Tag Archives: Japan

article 3 months old

The Overnight Report: Break Down

By Greg Peel

The Dow closed down 90 points or 0.5% while the S&P lost 0.6% to 2157 and the Nasdaq fell 0.9%.

Sell the Fact

There may be some confusion as to why an interest rate cut from the RBA would cause the first sell-off in some time on the ASX when one would assume the opposite. The explanation is merely that the market so aggressively priced in an expected cut over the past few sessions there was really nowhere else to go, as profits were locked in.

An August rate cut was being tipped by economists as far back as May, although there was a little wavering from the market in between. Though not referred to directly in the governor’s statement yesterday, the cruncher was likely the US GDP result. On justifying its decision, the board cited moderate local economic growth, low inflation, and that persistent “complication” of the strong currency.

The weak US GDP result largely killed off any expectations of a September rate hike from the Fed, or even this year. Hence the US dollar has been falling ever since, forcing the Aussie higher. Unfortunately for the RBA, it appears the rate cut will only serve to drag on the Aussie, not send it falling. Last night the US dollar index fell another 0.8% and the Aussie is back to where it was pre-cut this morning at US$0.7604.

With regard individual sectors, in yesterday’s report I observed “a weaker US dollar is supportive of commodity prices. As to whether such support was worth a 2.7% jump in the energy sector yesterday on only a slight tick up in the oil price is a different matter”. And yesterday energy fell 3.2%. This contributed significantly to the overall 0.8% index drop but if we average out the two sessions, energy has only fallen in line with other sectors.

Outside of oil, the big loser yesterday was again consumer discretionary, down 1.4%. This sector should be a beneficiary of lower rates, but it had also been heavily bought in the lead-up to the RBA’s decision. The banks should also benefit, and they fell 0.7%.

On that note we saw the banks move swiftly yesterday to hand over only around half of the RBA cut in variable rates. The peasants are already at the gates wielding pitchforks. The trade-off was an increase in deposit rates, which will be some comfort to those living off investments, but no doubt will be overlooked by blood-spitting politicians.

The ASX200 was very much due a correction from the post-Brexit run-up, which received extra fuel from RBA speculation. A re-basing ahead of earnings season proper is not such a bad thing, and to that end the futures are suggesting another decent drop today.

Fiscal Helicopter

The RBA’s problem with the Aussie is nothing compared to the Bank of Japan’s problem with the yen. Not only has the yen refused to fall despite everything the BoJ and Abe government have thrown at it, now hopes have faded once more of the Fed coming to the rescue and pushing up the greenback.

It has been expected for a month that the BoJ and Japanese government would unleash a combined monetary and fiscal shock & awe package as a last ditch effort, but on Friday the BoJ disappointed. So it was over to Abe, who yesterday announced a new fiscal stimulus package worth US$73bn over several years.

The package will cover everything from infrastructure, such as port upgrades, to child care and maternity leave. And 22 million low-income Japanese will all receive a direct “Pennies from Shinzo” hand-out of US$147. They can each now buy a beer in Tokyo.

Alas, the yen is another 1% higher against the greenback this morning, having jumped substantially following Friday’ BoJ disappointment. There may be some disappointment in the fiscal package as well, but it’s more a case of a weaker dollar.

Deflated

The US dollar was weaker again last night because the Fed’s preferred gauge of inflation, the core personal consumption & expenditure (PCE) measure, rose a mere 0.1% in June. An annual rate of 0.9% is well below the Fed’s 2% target.

It’s not that US consumers aren’t spending. Indeed, personal consumption rose 0.4% in June, and the increase in June quarter spending is the biggest since the GFC. But incomes rose only 0.2%, meaning the trend is consumers dipping into their savings continues. This does not bode well. The Fed would like to see rising consumption, but supported by rising wages.

And to add to concerns, last night’s US auto sales numbers for July were disappointing. For month after month recently, auto sales have surprised to the upside, sparking fear of a “subprime” bubble building in car loans given the near-zero interest rate environment. The “miss” was not substantial, but following on from a surprisingly weak earnings result from Ford last week, it appears the positive economic contribution of auto sales is finally fading.

This news weighed on Wall Street last night. The other issue was the oil price.

WTI is only down US36c this morning but the point is that at US$39.72/bbl, the 40 support level has been broken. With supply returning after outages everywhere from Nigeria to Libya and Canada, supply-side fears have returned. Wall Street has paid a lot of attention to an oil price which for some time had been fluctuating within a comfortable range, but a break-down is a different matter.

Wall Street has subsequently broken out of its own tight trading range as well. Although last night marked the seventh straight down-day for the Dow, it was the first substantial fall since the Brexit rebound began. The S&P500 has dropped out of its two-week 2165-75 range, and the Nasdaq turned south for the first time in six sessions.

Commodities

As noted, West Texas crude is down US36c at US$39.72/bbl.

Base metals were mixed yet again, with no metal moving more than 1%.

Iron ore rose US20c to US$60.70/t.

The US dollar index is down 0.8% at 95.07, thus gold is up US$10.40 at US$1362.10/oz.

Today

The SPI Overnight closed down 35 point or 0.6%.

It’s service sector PMI day across the globe today, including Caixin’s take on China’s number.

The US will see the private sector jobs report for July tonight.

On the local stock front, we’ll see earnings results from Rio Tinto ((RIO)) and Genworth Mortgage Insurance ((GMA)) and in the wake of yesterday’s shocker from Seven West Media ((SWM)), Seven Group Holdings ((SVW)) will also report.
 

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article 3 months old

The Monday Report

By Greg Peel

BoJ Disappoints

Well I hate to say I told you so, but I told you so. Whenever the world expects the Bank of Japan is about to unleash monetary shock & awe, it always disappoints. Then when no one’s paying much attention, it surprises with an extensive package.

The world was sure the BoJ would deliver something substantial on Friday – increased QE and/or a cash rate further into the negative, and the central bank itself had previously dropped a few hints. But Friday’s meeting brought no change to QE or rates, but rather the BoJ will increase its annual purchase of Japanese stock ETFs (exchange traded funds) by almost double, to around US$58bn.

The news lifted the Nikkei a little but sent the yen soaring, given the world was set for something more aggressive. It’s now over to the freshly mandated Japanese government to come up with something more substantial on the fiscal front.

The Australian stock market was bumbling along looking very “Friday” during the morning ahead of the BoJ announcement, which was worth a drop of 20 points. The index recovered late in the session, probably reflecting the fact it was the last day of the trading month and fund managers would have been keen for the index to close on a 2016 high.

With China such a focus, it’s easy to forget the importance of Japan as a trading partner, and specifically a buyer of iron ore, coal and LNG. The oil price had been down on Thursday which might otherwise explain a 1.3% drop for the energy sector on Friday, but iron ore was up strongly, base metal prices were up and the materials sector finished down 1.2%.

Elsewhere, a 1.3% gain for consumer discretionary is a “risk on” trade, probably backed by hopes of an RBA rate cut tomorrow, but this was countered by the biggest mover of the day – utilities, up 1.5%. Ditto on the RBA, so as usual, the markets are simply playing the central banks. And why wouldn’t you?

Could be some disappointment tomorrow if the RBA doesn’t oblige.

No Fed Rate Hike?

So we’ve covered the BoJ and RBA, so now we must move on to the Fed.

Economists had forecast a 2.6% growth rate for the US June quarter GDP. On first estimate, it came out at 1.2%. The March quarter GDP was also revised down to 0.8% from 1.1%. The culprit within the June numbers was a 3.2% decline in business investment – the largest since the GFC.

The US dollar index had fallen a full 1.2% on Saturday morning to 95.52 on a combination of the weak GDP result and the surging yen.

Yet the US stock market remained as it has been of late, as idle as a painted ship upon a painted ocean. The Dow fell 24 points or 0.1% while the S&P rose 0.1% to 2173 and the Nasdaq rose 0.1%. Over the last eleven trading sessions the S&P500 has moved in a range of 0.9%. The last time that happened was in 1970.

Fundamentally, one would suggest therefore that the US market is looking a bit toppy after its sharp rebound post-Brexit. Technically however, this stall in the rally without a pullback is deemed a bullish sign.

The biggest drag on the Dow on Friday night was ExxonMobil, which posted its worst quarter in some time after more than halving earnings compared to the same quarter 2015. The result was a miss. Fellow Dow component and oil producer Chevron also posted a miss but managed to avoid share price punishment.

The major take-out from Friday night was nevertheless another diminishing of Fed rate hike expectations. September now appears unlikely, unless there are some astounding data between now and then (US jobs this week).

Commodities

The big drop in the dollar and reduced rate hike expectations predictably had gold rising US$15.80 to US$1350.40/oz.

The story was more mixed in base metal markets, where metal-specific stories are more dominant at present. Aluminium jumped 2% and zinc 1.5%, but copper and lead only managed 0.5% and nickel fell 1%.

Iron ore fell US40c to US$58.80/t.

After having a good look at its 200-day moving average on the downside, West Texas crude rose US30c to US$41.40/bbl.

On greenback strength the Aussie was up 1.3% at US$0.7598 on Saturday morning.

The SPI Overnight closed up 17 points or 0.3%.

Not Stressed

Not long after Wall Street, and thus the world, closed for the weekend, the results of the latest UK/EU bank stress tests were released. There was a lot of eye-rolling when the bulk of 51 banks assessed were given a thumbs-up.

The tests are supposed to determine whether a bank has enough capital to survive another GFC-style shock. However, unlike the Fed’s equivalent tests on US banks, the European tests have no quantitative hurdles built in. The assessment is qualitative. The sceptics would say this allows the results to be prima facie positive in order to avoid a compounding panic on the day.

It was also noted the results provided no “test” to incorporate Brexit or negative interest rates. Nor were the results for Greek and Portuguese banks published – those banks are informed privately. In the end, the only banks deemed to be in trouble were the ones the world knew were in trouble anyway – mostly Italian.

The Week Ahead

On the subject of Fed focus, the US non-farm payrolls report for July is out on Friday night, preceded by the private sector report on Wednesday night.

Other US data releases this week include the manufacturing PMI and construction spending tonight, personal income & spending and vehicle sales tomorrow, the services PMI on Wednesday, factory orders and chain store sales on Thursday and the trade balance on Friday.

Today is manufacturing sector PMI day across the globe, with Beijing also throwing in China’s service sector PMI. Wednesday sees everyone else’s services PMI.

The Bank of England will meet on Thursday night but having done nothing at the last meeting not long after the Brexit vote, it’s unlikely to move at this meeting.

Aside from PMIs, Australia will see house prices and new home sales today, building approvals and the trade balance tomorrow, and retail sales on Thursday.

The RBA will meet tomorrow and publish a quarterly Statement on Monetary Policy on Friday. The chance of rate cut tomorrow is currently deemed to be 50/50.

Welcome to August, and that means welcome to result season proper. Things start slowly this week before snowballing through the month. Report highlights this week include those of Rio Tinto ((RIO)) on Wednesday, Suncorp ((SUN)) and Tabcorp ((TAH)) on Thursday and Virgin Australia ((VAH)) on Friday.

It’s a long weekend in NSW thanks to Banking Holiday today. The ASX remains open but things might be a little slow.

Rudi will appear on Sky Business on Tuesday via Skype-link to discuss broker calls at around 11.15am. He'll re-appear in the studio on Thursday, 12.30-2.30pm and does the Skype-link again on Friday, 11.05am.
 

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article 3 months old

The Overnight Report: Going Nowhere

By Greg Peel

The Dow closed down 15 points or 0.1% while the S&P gained 0.2% and the Nasdaq rose 0.3%.

Risk On?

The ASX200 is not exactly shooting the lights out at the moment but the bias clearly remains to the upside. The index has spent the week grafting its way to 5550 from 5500 with the technicals still suggesting higher levels to come.

The Brexit blip notwithstanding, the longer run rally from below 5000 to yesterday had initially been led by defensive stocks, with the big cap banks and miners dipping and recovering at different times. I have made mention often enough of how the utilities sector just kept rising and rising.

Analysts were already struggling with valuations among the defensives, while at the same time conceding the fact global interest rates continue to fall, the Fed continues to stall, and the RBA may yet act again. So throw out your historical PE comparisons – what’s the point when the German government is issuing zero coupon ten-year bonds? We have never been here before.

But on Wednesday we finally saw some selling in the local utilities sector and yesterday that continued. The banks have quietened down now with Commonwealth Bank’s ((CBA)) result, due in a couple of weeks, set to be the next catalyst other than a rate cut next week.  Yesterday’s big movers were materials, up 1.5% consumer discretionary, up 0.8%, and energy, down 1.0%. Everything else was pretty quiet.

Energy fell on the oil price and that currently is looking a bit vulnerable but solid iron ore prices, resilient gold prices and some strength in base metals have seen materials now taking the lead. This is cyclical, not defensive, as is consumer discretionary, which of course would benefit from another rate cut.

Central banks are driving global markets. They are the “free put”. If the defensive yield plays have now stretched about as far as they can, even under the new world order, will it be cyclicals that take us back to 6000? That, supposedly, will depend on result season.

Stalled

And on the subject of earnings, Ford (Dow) shocked all and sundry last night by posting a weak result and disappointing guidance. Its shares fell 8%, and ensured the Dow was down over hundred points early in the session in a dour mood.

The result was a shock because US car sales have been posting record after record every month and providing some hope for the US economy. But on the one hand there are concerns about the growing number “subprime” car loans being issued, and on the other, it turns out Ford has been forced to offer huge money-back incentives in order to post those record sales numbers. Globally, Ford cited the China slowdown as also being a drag.

However, General Motors reported earlier in the season and beat on expectations. So maybe Henry just needs to have a good look at himself. Whatever the case, and as so often has played out these past couple of weeks, Wall Street grafted its way back through the session to a relatively flat close.

The past ten sessions of almost no close-to-close movement is the tightest in a couple of decades.

US earnings season is at the halfway mark, with just over 50% of S&P500 companies having reported. So far, everybody’s pleased. The quarterly decline in earnings to date is closer to 3% than the 6% forecast pre-season.

Just don’t tell anyone the same has been happening every quarter for some time now. Forecasts are marked down and down and down until most companies can’t help but beat.

Wall Street may be pleased, but it’s still not going anywhere.

This mornings after-the-bell results have included a beat from Amazon which has its shares up 2%, and a strong beat from Google parent Alphabet, which has its shares up 4%.

One obvious drag on Wall Street at the moment is oil. Following another 2% fall last night, WTI is close to its 200-day moving average. If that breaks, commentators assume the oil-stocks correlation of early 2016 will reassert itself.

Commodities

West Texas crude is down US81c at US$41.10/bbl.

The US dollar index is only down 0.1% at 96.68 but base metals had a strong session last night following a couple of weaker ones. There is likely positioning going on ahead of today’s BoJ meeting for which great expectations are held, and in between there’s the Filipino nickel industry story.

Nickel rose 3% in London last night, zinc 1.5%, aluminium 1% and copper 0.5%.

Iron ore rose another US$1.20 to US$59.20/t.

After jumping sharply post-Fed on Wednesday night, despite the Fed remaining as inconclusive as ever, gold is back down US$5.10 at US$1334.60/oz this morning.

The Aussie is 0.2% higher at US$0.7504.

Today

The SPI Overnight closed up 8 points.

As I have noted before, whenever the world is expecting shock & awe from the BoJ the central bank usually does nothing, but often catches everyone out another time when expectations are negligible. Expectations are very high that today the BoJ will do something significant on the monetary front, to be followed up next week by something significant from the government on the fiscal front.

Stay tuned.

Locally we’ll follow up Wednesday’s June quarter CPI result with the PPI today, along with month of June private sector credit.  Japan will dump a lot of monthly data and the BoJ meets, and tonight sees first estimates for June quarter GDP in both the eurozone and US.

Origin Energy ((ORG)) is among those posting the last of the production reports today.

Rudi will Skype-link with Sky Business around 11.05am today to discuss broker calls.
 

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

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

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

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article 3 months old

The Monday Report

By Greg Peel

Predictable

The dip overnight on Wall Street provided an excuse but realistically it was an all too predictable session on the ASX on Friday assuming no unexpected news. We had a solid run-up during the week, profits are often locked in ahead of a weekend, and next week sees critical central bank meetings that offer reason to move back to the sidelines to see what transpires.

The consumer sectors had been leaders in the rally over the week, so no great surprise they were the underperformers on Friday. Telcos also came in for some more selling, but otherwise downward moves across sectors were minimal and materials posted a sole gain with a 0.2% increase.

The pullback put the ASX200 pretty much on the 5500 level, which is rather neat, and suggests a pivot point for what happens next. The technicals remain generally bullish at this stage but we’ll still need some sort of fundamental justification to move into the next up-leg.

While markets across the globe may go quiet early this week ahead of the Fed meeting and statement release on Wednesday night, in Australia we will also see the release of June quarter CPI numbers on the Wednesday ahead of the Fed. The RBA has left the door open for an August rate cut were the June numbers to again be weak. Economists are forecasting weak numbers.

We also saw falls in commodity prices on Friday night, which should weigh on the ASX200 this morning.

Poised

The focus on Wall Street this week is clearly on the Fed, although US indices did manage slight gains on Friday night. The Dow closed up 53 points or 0.3%, the S&P gained 0.5% to 2175 and the Nasdaq rose 0.5%. The Dow and S&P both posted new highs.

On the US earnings front, the trend continues to be positive, or at least “less bad”. General Electric’s (Dow) result disappointed somewhat on Friday but with 100 of the 500 S&P stocks now having reported, the running change in earnings per share is minus 4.2% compared to a consensus forecast ahead of the season of minus 5.3%.

There are still 400 stocks to report over the next couple of weeks.

Meanwhile, the early earnings trend may be positive, thus justifying Wall Street strength, but the indices were again led by telcos and utilities on Friday night. The hunt for yield continues to override any notion of economic improvement.

US economic data have nevertheless been positive this month, and the trend continued on Friday night. A flash estimate suggested the US manufacturing PMI for July would come in at 52.9, up from 51.3 in June and well ahead of 51.5 forecasts.

It is this sudden turnaround in US data that has Wall Street assuming the Fed must now be seriously looking at a rate hike sooner rather than later, given the feared Brexit disaster did not transpire. Up until this month US data had been a bit too mixed to assure a hike, and the shockingly weak May jobs number was the cruncher. But since the June jobs number came screaming back, a string of very positive releases including retail sales, industrial production and various housing numbers has followed.

There is no hike expected on Wednesday night. But markets will be looking to see just what sort of hint the FOMC may be prepared to provide of a September move.

The Fed is under no pressure to hike this week, which is handy given Friday brings a Bank of Japan policy meeting. Strictly the Fed should not be in any way beholden to what Japan does, but given some form of shock & awe is being assumed out of Tokyo, the FOMC will no doubt be keen to see what that is before having to make its own decision.

Commodities

The issue of a Fed rate hike is one commodity markets will be concerned about. While the justification for a hike – stronger US economy – is positive for commodity prices, a consequentially stronger US dollar is not. The US dollar index rose 0.5% to 97.35 on Friday night.

An outage of a commodity trading platform during the Asian session meant many traders were cut off from base metal markets as trading shifted over to London, ensuring very light volumes were then traded on the LME. This didn’t stop nickel falling 3%, although nickel has been the outperformer of late, while other metals fell by small amounts except aluminium. It’s been the underperformer of late, and rose slightly.

Iron ore fell US40c to US$55.70/t.

West Texas crude fell US29c to US$44.25/bbl.

Gold doesn’t quite know whether it’s Arthur or Martha at the moment, as it shifts back and forward inside a 1320-40 range. Friday night’s jump in the greenback prompted a fall of US$8.60 to US$1322.10/oz.

The strong greenback ensured the Aussie was down half a percent at US$0.7455 on Saturday morning.

The SPI Overnight closed up 4 points on Saturday morning.

The Week Ahead

Fed on Wednesday night, BoJ on Friday.

Ahead of the Fed meeting, the US will see new home sales, Case-Shiller house prices, consumer confidence and the Richmond Fed index on Tuesday, and pending home sales and durable goods on Wednesday. Thereafter, Friday will bring the first estimate of US June quarter GDP.

The UK will report its GDP on Wednesday, and the eurozone on Friday, although both reflect a pre-Brexit Europe.

Along with the BoJ meeting on Friday, Japan will see a raft of June data, including inflation, retail sales, industrial production and unemployment.

On the local stock front, the last of the resource sector quarterly production reports merge this week with early movers in what is otherwise the August result season.

Among the production reporters we’ll see Newcrest Mining ((NCM)) today, Fortescue Metals ((FMG)) and Independence Group ((IGO)) on Wednesday, and Origin Energy ((ORG)) on Friday.

Thursday will bring earnings reports from CYBG Plc ((CYB)), Henderson Group ((HGG)), GUD Holdings ((GUD)) and ResMed ((RMD)).

Thursday also sees the Macquarie Group ((MQG)) AGM, at which guidance will be updated.

Rudi will appear on Sky Business via Skype-link on Tuesday to discuss broker calls, 11.15am. Then on Wednesday he'll host Your Money, Your Call, 8-9.30pm. On Thursday he'll re-appear in the studio, 12.30-2.30pm and later that day he'll join Switzer TV on the channel. On Friday he'll repeat the Skype-link up at around 11.05am.
 

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

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article 3 months old

Next Week At A Glance

For a more comprehensive preview of next week's events, please refer to "The Monday Report", published each Monday morning. For all economic data release dates, ex-div dates and times and other relevant information, please refer to the FNArena Calendar.


By Greg Peel

The Fed will meet next week and release its latest monetary policy statement on Wednesday night. While no rate change is expected, the odds are firming once more for a September hike, given the markets’ shrugging off of Brexit and a run of strong US data. Further clues will be sought.

The Bank of Japan meets on Friday and while it’s always difficult to know what might transpire, markets are assuming fresh stimulus of some kind will be announced. The resounding win by the government in the recent upper house election supposedly provides a mandate to attack the persistently strong yen once and for all.

These two meetings will be very much the focus of next week, possibly keeping markets at bay until developments are known. But the US reporting season rolls on, and next week also sees initial June quarter GDP estimates from all of the UK (Wednesday), US and eurozone (Friday).

There will be more data releases to ponder in the US next week, including house prices, home sales, consumer confidence, durable goods, the Richmond Fed index and Chicago PMI.

Friday will not only bring the BoJ meeting but also a dump of Japanese data, including inflation, industrial production, retail sales, and unemployment numbers.

Ahead of the Fed release on Wednesday night, Australia’s June quarter CPI numbers will be released. We recall it was the weak March quarter CPI numbers which prompted the RBA into a swift rate cut in May, and almost universal expectations of an August rate cut are based on expectation of more weak numbers in next week’s release.

In the local market, next week will see a late rush of resource sector quarterly production reports coinciding with the first trickle of early season corporate earnings releases.

Production reporters include Newcrest Mining ((NCM)), Fortescue Metals ((FMG)), Independence Group ((IGO)) and Origin Energy ((ORG)).

Earnings reporters include CYBG Plc ((CYB)), Henderson Group ((HGG)), GUD Holdings ((GUD)) and ResMed ((RMD)).

Macquarie Group ((MQG)) will also hold its AGM next week at which a guidance update is always a potential share price mover.


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article 3 months old

The Monday Report

By Greg Peel

Scripted

I suggested on Friday morning the local market would likely open to the upside on overnight strength before fading in the afternoon as traders took profits following a week-long rally, unless Beijing had something to say about it. Well Beijing did have something to say about it, but the market still played to script.

China posted GDP growth of 6.7% in the June quarter, in line with the March quarter result and beating expectations of 6.6%. Industrial production grew 6.2% year on year in the month of June, up from 6.0% in May and beating expectations of 5.9%. Retail sales rose 10.6%, up from 10.0% and beating 9.9%. Fixed asset investment grew 9.0% year to date, down from the 9.6% pace in May and below 9.4% expectations.

On face value, these appear to be a pretty encouraging set of numbers with the exception of fixed asset investment. To the ASX200, they were worth 20 points at midday, taking the index from up 20 points, and ready to fade, to up 40 points. But then the sellers arrived on cue.

Economists do not, however, suggest these were numbers out of China that offer relief. Within the GDP result, growth in private investment, representing 60% of all investment, fell to a record low for the quarter. This leaves the government to carry the can. On that note, the 9.0% growth rate in fixed asset investment to June is the lowest since 2000, suggesting the government is easing off on the infrastructure stimulus.

The June retail sales number was indeed encouraging, but in a way China’s economy is a bit like Australia’s in that it is trying to transition away from a previous model. Can the growth of China’s consumer economy offset the slowdown in the export-driven sectors? Not if private investors are not on board. Beijing can beef up the stimulus again, as everyone expects it will, but just how many airports and railway lines can you build for the sake of it?

Local traders may have had a closer look at the Chinese data, after the computers had had first shot, and decided they were not so hot after all. The index faded all afternoon.

But importantly, the index has clearly breached the 5400 resistance level, meaning that will now become support. Wall Street took a breather on Friday night and the local futures finished down 11 points on Saturday morning, so 5400 will now be the pivot level for the decision as to whether we have reason to push higher.

That will likely come down to the US earnings season now underway and the local earnings season due to start next month.

Almost

Had the S&P500 closed even a tenth of a point higher on Friday night, it would have been the first Monday to Friday run of all-time highs for the index since 1998. But alas, the S&P closed down two points at 2161. The Dow closed up 10 points but that only marked four days of rally. The Nasdaq lost 0.1%.

The fact the 1998 record was not achieved underscores the reality that markets do not usually go up five days in a row. Wall Street was all set for a similar session of Friday profit-taking after a very strong week, but instead hung in there. It is a positive sign.

Traders have also pointed to other positive signs in the Russell small cap index catching up to its large cap counterparts post Brexit and indeed outperforming on the upside. This suggests the rally has breadth. And a further six basis point gain for the US ten-year bond yield to 1.59% equates to over 20bps from the Brexit low and an indication the safe haven money is coming back out again.

The ongoing element traders have been pointing to for several post-GFC years is the level of cash still on the sidelines. If investors decide they have no choice but to deploy that cash in a low interest rate world, stock market upside could be substantial.

The US CPI rose 0.2% in June, in line with expectation. The increase was largely due to the oil price which many believe should ease off after the summer driving season. Annual inflation is only 1.0%, reflecting the initial big drop in oil prices. Core inflation, without oil, is 2.3%. This should be enough to prompt the Fed into hiking but for three reasons.

Firstly, the Fed prefers the PCE measure of inflation, and that is still running under 2%. Secondly, the Fed did not hike in June because of Brexit risk, and despite the rebound in markets a rate hike is not expected at the July meeting either, on a “too soon” basis. Thirdly, wages fell 0.2% in June. Lack of wage growth suggests a subdued inflation outlook.

But US retail sales jumped 0.6% in June when 0.1% was expected. It’s the third consecutive solid gain.

The big earnings result on Friday night came from the banks. Citigroup posted a beat and Wells Fargo posted in line. The shares of both closed down on the day, but this was more a case of a Friday after a week-long rally and the fact JP Morgan’s solid result on Thursday night had traders amped up for strong beats on Friday night.

As of this week, the earnings reports will come thick and fast, with a lot of Dow names in the frame. If Wall Street is to hang on to or exceed new all-time highs, it will need the run of results to be as positive as the early numbers have suggested.

Commodities

Since we’re focusing on records today, we can also note the 0.6% jump in the US dollar index to 96.69 on Saturday morning ended the strongest week for the dollar against the yen since 1999. The yen has been plunging basically since “Helicopter” Ben Bernanke met with officials in Tokyo early in the week, sparking speculation the BoJ may be prepared to use “helicopter money” as a last ditch effort to soften the yen and boost the Japanese economy.

Helicopter money directly refers to hand-outs of printed money to the populace as a form of stimulus, analogously dropped from helicopters. In the GFC, the famed “Pennies from Kevin” is a local example. But it can also mean other drastic stimulus measures, such as the BoJ buying government bonds and then forgiving the debt. Whatever the case the policy is highly inflationary, but given a low inflation world and over two decades of deflation in Japan, hyperinflation is not considered a risk.

The jump in the greenback on Friday night helped aluminium, copper and nickel down around 0.5% on the LME and lead down 1.5%, with zinc rising 0.5%.

Iron ore fell US20c to US$57.80/t.

Oil traders cited the better than expected China GDP and US retail sales in sending West Texas crude up US73c to US$46.23/bbl, despite the US rig count marking its sixth week of gains in seven.

Gold held its ground against the strong greenback in rising US$2.50 to US$1337.10/oz.

The Aussie is down 0.7% on the strong greenback at US$0.7580.

The SPI Overnight closed down 11 points or 0.2% on Saturday morning.

The Week Ahead

All eyes will be on the ECB on Thursday night when it holds a scheduled policy meeting. But given the wold has quickly recovered from Brexit fears, and the Bank of England elected not to react, it is likely Draghi will keep his powder dry.

The US will see housing sentiment tonight, housing starts on Tuesday and existing home sales, the Chicago Fed national activity index, the Philadelphia Fed activity index, FHFA house prices and leading economic indicators on Thursday. Friday sees a flash estimate of July manufacturing PMI, and Japan and the eurozone will offer the same.

Japan is closed today.

The minutes of the July RBA meeting are due tomorrow and otherwise, NAB’s June quarter business confidence summary on Thursday provides the local data of note this week.

It will be a bit different on the local stock front however, as the quarterly reporting season ramps up.

Western Areas ((WSA)) will report quarterly production today, Rio Tinto ((RIO)) and Oil Search ((OSH)) tomorrow, BHP Billiton ((BHP)) and Woodside Petroleum ((WPL)) on Wednesday, South32 ((S32)) on Thursday and Santos ((STO)) and OZ Minerals ((OZL)) on Friday, among others during the week.

Rudi has returned from two weeks of touring Victoria and Queensland. He will appear on Sky Business via Skype-link on Tuesday, 11.15am, to discuss broker calls. On Thursday he'll return to the studio at Macquarie Park, 12.30-2.30pm and on Friday he'll do the Skype-link again around 11.05am.
 

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: Getting High

 

By Greg Peel

The Dow closed up 80 points or 0.4% while the S&P gained 0.3% to 2137 and the Nasdaq rose 0.6%.

Surge

Well it’s amazing what one good US jobs report can do. A reconfirmation of a US economy still growing, a big jump on Wall Street, and Australian banks rise 2.5%. The iron ore price was unchanged, gold little changed, and the materials sector rises 2.9%. But was it about US jobs?

It is likely the rebound in US employment, putting to bed any fears over the May anomaly, was a contributing factor. But for further incentive we can look to a 4% jump in the Japanese stock market on the day.

Many have called Abenomics a failed experiment and with good reason. Everything the government and Bank of Japan has thrown at the Japanese economy has amounted to little to date, and the yen remains stubbornly high. Not that it’s all Japan’s fault, as the country continues to lose out in the global race to the bottom.

Over the weekend Shinzo Abe’s coalition won a landslide victory in the upper house election – something a certain Mr Turnbull would give his right arm for (his right arm, of course, being Tony Abbott). The implication is that Abe has been granted an even more definitive mandate to keep doing what he’s doing. It is now expected the government, fiscally, and the BoJ, monetarily, may be preparing for some shock and awe, after a couple of years of pure frustration.

So tick the box on further Japanese stimulus. China is expected to ramp up its stimulus measures any time soon. The Bank of England is expected to cut its cash rate and/or reignite QE on Thursday night. The ECB is no doubt readying itself for more of “whatever it takes” post Brexit. And despite the strong US jobs number, the Fed is not expected to raise its cash rate due to global uncertainty.

Here come the helicopters. What does one do with all that free cash? Invest in the only market offering a positive return.

There was clearly an element of “risk on” in yesterday’s local rally as well as a search for yield. Cyclical sectors performed well. Defensives were slightly more muted. The banks lie somewhere in between. For all the angst surrounding that sector, it’s impossible to overlook the yields on offer.

And while we tend to obsess over China, it must be remembered Japan is also a major importer of Australian resources.

Back to the future

It was May last year when the S&P500 closed at 2130, which for all that time has been the all-time high. Last night the S&P closed at 2137. It was not a volatile session – the US indices opened higher from the bell and despite a bit of a fade in the afternoon, basically held their ground.

Why did Wall Street rally? See all of the above.

The US rally was also more notably “risk on”, with defensive sectors rising but underperforming, having outperformed for a couple of years now. It was also notable to see the US ten-year bond yield spike up 7 basis points to 1.43% despite the promise of more central bank stimulus around the globe. It would appear some investors elected to remove money from that crowded trade to put into stocks.

Similarly, gold fell back US$11.

So, here we are, back at the high. Now attention will turn to the US earnings season. It will begin to kick into gear later this week.

Commodities

Stock markets may have been surging across the globe last night but it was more of a mixed bag for commodities. The US dollar index rose 0.3% to 96.53 which may explain the US$11.10 fall in gold to US$1354.30/oz but this is most likely due to some unwinding of the safe haven trade.

Copper rose 1% on the LME and nickel 1.5%, but the other base metals barely moved the dial.

Iron ore rose US20c to US$55.40/t.

West Texas crude fell US41c to US$44.75/bbl.

Today

The SPI Overnight closed up 26 points or 0.5%

Locally we’ll see the NAB business confidence survey for June today which I believe would have been conducted prior to the election.

Alumina ((AWC)) will provide a quarterly production report.


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

Next Week At A Glance

For a more comprehensive preview of next week's events, please refer to "The Monday Report", published each Monday morning. For all economic data release dates, ex-div dates and times and other relevant information, please refer to the FNArena Calendar.


By Greg Peel

Well…it’s white knuckle stuff.

When I wrote the Overnight Report this morning it looked reasonably safe the UK would remain in the EU, as far as global markets were concerned, but now the result is unclear at best. It’s early days, so no point in me speculating. Brexit outcome notwithstanding, this is what we can look forward to next week…

Tonight in the US, durable goods orders.

Next week, trade, the Richmond Fed index, house prices, consumer confidence, pending home sales and the Chicago PMI. Wednesday sees personal income & spending, along with the Fed’s preferred PCE measure of inflation. Coincidentally, Yellen will speak on Wednesday.

Tuesday sees the final revision of US March quarter GDP before the first estimate for the June quarter comes along.

Friday is the first of the month, meaning manufacturing PMIs from across the globe and both manufacturing and service sector PMIs from China.

Late in the week we see a raft of data out of Japan, including unemployment, industrial production and inflation. The BoJ will no doubt be on a knife’s edge right now watching the Brexit vote, given a vote to leave will send the yen surging to further derail monetary policy impact.

In Australia we’ll see new home sales and house prices along with the manufacturing PMI.

Thursday is the end of financial year, which can mean a deal of volatility in isolation as fund managers and traders play argie-bargie on the local bourse.

But of course the world could possibly look very different net week.

Over to you London…
 

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article 3 months old

The Overnight Report: Swing Factor

By Greg Peel

The Dow closed up 93 points or 0.5% while the S&P gained 0.3% to 2077 and the Nasdaq rose 0.2%.

Ups and Downs

There were several factors at play in the local market yesterday, belied by a flat close. Brexit, central bank policy and the derivatives expiry were all potentially influential.

The index shot up from the opening bell to be 50 points higher at around 11am, peaking just under 5200. Thereafter the session played out as a slow sell, all the way to be as good as unchanged by the closing bell.

The decision by the Fed overnight not to raise its cash rate came as no surprise, but what did surprise is the apparent capitulation form the central bank after having talked up rates rather hawkishly since April. Janet Yellen has decided, about five years after everyone else, that low interest rates may now be “the new normal”. Was it one bad jobs number? Was it zero rates in Germany? Whatever the case, the FOMC has swung from suggesting three rate cuts to come this year to suggesting one, maybe.

If Fed dovishness is now actually entrenched, the pressure is back on the RBA to cut. US rate hikes would drive the US dollar higher and thus the Aussie lower, but now the Aussie is potentially under threat of rising again in its role as a safe haven, high-yield currency.

Thoughts of another cut may have been derailed by the better than expected addition of 17.900 new jobs in Australia last month, if it not for the fact they were all part-time. Not a soul was given a new full-time job last month, according to the ABS. The unemployment rate remains steady at 5.7% but means little, given the year to May has seen net jobs growth of 1.9% made up of 0.8% full-time and 4.4% part-time.

Employment is supposed to put money in consumers’ pockets. Part-time employment puts in far less. If we were able to add together the part-time hours to make a full-time job, how many new “jobs” would the numbers really show?

Thus it was no surprise the Aussie actually fell yesterday on the release of the employment report, rather than rising as a “beat” might otherwise have suggested. The drill-down is supportive of further rate cuts.

And while on the subject of central banks, the Bank of Japan surprised yesterday by doing nothing. The BoJ’s experimental drop into negative rates has had the opposite effect of that the central bank would have hoped for, actually sending the yen higher. Markets anticipated at least a bump-up of QE yesterday, if not a further foray into the negative. But nothing transpired, so the yen shot up again.

It has become apparent, over time, that the BoJ only acts when no one is expecting it and not when everyone is.

Whatever impact central bank shenanigans had on the local market yesterday, the Brexit cloud still hung, and market protection in the form of ASX index options, SPI futures and futures options all expired. Assuming investors are keen to remain protected, positions had to be rolled over by the close yesterday, if they hadn’t been already, putting downward pressure on the market.

The wash-up at the closing bell was a very mixed bag of sector moves. The defensives of telcos and utilities found support but the biggest move up came in consumer discretionary, thanks to the announced Crown Resorts ((CWN)) restructure and subsequent 13% pop. A bounce in base metal prices had materials in the green but a fall in the oil price had energy in the red, and the banks were lower again.

But today is a new day, with expiry now over and overnight developments to consider on a Friday.

Big Ups and Downs

Europe went back into selling mode last night as stock markets and the euro fell, supposedly on ongoing Brexit fear, a lack of any BoJ action and let’s face it – the sort of confusion that tends to keep investors out. The mood carried over onto Wall Street where the Dow fell 170 points from the open.

Euro and pound weakness allowed the US dollar index to surge despite the stronger yen, and as every man and his dog talks up gold, the safe haven traded up to US$1315/oz despite dollar strength. Oil tanked 4%.

There was further confusion on the news a British pro-stay MP had been shot and killed while campaigning, prompting Prime Minister Cameron to call a halt to all Brexit campaigning. Did this mean the vote itself would be delayed? It appears not.

But then another poll was released. It was not quite a week ago the world went into a tailspin on a poll showing 55% of Britons intended to vote “go”. Last night’s poll suggested 65% now want to stay. There’s only one poll that matters of course, as any polly will tell you if they’re behind, but at the very least it now appears a Brexit is a long way from a done deal.

The Dow rallied back to be up a hundred just before the close. The US dollar index came right back to flat at 94.63. Gold crashed back down to be down US$13.50 over 24 hours at US$1278.00/oz. Oil rebounded, but is still down 3%.

Throughout all the confusion, the German ten-year yield is now officially negative at minus 0.02% and the US ten-year has fallen to 1.56%.

And to top things off, tonight is quadruple witching in the US, with June representing the biggest derivative expiry volumes of the year.

The Brexit vote is five more trading sessions away.

Commodities

West Texas crude is down US$1.44 at US$46.05/bbl.

The LME closed with the US dollar at its peak, thus all base metals bar lead are 1-2% lower.

Iron ore is unchanged at US$50.20/t.

The Aussie is down 0.6% at US$0.7362.

Today

The new September expiry SPI Overnight closed up 35 points or 0.7%. Those wondering why the actual price of the futures has suddenly dropped sharply from the June contract must appreciate the futures now need to discount a full three months of carry.

There is very little of note on the global calendar over the next 24 hours, with quadruple witching on Wall Street the highlight at this time of heightened concern.

Rudi will Skype-link with Sky Business at around 11.05am today to discuss broker calls.
 

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

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

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

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article 3 months old

The Monday Report (On Tuesday)

By Greg Peel

Friday

The SPI futures suggested a 27 point opening to the downside on Friday morning but instead the ASX200 dropped 50 points in the first half hour, which again looked like computers gone mad. This assumption was backed up by an immediate attempt to rally back such that within the subsequent half hour, the index was only down 30.

But this time what might otherwise have been another session of grafting back towards square turned into a “just sell and get out of here by lunchtime” session. The index declined again to be down 50 points once more by midday and there it stayed all afternoon as offices emptied for the long weekend.

Word is a couple of large lines were sold in the futures market early in the session, so maybe it wasn’t all the computers’ fault this time.

Aside from the desire to square up ahead of a holiday, we may also point to the fact the index had tried on about three occasions now to break up through 5400, without success. Typically if markets find they just can’t go up, they go down instead. Friday did look like a bit of a capitulation on that front.

And as it transpired, a prescient one.

Commodity price weakness and accusations against BHP Billiton had materials falling 2.3% on Friday but a 1.0% fall for the banks was the standout, and did the bulk of the index damage. Energy dropped 1.3% but thereafter, sector falls were not as significant.

If a proprietary desk made the market for the lines of futures and was hit on the bid, that desk then has to sell “the index” of stocks to hedge their position. One need only slap the big caps – even just the top ten – to have the bulk of the market cap covered. The first thing one thus does is hit the banks, the big miners and so on.

It may have been that come this morning, the market would be ready to regain some of Friday’s lost ground on a bargain hunting basis, assuming nothing came out of left field overseas on the weekend.

But it did.

Friday Night

A new poll was published on Friday night suggesting – for the first time – that more British are in favour of leaving the EU than staying. Prior polls have indicated the opposite balance but Friday night’s poll showed not just a slight bias, but a 55/45 leave/stay split.

The London FTSE fell 1.9%, the French CAC 2.2% and the German DAX 2.4%. Hardest hit were the British and European bank stocks. However, by the time the UK and European markets were closed on Friday night, that Brexit poll result had not yet been published.

Weakness was a reflection of the rolling tide of bond buying in Europe, ahead of next week’s Fed meeting and the following week’s Brexit vote, turning into a torrent. The German ten-year yield traded as low as 0.01%. Ahead of the weekend, European investors were getting out of risky stocks and into safe haven bonds.

Wall Street opened lower as a result but was beginning another familiar graft back again when the poll news hit the wires. The Dow subsequently closed down 119 points or 0.7%, having been down as many as 173 points. The S&P closed down 0.9% at 2096 and the riskier Nasdaq fell 1.3%.

The British pound fell 1.4% against the greenback on the poll news, sending the US dollar index up 0.6% to 94.65.

The US ten-year bond yield closed down 4 basis points at 1.64%.

In the US, it was also the banks that suffered most on the day. The US banks had previously been leading Wall Street back to all-time highs on Fed rate hike expectations, but then along came that May jobs numbers, and now this.

The LME had already closed on Friday night before the Brexit news and greenback rally, and moves among base metal prices were minimal.

Oil was still open nonetheless, and West Texas crude fell US92c to US$49.53/bbl. Aside from the impact of the stronger greenback, the weekly US rig count showed another slight tick up.

Despite the stronger greenback, gold rose $3.80 to US$1273.30/oz as a safe haven.

The SPI Overnight closed down 61 points or 1.2% on Saturday morning.

Sunday

May data released by Beijing on Sunday showed Chinese industrial production rose 6.0% year on year as expected, and retail sales rose 10.0% as expected. The concerning result was fixed asset investment, which fell to a growth rate of 9.5% in the year to May, down from 10.5% in the year to April. Economists had forecast 10.5%.

Within that fixed asset number, private sector investment rose only 3.9% compared to 22.3% growth from the state. This is the figure that has economists worried, as it suggests China’s economy is almost solely been driven by government stimulus at present.

It is nonetheless assumed Beijing will need to bump up that stimulus to offset a weak private sector if year-end GDP growth targets are to be met.

Monday Night

While Orlando provided the shock, the focus of attention for markets across the globe was still the Brexit poll. While there is more than one poll being conducted on a regular basis, and others have a much closer outcome at this stage, suddenly the world is realising the vote is only ten days away and the result is unclear. Previously the “stay” vote was winning in the polls, leading to a level of complacency.

That has now changed.

Having already closed to the downside on Friday night before the latest poll was published, the London FTSE fell another 1.2% last night, while the French CAC fell 1.9% and the German DAX 1.8%.

Wall Street attempted a recovery from the open, prompted by news Microsoft had made a takeover bid for LinkedIn. The bid sent LinkedIn shares soaring 50% and floated all similar boats, while Microsoft (Dow) shares came off around 2%. But it wasn’t long before the mood returned to Brexit concerns.

There is also, of course, a Fed meeting and press conference this week, and meetings for the Banks of Japan and England.

While no one expects a Fed rate hike, the market is simply unsure now whether the Fed will be back in dovish mode or remaining in hawkish mode since the May jobs numbers were released. The Fed is also even less likely now to do anything ahead of the Brexit vote and on that score, nor is the BoE.

It could be a different story for the BoJ nevertheless, who again through no fault of its own is being faced with a surging yen. Seen as a “safe haven” currency, then yen has risen on the poll news as carry trades are reversed in the face of increased volatility. Will this force the BoJ to move further into the negative, or at least step up QE?

That volatility was reflected in the VIX index on the S&P500 last night, which rose 23% to 21 as investors moved to hedge their positions. The sidelines seemed a safer place to be, resulting in the Dow closing down another 132 points or 0.7% last night, the S&P falling 0.8% to 2079 and the Nasdaq dropping 0.9%.

It is going to be an interesting two weeks.

The US dollar index actually managed to slip back a bit last night as the yen became flavour of the month, down 0.3% to 94.38 despite ongoing weakness in the pound and euro. There was therefore no reason not to buy the other safe haven – gold – which is up US$10.50 to US$1283.80/oz.

Having been quiet on Friday night, base metals were mixed last night. Copper rose 0.7% and aluminium and lead both rose 1.5% but nickel and zinc slipped slightly.

Iron ore is down US30c at US$51.80/t.

West Texas crude is down US97c at US$48.56/bbl.

The SPI Overnight closed down 40 points or 0.8% this morning. That equates to a net 101 points down since the ASX closed on Friday for the long weekend.

The Week Ahead

The Fed statement and press conference are due on Wednesday night. The BoE and BoJ meet on Thursday night.

The US will see retail sales and business inventories tonight, industrial production, the PPI and Empire State activity index on Wednesday and the CPI, housing sentiment and the Philadelphia Fed activity index on Thursday.

On Friday it's housing starts and if there were not enough volatility on offer this week already, Friday is the quadruple witching derivatives expiry for the June quarter.

In Australia we’ll see the NAB business confidence survey today and the Westpac consumer confidence survey tomorrow. On Thursday the May jobs numbers are due.

Investor days will be held this week by nib Holdings ((NHF)) tomorrow and Goodman Group ((GMG)) and Graincorp ((GNC)) on Thursday.

Rudi will appear on Sky Business today, via Skype, to discuss broker calls around 11.15am. He'll return on Thursday, twice. First from 12.30-2.30pm and then again, between 7-8pm, for an interview on Switzer TV. On Friday he'll Skype-link again to discuss broker calls around 11.05am.
 

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

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