By Greg Peel

The Dow closed up 33 points or 0.2% while the S&P gained 0.4% to 2074 and the Nasdaq added 0.2%.

While economist consensus rarely lands right on the money for a data release as complex as the GDP, with its many moving parts, rarely do economists “miss” by such a wide margin. Expectations were for 0.7% growth for Australia’s GDP in the September quarter from the June quarter to mark 3.1% annualised growth, which is “on trend”. Instead we saw paltry 0.3% growth to leave us growing at a below trend level of 2.7%. The RBA’s implicit 0.5% estimate was also off the mark.

While Australia’s terms of trade (export value minus import value) have fallen on the back of lower commodity prices and, during the quarter in question, a still-high Aussie, economists knew that. This was not where the “miss” lay. The real surprise was a larger than expected fall in business investment, CBA’s economists declare, which detracted 0.4 percentage points from the GDP. This fall belied the indicators provided by the construction work done and capex numbers released earlier in the week.

Elsewhere, household consumption was moderate (up 0.1ppt) and dwelling investment, government spending and inventories were all negative (down 0.1ppt). Despite lower prices, net exports still provided the driving force (up 0.8ppt).

The conclusion is that there is now even more pressure on Australia’s non-mining economy to contribute to the game, given commodity prices have plunged lower since September. But the CBA economists are not too concerned. They point more recent data suggesting an entrenched upturn in residential construction (which is more than soaking up jobs lost in mining construction), rising momentum in consumer spending and better than expected plans for non-mining capex spend as indicating improvement ahead.

Will the RBA now cut its rate on the back of the weaker than expected GDP? Currency traders are certainly leaning that way, given the Aussie is down 0.5% to US$0.8406 on the back of the GDP result. But this becomes self-fulfilling of course, given a lower Aussie is a proxy for a rate cut. The RBA will not meet again until February, so there’s a fair bit of data to absorb in the interim, including Christmas spending. There are also macro-prudential control measures to be introduced shortly, one presumes.

As to why the ASX200 was up 50 points yesterday ahead of the GDP number, and despite across the board overnight falls in commodity prices, it is a mystery to me. Because the Dow was up 100? I’d love to know the connection between the US and Australian economies as we head into 2015. The GDP result took the wind out of the sails for a while until buying was restored on the assumption the RBA must now cut its rate, so we still finished on a very positive note, featuring gains in all sectors.

A day ago consensus was for the first change in the RBA rate in 2015 to be a hike.

Australia’s service sector PMI managed to improve in November, but the increase to 43.8 from 43.6 implies only a slight slowing in an otherwise rapid clip of what is now basically a six-year contraction. If one considers just how small Australia’s manufacturing sector is now, one might appreciate just how important the service sector is to Australia’s non-mining economy.

According to Beijing, China’s service sector PMI ticked up to 53.9 from 53.8 in November, while according to HSBC, it ticked up to 53.0 from 52.9.

Japan celebrated a return to expansion at 50.6, up from 48.7, while the eurozone slowed to 51.1 from 52.1. The UK enjoyed a cracking 58.6, up from 56.2, while the US topped that with a rise to 59.6 from 57.1.

US private sector jobs growth slowed to 208,000 in November, down from 233,000 in October and missing forecasts of 223,000. But Wall Street is happy with anything over 200k. The non-farm payrolls number is out tomorrow night.

The Fed’s Beige Book suggested the usual “modest to moderate” growth in eleven of the twelve Fed districts, but it did highlight improvements in consumer spending and hiring and a general optimism overall.

Wall Street was not particularly inspired early in the session last night nonetheless, and only managed a half-hearted rally towards the close. Yet the Dow did hit a new high again and this time the S&P500 also joined in. One impetus last night was a slight bounce in the oil price.

West Texas gained US21c to US$67.31/bbl, which in the context is hardly something to write home about, but at least it was not another plunge. Brent fell US75c to US$69.87/bbl.

It was a mixed bag on the LME last night, with a 1.5% rise in nickel offsetting a 1.2% fall in copper, with other metals doing not much.

Spot iron ore fell US20c to US$69.50/t.

Gold looks set to hang around the 1200 mark now until the next move is clear. Last night it gained US$9.30 to US$1210.10/oz despite the US dollar index rising 0.3% to 88.93.

The SPI Overnight closed up 12 points or 0.2%.

The GDP is now behind us, although look out for the next Westpac consumer confidence number. October also seems fairly distant now, but today we see October retail sales numbers and the trade balance. Can we kick off the December quarter with a bit of improvement?

And what might Mario Draghi do tonight when the ECB holds a policy meeting? It must be remembered that the likes of Europe, Japan, China and India will be looking at plunging energy prices with uncontained excitement.

Rudi will make his final appearance for 2014 on Sky Business' Lunch Money today, between noon-12.45pm.
 

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By Greg Peel

The Dow closed down 51 points or 0.3% while the S&P lost 0.5% to 2057 and the Nasdaq dropped 1.2%.

While Friday’s oil-related rout on Bridge Street was very much concentrated in the energy sector, yesterday saw a general Sell Australia trade as foreigner investors piled in to ditch their downunder exposures. The impetus to sell can largely be traced back to the Aussie, which right now has been forgotten as a carry trade or high-yield currency and focused upon entirely in its former guise as a commodity currency.

Lower commodity prices mean lower GDP growth for Australia, and thus a lower Aussie. Whenever the Aussie falls, foreign investors lose on their Australian investments. As they sell, they have to also sell Aussie, and thus is created a negative feedback loop which results in the sort of rolling wash-out we saw yesterday. The ASX200 did not open down 2%, it fell steadily all day to the close.

The energy sector was again the biggest loser, falling 6.4% after falling 7.4% on Friday. Materials took a beating with a 4.9% fall, selling in supermarkets continues unabated, and the banks chimed in with a 1% loss. The Aussie, at its nadir, traded at around 84.20.

It was not a session in which anyone was going to pay much attention to economic data. Particularly September quarter data that is up to five months old. But Australian corporate profits rose 0.5% in the quarter, belying expectations of a 1.3% fall, albeit the June quarter’s 6.9% loss was revised to a 7.5% loss. Profits are nevertheless up 3.3% for the year. Inventories rose a better than expected 0.7%.

House price growth slowed in the month of November, falling 0.3% to an annual growth rate of 8.5%. Australia’s manufacturing PMI surprised with its first shift into expansion since July, rising to 50.1 from 49.4 in October. This number is nonetheless notoriously volatile.

China’s manufacturing data may have drawn more attention, and did little to buoy the mood. Beijing’s PMI fell to its lowest level since March at 50.3, down from 50.8 in October. HSBC’s equivalent matched its week-ago estimate at 50.0, down from 50.4, just avoiding the psychological impact of a plunge into contraction.

Japan saw a fall to 52.0 from 52.4, and the eurozone posted 50.1, down from 50.4 (Germany 49.5). Among the better performing economies, the UK marked a rise to 53.5 from 53.3 and while the US slowed to 58.7 from 59.0, that’s still a cracking pace.

PMI results may have been noted last night across the globe but the centre of attention was once again the oil price. I suggested yesterday that the plunge in oil late last week looked a lot like a capitulation trade, in which the bloodied longs throw in the towel and just sell at any price. This appears to have been the case, given for no other apparent reason oil prices bounced hard last night. West Texas rose US$2.75 or 4% to US$69.74/bbl and Brent rose US$2.78 or 4% to US$72.93/bbl.

The bounce was enough to turn Wall Street around from an opening fall in which the Dow was down 100 points. Wall Street was closed last Thursday when OPEC dropped its bombshell and very sparsely manned on Friday for the half-day session, resulting in little movement in the indices. With everyone back on Monday it was decided the weak oil price is initially not a good thing, and this was backed up by soft results from the Black Friday retail wrap-up.

Black Friday had begun with a flurry as usual and thus it appeared to those few on Wall Street the offset to cheaper oil was in play. But by day’s end the sales numbers were actually down on the year before, which contributed to Wall Street’s opening drop last night. No one is that much surprised nevertheless, nor concerned, given Black Friday has become a bit of an anachronism. Some stores now open on Thanksgiving itself and others start offering discounts in the days before, diluting the impact of the traditional Black Friday session.

The US indices did not remain at their depths for too long, as all eyes were turned to oil prices. The indices grafted back, recognising the balances at play. The rise in the oil price turned around the big energy and energy-support sectors but transportation stocks, including airlines, fell back hard. Late in the session it appeared the Dow may even close flat but a few late selling orders ensured a softer close, with the S&P down half a percent and the Nasdaq and Russell small-cap losing over a percent each.

The link from oil to other commodities through commodity basket fund trading, which I outlined yesterday, was apparent again last night. On the LME, copper bounced back 1.6% and the other base metals all posted gains around 1%, except a steady tin.

Another story was being played out altogether in the gold pit. The gold price is linked to the oil price via inflation implications but there have been all sorts of other things going on in the world.

The Swiss voted “no” in the referendum which would otherwise have forced the Swiss National Bank to hold 20% of its reserves in gold, and thus imply a need to buy rather a lot of gold. Expectation was for a “no” result, so the gold price did not much respond. But last night credit ratings agency Moody’s dropped its sovereign rating for Japan to A1 from Aa3, with a weaker Japanese economy making gold look like a safe haven for Japanese investors. And yesterday India eased its gold import restrictions, which have been put in place to support the rupee.

The US dollar also fell 0.4% to 87.97 last night, so all the ducks lined up to be positive for the gold price, including the rebound in oil. Gold has subsequently shot up US$45.00 or 4% to US$1211.80/oz. Silver has bounced 6%.

As noted earlier, the Aussie looked like it might even break 84 last night as foreign sellers jettisoned Australian assets, but the subsequent turnaround in oil and the fall in the greenback have bolstered the local currency once more, sending it back to its starting point. This morning the Aussie is steady over 24 hours at US$0.8508.

It would have been nice to keep the Aussie down as the offset against lower commodity prices, although the trend appears biased that way. Meanwhile, more good news for the local market came in the form of an US80c rise in the iron ore price last night to US$70.60/t.

The SPI Overnight rose a tentative 16 points or 0.3%. Will we see a solid rebound for the local energy sector today?

Australia’s September quarter current account is out today, which includes the balance of trade. This will be a trade off, given a quarter of falling iron ore prices was offset by rising Chinese import volumes, and a lower Aussie provided a helping hand.

October building approvals data is also due today and around 2.30pm, Glenn Stevens will call his PA and tell her just to send out last month’s policy statement. Cross out “November” and write “December”.
 

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By Greg Peel

The Dow closed up 40 points or 0.2% while the S&P gained 0.5% to 2051 as the Nasdaq jumped 0.7% on a new all-time high for Apple.

Chinese property prices fell 2.6% year on year in October, the biggest annual drop since Reuters began keeping score in 2011. The fall belied a range of government support measures, although those measures are targeted at lower cost housing. Beijing has for a while now attempted to curtail China’s property development bubble, and price falls are expected to continue feeding on themselves as property investors back away and property developers are stuck with inventory.

Falling prices are bad news for the global economy in the shorter term, particularly for those economies relying on exports of raw materials which feed housing construction, but not so bad news in the longer term if Beijing can successfully engineer a “soft landing” for the property market rather than a bubble-and-bust “hard landing” so many commentators have feared for years now.

So far, so good.

Not so good for the Australian materials sector, which led the local index down yesterday along with weakness in supermarkets. There was nothing to be gleaned from the minutes of the November RBA meeting, which were again a repetition.

Nor was it much of a surprise when the Japanese prime minister announced a snap election yesterday, as such a move has been rumoured now for a week or more. Japan’s shock GDP contraction in the September quarter has put Abe’s aggressive Abenomics strategy very much in the spotlight, providing fuel for parliamentarians who have resisted the policy to date. The prime minister has now cancelled the planned second sales tax hike next year, which goes some way to indicating policy failure.

Raising the sales tax rate in steps to increase government income is a fiscal drag on Japan’s moribund economy, but the frenzied printing of yen was supposed to provide the stimulus offset, and more. The tax hike sparked a far more dramatic contraction in Japanese spending than had been assumed, to the point the Bank of Japan has been forced to pump in even more stimulus. Abe will now go to the people to seek electoral support for the cancellation of the second tax hike, which presumably would be well received, but also to allow the Japanese to provide a yea or nay on Abenomics in general. That call is not quite so clear.

On the other side of the world, German investors shocked the market last night by suddenly becoming very confident. Germany posted a paltry 0.1% GDP growth rate in the September quarter but economists nevertheless forecast a turnaround in the ZEW investor sentiment index to plus 0.5 this month from minus 3.6 in October, the first negative result in two years. But the number came in at plus 11.5.

The US producer price index for October also surprised last night, rising 0.2% after falling 0.1% in September against expectations of another 0.1% fall. The core PPI, ex food and energy, rose 0.1% when a 0.1% fall was expected. A little bit of inflation is a good thing, because disinflation implies a slowing economy. Too much inflation is a bad thing, as it implies a Fed rate hike is required. So last night’s result was middling.

More comforting was a rebound in the US housing market sentiment index this month, to 58 from 54 in October. October saw a fall from September’s nine-year high level.

Yet when the opening bell rang on Wall Street, silence followed. It looked for all the world like another meandering session in a small range was ahead. Slowly but surely, however, the stock indices began to rise. Shortly after 3pm when the Dow was up 88 points, traders began to wonder whether the average might even mark its first triple-digit move in two weeks. But no, the sellers arrived at the death and the Dow quickly slipped back to up 40.

The funk continues.

Oil traders are becoming increasingly nervous about next week’s OPEC meeting, which will fall on the Thanksgiving holiday. The jury is still out on whether production cuts will or won’t be announced, and a thin electronic market in the absence of US participation could produce significant price volatility on the day. Last night West Texas fell US$1.04 to US$74.46/bbl and Brent fell US62c to US$78.50/bbl.

On the Sunday after Thanksgiving, the Swiss will vote on whether or not they want their central bank to be committed to holding 20% of reserves in gold. This is another source of nervousness around commodity markets, as a “yes” vote may spark a scrambling rally. It has also been noted that a trickle of Russian central bank gold buying has rapidly become a flood, with Russia accounting for 25% of all known central bank gold purchases so far this year (Chinese purchases are a state secret). Last night gold rose US$8.20 to US$1193.80/oz.

A 0.4% fall in the US dollar index to 87.58 also aided gold, while the Aussie is up 0.2% to US$0.8728.

LME traders focused on falling Chinese property prices in sending all base metal prices lower, with copper and nickel both falling 1%.

The materials sector led down the Australian market yesterday, but today may be just a little more painful. Iron ore is down US$3.00 to US$72.10/t to mark a new multi-year low.

An optimistic SPI Overnight is up 8 points.

The Bank of Japan will hold a policy meeting today, but as the government is now “lame duck” presumably no new policy measures will be announced. The minutes of the last Fed meeting are out tonight.

James Hardie ((JHX)) will report its interim profit result today and Orica ((ORI)) its full year amidst another welter of AGMs.

Rudi will appear on Sky Business this evening at 5.30pm.
 

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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