply and demand could diverge even further. Iron ore exports from Brazil and Australia have been affected by bad weather and port maintenance issues and low inventory levels in China have left buyers exposed to further disruptions. The broker expects the upcoming weaker seasonal period for steel production will mean supply diverges further from demand as seaborne producers put operational issues behind them.

Goldman expects peak steel production will be followed by a contraction. The greater the delay before demand is allowed to fall to a more sustainable level, and the longer marginal iron ore producers benefit from capital inflows and prices above marginal costs, the more abrupt the transition is likely to be.

Up until recently, excess supply would have been taken up as inventory. In the current climate, optimism about future demand growth appears to be lacking, the broker observes.

Oil and Gas Equities

Another down-leg for the energy sector is unlikely, Morgan Stanley maintains. The upcoming reporting season for stocks will probably be about balance sheets and preserving capital. Bearish sentiment is seen near its peak and some equities are now deeply discounting long-term assets. The broker does not expect a rally, if the lacklustre performance of global energy equities is a guide. Just that there are few bull points on the horizon and bad news may be peaking.

Those equities which are deeply indebted need to sell assets and make additional reductions in expenditure, the broker maintains. Dividends are at risk. If coming from debt rather than free cash flow they will need to be cut, eliminated or underwritten. Morgan Stanley acknowledges the area for positive surprises lies in the depth and extent of expenditure cuts. The only company which has its dividend profile covered by cash flow at US$60/barrel is Oil Search ((OSH)) but the broker observes the yield is low.

Woodside ((WPL)) may respond with downward adjustments to its pay-out ratio, the broker contends. Both Santos ((STO)) and Origin Energy ((ORG)) have taken on large amounts of debt to complete LNG developments and their share prices reflect expectations of a funding gap. Morgan Stanley believes both have unsustainable dividends which, at the very least, are likely to be underwritten.

There are mounting pressures on the oil price, which may delay any meaningful recovery in the price until 2017, the broker maintains. These pressures are coming from resilient US supply, de-stocking in China, easing of Iranian sanctions and no effective OPEC response. Australian companies are not considered well positioned to withstand US$50/barrel oil prices, should they prevail. Still, the industry has survived an oil slump before. The response, the broker notes, was to cut spending.
 

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article 3 months old

The Overnight Report: Range-Bound

By Greg Peel

The Dow closed up 67 points or 0.4% while the S&P gained 0.5% to 2102 as the Nasdaq jumped 0.8%.

Adjustments

Commonwealth Bank ((CBA)) shares recommenced trading yesterday having successfully put away the institutional allocation of its $5bn capital raising and despite the 10% discount offered on the rights issue, fell only 1%. This contrasts heavily with ANZ Bank ((ANZ)) which, the week before, placed new stock at a 5% discount and saw its shares open down 7%.

The vote of confidence in CBA prompted a vote of confidence in the banking sector in general yesterday, which ultimately finished up 0.5%. Buyers are clearly interested in returning following the capital raising sell-offs as yield once again becomes difficult to ignore.

However it must be remembered that index-tracking funds and other large institutional investors in the Australian market must hold the banks, which represent over a quarter of market capitalisation, and therefore must buy CBA to reweight their portfolios. Ditto ANZ. Something then must be sold to adjust across both sector and index weightings.

The ASX200 was off to a flyer yesterday, aided by some reasonable earnings reports, and at 11am was up 43 points. But that was the end of that. Perhaps it provided a good opportunity to sell whatever it is one chooses to sell to fund new CBA shares.

Japan would not have helped either, posting a June quarter GDP result of minus 0.5% quarter on quarter growth, down from plus 1.0% in March. While not unexpected, it does bring into question the success, or lack thereof, of Abenomics. The June quarter saw 1.6% annualised GDP contraction. Exports are down 16.5%. Household consumption is down 3.1%. Inflation is nowhere to be seen.

Massive debt-funded QE may have driven optimism two years ago but the subsequent fiscal trade-off of an increased sales tax has killed off the momentum. Japan is Australia’s second biggest trading partner.

Familiar Territory

Wall Street was stunned at the open of trade last night when the Empire State activity index came in at minus 14.9, down from plus 3.9 in July, when economists had expected a rise to plus 4.5. It is the worst reading since April 2009.

The Dow promptly fell 120-odd points on the news, but in contrast, the US housing market sentiment index saw a one point rise to 61 to mark the highest level in a decade. The Dow then ran all the way back, and more.

The argument is that the Empire State index is merely a measure of one manufacturing region – New York State – and not a national indicator, and moreover it can be, and has been of late, very volatile. Housing sentiment, on the other hand, is national.

Or you can argue that the opening plunge based on the Empire State result was overrun by those cheering on weak data, as it implies delay from the Fed. The US ten-year bond yield fell 5 basis points to 2.15%.

Or you can look at the reality, which is that every time the broad market S&P500 index falls below its 200-day moving average, the buyers step in. This has been the case all year. Hence the S&P first hit 2100 in January and last night returned to 2100, having done nothing but travel backwards and forwards across that mark for eight months, whatever has been thrown at it – Greece, China, you name it.

We could speculate that given January was around the time debate began in earnest over a first Fed rate hike, all Wall Street has done ever since is mark time until the policy change is confirmed.

Commodities

A slowing economy has not stopped China increasing its production of metals. Data over the weekend showed production of aluminium, copper and nickel all rose in July, a point which was not lost on the LME last night. Base metal prices were all flat to modestly weaker.

Iron ore fell US20c to US$56.00/t.

The pervading opinion in oil markets is now one of oil must go lower. For a while there, after the rebound, the pervading opinion was US$50-60/bbl for WTI was about right, but not so anymore. West Texas fell US22c last night to US$41.91/bbl and Brent fell US47c to US$48.72/bbl.

Gold rose slightly to US$1117.40/oz despite a 0.3% gain for the US dollar index to 96.82. The Aussie is steady at US$0.7373 ahead of today’s release of the RBA August minutes.

Today

The SPI Overnight closed up 11 points or 0.2%.

Aside from the RBA minutes the focus today and for the next two weeks will be on corporate earnings reports. Highlights today include Asciano ((AIO)), Challenger ((CGF)), Dick Smith ((DSH)) and QBE Insurance ((QBE)).

We have now passed the halfway mark, time-wise, in the result season, but only a quarter of reports are in. The rest now flow in an avalanche.

The score card to date, according to the FNArena Reporting Season Monitor, is beats and misses equally on par but FNArena database broker upgrades to downgrades running at 29/18.

Please note that CBA goes ex-dividend today, as do a number of other stocks, so the index will start with a handicap.
 

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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)

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article 3 months old

The Monday Report

By Greg Peel

Oil Worries

It was the energy sector that took the big hit on the ASX on Friday, driven down by falling oil prices and the belief West Texas crude may be poised to fall into the thirties, thus revisiting GFC lows.

Energy fell 3.7%, and next worst performer on the day was materials with a 1% fall. The banks also fell 0.5% to round out a tough couple of weeks since the ANZ capital raising announcement. Commonwealth Bank ((CBA)) is also raising capital, and will come out of its trading halt this morning.

To add insult to the injury of bank sector woes, the Australian market in general copped an additional beating last week thanks to the sudden and poorly explained Chinese currency devaluation. Beijing has been at pains ever since to insist the devaluation is not about boosting China’s flagging export economy via currency wars but about moving the renminbi towards a marker-based pricing mechanism, as the IMF has entreated the Chinese to do so.

Fair enough, but the timing is certainly interesting. And while the last thing we need is for Beijing to begin disclosing possible policy moves a year ahead, a la the Fed, so we can all die of frustration debating the issue for the months and months preceding, it would be nice if Beijing at least made their explanations at the time of the event, rather than in a scramble a day or two later.

The local index attempted to stabilise after a torrid week on Friday morning, but was unable to hold out. When the ASX200 broke support at 5380, the technical sellers poured in in the afternoon.

As You Were

Australia has felt the pain but the US stock market did manage to recover ground last week after the initial renminbi volatility spike. Wall Street remains very much stuck in its 2015 range, and will no doubt remain stuck at least until the September Fed meeting.

On that note, Friday night featured a 0.6% rise in July US industrial production when 0.4% was forecast. The previous two months’ numbers were also revised upwards. The US producer price index rose a muted 0.2% in July after having risen 0.4% in June. The impact of lower oil prices is clearly evident in the annual headline PPI rate of minus 0.8% against the annual core rate, ex food & energy, of plus 0.9%.

Friday’s data sufficiently offset each other to provide no fodder for either side of the Fed timing debate, and no real impetus for Wall Street. It was only the news from Europe that provided a little boost as the week came to a close.

The Dow closed up 69 points or 0.4%, the S&P gained 0.4% to 2091 and the Nasdaq added 0.3%.

You might remember Greece? Well on Friday night the eurozone signed the deal that will see Greece receive E86bn over the next three years in bailout package number three. Packages number four, five, six and so on remain pending. As to whether this is enough to save Greece from economic disintegration in the meantime remains to be seen.

The deal’s approval was more of a rubber stamp than a source of great market relief but at least Greece might slip out of the news now for a while. The approval also managed to soften the blow from the eurozone’s June quarter GDP result, which showed an easing to 0.3% quarter on quarter growth following March’s 0.4%, for an annualised growth rate of 1.3%. Germany’s growth rate improved but not by as much as hoped, while France’s economy stagnated once more.

The best we can say of Mario Draghi’s QE package at this stage is that it has stopped the rot, and brought stability to the European economy if not raging growth. Of course, China’s currency devaluation is not going help an economy dependent on exports.

Commodities

It was a mixed bag on the LME on Friday night, with lead up around a percent, nickel a percent and a half and tin two and a half but aluminium, copper and zinc all fell asleep.

Iron ore remained unchanged at US$56.20/t.

The oils found some stability, having fallen 20% in a month and looking dangerous. West Texas was down slightly at US$42.13/bbl and Brent was down slightly at US$49.03/bbl.

Gold was steady at US$1113.70/oz as the US dollar index rose a tad to 96.52.

The Aussie is up 0.3% at US$0.7379.

The SPI Overnight closed up 9 points on Saturday morning.

The Week Ahead

US inflation – the weakness of which is the main reason supporting the “not in 2015” side of the Fed rate rise argument – will be in the frame again this week with the release of the US CPI on Wednesday.

The US will also see housing sentiment and the Empire State activity index tonight, housing starts on Tuesday, and existing home sales, leading economic indicators and the Philadelphia Fed activity index on Thursday. Wednesday also sees the release of the minutes of the last Fed meeting but any specific clues are unlikely.

The release of the minutes of the August RBA meeting is the only real economic highlight for Australia this week. Given the meeting pre-dated the Chinese currency revaluation, the minutes will not be of any great value.

Instead, the Australian market will be heavily focused on corporate earnings this week, as the gentle trickle of reports to date turns into a barrage.

Today’s highlights include Aurizon ((AZJ)), Charter Hall ((CHC)) and Newcrest Mining ((NCM)).

And a reminder that CBA recommences trading today following its announced 10% discounted rights issue.

Rudi will appear on Sky Business on Wednesday at 5.30pm.
 

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: Confusion

By Greg Peel

The Dow closed up 5 points while the S&P lost 0.1% to 2083 and the Nasdaq fell 0.2%.

Not a Devaluation

The PBoC is not deliberately devaluing the renminbi in a desperate attempt to revive China’s export economy, it is merely allowing the market to determine the exchange rate in a step towards floating the currency. At least that’s what the Chinese central bank has declared.

Yesterday the PBoC marked down the renminbi another 1.1% against the US dollar, representing the third “devaluation” in three days for a total 3.5%. Again, the reduction was in response to the market’s perceived level, but the good news this time is that the market did not sell down the renminbi any further, as it had done in each of the previous two days.

The market has been selling on the expectation the PBoC will ultimately “devalue” the renminbi by 10% to adjust for the perceived level of overvaluation of the Chinese currency against the global foreign exchange market. But yesterday the PBoC talked down such speculation, suggesting there is no reason for the currency to depreciate any further given a “strong” economic environment in China, a sustained trade surplus, sound fiscal position and deep foreign exchange reserves, all of which provide “strong support” to the exchange rate.

“Strong” economy? Suffice to say, economists are expecting the renminbi to eventually be devalued by 10%, just not all in one hit. China’s July producer price index, which fell 5.4% year on year to mark its biggest drop since 2009, is the biggest clue. Beijing is trying to head off deflation.

But how does the rest of the world respond? Well at the moment, it appears confusion reigns. After two days of steep falls, European stock markets managed to rally back somewhat last night. On Wednesday night the Dow fell 277 points before closing flat and last night rose 79 points before closing flat.

The Australian market was a rabbit in the headlights on Tuesday, freaked out on Wednesday, and attempted a comeback yesterday only to be slapped back to flat in the final hour of trade.

The problem here is one of disclosure, which is not China’s strong suit. The Fed has now learned to prepare markets for policy changes, to the point where we spend an entire, tedious, tiresome year discussing whether QE3 is coming, a taper is coming, a rate rise is coming…until everyone just wants to get it over and done with. Mario Draghi flagged QE for a good two years before he actually did anything.

The PBoC, on the other hand, feels no need to warn anyone of anything. The result is global market turmoil. One day the PBoC, too, will learn.

Choppy

The ASX200 chopped its way to be up 44 points just after 2pm yesterday as investors absorbed the China story, Wall Street’s impressive turnaround overnight and various local earnings reports. By the closing bell the index was up only 5 points.

The market was not thrilled with Telstra’s ((TLS)) dividend, sending the stock, and thus the telco sector, down 2%. After being trounced on Wednesday the resource sectors made a comeback, with energy rising 1.5% and materials rising 0.7% to be the leaders in the green of what was a very mixed bag of sector moves – not unusual in a result season.

Unfortunately for bargain hunters in energy names, West Texas crude last night traded under US$42/bbl briefly – its lowest level since March 2009 (when QE1 was introduced and the US dollar tanked).

We can again note that the support level for the ASX200 is 5380, which we’ve bounced off once, and yesterday we closed at 5387. The next level is 5100.

Sales Boost?

July US retail sales rose 0.6%. Although just shy of 0.7% forecasts, both the June and May numbers were revised higher, painting a brighter picture for the US consumer sector. At the same time, as noted, oil tanked again, and yet again bargain hunters in Wall Street energy names were forced to cut and run.

There is a growing concern weak energy prices are ultimately going to lead to deflation across the globe, and potentially in the US as well. For almost a year the expectation has been that US consumer spending would rise to provide the offset. This didn’t happen for months, but maybe it’s starting to happen now. But energy is an input into a lot more than just consumer petrol tanks, and thus consumer pockets via lower petrol prices. Hence the deflation concern.

Which brings us back to the Fed, and the aforementioned never ending debate over a September rate rise. Thank God there’s only one more month to go to find out. But at the moment, Wall Street, like Bridge Street, is just not sure what to do.

After its big fall on Wednesday night, last night the US dollar index was only a little higher at 96.39. The ten-year bond yield nevertheless bounced back 6 basis points to 2.19%. The US bond market, forever far less fickle than the stock market, also seems confused at present.

Commodities

With the dollar stable, base metals prices were mostly a little lower last night, with aluminium and nickel down around a percent.

Iron ore rose US40c to US$56.20/t.

West Texas closed down US$1.09 to US$42.24/bbl and Brent lost US61c to US$49.15/bbl.

The gold bugs are excited again, believing that Chinese investors, having been burnt in the property market, burnt in the stock market, and now finding their currency devalued from underneath them, will return to buying gold. But last night gold fell back US$10.90 to US$1114.60/oz.

The Aussie is 0.4% lower at US$0.7358.

Today

The SPI Overnight closed down 8 points.

The eurozone will release its first estimate of June quarter GDP tonight.

On the local earnings front, Automotive Holdings ((AHG)) and James Hardie ((JHX)) are today’s highlights.
 

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: Reversal

By Greg Peel

Float on By

Perhaps we can blame the IMF, which told Beijing recently, in rejecting China’s application for the renminbi to be included in the fund’s basket of global reserve currencies, that Beijing must first let the renminbi float. A PBoC devaluation is not a float, but the intention is to take a step towards such a goal. Yesterday the PBoC followed up Tuesday’s 1.9% renminbi devaluation with a further 1.6%.

The central bank did so because that’s where the market was indicating the renminbi should be. The Chinese currency is pegged only to the US dollar, and in revaluing the currency over the past several years against the greenback alone, the PBoC has failed to account for large valuation variances against other major currencies, such as the yen and euro. In devaluing, the PBoC is trying to find the right overall level.

The problem yesterday was that the PBoC responded to the market but then the market went again, selling the renminbi down further in what threatened to become a self-feeding spiral. Thus on the close of trade in China (long after the close on Bridge Street) the central bank intervened to stabilise the currency.

This is not a sinister response – every central bank, including the RBA, intervenes on occasion to prevent excessive currency volatility.

But it does show that Beijing is nervous, and highlights that the Chinese government is rather new to this game. The stock market debacle of last month was enough to give them the willies and so yesterday they got a little jumpy again. The issue for the rest of the world is one of just how bad is the Chinese economy right now? While the currency devaluation may have come at the IMF’s behest, there’s no masking the fact this is Beijing’s “shock & awe” stimulus tactic.

But as opposed to Beijing’s massive fiscal stimulus package of 2008, this form of stimulus is linked directly into the global financial market system. There is now great concern what the impact will be on Other Asia, which is so closely tied to the Chinese economy, and to emerging market colleagues such as Brazil, which is already struggling, and to the economies of China’s major export competitors such as Japan and Germany, who now see their respective QE measures – to date showing relative signs of success – undermined.

And what does it mean for Australia?

Delayed Reaction

I can admit now Tuesday’s action on Bridge Street had left me somewhat confused. In the wake of the first renminbi devaluation, why did the materials and energy sectors stubbornly rise 1% on the day, when all other sectors fell, as if the previous night’s jump in metal prices was all that mattered? Was a 1.5% plunge in the Aussie in sympathy really enough to negate the impact?

Looking at yesterday’s action I can only assume Bridge Street did not know how to respond. By yesterday morning, following big overnight falls in commodity prices and on Wall Street, it was clear. The materials and energy sectors both plunged over 3%.

It was a perfect storm. Chinese currency aside, we saw poorly received earnings reports from the likes of Computershare ((CPU)), CSL ((CSL)), Carsales.com ((CAR)) and REA Group ((REA)). And in opening lower from the bell, the ASX200 broke down out of its longstanding trading range. From there we could throw in the technical trade. First stop 5380, next stop 5100.

And where did we stop? 5380.

Bear in mind also that the biggest stock on the market – Commonwealth Bank ((CBA)) – was in a trading halt, having announced a 10% discounted $5bn rights issue.

Rebound

Mario Draghi must be shaking his head in despair. The QE package he introduced earlier in the year had, in the background of the whole Greek farce, been quietly working. Major export economy Germany, along with France and others, had begun to see economic improvement. And now this.

The German and French stock markets dropped over 2% each on Tuesday night, and another 3% plus each last night. When Wall Street opened, mid-session in Europe, the selling flowed across the pond.  In the first hour of trade in New York the Dow was down 277 points on heavy volume. But at the same time, the S&P500 reached the bottom of its 2015 trading range.

The selling suddenly stopped. On lower volume, Wall Street began to turnaround. Whether it be bargain hunting, short covering or both, the indices ran all the way back to square.

One consideration is that the renminbi devaluation may once and for all take September off the table as the Fed’s lift-off date. Maybe 2015 altogether. Although there is still debate. Whatever the case, the US dollar index fell 0.9% last night to 96.31, suggesting a delay is now the pervading expectation.

The US ten-year bond yield had seen its big fall the day before, and last night was only down another point to 2.13%.

The plunge in the greenback is not good news for the Australian economy. Having fallen a cent on the first renminbi devaluation, the Aussie fell another half a cent on yesterday’s second devaluation. If the Aussie could keep roughly in step with the renminbi, then the AUD-RMB trade impact would be negated. But alas, on the fall in the greenback the Aussie is this morning 0.8 of a cent higher than it was 24 hours ago, and about 1.3 cents higher than its nadir following the second devaluation. It is less than half a cent lower than where it was when the first devaluation was announced.

Commodities

Base metal prices fell again from the open on the LME last night, having plunged on Tuesday night, but then the buyers arrived. Aluminium, nickel and tin still closed lower on the day but copper rebounded 0.7%, lead 1.6% and zinc 1.8%.

Volumes were heavy, as at least some traders were prepared to “look through” the immediate impact of the renminbi devaluation to its intended goal – to stimulate China’s flagging export economy. Growth in exports means growth in raw material demand, albeit at a higher implicit price for the Chinese.

The oils also stabilised, with West Texas closing up US12c to US$43.33/bbl and Brent closing up US35c to US$49.76/bbl.

Iron ore ticked down US10c to US$55.80/t.

The US dollar drop finally sparked some life into gold, implicit of the Fed delaying its rate hike. Gold is up US$16.80 to US$1125.50/oz.

Today

The SPI Overnight closed up 24 points or 0.4%, suggesting that at this stage, the 5380 technical support level in the physical might hold.

Reporting highlights today include Crown Resorts ((CWN)), Fairfax Media ((FXJ)), Mirvac Group ((MGR)), Tabcorp ((TAH)) and the biggie, Telstra ((TLS)).
 

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

About Risk And Comfort

In this week's Weekly Insights:

- About Risk And Comfort
- Commodities: Buy Signal From Hell?
- US Equities: Divergence And Investor Concerns
- Realities Of The European Union
- Rudi On TV
- Rudi In The Australian

About Risk And Comfort

By Rudi Filapek-Vandyck, Editor FNArena

Investing is not about "knowing" the future. It's about deciding what risks you feel comfortable with.

Two events last week highlighted this very truth about investing and risk. Firstly, ANZ Bank ((ANZ)) requested a trading halt in its stock in order to announce a $3bn capital raising, dilutive in nature and relatively unexpected having previously indicated asset sales and a fully underwritten dividend reinvestment program (DRP) were the board's preferred strategy to deal with increased regulatory requirements.

Secondly, the world's largest supplier of explosives and blasting systems to mining and infrastructure projects, Orica ((ORI)), warned its profits will be lower than market consensus, with no immediate recovery in sight and some hefty impairment charges to be included for the year.

It is always easy to look smart after the event, but in these two cases: if you were completely taken by surprise then, sorry, but you haven't genuinely been paying attention.

Even excluding Weekly Insights, FNArena has offered numerous stories both on the banks and on Orica highlighting the potential risks. This is why I personally like diversity among the stockbrokers in the Australian Broker Call Report. It's not about Buy/Hold/Sell ratings, or about who is wrong and who is right. It's about trying to determine where the risks are, and whether I, as an investor, feel comfortable being exposed.

Mining Services Tragedy

Orica, whose corporate roots trace back to the Victorian gold rush more than 130 years ago believe it or not, has done Australian investors one huge, under-appreciated favour. In 2010 it spun off its paint division which now trades as DuluxGroup ((DLX)) on the Australian share market. One glance at the share price graph over that period suffices to support my view that Orica has given Australian investors one big gift and I do hope the average long term investment portfolio contains a little exposure to this relatively defensive business that offers lower volatility exposure to the booming housing market in Australia.

Late last year, Orica also disposed of its chemicals division and became a full, undiluted mining services provider. This is only a good thing if you happen to believe the cycle is finally turning for this sector. More announcements about capex restraints by the likes of BHP Billiton ((BHP)) and Rio Tinto ((RIO)), plus North American gold producers in pain with a bullion price below US$1100/oz, plus bulk commodities in severe and ongoing oversupply, does not genuinely support such view.

But then there's a plethora of views out there, and some experts on the sector, or on Orica in particular, are trying to convince you and me the shares represent an excellent buying opportunity at levels around $16 (5.7% yield, partially franked). Supporting their view is the fact the company's shares have mostly traded with a 2 in front post 2009. But then that was including Dulux and also including Chemicals until last year. Note Orica shares traded above $22 only a few weeks ago (so much for "market intelligence").

Mining services providers enjoyed a golden run until early 2012 when it became clear the giants in the sector had set their sights on reducing capex, which has been the sector's downfall until today. Just ask Downer EDI ((DOW)), whose outlook also disappointed last week.

Fund managers, stockbrokers, tip sheets and the like have been rummaging through the carnage in years past, trying to anticipate the turning point, if not for the sector in general then for some individual players. Admittedly, potential rewards can be significant if only because share prices have been absolutely pummelled. But is it worth the risk?

My view has been, and still is, this sector represents without the slightest doubt some fine buying opportunities that will be highly rewarding at some point in the future (exact timing unknown). The problem is there are so many more possibilities to pick a wood duck and suffer from the next profit downgrade (while cursing myself I ever ventured into this space in the first place).

Another way to look at this is: in five years from today, stocks like Orica, Downer EDI and the likes, which are generally considered high quality plays in an out-of-favour sector, will be more than likely trading at a higher price level. While they do offer healthy dividends in the meantime, nobody really knows what's going to happen in the short to medium term. Your own guess is as good as anybody else's as to whether this is the bottom of the cycle, or simply a pause in the downtrend, or much better, or much worse.

What I do know is this is not the type of risk I personally feel comfortable being exposed to. I do understand the principle of value investing and I do wish all value investors jumping on board post yet another shellacking all the luck in the world. As far as I am concerned, you need it.

Disclosure: the FNArena/Pulse Markets All-Weather Model Portfolio has exposure to DuluxGroup (see disclaimer further below for more info).

Banks Or No Banks?

Should you invest in Australian banks? The question is as divisive in Australia today as it has ever been. Most retail investors have large exposures to the Big Four banks, larger than is wise from a risk concentration point of view. They are being laughed at because of it by professionals in the funds management industry. Honest is honest though, many retail portfolios have performed better than expected in years past and the banks have played a crucial part in this.

Earlier this year I literally rang the bell when hosting Your Money, Your Call Equities on the Sky Business pay-TV channel. To announce the obvious: the golden era for Australian banks is now over. Don't look over your shoulder and fall in love with past returns.

Having said so: banks are by no means about to replicate the downturn that killed the bull market for mining services providers. But the way forward is looking a lot more demanding and challenging, and share price sell-offs and de-ratings this year are simply the market re-adjusting for the sector's new reality.

If anything, recent company announcements seem to indicate the sector has now lost its knack to always deliver a little extra on the positive side and that too is a true signal that times have reversed. The sector is now essentially ex-growth in that most levers that can be pulled, have been exercised in years past, while bad debts and margin pressure plus constraints on property loans are keeping growth in single digits to be eroded by the issuance of extra capital.

From here onwards we can all come up with various scenarios about what can go wrong for the Australian economy, and for the banks, and surely when downturns kick in, the bias is for more negative news to simply trigger more negative news. Soon we'll see doubt about whether this bank should no longer increase its dividend, or lower the pay-out ratio, or raise more capital.

The key question overshadowing all of this is whether share price valuations are already capturing these increasingly challenging prospects? If not, the bulls will argue most of it should be priced in by now (e.i. more upside potential than downside risk).

Note: despite this year's de-rating for Australian banks, local share market indices continue to point towards a positive return for investors.

Admirable Track Record On Banks

Most readers of Weekly Insights have been on the mailing list for many years, so I am expecting a lot of nodding heads in the next few minutes. To all others: I am specifically writing the following paragraphs for you. You might appreciate the how, why and what we do  at FNArena a little more.

In 2007 (gosh, that's such a long time ago), FNArena was among the first to understand the importance of what had been going on with subprime lending in the USA. We turned our focus to Australian banks and warned they would not be immune from overseas problems; a view that was held by a small minority only at that time, and for a long time. We pretty much spent the whole of 2008 repeating our view on banks, again, and again, and again.

We turned bullish on the sector in mid-2009. We were not the first, but then we were never going to be. When we make these calls, we want to make sure we are right in our assessment. That time around, we encountered a largely dismissive audience, having been burned in the years prior and not believing my personal prediction at the time that bank shares would offer 100% return over the decade ahead. As we've all experienced since, they have done better than that and the decade is yet far from over (2015 is giving some of it back, though).

Last year, we turned more cautious. Earlier this year, I rang the bell to announce the end of the golden era.

I do not believe Australian banks will be detrimental to investors' portfolios as have been mining companies and energy producers over the years past, especially the small caps in both sectors. But they won't be "fantastic", "excellent" or "outstanding" either, even from current price levels. Banks can, and probably will, still generate reasonable returns, not in the least because boards will defend those dividends with everything in their might.

I have a suspicion that once we get past regulatory issues and extra capital raisings, and the Federal Reserve's first interest rate hike, global bond markets will become more comfortable and settle for a prolonged period of no more rate hikes, and this -all else being equal- will trigger a come-back into favour for the banks. But this is, at this stage, not more than a suspicion.

There's so much that can still happen between now and then. Make sure you are comfortable with your portfolio and your strategies while bank shares, and equities in general, are sailing rougher seas.

Commodities: Buy Signal From Hell?

"As commodities reach new multi-year lows on a total returns basis and multi-decade lows relative to equities, fundamentals remain broadly weak. Therefore the sector is susceptible to any further deterioration in indices measuring manufacturing and industrial activity which remain narrowly in expansion at 51. Out of twenty commodities, only six are now above their 2000-2014 averages in real terms".

Those are the opening words to Deutsche Bank's latest update on the worst performing asset class for four years uninterrupted; commodities. It goes without saying everybody who took guidance from the sector's dismal performances in each of 2012, 2013 and 2014 and believed a return to favour surely must be around the corner, has now been burned badly, again, by July's general (and indiscriminate) wash-out.

Yet, there are a number of experts around, and not just in Australia, who are starting to suggest the sector is worth considering. Seriously.

The most fundamentally attractive thesis I came across in these volatile weeks full of turmoil and carnage and despair comes from sector analysts at Citi who published a daring report, essentially pointing out these wash-outs at the end of an enduring down turn ("bear market", if you like) are usually excellent buying opportunities, even though this may not become apparent immediately.

This is because markets tend to move well ahead of fundamentals.

Citi's report contains many graphs and charts, not even confined to the commodities space, which may well have been selected by Harry Hindsight, who's a multi-billionaire by now, as we all know.

Cue: those well-trodden quotes from Baron Rothschild and Warren Buffett that have been used a million times (make that a billion, surely?) about buying opportunities presenting themselves when things look bad, prices tank and investors are running scared. The most difficult part in this process is to overcome the past (full of disappointment), as well as the absence of any fundamental justification (just read Macquarie reports about how much supply needs to disappear).

Not for the faint-hearted. For all others: may Dame Fortuna be on your side, and remain on your side.

US Equities: Divergence And Investor Concerns

US equities are still showing healthy gains for the year. Or they are barely positive. Or they are, clearly, in negative territory now. It all depends on what benchmark investors happen to focus on.

What cannot be denied, however, is that technicals looks vulnerable, again, and divergence has become the new label to use when talking about US equities. Divergence is not a signal of a strong bull market, as we all know, but does this mean it automatically signals the start of a new bear market?

US investors are becoming increasingly worried. Not that we have much contact with investors in the US ourselves, here at FNArena, but whenever we read market updates written and published in the US by large financial institutions, and the topic shifts to contacts with clients, the background colour instantaneously turns grey. US investors are worried. On some indications, probably more worried than we here in Australia give them credit for.

A few snippets from a recent BTIG strategy missive, with BTIG strategist Dan Greenhaus retaining a bullish outlook nevertheless:

"Our client conversations have taken on a decidedly more negative tone of late and with the S&P 500 essentially sitting on its 200 DMA, we can hardly blame them... Further, with five major S&P sectors lower YTD and the type of narrowing leadership we've been discussing, many clients have found additional reasons to fret... Some have even brought up the year 2000 for comparison purposes, a year that many remember as hitting its top in March but fewer remember as being virtually unchanged with that peak level by August's end. It's been argued that peak was a "process" and this one will be too..."

I have written about US equities divergence myself (see "Time For Caution", 27 July 2015) and that title continues to illustrate my own view, and behaviour, regarding the Australian share market since the dynamics started to get rougher in May. For those who want to read more on divergence in US markets, here's a recent update from John P Hussman, from Hussman Funds: http://www.hussmanfunds.com/weeklyMarketComment.html

Be warned: the chart below is from Hussman's weekly market update and does not increase one's overall comfort with what's happening in US markets in 2015.
 


 

Realities Of The European Union

I came across this illustration via social media, but a targeted Google search helped me find a copy I can include in this week's Weekly Insights.

Even if you do not know which countries belong to all the flags on display, I think you get the general idea. And that's exactly how growing numbers of Europeans are starting to look at the political construction that is today's European Union.
 


 

Rudi On TV

- on Wednesday, Sky Business, 5.30-6pm, Market Moves

Rudi In The Australian

Australia's national newspaper, The Australian, has edited last week's Weekly Insights, to be published as an introduction to the local reporting season on page 27 of the Tuesday edition.

(This story was written on Monday, 10 August 2015. It was published on the day in the form of an email to paying subscribers at FNArena).

(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views are mine and not by association FNArena's - see disclaimer on the website.

In addition, since FNArena runs a Model Portfolio based upon my research on All-Weather Performers it is more than likely that stocks mentioned are included in this Model Portfolio. For all questions about this: info@fnarena.com or via Editor Direct on the website).

****

THE AUD AND THE AUSTRALIAN SHARE MARKET

This eBooklet published in July 2013 forms part of FNArena's bonus package for a paid subscription (excluding one month subscriptions).

My previous eBooklet (see below) is also still included.

****

MAKE RISK YOUR FRIEND - ALL-WEATHER PERFORMERS

Odd as it may seem, but today's share market is NOT only about dividend yield. Post-2008, less risky, reliable performers among industrials have significantly outperformed and my market research over the past six years has been focused on identifying which stocks, and why, are part of the chosen few; the All-Weather Performers.

The original eBooklet was released in early 2013, followed by a more recent general update in December 2014.

Making Risk Your Friend. Finding All-Weather Performers, in both eBooklet versions, is included in FNArena's free bonus package for a paid subscription (excluding one month subscription).

If you haven't received your copy as yet, send an email to info@fnarena.com

For paying subscribers only: we have an excel sheet overview with share price as at the end of July available. Just send an email to the address above if you are interested.

article 3 months old

The Overnight Report: Currency Shock

By Greg Peel

The Dow closed down 212 points or 1.2% while the S&P lost 1.0% to 2084 and the Nasdaq fell 1.3%.

China Cracks

What a difference a day makes. Yesterday global stock and commodity markets were all strong on the back of anticipation Beijing would shortly come in with hard hitting stimulus measures, given the weekend’s very weak Chinese trade and inflation data. But no one anticipated what came next.

Yesterday the PBoC devalued the renminbi by 1.9%. It is not the quantum that has spooked global markets – it has not been unusual for the euro, for example, to move by such an amount in a session in recent times – it is the implications that have frightened markets.

For years during the China boom of last decade, China’s trading partners cried foul over significant undervaluation of the renminbi, via the PBoC’s pegged currency policy, providing China with an artificial export advantage. In its attempts to reform its markets, thus to compete equally with Western open market economies, China has been revaluing that peg ever since, eventually wiping out what was once seen as 40% undervaluation.

But Chinese growth has now slowed. Beijing’s attempts to revive growth, through interest rate cuts, RRR cuts and various fiscal measures have, to date, failed. China’s export economy has suffered as all around its major trading partners have resorted to QE, which effectively promotes currency devaluation. China’s interest rates are not at zero but either way, China has no tradeable government bond. QE was never an option.

Instead, Beijing has simply devalued its currency. Given the government was intending to move the renminbi to full-float status as part of its ongoing reforms, such manipulation is a step backwards. But the PBoC pegs its currency every day, and has indicated it will now take direction from the CNY – the currency allowed to be traded outside China. Overnight the CNY has already anticipated another 2%-odd devaluation. The PBoC may well move again this morning. In a sense, China is trying to mimick some sort of “float”.

The ramifications, nevertheless, are worrisome. Firstly, commodity prices tanked overnight. They are US dollar-denominated and China has devalued the renminbi against the dollar, reducing the purchasing power of the renminbi to buy commodities in US dollar terms. The good news for the likes of Australia is that as a result, the Aussie dollar has also been sold down heavily, down 1.5% this morning to US$0.7303. The RMB-AUD effect is thus minimalized, with regard the trading price of iron ore, for example.

The Canadian dollar has seen the same sell-off for the same reason. From the outside looking in, less purchasing power in the renminbi leads to lower commodity demand from China. But from the inside looking out, if the export currency is also lower, equilibrium is maintained.

But the yen is another currency that was hit last night, and Japan is not an exporter of raw materials. It is an exporter of finished goods and thus a major competitor to China. The yen has been sold in anticipation the BoJ will now be forced to respond with more QE. Take it to the nth degree, and what markets really fear is an internecine escalation in the global currency war.

Result Concerns

On the local market yesterday, it was not a good one for earnings results. Cochlear ((COH)) disappointed and fell 7%. Domino’s Pizza ((DMP)) had a wild ride, plunging initially before recovering, while Transurban’s ((TCL)) result was not that well received either.

Yet we started to the upside, before swinging suddenly back to the downside. Leading that charge were the banks. After one day’s recovery from Monday’s big ANZ-inspired plunge, it seems the markets are not yet comfortable with bank valuations. Commonwealth Bank ((CBA)) reports today [and has done so, see below].

Then there’s the matter of the renminbi devaluation. It’s a bit difficult to know just what the impact will be on Australian exports – not only of commodities but also of tourism, education and so forth – given it depends on what the Aussie does. Indeed, the only two sectors to finish in the green yesterday were materials and energy, both up 1%, but possibly due to Monday night’s rally in commodity prices.

The situation was very different last night.

Commodities

Base metals rallied strongly on Monday night in expectation of Chinese stimulus, and collapsed last night when that stimulus turned out to be currency devaluation. Aluminium fell 1.5%, copper, lead and tin fell 2.5-3%, nickel fell over 4% and zinc fell almost 5%.

Iron ore returned to trading following the Singapore holiday, but only fell US40c to US$55.90/t.

Oil did not get off so lightly, with West Texas falling US$1.59 to US$43.21/bbl and Brent falling U82c to US$49.41/bbl.

Gold is not a commodity per se, and is up US$4.60 at US$1108.70/oz on a US dollar index which, on the balance of trading partner currency moves overnight, is flat at 97.17.

Wall Street

The US is the biggest loser. On the one-hand, weaker commodity prices on the back of reduced Chinese purchasing power impact on prices received domestically, given the US does not meaningfully export its commodities. But it does export manufactured goods and services to China, and here the reduced purchasing power effect is evident in the likes of Apple shares, which fell 5% overnight.

All up, the gains seen on Wall Street on Monday night were wiped out last night, when China did not do what anyone was expecting. But the other issue to consider is: what does this mean for Fed policy?

If China has now triggered another round of currency wars, it does not seem a good time for the Fed to be making its first rate hikes. US exporters are already crying foul over the strength of the US dollar. China’s move may well be the left-of-field event which prevents a first hike in September.

Which puts the Fed in a difficult position. Already it has been suggested that were China’s currency devaluation to continue, the US economy might head into recession. If the Fed has not raised rates by now, it has nothing to cut again to prevent such a result. That only leaves one policy alternative – a return to QE – and that’s really not what the Fed, or anybody else in the US markets – really wants.

The US ten-year yield closed down 10 basis points last night at 2.14%, having at one point seen 2.01%.

Today

The SPI Overnight closed down 28 points or 0.5%.

The world will hold its breath for another move from the PBoC.

Adding fuel to the fire will be today’s scheduled Chinese data dump of July industrial production, retail sales and fixed asset investment numbers.

In Australia, we’ll see the June quarter wage price index, which will be closely watched by the RBA, along with Westpac’s monthly consumer confidence survey.

It’s a big day on the earnings front. As we speak, CBA has gone into a voluntary trading halt. The bank has reported its FY15 profit and announced a greater than anticipated $5bn capital raising. The CBA board must be livid ANZ jumped the gun on them.

Today’s reporting highlights also include AGL Energy ((AGL)), Carsales.com ((CAR)), CSL ((CSL)), OZ Minerals ((OZL)), Primary Health Care ((PRY)) and REA Group ((REA)).

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

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

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

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

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided. www.fnarena.com

article 3 months old

The Overnight Report: China Watch

By Greg Peel

The Dow rose 241 points or 1.4% while the S&P gained 1.3% to 2104 and the Nasdaq added 1.2%.

Rebound

A nervous start on Bridge Street yesterday suggested potentially another bad session following Friday’s carnage, as bottom-of-the-range support threatened to give way. Very weak trade and wholesale inflation data from China over the weekend was not good news at this time.

But the weakness proved short-lived, and by lunchtime the ASX200 had recovered enough ground to put it back above the psychological 5500 level. Leading the turnaround was a quarterly update from National Bank ((NAB)).

Interestingly, the other three banks typically report their quarterlies after Commonwealth Bank ((CBA)) has published its earnings report each season, but clearly this season has required a different approach. With NAB having jumped the gun on a capital raising last month, ANZ obviously decided to get in before CBA with its raising last week.

ANZ also provided its quarterly numbers with the raising announcement, and they were not good. The bad debt reduction cycle has finally turned, it seemed, which is something analysts have been warning of for some time. Maybe NAB then decided to bring forward its own quarterly report, ahead of CBA’s result release tomorrow, to right the banking sector ship.

NAB surprised to the upside. Critically, increased bad debts did not feature, as they had for ANZ. The result was a 0.8% rebound for the banking sector following Friday’s 3% rout.

The other driver of yesterday’s local rebound, aside from the worst session in six years on Friday prompting a little bit of bargain hunting on Monday, was the old Wall Street theme of “bad news is good”, applied to China. Fresh stimulus has been expected from Beijing ever since last month’s GDP result release, as monthly Chinese data have continued to disappoint. The weekend’s trade and wholesale inflation numbers were so bad, the only assumption can be that Beijing is set to respond with something substantial.

The Shanghai index led the charge, with a 4.9% rally yesterday. The Australian materials and energy sectors managed small gains.

And Another Rebound

Following seven down-sessions in row for the Dow, the worst run since the 2011 US debt crisis, the US stock market had hit “oversold” territory as far as many were concerned and was rife for a rebound. Such snap-backs often occur without an obvious trigger, but there were a handful of drivers last night.

Firstly, expectations of Chinese stimulus. This led to rebounds in commodity prices, including oil, and thus the US materials and energy sectors were supported. Then there was the announced takeover of aerospace components manufacturer Precision Castparts by Warren Buffet, potentially his largest ever outlay. While Buffett is a long-term investor, his 21% premium provided a vote of confidence against those believing Wall Street to be overvalued.

Then there was Fedspeak.

In another session of “if you’re all going to say something different at the same time why don’t you all just shut up,” Fed vice chairman Stanley Fischer said one thing and Atlanta Fed president  Dennis Lockhart said another. Fischer kicked off by suggesting the Fed won’t move on rates until inflation has returned to more normal levels, closer to the 2% target. Lockhart countered by reiterating his view the US economy is now resilient enough to handle a rate hike and that “the gyrating needle of monthly data” should not be a “decisive factor in the decision making”.

Market reports overnight and this morning suggest Fischer’s comments were the primary driver of last night’s Wall Street rebound, again drawing on the “bad news is good news” theme of a delayed rate hike. I think that’s rubbish.

Firstly, the Dow jumped nearly 200 points from the opening bell and only continued to rise after Lockhart made his counter-comments. Secondly, the US ten-year yield is up 6 basis points to 2.24% -- the wrong way around.

Thirdly, US inflation has not been at 2% since early 2012 and having fallen to near zero in the interim, has taken a long time to grind back to around 1.6% (core) where it is now. With wage growth negligible and commodity prices, particularly oil, remaining under pressure, it would likely be a long time yet before the 2% mark is revisited. The Fed is not prepared to wait that long.

Finally, I believe the “bad news is good news” theme no longer rules after almost a year of rate rise debate. Such responses have not been seen on markets these past couple of months. Wall Street is not just ready for a rate rise, it is impatient to get it over and done with.

And Yet Another Rebound

Coming back to the more pervasive China stimulus theme, short-covering was evident on the LME last night as all base metal prices leapt 2-3%.

Iron ore remains closed.

West Texas crude rose US$1.00 to US$44.80/bbl and Brent rose US$1.64 to US$50.23/bbl.

Gold jumped US$10.30 to US$1104.10/oz, which you could argue represents expectations of a rate hike delay. Or you could argue it speaks to renewed demand from China, or that gold just wanted to get back to 1100, or that gold never seems to know what it’s doing anyway.

The US dollar index did slip a bit, nonetheless, by 0.4% to 97.15.

The Aussie is steady at US$0.7415.

Today

The SPI Overnight closed up 36 points or 0.7%.

NAB will publish its monthly business confidence survey today.

Today’s earnings result highlights include those of Cochlear ((COH)), Domino’s Pizza ((DMP)) and Transurban ((TCL)).
 

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

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

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

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided. www.fnarena.com

article 3 months old

The Monday Report

By Greg Peel

Carnage

I suggested on Friday morning that we might be headed back down to the bottom of the range, although I didn’t suspect that might happen in one session. At 5474, the ASX200 is back at the bottom of its range since June, with 5700 at the top, if we discount one quick foray to 5422 at the height of the Greece/China scare.

The worst day in six years on Bridge Street on Friday can mostly be attributed to ANZ Bank ((ANZ)), which having placed $2.5bn of its $3bn new capital raising with institutions by Friday morning at a 5% discount, saw its shares plunge 7% as soon as the trading halt was lifted.

The response to the ANZ raising is in contrast to the earlier National Bank ((NAB)) raising, which was well received by the market. But NAB’s raising was about spinning off its UK business plus some extra to cover new “too big to fail” capital requirements, while ANZ’s raising simply covers new mortgage requirements and is still not enough to cover TBTF capital. NAB’s raising came in the form of a rights issue, which offers new discounted capital to existing shareholders thus reducing the dilution impact. ANZ made a placement of new capital, maximising dilution for existing shareholders.

The bottom line is the bank index was slammed 3.1% on Friday, and given the Big Four together represent around a quarter of the total ASX200 market cap, that was a big impact on the index alone. But materials also came in for a sudden hammering, down 2.8%, and elsewhere it was just a matter of selling everything. Result season seemed not to matter, other than maybe the market now fears more “misses” than “beats”.

ANZ will not be very popular with Commonwealth Bank ((CBA)), which has been long tipped to announce a capital raising at its result release on Wednesday. CBA’s smaller rival’s pre-emptive strike sunk all boats, thus if CBA does have a raising lined up, it will be at lower price.

September Looms

As far as US jobs reports go, Friday night’s was about as uneventful as they get. The July non-farm payrolls report showed 215,000 new jobs added, smack on expectation, and the unemployment rate was unchanged at 5.3%.

There is nothing here, consensus suggested on Friday night, to stop the Fed raising in September. The data would actually have to be “bad”, rather than simply not “good”, to provide reason for pause, most believe. There’s one more jobs report to go before the September meeting and some various inflation measures, but barring some unexpected turn in fortune, Wall Street is starting to lock in September.

It’s arguably why the Dow has seen its worst run since the 2011 debt ceiling crisis, falling seven sessions in a row. The Dow fell 46 points or 0.3% on Friday night, flattered by an announced stake taken in American Express by an investment company. The S&P fell 0.3% to 2077 and the Nasdaq lost 0.3%.

Looking outside US stocks, one would be forgiven for believing the markets in general are not pricing in a September rate rise. The US dollar index fell 0.3% to 97.56 and the US ten-year bond yield fell 6 basis points to 2.16%. However the dollar index is still up solidly over a month, and the US ten-year yield is not necessarily the best benchmark of Fed funds rate prediction.

While the ten-year yield fell on Friday night, the five year yield rose slightly and the two-year yield rose more substantially. The thirty-year yield fell more than the ten. This implies a flattening of the yield curve, and thus “normalisation” of rates. When the Fed makes its first move it is not essentially “tightening” monetary policy, which occurs when a central bank lifts its rate above the “normal” level to slow an economy down, it is “normalising” policy, suggesting the economy is starting to fare well enough on its own.

The Fed is keen to get the ball rolling, if for no other reason than to build in a level of policy buffer, or “insurance”, against some new disaster. There’s nowhere to go from zero, and the Fed really does not want to have to go back down the whole QE path all over again.

Commodities

There was not much to read from the US jobs numbers for LME traders on Friday night, but a 1.4% drop in Germany’s June industrial production when a 0.3% gain was expected was enough to keep the mood fairly sour. All base metal prices fell somewhat, bar lead which managed a 0.9% gain.

Singapore celebrated 50 years of independence on Friday, closing exchanges and thus iron ore trading. Iron ore is unchanged at US$56.30/t.

Friday is US oil rig count in the US and once again the figure rose. While six rigs is hardly end-of-world stuff, the only support oil prices can hope for at this stage is from US production reduction. West Texas duly fell US$1.00 to US$43.80/bbl, its lowest level since March, and Brent fell US$1.13 to US$48.59/bbl, its lowest level since January.

Gold rose US$4.30 to US$1093.80/oz.

Despite the shellacking in the local stock market, the Aussie rose steadily all Friday night to be up a percent at US$0.7419.

The SPI Overnight closed down 2 points on Saturday morning.

China

China’s July trade data, released over the weekend, were not exactly flash.

Having risen 2.8% in June, exports fell 8.3%. Imports fell 6.1% in June and 8.1% in July (all year-on-year figures). The July inflation data were even more depressing. While the July CPI rose to 1.6% annual from June 1.4%, the PPI, representing wholesale inflation, fell 5.4% compared to 4.8% in June.

That’s the biggest monthly drop in the PPI in six years, following over three years of continuous falls.

But it all just adds to expectation that Beijing will ramp up the stimulus, and increases expectation they won’t muck around this time.

The Week Ahead

The local earnings season ramps up in earnest this week, ahead of hitting full pace next week. There are too many reporters now to highlight on a weekly basis, so please refer to the FNArena Calendar (link below).

Today’s highlights include Ansell ((ANN)), Bendigo & Adelaide Bank ((BEN)) and JB Hi-Fi ((JBH)).

Local data this week include the NAB business confidence survey tomorrow, and the Westpac consumer confidence survey on Wednesday along with the June quarter wage price index.

Following on from the weekend’s data releases, Beijing will publish July industrial production, retail sales and fixed asset investment numbers on Wednesday.

US data highlights will come at the end of the week with retail sales and business inventories on Thursday and industrial production, consumer sentiment and the PPI on Friday.

The eurozone will release its first estimate of June quarter GDP on Friday.

Rudi will appear on Sky Business on Wednesday at 5.30pm.
 

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: Cut The Cord

By Greg Peel

The Dow closed down 120 points or 0.7% while the S&P lost 0.8% as the Nasdaq plunged 1.7%.

Banked

For all the sensationalist, end-of-world-is-nigh headlines and nauseating polly-spin from either side of the argument, yesterday’s local jobs numbers were actually quite positive.

Sure, the unemployment rate jumped to 6.3% in July from a revised 6.1% (previously 6.0%) in June but this number is always (a) a bit spurious and (b) often misleading given the limitations of what it actually measures. We went down this path earlier in the year when there was a surprise jump up to 6.4% before the rate just as quickly fell back again.

The bottom line is 38,500 jobs were added in July, including 12,400 full-time, when economists had forecast a net 10,000. The jump in the unemployment rate was all about a sharp jump in the participation rate to 65.1%, the highest level in over two years. This implies more people who had given up on finding a job have re-entered the system to have another go, suggesting increased confidence in finding employment.

Either way there likely wasn’t a huge amount of attention paid to the jobs numbers yesterday on Bridge Street, given they’re unlikely to shift RBA policy and  there were other things going on, most notably the announced capital raising from ANZ Bank ((ANZ)).

Realistically there’s little excuse for surprise from the market given bank analysts have been debating the bank capital raising issue all year, since the Murray Review was tabled, and while suggesting maybe DRPs and hybrid issues might be enough, straight equity raisings were never out of the question in response to tighter capital requirements as far as analysts were concerned.

National Bank ((NAB)) went early, under the cover of its UK business exit, and at the time analysts suggested Commonwealth Bank ((CBA)) will quite possibly follow suit at its FY15 report release. The only surprise, therefore, is that ANZ made a pre-emptive move.

The banks led the ASX200 down yesterday with a 1.7% fall. The other source of weakness on the day was a badly-received result from Downer EDI ((DOW)), who these past months has been seen as one of the more attractive investment options among the beaten down engineers & contractors. Downer’s 11% plunge, right at the beginning of earnings season, appears a little ominous. Industrials suffered a decent fall yesterday, did energy yet again.

The only sector to close in the green yesterday was materials, albeit slightly, on a rise in the iron ore price and ahead of Rio Tinto’s ((RIO)) profit result. That result was relatively well received in London overnight, if we consider BHP Billiton ((BHP)) is down 3% and Rio is up a tad, and the two are usually joined at the hip.

Realistically what we saw yesterday is yet another move back towards the middle-ground safety of the 5600 mark, following yet another failed attempt to breach 5700. From this pivot point, specific earnings results will become influential, outside forces notwithstanding.

Media Madness

I noted yesterday that a weak profit report from media giant Walt Disney set in train a sudden sharp sell-off of all “old” media companies on Wall Street. The issue is one of so-called “cord cutting”, which sees consumers abandoning their expensive and content-restrictive cable TV subscriptions in favour of cheaper and less limited internet content streaming. Well that sell-off continued last night on Wall Street once more, with gusto.

Disney, owner of ESPN, was slapped again as were Viacom, 21st Century Fox, Time Warner and Comcast. The winner of the day was once again Netflix. Over to you Bob… “for the times, they are a-changing”.

On the other hand, weak sales guidance from electric car pioneer Tesla saw that stock slapped last night, which triggered a sympathetic sell-off in manufacturers of new-age vehicle systems such as on-board cameras and warning systems. In general Wall Street experienced one of those sessions in which the “momentum” plays, often centred around technology, were bailed out of. Thus the Nasdaq fell 1.7% and created a market-wide downdraught.

The Dow was down as many as 178 points at lunchtime but at that point the S&P500 hit its 200-day moving average and recovered somewhat.

For all its to-ing and fro-ing over 2015, Wall Street has still gone absolutely nowhere, and monetary policy uncertainty has been signalled out as the greatest contributing factor. That’s why many commentators are simply pleading with the Fed to get the first rate rise over and done with, whether the data be good or bad.

Commodities

It was a relatively quiet night on the commodity front last night, helped by a US dollar index relatively steady at 97.82.

Base metal prices on the LME were mixed on smallish moves, other than zinc which fell 1.3%.

Iron ore fell US10c to US$56.30/t.

West Texas has now traded under 45, which is a psychological level, but only on a US32c fall to US$44.80/bbl. Brent actually rose US11c to US$49.72/bbl.

Gold dipped US$4.90 to US$1089.50/oz.

The Aussie is steady at US$0.7347.

Today

The SPI Overnight closed down 36 points or 0.7%. Are we heading back down to the bottom of the range?

ANZ has completed the $2.5bn institutional component of its $3bn raising so it will be interesting to see how far ANZ shares fall today, having come out of their trading halt, given the 5% discount. We recall that the earlier NAB raising was soaked up with barely a blink.

Rio Tinto will be in focus following its profit report and today sees a full-year result from Virgin Australia ((VAH)).

The RBA’s quarterly Statement on Monetary Policy will be released today, featuring updates on the central bank’s forecasts for GDP, unemployment and various other metrics.

Jobs numbers in the US tonight.

Over the weekend, China will release inflation and trade data.
 

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