Tag Archives: Precious Metals

article 3 months old

Perseus Renews Focus On Sissingue, Yaoure

-Improved Perseus cash flow expected from H2 FY17
-Capital raising now supports full funding of Sissingue
-Re-rating potential from Yaoure DFS
-Grade control critical to Edikan's performance
 

By Eva Brocklehurst

Perseus Mining ((PRU)) is making progress in regaining investor confidence as it turns its focus to the development of Sissingue, and Yaoure beyond, to mitigate the disappointment with the Edikan gold mine in Ghana. The company has made no changes to its FY17 guidance for 205-245,000 ozs at cash costs of US$1,110-1,325/oz.

Canaccord Genuity found few surprises in the June quarter report and while the next six months will expose the high costs at Edikan, improved cash flow should be apparent from the second half of FY17. Newsflow on Sissingue and Yaoure should also provide catalysts.

Perseus will commence a drilling program in the current quarter to provide further confidence in the Yaoure resources as part of a definitive feasibility study (DFS). The company has previously suggested it may decide on a smaller project to reduce up-front capex. The DFS is currently expected to completed in mid 2017.

The broker expects lower grades, lower mill throughput and remaining re-location capital expenditure at Edikan to impact on costs before higher grades and reduced capex lead to significantly improved cash flow from the second half.

Canaccord Genuity, not one of the eight brokers monitored daily on the FNArena database, retains a Buy rating and $1.05 target, and believes the shares offer the best valuation upside potential and production growth of its gold producer coverage.

FY16 was a disappointing year for Credit Suisse, although it concedes the operating challenges have been resolved. Recent guidance on Edikan proved ambitious, the broker notes, with the bottom of the range now confirmed as likely, further undermining the projections for cash generation and funding.

The next six months are expected to be dull as the Edikan mine processes lower average grades and sustains elevated capex. The broker expects the move to fresh ore late in the December quarter should boost second half production in FY17.

In mid 2017 Yaoure's DFS should be ready and, at this time, the attributed risk discount on the project should be reduced, with the time to first production sorted out, the broker maintains. This would then suggest re-rating potential for the stock.

Early in 2018 the broker expects first evidence from Sissingue as to whether grades are meeting projections. Management has stressed it has learned from the experiences at Edikan and the Sissingue design is expected to be far more robust.

Yaoure is expected to commence production in early FY20 so its full potential value is unlikely to be attributed until the ramp-up and delivery of consistent operating results in 2021, Credit Suisse asserts, perhaps beyond the pricing horizon of current gold equity investors.

The company has raised $102m, a surprisingly large amount in Credit Suisse's view, which, along with additional gold hedging, signals management is unwilling to bet on its own forecasts of Edikan's performance. Credit Suisse believes that despite the achievements, the Edikan operation is insufficiently robust, based on years of operational disappointments, to support the previously proposed debt and internally equity-funded development of Sissingue.

Sissingue will soon be fully funded independent of Edikan. If delivered on budget and it performs to plan it should rapidly repay its debt and generate a satisfactory return, Credit Suisse believes, subsequently contributing to the future funding of Yaoure.

Macquarie expects the recently revised mine plan and ongoing re-investment should deliver a material improvement in the performance of Edikan. On the broker's estimates, assuming the benefits of the revised life-of-mine are realised and Sissingue is successful, Perseus should be in a position to develop Yaoure. Macquarie believes Perseus is now well on the way to becoming a significant West African gold producer.

The broker acknowledges Edikan's performance has been variable. The operation is low grade and a high strip ratio makes material movements and grade control critical to its success. Challenges have been compounded by unreliable power supply and plant availability. Still, Macquarie believes FY15 was a clear demonstration of what can be achieved when these two factors are brought under control.

Macquarie maintains a higher discount rate on the stock, given the West African location and high level of development ounces, and uses a 10% real weighted average cost of capital for its valuation.

FNArena's database shows two Buy ratings for Perseus (Macquarie, Credit Suisse) and three Hold (with Morgan Stanley, Citi and UBS yet to update on the production report). The consensus target is 69c, suggesting 16.6% upside to the last share price. Targets range from 54c to 90c.
 

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article 3 months old

The Overnight Report: Poised

By Greg Peel

The Dow closed down 19 points or 0.1% while the S&P was flat at 2169 and the Nasdaq rose 0.2%.

Resilient

It was back to a familiar pattern on the local market yesterday as the ASX200 plunged 35 points on the opening rotation before bouncing sharply to ultimately stumble its way back into the positive. Any attempts to send this market into reverse appear ill-fated at present.

The sector to watch yesterday was always going to be energy, given the oil price fell out of its technical range overnight. In the end a 1.5% drop on the day was a modest response compared to the sort of volatility we were seeing earlier in the year.

With the short-coverers licking their wounds, Woolworths ((WOW)) was able to fall back 3% yesterday to a more sensible level after Monday’s 8% pop. Analysts have applauded the tough stance being taken by the embattled supermarket, but do not foresee any great turnaround for some time yet.

Consumer staples thus closed down 0.8% in what was otherwise a mixed session across the sectors. Investors were no doubt positioning ahead of today’s local CPI release, and RBA implications, and tonight’s Fed statement release. The banks had a good day, healthcare didn’t, the telcos are being dominated by a down-playing of expectations from Telstra ((TLS)) and would you know it, utilities was up again.

Materials was flat yesterday but may not be today following a big jump in the iron ore price overnight.

Today’s June quarter CPI numbers could be interesting. The March numbers shocked with a 0.2% drop in quarterly headline inflation and despite a 0.2% rise in the RBA’s core inflation measure, the central bank wasted no time in acting.

Economists are forecasting a turnaround in June to 0.4% headline growth but for annual headline inflation to fall to 1.1% from 1.3%. If the RBA acted at 1.3%, why would it not act again at 1.1%? Except for the fact economists expect core inflation to rise to 1.7% from 1.5%.

That’s still outside the RBA’s 2-3% comfort zone, but is it enough to ensure an August rate cut?

Looks like we’ll have to wait for the actual results.

Hamburgled

McDonalds (Dow) posted a shocker last night. The 4.5% fall for this otherwise defensive consumer staple (Yes – in America fast food is considered staple) was its biggest one day drop since the GFC, and worth 40 Dow points.

It was enough to sour the early mood on Wall Street, along with another dip in the oil price, and the Dow was consequently down over a hundred points in early trade. But as was the case on the local market yesterday, Wall Street fought its way back to a flat close.

In other Dow earnings news, new Yahoo owner Verizon posted a beat but its share price fell, while share price gains were booked for DuPont and United Technologies following positive reports.

After the bell this morning, Twitter disappointed and its shares are down 10% as I write, while Apple (Dow) did the opposite and its shares are up 7%. This bodes well for the Dow tonight, although we will likely see the usual quiet market ahead of the Fed.

The Fed keeps telling us it’s data dependent. Last night saw US new home sales up 3.5% in June to the highest level in seven years. Case-Shiller house prices were slightly higher in May, while the latest Conference Board monthly consumer survey showed confidence steady this month from the last.

Overall the data continue to improve, prompting many on Wall Street to point out that in any other era, the Fed would be hiking steadily. Brexit is now past us in terms of an immediate threat but no one expects the Fed to raise tonight, and there are still plenty of pundits believing the Fed will not move ahead of the election.

Any excuse, it seems. While history shows the Fed is not always kept at bay by an election, the long-running and often hysterical sitcom that is the US election process has arguably “jumped the shark” this year in terms of sheer ludicrousness.

Commodities

West Texas crude is down US41c at US$42.64/bbl.

The US dollar index is steady at 97.16 and all base metals moved 0.5-1% last night in London – copper up and the others down.

Iron ore jumped US$1.60 to US$57.40/t.

Gold is US$4.40 higher at US$1319.70/oz.

The Aussie is up 0.5% over 24 hours at US$0.7504 despite the flat greenback. This occurred in the local session yesterday and suggests there may be some concern amongst those short the currency that today’s CPI numbers won’t be as weak as many assume.

Today

The SPI Overnight closed up 12 points. We can probably attribute most of that to the iron ore price.

The CPI numbers will be out late this morning.

Tonight sees the UK post its first estimate of June quarter GDP, but being pre-Brexit it won’t mean much.

The US sees durable goods ahead of the 2pm release of the Fed statement.

On the local stock front, Fortescue Metals ((FMG)), Independence Group ((IGO)), Sandfire Resources ((SFR)) and Senex Energy ((SXY)) will post production reports today, although Independence has already pre-released some numbers.

Rudi will host Your Money, Your Call Equities tonight on Sky Business, 8-9.30pm.
 

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article 3 months old

The Overnight Report: Oil Jitters Return

By Greg Peel

The Dow closed down 77 points or 0.4% while the S&P lost 0.3% to 2168 and the Nasdaq fell 0.1%.

Pride Cometh

Once the undisputed and complacent king, Woolworths ((WOW)) will now close stores and cut back staff in order to reverse course after a lengthy fall from grace. As a Top 20 company, Woolies has offered nothing but disappointment for several years now for those still hanging on to a mega-cap, must-have principle. Yesterday was a different story.

The market saw the news as positive, and the short-coverers did the rest as Woolies jumped 8% yesterday, sending the consumer staples index up a stand-out 3.3%. At near 8%, Woolies was far and away the most shorted Top 20 stock in the market until the scramble began.

It was a less exciting session for other sectors. Consumer staples and healthcare resumed their rallies following some profit-taking on Friday, and utilities just keeps on keeping on. Outside of info tech, the resources sectors offered the only drag on a market that clearly remains in positive mode.

As to whether we can go again today is unsure nevertheless. Energy may prove a drag without another Woolies, although metals prices were relatively steady overnight and the ever-confident SPI Overnight closed up one point. Yesterday saw the ASX200 rally 35 points after the SPI had closed up 4.

Oil Concerns

The oil price was almost the singular driver of Wall Street earlier this year but once the WTI price recovered and settled into a range of US$44-50/bbl, the market turned its attention elsewhere. Last night oil traded down to US$43 and settled at its lowest level since April. Representing a break-down through the bottom of the range, oil now poses a renewed threat.

On the topside, the issue was one of a price of 50 bringing idled production back on line. This set 50 clearly as an upside barrier. On the downside, the issue is not crude but refined products.  There is a glut in the US of gasoline, diesel and other products, squeezing refiner margins and forcing refining cutbacks. These cutbacks lead to less crude demand, unwanted crude ends up in storage, and so down goes the price.

With the annual refinery maintenance season soon to begin, oil traders fear the level of crude in storage will only rise.

But it could have been worse. Sharp movements in the oil price earlier in the year had Wall Street panicking in either direction. The earnings season rolls on, and Wall Street still awaits the Fed’s decision and commentary on Wednesday night. The technicals remain to the upside, and pullbacks on the way are always considered healthy.

With regard the Fed, it is interesting to note last night’s auction of US two-year Treasuries saw the weakest demand in seven years. Dealers were left holding some 60% of notes on offer. Clearly investors are reluctant to buy short-term bonds ahead of the Fed and BoJ meetings this week.

The benchmark US ten-year yield remained unchanged at 1.57%, bearing in mind it was over 20 basis points lower at the Brexit nadir.

Commodities

West Texas crude is down US$1.20 at US$43.05/bbl.

With the US dollar index slipping 0.1% to 97.24, base metal price moves were minimal in London.

Iron ore rose US10c to US$55.80/t.

Gold is down another US$6.80 at US$1315.30/oz and is starting to look a little vulnerable ahead of the Fed meeting. If the FOMC comes out with a hawkish statement, and the market starts to bake in a September hike, gold will struggle to hold 1300.

The Aussie is up 0.2% at US$0.7468.

Today

The SPI Overnight closed up one point.

It’s a quiet day for data across the globe until the US reopens tonight, when home sales, house prices and consumer confidence will be in the frame.

Locally, ALS Ltd ((ALQ)) will hold its AGM today and Alacer Gold ((AQG)) will reportedly issue an earnings report.

This would be a good time to remind readers that all the upcoming reporting dates of major companies are listed in the FNArena calendar, on a best endeavours basis. In Australia, companies are not obliged to set a reporting date nor stick to one if they do, and for many a company, three different brokers will suggest three different dates for the same report.

Rudi will Skype-link with Sky Business today to discuss broker calls at around 11.15am.
 

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

Brokers Urge Caution On South32 Outlook

-Stockbrokers awaiting update on costs, FY17 guidance from South32
-Depressed commodity prices weigh on forecasts
-Favourable FX conditions diminish
 

By Eva Brocklehurst

South32 ((S32)) has largely achieved its cost reduction targets emanating from restructuring and maintains it is on track to achieve FY17 unit cost guidance. Restructuring initiatives at five operations – Worsley, Illawarra coal, manganese in Australia and South Africa, and Cerro Matoso nickel – are now complete.

The company reported a 4% lift in copper equivalent production in the June quarter, with metallurgical coal, manganese and silver/lead/zinc offsetting a modest decline in alumina. Deutsche Bank estimates the net company's cash position has increased to US$96m at the end of June from US$18m at the end of March.

Several brokers note the fact the company chose not to update on costs or reiterate FY17 guidance at this point. Hence, the cost position at the August results will be scrutinised. Deutsche Bank suspects, based on the strong June quarter, guidance may be lifted for some assets. The broker now forecasts a lift of 2% in copper equivalent production in FY17 with a decline of 3% in FY18 and 7% in FY19, as grade decline accelerates at the base metal mines.

Citi observes the share price has withstood the expected pullback in alumina and manganese, thanks to a rally in nickel and silver prices, which it now expects will also correct, supporting its Neutral rating on the stock. The broker does point out the company has make tentative steps to procure growth by entering into an option deal over the Huckleberry project in Canada. The farm-in will earn up to 70% of the property which is prospective for copper, nickel and platinum group elements.

Diversity has improved the South32 offering, Ord Minnett maintains. The largest driver in FY17 earnings is now coal (34%), followed by aluminium and alumina (26%) and then Cannington silver (24%), with the balance in manganese and nickel. The broker likes the attractive valuation, balance sheet and high quality assets but believes the over supply in key commodity markets needs to be addressed and investor sentiment towards commodities needs to improve before value can be realised.

Manganese alloy production was affected by power shortages in Tasmania, which led to the suspension of two of four furnaces, but these should return to full capacity this month. There was also a temporary reduction in throughput at Cannington in the quarter.

Credit Suisse makes slight upward adjustments (2%) to earnings forecasts for FY16. A dividend pay-out of 40% in the second half is assumed, but this is a small number – US0.4c – given the low earnings currently.

Stronger than expected sales result in a 32% increase to earnings estimates for FY16 and UBS forecasts net cash of US$130m at year end, with a full year dividend of US1c. The broker likes the strong balance sheet, improving cash flow and earnings momentum and, on this basis, retains a Buy rating.

The main surprise for Macquarie was the return to full production in South African manganese in response to better prices. Illawarra production and sales were also higher than forecast, while South African energy coal was lower.

The broker also flags the lack of an update on the cash balance or FY17 outlook and maintains that, where internationally diversified miners have benefitted from rapidly depreciating commodity currencies, these favourable conditions have reversed and could squeeze margins in the December quarter.

Macquarie suspects the deliberate exclusion of any update could signal a miss on cost targets for 2016. The broker remains bearish on the outlook for most of the commodities that South32 produces, hence an Underperform rating, but acknowledges in its calculations that, at spot prices, forecasts and valuation rise significantly.

FNArena's database contains two Buy ratings, five Hold and one Sell for South32. The consensus target is $1.78, suggesting 3.0% downside to the last share price. Targets range from $1.40 (Macquarie) to $2.00 (Ord Minnett, Morgans – yet to update on the quarterly).
 

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article 3 months old

The Overnight Report: Consolidation

By Greg Peel

The Dow closed down 77 points or 0.4% while the S&P lost 0.4% to 2165 and the Nasdaq fell 0.3%.

Stall

The ASX200 posted its tenth gain in eleven sessions yesterday but conviction waned as the day wore on. After such a solid run, not only recovering the Brexit plunge but far overshooting it, it is inevitable that a pullback of some extent should occur as profits are booked.

Having opened up over 40 points, the index closed only up 24. With Wall Street also finally seeing some consolidation last night, the futures are suggesting an open of down 32 points this morning.

Healthcare was again the star yesterday, having previously been a bit of a laggard in the rally. It rose 1.5%, outperforming more modest and relatively even gains in other sectors. The exceptions were materials, which fell another 0.4% having led out the rally from the start, and telcos, finally seeing a dip of 0.1%. Utilities were still in favour nonetheless, rising 0.6%.

The materials sector should continue to play more of an “alpha” (stock-specific) game through to next week as more quarterly production reports roll in, and as they wrap up we’ll be into the reporting season proper.

Technically, the ASX200 has done all the right things in rising to 5500. The next target should be 5800 but first we need to get past a couple of significant central bank meetings and then we need to see a successful reporting season.

Banking It

A market can’t make new highs forever, which is why nobody much minded that Wall Street pulled back last night. There were some good and not so good earnings reports on the day, but Wall Street is now looking ahead to next week’s central bank meetings and deciding to move to the sidelines.

The Fed will release its policy statement on Wednesday. A rate hike is not expected at this meeting but in the constant ebb and flow of Fed speculation, September is now firming as a good chance. Brexit has been a storm in a tea cup and recent US data, including jobs, housing industrial production and retail sales have all been solid – solid enough to put the onus on the Fed to explain why it would not raise.

The US ten-year yield has moved back up from its Brexit low of 1.36% to now sit at 1.56%. Gold has stopped rising, although it’s interesting to note that having fallen around US$15 on Wednesday night understandably, gold last night rallied back US$15.40 to US$1330.70/oz on only a 0.3% retreat for the dollar index to 96.88.

Next Friday the Bank of Japan will meet. No one knows for sure what it has in mind, but ever since the Abe government won a sweeping majority in the recent upper house election the market has assumed that whatever it is, it won’t be pop gun stuff. Mind you, I have noted before that whenever the world assumes big things from the BoJ it does nothing, and vice versa.

And on that subject, nothing is exactly what the ECB did last night, unsurprisingly. Mario Draghi pledged low rates for longer and a continuation of QE into 2017, and perhaps beyond, but saw no reason to introduce any new measures. The ECB’s status quo decision follows the Brexit rebound and a similar decision by the Bank of England last week.

Had any combination of the BoE, ECB and BoJ been forced to act swiftly to stave off post-Brexit disaster, the Fed would have an argument that staying put is the sensible option. We still await the BoJ.

And just to underscore the argument for a Fed rate hike, US existing home sales rose 1.1% in June to the strongest rate since February 2007.

Commodities

There is talk of Libya being able to recommence export from an oil terminal and that had a negative impact on oil prices last night. However, the West Texas contract rolled over into September front month delivery and often we see some selling at expiries. It’s down US$1.21 to US$44.54/bbl.

Aluminium continues to suffer from building inventories and it was down another 1.5% last night in London. The Philippines story continues to drive nickel, which rose 1.5%, while the other metals were quiet.

Iron ore rose US$1.00 to US$56.10/t.

On the dip in the greenback, the Aussie is up 0.4% at US$0.7495.

Today

The SPI Overnight closed down 32 points or 0.6%. And it’s Friday.

Japan, the eurozone and US will all post flash estimates of July manufacturing PMIs today/night.

Santos ((STO)) and OZ Minerals ((OZL)) will post production reports today.

Rudi will Skype-link with Sky Business this morning at around 11.05am 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 Overnight Report: Conviction Lite

By Greg Peel

The Dow closed up 36 points or 0.2% while the S&P gained 0.4% to 2173 as the Nasdaq rose 1.1%.

Healthy

Healthcare led the local market up yesterday with a 1.7% rise thanks to a 2% gain for mega-cap CSL ((CSL)) in response to a broker upgrade. Meanwhile, the consumer sectors continue to be the consistent players in the run above 5400 for the index, with both staples and discretionary gaining 1.4%.

One might argue whether staples is truly a “defensive” sector these days amidst the supermarket wars and the sheer size of the major players in the sector, but it seems Woolies is a stock investors find difficult not to hold in a portfolio.

The same could be said for BHP Billiton ((BHP)), which yesterday posted a mixed production report and helped materials down 1.4%, to post the only sector loss. The move down in the big miners was countered by a 1% gain for the banks, for which the story is much the same in terms of “must-haves” of the bygone era.

Were this recent rally to be a cyclical one, we would be seeing a rotation out of some of the defensives many an analyst sees as overbought. But yesterday telcos and utilities continued to rise along with the market.

What we’re likely seeing here is a combination of TINA and FOMO – there is no alternative and fear of missing out. With a central bank safety net under global stocks – and that will likely include another RBA rate cut -- there doesn’t seem much risk in holding stocks and there’s no point in suggesting the rally lacks fundamental basis if it’s just going to keep moving higher.

Yesterday’s session represented the ninth gain for the ASX200 in ten.

The Aussie is continuing to go the right way as well, down another 0.6% this morning at US$7463.

Spectators

There may not be too much FOMO going on on Wall Street at the moment given the ongoing graft into new blue sky territory is occurring on very low volumes, even for summer. Commentators make constant reference to historically high levels of US cash on the sidelines but new all-time highs, and bullish talk, has not yet been enough to shift that cash back into play.

Which is interesting considering you basically get no return on your cash in the US.

Microsoft (Dow) was the talk of the Street last night after having posted an earnings beat in Tuesday night’s aftermarket and a 5% gain in last night’s session. Traders were most excited about one particular element of Microsoft’s result, being its suddenly popular cloud business. A successful move into the cloud shifts the tech stalwart more into “new tech” territory from its “old tech” status.

Microsoft’s result spurred a fresh round of tech stock buying on Wall Street last night, as evidenced by Nasdaq outperformance.

Morgan Stanley rounded out the bank sector results with a solid beat, just as each US bank has largely done. MS shares rose 2%.

After the bell this morning, we note Dow stocks Intel and American Express are seeing post-result selling, down 3% and 1.5% respectively as I write. EBay, on the other hand, is up 6%.

We’re still only now getting into the meaty part of the US results season but so far the beats are clearly outweighing the misses. It must be taken into consideration nevertheless – and here the banks are a case in point – that most of the “beats” reflect not-as-bad-as-expected profit declines rather than profit growth.

Yet Wall Street is creating new highs every day.

There is also a growing concern that the VIX volatility index on the S&P500 has fallen to 11, which is typically the bottom of the range and often the contrarian signal for volatility to come. In theory, 11 suggests over-complacency. In practice, it means fewer investors feeling the need to buy downside protection for their portfolios.

While 11 is about as low as it goes, the VIX can hang around the lows for long periods of time. I’d also wager that the current low level is a result of so many investors being burnt on protection they took against a Brexit disaster that lasted all of five minutes, they are wary of making the same mistake twice.

One doesn’t need one’s own put options. The central banks have that covered.

Commodities

It was weekly US oil inventory night last night and for the ninth week in a row, crude inventories fell. Last week’s drop was greater than expected so West Texas is up US37c at US$44.94/bbl.

The US dollar index continues to tick higher, and is up another 0.1% at 97.14 this morning. While the strong dollar is acting as a headwind for commodity prices it’s not yet causing any major dramas. Base metal prices were once again mixed on small moves last night in London, other than a 1.5% fall for aluminium.

Iron ore is unchanged at US$55.10/t.

It’s a different story for gold. Are those assuming EU turmoil, BoJ shock & awe and a timid Fed starting to lose their conviction? Gold is down US$16.40 at US$1315.30/oz.

Today

The SPI Overnight closed up 20 points or 0.4%, matching the S&P500. That would take the ASX200 past the 5500 level.

The ECB holds a policy meeting tonight. There should not be any great surprise if the central bank does nothing, given the world has shaken off Brexit altogether and the euro is lower, which is exactly what the doctor ordered.

It’s a busy night for US data tonight, including existing home sales, house prices, the Philly Fed index, the Chicago Fed national index and leading economic indicators.

NAB will publish a June quarter summary of its business confidence survey today.

Woodside Petroleum ((WPL)), South32 ((S32)) and Evolution Mining ((EVN)) will post production reports today.

Rudi will appear on Sky Business from 12.30pm until 2.30pm today.
 

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: Greenback Worries

By Greg Peel

The Dow closed up 25 points or 0.1% while the S&P lost 0.1% to 2163 as the Nasdaq fell 0.4%.

Not the Whole Nine

The minutes of the July RBA board meeting revealed the board’s opinion that “the transition of economic activity to the non-resources sector was now well advanced and recent data suggested that growth had continued at a moderate pace in the June quarter”. However, recent data has also suggested that the labour market has been “more mixed of late”, inflation is expected to remain “quite low for some time”, the housing market has become “somewhat mixed” and the stronger Aussie continues to “complicate” policy.

The board now awaits upcoming data on inflation, labour and housing due before the August meeting. “This information would allow the Board to refine its assessment of the outlook for growth and inflation and to make any adjustment to the stance of policy that may be appropriate”.

In other words, economists are still expecting an August rate cut.

It was around the time of the release of the minutes yesterday the ASX200 began to slide into the negative, not that they likely had any influence, killing off hopes of a ninth straight day of gains. At the index level, a fall of 7 points is hardly momentous nonetheless. The higher markets rise in a single run the bigger the inevitable pullback is going to be.

A minimal move for the index nevertheless belied some largish sector moves. The loser on the day was materials, down 1.8% on a lower iron ore price and otherwise profit-taking after a solid run. Materials was the negative that cancelled out decent moves up for energy and the consumer sectors but the star on the day was utilities, up 1.7%.

How crowded can the yield trade become?

Having broken up through 5400 resistance, the index is now looking a little hesitant at 5450. Once again there has been no lead from Wall Street overnight, and the futures are again up just the one point this morning.

The good news is the Aussie has dropped a percent to US$0.7504 on a combination of yesterday’s RBA minutes and a further surge in the greenback overnight. Attention is now firmly back on the Fed, which meets next week. The US dollar is adjusting for Brexit-related pound and euro weakness and assumed policy action from the BoJ to cap the yen on the one hand, and improving US data on the other.

In other words, rate hike talk is back. It would be interesting if the Fed were to hike next week as that might act as a proxy for an RBA cut, at least in terms of the currency. But September is considered more likely for the Fed, if at all, hence the RBA will have to make its decision first.

Stalled

Wall Street continued to go nowhere last night although the Dow did manage to notch up a sixth straight gain into further blue sky. The offset for the broad market S&P500 can be seen in the Nasdaq, which was dragged down by a 14% fall for Netflix following its disappointing result and a subsequent market reassessment of streaming businesses.

On the other side of the coin, plodding old consumer staple Johnson & Johnson (Dow) posted an earnings beat and provided upbeat September quarter guidance. Goldman Sachs (Dow) matched its bank peers with an earnings beat but its shares were off on the day, likely because the market repriced the banks last week following JP Morgan’s strong result.

On the data front, US housing starts rose a better than expected 4.8% in June. It was this release that helped the US dollar index rise to a four-month high, up half a percent to 97.03.

The greenback was the big talking point of the day on Wall Street. Much was made last year of the currency drag on US multinational earnings as the dollar surged in the December quarter ahead of the Fed rate hike. At that time the index just pipped 100, before the early 2016 commodity slide brought it back to earth once more and killed off further Fed rate hike expectations.

When the index crossed back over 97 last night it was a trigger for renewed concern. The age-old Catch-22 for any market is that a strengthening economy is good, but a strengthening currency is not so good if you are an exporter.

Commodities

Materials and energy were among the sectors in the red on Wall Street last night as a result of the stronger greenback. West Texas crude fell US63c to US$44.57 to drop below the low end of the recent range at 45.

For base metals it was not necessarily a case of blindly responding to the US dollar, nonetheless. Trading was relatively quiet on the LME ahead of Thursday night’s ECB meeting but there was a nod to the strong US housing starts number, which was the cause of dollar strength. Copper and zinc rose 1%, aluminium fell 0.5% and the others were flat.

Iron ore fell by another US$1.10 to US$55.10/t.

Gold is not blindly responding to the dollar either, but if the dollar continues to rise the headwinds will blow stronger. Immediate Brexit fears may now have passed but there is no reason to assume there will be no fallout whatsoever, which is likely what’s keeping investors in the safe haven for the time being. Gold is up US$3.20 to US$1331.70/oz.

Today

The SPI Overnight closed up one point.

Yesterday’s production report from Rio Tinto ((RIO)) was more “okay” than great but on a weaker iron ore price, profit-taking in the sector was always on the cards. The iron ore price is down again, and BHP Billiton ((BHP)) has just reported today.

Woodside Petroleum ((WPL)) also posts its production report today, Cimic ((CIM)) already jumped the gun with a pre-season earnings result yesterday, and yield lovers will be glued to Sydney Airports’ ((SYD)) June traffic stats.
 

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article 3 months old

Material Matters: Iron Ore, Oil, Gold, Potash And Nickel

-China's steel market consolidating
-More deficits needed for rally in oil
-Buy gold equities on pullback - RBC
-Pressure building on potash price
-Philippines unlikely a strong catalyst
 

By Eva Brocklehurst

Iron Ore

Rising steel prices in China have dragged up the price of iron ore, with ANZ Bank analysts suggesting the news regarding a possible restructure of the Chinese steel industry is behind the firmer prices. Baosteel and Wuhan Iron & Steel have announced a joint strategic restructuring, resurrecting the hope over-capacity in the industry could be addressed.

The analysts cannot envisage iron ore prices staying at current levels for too long and consolidation in the steel market is expected to be, ultimately, bearish for iron ore demand. Supply growth in iron ore remains relatively high as well. The analysts recommend producers use the current rally to forward-sell some production.

Oil

Sentiment in the oil market has turned bearish on the back of rising rig activity in the US amid signs of weak demand. This is in contrast to what the ANZ analysts consider is a constructive fundamental backdrop.

The analysts expect the tightening in the oil market to continue, but the extent of the current increase in activity is also considered unlikely to be sustained at current prices. The analysts do not expect US output to stabilise until the December quarter, even assuming prices over US$50/bbl.

A high level of inventories remains a concern and will likely require a market deficit over a period to fall back to a more sustainable level. The analysts suspect any further declines in price will accelerate supply closures and set the stage for an even stronger recovery in 2017.

Gold

RBC Capital Markets expects gold prices to strengthen from the current US$1,340/oz, as investors choose gold as a safe haven investment. This comes amidst elevated levels of geopolitical uncertainty, and higher systemic risk associated with declining real rates and increasing amounts of sovereign debt offering negative returns.

The analysts increase gold price assumptions to US$1,500/oz in 2017 and 2018, 12% above the current spot price, before forecasting a decline to US$1,300/oz in 2020. Investment demand for gold has outshone the decline in jewellery demand, the analysts note, and this situation is expected to continue with investors buying on any pullback in the price.

The analysts recommend investors take advantage of any pullback to buy gold equities, with a focus on operating companies that have attractive margins, solid balance sheets and organic growth opportunities. Preferred Australian stocks include Silver Lake Resources ((SLR)) and Saracen Minerals ((SAR)).

Potash

Contracts have finally been settled for potash shipments to China. At US$219/t CFR Macquarie notes the agreement set by Belarus is more than 30% below the price in 2015. This suggests a commodity space fast turning into a battle for market share while the discipline of the old producer cartel has been broken. Further capacity is being added so the pressure on prices is building.

Potash has recently been the only commodity trading out of its cost curve but now Macquarie observes market economics have taken hold. One area of hope for the market in 2017 is the recent recovery in agricultural prices, which points to better future demand. Chinese imports are now also expected normalise after a weak period.

Still, the broker does not expect spot prices to recover to levels seen at the start of 2016 in the foreseeable future. Macquarie acknowledges it has long been a bear on potash, but the latest contract settlement was even lower than it expected.

The broker also reiterates a view that the contract system is starting to break down and heavy discounts to this benchmark could well be done. Such a process would be a further de-rating event for producers.

Nickel

Deutsche Bank observes the new administration in the Philippines could mean, if a large enough swathe of the country's nickel ore mines are closed because of environmental infringements, there will be a second supply shock to the market in as many years.

The Philippines accounted for just over 20% of the mined nickel units in 2015. Still, the broker does not believe the drawdown of inventories will reach critical levels. The lesson from the last shock, when Indonesia applied a nickel ore export ban, is that support for the metal is only temporary, given the abundant supply of laterite ore.

Indonesia is coming back into the market as its smelting capacity ramps up while New Caledonia could potentially allow more ore exports. Deutsche Bank concludes that the Philippines will not be a catalyst for a complete re-basing of the nickel price overnight but could help along the way to a more sustainable price range.

See also, Nickel Price Hike Likely on July 18 2016.

Syrah Resources

Syrah Resources ((SYR)) has secured its funding for Balama after recently raising $194m in a placement. With the funds secured the company has earmarked up to US$45m to progress the company's spherical graphite project in the US.

It now appears likely the company will assess the viability of an enlarged plant compared with its prior consideration of a 25,000 tpa plant, given offtake agreements with Morgan Hairong and Marubeni now point towards demand being stronger than anticipated.

Canaccord Genuity updates its model to account for the equity raising and the timetable for construction at Balama. The broker looks to updates on construction as it progresses at Balama and considers further marketing and offtake arrangements are the next de-risking catalysts. Canaccord Genuity retains a Buy rating and raises the target to $7.00 from $6.15.
 

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article 3 months old

The Overnight Report: Slow And Steady

By Greg Peel

The Dow closed up 16 points or 0.1% while the S&P gained 0.2% to 2166 and the Nasdaq rose 0.5%.

Grafting

The ASX200 posted its eighth consecutive up-day yesterday in rising 28 points. I haven’t seen any referrals to history, but I assume it’s been a while since we’ve seen such a run. The eight days have taken us from a Brexit low of 5197 to yesterday’s close of 5458 – a gain of 5%.

That’s a lot in a week but if we take out the hundred point gain of Monday last week we’re otherwise looking at a steady graft. That Monday was the day the world decided Brexit was no big deal but otherwise, our market, Wall Street and other markets clearly have a feel of “Where else could I put my money?”

Materials slipped a little yesterday to be the only losing sector while gains were mostly even across all other sectors with the exception of energy, up 1.2% as Oil Search ((OSH)) abandoned its bid for InterOil, and consumer discretionary, which gained 1.4%. JB Hi-Fi ((JBH)) was the mover in a sector that has been a little left behind in the rally so far, being one of the most cyclical.

Which brings us back to the question of just how long a rally based on defensives can last. The bounce in commodity prices helped the index back over 5000 pre-Brexit vote and while issues of capital and low interest rates still trouble banks, their yields cannot be ignored. Otherwise, utilities and telcos have been drivers, consumer staples has defied the supermarket wars, although we must remember there are other stocks in that sector, and healthcare has wobbled its way back after various regulatory and Brexit (currency) scares.

To seriously push to new highs – and here we remember that while Wall Street long ago surpassed its pre-GFC high, the equivalent ASX200 high is still 25% away – we will need growth stocks to take the baton. Yield compression in the banks, REITs and infra funds can only last so long before bond proxies become way too expensive.

Bring on the result season.

Grafting

It occurred to me this morning that the original FNArena Overnight Report was only ever written on days in which the Dow moved 50 points or more. That was ten years ago. The reason being that under 50 points there wasn’t really much to talk about – over 50 points obviously something had happened. Nowadays 50 points is a slow day.

The point is that with the odd exception of 1987, the tech wreck wreck and other spurts of volatility, grafting is what stock markets typically did up until the GFC. The financial world was a steadier, safer place. But for the fact there may not be a lot to talk about in an Overnight Report, it would be nice to return to that world.

Wall Street grafted higher again last night without any great conviction. Each move up in both the Dow and S&P is currently a new all-time high. The Nasdaq is back over 5000 and at new highs for 2016 but still below its 2015 high.

The Nasdaq was in the frame last night, outperforming with a 0.5% gain thanks to Japan’s Softbank making a takeover bid for US-listed but UK-based ARM Holdings, makers of technology for Apple and others. Jaws dropped at the 43% premium offered by Softbank, the CEO of which explained his eagerness as a longer term investment in the Internet of Things.

Call that “new tech”. New tech was otherwise dealt a blow after the bell this morning when Netflix posted a shocker that sees its shares down 14% as I write. Old tech, in the form of IBM (Dow) and Yahoo, posted reasonable results which have them both up slightly.

Bank of America joined its peers in posting a beat during the session, which sent BofA shares up 3%. But to put that into context, BofA’s “beat” was still on a 19% drop in June quarter earnings year on year, blamed on low interest rates.

Wall Street continues to worry over the TINA rally and the high multiples being paid for defensive yield, as is the case here. As the US result season rolls on, a clearer picture will emerge, particularly from forward guidance rather than just last quarter’s earnings numbers.

Commodities

Iron ore tumbled back last night, falling US$1.60 to US$56.20/t.

A mixed session on the LME saw nickel starring with a 2.7% gain (See Nickel Price Hike Likely).

West Texas crude fell back US$1.03 to US$45.20/bbl as it became clear the Turkish government is back in control. WTI is bouncing around a lot, and so too local energy stocks, but for the moment it’s firmly wedged into a 45-50 range.

Gold is down US$8.60 to US$1328.60/oz despite the US dollar index being down 0.1% at 96.56.

The Aussie is steady at US$0.7580.

Today

Anyone want to back nine days? The SPI Overnight closed up one point.

We’ll see the minutes of the July RBA meeting today. Economist consensus is still baking a rate cut next month.

The first post-Brexit ZEW survey of eurozone investor sentiment is out tonight.

On the local stock front, Oil Search and Rio Tinto ((RIO)) will post June quarter production reports.
 

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

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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