Tag Archives: Precious Metals

article 3 months old

The Overnight Report: All About The Oil

By Greg Peel

The Dow closed down 162 points or 0.9% while the S&P lost 0.7% to 2063 and the Nasdaq fell 0.1%.

Capitulation?

In depth analysis is not required to figure out why the ASX200 closed down 0.9% yesterday. Energy was down 6.4% and materials 3.4%, as both benchmark prices for oil and iron ore are now under the psychological US$40 mark. All other sectors traded off gains and losses of around a half a percent.

The big fall in the energy sector was compounded by Woodside Petroleum’s ((WPL)) announced withdrawal of its bid for Oil Search ((OSH)), thus removing a takeover premium from the Oil Search price. To explain the big fall in BHP Billiton ((BHP)), again, one must remember that while BHP is mostly thought of as an iron ore producer, it also has a large energy division.

The unfortunate reality for the market in general is that while recent falls can be squarely blamed on the resources sectors, as opposed to market-wide concerns, a lot of technical damage is being inflicted on the index. The 5100 level is considered support which, if breached, suggests another move down towards 4900. However, if investors can take anything away from the performance of Australian stocks in 2015, it is that index-tracking has been a disastrous strategy this year. Stock-picking has ruled, particularly outside of the large caps, with only one or two exceptions (CSL comes to mind).

It was probably never going to make much difference what China’s November trade numbers, released yesterday, looked like. It was not a day to be brave when playing the resources. Weak numbers would have been met with a “Yeah, well there you go,” and strong numbers would have been trampled in the stampede anyway.

As it was, the numbers offered a balance of sorts. They were weak, but not as weak as expected. Exports fell 3.7% year on year in November compared to 3.6% in October, but that was not as bad as expected, and imports fell only 5.6% following a 16.0% fall in October. Forecasts had suggested another double digit fall.

It is interesting to note the impact of China’s August currency devaluation. In USD terms, exports fell 6.8%, better than 6.9% a month ago, and imports fell 8.7%, better than the previous 18.8%. The numbers look worse in dollars, but is there a trend of stability emerging?

That’s a big question for 2016. Meanwhile, more immediately, have we seen the bottom for oil and iron ore prices? Monday night’s 6% trashing of oil had a hint of capitulation trade about it. Iron ore’s decline has been rather more orderly, so it is difficult to tell when that might stop. Iron ore is also beholden to Beijing’s efforts to reduce excess steel capacity – a slow process – while Beijing has no control over oil markets. That’s all down to US shale producers and OPEC.

Overnight WTI initially fell again, but found some support under the US$37/bbl level before closing only slightly lower on the session. It would be a brave trader who would suggest we’ve definitely now seen a bottom, and bottom-pickers who moved in too soon mid-year have been taken out on stretchers. But with all the talk of which US oil companies are now set to go to the wall, implying reduced supply, it may be time to look at those companies that can survive and maintain dividends. If you are stout of heart, that is. At least, that’s the call from some stout-of-heart US fund managers right now.

Wider Implications

WTI crude fell initially in last night’s session by about another dollar before finding support and rallying to be up slightly. It is currently down slightly on the session. The Dow fell 245 points in the morning before rallying back to be down 160 points. It was all about oil.

Traders were clearly hiding in the big tech space while the oil story played out. Hence we see the Nasdaq flat on the session. The S&P split the difference.

It might be all about oil, but wider implications threaten the US financial sector. Billions had been lent to mostly smaller shale oil companies by mostly smaller regional banks in the US at pervading low interest rates, against hedged barrels. Those hedges have now rolled off, the Fed is about to begin a tightening cycle, and many a shale producer was already burning cash under US$60/bbl, let alone under 40.

Wall Street is thus nervous about the flow-on effect into the financial sector. This is not the case in Australia. Outside of BHP, Australia’s Big Oil names are heavily exposed to LNG rather than crude, and the big LNG projects are financed mostly through pre-organised offtake agreements and, as is the case recently for Santos for example, fresh equity. Australia’s banks are negligible lenders to the energy sector.

Until oil can find a bottom, or at least some stability, the spectre of energy sector defaults and bankruptcies will worry Wall Street. The irony is, of course, that the more oil companies go bankrupt, or at least throw in the towel, the more likely the oil price is to stabilise on reduced production.

Commodities

West Texas is down US5c to US$37.57/bbl and Brent is down US45c to US$40.21/bbl.

In Australia, the focus is as much on iron ore as it is on oil, whereas in the US, oil is the far more dominant stock market sector of the two. Iron ore has not seen 6% overnight plunges and is not prone to such volatility, being more of a China-dominated rather than global market place and trading nothing even remotely close to the volumes that go through the oil market each day.

There is no doubt concern, nevertheless, that as the iron ore price continues to quietly slide – it’s down another US10c to US$38.80/t – there appears no reason for a bottom-picking cavalry to suddenly appear for a short-covering scramble to hint at possible consolidation. Thus junior Australian iron ore miners who are burning cash are facing heightened financial risk. But again, Australia’s banks are not in the business of lending vast sums to junior miners.

On the LME, activity has almost ground to a halt. Traders suggest end-of-year blues and next week’s Fed meeting are keeping the punters away at the moment. Last night saw mixed and smallish moves among the base metals, with the highlights being one percent falls for nickel and tin and a one percent rally for lead.

The commodity price issue has taken further toll on the Aussie dollar, which is down another 0.8% at US$0.7208. The US dollar index is also down, by 0.2% to 98.44, and gold is relatively steady at US$1073.80/oz.

Today

The SPI Overnight closed down 23 points or 0.5%. A breach of 5100 threatens for the ASX200.

Yesterday’s NAB business confidence survey was fairly benign, but today we’ll see Westpac’s consumer equivalent which has particular importance at this time of the year. We’ll also see housing finance data, which is also a strong focus of attention at present.

Beijing will release Chinese inflation data today.

 

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article 3 months old

Material Matters: Bleak Outlook For Commodity Prices In 2016

-Less commodity-intensive growth in China
-Cement, glass, aluminium, steel oversupply
-Base metals pricing relatively better positioned
-Bulks likely to remain weak over 2016
-Titanium dioxide feedstock outlook soft
-Temporary sharp sell off in PGMs
 

By Eva Brocklehurst

Commodity Outlook

It may be tempting to look for a bottom for commodity prices next year but Citi suspects there may be more softness ahead. The issue is whether the supply/demand fundamentals are shifting closer to balance for many commodities.

The core of the problem, in the broker's view, is the damping down of expectations in China and a shift to less commodity-intensive growth, plus a slowdown in other emerging markets. The rising US dollar is expected to be an ongoing headwind in general, ranging from most beneficial to gold prices on a tactical basis to meaningless for soybeans.

Citi expects higher prices by the end of 2016 for US natural gas, crude oil, base metals – especially copper and nickel – as well as platinum and palladium. A mild price recovery is expected in cereals while bulk minerals are expected to remain weak. The broker does expect price recoveries to be more persistent in 2017 for oil and base metals and possibly agriculture.

Commonwealth Bank analysts believe China has re-emerged as the key downside risk for prices. A deterioration in tier one and three cities in October has renewed the potential for the property sector to tank again.

Meanwhile China's secondary sector, dominated by manufacturing of finished goods, continues to slow. Electricity output and loan growth to heavy and light industries confirm this is the case, the analysts maintain.

Overcapacity continues to hinder the economy with a number of industries in chronic oversupply, particularly cement, glass, aluminium and steel. Reductions by major Chinese metal producers do bode well for base metal prices but the analysts are cautious, believing aluminium, alumina, steel and zinc are the best positioned for a price increase if supply does ease.

National Australia Bank analysts add their weight to the bearish tone. Declines in prices are expected to be a little more modest in 2016, with iron ore the main drag on the sector. US dollar strength will help to partly offset price declines in Australian dollar terms. Overall, the Australian terms of trade is expected to trend lower but at a slower pace.

The analysts expect iron ore spot price will stabilise at an average US$42/tonne in 2016 while hard coking (metallurgical) coal will average US$83.50/tonne. Their forecast for thermal (steaming) coal for the 2016 Japanese fiscal year is unchanged at US$62/tonne.

To account for further upside risks to OPEC (Organisation of Petroleum Exporting Countries) production in coming months, despite a fall in US production, the analysts have revised near-term forecasts marginally lower.

Oil prices are now expected to stay around the high US$40 to low US$50 per barrel in the first half of 2016 and improve slowly towards US$60/bbl by early 2017. Higher global LNG supply is weighing on prices but the analysts note prices have flattened out since March in Australian dollar terms.

Meanwhile, the NAB analysts expect gold price movements will be largely determined by the US Federal Reserve's policy tightening. A hike is expected this month in the Fed Funds rate but the analysts believe the tightening will be gradual next year before accelerating in 2017. Gold prices are expected to maintain a modest downward trend, reaching below US$1000/oz by the second half of 2016.

Goldman Sachs, in marking to market, has highlighted the broad downward move this year across a raft of prices, particularly for iron ore (13%), nickel (9%), zinc (8%), alumina (7%) and steel (3%). Changes to commodity price forecasts have a material impact on the broker's earnings forecasts for those stocks exposed to these metals.

The broker's major changes include a 10% downgrade for South32 ((S32)), Fortescue Metals ((FMG)) and OZ Minerals ((OZL)) earnings. The gold price has been significantly weaker than Goldman expected over October and November and this has had a negative impact on earnings estimates for Newcrest Mining ((NCM)), Regis Resources ((RRL)) and Northern Star Resources ((NST)). The broker upgrades Independence Group ((IGO)) to Neutral from Sell on valuation grounds.

Mineral Sands

The titanium dioxide feedstock market continues to weaken. Ord Minnett expects prices, particularly for ilmenite, will remain weak over the near term. Additional volumes from Africa are entering the market, taking share in the Chinese market from higher cost producers in Vietnam.

Meanwhile, capacity reductions are occurring across the pigment industry. Ord Minnett believes the curtailments in the pigment industry are not yet complete and, amid lower Chinese growth estimates, are likely to flow through to lower feedstock demand. The broker reduces feedstock price forecasts by 10-20% for the next two years.

Platinum Group

Large outflows in both platinum and palladium exchange traded funds have occurred over recent months. Macquarie observes most of the moves in these funds have emanated from South Africa.

The broker suspects investors are losing patience with these metals after the prices fell substantially over the year. The timing is of interest. Macquarie surmises the appeal of platinum, particularly, may have been hurt by the VW diesel scandal with investors deciding it was a good time to exit. In any case the broker is not losing sleep over it, noting the selling has eased.
 

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article 3 months old

The Overnight Report: Wasted Energy

By Greg Peel

The Dow closed down 117 points or 0.7% while the S&P fell 0.7% to 2077 and the Nasdaq lost 0.8%.

The Bad Oil

One year ago the world assumed that the regular December OPEC meeting would bring about announced production cuts to stem the tide of the falling oil price, as that’s what OPEC had always done in the past. The WTI crude price had fallen from above US$100/bbl to US$60 at that time. But OPEC did not cut.

Instead, as it turns out, OPEC, and Saudi Arabia in particular, increased oil sales at whatever price obtainable in order to protect market share, leaving it to the US shale producers to provide the production cuts given it was they who had brought about global oversupply. In late January WTI hit US$45.

Signs of apparent US production reduction, via lower rig counts, took oil back to US$60 in June but supply volumes just kept going up. WTI almost went through US$40 in August before stabilising, but overnight, in the wake of another OPEC meeting featuring no announced production cuts, West Texas has fallen US$2.43 or 6% to US$37.62/bbl – its lowest level since 2009.

This seems a delayed reaction. The OPEC meeting was held on Friday night and oil markets traded only slightly lower on the session, probably because no one really expected OPEC to cut anyway. Maybe Wall Street needed the weekend to think about it, away from the euphoric fog of Friday’s jobs number and Mario Draghi’s reassured commitment to QE. OPEC is backing a combination of US shale reduction and growing global demand to stabilise prices in 2016. But right now, US crude supply continues to grow and global demand, particularly that from China, is sluggish.

This scenario was apparently not lost on one or more investors who decided to slam Australian oil stocks yesterday. The ASX200 opened up 78 points, erasing the previous session’s “Draghi Disappointment” falls, in concert with the big rally on Wall Street. But in moved the energy sector sellers, and by lunchtime the index was flat, where it remained for the rest of the session. The telcos were the only other sector to see notable selling, down 1.9%. Otherwise all sector moves were negligible bar energy, which fell 4.6%.

It was smart selling, in retrospect. Oil prices did not start the tumble that has taken WTI well below 40 and Brent knocking on the door until after the local close yesterday.

Rock and Roll

It’s been a wild ride for Wall Street these past three sessions. Dow down 250 points on Thursday night on Draghi disappointment, up 350 points on Friday night on jobs and Draghi back-tracking, down 100 points last night on the oil price slide. The Dow was down 200 points at one stage last night, so at least there are some prepared to buy.

Oil did not impact upon European markets last night, as one might expect given Europe is an oil & gas importer, whereas Australia is an exporter and the US is a self-sufficient producer (if we bring along Canada and Mexico). Responding to US jobs and Draghi at the first opportunity last night, the German stock market jumped 1.3% and France 0.9%. There are oil names listed in London, but the FTSE only fell 0.2%.

The flow-on issue for Wall Street with regard falling oil prices is credit defaults. US business television has already been publishing lists of oil companies deemed most likely to go bankrupt were oil to fall below 40, but before bankruptcy comes default. US banks, many of the smaller regional variety, previously lent money to shale oil aspirants on the basis they hedge their production at the time. Those hedges, which would have been placed anywhere up to US$100/bbl, have been rolling off this year and rollover values at US$40/bbl mean an incapacity to service loans.

Having experienced a GFC in silly home loans, a still nervous Wall Street is always on the lookout for new GFCs in the making. There has been much concern that surging US auto sales these past few years are the result of cheap finance and “subprime” car loans, but it turns out car dealers have actually been quite tight with their finance criteria. For a while now oil loans in a low interest rate environment have been a source of angst. The jury is still out on whether a wave of oil company defaults will set in train a wave of bank failures, and whether that will reach to the high end.

The Fed is set to commence raising interest rates next week.

Commodities

As noted, West Texas crude is down US$2.43 or 6% at US$37.62/bbl. Brent is down US$2.41 or 5.5% at US$40.66/bbl. Even the US natgas price fell 5.5% last night.

The moves have little to do with the US dollar, which is up only 0.3% on its index at 98.64.

Base metals actually saw some short-covering on Friday night on the strong US jobs number, which cements a Fed rate rise. Last night traders seemed to have changed their minds nevertheless, in what has been described as a slow day that highlights the rapid approach of year-end. Copper and tin fell 1%, aluminium, nickel and zinc fell 2%.

That other member of the sub-40 club, iron ore, is down another US50c to US$38.90/t.

Gold’s moment in the sun didn’t last, confirming a short-covering scramble on Friday night. Gold is down US$15.20 at US$10.71.30/oz.

Today

Although oil prices crashed overnight, the Australian market arguably saw its oil-related sell-off yesterday. The SPI Overnight closed down 14 points.

The NAB business confidence survey is out locally today. China will release November trade numbers.

National Bank ((NAB)) has provided an update on the progress of its UK demerger.
 

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

There is little point in analysing the big fall in the local market on Friday, as it was all about “Draghi Disappointment”. Suffice to say it was a market-wide sell-off, consistent with falls around the globe, triggered by the announced extension to ECB stimulus, and on Friday night Mario Draghi eased concerns and effectively assured markets the ECB is still ready with shock and awe if necessary.

Alongside yet another positive US jobs report, which cements a rate hike from the Fed next week, Friday night saw the Dow turn a 250 point drop on Thursday night into a 370 point rally. European markets did not participate in the rebound during their sessions as Draghi spoke in New York after they had closed.

Lock it in

Ahead of the release of the US non-farm payrolls report for November, Wall Street was reeling in its expectations. Assuming the big surge in the October report to be a seasonal blip of sorts, some commentators were talking a mere 100,000 new jobs. But not only did the November result come in at 211,000, the October number was revised up for a total of over 300,000 job additions.

The unemployment rate remained unchanged at 5.0% on a slight tick-up in the participation rate. The only stumbling block was wage growth, which eased to an annualised 2.3% from October’s 2.5%. But that alone is not going to stop the Fed.

Whether or not one believes the Fed had already made its decision, the November jobs report locks in a December rate hike once and for all, as far as Wall Street is concerned. As is oft noted in this Report, the biggest enemy of markets is uncertainty, and uncertainty has reigned throughout 2015 in regard to Fed policy, up until Friday night. Certainty was arguably worth about half of the subsequent rally on Wall Street, which saw the Dow close up 369 points or 2.1%, the S&P gain 2.1% to 2091, and the Nasdaq rally 2.1%. The “technical damage” done to the indices from Thursday night’s big drop was more than repaired.

The other half came thanks to Mario Draghi.

“Well, of course”

It is important to note that while ECB president Mario Draghi has been consistent in his hints that QE would be extended from December, and consistent in his “whatever it takes” mantra over the past few years, never did he actually provide any numbers that should be expected at the ECB’s December policy meeting last week. It was left to the markets to assume the quantum.

The market assumed a 20 point cut to the ECB’s bank deposit rate and some increase above the prevailing E60bn per month of bond purchases. Thus when a 10 point cut and no increase were delivered, the market spat the dummy. Mostly because the market had set loaded itself up long or short as appropriate – long US dollar, short euro for example – to the point that if Draghi had delivered on assumed numbers, there may even have been a “buy the fact” rally in the euro, for example. Disappointment meant the biggest move in the euro since 2009.

Mr Draghi, it seems, got a bit of a shock at just how big the moves were on Thursday night, and just how destabilising they were for markets when the whole point of central bank stimulus is to provide some stability. But he had an immediate opportunity to set things straight in a speech he was due to deliver in New York on Friday night.

In that speech he emphasised that while the ECB only extended QE to a level the market was disappointed with at the December policy meeting, there is “no limit” to what the ECB is prepared to do and the central bank will act “without delay” to bump up the stimulus in 2016 if deemed necessary. European markets were already closed when Draghi spoke, but Wall Street, which had arguably been oversold on the ECB knee-jerk reaction, was open, and ready to reverse Thursday night’s moves.

The comical moment came in the Q&A panel session after Draghi’s speech, in which former Bank of England guv’na Merv King evoked chuckles from the crowd when he asked Draghi whether his speech was in direct response to the market carnage the night before. “No, not really,” Draghi replied, “it…um…well, of course”. Hilarity ensued.

It’s a relief to see a bit of Italian self-deprecation in contrast to the typically po-faced Janet Yellen.

As to whether the strong US jobs report was the main driver of Wall Street’s rally on Friday night, or Draghi, or both, it doesn’t much matter. Clearly Draghi held sway over the US bond market, given the ten-year yield fell 5 basis points to 2.15%. This is the wrong direction for a certain rate hike, but the right direction to reverse the carry trade rally in yields on Thursday night which was prompted by big jumps in European yields, following ECB disappointment.

Similarly, gold posted an ECB response. While additional stimulus in Europe is a positive for the gold price in isolation, Fed tightening and a stronger greenback are more pervasive for USD-denominated gold. With expectations strengthening that the Fed will raise next week, gold has been sold down heavily, talk of triple-digits has prevailed, and everyone had set themselves short. The disappointing ECB package only served to reaffirm short positions.

So despite the US jobs report, gold surged US22.00 to US$1086.50/oz on Friday night. Draghi’s comments were enough to trigger a short-covering scramble. The rally came despite the US dollar index also rallying, as the euro rebounded, by 0.7% to 98.37.

Commodities

The LME was well and truly closed when Draghi spoke in New York, so base metal traders only had the US jobs report to respond to. A strong jobs number implies a Fed rate rise and thus a strong dollar, thus weaker commodity prices. That is if you ignore the fact a strong US jobs report implies a healthy US economy, which is good for commodities. Once again, the base metal market had set itself very short, and thus on the jobs numbers, a short-covering scramble was triggered.

Copper rose just under 1%, lead, nickel and zinc all rose just under 2% and aluminium jumped over 2%. Tin sat still.

The oil markets weren’t ignoring US jobs and Draghi’s comments on Friday night, but the overriding influence was the OPEC meeting also underway. While no one really expected the Saudis to concede to production cuts, disquiet among OPEC members who all have, Saudi Arabia included, heavily bleeding national budgets, meant that maybe there would be some talk of production cuts in 2016.

The Saudis proved defiant however, and continue to assume a combination of rising global demand and falling US shale oil supply will lead to oil price stability returning at some point in 2016. Oil prices had jumped on Thursday night due to the terrorism implications of the San Bernardino massacre, and following the OPEC meeting fell back from whence they came. West Texas is down US$1.07 to US$40.05/bbl and Brent is down US80c to US$43.07/bbl.

Iron ore cares not for central bank policy outside of China. It is official – iron ore is now sub-40. The spot price fell US90c on Friday night to US$39.40/t.

The Aussie dollar is caught in a bit of a push me-pull you situation at the moment under the influence of both global and domestic central bank policy, as well as commodity prices. It was down 0.2% on Saturday morning at US$0.7340.

The SPI Overnight closed up 31 points or 0.6% on Saturday morning.

The Week Ahead

We can now all start tediously debating just when the second Fed rate rise might be. Oh joy.

US data releases drop off a bit this week and ahead of Wednesday week’s Fed policy meeting. The important data releases this week are all on Friday, being November retail sales, which include “Black Friday” and the general Thanksgiving weekend shopping spree, and the PPI and fortnightly consumer sentiment. Next week sees the CPI ahead of the FOMC meeting.

China is back in the frame this week. November trade numbers are due tomorrow and inflation numbers on Wednesday. The usual data dump of industrial production, retail sales and fixed asset investment numbers will occur on Saturday.

Locally we’ll see the construction PMI today along with ANZ’s job ad series. Tomorrow it’s NAB’s monthly business confidence survey, and on Wednesday Westpac’s consumer confidence survey along with housing finance data. On Thursday it’s our own November jobs numbers.

The local AGM season is all but over but there remain some stragglers including Westpac ((WBC)), who will host on Friday. National Bank ((NAB)) is due to update on the UK situation tomorrow and CSL ((CSL)) holds its annual R&D Day on Thursday.

This week, Rudi will give his final presentation (the first after publishing his book) to members of Australian Shareholders Association (ASA) in Canberra on Tuesday. He'll make his final TV appearance for the year on Sky Business on Thursday at noon. There will be no more Weekly Insights until late January.
 

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: Draghi Disappoints

By Greg Peel

The Dow closed down 252 points or 1.4% while the S&P lost 1.6% as the Nasdaq fell 1.9%.

Commodity Crunch

The driver of weakness in the local market yesterday was writ large in sector moves by the closing bell. With both WTI oil and iron ore set to fall into the thirties, the energy sector lost 2.2% and materials 1.8% while almost all other sectors saw insignificant moves. Healthcare was the only other sector to see a plus 1% drop.

Bargain hunters were nevertheless waiting when the ASX200 fell 58 points on the open, quickly halving that drop ahead of the release of the local October trade data. The deficit revealed in the numbers was enough to bring in the sellers once more before again the buyers fought back, and we saw a net 30 point drop by the close.

September’s trade deficit was $2.4bn and economists were looking for $2.6bn for October, thus the result of $3.3bn came as somewhat of a shock, particularly in the wake of the “beat” on September quarter GDP due to a better than expected contribution from exports. Exports of goods and services fell 3.0% in October while imports rose 0.2%.

Breaking down exports reveals goods down 4.1% and services up 0.1%, while within goods, metals exports were down 6%. The bottom line is that the deficit blow-out can simply be blamed on the iron ore price. Elsewhere, there is good news in that while rural exports did sag in the month, annual growth in rural exports is running at 11.4% with more to come thanks to recent free trade agreements. And the lower Aussie dollar is clearly having a positive impact on tourism.

Not Happy Mario

At the same time that the world was quietly becoming convinced the Fed will hike in December, the world had more assuredly assumed the ECB would announce extended QE at its December meeting last night. QE has been duly extended out to March 2017, but the quantum is what caught markets by surprise.

It was assumed the QE program would not only be extended in time but also in quantum, but the ECB left its monthly bond purchase target unchanged at E60bn. It was also assumed the central bank’s deposit rate would be cut by 20 basis points but it has only been cut by 10, to minus 30 basis points. The response to these numbers was the biggest move the euro has seen against the US dollar in either direction since 2009. Every man and his dog was short.

The euro jumped over 3% against the greenback, sending the US dollar index down a whopping 2.3% to 97.66. There was carnage in European stock markets, with Germany and France both down 3.6% and London down 2.3%. The carnage was also evident in European bond markets, more closely linked to monetary settings. The German ten-year yield jumped 13 basis points to 0.60%. That’s a 42% jump.

The sell-off in European bonds flowed over the Pond on the carry trade connection, sending the US ten-year yield up 15 basis points to 2.33%.

I noted in yesterday’s Report that not everyone in Europe thought it a good idea were the ECB to go “shock and awe” on its easing, given recent positive signs in the economic data, and it appears Mario Draghi is of a similar mind. He is keeping his powder dry and, as always, promised he can do more “if necessary”.

Terror-Fied

It has been suggested that the Pakistani-born husband and wife team who carried out the mass shootings in San Bernardino were “radicalised”, suggesting America’s 355th mass shooting for 2015 was not the act of the usual home-grown nutter but indeed an act of terror. While commentators suggest last night’s sell-off on Wall Street was predominantly about the ECB, they concede an element of fear related to the shootings.

Meanwhile Wall Street also had economic data to deal with. The US November service sector PMI tumbled to 55.9 from 59.1 in October when economists had forecast 57.5. While 55.9 is nothing to shirk at, the easing in the pace of growth is the biggest since 2008. Factory orders posted a gain in October, but missed expectations.

A good time to tighten monetary policy? On that subject, Janet Yellen was providing a testimony to a House Economic Committee last night and once again her rhetoric implied the Fed has already decided to hike this month. With reference to San Bernardino, Yellen agreed terrorism had the potential to impact on the US economy but that there was no sign of such at this time. She also said that were the Fed to raise its cash rate, it could always cut it again if needs be.

Tonight sees the US non-farm payrolls report for November and economists are forecasting 200,000 new jobs. The market is assuming it probably doesn’t matter what the result is.

Commodities

If there was any market that specifically exhibited a terrorism-related response last night it was the oil markets. As soon as police officials used the word “radicalised” on live news broadcasts, oil prices jumped. West Texas is up US$1.05 at US$41.12/bbl and Brent is up US$1.26 to US$43.87/bbl.

WTI has avoided a 30 handle for now. Iron ore is also hanging in there, but fell another US30c last night to US$40.30/t.

Fear of a rising US dollar has been a big driver of commodity price falls most recently, so one would expect the big drop in the greenback to spark some short-covering. However the flipside of the dollar fall is disappointing stimulus from the ECB, which is itself disappointing for commodities markets. The oils rose on the terror element but last night in London, zinc fell 1.5% and nickel and tin 1% while the other base metals were relatively steady.

The winner on the currency move was gold, up US$11.60 at US$1064.50/oz.

The Aussie had fallen under 73 in yesterday’s trade on the release of the weak trade data, but the greenback’s fall has meant a 0.7% rise over 24 hours to US$0.7357.

Today

It just goes to show how dependent markets remain on central bank support, all these years after the fall of Lehman. The world has baked in a Fed rate rise and just wants to get it over with, knowing subsequent hikes will come very slowly. But the focus is now on Europe following in the footsteps of the US response to the GFC, and the world did not get what it wanted last night.

The SPI Overnight closed down 67 points or 1.3%.

Today sees retail sales data in Australia. Tonight sees the US jobs report which would typically be “all-important”, but one gets the feeling this one isn’t.

No one is expecting production cuts to be announced at tonight’s OPEC meeting, but then everyone expected more from the ECB.

On the local stock front, quarterly changes to the S&P/ASX stock indices will be announced today, becoming effective in two weeks’ time.
 

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article 3 months old

The Overnight Report: Life After Forty

By Greg Peel

The Dow closed down 158 points or 0.9% while the S&P lost 1.0% to 2081 and the Nasdaq fell 0.5%.

Quiet Achiever

Australia’s economy grew by 0.9% in the September quarter for a 2.5% annual rate, beating forecasts of 0.8% and 2.4%. It was a big improvement on the June quarter result, but indicates the economy is still growing at a sub-trend level.

It used to be accepted that 3.5% represented “normal” growth but in the post-GFC world, anything previously considered “normal” is being reassessed, particularly in light of an historically low global interest rate environment which, at least for the foreseeable future, appears to be the “new normal”.

The good news from the GDP result is that Australia’s non-mining economy is indeed growing sufficiently to offset the drag of declining mining investment. The housing sector remains the stand-out contributor, which is also providing a flow-on into consumer spending on household goods. And while investment might be declining now in mining, money previously invested has resulted in increased export volumes – at lower commodity prices, offset to some extent by a lower currency, but solid nonetheless.

The GDP result appeared to turn around what was an otherwise weak local market from the open yesterday, following on from Tuesday’s big surge. It was a very choppy session, suggesting a staunch battle between buyers and sellers, but the end result was only a small loss at the close. A profit-warning from Spotless ((SPO)) sent that stock down 40% and thus the industrials sector down 1.8%, distorting otherwise mixed and minimal sector moves.

Fear

Around 2pm New York time, news hit the wires of a mass shooting in San Bernardino, California. As the US markets came to a close the suspects were still at large.

The response on Wall Street was basically a hundred Dow points, given the Dow was down around 70 points before suddenly plunging to down 170 on the news, no doubt based on fear of another terrorist attack. Weakness prior was largely due to the WTI oil price once again trading below the US$40/bbl mark.

The US private sector added 217,000 jobs in November, up from 196,000 in October and beating forecasts of 185,000. The result does nothing to change the general assumption the Fed will raise in two weeks.

If there is to be a hike, Janet Yellen is still trying to assert that it is not yet a done deal. In a speech last night the Fed chair suggested she believed the two requirements for a hike – labour market improvement and inflation moving in the right direction – have been met, but the FOMC still intends to assess the data prior to making the decision. Presumably the highlight of “the data” as far as this decision is concerned is Friday night’s non-farm payrolls report, but there are plenty of other data releases due in the interim, including CPI numbers.

Whereas once Wall Street would surge and plunge on any little snippet of a clue about what the Fed might do, now the markets largely respond with a shrug. The US dollar index is up 0.2% to 100, helped by a weaker euro. The ECB meets tonight. The US ten-year bond yield closed up 2 basis points at 2.18%. The US stock market basically did not respond.

Commodities

Commodity markets nevertheless remain edgy over a Fed rate rise and the implications for the US dollar, particularly if we add in an extension of eurozone QE as markets are expecting tonight. It’s a double whammy for the greenback, and of little help to already weak commodity prices.

Last night saw the weekly US oil inventory data released, and they indicated the tenth weekly increase in crude supplies. West Texas crude settled in the afternoon at US$39.94/bbl but in later electronic trading has managed to sneak back up to US$40.07, down US$1.52 or 3.6% on the session. Brent is also down 3.6% at US$42.61/bbl.

Iron ore is down 2.4%, or US$1.00, to US$40.10/t. Analysts have for some time been assuming the potential of a number with a three at the front, and it looks very much like that time might be upon us.

Strength in the US dollar is forcing commodity funds to liquidate positions, which was evident last night in London as all metals bar aluminium fell once more. Copper fell 1.2% and zinc fell 2%.

The gold market likely saw the US private sector jobs number and Yellen’s “on track” comments as going further to cementing a December rate rise. Gold is down US$15.70 at US$1052.90. Analysts are now looking ahead to gold in triple digits in 2016.

The Aussie initially railed yesterday on the GDP “beat” but has since fallen on weaker commodity prices and the lower greenback. It’s down 0.3% over 24 hours at US$0.7308.

Today

With both oil and iron ore at the brink of trading under 40, the SPI Overnight closed down 53 points or 1%.

Australia’s October trade balance is due out today and across the globe it’s service sector PMI day.

All eyes will be on the ECB tonight. In stark contrast to counterpart Janet Yellen, Mario Draghi is a man who tends to offer clear intentions and then follow through on them. For some time Draghi has suggested a QE extension is possible if needs be, and European markets are assuming a “needs be” situation exists, particularly since Paris.

There is nevertheless an argument to suggest the ECB should not “ease” tonight nonetheless, given recent eurozone data have been reasonably positive. Inflation, or lack thereof, remains the sticking point. And one presumes the ECB cannot ignore the financial impact of the Syrian diaspora.

Rudi will make his usual weekly appearance on Sky Business' Lunch Money today (noon-1pm) and then later re-appears on Switzer TV, with Marty interviewing, between 7-8pm.
 

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article 3 months old

The Overnight Report: Dashing Through The Snow

By Greg Peel

The Dow closed up 168 points or 1.0% while the S&P gained 1.1% to 2102 and the Nasdaq added 0.9%.

Buy Australia

It’s unclear exactly who waved the flag, but whatever the case offshore investors decided yesterday, the First of December, was the day to Buy Australia after a period of weakness for the local index. That weakness has been as much due to company specific issues (think BHP, Woolworths for example) as it has to any macro consideration. And the fact the 5% fall in the Chinese stock market last week now appears to be a blip likely helped.

The investment strategy of yesterday’s buyers becomes clear if we break down the sector moves. The winners were consumer staples (2.8%), telcos (2.4%), consumer discretionary (2.3%), materials (2.3%) and financials (2.1%). We then drop to energy (1.5%) and thereafter, no sector move exceeded 1%.

In the big movers we see an intersection of the subsets of yield (staples, telco, banks and big miners, although don’t count your chickens on the last one) and beaten-down large caps (banks, BHP, Woolies). The consumer sector moves also provide evidence of short-covering (Metcash, Dick Smith).

 We also see evidence of the offshore element in an Aussie dollar that is up a full cent to US$0.7327 over 24 hours. Some of that is overnight due to the US dollar index being down 0.4% to 99.76, and some of it was due to yesterday afternoon’s “on hold” from the RBA. But the currency moved steadily up all day.

Yesterday’s RBA rate decision did not come into play in the local equity market. The ASX200 was up a hundred points by lunchtime and held that through the afternoon rate decision. But the statement did confirm stock market investors have the luxury of knowing the “RBA Put” remains in place. Glenn Stevens could not have made it any clearer:

“At today's meeting the Board again judged that the prospects for an improvement in economic conditions had firmed a little over recent months and that leaving the cash rate unchanged was appropriate. Members also observed that the outlook for inflation may afford scope for further easing of policy, should that be appropriate to lend support to demand.”

Everyone’s a winner.

In terms of economic conditions that have “firmed”, yesterday’s local data releases supported that thesis.

Australia’s current account deficit did not narrow in the September quarter by as much as economists had forecast but the terms of trade suggested a sizeable 1.5ppt contribution to today’s GDP result, ahead of 1.2ppt predictions. With all the angst created by falling commodity prices, it is often lost on observers that export volumes remain robust, and that the lower Aussie is offsetting price falls.

Australia’s manufacturing PMI improved for the fifth consecutive month in November, rising to 52.5 from 50.2 in October.

Building approvals rose 3.9% in October, against expectations of an easing. The annual pace of approvals has nevertheless eased to 12.3% from 21.4% in September, but this reflects lumpy apartment block approvals. A cooling in runaway apartment block construction is not a bad thing as it alleviates “bubble” fears. Ditto a 1.5% drop in average house prices. Construction will continue to support the economy for a little while yet, but not scare economists or the RBA.

Consensus forecasts for today’s September quarter GDP result are for 0.8% quarterly growth and 2.4% annual growth.

Disappointment

To the north, China’s economy is not showing signs of “firming”.

Beijing’s official manufacturing PMI slipped to 49.6 from 49.8 last month when economists were hoping for a steady result. Four consecutive months of contraction represent the longest run since the GFC. Caixin’s equivalent PMI preformed a little better, rising to 48.6 from 48.3, but still representing faster-than-official contraction.

Yet we must once again be mindful of Beijing’s attempts to shift China’s economy away from exports and towards consumption. The official service sector PMI came in at 53.6, up from 53.1. And the Chinese data appeared to have no effect on the Australian market yesterday, when in the past the response has often been substantial.

Around the grounds, Japan’s manufacturing PMI rose to 52.6 from 52.4, the eurozone rose to 52.8 from 52.3 and the UK slumped to 52.7 from 55.2. The most disturbing result came from the US, which saw a fall to 48.6 from 50.1.

That You Santa?

US economists had expected 50.5. It’s the first fall into contraction for US manufacturing since November 2012 and the lowest reading since June 2009, at the depths of the GFC. The last time the Fed raised rates when the US manufacturing sector was in contraction was in 1981, when inflation was 10%.

But ultimately this didn’t faze Wall Street last night. US investors had clearly made up their minds that on the First of December, they will buy US stocks as well as Australian stocks, with a preference for those that have been beaten down over the year. Such is the December theme, and one of the factors behind the famed Santa Rally.

The indices did suffer a rapid pullback from early strength when the PMI result was released, but it did not last long. Wall Street was in buying mode.

In contrast to the weak manufacturing data was last night’s consumer data. Wall Street continues to shake its head at the ongoing surge in US car sales, led by low petrol prices and low finance costs. Total sales for November were 18.2m, up from 17.2m a year ago. The big winner in the month was Toyota. No prizes for guessing the biggest loser (dak, dak, dak).

The weak manufacturing data did, nevertheless, spark a flight into US bonds for the first time in a while. Having fallen into a slumber of late, last night the US ten-year yield fell 6 basis points to 2.15%. Commentators were nevertheless quick to suggest this does not imply the US bond market has decided there may not now be a Fed rate hike this month. They have decided that the pace of subsequent hikes will be very, very slow.

Commodities

One would expect a combination of weak manufacturing data for both China and the US to be negative for base metal prices, but base metal prices have been pretty well thumped of late. Thus on the relief of the drop in the greenback overnight, prices rallied somewhat. Aluminium rose 2%, zinc rose 1.5% and copper, lead and nickel rose around 1%.

The trend is not good for the iron ore price. A US$1.20 fall overnight to US$41.60/t suggests a number with a three in front of it may well be on the cards.

The oils had another quiet session last night, as markets await the outcome of Friday’s OPEC meeting. West Texas is little changed at US$41.59/bbl and Brent is down US37c to US$44.18/bbl.

Gold is up US$3.70 at US$1068.60/oz.

Today

The SPI Overnight closed up 3 points.

Australia’s GDP result is out today as noted, while RBA governor Glenn Stevens will speak in Perth.

Wall Street will see private sector jobs tonight, ahead of Friday’s non-farm payrolls report.

Collins Foods ((CKF)) will report its interim result today, and Fletcher Building ((FBU)) will hold an investor day.
 

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article 3 months old

The Overnight Report: Eyes On China

By Greg Peel

The Dow closed down 78 points or 0.4% while the S&P lost 0.5% to 2080 and the Nasdaq fell 0.4%.

China Slam

It was a relatively benign first hour of trade on Bridge Street yesterday, suggesting the market was not quite sure how to assess overnight developments. It was sure that a $7bn lawsuit against BHP Billiton ((BHP)) was not good news, hence that stock unsurprisingly closed down 3.6% on the day, sending a materials index, also hit by lower base metals prices on Friday night, down 2.4%.

But the Shanghai index had suddenly fallen 5.5% on Friday evening after the close on the ASX, and it was anticipated the renminbi was about to be included in the IMF’s basket of global reserve currencies. Should Bridge Street be nervous?

The answer came at 11am local time when the daily fix by the PBoC for the renminbi was lowered, meaning devaluation. The last time the PBoC devalued the renminbi the Chinese stock market reacted badly, but at the time it was already in crashing mode. Either way, a wave of selling hit both the Australian and Japanese stock markets ahead of the open in China.

Whether or not the fact it was the last day of the month had anything to do with it, the ASX200 did not recover by the close. As it was, the Shanghai index was indeed down another 3% after the close on Bridge Street, but from there it recovered to be up slightly on the session. Nothing, it would seem, to be concerned about there.

Nor was there anything to be concerned about in yesterday’s Australian data releases.

September quarter company profit growth came in at a better than expected 1.3%, with the non-mining sector posting an encouraging 4.4%. Private sector credit grew by 0.7% in October to mark a solid 6.7% annual rate, with business credit leading the way – also encouraging. TD Securities’ November inflation gauge showed 0.1% growth at the headline, for 1.8% annual, and 1.6% annual for the core rate. The numbers are edging up to the RBA’s target 2% without running away.

Aside from the macro, yesterday on the local bourse was an interesting one for those who keep an eye on stocks that are heavily shorted.

At almost 25% shorted according to ASIC data, and thus top of the pops, supermarket try-hard Metcash ((MTS)) enjoyed a 12% share price bounce on short-covering yesterday after posting a better than expected half-year result. Slapped down ambulance chaser Slater & Gordon ((SGH)), 16% shorted, jumped 34% just by reiterating guidance. But troubled electronics retailer Dick Smith ((DSH)), 11% shorted, could not even encourage the shorters to cash in by issuing yet another profit warning. Dick shares fell 58%.

[Note: All major short positions are tabled in FNArena’s weekly Short Report.]

Hangover

Consumption is the driving force of the US economy and thus Christmas retail sales are of vital importance. Returning from the long weekend, Wall Street traders are still trying to assess the success or otherwise of this year’s Black Friday sales. What initially seemed like discouraging results have been tempered by the news, according to a survey, that more Americans shopped on line on Friday than in stores. Yet last night was Cyber Monday, the “traditional” online shopping day, so until the full picture emerges in a few days Wall Street is biding its time.

It was also the last day of the month, and no one seemed much in the mood to buy. Selling quietly accelerated to the close. The Dow closed the month pretty much where it started, despite some ups and downs.

The day’s data releases were mixed. The Chicago PMI dropped sharply back into contraction in November at 48.7, down from 56.2 in October. Pending home sales ticked up 0.2% in October after two months of declines.

As the new month dawns tonight, Wall Street will be looking ahead to Friday’s jobs number and its implications for monetary policy. Consensus suggests that as long as the result is not a shocker to the downside, a Fed rate hike is baked in.

Commodities

Commodities markets are similarly on watch, not just for US dollar implications but also for today’s PMI data out of China. The greenback is up only slightly at 100.18.

After several volatile sessions, the base metal market quietened down last night. Aluminium dropped 0.8%, nickel rose 0.8% and lead jumped 1.6%, but all other moves were negligible.

The same cannot be said for iron ore unfortunately, which fell another US70c to US$42.80/t.

The oils had a quiet night, with West Texas down US22c to US$41.62/bbl and Brent down US31c to US$44.55/bbl.

Gold managed to rally back US$8.30 to US$1064.90/oz, but closed down 6.7% for the month.

The Aussie dollar did not much react yesterday to reasonable local data but is up 0.5% over 24 hours at US$0.7232, despite little movement in the greenback.

Today

The SPI Overnight closed up 2 points.

It’s a big day for data today.

Locally, the September quarter current account will be released which includes the terms of trade. Monthly building approvals are also due, as is the local manufacturing PMI.

The RBA will issue its statement this afternoon which will be highly scrutinised, despite no one expecting a rate cut.

It’s PMI day across the world today, with manufacturing numbers also due from Japan, the eurozone, UK and US. But all eyes will be on four numbers out of China – Beijing’s official November manufacturing and service sector PMIs, and Caixin’s independent equivalents.

ALS ((ALQ)) will hold an investor day today.
 

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article 3 months old

The Monday Report

By Greg Peel

Mixed

With no Wall Street on Thursday night, Friday was never going to be a big session on Bridge Street. However strong gains for oil and base metals prices overnight, and a slight tick up for iron ore, ensured a solid start. The ASX200 was up 48 points from the open.

But if you’d blinked you would have missed it, as the index came right back down again before meandering to an insignificant close. While energy was able to lead the way with a 1.1% gain, materials slumped to a 0.4% fall. A pall still hangs over BHP Billiton and its dividend, and news over the weekend is that the Brazilian government is suing BHP and Vale for over $7bn for the dam disaster.

Elsewhere most sectors closed flat with the exception of utilities, down 1.8%. The market has voiced its disapproval of Spark Infrastructure’s involvement in the Transgrid consortium.

China

Bridge Street was winding to a close when the Shanghai stock market suddenly plunged on Friday evening to close down 5.5% for the session.

Neither the Chinese nor Australian stock markets showed much of a response earlier when Chinese industrial profits showed a 4.6% year on year fall in October, down from a 0.1% fall in September. Markets are currently taking Chinese economic weakness in their stride. The trigger for the Shanghai sell-off – the biggest since the August crash – was news the Chinese government is investigating several major brokerages for insider trading.

The news represents a widening of the investigation begun in August, growing to include the country’s largest brokerage firm Citic Securities. At the same time, China’s market regulator announced on Friday that Citic, a state-owned enterprise, had overstated the value of its derivatives portfolio by no less than one trillion renminbi, or around US$157bn.

If China’s stock market begins another sell-off, it will not be helpful for Santa. However, given the level of government intervention which finally halted the slide in August, one wonders just how far Chinese investors are game to sell down the market.

Meanwhile, the IMF is today expected to announce the addition of the Chinese renminbi into its basket of special drawing rights currencies, representing global reserve currencies. The addition follows Beijing’s clumsily handled “floating” of the renminbi a couple of months ago, which amounted to a significant devaluation and caused further global market angst. The renminbi will join the US dollar, euro, pound and yen.

Not So Black

It was a half-day session on Wall Street on Friday night, squeezed in between the Thanksgiving holiday and the weekend. Only the skeletons were in attendance. No surprise that activity was minimal and the indices closed flat. The Dow fell 14 points or 0.1%, the S&P was little changed at 2090 and the Nasdaq rose 0.2%.

For those who did draw the short straw, the focus was on the annual Black Friday sales fest. As the day progressed it soon became apparent America’s answer to Australia’s Boxing Day sales was proving to be a fizzer. Department store shares were sold down as a result.

But it was only a fizzer in terms of foot traffic in the big US bricks & mortar establishments. Online sales actually jumped 15% from last year, despite the fact the online equivalent is meant to occur tonight – Cyber Monday. The reality is the whole Black Friday/Cyber Monday thing has become an anachronism, and very blurred around the edges. Suffice to say in future the days after Thanksgiving will remain America’s biggest shopping days, just not under old-fashioned labels.

The only reason the Dow did not close flat was a 3% fall in Disney shares, thanks to news the company’s iconic ESPN sports network has lost three million subscribers in a year. The loss represents another example of “cord cutting” in the US – the shift away from cable television to online streaming services such as Netflix. In the case of sport, the major US sporting leagues are quietly shifting to their own live streaming services, thus drawing both content and viewers away from the likes of ESPN. The news in Australia last week is that the NRL will now jump on the streaming bandwagon, following in the footsteps of the AFL.

Bricks & mortar retailing and fixed-time television. Vale.

Commodities

The fall in the Shanghai stock market on Friday pushed the yen lower, given Japan’s trade dependency with China. This pushed the US dollar higher, to the point the index was able to raise its bat and salute the crowd. It’s up 0.2% at 100.09.

The combination of the stronger greenback and the potential of another Chinese stock market crunch was not what volatile metal markets want to contemplate, not to mention the 4.6% fall in Chinese industrial profits, within which the biggest falls were posted by China’s resource sector. Thus after a wild week, base metals prices finished Friday night with another round of steep falls.

Copper and lead fell over 1%, and aluminium, nickel and zinc all fell 3.5%. Tin was again the only non-mover.

Over the weekend, China’s nine biggest copper smelting companies met and agreed to cut production in 2016 by 200,000t or 5%. We shall await the LME response tonight.

Iron ore fell US10c on Friday night to US$43.50/t.

Gold fell US$14.00 to US$1056.60/oz as the dollar index reached the ton.

On the stronger greenback, the oils were weaker again. The geopolitical premium added last week following Turkey-Russia tensions has now waned as escalation fears have subsided. West Texas is down US54c to US$41.84/bbl and Brent is down US51c to US$44.86/bbl.

Lower commodity prices and strength in the greenback saw the Aussie down 0.5% on Saturday morning at US$0.7194, ahead of tomorrow’s RBA meeting and Wednesday’s GDP result.

The SPI Overnight closed down one point.

The Week Ahead

Wall Street will be quickly awoken out of its long weekend slumber this week with a raft of data releases, culminating on Friday with the all-important jobs report.

Tonight sees the Chicago PMI and pending home sales, Tuesday it’s construction spending and vehicle sales, Wednesday private sector jobs, Thursday factory orders and chain store sales, and Friday brings trade data along with non-farm payrolls. Tuesday also sees the manufacturing PMI and Thursday the services PMI, while the Fed’s Beige Book will be released on Wednesday and Janet Yellen will make a speech.

Tuesday is manufacturing PMI day across the globe, including in Australia, but China’s calendar now has both Beijing and Caixin publishing both their manufacturing and service sector PMIs on the first day of the month. The rest of the world will release service sector PMIs on Thursday.

The ECB will hold a policy meeting on Thursday, at which a QE extension is expected to be announced.

OPEC will meet on Friday but despite a lot of talk about oil price stability, is not expected to alter current production quotas.

It’s a busy week for Australian data, culminating in Wednesday’ September quarter GDP result.

Quarterly data releases beforehand include company profits and inventories today, and the current account, including the terms of trade numbers, tomorrow. There is also a raft of monthly data due out this week, including private sector credit and the TD Securities inflation gauge today, building approvals tomorrow, the trade balance on Thursday and retail sales on Friday.

The RBA will meet tomorrow and leave its rate unchanged, and Glenn Stevens will speak in Perth on Wednesday.

On the local stock front, the AGM season is now all but over outside of a trickle of stragglers meeting in December. Collins Foods ((CKF)) will report its half-year result on Wednesday.

On Friday, quarterly changes to the S&P/ASX stock indices will be announced, pending implementation on December 18.

Rudi will appear on Sky Business on Thursday at noon and again between 7-8pm for the Switzer Report.
 

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: Thanks

By Greg Peel

Capex

The local market was surprisingly off to the races from the opening bell yesterday despite the futures suggesting a 9 point fall. Perhaps the fact Russia did not declare war on Turkey – it has elected to retaliate economically instead – was enough for the market to decide to reverse the selling of the day before.

The ASX200 was up 60 points by late morning but there it stalled, before drifting slowly away all afternoon to a 17 point gain on the close. While the selling began around the time of the release of the September quarter capex report, that report was not an overall disaster. More likely the market simply settled back after some early exuberance.

Private capital expenditure fell 9.5% in the September quarter when economists had expected a 2.9% fall. The sensationalist headline on the day for the popular press was the 20% capex decline year on year, within which mining spending is down 29.6% and business spending down 9.0%.

The mining story comes as no surprise given persistently low commodity prices, but the business number suggests further downside risk to non-mining spending over FY16, Commonwealth Bank’s economists suggest. There was, nevertheless, some minor good news.

For economists, and the RBA, the key component of the capex data is capex intentions. The September quarter numbers represented the fourth quarter in which those surveyed provided an estimate for FY16. It came in at $120.4bn, which is 4% higher than the last estimate made in the June quarter.

The problem with such estimates is they tend to ebb and flow from quarter to quarter depending on the economic mood and confidence at the time. Nailing down a trend is not easy. CBA’s assessment is that mining capex will fall by 35-40% in FY16, and non-mining by 10%. These numbers are in line with the RBA’s projections. While yesterday’s report will lead to a trimming of September quarter GDP forecasts, there is no reason for the RBA to alter its policy.

And pragmatically, what would another 25 basis point interest rate cut achieve? Commodity prices are the major issue, not borrowing rates. For non-miners, it is clearly a matter of confidence. If a record low 2% cash rate is not a trigger to start investing in one’s business, why would 1.75% be any different? The best thing that can happen to non-mining in the near term is that the benefits of the lower Aussie dollar start to show up in the numbers. This does not happen overnight, but rather can be a lag effect of six to twelve months.

By the close, the resource sectors bore the brunt of any capex disappointment. Energy fell 0.5% and materials 1.3%. Woolies management clearly did not manage to wow them at the company’s AGM, so consumer staples fell 0.6%. Otherwise, the yield stocks that were all sold down on Tuesday were all bought back up again yesterday.

The Aussie is 0.3% lower at US$0.7230.

Commodities

For the record, European stock markets posted gains of around 1% overnight. For eurozone markets, the promise of extended ECB stimulus continues to provide support. For the London market, rallies in metal prices overnight provided a fillip.

It was reported overnight that the China Non-Ferrous Metals Industry Association has suggested to Beijing the government buy 900,000t of aluminium from the market, 300,000t of nickel and 400,000t of zinc. If the government agrees, it will be the first such intervention since 2009.

In a base metals market still susceptible to bursts of short-covering, and in thin trading overnight due to the absence of US interest, tin rose 1.5%, copper, lead, nickel and zinc rose 2% and aluminium rose 4%.

Commentary out of the LME was nevertheless dismissive. While it is all well and good for the Chinese government to take supply out of the market it is still there, just in another location. Such purchases will not resolve the issue of global oversupply.

Meanwhile, iron ore rose US20c to US$43.60/t.

Gold is unchanged at US$1070.60/oz given a flat US dollar index.

Electronic trading sees West Texas crude down US59c at US$42.38/bbl and Brent, which is only electronic, down US72c to US$45.37/bbl.

Today

With the base metal rally about the only thing to go on, the SPI Overnight closed up 16 points or 0.3%.

China will release industrial profits numbers today and Japan will release inflation data.

The NYSE will close at 1pm New York time tonight.

The local AGM season suddenly eases back to a trickle of stragglers as of today. Fisher & Paykal Healthcare ((FPH)) will report half-year earnings.
 

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