By Greg Peel

The Dow closed up 14 points or 0.1% while the S&P was flat at 2033 and the Nasdaq rose 0.4%.

Fizzer

Absolute edge of the chair, heart in the mouth, hide behind the sofa stuff. No, I’m not referring to China’s GDP result yesterday. While I waited for that announcement I was watching my recording of the Scotland game, having managed to avoid hearing the result. I was transported back to Lansdowne Road, 1991. Back then we went on to win the cup.

The Chinese GDP result, on the other hand, was so benign one might almost be tempted to believe it was scripted. The government is targeting 7.0%, economists had forecast 6.8% in the September quarter, and the result came in at 6.9%. What does one do with that number?

No one knows, it seems. Yesterday the ASX200 rose 20-odd points from the open, as the futures had suggested, before meandering aimlessly through to lunchtime and Beijing’s announcement. When the result was known, the index similarly meandered aimlessly through to the close.

Sector results were mixed, and the only notable moves were a 1.1% fall for materials, for which a lower iron ore price had already provided impetus, and a 2.4% fall for telcos. Suddenly Telstra is looking very unloved.

The 6.9% number is probably the Goldilocks result. It’s not bad enough to send markets into a tailspin but not good enough to prevent Beijing from implementing further stimulus measures. Meanwhile, the accompanying data for the month of September was also mixed.

Chinese retail sales grew 10.9% year on year in September, up from 10.8% in August, beating forecasts of 10.8%. Industrial production grew 5.7%, down from 6.1%, and missing 6.0% forecasts. Fixed asset investment grew 10.3% year to date, down from 10.9%, missing forecasts of 10.8%.

Beijing is attempting to transition the Chinese economy away from reliance on heavy industry production and towards domestic consumption. While the above production and investment numbers are disappointing, the better sales result suggests things are at least moving in the right direction. But of course the likes of BHP are not going to be ecstatic to learn the Chinese are buying more iPhones.

With the results providing no great incentive to buy or sell, we’ll now just have to wait to see what Beijing’s response will be. The numbers similarly sent European and US markets into a torpor last night. And this morning the local index futures have closed unchanged.

Commodities

To find any notable response to the Chinese data we have to go to the commodities markets. Here the response was negative, although not dramatically so. If we suggest that the GDP result was better than expected, then the monthly industrial production and fixed asset investment numbers were likely the cause of commodity market angst.

On the LME, all base metal prices fell roughly one to one and a half percent.

Iron ore fell US10c to US$52.50/t.

West Texas crude fell US$1.16 to US$46.06/bbl and Brent fell US1.69 to US$48.75/bbl. While these are reasonable falls, they only take prices back to the lower end of the ranges they have been trading in for some months now. Indeed, it’s amazing how much our local energy index has been flying around of late when WTI has not broken 45-50 since July.

The US dollar index is up 0.3% at 94.95, which also would not have helped commodities. Gold is down US$6.30 to US$1170.00/oz.

The Aussie initially shot up on what was a forecast-beating Chinese GDP, but fell thereafter and is 0.5% lower at US$0.7246 over 24 hours.

Stagnant

Commodity prices falls had their impact on Wall Street last night, but the major indices balanced out for an overall flat result.

On the earnings front, Morgan Stanley posted the biggest miss of all the major banks and its shares dropped 5%.

On the data front, the US housing sentiment index rose to 64 from 61 in August to mark its highest level in ten years. While Wall Street is encouraged by the news, it is also somewhat perplexed. Housing starts are still growing steadily but at much slower pace now than they were two years ago. Why the jubilation?

While there are plenty of data releases yet to follow this week, the data-watching game has rather now lost its excitement given expectations of a Fed rate rise have waned. It would probably require a huge surge in October jobs to spark up interest once more.

That leaves US earnings results to watch, and there are plenty more of those to come in the next couple of weeks.

Today

As noted, the SPI Overnight is unchanged.

The minutes of the October RBA meeting will be released today. We’ve nevertheless had two significant developments since that meeting was held. Firstly, a second consecutive US jobs shocker took a 2015 Fed rate rise off the table for most. Secondly, Westpac has increased its mortgage rates and the other banks are expected soon to follow. Both developments shift the dial more towards the possibility of an RBA rate cut.

On the subject of banks, this morning the Turnbull government will issue its official response to last year’s Financial Systems Inquiry. News services are a-buzz this morning, breathlessly reporting that Turnbull is “going after the big banks” and warning viewers they may have to pay more for their mortgages.

The reality is, of course, that the banks have already largely adjusted for what the FSI recommended, through capital raisings, risk weight adjustments and mortgage repricing. Tightened APRA regulations have also pre-empted likely new rules. So unless the government decides to legislate to a degree far more onerous than David Murray has recommended, there should be no real surprises.

Cochlear ((COH)) will hold an AGM today. Newcrest Mining ((NCM)) and Oil Search ((OSH)) will post quarterly production reports.
 

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By Greg Peel

The Dow closed down 157 points or 0.9% (to below 17,000) while the S&P lost 0.5% to 1994 and the Nasdaq fell 0.3%.

Beijing phone home

Australia’s energy sector has become particularly fickle of late, flying around on the slightest moves in overnight energy prices. The rally in WTI crude back to almost US$50/bbl last week had the big oil names on the fly as bargain hunters piled in, but this week hopes of a break to the upside for oil prices have evaporated.

Crude oil prices were weaker on Tuesday night so yesterday those big oil names were hammered, sending the energy sector down 3.3%. But this move proved to be very much a standout among the sectors.

The ASX200 fell around 40 points from the open yesterday and despite a couple of blips, was still around that level when Beijing released China’s September inflation data.

China’s headline CPI fell to an annual rate of 1.6% in the month, down from 2.0% in August. The PPI was down 5.9%, unchanged from the August annual rate, to mark the 43^rd consecutive negative number and maintain a six-year low.

Of course in this upside-down economic world, this is good news. It is now assumed Beijing will be jolted into acting, and acting swiftly, with further monetary policy stimulus, most likely in the form of interest rate and/or reserve ratio requirement (RRR) cuts.

To that end, the ASX200 recovered through the afternoon to be down only 5 points at the close. Energy remained hammered, but materials fell only 0.4%, while consumer discretionary (+0.9%) and healthcare (+0.8%) provided a balance.

The banks were also very much in the spotlight following Westpac’s ((WBC)) announced capital raising and increase in floating mortgage rates. Westpac shares remained in a trading halt, thus were not factored into yesterday’s 0.2% gain for the financial sector. The points to note about Westpac’s announcements are firstly that the bank is the last of the Big Four to raise new capital, thus there is no further sector implication to consider, and secondly that Westpac’s rate hike will probably prompt its peers into following suit.

RBA?

Analysts were surprised when Westpac didn’t join in the capital raising rush last quarter when ANZ Bank and Commonwealth Bank announced in quick succession, with National Bank having raised previously. Perhaps the volatility at the time, which saw bank shares carted, encouraged the board to delay.

The potentially good news for the wider Australian economy is that in lifting mortgage rates, and assuming all will follow, the banks have relieved the RBA, to some extent, of the need to carefully balance monetary policy for the wider economy against the rampant Sydney-Melbourne housing boom. Across the board 20 basis point mortgage rate hikes leaves the door a lot more open for the central bank to deliver a 25 basis point cash rate cut, perhaps on its oft favoured date of Cup Day.

The housing boom is already showing signs of having topped out, particularly in the apartment segment, following stricter APRA regulations and supply rising ahead of population growth. Mortgage rate increase will go further towards taking the heat out.

Possibly hindering a decision by the RBA to rush into another rate cut, despite the drag of lower commodity prices, is the fact the Aussie has finally come down to a more realistic level, and the impact of that is yet to really be seen in the Australian economy. However, the news coming out of the US last night may offer the RBA sufficient grounds to take the cash rate down to a new historic low.

Retail Rout

US retails sales rose just 0.1% in September, it was revealed last night, following a flat August result. While meeting expectations, the number nevertheless remains disappointing. Take out the balance of strong auto sales and lower fuel prices, and sales were actually flat.

The fall in gasoline prices over the month saw the US PPI fall 0.5%, again in line with expectations. The core PPI, ex food & energy, fell 0.3%.

Just as Wall Street was absorbing these rather dour data, America’s biggest bricks & mortar retailer and employer, Wal-Mart, issued a profit warning which suggested earnings would be flat for the next three years. The company’s decision earlier in the year to raise wages for its enormous employee pool is the issue, along with impacts from the stronger US dollar.

Wal-Mart shares were subsequently slammed 10%, which is why the fall in the Dow last night was much greater than that of the S&P500. However, the Wal-Mart news sparked selling across all US bricks & mortar names, most likely because of selling in the leading related exchange traded fund.

If the above wasn’t enough to ensure a soggy session on Wall Street last night, later in the day the Fed Beige Book was released. The anecdotal assessment noted apparent slowing in three of the twelve Fed districts, with the remaining nine posting only “modest” or “moderate” growth. The report specifically pointed to the impact of the stronger US dollar as being behind this weaker assessment.

All up, last night’s economic news suggests the US economy is not going to grow as strongly in 2015 as had been hoped earlier in the year, particularly after the strong June quarter rebound from the weather-bound March quarter. The US economy is consumer-led, and consumers are not coming to the party.

Fed rate rise in 2015? Forget it. At least, that’s what most commentators are now suggesting, while the Fed itself is appearing to be more and more fractured in its views, frustrating Wall Street and adding to uncertainty. This would explain why last night’s bad news was indeed taken as bad news, when otherwise further confirmation of a 2015 rate rise being off the table could be seen as bullish for the stock market.

The US bond market certainly doesn’t expect a rate rise. Last night the ten-year yield fell 7 basis points to 1.98%. And that US dollar that has been causing all the trouble took a beating last night, with the dollar index falling 0.8% to 93.97.

Commodities

The weaker greenback and heightened expectations of further Chinese stimulus were enough to spark some buying of base metals last night. Tin lead the charge with a 2.6% gain while copper and lead rose 1%, with the others posting smaller gains.

Iron ore nevertheless fell US60c to US$54.30/t.

The oils were almost unchanged last night, which we haven’t seen for a while, no doubt balancing underlying weakness against the impact of the lower US dollar. West Texas is at US46.63/bbl and Brent is at US$49.15/bbl.

The big winner on the night was gold which, on the dollar crunch, rose US$19.00 to US$1187.00/oz.

The loser, we might say in a reverse sense, was the Aussie, which having fallen sharply after the release of the weak Chinese trade data earlier this week has jumped 0.7% to US$7303.

If the US dollar is now set to lose its rate rise expectation premium and force the Aussie higher, the chances of a November RBA cut improve.

Today

On the balance of everything, the SPI Overnight closed down only one point.

It’s jobs day in Australia today, while tonight the US CPI will provide further fuel for the Fed speculation fire.

It’s a busy day on the local stock front today featuring several AGMs, including that of CSL ((CSL)), along with a raft of resource sector production reports. Fortescue Metals ((FMG)), Iluka Resources ((ILU)) and Woodside Petroleum ((WPL)) provide the highlights.

Rudi will make his weekly appearance on Sky Business. Tune in midday-1pm for Lunch Money.
 

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By Greg Peel

The Dow closed up 138 points or 0.8% while the S&P gained 0.9% to 2013 and the Nasdaq rose 0.4%.

Hesitating

My apologies for suggesting yesterday that Australia’s September jobs report was due. It seems the ABS has moved the date on me, shifting the release to next Thursday, which is a week later than has always otherwise been the case. Perhaps I missed an announcement.

Following strong leads from overseas, the ASX200 rocketed out of the blocks yesterday to jump 59 points from the bell, charging through the 5200 support level to above 5250. The breach of that support is a bullish sign, but often markets have to work hard at establishing what is finally a breach confirmation.

As it was, the index began to waver through the morning, and there was much anticipation regarding the opening of the Shanghai Exchange after China’s week-long break – a week which has seen a very strong global market recovery. The Shanghai index duly opened up 3%, and largely remained there for the rest of the session.

Not enough? The ASX200 suddenly plunged at lunchtime before wobbling its way to a close of up 12 points. At 5210, the index has held the 5200 previous resistance level, but it appears more needs to be done to convincingly push higher. Given the SPI Overnight is up 62 points this morning, it may be the case today.

If China was a disappointment then we would not have seen the best performers on the index yesterday being materials (+1.7%) and energy (+1.3%), offset by a 1.0% drop for industrials and a 0.9% fall for the telco. This looks like more of a switch trade. Calls of commodities and therefore resource sector stocks having now seen their lows have become stronger, and there’s a lot of potential recovering to do.

Backflip

Last night Wall Street did a whole lotta nothing ahead of the release of the minutes of the September Fed meeting at 2pm. Then the Dow rallied over 100 points.

It had been assumed that the Fed’s decision not to raise in September had been a close-run thing. The FOMC may well have been ready to pull the trigger, but at the last minute members were spooked by the level of market volatility in August on growing concerns for Chinese, and global, growth. They thus decided to hold off, but suggested a 2015 hike was still the likely outcome.

Well the minutes revealed that the decision was not as close-run as assumed. The FOMC really was quite worried about China, its inexorable connection to the US economy in today’s world, and the drag a weaker China would likely have on US inflation. Members were not concerned about market volatility, and indeed they shouldn’t be or no policy decisions would ever be made. Market volatility was due to the same China concerns held by the FOMC, so to be concerned about volatility per se would be to double up.

Members were also hesitant over US jobs. Clearly the slack in the US labour market had been overcome if one takes a “normalised’ unemployment rate as the guide. But wage growth remains minimal, and that’s not what one would otherwise expect. Without wage growth, inflation is not likely to push back above the Fed’s 2% target anytime soon. Put these two inflation-related considerations together, and the FOMC decided to wait.

The irony is that the rally we’ve seen this past week, beginning from an initial Wall Street plunge on the shock September jobs number, has taken the S&P500 back to where it was just before the September Fed meeting. On that day, when the Fed didn’t raise, Wall Street tanked, suggesting the market really wanted a rate rise. Last night, on the release of the minutes of that meeting which suggest the Fed was even further away from a rate rise than assumed, Wall Street rallied.

The S&P500 has now reconquered the 2000 mark.

It just goes to show that above all else, markets do not like uncertainty. Clearly Wall Street is buoyed by lower-for-longer monetary policy, as has been the case since the GFC, but when it looked like the Fed was set to raise, Wall Street said please just get this out of the way and end the speculation. Disappointment thus followed. Since the weak jobs report, and now greater insight from the release of the minutes (of the meeting held before the jobs numbers were released), Wall Street sees the uncertainty as having been nipped in the bud for now.

Interestingly, on the above scenario one would expect US bonds to be bought alongside stocks, on implication of lower for longer. But the US ten-year yield jumped 5 basis points last night to 2.11%, just to add some confusion.

Commentators suggest that the minutes were not so influential last night, and rather the bond market is focussing on a steepening of the yield curve, implying short-end bonds are indeed being bought but the long-end is being sold. This, it is suggested, represents foreign central bank selling from those countries looking to bolster their own finances, such as China and Japan.

Commodities

While LME traders have been keenly awaiting the return of the Chinese to metal markets, it seems no one was very keen to do anything radical last night ahead of the release of the Fed minutes, by which time the exchange was closed. Yet there was still disappointment the Chinese did not come barrelling in.

Hence aluminium, copper and zinc fell 1%, with other metals seeing smaller, mixed moves.

Iron ore rose US40c to US$54.80/t.

The oil markets were back in buying mode last night, and again WTI had a shot at US$50/bbl. But once again this proved a bridge too far for now. The oils still managed 3% gains on the session, with West Texas up US$1.48 to US$49.63/bbl and Brent up US$1.55 to US$53.24/bbl.

Last night it was not about supply/demand balances but about good old geopolitics. To date, oil markets have not paid too much attention to the war in Syria because Syria is not an oil mover and shaker, but now that Russia’s in on the game the mood is changing. Reports last night that Russian missiles aimed at Syria had strayed into rural Iran were unsettling.

The US dollar index is down 0.2% on the impact of the minutes at 95.31, but gold fell back US$6.10 to US$1139.90/oz.

If Fed policy is set to remain lower for longer, then pressure on the Aussie dollar is eased. The Aussie is up another half a cent at US$0.7258 and looks like, for now at least, the swinging sixties will have to wait.

Today

The SPI Overnight, as noted, closed up 62 points or 1.2%.

Australia will see August housing finance details today (I hope), which will provide more colour to an emerging picture of weaker building approvals and a clear drop-off in apartment building and sales.
 

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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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