Tag Archives: Precious Metals

article 3 months old

The Overnight Report: Fedheads Or Fedtails

By Greg Peel

The Dow closed up 239 points or 1.3% while the S&P gained 1.5% to 2159 and the Nasdaq rose 1.7%.

Lemmings

I took an each way bet this time yesterday in suggesting maybe local investors would assume the Australian market had already seen a Fed rate hike-related sell-off and as such look to pick up some bargains, or perhaps we’d simply see “one of those panic 100 point drops we suffer every now and then”. Clearly, panic set in.

At yesterday’s close, fears of a Fed rate hike, surfacing late August, had manifested as 6.1% plunge for the ASX200. That’s 6% wiped off the Australian stock market for the sake of US rates going from 0.50% to 0.75%. At Friday night’s close, the S&P500 had fallen 2.9% for the same reason. Talk about coughs and colds.

But clearly it was a capitulation session yesterday on the local market as the resources sectors, industrials and utilities were sold down by 3%, the banks, healthcare, info tech and consumer discretionary by 2% and the staples and telcos by 1.5%. On such “outperformance”, clearly Woolies and Telstra had already suffered enough.

Yet last night we saw a rebound on Wall Street. And given the futures are up 79 points this morning which, funnily enough, is exactly what they were down yesterday morning, presumably we’ll see a rebound on the local market today as well.

However if we do rebound today, it won’t be because local investors have decided yesterday’s sell-off was indeed overdone given the selling that preceded it and nor will it be because investors have decided 25 bips on the Fed rate is really no big deal in the scheme of things. It will be because another Fedhead came out last night and this time spoke dovishly.

So if we rebound today, it will be because maybe there won’t be a Fed rate hike next week. If there is, one can only assume we’ll go down again, maybe all the way back to our old friend 5000.

And if there isn’t, who’s going to be game enough to buy the market back up ahead of the December Fed meeting, which would solidly firm as a rate hike chance?

But on the other hand…

Last night Fed governor Lael Brainard (sorry, who?) suggested “prudence” is required with regard rate hikes. The Fed governor is an official with a permanent vote on the FOMC unlike the Fed presidents of the various regions who form part of the FOMC on rotation.

Another little-known Fedhead also piped up on the dovish side while better-known Atlanta Fed president Dennis Lockhart suggested a hike would require “serious discussion”.

The good news is we have now entered a Fedspeak blackout period ahead of the Fed meeting. They will all now have to shut the hell up. The bad news is we still have over a week to wait. It has been suggested Brainard was sent out last night to “calm” the markets, following Wall Street’s big plunge on Friday night. If only these idiots could just keep their bloody mouths shut in the first place.

There is quite a lot of US data to be delivered between now and the Fed meeting so no doubt they will have the ferry swaying from side to side. Interestingly the Bank of Japan will also hold a policy meeting next week – on the day before the Fed statement is released that night.

On another interesting note, it was suggested by a Wall Street trader on US business TV this morning that Friday night’s sell-off was not just about the Fed, but also about the latest North Korean nuclear missile test vis a vis the thought of Donald Trump being the man with the US launch codes.

And on a final interesting note, Eric Rosengren’s comments on Friday night sparked the sell-off in US stock markets, a rise in the US dollar, a plunge in gold and a rally in US bond yields. Last night Brainard’s comments caused a rebound in US stocks and a dip in the US dollar, but gold and the US ten-year yield are unmoved.

Commodities

West Texas crude fell 3% on Friday night and last night rose US33c or 0.7% to US$46.06.

Base metal prices all fell bar nickel but last night only copper managed a slight bounce, while aluminium fell another 0.5% and lead and zinc fell 1.5%, and nickel copped a 2.5% hiding.

Iron ore is unchanged at US$57.50/t.

Gold is as good as unchanged at US$1327.40/oz.

The US dollar index is down 0.2% at 95.13 and following its big plunge on Friday night, the Aussie is up 0.3% at US$0.7565.

Today

The SPI Overnight closed up 79 points or 1.5%.

China will release its monthly industrial production, retail sales and fixed asset investment numbers today.

NAB will release its local business confidence survey.

A handful of stocks go ex today, including CSL ((CSL)) and Healthscope ((HSO)).

Rudi will link up with Sky Business around 11.15am, through Skype, to discuss broker calls.
 

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article 3 months old

The Monday Report

By Greg Peel

Fed Sell-Off

There’s little point in trying to over-analyse the drop on Friday in the Australian market given Wall Street fell 2.5% on Friday night. But let’s make a comparison.

The Australian market loped along through almost the entire August result season doing very little on a net index basis. Only towards the end of the month did we see the market begin to fall, not because of earnings results but because of rising fears of a Fed rate hike in September.

As we entered September, US economic data releases began to look weak – the August jobs number being a case in point – hence markets relaxed a little on the assumption the Fed would not be hiking this month. But despite the weak data, Fedhead rhetoric continued to be hawkish. The feeling grew that weak data or not, the Fed was going to raise. Even if only to save face.

Australian yield stocks have been carrying a premium for some time now, not just because they are attractive to local investors but because they are attractive to foreign investors who otherwise are looking at zero to negative returns available on alternate investments. Australia’s comparatively high dividend yields are very attractive not only compared to US interest rates, but compared to US dividend yields. On Wall Street, 2% is considered an attractive return.

So whether or not anyone believed the Fed would raise, fear took hold. As a consequence, a trickle of selling on the Australian market has largely turned into a flood in September, and we can pretty much attribute the selling to Fed policy, which has implications not just for yield differentials but for commodity prices and beyond.

The ASX200 hit its recent peak on August 24. By Friday’s close it had fallen 4%. The S&P500 hit its recent peak – an all-time high – on August 15. Prior to Friday night’s session, it had fallen 0.4%.

Do you see where I’m going here?

Of Straws and Camels

On Friday night Boston Fed president Eric Rosengren joined the chorus of Fedheads suggesting the US economy was sufficiently in balance to imply gradual rate increases are appropriate. The Dow fell 394 points or 2.1%, the S&P fell 2.5% to 2127 and the Nasdaq fell 2.5%.

It was the first move in excess of 1% for the S&P500 since July 8. But we have had a procession of Fedheads coming out to make the same suggestion as Rosengren these past sessions with little impact, so why, all of a sudden, does Wall Street tank on one more similar comment?

One reason is that Rosengren has up to now been among the doves on the FOMC. And he has not said anything much of late. It is not insignificant for him to change his tune. But most likely Rosengren simply was the straw that broke the camel’s back. For the past month Wall Street has been saying they wouldn’t, would they? They might, could they? And even though there are still plenty of people insisting they won’t, well, maybe they just might.

Wall Street opened lower on Friday night and just kept on going, tracking a very straight line downwards to the close as more and more traders joined in. Many of those traders have only just come back from vacation. But there was no real panic.

There was no real panic because many have been expecting exactly this, whether it be triggered by a September rate rise or a December rate rise. The US indices have been sitting around all-time highs for no real reason other than central bank policy dictates there’s no alternative. Not only have traders been waiting for such a move, they’ve been looking forward to such a move.

At this stage Wall Street has fallen 2.5%. Not such a big deal. There could be more selling, but there are plenty of buyers lined up for just such an opportunity.

To underscore the fact Friday night was all about Fed policy speculation, the US dollar index rose 0.3% to 95.35, gold fell US$10.40 to US$1327.80/oz and the US ten-year bond yield rose 6 basis points to 1.67%.

From Australia’ perspective, the SPI Overnight closed down 79 or 1.5% points on Saturday morning. If accurate, that would take us down towards the next level of technical support for the ASX200 at 5250. It would not be surprising, given recent history, were we to see a much bigger capitulation day today – one of those panic 100 point drops we suffer every now and then.

But it would also not be surprising if we saw the buyers move in sooner rather than later. As I noted, the index has fallen 4% to now on Fed rate hike fears. The S&P500 had fallen 0.4%, and now has dropped 2.5%. Is Australia not already ahead of the game?

Commodities

Higher US rates implies a stronger US dollar and thus pressure on commodity prices.

On Friday night West Texas crude fell US$1.58 or 3.3% to US$45.73/bbl.

In London, lead dropped 1.5%, aluminium and zinc around 1% and copper around 0.5%. Nickel held its ground.

In typical independent fashion, iron ore rose US10c to US$57.50/t.

As noted, gold fell 0.8%.

The good news, on the other hand, is that the Aussie fell a solid 1.3% to US$0.7537.

The Week Ahead

Is the Fed data-dependent, as it claims to be, or not? Soft jobs, weak PMIs, low inflation – none of these in the past couple of weeks have silenced the chorus of hawkish Fedspeak. If it does actually remain data-dependent, then there will be a lot to consider towards the end of this week.

Thursday night brings industrial production, retail sales, business inventories, the PPI, the Empire State activity index and the Philadelphia Fed activity index. Friday night brings the CPI and consumer sentiment.

Friday night is also the quadruple witching equity derivative expiry.

The Bank of England will hold a policy meeting on Thursday night, but given its extensive easing at the last meeting and the fact the UK seemingly has shrugged off Brexit there is no change expected.

China will release industrial production, retail sales and fixed asset data tomorrow, ahead of public holidays on Thursday and Friday.

New Zealand will release its June quarter GDP on Thursday.

In Australia we’ll see NAB business confidence tomorrow, Westpac consumer confidence on Wednesday and the August jobs numbers on Thursday.

On Friday the changes to the components of S&P/ASX indices, announced earlier in the month, will become effective.

On the local stock front, we’re still working our way through the ex-dividends. On Thursday, earnings results are due from Myer ((MYR)) and OrotonGroup ((ORL)).

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

On Wednesday evening he'll present to the Chatswood chapter of the Australian Investors Association, at the Chatswood Club at 11 Help St. Starts at 7.15pm.


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article 3 months old

The Overnight Report: Central Bank Tango

By Greg Peel

The Dow closed down 46 points or 0.3% while the S&P lost 0.2% to 2181 and the Nasdaq fell 0.5%.

Sell Australia

There were a lot of stockbrokers and traders running around yesterday morning shouting “What the hell just happened?” As the opening rotation concluded on the ASX, the index was down 66 points.

Initial selling took the ASX200 down through the 5400 support level so at that point technical selling was triggered. And of course, as has been the case all week and will continue to be the case, albeit on a diminishing basis throughout the month, the index started with an ex-dividend handicap.

But it appears the selling began in the futures, thus triggering selling in the physical market. A big Sell Australia order hit the boards, most likely from offshore. As it was, this order provided a re-basing of the index from which point we could say the session featured a 28 point rally.

Australia’s July trade data were released yesterday and they looked good at first glance. Exports were up 3% on better commodity prices and imports were down 0.4% on the stronger Aussie. But it was notable that one small and typically volatile component of exports – gold sales – had made a difference in leaping 21%.

Take out gold and exports were still up 2%, and that number should continue to be supported in coming months given big moves up in coal prices and the ramp-up of production and sales of LNG. Bear in mind there’s always a lag effect as contract prices are set before actual sales are completed.

China also released its trade data yesterday, in this case for August, as it only takes Beijing a week to tally up the trade activity of 1.4bn people or whatever the count is these days. Surprisingly, imports rose by 1.5% year on year having fallen 12.5% in July, when economists had expected a 4.9% fall. It was the first monthly rise in imports in almost two years.

Within that imports number was plenty of coal and iron ore. Exports fell 2.8% year on year, but again this was a better result than the 4.0% decline anticipated.

The interesting point about the Chinese trade data, or any Chinese data for that matter, of the last few months is that they’ve generally been pretty bad but haven’t caused any sort of angst for the Australian market. That’s because the assumption is bad numbers simply imply further stimulus from the PBoC and/or Chinese government. So how do we interpret good numbers?

Well if bad numbers evoke a benign response then presumably good numbers do too – it’s just a balance of how much stimulus is required. And as I suggested, we could argue the ASX200 rallied over the course of yesterday as both the local and Chinese trade numbers were published, just from a lower starting point.

All sectors took a beating yesterday, as one would expect from index selling, with the exception of healthcare, thanks to a solid result and 11% share price jump for Sigma Pharmaceuticals ((SIP)). The biggest losses were reserved for the resource sectors which of course contain some of the bigger market cap names. Iron ore and gold prices were also weaker, but a jump in the oil price could not save energy. Consumer staples also took a beating but Woolies went ex.

Another 13 point drop in the futures this morning suggests this bout of weakness is not yet over. On the back of an increased chance of a Fed rate rise in September (if Fedspeak is anything at all to go by), a decreased chance of another RBA rate cut (if we assume the GDP to be too strong), nothing yet out of Japan, perhaps not so much out of China, and as was apparent last night, nothing out of the ECB, the net central bank influence on the Australian market is presently negative, or at least potentially negative.

Not Even Discussed

A rate cut wasn’t expected from the ECB last night but there was an assumption something would be suggested, particularly an extension to the QE program which is scheduled to end in March. The eurozone economy is not exactly firing and Brexit remains a threat.

As it was, Mario Draghi said in his press conference that a QE extension “wasn’t even discussed”. That was enough to send the euro flying.

And enough to foster weakness on Wall Street. The major indices were further hit by a slump in Apple shares prompted by early reviews of the new iPhone7 failing to excite.

The counterpoint was a solid rally in energy stocks on the back of another 2.5% jump in oil prices. If we consider that the inventory data released on Wednesday night hit the wires after Wall Street’s close, oil prices were up over 5%.

There are two organisations which each week publish US oil inventory data – the American Petroleum Institute and the Energy Information Administration -- a day apart. Half the time the two sets of data don’t even come close to matching. But there was no doubting the correlation last night as the EIA numbers suggested the biggest weekly drawdown of crude since 1999.

This result left the oil market pondering whether there is a cyclical indicator here – have we finally reached the point where the supply glut is easing? The problem is, there was a hurricane in the Gulf, which cut off supply. So it’s difficult to tell. Now that Gulf supply is running again, next week’s data will be closely watched.

Commodities

Over 24 hours West Texas crude is up US$1.17 or 2.5% to US$47.31/bbl.

Once again there was not a lot of action in base metals and moves were again mixed. Nickel rose 1% and zinc fell 0.5%.

Iron ore fell US90c to US$57.40/t.

While the US dollar index was up only slightly at 95.04, the ECB’s lack of action was enough to send gold down US$6.80 to US$1338.20/oz.

The Aussie is down 0.4% at US$0.7639.

Today

The SPI Overnight closed down 13 points or 0.2%. The next level to watch for the ASX200 is 5350.

Australian housing finance data are out today and China will release inflation numbers.

There are only a handful of small ex-divs today and Premier Investments ((PMV)) will release its earnings report.

Rudi's link-up with Sky Business via Skype has been delayed this morning and should occur around 11.45am.
 

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article 3 months old

Material Matters: Bulks, Precious Metals, Energy and Copper

Varied drivers for iron ore and coal; precious metals trajectory; focus on US oil production; copper drifts.

-Improved commodity prices factored into FMG and WHC?
-Evidence mounting for correction in silver prices
-Positive outlook for gold as real rates remain low
-US oil production still observed heading lower
-Subdued price action in copper heralds soft outlook
 

By Eva Brocklehurst

Bulks

Bulk commodity prices – iron ore and coal – have been stronger than UBS had expected in recent months. The drivers are varied but include Chinese steel prices and margins, which are conducive to higher raw material prices, while weather has affected Shanxi coal production. Some features of the rally will reverse and, on balance, the broker believes markets are a little tighter than previously expected.

UBS raises iron ore price forecasts by 6-7% for 2016 and 2017, to US$53/dmt CFR and US$50/dmt CFR, respectively. Hard coking coal estimates are lifted to US$96/t and US$101/t for 2016 and 2017 respectively, while thermal coal lifts to US$59/t for both years.

While Fortescue Metals ((FMG)) and Whitehaven Coal ((WHC)) have been the best performers over the year to date, as commodity prices have enabled debt to be reduced, the broker believes this is now factored into share prices. UBS retains South32 ((S32)) as its preferred exposure.

Goldman Sachs highlights the price movements for thermal coal, up 32%, metallurgical coal, up 28% and iron ore, up 12% month on month in August.

The broker's upward revisions to coal and Henry Hub gas forecasts have resulted in upward revisions to BHP Billiton ((BHP)), Rio Tinto ((RIO)) and South32 earnings per share estimates while the stronger Australian dollar has reduced 2017/18 estimates across the remainder of stocks under coverage.

Silver And Gold

The gains in the silver price in the year to date could be short-lived Citi contends, following a 7% decline in August. The broker observes both gold prices and the niche silver industrial sectors have stalled. A steepening curve and money market positioning add to the evidence for a correction.

Citi suspects the prospects for a rate hike from the US Federal Reserve at the upcoming FOMC meeting is slightly reduced following a soft employment figure in August. Despite the removal of US dollar pressure for now the broker does not believe there is enough impetus for markets to resume an overweight exposure in silver in the short term.

The broker notes US silver eagle coin sales have slumped and the cause is likely to be a function of price-sensitive retail investors preferring to buy on the dips. Citi expects silver prices to average US$19.20/oz in the December quarter.

Where did all the shine go? That's the question UBS asks regarding gold equity sentiment, which has turned almost 180 degrees, falling on an improving outlook for US interest rates. UBS maintains a positive view over the medium term for gold, considering real rates remain low or negative.

The broker believes gold has entered a new bull run and US real rates are likely to fall, with equilibrium real rates having limited upside. While recent Australian dollar strength has cast doubt over the direction of cost reductions for the sector, companies are still expected to keep a lid on costs.

The broker remains drawn to Evolution Mining ((EVN)) for asset diversification and notes Regis Resources ((RRL)) for production growth and a net-cash balance sheet. At the smaller end, UBS has raised its rating on Silver Lake Resources ((SRL)) to Buy. The broker also upgrades copper/gold stock Sandfire Resources ((SFR)) to Buy as value is emerging.

Energy

Global oil prices have declined following a build up in US inventory amid scepticism that OPEC members will commit to a production freeze at the meeting in Algeria scheduled for September 27-28.

UBS observes the market is focused on the US oil production and a sustained decline should help bring global supplies back into balance. Weekly estimates suggest US oil production is continuing its downward trend from a peak of 9.6mmbbl/d in June 2015, driven by lower rig activity.

UBS calculates that Woodside Petroleum ((WPL)) has the lowest break-even free cash flow for 2017 at US$29.54/bbl, trading at an implied oil price of US$62.16/bbl. Santos ((STO)) trades with the highest implied oil price of US$63.78/bbl.

Copper

A 3% increase in FY16 copper prices, revisions to FX forecasts and model updates to incorporate results means Goldman Sachs makes FY17/18 adjustments to earnings-per-share forecasts that range from down 9% to down 99%. The largest change is for OZ Minerals ((OZL)), which reflects the current break-even position of net profit.

Morgan Stanley observes copper has somehow missed out on China's credit surge this year and is now drifting into the typically tough trading period in the December quarter. The broker notes most of the 2016 price action has related to metal transfers in and out of China.

Grid investment in China is strong but the broker flags the fact it is being directed to less copper-intensive activities. Meanwhile, growth in construction has slowed to low single digits and while automotive output in July was robust the lift was from a low base.

The broker does not envisage a large copper surplus in 2016 and believes supply is sufficient to meet subdued demand growth.
 

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article 3 months old

The Overnight Report: Modestly Moderate

By Greg Peel

The Dow closed down 11 points while the S&P was flat at 2186 and the Nasdaq rose 0.2%.

Happy Anniversary

At 0.5% quarter on quarter and 3.3% year on year, Australia’s June quarter GDP growth was as good as in line with expectations and marked 25 years of uninterrupted growth. Bearing in mind the last recession was one we had to have.

It was an unusual start to trading on the local bourse yesterday given the futures said down 10 points and the ASX200 shot up almost 30 points from the open. Then the GDP numbers came out.

You’d think we’d all be thrilled with the sort of growth number any major developed economy would swoon over but no, like the strong Aussie, it’s a complication. Can the RBA justify cutting the cash rate further on this growth number? Low inflation justifies a cut, but the GDP would suggest otherwise.

The Commonwealth Bank economists, for one, are still tipping a November cut to 1.25% but they do make a couple of points from the breakdown of yesterday’s numbers. One is that government infrastructure spending is picking up, which despite Labor’s sad attempt to negatively politicise is just what the RBA wants to see – fiscal support to take the pressure off monetary policy.

Another is that weak wages growth, which is keeping the lid on inflation, is concentrated in the mining states. This suggests the issue is cyclical and not structural, such that as the decline in mining investment abates, so too should wages in the industry stop weakening any further.

Either way, the market didn’t like the strong result, even though it came in pretty much on the money. The index closed the session up only ten points. Funnily enough, the consumer sectors did like numbers as they were the stand-out performers on the day. Retailers like rate cuts, but then they also like economic growth. The offset was energy.

Oil prices were a little lower but the 5% fall in Santos ((STO)) was the main drag on the sector. According to the AFR, the Shanghai Stock Exchange is questioning why a Chinese company took an 11.7% equity stake this year in an Australian company booking huge losses.

Moves in other sectors were benign.

Oh Please

It was another dull old session on Wall Street last night. Supposedly everyone is now back to work after their summer vacations but while volumes have picked up from the previous week, they remain tepid at best.

The highlight, supposedly, of the day was the release of the Fed Beige Book, an anecdotal assessment of the state of the economies of each of the Fed regions. Growth in each region was deemed to be either “modest” or “moderate”, not that anybody much knows what that means or what the difference is. And growth has been M&M in every Beige Book pretty much since about the time QE started.

As I’ve said before, never has a book been so aptly named.

Wall Street scoffed at the Beige Book and scoffed again when a couple of Fedheads came out to tout the usual “it’s time for a rate hike” spiel. No one expects a September rate hike unless it has come to the point the Fed decides to man-up and actually lead the market rather than meekly follow it.

Testament to a slow news day on the Street is that all anyone could seem to talk about was the new iPhone, which everyone agrees is little different to the old one. Still, Apple shares closed higher on the day and hence the Nasdaq once again snuck quietly to a new record high.

Commodities

What Wall Street missed was the late release of a weekly oil inventory report that showed a bigger drawdown than was expected (we play this game every week), hence in electronic trading West Texas has shot up US$1.26 or 2.8% to US$46.14/bbl.

A strike in Chile provided a bit of a boost for the copper price last night but the sellers were lined up for any sign of life and thus copper closed up only 0.7% in London. Nickel rose 1% and lead fell 1.5% in yet another mixed session.

Iron ore fell US30c to US$58.30/t.

After Tuesday night’s pop, gold has fallen back US$4.40 to US$1345.00/oz as the US dollar index bounced off technical support and is up 0.1% at 94.96.

The Aussie is subsequently off 0.1% at US$0.7673, with the in-line GDP result failing to make any impression.

Today

The SPI Overnight closed down 18 points or 0.3%. Not sure why, unless traders expect a response to last night’s hawkish Fedspeak. If accurate we may once again test support for the ASX200 at 5400.

Otherwise we’ll see trade numbers today both locally (July) and from China (August).

Tonight the ECB will hold a policy meeting.

Quite a few ex-divs today, including Woolworths ((WOW)), while Sigma Pharmaceuticals ((SIP)) will release its earnings report.

Rudi will appear twice on Sky Business today. First from 12.30 to 2.30pm and again during Switzer TV between 7-8pm.
 

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

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

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article 3 months old

Of Gold And Gold Stocks

Gold stocks have been hot property in 2016 as the Fed's enthusiasm for rate rises has waned. But where does that leave us now?

- Gold price has jumped in 2016 thanks to a dovish Fed
- Gold miner share prices have risen further
- Fed rate rise speculation is a swing factor
- Not all Australian gold stocks are overvalued


By Greg Peel

Gold and Central Banks

Gold could be worth US$1700/oz, argues Deutsche Bank.

The reason why gold could be at this level is based on the correlation between the gold price and the balance sheets of the Big Four central banks – the US Federal Reserve, the European Central Bank, the Bank of Japan and the People’s Bank of China. Since the beginning of 2005, the combined balance sheets of the Big Four have steadily increased by 300%, Deutsche notes, albeit the total has levelled off since 2015.

The Fed started the process when it introduced the first of its quantitative easing programs in 2009, post-GFC. The Fed then began tapering off its bond buying in 2014 and by 2015 was talking rate rises, delivering the first at year-end.

In the meantime, the BoJ has picked up the ball and run with it since 2013, while the ECB finally settled on a way to begin its own QE program in 2015.

Since 2005, the quantity of actual gold in the world – above-ground gold stocks – grew by 19%. If it is assumed the value of central bank balance sheets should be equivalent to that of total above-ground gold, then gold should be trading at US$1700/oz, Deutsche calculates.

Deutsche notes there is a strong correlation between central bank balance sheets and the gold price, and every time the gold price runs above/below the correlation value it soon reverts. The only recent times the correlation broke down were in 2008 at the height of the GFC, when desperate investors were liquidating gold positions to cover margin calls on plummeting stocks, and in 2013, when the Fed first began to talk about winding down QE, at a time it was thought Cyprus would have to sell all of its gold on market to avoid bankruptcy.

So, gold should be trading at US$1700/oz. But Deutsche is not expecting it to anytime soon. Indeed, gold could yet trade lower if the probability of a second Fed rate hike increases, the analysts concede.

Gold and Physical Demand

Macquarie asks, why is gold not at US$2000/oz?

2016 has seen a huge surge in physical gold buying via exchange traded funds (ETF), pushing the gold price up 24%. In the past decade, only 2011 saw a sharper gain. Yet at current prices gold is around 30% below 2011’s all-time high price of US$1895/oz, Macquarie notes. That peak would equate to greater than US$2000/oz in today’s dollars.

One reason that peak hasn’t been reached is because the 2016 rally began at the lower level of US$1050/oz, so US$2000/oz would represent a more significant gain. The second is that the US economy is not in the same dire straits it was in 2011 (when its AAA rating was lost), and hence the US dollar is stronger.

A third is that jewellery demand has waned, particularly as the economies of emerging markets such as China have slowed. It is oft overlooked that the bulk of the world’s actual gold ends up as jewellery. Hence jewellery demand is as important as investor demand.

The US dollar will likely continue to be strong on the assumption the Fed will eventually raise rates. But Macquarie still sees upside for the gold price – not as any sharp spike upward, but as measured appreciation.

Outside of gold buying for investment and as jewellery (although there is overlap between these two), gold is bought by central banks to support currency valuations. From the late 1990s to 2011, global central banks were net sellers of hundreds of tonnes of gold, Macquarie notes. Net selling has now swung to net buying, but almost entirely by China and Russia.

Unless there is some shock change in policy, Macquarie expects ongoing buying from China and Russia but at a slower pace as gold prices rise.

The Swing Factor

One of the primary drivers of the 2016 gold price rally has been dovish shift in Fed sentiment. When the Fed delivered its first rate rise in December 2015 it was assumed, by the Fed and the market, a gradual but consistent tightening phase had kicked off. At the beginning of 2016 the Fed was talking four rate rises in the year.

At the beginning of September, we’re still waiting for the first one. A week ago speculation began to build we might see a hike this month but then out came a soft US jobs number, followed by surprisingly weak readings for US manufacturing and service sector data. September is now considered unlikely. There’s no meeting in October and November is off the table given the presidential election. That just leaves December, again, if indeed there is to be a 2016 rate rise.

A Fed rate rise is the biggest threat to the US-dollar denominated gold price. Yet as recent moves in the US dollar index have underscored, a lot still depends on what other major central banks are up to. China continues to ease quietly, Japan has moved to negative rates, the ECB has stepped up its QE program and the UK recently saw a rate cut on Brexit fears.

Such widespread central bank easing poses an inflation threat, and in theory gold is a hedge against inflation. Mind you, we’ve been hearing about this “inflation threat” since 2008, and like subsequent Fed rate rises, it never seems to arrive.

The bottom line is such central bank activity ex-Fed likely puts a floor on the gold price, Morgan Stanley suggests. Upside would be constrained were the Fed to finally move. Further support is provided by aforementioned significant purchases of ETFs. The bulk of these purchases emanate from China, Morgan Stanley notes, and given this represents the fear of the growing national debt in China, there’s no reason to believe Chinese buying will evaporate in the short term.

Gold Stocks

Outside of physical or paper gold buying, the other (and arguably simplest) way to invest in gold is to buy gold mining stocks. And that’s certainly been the case in 2016.

Total shareholder returns for global precious metal equities had by mid-August exceeded 169%, Morgan Stanley notes. While the surge has been aligned with a rising gold price, more than 50% of increased valuations can be ascribed to multiple re-rating.

This means less than half of the increase in gold stock price/earnings ratios can be attributed to actual increased earnings thanks to the higher gold price. More than half is attributable to share prices rising beyond that suggested by earnings increases. Such expansion of PE “multiples” is a simple reflection of investor sentiment.

PEs have risen to the point that the market is paying a premium of some 32% over historical averages for the global gold stocks covered by Morgan Stanley. Looking at it another way, gold stock share prices imply a gold price 24% higher than it is now into perpetuity.

In short, Morgan Stanley is warning that global gold stocks are overvalued.

But there’s never been a better time to build a gold mine in Australia, Macquarie suggests.

The US dollar gold price is at post-GFC highs and the Australian dollar gold price is at all-time highs. It appears global central bank monetary policy will be supportive of gold, Fed notwithstanding, for some time yet.

Given the mining investment boom is over, there is a surfeit of skilled workers looking for employment and service company rates have fallen back to earth. The currency tailwind enjoyed as the Aussie dropped back down through parity has now abated somewhat, Macquarie notes, but mining cost depreciation has been significant.

Which is all well and good, but you won’t get much of an argument out of Macquarie regarding Morgan Stanley’s assertion gold stocks are overvalued. Yet, not all gold stocks are overvalued, Macquarie argues.

Macquarie highlights two local gold stocks developing projects which offer competitive costs and better or comparable mine lives than more recognisable names along with considerable exploration upside potential. On a risk-adjusted basis (which means applying a valuation discount to a development that is yet to be completed), the broker sees considerable share price upside for Gold Road Resources ((GOR)) and Dacian Gold ((DCN)).

Despite calls of overvaluation, Bell Potter suggests there are a handful of local gold stocks that are well positioned even if gold prices were to remain subdued on Fed hike speculation. The bottom line is a miner with a strong balance sheet and/or solid cash flow is less leveraged to short-term shifts in the gold price and better able to pursue growth opportunities.

Offering the greatest high-margin, free cash flow are Northern Star Resources ((NST)) and Evolution Mining ((EVN)), Bell Potter believes.

On the other side of the coin are miners offering strong leverage to gold prices, thus providing solid upside potential were gold to rally (and vice versa). Here Bell Potter favours Perseus Mining ((PRU)) and Metals X ((MLX)).
 

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article 3 months old

The Overnight Report: Out Of Service

By Greg Peel

The Dow closed up 46 points or 0.3% while the S&P gained 0.3% to 2186 and the Nasdaq rose 0.5%.

Not with a Bang

Glenn Stevens' last monetary policy statement as RBA governor, released yesterday, was benign, and little different to the July statement. After the May rate cut economists were rapidly pencilling in August as the next cut ahead of more in 2017, but by yesterday morning no one was expecting an August cut anymore.

Inflation, or lack thereof, had been the big issue back in May but as we await the release of the June quarter GDP result this morning, the fact it could be as high as 3.4% growth rather puts the need for further stimulus into question, low inflation or not.

Yesterday saw the release of the last component of GDP, being the current account. The current account deficit surprised economists by dropping down to $15.5bn from the March quarter’s $20.8bn when $20.0bn was expected for June, but then the March quarter result was revised down to $14.9bn so what’s the point in being surprised? In fact the deficit widened.

I use the word “fact” advisedly.

The terms of trade in theory rose 2.3% in the June quarter thanks to stronger commodity prices but it’s still down 5.7% from a year ago. Yesterday’s data did not alter economists’ expectations that the pace of growth will have slowed to around 0.5% in June from a shock 1.1% reading in March, but that annual growth will remain an envy-of-the-developed-world 3.4% or thereabouts.

It was a lacklustre session on Bridge Street following no lead-in from Wall Street but clearly there was some give-back after Monday’s surprising surge. Yield stocks that were hot property on Monday eased back. The banks dropped 0.5% for example.

Monday’s rally was all about the US jobs report which apparently killed off, many had decided, the chance of a September Fed rate hike. Yesterday we saw local rate considerations at work. When the current account numbers came out, the ASX200 slipped, likely because they did not alter strong GDP expectations and therefore provided no reason for an RBA rate cut.

After recovering thereafter, the ASX200 slipped again in the afternoon when the RBA statement offered no hint there may have to be another rate cut sometime soon.

The Aussie didn’t do much, given no one had expected anything from the RBA. But that all changed overnight. Glenn Stevens is probably relieved he’s getting out.

No Chance

The Dow initially dropped 40 points from the opening bell last night on the release of the US services sector PMI for August, which showed a sharp drop to 51.4 from 55.5 in July. It’s the lowest reading since February 2010.

But the weakness was short-lived as those investors relieved by weak data, which suggest the Fed will not be hiking in September, moved in and started buying.

The US dollar index plunged 1.0% to 94.84. No doubt to Phil Lowe’s frustration, the Aussie has shot up 1.3% to US$0.7683. The US ten-year bond yield dropped 5 basis points to 1.54% and gold leapt US$22.70 to US$1349.40/oz.

Forget September, we can now all spend three months debating the possibility of a Fed rate rise in December.

We’re back in TINA mode – one might as well buy stocks as there is no other alternative. The Nasdaq hit a new record high last night. It’s hard to find a Wall Street commentator who doesn’t like the high-growth tech sector at present. It’s also hard to find anyone who likes the high-yield sectors such as utilities and telcos, other than the people who keep buying them. Where else can one source income? TINA.

The story in Australia is very similar.

Commodities

A big drop in the US dollar should be good news for commodity prices, but there was little evidence of it last night. Other than in gold of course, but that’s not a commodity.

Oil prices continued to drift lower after the disappointment of the Saudi-Russia announcement of, effectively, no production freezes probably ever. West Texas crude is down US21c at US$44.88/bbl.

Trading on the LME continued to be mixed and largely sedate, although zinc did drop 2% and lead rose 1% while the others did nothing much. Base metals continue to be influenced by individual demand/supply equations.

Iron ore fell US20c to US$58.60/t.

Today

The SPI Overnight closed down 10 points or 0.2%.

The local GDP result will be out late morning.

The Fed will publish its Beige Book tonight which will no doubt be stuck on the usual assessment of modest or moderate growth across Fed regions.

Among another handful of ex-divs today on the local market, Brambles ((BX)), Cochlear ((COH)) and Qantas ((QAN)) stand out.

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

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article 3 months old

Better Production Outlook For Medusa Mining

Small gold producer Medusa Mining is improving its operations at the Co-O gold mine in the Philippines and brokers welcome the better production outlook.

-Valuation gap to peers reflecting single asset status and sovereign risk
-Growth in production, margins and mine life expected at Co-O in medium term
-Near-term production constrained because of infrastructure upgrades
 

By Eva Brocklehurst

Small gold miner Medusa Mining ((MML)) has put the problems with its operations well behind and taken a turn for the better over the last two years, with brokers observing production is now more reliable. There is less dilution of ore and mine infrastructure is being improved.

The company operates the high-grade Co-O gold mine in Mindanao, Philippines, which is expected to produce 105-115, 000 ozs in FY17 at an all-in cost of US$1,000-1,100/oz. Macquarie observes the company generated US$127.8m in revenue from gold in FY16, within forecasts, while net profit of US$43.8m, also in line, is considered remarkably strong for a small gold producer.

The FY16 results lacked the painful asset write down of FY15 and Citi expects growth in earnings per share of 32% in FY17 on higher gold production. The broker rates the stock as Neutral/High Risk with a 70c target, given Co-O is a labour-intensive, narrow-vein mine and the risk of regular serious safety incidents is high.

Canaccord Genuity initiates coverage on Medusa Mining with a Speculative Buy rating and $1.35 target, contending its recommendation is supported by an improving outlook. The broker considers the stock one of the most undervalued under coverage, with the relative valuation gap in part reflecting the single asset status and sovereign risk. Mine infrastructure upgrades are expected and there is a highly prospective tenement portfolio. The balance sheet has also been strengthened.

Co-O is expected to deliver growth in production, margins and mine life in the medium term. The main catalysts for FY17 include a high intensity underground drilling program, continued net cash build up and completion of the service shaft in the June quarter, which should instantly boost production.

Macquarie suspects production will be constrained until the E15 service shaft is completed and the company is unlikely to make much headway until then. As a result, the broker reduces earnings forecasts for FY17 and, subsequently, valuation. Macquarie has a Neutral rating and 60c target.

What about the political climate in the Philippines and the review of all mining activity in the country? Canaccord Genuity acknowledges the current uncertainties but believes the impact on Medusa Mining will be minimal, given the company has adopted stringent environmental standards and a small surface footprint.

The broker notes the surface infrastructure at Co-O is capable of supporting a 150,000 ozs per annum profile. Growth projects beyond Co-O include Bananghilig and Guinhalinan. Both projects are near Co-O and on granted mineral production sharing agreements. A feasibility study is ongoing for a 200,000 ozs per annum open pit project at Bananghilig.

Canaccord Genuity factors in a nominal $10m in resource upside for Bananghilig. On current modelling for Co-O the broker factors in a life-of-mine inventory that is significantly above the current reserve and has not placed additional value on exploration.

Medusa Mining has been reinvesting cash into its mine development and does not pay a dividend. On the broker's estimates, the company would be in a position to consider dividend payments in FY18.
 

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article 3 months old

The Overnight Report: Labor Day Lull

By Greg Peel

Odd Jobs

The difference between 151,000 jobs added in the US in August and the 185,000 predicted led to a 1% rally for the Australian stock market yesterday. Go figure.

The point is Australian stocks sensitive to US interest rates – resource companies producing US dollar-denominated commodities and yield payers attractive to US investors – had been sold down last week on building speculation, post Jackson Hole, that the Fed was moving to raise its cash rate at the September FOMC meeting. The shortfall in jobs had many, but not everyone, in the market now assuming September is off the table.

So, as you were. Everything that was sold down came roaring back yesterday – the resource sectors, the banks, the telcos – to ensure the ASX200 made it comfortably back above critical support at 5400. Now we wait for the actual Fed meeting.

It was not, however, a good day for all sectors.

We’ve seen it in medical services, we’ve seen it in childcare, we’ve seen it in vehicle leasing and now we’ve seen it in residential aged care. Adding insult to the injury of disappointing earnings results last month, yesterday the three listed residential aged care stocks were absolutely trashed on the implication of likely new government regulations. At one point Estia Health ((EHE)) was down 30%, having already fallen a long way from its pre-result peak, and peers Japara Healthcare ((JHC)) and Regis Healthcare ((REG)) were not faring much better.

At the final bell each closed down 12%, 15% and 17% respectively. It was a capitulation. Not helping either recently was news the founder of Estia had sold his entire stake post-result.

In economic news yesterday, Australia’s service sector PMI went the same way as manufacturing PMI and collapsed, to 45.0 in August from 53.9 in July. Given tomorrow will see a GDP print in the order of 3% growth, we’ll also ignore this one.

Meanwhile, company profits rose over the June quarter by a greater than expected 6.9%, to be flat year on year. Manufacturing was the star performer with a 23% leap (See: PMI joke?) while mining chimed in with 14% thanks to the commodity price recovery. Construction fell 28% because the ongoing decline in resource sector construction out-weighed the residential construction boom.

The June quarter GDP remains on track to be over 3% (annual).

ANZ’s job ads series showed a solid 1.8% rebound in August after a weak July, to be up 8% year on year.

The RBA will meet today and do nothing, for the various reasons I outlined yesterday, and because Glenn Stevens is unlikely to do anything unexpected in his last statement.

Brexit Worries?

Caixin’s take on China’s service sector PMI showed a rise to 52.1 in August from 51.7 in July, in contrast to the official number. Japan still can’t take a trick – its equivalent fell into contraction at 49.6 from 50.4.

The eurozone saw a dip to 52.9 from 53.2 but the star of the show was the UK, which saw a jump back into expansion at 52.9 from 47.4. Once again we say Brexit Schmexit.

The US PMI is out tonight.

Commodities

Oil prices shot up by 5% at one point last night, in a thin market in the absence of the US, as it was reported the Saudis were set to make a “significant statement” at the G20 meeting. The assumption was an agreement between the Saudis and Russia to freeze production.

Prices soon retreated nonetheless when the announcement turned out to be one of agreeing to set up a working group to monitor the oil market. Led, one presumes, by Sir Humphrey Appleby. But West Texas crude is still up a net US87c or 2% at US$45.09/bbl.

Elsewhere, commodity markets were largely quiet in the absence of the US. In London, aluminium fell 1% and lead rose 1% but the other base metals moved little.

Iron ore fell US20c to US$58.80/t.

Gold is roughly steady at US$1326.70/oz.

The US dollar index is off 0.1% at 95.77 and the Aussie is up 0.2% at US$0.7584.

Today

The SPI Overnight closed down 20 points or 0.4%, probably suggesting yesterday’s bounce-back was a bit over-enthusiastic.

The last of the local GDP component releases is due today in the form of the June quarter current account, which includes the terms of trade.

As noted, the RBA statement will be released at 2.30pm today and the board will shoot off to the pub to toast Stevo.

There are a few more stocks going ex locally today.

Rudi will appear on Sky Business, via Skype-link, at around 11.15am to discuss broker calls.

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article 3 months old

The Monday Report

By Greg Peel

Running in Fear

Fear of a September Fed rate rise had been building in the local market as we moved towards Friday, evident in selling in yield stocks. Things came to a head on Friday with forecasts of 185,000 jobs to have been added in the US in August which, it was assumed, would be enough to force the FOMC’s hand.

Nor did it help that the ASX200 broke strong technical support at 5400 from the opening bell, ensuring a weak session. A brief attempt by the buyers to push the index back was destined to fail and when it was all said and done it was a Friday – always a good day to sell, and this time more so given the US long weekend.

The banks led the selling on a cap-weight basis with a 1.0% fall while telcos and healthcare each fell 2.1% to be joint losers among the sectors. Utilities backed up with 0.9% and industrials, which includes some faithful dividend payers, lost 1.1%. Only the resource sectors finished in the green, slightly, thanks to supportive commodity prices and the fact they’d already had a bad week.

But all is forgiven. The US jobs number fell short, and the futures are suggesting an opening gain of 31 points, which would take the ASX200 back over 5400 and potentially stave off more substantial weakness.

Couldn’t have been worse

As far as US monthly jobs results go, August’s result on Friday night was nothing short of frustrating. At 151,000, the number fell short of 185,000 estimates.

But not that short. The bottom line is, 151,000 is not a number to end Fed speculation one way or the other. Indeed it is a number that has divided economists and ensured we’ll be arguing the case back and forward for another two weeks.

Had the number been in excess of 250,000, as was the case in both June and July, the assumption would be yes, the Fed will raise this month, and now we can all get on with it. Had the number been something like 120,000 we could have said no, clearly the Fed won’t raise this month, and now we can all get on with it, at least until it’s time to start discussing December.

But at 151,000, and an unchanged unemployment rate of 4.9%, half the market is saying yes, it’s still enough, and the Fed has been setting us up for a hike. The other half of the market is saying that a number short of estimates, and a drop-back in wages growth to 0.1% for the month, means no, a hesitant Fed will have an excuse to hesitate once more.

So take your pick.

The various markets took their picks on Friday night, in either direction.

The US dollar index initially plunged on the jobs release, suggesting no hike, before turning around and closing up 0.3% at 95.88. A stronger dollar should be a drag on gold, but gold is up US$11.20 at US$1324.80/oz, suggesting no hike.

The US ten-year bond yield closed up 3 basis points at 1.60%, suggesting a hike. Commodity prices were both up and down. The US stock markets opened up on the news – probably suggesting relief that there would not be a hike, before dropping mid-session as the debate raged, and finally recovering to a modest gain on the day.

The Dow closed up 72 points or 0.4%, the S&P gained 0.4% to 2179, and the Nasdaq rose 0.4%.

Not even a US jobs number day could break the Dow/S&P run of sessions of no move in excess of 1% in either direction, which has now extended to forty.

So how do we interpret these moves? We don’t. We’ll likely just have to wait till September 22.

Commodities

West Texas crude closed up US69c at US$44.22/bbl, suggesting the technical bounce off 43 was more influential than jobs.

Aluminium fell 1.5% but lead rose 0.5% and nickel and zinc rose 1%, with copper off a tad.

Iron ore rose US60c to US$59.00/t.

As noted, gold jumped US$11.20.

With the US dollar index up 0.3%, the Aussie is actually up 0.2% at US$0.7570.

And also as noted, the SPI Overnight closed up 31 points or 0.6% on Saturday morning.

The Week Ahead

US markets are closed tonight. It’s a quiet week thereafter for US data, but the Fed’s Beige Book will be released on Wednesday.

It’s far from a quiet week in terms of Australian data.

Today we’ll see the service sector PMI, along with everyone else except the US, which will publish tomorrow night. We’ll see the local construction PMI on Wednesday.

In terms of other monthly data, today it’s ANZ job ads, on Thursday it’s the trade balance, and on Friday it’s housing finance.

In terms of June quarter data, today we’ll see company profits and inventories and tomorrow the current account, including the terms of trade. On Wednesday the GDP result will be released. Expectations are for an ease-back in quarterly growth to 0.4%, down from March’s shock 1.1%, but for the annual rate to increase to 3.2% from 3.1%.

The RBA will hold a policy meeting tomorrow but no change is likely, given (a) they moved last month, (b) they usually don’t move ahead of a GDP result and (c), there’s no clarity around Fed policy.

The ECB will hold a policy meeting on Thursday, just to add to the fun.

China will release trade numbers on Thursday and inflation on Friday.

On the local stock front, we’ll see out-of-cycle earnings reports from Karoon Gas ((KAR)) tomorrow, Sigma Pharmaceutical ((SIP)) and Xero ((XRO)) on Thursday and Premier Investments ((PMV)) on Friday.

It’s a big week for companies going ex-dividend, acting as a natural drag on the index.

Rudi will appear on Sky Business on Tuesday, via Skype-link, to discuss broker calls at 11.15am. He'll be in the studio twice on Thursday. First from 12.30-2.30pm and again for an interview on Switzer TV between 7-8pm. He'll repeat the Skype-link up around 11.05am on Friday.


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

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