Tag Archives: Precious Metals

article 3 months old

Treasure Chest: ANZ Warns Of Commodity Price Volatility

By Greg Peel

Earlier in the year it appeared as if Beijing’s stimulus measures, both monetary and fiscal, may have been starting to have their desired impact on the Chinese economy. The data began to improve. Mind you, one always has to be wary of misleading Chinese data fluctuations before, during and after the Lunar New Year holiday.

China’s May data now suggest things have taken a turn for the worse once more. Commodity price rebounds out of the February dip have to a degree been driven by stronger Chinese demand for the likes of iron ore, oil, and to some extent, base metals. There have been fears of such demand simply reflecting a re-stocking phase which must eventually come to an end, but analysts have been surprised that this had not yet become apparent.

Reality bit last weekend when Beijing released a weak number for May fixed asset investment, which reflects infrastructure spending. Industrial production was also uninspiring. The weakness in China’s financing numbers for May released earlier this week was notable, ANZ’s commodity strategists point out.

Loan growth was stronger than expected but total social financing was quite subdued, ANZ notes, corroborating the fall in fixed asset investment growth. A decline in the money supply and aggregate finance suggests the Chinese economy has peaked. Yet the data is not so poor as to press the PBoC into more aggressive monetary easing. ANZ nevertheless believes the government will likely launch further fiscal policies and speed up infrastructure approvals.

While the Chinese story is an ongoing one, of more immediate threat to commodity prices is next week’s Brexit vote. A “go” vote will likely send stock and commodity (ex-gold) markets into a tailspin. The impact may only prove temporary, ANZ suggests, but losses could be steep.

Commodity prices should otherwise be supported on the downside now that the Fed has returned to a more dovish stance, in line with market perception. Three anticipated US rate hikes this year have now become one, and that’s not a given either. Rate hikes would have placed upward pressure on the US dollar and thus by default, downward pressure on commodity prices.

It is still likely a Brexit “go” vote will result in US dollar strength as a safe haven for funds following out of the UK and Europe, adding to downside pressure on commodity prices irrespective of general volatility.

The exception is gold, which is more currency than commodity and as a safe haven, can move independently of the US dollar if circumstances warrant. Gold has already challenged the US$1300/oz mark, which will no doubt be breached were the Brexit vote to throw the world into turmoil.

The latest polls have the “stay” vote in front. It will be a nervous week.


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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

Material Matters: Gold, Zinc, Copper, Thermal Coal and Steel

-Real US rates key to gold
-Global zinc deficit continues
-TGS offering leverage to copper
-Oil, LNG driving thermal coal
-Few positives seen for copper, aluminium
 

By Eva Brocklehurst

Gold

Prices for gold are surging, as a patch of bad economic data in the US is seen hampering the Federal Reserve's ability to tighten monetary policy. Macquarie envisages the near-term gains for gold are temporary as it does not believe the US is heading into recession.

The timing of a weak jobs report could not have been worse for the Fed, Macquarie contends. The broker believes the Fed was moving in the direction of raising rates again.

While gold does gain ground amidst Fed inaction, Macquarie notes it has not re-rated against US metrics such as interest rates and the currency. This is because the latest employment report, while poor, does not mean much more than a slightly longer wait for the Fed to hike. The broker's US economist does not find the jobs data indicative of overall trends and still envisages a high probability of a Fed funds hike at the next meeting in July or, if not then, September.

Still, Macquarie remains bullish in the medium term on gold, arguing for higher gold prices in 2017 and 2018, based on increasing inflationary pressures, and the fact the Fed may be reluctant to react compared with previous cycles because of its fear of causing another recession.

The appearance of weak economic data now and then is expected to embolden the Fed's doves and ensure real interest rates in the US remain low, and it is real interest rates that typically determine longer-run gold prices.

Zinc

The top performer among commodities in 2016 is zinc, given mine shortfalls and China-led demand growth, Morgan Stanley observes. The spot price is up 30% in the year to date and above US$2,000/t for the first time since July 2015 and the broker suggests it is close to a peak.

More than half of all zinc supply ends up on steel, as galvanising. So, as steel production rates lifted so did demand for zinc. Softer prices for steel in May reflect a slowing in local demand in China amid emerging anti-dumping constraints on its exports, the broker contends. Still, the growth outlook remains solid for 2016 and the broker continues to forecast a deficit for zinc in the global market in 2016-17.

Copper

Macquarie continues to be bearish on copper, decreasing its FY16 and FY17 copper price forecast by 4% and 9% to US$2.13/lb and US$2.17/lb respectively. Mid tier copper producers in the broker's coverage suffer downgrades to earnings estimates as a result.

Sandfire Resources ((SFR)) remains the preferred copper play, trading on a 2017 price/earnings ratio of 6 versus 11 and 12 for OZ Minerals ((OZL)) and Tiger Resources ((TGS)) respectively. The broker concludes that all three are currently fully valued. The broker also prefers Sandfire's exploration potential in the Doolgunna province over Oz Minerals' Gawler Craton tenements.

In an absolute sense, Tiger Resources offers the most leverage to a near-term improvement in copper prices. The stock is the only primary copper producer under coverage with material geographical risk, which the broker suggests may be discounting the current valuation.

Thermal Coal

Morgan Stanley observes it is over five years since the market was surprised by the seaborne thermal coal market, with prices down 50-60% since the 2010 peak. Since late April prices are up 2-10%, with the biggest moves in the top grades.

The reason the broker finds this rally surprising is the season. A lift might occur in November or December in the pre-northern winter re-stock but not in the middle of the year when the trade is well supplied.

The broker also suggests China's import regime is not the culprit, as it is not a driver of the thermal coal price now. Rather, ongoing strength in crude oil and gas prices are behind the latest rally. China faces a looming shortfall in supply to its coal-fired power grid and in the longer term Morgan Stanley suspects conditions are improving for seaborne thermal coal.

Steel & Iron Ore

The re-start of blast furnaces under higher steel prices seems muted to Credit Suisse. Lower output may reflect a decline in steel prices in mid May but also seasonality, as China's output typically peaks early in the second quarter of the year.

Meanwhile, as the northern slowdown of steel demand approaches, this is likely to keep iron ore demand subdued until mid August and the price appears to be in a holding pattern for the near term.

Credit Suisse expects steel demand will step up again in the December quarter as the infrastructure stimulus that China initiated early in the year comes into play. The broker also notes no building up of iron ore at ports, with China's domestic supply seen declining to balance the market.

China Outlook

Macquarie observes after a trip to China that a more cautious approach to demand is increasing. Most contacts suggested to Macquarie that a peak has already occurred in sequential economic growth for this mini-cycle. Yet none expect a imminent sharp decline. Concerns over structural problems have also started to re-emerge.

The broker's views were reinforced, with a belief that iron ore is well supported around current prices and the recovery in coal is likely to be limited. On the subject of base metals, besides zinc standing out in a tight market, there was little to make Macquarie more positive about copper or aluminium. Industry participants were more cautious about a recovery in nickel than the broker is currently.
 

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article 3 months old

The Overnight Report: Hawkish Yesterday, Dovish Today

By Greg Peel

The Dow closed down 34 points or 0.2% while the S&P lost 0.2% to 2071 and the Nasdaq lost 0.2%.

More of the Same

The change of mood was still evident yesterday morning in the wake of Tuesday’s hundred point capitulation as the index opened lower once more. Last week Brexit was a date on the calendar, this week it’s a looming potential catastrophe.

The market did nevertheless decide mid-morning that perhaps enough is enough. Brexit is by no means a given at this stage, and if the result is to stay, one presumes an almighty rebound. If it is to go, well a lot of that risk has already been priced in.

But after managing to hold its ground into the afternoon, the index conceded to selling late in the session to ensure the market closed on its lows. That selling may not, however, be specifically Brexit related. Today sees the expiry of June quarter ASX index options, SPI futures and futures options. If investors are rolling over protection, as is sensible to do before the potentially volatile expiry day, protection sellers are selling stocks to hedge.

The same thing happened on Wall Street last night. More on that in a moment.

While all sectors again finished in the red yesterday, this times the banks (-1.4%) were a particular stand-out. The biggest impact of a Brexit will be felt by the global banking industry, as reflected in the ongoing shift down in global interest rates.

Materials also fell 1.4% on the lower iron ore price and on hedge selling of large caps, which also ensured telcos were down another 1.1%, Thereafter, the magnitude of sector drops tailed off.

As was the case with Tuesday’s NAB business confidence survey, yesterday’s Westpac consumer confidence survey was never going to have much of an impact on a market worried about other things. As it was, it was a pretty solid result.

The confidence index fell 1.0% in June to 102.2. But given it jumped 8.5% in May following the RBA rate cut, economists suggest that to only slip back a percent is a sign of lingering confidence. And numbers over a hundred represent optimism. It’s also not a bad result given election uncertainty. The result pre-dates the sudden rearing of Brexit’s ugly head, but one wonders just how long the average consumer lays awake at night worrying about such matters.

Loss of Credibility

Before last night’s Fed statement release and Janet Yellen’s press conference in the afternoon, there were a couple of significant data releases in the morning.

The US producer price index rose 0.4% in May, beating 0.3% expectations, but it was all about oil prices. Take out oil and food, and the core PPI actually fell 0.1%. Nothing to suggest a rush to hike rates there.

Industrial production fell 0.4% to market the seventh decline in nine months. See above.

Yet according to the afternoon’s Fed statement, and despite a very low March quarter GDP result, the US economy is actually looking better now than it was in April when the last FOMC meeting was held. Back in April, it was the strong US labour market that was driving Fed thinking, and expectation of rising inflation. But now, the Fed sees the labour market slowing.

One bad apple don’t spoil the whole bunch girl. Maybe Donny Osmond should be Fed chairman. The Fed may be data dependent, but the FOMC will be a bit red-faced if the weak May jobs number does prove to be a one-off as many expect.

Whatever the case, the FOMC chose not to raise its cash rate last night. It was a unanimous decision, meaning prior hawks on the committee have now pulled their heads in. More importantly, the infamous “dot plots” showed the FOMC members have all reduced their rate expectations through to 2018. The Brexit vote may have held the Fed up this month, but it would seem a July hike just flew out the window.

Indeed, it appears the Fed may now only be looking at one rate hike this year, down from four after hiking in December. The market thinks even one is becoming unlikely. What has everyone frustrated is that in April the Fed suddenly swung to be quite hawkish, leading markets to prepare for a June rate hike that seemed inevitable. Then came one bad jobs number. Now the Fed is back to being dovish again.

The market had always been dovish. The Fed has come back to meet the market. Who is influencing who?

There is also general feeling, Brexit fears aside, that the Fed simply cannot risk a rate hike when Japan is negative, half of Europe is negative and Germany is on the cusp of negative. The gap may be too much for global markets to handle. Not that global markets are supposed to be the US Federal Reserve’s responsibility.

The fact that the Fed has come back to meet the market was reflected in stock index movements over the session. Indices were a little higher in the morning thanks to rebounds in Europe, and typically quiet ahead of the statement release. On the statement release they did very little at all, which is most unusual. The Dow sat at around 50 points up all through Yellen’s press conference and beyond.

The fact the Dow closed down 34 points, representing a sharp late sell-off, has been attributed to Friday night’s “quadruple witching” equity derivatives expiry – the equivalent of what the Australian market will see today only of a much greater magnitude. The June quarter always represents the biggest expiry volumes, and typically the market starts to roll over positions a couple of days ahead. With protection still being sought at this time of uncertainty, rollovers translate into stock selling.

Commodities

West Texas crude is down another US41c at US$47.49/bbl.

Whatever’s going on in base metals at present, no one’s quite sure. The LME always closes just as the Fed statement is being released, which usually means little movement until the night after. But last night copper jumped 2.7%, following a couple of weak sessions. Aluminium rose 0.5% and nickel and zinc both around 1%, while lead stood still. Short covering was cited.

Iron ore fell US60c to US$50.20/t.

The US dollar index is down 0.4% to 94.59, but that’s all post-Fed. Gold is up US$6.00 at US$1291.50/oz, having briefly kissed 1300 post-Fed.

The Aussie is up 0.8% at US$0.7408 but that is not a Fed-related spike. The Aussie has steadily been climbing over the past 24 hours, possibly as the world comes to realise Australia’s is one of the few developed economies left offering reasonably positive rates. Even at 1.75%.

Today

The SPI Overnight closed up one point. Have we seen the end of the pre-Brexit vote selling? Today, as noted, is expiry day, so anything might happen.

And to that end we note the Bank of Japan will hold a policy meeting today, no doubt very relieved the Fed has backed off.

Locally we also see the May jobs numbers today.

Goodman Group ((GMG)) and Graincorp ((GNC)) will host investor days.

Rudi will make his weekly appearance on Sky Business, 12.30-2.30pm, only to return again between 7-8pm for an interview on Switzer TV.


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

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

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article 3 months old

The Overnight Report: Will I Stay Or Will I Go Now

By Greg Peel

The Dow closed down 57 points or 0.3% while the S&P lost 0.2% to 2075 and the Nasdaq fell 0.1%.

Market-Wide

There is not a lot to say about yesterday’s sell-off on the ASX, which simply echoed global fears that have built since Friday night with regard a possible Brexit. The public holiday in Australia meant some catching up was needed.

All sectors were hammered yesterday, and those involving larger caps more so.

Energy led the charge with a 3.9% fall, exacerbated by the lower oil price. The banks had the biggest impact with a 2.2% drop. Healthcare, which has exposure to Europe, fell 2.9%. Telcos, which might otherwise be a defensive but for mega-cap Telstra, fell 2.0%, and ditto the supermarkets, which fell 1.8%.

The true defensive – utilities – was the outperformer on the day in falling only 0.6%.

The index suffered technical damage in falling through 5225 to rest at 5200, which offers up the potential of a move back to 4800. However what we are dealing with here is a binary risk event. Either Britain will vote stay or go. Markets are currently building in “go” risk and if the polls keep swinging that way over the next few days, there may be more such risk to build in. But then the result may be “stay”, which is still the bookies’ tip to date.

“Stay” would take us all the way back again, presumably. And it is possible “go” will have less of an impact now markets have begun to adjust.

Taking a back seat yesterday was NAB’s business confidence survey for May, which was conducted after the federal budget but before anyone started worrying about a Brexit.

Business conditions continued to improve in May, to 10.1 on the index from 9.7 in April. This bodes well for Australia’s economic transition and employment prospects. But business confidence fell, to 2.7 from 5.3, suggesting concern about the future.

This time last year, confidence surged following the Abbott government’s small business friendly budget. This year’s Turnbull government budget is also business friendly, but it would appear there is concern as to whether there will still be a Turnbull government after July, or worst still, some unworkable hung parliament.

Trader’s Market

What is most notable about Wall Street’s response to sudden Brexit paranoia is a lack of major stock market volatility despite a spike in the VIX volatility index. That index is not measuring volatility based on daily market movement, it is measuring volatility implied by the cost of put option protection. Wall Street is covering its backside, but not bailing out in any mad panic.

Having already fallen substantially on Monday night, last night stock markets were down 2.0% in London, 2.3% in France and 1.4% in Germany. The German ten-year bond yield traded into the negative before settling at 0.00%.

Stock market selling rolled across the pond to send the Dow down 130 point in the morning, accompanied by bond buying that saw the ten-year yield heading towards 1.50%. But once Europe closed, Wall Street turned around. The fact the S&P500 closed down only 0.2% when all about were losing their heads suggests US traders believe the panic is overdone and/or if Europe is about to suffer upheaval, the US is a much safer place to be.

The US ten-year yield ultimately returned to 1.61%.

Adding to the confusion was a 0.5% jump in US retail sales in May, beating 0.3% forecasts. While Brexit is dominating the current market psyche, we must not forget the Fed will release a policy statement tonight. If, as many believe, the May jobs number turns out to be a statistical blip, then the positive retail sales number plays back into Fed rate hike possibility.

But not tonight. Maybe next month, after the Brexit result is known.

Commodities

West Texas is down another US$1.36 at US$47.90/bbl. Of all commodities, oil is most closely linked to the global economy as a whole.

Less so are base metals, which continue to play individual games dependent on actual supply-demand balances, inventories, China and currency moves. The US dollar index has risen 0.6% to 94.93 and copper and lead fell 1.5% and zinc 3%, but aluminium and nickel held steady.

Iron ore fell US$1.00 to US$50.80/t.

Gold is steady at US$1285.50/oz.

Reflecting the stronger greenback, the Aussie is down 0.6% at US$0.7346.

Today

The SPI Overnight closed down 9 points.

Was yesterday’s hundred point wipe-out enough to price in the Brexit factor, ahead of next week’s actual outcome? We are poised at 5200.

Today sees the Westpac confidence survey for June.

Tonight the Fed will release a policy statement, and update its forecasts, and Janet Yellen will hold a press conference.

Nib Holdings ((NHF)) will host an investor day 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.

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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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article 3 months old

The Overnight Report: Nowhere To Run To

By Greg Peel

Do Not Pass Go

Up 18 points from the open, down 34 at lunchtime, down 8 at the close. That was the story for the ASX200 yesterday in what one would assume was a session packed full of conflicting reports and releases, sending investors hither and thither. But it wasn’t.

The only report of any note was a rare profit warning from ever reliable Amcor ((AMC)), confessing to a Venezuelan forex impact in its upcoming result. That stock lost 8% on the day.

The only release of any note was Chinese inflation for May. Annual CPI came in at 2.0%, slightly lower than 2.3% expectations, while the PPI printed minus 2.8%, better than minus 3.1% expectations. So nothing to cause any great anxiety there.

Not only did the index close almost flat, there were no stand-out performers among the sectors either. Telcos (-0.7%) and healthcare (-0.5%) were the worst performers on the day, while utilities, energy and consumer discretionary (all up 0.3%) were the best performers. The banks were off a tad and materials flat.

We still seem to be in Limbo Land, with no great incentive to break away in either direction. Today is a Friday before a long weekend and not a great deal has happened offshore overnight, although the futures are down 27 points this morning to suggest a weak open.

More Work Needed

The common trend on Wall Street at present is to open lower and spend all day grafting back again. This has occurred many times in the last several sessions. It happened again last night, with the Dow opening down to be off 90 points by lunchtime before recovering.

The Dow was sitting smack on 18,000 with only minutes to go, before sell-on-close orders ensured a slight down-day at the bell.

Again, there was not a lot of news to inspire conviction either way. Having shot up over 50, oil fell back a dollar to be just above 50 this morning. Oil’s fall helped Wall Street lower from the outset, but the direct correlation that existed in the March quarter has now all but disappeared in the June quarter.

It would appear Dow 18,000 has been selected by the market as the pivot point as we move towards next week’s Fed meeting and the following week’s Brexit vote. Brexit continues to dominate debate, and we’ve two more weeks to wait.

Commodities

West Texas crude is down US$1.08 at US$50.45/bbl. The selling can be attributed to nothing more than consolidation following the long awaited breach of the 50 mark, with traders now assuming longstanding resistance at 50 will now become support.

It might be interesting to make note at this point that as the price of oil has risen on falling US production, the price of natural gas in the US has also been on a run of late. This seems logical, other than natural gas did not collapse in January as oil did. Having hung around under the US$2/mmbtu mark for a very long time, the Henry Hub price is currently US$2.60, representing a substantial rise.

Not only has US oil production been curtailed, US gas production is being curtailed. The price rise belies the seasonal trend of demand falling off into summer.

While there is no direct correlation between the closed-shop US domestic gas price and the price at which Australia’s LNG producers can sell their product to the Chinese, it’s better to see higher US prices than lower, now that the US is moving towards export.

Having run hard on Wednesday night, last night aluminium fell back 1% and lead 2%. Copper did not run up on Wednesday and has fallen 1% overnight.

Iron ore is unchanged at US$52.10/t.

Gold is up another US$7.00 at US$1269.50/oz despite the US dollar index jumping 0.6% to 94.10.

That jump has helped the Aussie down 0.7% to US$0.7432.

Today

The SPI Overnight closed down 27 points or 0.5%.

Chinese markets are closed today.

Beijing will release May industrial production, retail sales and fixed asset investment numbers on Sunday.

The ASX will be closed on Monday, as will FNArena.

Rudi will Skype-link with Sky Business around 11.15am 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: Slow Grind

By Greg Peel

The Dow closed up 66 points or 0.4% at 18,005 while the S&P gained 0.3% to 2119 and the Nasdaq rose 0.3%.

Flat

The ASX200 yet again suffered one of its first-half-hour plunges yesterday before immediately being bought back up again, to be only down slightly by midday. The futures only signalled down 18 on the open, so the rest was up to the computers.

The morning saw the release of the local housing finance numbers for April.

While the number of loans to owner-occupiers increased in April to be 4.6% higher year on year, the net value of those loans fell 1.8% to be 4.4% lower year on year. Meanwhile, loans to investors fell 5.0% in the month to be down 20.8% from a year ago, cycling a comparable reading ahead of the RBA/APRA clamp-down on investor lending mid-2015.

This is the housing market that has been offsetting the impact of weak commodity prices. Just as well commodity prices have rebounded, and China is buying greater volumes to offset the impact of weaker prices.

China’s net imports nevertheless fell 0.4% in May year on year but this was a better result than the 6.0% drop forecast, and the 10.9% fall in April. Exports fell 4.1% -- more than the 3.6% forecast and worse than the 1.8% April decline.

It was a mixed result which saw the ASX200 take another stumble at midday before grafting back again in the afternoon to a flat close.

Higher oil prices ensured a 2.1% gain for the energy sector yesterday so there needed to be an offset to square up the index. The banks were only a little weaker so it required materials to fall 0.6% due to weaker base metal prices, and despite a stronger iron ore price, and telcos to fall 0.9%.

Two sectors that have really been bouncing back and forth for no major reason these past few sessions have been telcos and consumer staples – both sectors one would normally expect to be plodders. Seems no one can make up their mind.

The index is poised at 5370, a number which is neither here nor there on a technical basis. We’re heading into a long weekend locally.

Muted Cheers

The Dow chopped around last night in an insignificant range before finally closing above 18,000 for the first time since April. But no corks were popped. The S&P 500 is within 0.6% of its all-time high, but no one is particularly excited.

It has been described as the unloved rally – a slow graft higher without any real impetus beyond the rebound in oil prices, which may yet fade, and central bank policy. A lot of attention is being focused on Europe at present, where the German ten-year yield (0.06%) continues to fall to reflect a step-up in corporate bond issuance. That step-up is all about the ECB.

The ECB’s latest QE upgrade included the addition of corporate bond purchases, on top of purchases of government bonds issued by eurozone members. Corporate Europe knows it has a willing buyer, and rates have never been so low. Why not borrow, even to buy back shares, as has been all the rage in the US. Deutsche Bank did it recently and in so doing, halted its share price slide and turned all European banks around.

Meanwhile on Wall Street, all discussion is about the Fed. Occasionally there is mention of actual corporate earnings, but they’re just a sub-text. The markets are being controlled by the central banks. In such an environment, the only real explanation many can come up with for the stock market rally on Wall Street is the TINA trade – there is no alternative investment one can make to provide any sort of positive real return.

At this rate the S&P will likely hit a new all-time high next week, possibly when the Fed puts out its statement on Wednesday night and no sign of the next rate hike is provided.

But there will likely be little excitement. An interesting element of last night’s trade was that oil rallied again, but the energy sector actually closed weaker.

Commodities

Amongst those Chinese May trade numbers was an indication of increased oil imports. US crude inventories fell again last week. There has been another pipeline attack in Nigeria. The US dollar index is down 0.3% at 93.56.

Add it all up and West Texas crude is up US$1.10 at US$51.53/bbl.

China was also importing buying base metals in May. Seems like the commodity funds picked the wrong day to bail out on Tuesday. In a session smacking of short-covering, lead rose 1%, aluminium 2%, zinc 3% and nickel 4%. Only copper stood still.

Iron ore fell US20c to US$52.10/t.

Having stalled for three days, gold appears to have decided the dip in the US dollar last night was enough reason to buy once more. It’s up US$19.30 at US$1262.50/oz.

The Aussie is up 0.4% at US$0.7485.

Today

The SPI Overnight closed up 9 points.

Presumably yesterday’s selling in the materials sector will turn into buying today on base metal and gold strength.

Chinese inflation numbers for May are due today.

ECB president Mario Draghi will speak tonight.

Rudi will make his weekly appearance on Sky Business today, 12.30-2.30pm.
 

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

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

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

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article 3 months old

The Overnight Report: Bridge Too Far

By Greg Peel

The Dow closed up 17 points or 0.1% while the S&P gained 0.1% to 2112 and the Nasdaq fell 0.1%.

Policy Shock

In his April policy statement, RBA governor Glenn Stevens concluded: “Continued low inflation would provide scope for easier policy, should that be appropriate to lend support to demand.” Inflation proved to indeed be low, so the RBA cut in May to 1.75%.

So low was inflation, as evidenced by the March quarter CPI numbers, that economists immediately pencilled in further rate cuts. August was assumed as the next move, with potentially as many as two more into 2017. Nobody expected a follow-up June cut, so yesterday economists were simply looking for confirmation that the RBA remained in an easing mode. But this was the conclusion of yesterday’s statement:

“Taking account of the available information, and having eased monetary policy at its May meeting, the Board judged that holding the stance of policy unchanged at this meeting would be consistent with sustainable growth in the economy and inflation returning to target over time.”

The RBA is not in an easing mode at all. Having cut once, it has returned to a “holding stance”.

That is why the Aussie dollar shot up a cent yesterday at 2.30pm. This morning the Aussie is 1.2% higher over 24 hours at US$0.7458.

It’s also why the ASX200, having peaked at 32 points up on the day around lunchtime yesterday, was back to square by 3.20pm. A slight recovery thereafter left a close of up 10 points.

Among those sectors suddenly turning tail were the banks, although they still managed to close with a sufficient gain to offset further insurance company selling in the financials sector. Utilities managed a flat close, while telcos fell 0.4% and consumer staples 1.0% as yield-plays lost some of their gloss. Although the flipside is the benefit of the Fed supposedly not raising.

The Fed not raising implies less strength in the greenback, so the resources sectors were able to lead the gains yesterday to offset the losses in other sectors, thanks to higher commodity prices. Materials rose 1.1% and energy 1.7%.

But for local investors, it’s back to square one. If the ASX200 was to push up through 5400 as the technicals have been suggesting, it would require a combination of a lower local interest rate and a subsequently weaker Aussie dollar to provide support. That doesn’t look like happening now, so we have to look forward past the June Fed meeting, the Brexit vote and the local federal election towards the August result season before – left field events notwithstanding – this market finds a new impetus.

Perhaps that impetus could come from rising commodity prices – oil closed above 50 last night and iron ore is up another 3% -- but just how far can these rallies run when capacity is idled?

Getting High

WTI crude rallied 1.4% last night to its first close above US$50/bbl in ten months. Disruptions in Nigerian supply aside, the oil market has begun to focus more on rising global demand.

The energy sector drove Wall Street higher last night, backed up by an ongoing feeling of relief following the Fed’s apparent back-down on a summer rate hike. Having closed above 2100 on Monday night, the S&P500 was also supported by the technicals, with traders beginning to eye off the all-time high of 2134.

But while the S&P500 is the traders’ preferred indicator, being a broad market, cap-weighted index, the antiquated Dow average still has lingering power. When the Dow hit 18,000 last night, the sellers moved in.

Round numbers are always difficult to breach in one go. The S&P is still sitting above 2100, but clearly more work will need to be done to get to the Dow all-time high of 18,188.

Next week’s June Fed meeting is no longer as critical as it was a week ago, given no one is expecting a rate hike. Then there’s the Brexit vote, which is the big unknown for markets. Perhaps new all-time highs on Wall Street will have to wait until a Brexit outcome is clear.

Then there’s the small matter of a looming presidential election, which many believe will also serve to keep the Fed at bay. Rate hike expectations have shifted away from the summer and towards year-end, with September a chance but December now preferred. By December, the Fed will know who will be controlling fiscal policy for the next four years.

Commodities

West Texas crude is up US71c at US$50.43/bbl. Many are assuming 50 is the line in the sand for the recovery rally, given it is a sufficient price to trigger the restart of idled production. The US Energy Information Administration nevertheless begs to differ.

“Low oil prices continue to cut into domestic oil production, with US monthly oil output not expected to start steadily increasing until the end of 2017,” said an EIA statement last night. This implies oil prices still have further upside on increasing demand.

The Fed-inspired base metals rally of the past few days came to an abrupt halt last night as commodity funds decided a weaker US dollar is not in itself enough to suggest higher prices. Copper was slapped 2.7% in London, while lead fell 2% and nickel and zinc 1%. Only aluminium was spared, with a 0.5% gain.

Iron ore rose US$1.70 to US$52.30/bbl.

The US dollar index is down 0.2% at 93.84 but gold remains steady at US$1243.20/oz.

Today

The SPI Overnight closed down 18 points or 0.3%. The RBA statement has taken the wind out of the sails.

Locally we’ll see housing finance numbers out today, while much attention will be paid to the release of China’s May trade data.

Vicinity Centres ((VCX)) will host an investor day 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.

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article 3 months old

Follow The Northern Star

By Michael Gable 

It was quite timely that we gave an update on gold last week and reaffirmed our views that it actually looked positive overall, not as bearish as many analysts were now turning. The news last Friday that US employment grew at the slowest pace in nearly six years put the prospects of June rate rise off the table in the US and put a rocket under the gold price.

Our tip five weeks ago on getting out of Evolution Mining (EVN) for a 37% return and getting into St Barbara (SBM) paid off with SBM now up 23.3% since that recommendation. We have to admit to being a little surprised at how much it pushed on yesterday into the close, but beyond some short-term weakness, it should head higher with the price of gold. We have also taken the liberty to look at the chart of another gold stock, Northern Star Resources ((NST)).
 


We are seeing a textbook trend in NST as it continues to head higher and higher. The stock had a couple of flat corrections in 2015 and you will notice on the chart that they sat nicely on top of the previous highs, which is a positive sign. Then the correction earlier this year managed to create a bit of space to the 2015 high which suggests a pick-up in momentum now. The recent pullback from the last few weeks also created a gap to the previous peak on the chart. Not only that, but these corrections are getting smaller and smaller in time. This all bodes well for NST. We cannot pinpoint price targets from here but any slight dips should be bought as NST is likely to accelerate well into the $5.00s over coming weeks.
 

Content included in this article is not by association the view of FNArena (see our disclaimer).
 
Michael Gable is managing Director of  Fairmont Equities (www.fairmontequities.com)

Michael assists investors to achieve their goals by providing advice ranging from short term trading to longer term portfolio management, deals in all ASX listed securities and specialises in covered call writing to help long term investors protect their share portfolios and generate additional income.

Michael is RG146 Accredited and holds the following formal qualifications:

• Bachelor of Engineering, Hons. (University of Sydney) 
• Bachelor of Commerce (University of Sydney) 
• Diploma of Mortgage Lending (Finsia) 
• Diploma of Financial Services [Financial Planning] (Finsia) 
• Completion of ASX Accredited Derivatives Adviser Levels 1 & 2

Disclaimer

Michael Gable is an Authorised Representative (No. 376892) and Fairmont Equities Pty Ltd is a Corporate Authorised Representative (No. 444397) of Novus Capital Limited (AFS Licence No. 238168). The information contained in this report is general information only and is copy write to Fairmont Equities. Fairmont Equities reserves all intellectual property rights. This report should not be interpreted as one that provides personal financial or investment advice. Any examples presented are for illustration purposes only. Past performance is not a reliable indicator of future performance. No person, persons or organisation should invest monies or take action on the reliance of the material contained in this report, but instead should satisfy themselves independently (whether by expert advice or others) of the appropriateness of any such action. Fairmont Equities, it directors and/or officers accept no responsibility for the accuracy, completeness or timeliness of the information contained in the report.

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