Tag Archives: Precious Metals

article 3 months old

The Monday Report

By Greg Peel

Flat

It was a choppy session on Friday on the local bourse leading ultimately to a flat close. A fairly tight range belied some notable moves in sectors nevertheless.

Winners on the day included industrials (0.7%), utilities (0.7%), telcos (0.3%) and consumer staples (0.3%) while losers included the banks (-0.3%) and materials (-0.5%). Energy closed on a rare 0%. Here we see further evidence of a reversal of the theme of the past few weeks in which overbought yield stocks have been sold off on Fed rate rise expectations and undervalued cyclicals have come back to the fore.

It has been a substantial sell-off in yield stocks, and thus no surprise some consolidation has eventuated. But interestingly the initial trigger for the reversal of prior rotation was China’s trade data last week which surprised to the downside, reigniting China slowdown fears and perhaps raising doubts of a Fed rate hike being “baked in”. Friday’s Chinese data release paints a different picture.

China’s CPI rose 1.9% year on year in September having risen only 1.3% in August, beating expectations of +1.6%. But the big news is the PPI, which rose 0.1% to mark its first gain in five years. In August the PPI was down 0.8% and September forecasts had a 0.3% drop.

China’s producer price index had been in the negative since 2012 but recent months have shown it quietly beginning to graft its way back. Last month saw a turning point, which goes some way to relieving fears of Japanese-style entrenched deflation becoming the long term story for China – the twenty-first century’s version of the Japanese economic miracle.

The inflation data provide a little bit of confidence heading into this week’s major data event on Wednesday, which sees September industrial production, retail sales and fixed asset investment numbers along with the September quarter GDP result. Forecasts are for GDP growth to hold steady at 6.7%.

Yellen Gets Hot

While tradition has the Alcoa result signalling the beginning of any US quarterly earnings season, most now consider the real kick-off to be on the subsequent Friday, when all of JP Morgan (Dow), Citigroup and Wells Fargo report. A good result from the banks provides some confidence for the rest of the season.

All three reported earnings beats on Friday night, mostly due to elevated trading volumes in the fixed income market. US bank shares have been in a bit of a push me-pull you lately, on strength from Fed rate hike expectations on the one hand and weakness on European bank fears, Deutsche Bank in particular, on the other.

Friday night also saw all-important US retail sales numbers which showed a 0.6% gain in September. This was a tad shy of 0.7% expectations but not enough to alter any assumptions regarding Fed policy. The US PPI also continues to creep higher, rising 0.3% on the core in September to be 1.5% higher year on year.

Fed watchers may have been jolted, nonetheless, by comments made by Janet Yellen in a speech on Friday night, in which she suggested that in order to reverse the effects of the GFC recession it might be best to run “high pressure” economy with a tight labour market. The way to run a hot economy is, of course, to not fight heat with rate hikes.

December off again? No. Yellen’s supposed paradigm shift simply plays into what she and fellow FOMC members have been stressing for some time – subsequent policy tightening will be very gradual. While central bank preference is to get ahead of any potential inflation spikes, the implication is that a bit of inflation is a good thing in the post-GFC world.

This is longer term good news for the US stock market, and as such the Dow was up as many as 160 points early on. But just as Thursday’s 180 point fall was pared back to only a 45 point fall, Friday’s 160 point gain was ultimately pared back to only a 39 point, or 0.2%, gain. The S&P closed flat at 2132 and the Nasdaq closed flat.

The US dollar index, on the other hand, rose another 0.6% to 98.10. The dollar is quietly becoming what the RBA might call a “complication”, but that’s what you get with a rate rise. Friday’s retail sales and PPI data no doubt helped pushed the greenback along.

And having slipped back on last week’s weak Chinese trade numbers, Friday night saw the US ten-year yield pop up 6 basis points to reclaim 1.79%.

Commodities

The stronger greenback is acting as a drag on commodity prices but demand-supply equations remain the dominant theme.

West Texas crude closed down US16c on Friday night and at once stage dipped below 50, which is one reason Wall Street came off the boil.

Aluminium and copper both fell 1% on the LME but nickel and zinc each rose 0.5%.

Iron ore rose US20c to US$56.80/t.

Gold fell US$5.70 to US$1251.80/oz.

The strong greenback should be good news for the Australian economy by pushing down the Aussie and thus supporting the non-mining economic revival. But it is mining that is enjoying a revival at present – particularly coal – hence the Aussie is up 0.6% at US$0.7610.

The SPI Overnight closed down 9 points on Saturday morning.

The Week Ahead

China’s GDP result, as noted, will take centre stage, but US earnings season will dominate the week as the results start to come thick and fast, including from many Dow components.

There are also a lot of US data releases to mull over this week. Tonight it’s industrial production and the Empire State activity index, Tuesday it’s housing sentiment and the CPI, and Wednesday brings housing starts and the Fed Beige Book. Thursday sees leading economic indicators, existing home sales and the Philadelphia Fed activity index.

The ECB will hold a policy meeting on Thursday night amidst rumours, since quashed but not with any conviction, that QE tapering is being considered.

The minutes of the September RBA meeting are out tomorrow ahead of September jobs data on Thursday.

The local stock market calendar is beginning to fill up once more and this week sees a rush of resource sector production reports alongside various corporate quarterly updates and a building number of AGMs.

Today’s highlights include production reports from Evolution Mining ((EVN)) and Whitehaven Coal ((WHC)) and a quarterly result from James Hardie ((JHX)).

Rudi will appear on Sky Business on Thursday, 12.30-2.30pm, and again on Friday, through Skype-link, to discuss broker calls at around 11.05am.

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article 3 months old

The Overnight Report: Risk Reversal

By Greg Peel

The Dow closed down 45 points or 0.3% while the S&P lost 0.3% to 2132 and the Nasdaq fell 0.5%.

Cracks In China

Just when it looked like the Chinese economy may have bottomed out, suggesting stimulus measures were finally beginning to gain traction, along came yesterday’s trade numbers. Slight improvement in the September PMIs was encouraging but now China-watchers have been left scratching their heads.

Chinese exports fell 10.0% year on year in September when a 3% drop had been forecast, while imports fell 1.9% when a 1% gain had been forecast. Within the numbers, imports of iron ore and copper were lower than expected. Given the oil price rallied over the month, in equivalent terms the import result would have been weaker still.

The ASX200 had been expected to open weaker yesterday morning on the lower overnight oil price, and indeed the index fell around 25 points from the open. From there it tracked sideways until midday when the Chinese data were released. At 2pm the index hit bottom, down 54 points.

Following a slight recovery to the close, the energy sector finished down 2.0% and materials 0.9%. Most influential was a 1.1% fall for the banks, reflecting the flow-through from the Chinese economy to the Australian economy. Adding to weakness in resources was the decision by Citi to downgrade both the Big Two miners to Sell because they had rebounded too far, in the analysts’ view.

Two of the sectors finishing in the green by the close were the safety plays of utilities and consumer staples.

The Aussie took a dive, dropping close to the US$75c mark.

We recall that the sell-off experienced in the beginning of 2016 had a lot to do with fears of a Chinese slowdown – or at least a more dramatic slowdown than might otherwise be expected. Those fears were one reason, among others, the Fed started to back down on its intention to raise rates several times in the year. But as fears slowly abated, attention became squarely focused on the next Fed rate rise. China somewhat slipped into the background as Brexit and European bank issues took centre stage.

Now China is back in focus. Chinese data are not seasonally adjusted and are notoriously volatile, and October numbers will likely be even more distorted given the week-long holiday. But concern has been building over a bubbling Chinese housing market. Were the bubble to burst, demand for steel, copper and other materials would likely crash too. Yesterday’s weak trade numbers do little to ease tensions.

Mind you, we went through this exact same scenario shortly after the GFC. Massive government stimulus flowed straight into asset price inflation, sparking fears of a property bubble and bust and prompting endless talk of a Chinese “hard landing”. Years on, we don’t hear that expression much anymore. Beijing muddled through, and most likely will muddle through again. But there are concerns over just how much China’s debt to GDP has grown in the meantime.

Will China once more provide the Fed with an excuse not to hike?  One month’s data do not a summer make.

Risk Off

But what they have done is sparked a sharp risk reversal on Wall Street overnight.

As Fed rate rise expectations have grown over the past couple of months, US investors have been selling out of high-yield utilities, telcos, REITs and government bonds, and buying the banks and the US dollar. Last night investors bought utilities, telcos, REITs and bonds and sold banks and the dollar.

It was all about China. The Dow was down 184 points early in the session before rallying back to be almost square, and fading off again towards the close. The movement suggests traders first sold what they wanted to get out of, and then turned around and bought what they wanted to get back into. On one set of numbers, Wall Street reversed from “risk on” to “risk off”.

The sell-off in bonds – the US ten-year yield fell 4 basis points to 1.74% -- came just after it had looked like a breakout to 2% was on the cards. The sell-off in bank stocks comes before tonight when all of Citigroup, Wells Fargo and JP Morgan (Dow) report quarterly earnings. This is when the US earnings season really starts.

It seems like an overreaction to so swiftly change tack after months of rotating portfolios in the other direction. But given those months of rotation, it makes enough sense and is hardly too worrisome to think some profits might be taken the other way around on a heightened sense of caution. The Chinese data provided a prompt.

Commodities

Copper posted the biggest loss on the LME last night, unsurprisingly, in falling 2%. Lead, nickel and zinc all fell 1% but aluminium managed a 0.5% gain.

Iron ore always confounds, and it rose US10c to US$56.60/t.

On the back of the China data, and the fact US weekly oil inventories showed a much bigger build than anticipated, we should have seen WTI drop through the US$50/bbl mark. But the weekly data also showed US refining has slowed considerably, albeit largely due to seasonal maintenance shutdowns, so actually West Texas crude is up US25c at US$50.46/bbl.

We might also have expected that as part of this risk reversal trade, and the fact the US dollar index is down 0.4% at 97.56, would mean gold would be back in favour once more. But gold traders must be feeling a bit once-bitten at the moment. Gold is up US$3.40 at US$1257.50/oz.

Having fallen in the local session on the Chinese data, the Aussie has since rebounded right back on the weaker US dollar to be little changed over 24 hours at US$0.7567.

Today

The SPI Overnight closed up 11 points. Here we likely see a case of Australia having reacted first to the Chinese numbers, so to react to Wall Street’s reaction would be double counting.

If the US banks come out with solid earnings result tonight, last night’s action may just prove a bit of a blip. Then there’s a month-long US results season to get through which will no doubt draw the focus away from China once more.

Janet Yellen will speak tonight, which as always will be closely monitored.

And tonight’s US data include the all-important retails sales numbers along with inventories, consumer sentiment and the PPI.

China will release inflation numbers today. They’re typically not as powerful as trade numbers these days but everyone’s now on edge. China’s September quarter GDP result is due next week.

The RBA will publish its Financial Stability Report today.

Rudi will Skype-link with Sky Business today to discuss broker calls at 11.10am.
 

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article 3 months old

Material Matters: Base Metals, Gold, Uranium And Coal

Mixed outlook for base metals; upside in gold expected; positive uranium fundamentals; quarterly production previews; coal settlements.

-Copper supply surging but growth expected to slow
-Nickel demand lifting and supply moving out
-Absence of catalysts in the near term for uranium
-Strong September quarter for bulk commodities
-Coking coal market expected to remain tight


By Eva Brocklehurst

Base Metals

Zinc support was in evidence from additional infrastructure spending as Goldman Sachs conducted a field trip to China. This infrastructure spending has a solid historical relationship with galvanised steel output and tends to lead it by 2-3 months. Goldman highlights the uncertainty on the supply side and believes zinc will continue to outperform in the second half of 2016 and in early 2017.

Copper is entering a supply storm, Goldman believes, and this should translate into higher copper smelter and refinery charges and ultimately higher refined copper production. This drives the broker's forecasts for copper prices at US$4,083/t and US$4,000/t for 2017 and 2018 respectively. UBS has been negative for a long time on copper but is starting to change its view.

The demand side is considered to be strong, while supply-side growth is expected to slow. In copper stocks, despite upgrading OZ Minerals ((OZL)) to Neutral the broker still prefers Sandfire Resources ((SFR)), given its simpler organic growth opportunities, although suspects mine life is an issue that may keep some investors away.

Nickel demand is lifting and around 10% of supply is set to leave the trade, UBS notes. Inventory levels will provide a buffer in the short term but by early 2017 the broker suspects this will be reduced. At spot prices of around US$4.55/lb the broker observes the industry is not on a sustainable footing and many producers are still losing cash. Prices are expected to lift to US$5.50/lb in 2017.

The broker prefers Independence Group ((IGO)) over Western Areas ((WSA)) as the Nova mine offers lower break-even prices. The broker concedes Western Areas' pure nickel exposure makes it a key name and it is likely to trade at a premium while price upside risk is present.

Aluminium smelting is being targeted by the Chinese government for supply-side reform, leading to a number of capacity reductions throughout the country. Goldman Sachs observes the current oversupply of power throughout China still makes smelting aluminium an attractive industry, especially as the country is a significant importer of bauxite. Aluminium prices are expected to decline in the second half and in 2017.

Gold

UBS continues to expect upside in gold. Low inflation should keep yields down and the US Federal Reserve's policy setting loose. The broker expects gold prices to edge towards an average of US$1,400/oz over 2017. UBS prefers Evolution Mining ((EVN)) and Alacer Gold ((AQG)) in the sector.

Uranium

On a 5-year view UBS considers the uranium industry fundamentals very positive but estimates Energy Resources of Australia's ((ERA)) stockpiles will be exhausted by 2020 and its mining licence will conclude in 2021. Catalysts are lacking in the near term which means prices are likely to languish in the low US$30/lb region for 2016-17, around marginal cost in the broker's view. Looking ahead the broker expects a similar premium will be maintained by ERA, with an average price of US$44.80/lb versus average spot at US$30.10/lb being realised over the September quarter.

Production Previews

UBS expects the September quarter will have been strong for bulk commodities in Australia but, following above-average rainfall, production and sales have risks to the downside. Offsetting this will be a lift in the Platts 62% iron ore price over the quarter. The broker expects a weak set of numbers from Newcrest Mining ((NCM)), OceanaGold ((OGC)) and Sandfire Resources. Beadell Resources ((BDR)) is expected to report a significant lift in production, with a near doubling of head grade.

OZ Minerals is expected to lift production over the quarter while Evolution Mining is expected to report lower costs as the June quarter was adversely affected by one-off items. Iron ore shipments are likely to be weaker, with UBS observing volumes in the vessel movements off the coast of Western Australia were below expectations.

The broker lowers its ratings for BHP Billiton ((BHP)) and South32 ((S32)) to Neutral from Buy and Whitehaven Coal ((WHC)) to Sell from Neutral. The broker believes all three are quality companies but envisage risks as manganese and coal prices are at unsustainable levels, with the factors that drove prices higher being reversed. UBS switches its diversified preference to Rio Tinto ((RIO)) with a view that a sustained iron ore price through to year end could mean additional returns in 2017.

Coal

Peabody and Nippon Steel have reportedly settled the benchmark hard coking (metallurgical) coal price at US$200/t for North Goonyella product. This is much higher than Macquarie was expecting and the highest quarterly contract price since the September quarter of 2012. Peabody settled PCI coal prices at US$133/t recently. The broker envisages a boost to free cash flow for BHP Billiton while South32 cash flow could double at spot prices. Whitehaven Coal would be debt free in a year's time using spot prices.

Goldman Sachs suspects the coking coal market may remain relatively tight as a direct result of the 276 working day rule imposed by China in May. There is also a commonly held belief that authorities are less inclined to relax restrictions on coking coal producers versus thermal coal, because steel making is targeted for supply-side reform.

The adoption of a more flexible production regime in China and re-start of supply ex China should mean the global market returns to more normal levels in 2017, in Goldman's view. Spot premium hard coking coal prices are expected to be US$180/t in the December quarter and US$135/t and $125/t for 2017 and 2018 respectively.

Thermal coal, while not experiencing the price response on the level of coking coal, is also affected by the working day rules although regulators have slightly relaxed the production cap. Goldman Sachs expects lower demand from buyers of semi soft coking coal and greater competition with LNG in the power sector should all contributed to a balanced market net year for thermal coal. Price estimates are US$65/t for the December quarter and US$61 and US$60/t for 2017 and 2018 respectively.
 

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article 3 months old

The Overnight Report: Then Suddenly, Nothing Happened

By Greg Peel

The Dow closed up 15 points or 0.1% while the S&P rose 0.1% to 2139 and the Nasdaq fell 0.2%.

What Goes Up

Tuesday on the local market saw a rally led entirely by the resource sectors as China came back from holiday to buy up bulks and metals and Russia suggested it would be prepared to join with OPEC in oil production cuts. On Tuesday night the Dow fell 200 points for a number of reasons – one of them being a pullback in the oil price and another being a big miss on earnings from Alcoa.

I thus suggested in yesterday’s Report we would probably see the opposite yesterday, and indeed the only stand-out moves among the sectors yesterday was a 1.1% drop for materials and a 0.9% drop for energy.

But it was a lot worse early in the session. The ASX200 traded down as many as 46 points, led by resources, before the cavalry came over the hill and quickly pushed the index back up again to a fairly benign close. Aside from bargain hunting among resources, the banks managed to close on a slight positive and the early guide to AGM season appears to be one of capital management will buy you a bid.

Telstra’s ((TLS)) seen a bit of a revival since its AGM and yesterday CSL ((CSL)) confirmed its buyback, ensuring telcos and healthcare provided the offset yesterday against weak resources.

Consumer discretionary managed a slight gain. We might have expected more on the back of Westpac’s monthly consumer confidence survey showing a 1.1% index increase to 102.4, to mark three straight months of improvement, at a time the tinsel is going up and the muzak is becoming nauseatingly festive.

I made mention yesterday of general agreement among stock analysts that the housing boom is set to shortly cool and thus act as a drag on the economy, albeit there is disagreement about the timing. Market indicators such as finance, approvals and auction clearances are still positive but starting to now ease off.

Westpac’s survey yesterday nevertheless showed a 1.6% gain in the month in a sub-segment of expectations for rising house prices, to be 12% higher year on year. The proportion of respondents who think now is a good time to be buying a house has also been on the rise in recent months.

If your Uber driver tells you he’s just taken out a one million dollar mortgage to buy bed-sit in Blacktown, sell!

Shalom

Yom Kippur is not a public holiday in the US but it might as well be on Wall Street. That’s one reason why last night saw light volumes and little more than sideways trade all session, despite Tuesday night’s big plunge.

We may otherwise have expected a lack of activity ahead of the release of the Fed minutes at 2pm, but they failed to produce any excitement either. Basically they didn’t tell us anything we didn’t already know.

The case for a rate rise this year has strengthened, the FOMC believes. Indeed, September was a close call and three of twelve members dissented on the decision not to raise, and much has been made of the fact three is a lot. It was also noted that to not raise once by year-end after having talked rate rises all year, the Fed would lose credibility.

If it hasn’t already. It will still come down to the data, of course, but one presumes they would have to take a sharp turn for the worse to prevent the December hike that 70% of the market is predicting. Otherwise something out of left field is always possible, in Britain or Europe for example or even Russia. But these things we can never predict.

Assuming the majority of the market has now accepted a December hike and positioned accordingly, the focus between now and then is on two major issues – OPEC and the election.

Virtually nobody expects a production cut agreement in November will be reached but virtually nobody wants to take the risk. Hence the real risk is of an oil price tumble post meeting triggering another Wall Street sell-off.

There is the risk of the great unknown were Trump to be elected, but Wall Street has now shifted from being relieved Clinton will likely win to being rather concerned the Republicans could lose the House. Such concern was evident in the US healthcare and biotech sectors last night, which weakened on the fear Obamacare might be here to stay and the new administration will be able to clamp down on drug pricing.

As to how the Fed reacts to any such developments is unclear. The central bank is, of course, independent and apolitical. But it didn’t stop the FOMC overtly claiming Brexit risk as a reason to not to hike in June.

Either way, the US dollar continued to strengthen last night and an auction of ten-year bonds was settled at a lower price, such that the yield is up another 2 basis points at 1.78%. The past couple of months has seen the ten-year yield rise over 20 basis points. What does that tell us?

Commodities

West Texas crude is down US61c at US$50.21/bbl. Unless something is said between now and the OPEC meeting, oil is expected to hang around the 50 mark in the interim.

All base metal prices were positive last night despite another 0.3% rise in the US dollar index to 97.92, except lead, which fell 1.5%. Nickel was otherwise the only metal to gain in excess of 1%.

Iron ore was unchanged at US$56.50/t.

Gold is as good as unchanged at US$1254.10/oz.

The Aussie has bounced back 0.4% to US$0.7565.

Today

The SPI Overnight closed down 14 points or 0.3%, probably influenced by another dip in the oil price.

China’s September trade numbers are due today.

Iluka Resources ((ILU)) and South32 ((S32)) release production numbers today while Orora ((ORA)) and Transurban ((TCL)) are among those holding AGMs.

Rudi will travel to Macquarie Park to appear on Sky Business from 12.30 till 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: A Bout Of Nerves

By Greg Peel

The Dow closed down 200 points or 1.1% while the S&P fell 1.2% to 2136 and the Nasdaq dropped 1.5%.

Erratum

In yesterday’s report I suggested Energy Resources of Australia ((ERA)) is no longer “producing” uranium. I said so in the knowledge the company was drawing upon stockpiles. It was a poor choice of words on my part.

ERA is indeed producing uranium via the processing of stockpiled ore. It is not currently mining uranium ore, which is really what I meant and should have said.

My apologies to ERA, Rio Tinto, and anyone who may have been misled by my semantical error.

Meeting Resistance

Yet again we saw a sharp move in the opening rotation of the local market yesterday and an immediate reversal at 10.30am. The ASX200 hit 5497 before pulling back sharply. But this time investors were keen to have another crack.

At midday the index had pushed back up to 5498, led by the resource sectors, which in turn were led by strong gains overnight in the prices of oil, bulks and metals. But clearly traders have set 5500 as the level to take profits on the rally we have seen from 5200 a month ago. By 3pm we were back to square.

In the final sector breakdown, resources were still the clear winners on the day. Indeed, of the top ten ASX200 up-movers on the day, all ten were either miners, oil & gas producers or companies servicing those sectors. Materials rose 0.9% and energy rose 2.3%.

The flipside saw a mixed bag of down-movers, mostly stocks that not so long ago had been high-flyers, including gold miners. The rout in the residential aged care sector continues, and indeed healthcare proved the worst performing sector on the day with a 0.9% drop.

There will be a few traders breathing a sigh of relief this morning that they had considered 5500 as a good level to take profits.

One theme popular among analysts at present, albeit drawing some level of disagreement on timing, is expectations of a cooling housing market. Housing is very important to the Australian economy given (a) it drives construction earnings, (b) it drives flow-on earnings in household goods and appliances, (c) it underpins bank earnings, and (d), higher house prices imply greater wealth and this makes consumers more confident.

The housing market has recently been the primary driver of the “non-mining” economy, allowing for positive GDP growth despite the ongoing decline in mining investment. That is why analysts are concerned – housing booms don’t last forever.

Yesterday’s data showed the volume of loans to owner-occupiers fell a greater than expected -3.0% in August. Since APRA clamped down on loans to investors, O-Os have picked up the ball and run with it. But now it seems they, too, are starting to back off. Loans to O-Os are -4.2% lower than they were a year ago.

Loans for housing construction rose 3.7% in August but are -1.7% lower than a year ago. We can conclude that the housing boom is indeed cooling, but slowly. Low interest rates continue to underpin.

Australian businesses remain confident, nonetheless. NAB’s survey for September showed a rise in the conditions index to 7.7 from 6.8 and a rise in the confidence index to 5.9 from 5.6. Slightly worrying, however, is a fall in capacity utilisation to 80.6% from 81.0%. After rising steadily over past months, utilisation appears to have peaked out. This does not bode well for ongoing business investment.

Potpourri

Why did Wall Street tumble last night? Take your pick.

Firstly, the rally over the past week has been led by the energy sector thanks to the price of WTI rising back over US$50/bbl, in turn due to talk of an OPEC/non-OPEC production freeze agreement. Last night WTI pulled back a bit. Hardly sinister nor any great surprise, but inevitably the energy sector saw selling.

Secondly, Alcoa reported a September quarter miss on both earnings and revenue and its shares fell 11%. Alcoa is always the first large cap company to report in every earnings season. Once upon a time the Alcoa result was considered an early indicator of how the season as a whole would play out.

Since the end of the commodity super-cycle, this is no longer the case. And Alcoa is not even a Dow component anymore. But with Wall Street heartened by the fact forecasts are for a net S&P500 decline of “only” -2% for the September quarter compared to -6% or more numbers of past quarters, such a weak start is just a little ominous.

Thirdly, Clinton is deemed to have won the second debate. Outside of oil, the swing towards Clinton has been cited as a reason for Wall Street strength given she represents the less dangerous status quo and Trump represents…well…who knows what Trump represents. But for Wall Street, “status quo” includes the Republicans retaining their majority in Congress so as to block anything fiscally unpalatable.

But now, as the Trump campaign quietly disintegrates, Wall Street has begun to fear the train crash may reflect on the Republican party in general, to the point the Democrats could win control of Congress. This has Wall Street worried.

While all of the above are contributing factors, perhaps the underlying macro reason for last night’s sell-off is the most influential.

Central banks across the globe are backing away from ultra-easy policy experiments. But the Fed is one step ahead, looking at a second tightening. Last night the US dollar index jumped 0.8% to 97.65. A strong dollar is not good for America’s multi-national exporters.

The expectation of a Fed rate rise has also had bond yields on the rise, and last night the US ten-year yield rose 4 basis points to 1.76%. This is the top of the range in place since the Brexit shock. If yields break out of the range, Wall Street fears a long-awaited rush to sell bonds may be triggered, sending the ten-year rapidly towards 2%.

That would not be good for stocks. Last night the VIX volatility index on the S&P500 jumped 16%, suggesting investors have again begun to seek downside protection.

So put it all together, and the fact the market was back to full participation last night following Monday’s holiday, and the Dow dropped 200 points – not quite the low of the day but not far off it.

Commodities

Throw a 0.8% jump in the greenback at commodities and price weakness is not hard to explain.

West Texas crude is down US38c at US$50.82/bbl.

Aluminium, copper and nickel all fell between -0.5 and -1% in London while lead fell -2.5% and zinc fell -3%. So much for China’s return.

But China’s return is clearly impacting on iron ore. It rose another US70c to US$56.50/t.

Gold has already had its big adjustment, but on dollar strength is down -US$6.50 at US$1252.90/oz.

The Aussie is down -0.9% at US$0.7538.

Today

The SPI Overnight closed down -45 points or 0.8%. Notwithstanding iron ore, the leading sectors to the upside yesterday may lead the downside today.

Westpac will release its October consumer confidence survey locally today.

With Wall Street on edge over Fed policy, the minutes of the September FOMC meeting will be released tonight.

CSL ((CSL)) will hold its AGM today.
 

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article 3 months old

The Overnight Report: Putin On The Spin

By Greg Peel

The Dow closed up 88 points or 0.5% while the S&P gained 0.5% to 2163 and the Nasdaq rose 0.7%.

On The Money

The futures had suggested an 8 point gain for the local stock market yesterday and that’s exactly where the ASX200 closed. As to why the computers pushed the index up 27 points on the opening rotation is anyone’s guess. From there on, all we did is drift back.

We are seeing these sharp opening moves followed by immediate reversals time and time again. If the high frequency traders are putting in bogus bids/offers to push the market up/down, then selling/buying into the move, they are doing it very well.

The wash-up among the sectors yesterday indicated no clear trend whatsoever. Energy was down and materials up. Banks were up and industrials down. Telcos were up and utilities were down, again. The tepid US jobs report on Friday night has done little to change the status quo. A December Fed rate rise is still expected.

The consumer discretionary sector was the worst performer on the day, with a 0.9% fall, but that was all about individual stories in individual stocks.

Despite the quasi-holiday in the US last night, we should see some more definitive movement in the market today. For that we can thank Russia and China. The index shied away from 5500 yesterday but today may be different.

Blind Faith

Speaking at another informal meeting of oil producers last night, this time in Istanbul, Vladimir Putin said Russia was ready to “join in common efforts to limit oil production and urges others too as well”. At the same meeting, the Saudi oil minister suggested he was confident an agreement will be reached at the formal OPEC meeting in November and that it was “not unthinkable” oil could reach US$60/bbl.

What does one do with that information? OPEC has set production quotas throughout its history which members have famously never stuck too. Russia has offered to curb production several times over past years and never done so. But once again oil traders have decided they have no choice but to play it safe. Hence WTI has jumped 3%.

If it turns out the Saudis and Russians are simply gaming the market once more, then oil will come crashing back down again. But at least they’ll get to sell some oil at a better price for a couple of months. And there’s also the reality that were oil really to trade up to US$60, a lot of marginal US shale rigs would be brought out of mothballs.

But on a day when US banks and the bond market were closed, and only about half of the usual stock market participants bothered to turn up to play, Wall Street rallied on the energy sector’s lead. It was not too convincing nonetheless. On light volume, the Dow opened up 160 points and spent all day drifting back again.

A nod was also given to the US presidential debate the night before. While it is considered Clinton did not deliver a knock-out blow, it is suggested Trump did nothing to improve his position either. Hence the polls still favour Clinton and Wall Street is happy with the status quo.

Commodities

West Texas crude is up US$1.62 or 3.2% at US$51.20/bbl.

The Chinese are back. While they were off celebrating Golden Week, Fed rate rise speculation saw the US dollar on the rise and metals prices on the sag as a result. This, it appears, has provided Chinese traders with the opportunity to pick up some cheap supplies.

Aluminium, copper and lead all rose over 1% in London last night, while zinc played wood duck. Nickel shot up 4% but that came down to the Philippines issue. When Duterte is not off murdering drug dealers he is shutting down polluting nickel mines, and then he’s not, and then he is again. He shut one down yesterday so nickel is up 3.7%.

Iron ore jumped US$1.40 to US$55.80/t.

Metal markets were not fazed by the fact the US dollar index rose another 0.5% last night to 96.92. Indeed all oil-related currencies rose. The Aussie is up 0.3% at US$0.7605.

By rights gold should be lower, but after its big plunge last week gold has been inching back up since. It’s up US$3.10 at US$1259.40/oz.

Today

The SPI Overnight closed up 21 points or 0.4%. The energy sector rollercoaster should head up the hill today, providing for another opportunity to test resistance at 5500.

Housing finance numbers are out locally today along with NAB’s monthly business confidence survey.

Not much attention will be paid to Energy Resources of Australia’s ((ERA)) September quarter production report, given ERA is no longer producing, but it does signal the production report season is upon us.

More attention will be paid to the Telstra ((TLS)) AGM.

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

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article 3 months old

Gold Prices Plummet: Downside Risk Remains On Hawkish Fed

By Michael Boutros, currency strategist, FXCM

Fundamental Forecast for Gold:Neutral

  • Gold price drop in perspective and the next trade level
  • Gold prices drop to a four month low

Gold prices plummeted this week with the precious metal down nearly 5% to trade at [US$/oz] 1252 ahead of the New York close on Friday. The decline marks the largest weekly loss since October of 2014 and come alongside a broad rally in the U.S. Dollar with the DXY climbing more than 1.3% this week. U.S. Non-Farm Payrolls were mixed and although the headline print missed estimates, an uptick in labor-force participation paired with the upward revision to last month’s read further supported expectations for a December rate hike.

Coming into October, gold prices extended the late-September losses as USD strength continues to dampen the appeal of non-yielding assets. Nevertheless, with the recent batch of data failing to move the needle for the Fed’s November meeting, the recent weakness in the precious metal may abate over the days ahead should we get more of the same rhetoric from Fed officials. Heading into next week traders will be closely eyeing the release of the FOMC minutes on Wednesday as well as a fresh batch of commentary with a slew of 2016 FOMC voting-members (New York Fed President William Dudley, Kansas City Fed President Esther George, Boston Fed President Eric Rosengren and Chair Janet Yellen) slated to speak.
 


A summary of the Daily FC Speculative Sentiment Index shows traders are net short Gold- the ratio stands at -2.69 (73% of traders are long)- bearish reading. Long positions are 4.7% above levels seen last week while short positions are 19.8% lower over the same time period. Open interest has also continued to soften and suggests that while the broader focus remains lower, the immediate decline may be nearing exhaustion.

 


I published this chart in the Q4 forecasts published last week and as warned, the break of the 1303 key confluence support barrier marked a significant decline in gold prices. Look for support at the upcoming slope lines (note that the 52-week moving average falls within this range) with key support at 1204/10.

If gold closes lower on Friday it will have marked nine consecutive days of declines for the first time since mid-November (right before prices bottomed). The previous instance occurred in November of last year (prices bottomed in December). Note that daily RSI is deep in oversold territory, as was the case last year and suggests that we may yet see further downside before a more significant low is in place.

That said, gold is set to close the week above near-term support at 1249 - a region is defined by the the 38.2% retracement of the advance off the December low and the median-line extending off the My high. A break below this level targets the highlighted median-line confluence (~1220) backed by key support at 1204/10.

Initial resistance is eyed at former median-line support ~1290 with our bearish invalidation level now back at 1303. From a trading standpoint, I would be looking for a rebound early next week to fade into more meaningful structural support where prices could mount a more aggressive counter-offensive.
 

Reprinted with permission of the publisher. The above story can be read on the website www.dailyfx.com here.

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article 3 months old

The Monday Report

By Greg Peel

Rotation

Friday’s trade on the ASX was a bit of a non-event ahead of Friday night’s US jobs number but behind the tepid close we still saw further evidence of investors reallocating their portfolios. The global interest rate cat is out of the bag and not showing any signs of wanting to go back in.

The biggest sector losers on Friday were once again the yield-plays telcos (-1.1%) and utilities (-0.9%), backed up by industrials (-0.5%) where many of the popular reliable-growth-and-yield names reside. On the flipside we saw energy up 0.7% with oil rising over the US$50/bbl mark, underscoring the ongoing move back into cyclicals.

Beyond that, it was all pretty quiet. The US jobs report was going to tell us whether perhaps the Fed might even be forced to raise in November, rather than December, given the urgency that appears to have crept into Fed rhetoric.

Benign

As it was, 156,000 new jobs in September in the US was one of those neither here nor there results. Forecasts were for around 175,000, and the so-called “whisper number” had suggestions as high as 200,000. I’ve never known these whisper numbers to meet their mark.

Had the result indeed been 200,000, then we would all have been talking about the possibility of a November Fed hike. Given it fell short of expectation, that isn’t the case. But the August result was revised up by about as much as the September result missed the forecast, which realistically implies “as expected” all up. That means the market is still assuming a December hike. The futures have this as a 66% chance.

The unemployment rate ticked up to 5.0% from 4.9%. Not so long ago 5% was the Fed’s prime target to trigger monetary tightening but that has since gone out the window on recognition of what that figure does not disclose. It does not disclose the level of long term unemployment – those who aren’t registered as job-seeking – and it does not disclose underemployment – those with a part-time job who’d like more hours. With the participation rate – those trying to find work – at an historical low, the Fed can justifiably point to “slack” in the labour market not revealed by that 5% figure.

And this year we have found Wall Street really not all that fussed about the actual number of jobs added. The number that really matters is wage growth, as it is the indicator of potential inflation – the other prime Fed target. Average wages grew by 0.2% in September to be 2.6% higher year on year. While this is not runaway stuff, the job of a central bank is to act against inflation before it does run away, when it is usually too late.

So put it altogether and Wall Street came out of Friday’s jobs result assuming December is still the date, which is how traders were positioned ahead of the result.

The Dow did initially fall over a hundred points on Friday night to midday. It remains difficult to know whether Wall Street is in a mood of bad news is bad news – i.e. a miss on the jobs number – or bad news is good news – i.e. a less trigger-happy Fed. But Friday’s trade was clouded by an announced earnings guidance downgrade by large cap heavy industrial Honeywell.

With Alcoa’s report tomorrow night unofficially kicking off the September quarter result season, this late “confession session” announcement from Honeywell saw its shares down 8% and shares of all similar companies in aerospace and other big-end industries taking a hit as well. A lot of the morning fall can therefore be attributed to these moves rather than jobs.

And then Wall Street came all the way back in the afternoon before closing only a tad weaker. We would have to think that investors, while not specifically happy with the idea of a December rate rise, are not going to be shocked into selling off if that is to be the case.

There’s still more data to flow before December of course, and the small matter of the US election. The weekend’s developments in the Trump camp had the peso soaring again this morning on the assumption The Donald’s chances are going down the gurgler. At midday Sydney time today the two candidates will hold another debate which, it is being said, will probably decide The Donald’s fate one way or other.

Wall Street is cringing at the thought of a Clinton presidency, four more years of Democrat rule and four more years of Congressional inertia on the assumption the Republicans will still win one or both houses. But more cringe-worthy is Trump. And more frightening.

Commodities

After its solid run up through the 50 mark, West Texas crude pulled back a bit on Friday night, dropping US95c to US$49.58/bbl.

Base metals were again mixed. Copper rose 0.5%, lead rose 1% and nickel fell 1%, with aluminium and zinc little moved.

Iron ore fell US10c to US$54.40/t.

The US dollar also fell back a little, down 0.2% to 96.49 on its index. But gold only managed a US$2.10 gain to US$1256.30/oz.

The Aussie was relatively flat on Saturday morning at US$0.7583 but is a little higher this morning.

The SPI Overnight closed up 8 points on Saturday morning.

On Saturday, Caixin released its take on China service sector PMI for September. It showed a drop to 52.0 from 52.1.

The Week Ahead

The minutes of the September Fed meeting are due on Wednesday. As usual, they will be closely scrutinised.

It’s a quiet week in the US data-wise until we get to Friday, when retail sales, business inventories and fortnightly consumer sentiment numbers are released. Tonight in the US is a quasi-public holiday for Columbus Day. The stock and commodity markets are open but with banks and bond markets closed, activity will be limited.

That will provide more time to discuss today’s debate.

Japan is closed today but China is back after its week-long break. Chinese trade numbers are due on Thursday and inflation on Friday.

Locally we’ll see data for housing finance and housing affordability tomorrow along with NAB’s monthly business confidence survey. Wednesday it’s Westpac’s monthly consumer confidence survey.

On the local stock front, this week brings the first of the resource sector quarterly production reports. Among those reporting this week are Iluka Resources ((ILU)), South32 ((S32)) and Whitehaven Coal ((WHC)), all on Thursday.

We are also now seeing the AGM season start to ramp up. Telstra ((TLS)) will meet tomorrow and CSL ((CSL)) on Wednesday.

Rudi will appear on Sky Business on Tuesday morning, via Skype-link, at 11.15am to discuss broker calls. On Thursday he'll appear in the studio, 12.20-2.30pm and he'll repeat the Skype-link again on Friday, at around 11.10am.
 

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article 3 months old

The Overnight Report: Awaiting Jobs

By Greg Peel

The Dow closed down 12 points or 0.1% while the S&P rose one point to 2160 and the Nasdaq fell 0.2%.

Well Oiled

I suggested yesterday that outside the big moves we’ve being seeing in commodity prices, the rate-related theme remains the same for Australian stocks. Sure enough the telcos fell another 1.6% yesterday against the tide of the market and utilities were slightly weaker. Bucking the trend was consumer staples, up, 1.4%, given the supermarkets found some buying support.

I also suggested the selling in gold stocks would stop given gold had been steady overnight, but this was not the case overall. Yesterday’s top ten down-movers again included no less than seven gold producers. And fair enough too – gold is down another US$12 overnight.

The materials sector did manage to close up 0.6% nonetheless thanks to support for the Big Miners. The banks gained 0.7% despite an earnings miss from Bank of Queensland ((BOQ)). There has been talk recently from brokers that after a very poor year, perhaps now it is time to readdress Australia’s Top 20 big caps which have been cast aside in favour of small cap growth names. Those growth names have pushed far enough, and big caps like the miners, banks and supermarkets, are showing value.

So it is said.

The energy sector was nevertheless the predictable winner yesterday, rising 2.0% on the stronger oil price. WTI last night moved above the US$50 mark, so energy should also do well today.

Yesterday’s data release was the August trade numbers, which showed a narrowing of the deficit due to imports falling and exports remaining flat. The deficit is otherwise slowly reducing as the impact of higher commodity prices flows through on flatter export volumes. There is a considerable lag between delivery contract prices set and today’s spot price, so that trend is set to continue for now.

Taper Off

Wall Street traded in a straight line sideways all afternoon, just as one might expect ahead of yet another critical jobs report. But this lack of movement belies the fact the Dow was actually down a hundred from the open.

It is unclear just what was behind initial weakness. The weekly new jobless claims number was positive in the sense of a very low level of claims, suggesting tonight’s non-farm payrolls outcome might be better than the 170,000 expected. This would boost the chance of a December Fed rate hike.

So is that bad? Again we see a market split between “omigod, not a rate rise” and “for God’s sake just get it over with”. It may be that the nervous types sold stocks down early, or perhaps weakness had something to do with Hurricane Matthew, which is posing a serious threat to both life and the Atlantic coast economy.

Either way, mid-morning the ECB vice president announced the central bank had no plan to begin tapering bond purchases (QE) next March. It was this rumour perpetuated earlier this week, alongside Fed rate rise expectations, that provided a boost to the portfolio reallocation theme of which I spoke yesterday.

But why did the ECB wait days, not hours, to quash the rumour?

Whatever the case, the Dow immediately bounced back one hundred points. This implies Wall Street is still happier to suckle on the milk of easy global monetary policy for the time being.

The US ten-year yield continues to push higher nonetheless, up 3 basis points last night to 1.74%.

The other influence on markets this week other than monetary policy has been oil, and last night WTI traded above the US$50/bbl mark on news OPEC was planning yet another informal meeting this month ahead of the official November meeting. This might suggest a further nutting out of production freeze/cut measures and exemptions.

Commodities

West Texas crude is up US80c at US$50.53/bbl.

Base metal moves were mixed last night, with only a 1.7% gain for nickel exceeding 1%.

Iron ore is unchanged at US$54.50/t.

Gold is down another US$12.90 at US$1254.30/oz.

Gold is down on another 0.6% jump in the US dollar index to 96.68, driven by both the strong jobless claims number and the ECB’s announcement.

The Aussie is subsequently down 0.5% at US$0.7586.

Today

The SPI Overnight closed up 14 points or 0.3%. Looks like futures traders are expecting oil strength to pip gold weakness once again.

The local construction PMI for September is out today.

Then its jobs in the US tonight.
 

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article 3 months old

Material Matters: Iron Ore, Bulks, Gold, Oil And Steel

Iron ore exports down in August; Deutsche Bank raises forecasts for bulks & base metals; gold outlook & US Fed; oil outlook & OPEC; BlueScope Steel.

-Risks to the upside for iron ore producers if iron ore prices continue at current levels
-Demand concerns may weigh on bulks, base metals by the second quarter of 2017
-Gold prices likely to range trade but heavily dependent on US dollar
-Uncertainty over oil market balance in 2017
 

By Eva Brocklehurst

Iron Ore

Demand indicators for iron ore are robust although Ord Minnett observes the seasonal slow down into the year end is apparent. Meanwhile, Port Hedland and Brazilian iron ore exports rose in August, up 11% and 14% respectively month on month, while Chinese domestic output fell.

The broker believes the data points to a 1.5% increase in Chinese steel production growth in 2017. Ord Minnett observes spot iron ore averaged US$57/t in September and, while down on August's US$61/t, is still providing healthy margins for the major producers.

Macquarie suspects BHP Billiton ((BHP)), Rio Tinto ((RIO)) and Fortescue Metals ((FMG)) will report weaker iron ore shipments in the September quarter and reduces forecasts by 2%, 3% and 6% for the big three producers respectively.

Rio Tinto is expected to miss its 2016 shipment target of 330mt by 3mt. Fortescue Metals is still expected to achieve its FY17 guidance of 165-170mt. Roy Hill has indicated it shipped 14.1mt in the first half of 2016, in line with Macquarie's estimates.

The latest port data suggests the average shipping rate for the September quarter is is running around 3% below expectations. The broker makes only modest adjustments to forecasts as the rates are broadly within annual seasonal differences.

Iron ore prices continue to trade above Macquarie's forecasts for 2016 and 2017 and, therefore, the risk is to the upside for base case forecasts. BHP has the superior upgrade potential of the big three, the broker maintains, given a stronger exposure to coking coal.

Bulk And Base Metal Commodities

Deutsche Bank has raised its forecasts for a number of bulk and base metal commodities for 2016 and 2017 to reflect supply-side changes. These include China's policy on coal, the potential for the Organisation of Petroleum Exporting Countries (OPEC) to curb production, uncertainty regarding Philippine nickel exports and the slower ramp up of iron ore producer Vale's S11D project.

By the second quarter of 2017 the broker expects demand-side concerns will weigh, as a result of a significant slowing in Chinese construction activity. The broker suspects positive Chinese data could continue to support bulks and base metals over the near term. Deutsche Bank upgrades price forecasts by an average 3% for 2016 and 6% for 2017.

2017 iron ore forecasts are upgraded 7% to US$45/t, coking (metallurgical) coal by 25% to US$111/t, Newcastle thermal coal by 27% to US$63/t, copper by 1% to US205c/lb, manganese by 37% to US$3.8/dmtu, aluminium by 2% to US71c/lb, nickel 7% to US488c/lb and zinc by 22% to US113c/lb. Gold is unchanged at US$1,328/oz.

Gold

Citi remains sceptical of a gold price rally into the end of the year as prices in the year to date have largely traded sideways. Several structural drivers appear challenged, with stable mine supply coupled with subdued Asian retail demand.

The broker expects gold prices to average US$1,320/oz in the fourth quarter and gold to trade within a US$1,300-1,350/oz range until the US Federal Reserve meets and potentially raises rates in December, after which prices are expected to modestly decline throughout 2017. [Note: Citi is writing prior to this week's sudden US$40/oz drop in the gold price -- Ed]

The broker interprets the September statement from the Fed as indicating the case for a second rate hike has strengthened, pending confirmation from the data. Citi believes the US dollar could make or break sentiment on gold and this may have ramifications for the rest of the precious metal complex. Moreover, the US election is significant in that, absent an asset sell-off with a Trump victory, a stable US dollar could keep gold from rebounding aggressively in the fourth quarter of 2016.

In terms of central banks, Citi believes, outside of Venezuela, net movement of gold reserves should be minimal in the short term.

Energy

As oil prices rallied after OPEC announced a vague agreement to reduce total crude output, Citi observes uncertainty has increased, with Iraq's new oil minister claiming that third party estimates of the country's oil production were too low and this needed to be addressed for Iraq to accept any November agreement.

The broker does not believe the OPEC move is a game changer but probably raises the floor of the oil price to the mid US$40's a barrel from the low US$40's. Moreover, countries may try to push production as high as possible in the next two months before they are forced to freeze or cut.

Sticking with OPEC's forecasts, a cut in output to a production ceiling around 32.5-33mmb/d, presumably starting in January 2017, would imply inventory builds up through the first half of 2017 at 0.9mmb/d but this would be reversed in equal magnitude in the second half. At 33mmb/d Citi envisages the oil market would be over supplied into 2018.

Deutsche Bank believes the proposed production ceiling will tighten oil markets by 0.4mmb/d in 2017. This move offsets the broker's expectations for higher US oil supply from 2017 and has kept its oil market re-balancing thesis on track for a return to deficits in 2017.

Deutsche Bank retains its US$55/bbl Brent oil forecast for 2017 and Oil Search ((OSH)) its top pick in the sector as it has superior asset quality coupled with the lowest-cost proposed LNG projects globally.

BlueScope Steel

Australian steel spreads – the difference between the price of a commodity and the price of the raw material in that commodity - have fallen significantly, Morgan Stanley observes, largely because of higher coal prices and somewhat weaker regional steel prices. Spot spreads in east Asia have fallen to $183/t.

The broker envisages limited downside to first half guidance for BlueScope Steel ((BSL)) but significant downside potential in the second half should spreads remain at current levels, albeit this is not a base case.

The broker expects China's measures to relax its coal production cap should help moderate coal prices from October and, all else being equal, a move to US$140/t for coking coal is required for spreads to equal second half forecasts.

US steel spreads have also fallen in line with the company's guidance, currently at around US$325/t. The broker's US steel analysts continue to flag downside risks to US hot rolled coil prices although this may be offset to some extent by lower scrap prices.

A rebound in spreads is required to justify upside in the stock price, Morgan Stanley believes. Management is expected to reiterate first half guidance at the AGM in November.
 

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