Tag Archives: The Overnight Report

article 3 months old

The Overnight Report: All Is Forgiven

By Greg Peel

The Dow rose 390 points or 2.4% while the S&P gained 2.5% to 1969 and the Nasdaq jumped 2.7%.

W-Bounce

“The next words you will hear with regard material and energy sector stocks around the globe will be ‘consolidation’ and ‘rationalisation’”.

- Overnight Report, August 25

The ASX200 jumped 70 points from the opening bell yesterday. Having failed to close under 5000 three times in a row, the index was always a good chance to see renewed strength in buying on its own, but a little bit of help from the energy sector also provided for a more positive mood.

Yesterday Woodside Petroleum ((WPL)) made a takeover offer for Oil Search ((OSH)), sending Oil Search shares up 17%. The move is seen as opportunistic – exploiting the fall in oil prices and thus energy sector share prices – and Oil Search may well reject it, but Oil Search shares jumped 17% yesterday and the bid floated all boats in the sector.

Woodside shares fell 3%, which is typical for the predator company in a takeover, but the third member of the LNG Big Three – Santos – jumped 5% and some of the smaller players, such as Beach and Senex, enjoyed 3% gains. The energy sector as a whole closed up 2.7%.

There is no connection between global LNG exporters and domestic banks, but the financials sector jumped 2.2% yesterday to add the most number of sector points to the index rally. This buying represents more general buying of beaten-down large caps in anticipation that the three failures under 5000 represents the beginning of a typical W-bounce for the Australian stock market.

The utilities sector definitely is connected to the energy sector, via pipelines, and it was the second best performer yesterday with a 2.3% gain. Materials rallied 1.8% thanks to a jump in the iron ore price, and all other sectors posted lesser moves into the green.

It was never going to matter what NAB’s business confidence survey revealed yesterday.

As it was, NAB’s survey looked pretty bleak at face value but was actually quite positive behind the scenes. Business confidence dropped 3 points to plus 1, to be well below the long run average of plus 5. But given the survey was taken two weeks ago, at the height of global market volatility, the result has been quickly dismissed as being reactionary.

On the other hand business conditions – the “now” – rose 5 points to plus 11 compared to a plus 1 average. The increase has been attributed to the falling Aussie dollar finally beginning to have an impact on the economy.

Again, the survey could have been much worse and the Australian stock market would not have much cared yesterday. Nor was there much angst evidently created by another weak set of Chinese data. The ASX200 dipped a little after the release, but kicked on strongly to the close.

Let’s Get Stimulated

I suggested last week that this week’s raft of Chinese data releases were unlikely to set off another round of selling, given the market is ready for them to be bad anyway. And yesterday’s August trade numbers were certainly bad.

Exports fell 6.1% year on year, having been down 8.9% in July. This was not only in line with expectations, but an improvement of sorts. But the shock came in imports, which fell a much greater than expected 14.3% having been down 8.6% in July.

Moreover, Beijing quotes its figures in US dollars, converted from renminbi. Last month the PBoC devalued the renminbi, and the new exchange rate was used for yesterday’s conversion. Given half the month represented trade at the old exchange rate, the numbers are a little misleading. At the old exchange rate, exports fell 10% and imports fell 17%.

The Australian stock market may have retreated yesterday afternoon if the Chinese stock market fell out of bed on the trade numbers, but it didn’t. Having been down 2% after lunch, the Shanghai index turned and rallied 5% to close up 3%.

While this might be explained by the PBoC kindly declaring on the weekend that the stock market rout was near to an end, it has been attributed to assumptions Beijing will consider even more stimulus measures, beyond the interest rate and RRR cuts and currency devaluation we’ve seen to date. One might also realistically consider that the data are yet to reflect any impact from the devaluation, notwithstanding interest rate cut impact has a lag-time in effectiveness as well.

Back to Business

I have suggested in this Report time and time again that the “smart money” on Wall Street stands aside on days of important economic releases, such as Fed statements and jobs numbers, and lets the headless chooks run around in panic. The smart money then makes its move the following trading day after more thoughtful consideration.

Friday on Wall Street saw a big drop, which was attributed to a 5.1% unemployment rate making a September Fed rate rise more likely. But we must also consider that it was a Friday before the long weekend that heralds the end of summer, and that most of the market disappeared at lunchtime. The afternoon session was then conducted among the tumbleweeds and trading was thin.

I have also suggested for a while now Wall Street is quite ready for a September rate rise, and indeed would just like to get it over and done with. Thus I also believe that while last night’s rally on Wall Street was attributed by commentators to a strong finish in Shanghai on hopes of further Chinese stimulus, it was more a case of the smart money deciding Friday’s drop was unnecessary and with global volatility easing, it’s a good time to buy.

September rate rise? Bring it on!

It is also interesting to note the Dow closed last night above the level at which it closed prior to the thousand point opening fall on August 21, which set off the aforementioned bout of heightened global volatility. And it is possibly more interesting to note the US ten-year bond yield jumped 7 basis points to 2.19%

There is some concern that the US indices did not go back down to retest the lows after the first drop, and hence may yet have to do so before the bull market can resume, it is suggested. In other words, we need another leg down before we can actually go up. Maybe a September rate rise could prompt this, but that would be to assume (a) Wall Street is terrified of a rate rise, which it appears not to be, and (b), stock markets follow rules.

Commodities

The “bad news is good news” theme out of China, meaning expectations of further stimulus, set off short-covering rallies on the LME last night. Base metal prices were weak on Friday night in the absence of US traders, and so short-covering was always going to spark sharp rallies.

Copper led the field with a 4% gain, while nickel and zinc rose 3% and aluminium rose 2%.

Iron ore rose US40c to US$56.40/t.

Oil traders are getting a bit giddy, and last night saw 3% jumps. West Texas rose US$1.29 to US$45.73/bbl and Brent rose US$1.59 to US$49.38/bbl.

The US dollar index fell 0.3% to 95.87, helped by some more positive trade data out of Germany supporting the euro. Gold was a little higher at US$1121.20/oz.

Aussie traders had set themselves very, very short, so a bounce in commodity prices was always going to be a sufficient trigger for an inevitable snap-back rally. The Aussie is up 1.3% to US$0.7017.

Today

The SPI Overnight closed up 45 points or 0.9%.

Today brings the Westpac consumer confidence survey, which will probably suffer the same fate as the business survey on the basis of timing. Housing finance data are also due.

Boral ((BLD)) will hold an investor day today, and there are a lot of stocks going ex-div, including BHP Billiton ((BHP)) and Woolworths ((WOW)).

Rudi shall make his weekly appearance on Sky Business's Market Moves, 5.30-6pm.
 

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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: Third Time’s A Charm

By Greg Peel

US markets were closed last night.

Technically Positive

Yesterday’s Australian data included the August construction PMI, which jumped to 53.8 from 47.1 in July, mostly thanks to the apartment boom overcoming the ongoing decline in resource sector development.

We also saw the ANZ job ads series for August, which saw a 1.0% increase following a 0.5% drop in July. Ads are growing at an annual rate of 0.4%, but they were growing at 1.0% earlier in the year. The early pace was fuelled, ANZ suggests, by strong growth in service industry employment leading an accelerating pace of mining/energy job losses. The latter will catch up to the former, such that ANZ expects the pace of ad growth to continue slowing from here.

But local economic data are not the focus of the market’s attention right now.

The ASX200 was down 57 points from the opening bell yesterday, presumably reflecting a sizeable drop on Wall Street which, supposedly, was all about a 5.1% US unemployment rate providing a green light to the Fed to raise its funds rate next week.

The plunge took us down through 5000 to 4973 before the index steadied, consolidated, and then rose back to the 5000 mark by 11.30am. Thereafter, the buyers battled it out with the sellers for the rest of the session before the buyers ultimately prevailed. We still finished down 10 points, but at 5030, we importantly finished comfortably above 5000.

Last month’s intraday low point in the correction from 6000 was 4928, before a bounce to above 5300, and the second wave took us to 4995 last Friday before a bounce to 5040. Yesterday we saw 4973 before 5030, to mark a third failed attempt at breaching 5000 and closing below that level. Three failed attempts at a break-down is technically a rather positive sign.

Below 5000 it appears investors are confident in buying big, reliable names that have been caught in the downdraught of recent China and Fed-related selling through no real fault of their own. If we take out the performances of the energy (-1.3%) and materials (-0.7%) sectors yesterday the ASX200 would have finished in the green, and let’s face it, it is difficult to accuse some of the bigger names in those sectors of being reliable anymore. Or for that matter, quite that big.

Investors looking for value in safer names are clearly not concerned that today we will see China’s August trade numbers, and over the week inflation, retail sales, industrial production and fixed asset numbers. Indeed, the only surprise that could arise from the releases is if they are not too bad. Nor are the bargain hunters apparently concerned about Fed policy. In the wider scheme of things, the Fed is going to raise either next week or soon, and everybody knows that.

Chinese Checkers

Perhaps the buyers took some heart in the announcement over the weekend from the head of the PBoC that “the correction in the [Chinese] stock market is almost done”. Shucks, and there I was thinking stock markets are unpredictable. Perhaps the call was due to the government’s latest stock market-manipulating move, which sees tax exemptions for those holding onto their shares for more than one year.

But yesterday we also had Beijing admitting China’s 2014 GDP growth rate was only 7.3% and not 7.4% as first estimated. It’s interesting that Beijing can issue a quarterly GDP number only two weeks after quarter-close but it takes nine months to make a revision.

A drop to 7.3% from 7.4% is not exactly substantial, and has managed to shock no one. The more prescient issue is that the revision only serves to underscore a belief Beijing’s 7.0% target for 2015 might be looking a bit Disneyland at this point, but then just about every foreign economist set a forecast in the sixes at the beginning of the year. Beijing has assured us, of course, that China is still on track for 7.0%. It was also on track to meet the government’s 7.5% goal last year.

Commodities

When Wall Street is closed, every other market goes quiet. The European stock markets, for example, were up a bit last night having tanked on Friday night.

Nickel was the only metal to post a move of more than 1% on the LME last night, indeed falling closer to 2%, while the scorecard on the sub-1% moves was copper, lead up, aluminium, tin, zinc down.

Iron ore jumped US$1.00 to US$56.00/t.

Selling pressure hit Brent crude, which fell US$1.79 or 3.6% to US$47.79/bbl, and subsequently dragged down West Texas in electronic trade by US$1.27 or 2.8% to US$44.44/bbl. Traders suggested very thin volumes exacerbated the moves.

With the US dollar index little changed at 96.15, gold fell US$3.90 to US$1118.90/oz.

The Aussie had a brief look at 68 yesterday before trading up 0.2% over 24 hours to US$0.6924.

Today

The SPI Overnight closed down 3 points.

Locally, NAB will release its monthly business survey today.

China will release August trade data.

Japan and the eurozone will both revise their June quarter GDP estimates.

There’s another decent-sized group of local stocks going ex-div today, including Cochlear ((COH)).
 

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

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

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article 3 months old

The Monday Report

By Greg Peel

To recap on the correction so far, the initial drop took the ASX200 down to 5001 which marked the first bottom on a closing price basis. The next day it traded down to 4928 intraday, but closed at 5137. On the rebound, the closing price peak was 5263 (5303 intra) before the second wave of selling last week took us back down to 5027 on Thursday (4995 intra).

Friday was a nothing day, in which the ASX200 bungled along the flatline going nowhere much before closing up 12 points at 5040. It was very “Friday”, after another week of volatility and ahead of both the US jobs number on Friday night and the US holiday tonight.

We may conclude that the 5000 level, which offered impenetrable resistance from 2009 to 2013, is now the solid base of support. A close below that level would likely suggest more downside. The story would be different, nonetheless, were 5000 to hold right through the difficult month of September, which this week includes a raft of August Chinese data, next week the Fed meeting, and maybe by month’s end a Greek election.

No Clear Signal

Wall Street was nervous before the opening bell on Friday night, having seen selling pressure impacting on the Japanese stock market on Friday, which fell 2.2%, rolling into pressure in Europe, resulting in falls of 2.8% in France, 2.7% in Germany and 2.4% in the UK. It was all going to come down to the non-farm payrolls report.

Wall Street had expected 220,000 jobs, so the 173,000 result was a clear miss. However, this number alone does not tell the full tale.

Firstly, it had been widely discussed prior to Friday night that the first August number almost always comes in low, before subsequently being revised higher. It’s all to do with August being the summer shut-down month, similar to January in Australia. Thus the market was ready for a weak initial reading.

As it was, the August result included upward revisions to the July and June numbers, such that 173,000 still provided for a three-month rolling average of 200,000 plus. Then there’s the unemployment rate, which fell to 5.1% from 5.3% in July. The Fed has stated that it considers “full” employment to be 5.0-5.2%. Thus as far as the Fed is concerned, employment is now full, for the first time since April 2008.

For the past year there has been concern that while the unemployment rate has been falling, it has not been accompanied by wage growth, which supports inflation. August wage growth came in at 0.3%, beating 0.2% expectations. At 2.2%, year on year wage growth is the strongest it’s been in four years.

So overall, was it a “good” jobs report or a “bad” jobs report? It rather depends on who you ask.

The US stock market said “good” because the unemployment rate has fallen into the Fed’s target zone. That suggests lift-off at next week’s Fed meeting, and for the stock market, that’s taken as “bad”. The Dow fell on the open, traded to down 350 points around 2.30pm, rebounded to be down 200 points at 3.30pm and closed down 270. But if the jobs numbers were a clear green light to the Fed, we would expect to see both the US dollar and US bond rates rise.

The US dollar index fell 0.2% to 96.22 and the US ten-year bond yield fell four basis points to 2.14%. We recall that at the height of Fed rate rise speculation this year, the dollar index has been at 100 and the ten-year has been at 2.50%.

Meanwhile, commodity prices all fell, suggesting commodity traders believe it’s a green light for the Fed and thus the US dollar will have to rise.

So what are we to make of it all? Economists are largely split down the middle on September or December, with some outliers suggesting next year. Some suggest the Fed cannot raise when the markets are volatile, others say it is not the Fed’s mandate to placate the stock market. Some say the Fed cannot raise due to the threat of an accelerated Asian currency crisis, others say the rest of the world is not the Fed’s responsibility.

Many, like myself, simply say please get it over and done with. I continue to believe this is the way the Fed is feeling too.

Commodities

LME traders clearly took the US jobs report as ominous in Fed rate rise terms, given nickel fell 0.5%, aluminium, tin and zinc fell 1% and copper and lead fell over 2%.

Iron ore fell US80c to US$55.00/t.

West Texas crude fell US94c to US$45.71/bbl and Brent fell US97c to US$49.58/bbl.

Typically, gold takes a while to react, and hence Friday night gave us little indication of interest rate views given gold fell US$2.10 to US$1122.80/oz.

What is the Aussie telling us? I suggested on Friday morning that 70 appeared to be a line in the sand for now, but that idea was quickly kyboshed. On the break of 70, the Aussie fell sharply and is down 1.5% at US$0.6911. We haven’t seen the Aussie in the sixties since 2009. But are we seeing Fed speculation or ongoing Chinese slowdown fears? There is a raft of Chinese data releases due this week.

One thing’s for sure – the forex market is very short Aussie at present, hence sharp rebounds are on the cards.

The Week Ahead

The SPI Overnight closed down 28 points or 0.6% on Saturday morning which, if accurate, would take the ASX200 back down towards the 5000 level again today.

Tomorrow Beijing will release China’s August trade data. On Thursday the inflation numbers are due, and the weekend sees industrial production, retail sales and fixed asset investment. Chinese markets reopen today after two days off last week.

Wall Street is closed tonight for Labor Day, before consumer credit data tomorrow night, wholesale trade on Thursday and the PPI and fortnightly consumer sentiment on Friday.

The RBNZ and Bank of England will both hold policy meetings on Thursday.

In Australia, we see the construction PMI and ANZ job ads today, NAB business confidence tomorrow, and housing finance and the Westpac consumer confidence on Wednesday. Thursday brings our own August jobs numbers.

Quite a lot of stocks go ex-div this week, including CSL ((CSL)) and Insurance Australia Group ((IAG)) today.

Westpac ((WBC)) will hold a strategy meeting today and Boral ((BLD)) will host an investor day on Wednesday. Sigma Pharmaceuticals ((SIP)) will release its interim result on Thursday.

Rudi will appear on Sky Business on Wednesday at 5.30pm and on Thursday at noon and again between 7-8pm for the Switzer Report.
 

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

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article 3 months old

The Overnight Report: Job Watch

By Greg Peel

The Dow closed up 23 points or 0.1% while the S&P gained 0.1% to 1951 and the Nasdaq fell 0.4%.

Lacking Discretion

There were actually a lot of similarities between Wednesday morning’s trade on Bridge Street and yesterday morning’s trade on Bridge Street. On Wednesday morning, second-wave selling, spurred on by weakness on Wall Street, sent us down 70-odd points from the open. At 11.30am, the disappointing GDP was result was released but the index initially bounced before heading south again.

By yesterday morning at 11.30am we were down 50-odd points before the retail sales result was released. The difference is we were actually up 70 points from the opening bell, so this time we fell 120 points to 11.30am. When the disappointing retail sales number came out the index briefly bounced, before heading south again.

On Wednesday afternoon, the buyers arrived and pushed us back to flat for the session. Yesterday afternoon, those buyers were otherwise occupied. The late buying on Wednesday, and a positive session on Wall Street, encouraged buying from the open yesterday. But the sellers were biding their time. The index was not bought up from the open, it simply “fell into an upward hole”, as we say in the market, where the offer prices had been pulled right back.

Then someone said “Now!” and in they came. Yesterday morning told us the second wave of selling is not yet exhausted, as we might have hoped by Wednesday’s close. By lunchtime, the damage had already been done. All sectors had fallen by fairly even percentages, indicating “market” selling. The drift-off in the afternoon reflected the weak retail sales number, such that the consumer discretionary sector closed down 3.2% when all about lost about 1.5% (except consumer staples, which likely saw some switching to be down only 0.3%).

The consumer sectors saw switching because the 0.1% fall in retail sales in July, against expectations of a 0.4% rise, was split into a 0.6% fall for discretionary and a 0.5% gain for staples. The fall in discretionary was largely due to a big fall in spending on household goods. This is the element that took economists by surprise, but on reflection, they have realised that household goods spending was the driver of solid retail sales numbers in both June and May. In the first month of the new financial year, it appears households took a breather.

So we might conclude that yesterday’s sales numbers were not quite as bad as they appeared at face value.

That just leaves us with the question of whether or not the general selling is now exhausted. It would be foolish to call this, particularly ahead of the US jobs report tonight, the Fed meeting in a couple of weeks and, let us not forget, another Greek election soon to be held.

Whatever More It Takes

With Greece under a current caretaker government, China has been able to hog the spotlight this past month and send global markets into a spin. Such volatility has not been lost on the ECB, which held a policy meeting last night.

Mario Draghi did not name China specifically at his press conference, but cited a slowdown in emerging markets and a further decline in oil prices as posing fresh risks to a European economy already being propped up by QE. Lower oil prices should ultimately help the oil-importing eurozone but the payback is weak oil-producing trading partners and the deflationary impact of lower fuel costs.

The ECB’s last QE program began in March and at the time, it was slated to last through to September. So the central bank must now decide what to do next and as Draghi declared last night, an increase in QE is on the cards if deemed necessary. For a long time now, the ECB president has promised to do “whatever it takes”.

The response was a big drop in the euro and a big rise across European stock markets, including 2.7% in Germany, 2.2% in France and 1.8% in the UK.

Payroll Roulette

The buying carried across the pond onto Wall Street and by 11am in New York, the Dow was up 200 points. But given a 200 point gain in the previous session as well, it was time for the sellers to act.

The difference last night is that the sellers weren’t representing second-wave investor selling on general fear but rather traders squaring up ahead of tonight’s US non-farm payrolls report and the volatility that may well transpire. The Dow retreated in an orderly and almost leisurely fashion to be roughly square on the session, without heavy volume.

It’s also a long weekend in the US, when typically Wall Street clears out by lunchtime on Friday. So not much point in holding risky longs heading into tonight.

Square is the safest place to be when no one can tell you (a) how Wall Street will react if tonight’s number is good/bad or (b), how the Fed will react if the number is good/bad. There are plenty of opinions, but no consensus. The general feeling is that a forecast of around 220,000 means 170,000 is bad and 250,000 is good. But it has also been noted that seasonally, August tends to deliver a weak number. In fact, August jobs numbers have disappointed for eleven of the past twelve years.

But then if it’s bad, does Wall Street rally on the assumption the Fed won’t raise this month, and vice versa if it’s good? Such volatility will likely be on display, but we know that the smart money tends to stay out on the day as the headless chooks go berserk and come in the next trading day following more thoughtful consideration. My consideration would be what difference will it make in the scheme of things if the Fed raises in September, October or December? It’s going to raise either way. Get it over with.

And I’m prepared to bet a lot of people on Wall Street feel this way, and that ultimately a September rate rise will prompt a rally, if not on day one, particularly now that the market PE has come back to reality thanks to China.

Commodities

The oil market mimicked the US stock market last night in initially lapping up the promise of more stimulus from the ECB before fading away on a square-up. West Texas closed up US60c to US$46.65/bbl and Brent closed up US11c to US$50.55/bbl. You might be forgiven for thinking oil finally had a quiet night after the madness of the past couple of weeks, but actually WTI was up 6% at lunchtime.

The LME also saw fairly similar action, albeit there was divergence amongst metals. Initial price strength faded late in the day but still left copper up 2%, aluminium up 1.5% and nickel up 1%, while lead, zinc and tin were flat to slightly weaker.

With China on holiday, iron ore is unchanged at US$55.80/t.

Talk of more QE in Europe sent the euro plunging, as noted, hence the US dollar index rose 0.5% to 96.37. And hence gold fell US$8.90 to US$1124.90/oz.

We might say the stronger greenback is the reason why the Aussie is down 0.3% at US$0.7017 this morning, but over the past month there has been no direct (inverse) correlation whatsoever. On yesterday’s weak retail sales number, the Aussie took another little trip into the 69s before scrambling back to safety above 70. Having fallen 36% from 110, it seems at the moment that 70 is a bit of a line in the sand for the Little Battler.

Today

The SPI Overnight closed up 20 points or 0.4%.

China is closed again today.

The eurozone’s June quarter GDP result will be revised tonight, but is irrelevant after last night.

Everything hinges on tonight’s US jobs report.

Note that locally, the S&P/ASX will announce this quarter’s promotions and relegations into/out of their indices, including the ASX200, before the changes take effect in two weeks.
 

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: Now, Back To The US Economy…

By Greg Peel

The Dow rose 293 points or 1.8% while the S&P gained 1.8% to 1948 and the Nasdaq added 2.5%.

Weak

There are no two ways about it, yesterday’s Australian June quarter GDP report was a disappointment. The economy grew 0.2% in real terms from the March quarter for an annual growth rate of 2.0%, missing expectations of 0.4% and 2.2% respectively. The trend rate is considered in a post-GFC world to be 2.75%, and was previously 3.25%.

It gets worse in nominal, ex-inflation terms, which provides the true picture of national income growth. The nominal economy grew 1.8% in 2014-15, the lowest rate since 1961-62. Lower, that means, than the Keating recession of 1991-92.

We don’t have to look too far to nail down the culprit. A combination of falling mining investment and falling commodity prices is proving too significant a force for the non-mining economy to overcome at this stage. Growth came from household spending and government spending (mostly on lumpy defence) while weakness was felt in business investment and the rundown of business inventories.

And while household spending is a positive driver, the hangover from the GFC continues to be evident in the household savings rate, which ran at 8.8% annual growth in the June quarter. That’s good for future financial risk, but not good for immediate economic growth.

There are two factors that have the power to save the Australian economy – the Aussie dollar and fiscal reform. The currency is doing its bit, and as I noted yesterday the Aussie began and ended the June quarter at 76 with a trip to 81 in between, and today we’re at 70. The other factor relies on the commitment, foresight and courage of our politicians.

We’re all doomed.

W-Bounce?

I asked the question yesterday morning, with the Dow down over 400 points and the SPI futures suggesting a 62 point fall for the ASX200, whether this would actually be double-counting of the previous session in which the Chinese PMIs were released. Well at 11.30am we were down 75 points.

That’s when the GDP result was released, and while the Aussie enjoyed a 69 (handle) the stock index actually bounced, briefly, before the index dropped to 81 points down just before 1pm. At that point we were getting closer to the 5000 support level, at 5015, and it seems someone with some money said “While they’re all at lunch, start buying”.

Sandwiches were hastily thrust aside and others joined the rally in the afternoon, taking us back to be 5 points up on the day. Yes – to be down again would have been double-counting.

The good news is China is closed today and tomorrow, to honour a parade of missiles. Taking China off the screen does not solve any problems, but it does mean one less distraction as Bridge Street tests the waters to see whether the second wave of selling is now over, or whether there are some even slower sellers still waiting to pounce at higher levels. If the former is true we can book in a standard W-bounce, at least for now, until mid-month when the Fed meets.

Normal

It would be foolish to suggest Wall Street is taking its lead from Australia at the moment but it has seemed that way this week, basically because we see the Chinese data while they’re all asleep.

Last night Wall Street traders also decided to test the waters to see whether the second wave of selling might now be over. They did so from the open, sending the Dow up about 200 points into a void. There were a few wobbles, but the US indices largely held their ground throughout the day as everyone waited to see how the market-on-close orders would stack up this time around.

The imbalance was benign, and so it was safe to buy to the close. The Dow kicked up another 100 points in the last half hour.

For the first time in ten days, traders suggested the market felt “normal”. Volumes were on average, heartbeats had settled down and anxiety had subsided. Wall Street is no doubt now looking forward to the Labor Day long weekend. For many this means back-to-work next week, other than for those who cut short their summer holidays when all hell broke loose over a week ago. It also means back-to-school, which for many US retailers is almost as significant a consumer spending period as Christmas.

“Normal” also meant traders could concentrate on US economic data releases, which had garnered little attention during the turmoil.

The ADP reported 190,000 private sector jobs were added in August. This is a bit better than July, and around about expectation. Economists are forecasting Friday’s non-farm payrolls report to show 213,000 jobs added.

The US measure of June quarter productivity had originally been estimated at 1.3% growth, but last night was revised up to 3.3% growth. Read it and weep Mr Hockey (aka Dead Man Walking).

But the big talking point was the Fed Beige Book, which provides an anecdotal economic assessment of each of the twelve Fed regions. While it gave a nod to the impact of the stronger greenback and lower oil prices, most importantly it reported “increasing wage pressure due to labour market tightening” across several regions. Wage growth is the one thing that had been noticeably lacking in the US as 2015 played out, but now it seems inflationary pressure is building.

The Beige Book also suggested there were few signs of spill-over into the US economy from the Chinese turmoil. Such an observation only serves to reinforce the fact the China-triggered Wall Street sell-off was all about US stock market overvaluation and not about sudden China fears.

On this collection of positive US data, the Dow opened up 200 points. Yet on last night’s data alone, the Fed would raise. This confirms to me what I have suggested for a while now – when the Fed raises, Wall Street will rally. Maybe not in the first five minutes, but once the initial dust has settled.

Commodities

LME traders were encouraged by last night’s US data, while remaining wary that the number that matters is Friday night’s jobs report. Copper, nickel and zinc rose 1%. Short-covering in tin continued, for a second 3% gain.

Iron ore rose US10c to US$55.80/t.

Volatility continued in the oil markets. After Tuesday night’s 8% plunge, which followed two successive 6% gains, WTI initially attempted to rally but was sold off again when the weekly US crude inventory report showed an unexpected increase. But the sell-off proved short-lived, and in came the technical buyers. West Texas is up US$1.83 or 4% to US$46.05/bbl.

Brent is up US$1.92 or 4% to US$50.44/bbl.

The US dollar index fell on Tuesday night but rallied back on the strong US data last night, to be up 0.7% at 95.90. Gold is thus down US$6.10 at US$1133.80/oz.

The Aussie is up 0.3% to US$70.40 over 24 hours, having dipped below 70 briefly yesterday following the weak GDP report. We may assume the forex markets are mostly short Aussie.

Today

The SPI Overnight closed up 31 points or 0.6%.

The focus in Australia will be back on more immediate data today, with the release of the July retail sales and trade balance numbers. The August service sector PMI will also be released, as it will in Japan, and in the eurozone, UK and US tonight.

As noted, China is closed today and tomorrow.

The ECB will hold a policy meeting tonight.

The US will also see its July trade numbers tonight, along with August chain store sales.

Rudi will appear on Sky Business' Lunch Money, noon-12.45pm today.
 

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

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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: Second Wave Breaks

By Greg Peel

The Dow closed down 469 points or 2.8% while the S&P lost 3.0% to 1913 and the Nasdaq fell 2.9%.

Playing to Script

These are the August purchasing managers’ index (PMI) numbers out of China yesterday:

Beijing’s official manufacturing PMI fell to 49.7 from 50.0 in July, and official service sector PMI fell to 53.4 from 53.9.

Caixin’s independent manufacturing PMI fell to 47.3 from 47.8 and services PMI fell to 51.5 from 53.5.

According to the populist press, these numbers were the reason the Australian stock market yesterday (and Wall Street last night) fell precipitously once more.

Rubbish.

On Friday, August 21, Caixin published a flash estimate of its China manufacturing PMI for August. It suggested a fall to 47.1 from 47.7 in July. That data release triggered the big sell-off on Wall Street, which continued until Beijing implemented further monetary policy stimulus last week. So tell me: what exactly did we learn from yesterday’s numbers that we didn’t already know over a week ago?

Exactly. And indeed, on any other day the fact Caixin’s final result was 47.3, up from the 47.1 originally estimated, we might have even seen a rally. August 21 was simply the straw that broke the camel’s back of suspended disbelief in a slowing global economy, and in particular the overvaluation of US stock markets. Yesterday was simply representative of those investors who were too slow to get out on the first plunge taking a welcome opportunity to get out after a rebound.

Absolute text book stuff.

And which sectors were the hardest hit on the Australian market yesterday? None of them. Bar industrials (-0.8%), which carries several large cap defensives, every sector was down evenly around 2%. It was a market sell-off, and absolutely nothing to do with PMIs. The PMI releases simply waved the flag to say “Get out now!” given second-wave selling had already begun on Monday.

Meanwhile…

Meanwhile, back in the real world, yesterday’s Australian June quarter current account numbers disappointed. The trade deficit was wider than forecast because while imports were flat over the period, exports fell by more than anticipated. The net terms of trade fell by 3.4% to be 10.6% down year on year.

It’s a story of commodity prices and not of volumes. The good news is that even if prices remain low, which they likely will for some time, the positive effect of the now much lower currency is yet to flow through to dollar values. The Aussie began and ended the June quarter at around 76, with a little trip to 81 in between. This morning it’s around 70. And export volumes are soon to be significantly boosted by long awaited LNG exports.

In further good news, July building approvals jumped 4.2%, it was revealed yesterday, to be up 13.4% year on year. There is much talk the apartment building bubble must soon burst, but July saw an 11.7% gain in apartment approvals, to 27.6% growth yoy, while house approvals fell 2.6% but are up 9.6% yoy.

House prices rose 0.3% in August to be up 17.6% yoy, led by Sydney.

As commodity prices slide, LNG exports will boost the terms of trade (in dollar value) while housing leads the non-mining recovery, and the way things are going the Aussie will be back to the two-thirds level (~67) that thirty years ago, when I started in this game, was considered “fair value”.

Little wonder the RBA left rates on hold yesterday, as every man and his dog expected. Aside from a small nod to “softening conditions” in China and east Asia, Glenn Stevens’ statement was pretty much a carbon copy of the July offering.

Oh and by the way, the Australian manufacturing PMI came in at 51.7, up from 50.4. Given the history of this series it could be 41.7 in September, but let us not forget that Aussie.

And for the record, Japan rose to 51.7 from 51.2, the UK fell to 51.5 from 51.9, the eurozone ticked down to 52.3 from 52.4, and the US fell to 51.1 from 52.7. Some ups and downs there, but interestingly, of the global sub-set of manufacturers – Australia, China, Japan, the eurozone and UK – only China is contracting.

Same Pattern

Wall Street also suffered ongoing second-wave selling last night, which saw the Dow drop 200 points from the open and fall to down 500 points just before a slight kick at the close. The pattern is the same, in that the Chinese data simply provided the excuse, not the impetus.

The acceleration of selling throughout the session was fuelled by the oil price, which fell 8%. On any other day, an 8% fall in WTI would be the stuff of Armageddon, but given WTI has rallied 27% from its low in a heartbeat on short-covering, an 8% drop engenders no great shock.

What was most notable about last night’s session on Wall Street is that the volume was much lighter than it was a week ago, when the first wave struck. The fall in the indices did not suggest the same “Get me out!” levels of desperation as last week, more a dearth of buying interest. The smart money is waiting for the muppets to run back and forth in panic before the fear is shaken out and buying opportunities become more secure.

In the background, of course, is Fed debate, and thank God there’s only a couple of weeks to go before we’ll all be put out of our misery. The interesting point to note here is that the US ten-year bond yield closed last night at 2.17%, which is basically where it was at the end of June. The fives and thirties also are sitting around similar yields. The US bond market priced in a slower global economy long before the US stock market did. And as Fed speculation has ebbed and flowed, has just sat there.

Commodities

West Texas and Brent both fell 8% last night, with WTI falling US$3.88 to US$44.22/bbl and Brent falling US$4.42 to US$48.52/bbl. Once again, the press has cited “weak Chinese data”.

This would suggest the oil market assumed that Caixin’s 47.1 flash estimate would leap back up to over 50 as Chinese manufacturing surged in the last week of August, and that markets were simply stunned when this didn’t happen. In other words, rubbish.

WTI jumped 6% two days in a row on thin air short-covering and the sellers came back in last night. It’s common or garden volatility as is always the case when markets adjust to reality rather suddenly.

Base metal trading re-opened in London after a night off for the public holiday, and prices fell. See all of the above. The big moves were in copper, down 1.5%, and nickel, down 3%. Tin actually rose 3% following a surprise drop in inventories.

Iron ore was steady at US$55.70/t.

The falls in commodity prices belied a 0.7% fall in the US dollar index, but the standard converse relationship has been put aside in this volatile period. Gold, nonetheless, rose US$5.40 to US$1139.90/oz.

The Aussie is down 1.3% at US$0.7017, and not because the RBA didn’t cut yesterday.

Today

The SPI Overnight closed down 62 points or 1.2%. The question is whether this is just a double-up reaction to Wall Street’s reaction overnight to the Chinese data, given Bridge Street reacted yesterday.

Or are we going to retest the lows on heightened levels of fear? The Dow closed last night at 16,058, over 700 points above last week’s intraday low. The ASX200 closed yesterday at 5096, about 170 points above last week’s intraday low. The selling on Wall Street last night lacked conviction, and was more about lower prices than heavy volume.

We can put to bed a V-bounce, which no one had expected anyway, and now debate whether a W-bounce features a higher low or a lower low. At the moment the mood favours higher, but it depends on just how bold you want to be.

Australia’s GDP is out today. Look for 2.2%.

US private sector jobs numbers are out tonight ahead of Friday’s non-farm payrolls. If better than expected, Wall Street will lock in September. As to how the market reacts will be interesting.

Rudi will make two appearances on Sky Business today. First at 5.30pm (Market Moves) then again at 8pm when he will host Your Money, Your Call Equities.
 

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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: Second Wave

By Greg Peel

The Dow closed down 114 points or 0.7% while the S&P lost 0.8% to 1972 and the Nasdaq fell 1.1%.

Normal Programming

Yesterday Bridge Street witnessed what you might call a bog-standard second wave sell-off having rebounded sharply out of the depths of the correction last week. Markets never V-bounce off a bottom, they always suffer a choppy consolidation period and perhaps even a new low before an existing bull market trend can be re-established.

The clear case in point of such a second wave was provided yesterday by the energy sector. The oil price jumped 6% overnight, yet the local energy sector closed down 1.2%. This just goes to show we were seeing a combination yesterday of traders who bought perceived oversold stocks at their depths taking quick profits, along with Johnny-come-lately selling from investors who were caught in the headlights the first time around.

It was also the last day of the month, and as such a time to put to bed the worst month for the index since the GFC. Most of the damage was done from the opening bell, but there was some further choppiness as the day proceeded. Selling was relatively even across sectors with one exception. With a day’s delay, investors decided Woolies is very sick patient waiting for help to arrive in the form of a new CEO. The consumer staples sector outperformed to the downside with a 2.5% fall.

The lesson for Woolies is: never take the status quo for granted.

Yesterday’s private sector credit data were mildly encouraging, not that the stock market is focused on such trivialities as the local economy at present. Growth of 0.6% in July came in just ahead of forecasts, thanks to a better than expected gain in business credit, which rose 0.7% alongside housing credit’s 0.6% growth.

Housing credit is still running at 7.4% annualised growth to business credit’s 4.8%, which remains low by historical standards. Investor housing credit also rose by 0.6% in the month but – and this is the “but” FOMO buyers might want to pay attention to – it’s the slowest monthly pace of investor credit growth since October 2013.

[FOMO: fear of missing out]

June quarter data showed gross company operating profits fell 1.9%, split into a 1.1% gain for non-mining and a 9.8% plunge for mining. Net profits are down 3.9% year on year, but it’s all about commodity prices. Wages have only risen by a paltry 1.6% over the same period, but they did rise 1.1% in the June quarter, which is mildly encouraging.

Just Some Bad Apples

The Chinese government has confirmed it will no longer be sending in the Plunge Protection Team to prop up the stock market, as the source of the selling has been identified. Jolly good work chaps. Apparently some two hundred rogues were spreading false and malicious online rumours about the market, fuelling the panic.

And there we were all thinking it was a correction.

These despicable outlaws have now publicly confessed and expressed remorse for their actions. With the Communist Party’s PR exercise now over, it is unclear what their fate will be. But having informed the people it was all their fault, at least the families of the rumour mongers will now live.

Five Year Flop

A similar second wave of selling was seen on Wall Street last night, ensuring the worst month for the Dow in five years and the worst August in seventeen. But unlike the Australian market yesterday, the US market was keen to buy energy stocks on rising oil prices.

Having leapt 6% on Friday night, WTI jumped another 6% last night to mark a 27% rebound from the last intraday low. It looks like traders had set themselves particularly short, likely expecting to see the 2009 low price retested. While a 27% rebound in the oil price is very nice for global energy companies in the short term, it’s actually self-defeating in the longer term. If oil cannot sit at sub-50 prices for any length of time, requisite supply curtailment among high-cost marginal North American non-conventional producers will not transpire.

The rise in the WTI price nevertheless helped turn an initial 200 point drop in the Dow from the opening bell, and some renewed feelings of nausea among investors, into only a 100 point drop by the closing bell.

The mood on Wall Street is one of “this is what we expect to see anyway”, so there’s not too much concern. Tonight it will be September in the US, and we all know what that means. T minus 17 days and counting.

Commodities

The trigger for the oil price spike this time around was a US Energy Information Agency report noting US crude output in June fell 1.1% from May. But it’s all just an excuse really. And if WTI heads back to 60 from whence it fell, production will increase again.

West Texas rose US$2.77 to US$48.10/bbl and Brent rose US$3.04 to US$52.94/bbl.

The LME was closed last night for a UK public holiday.

Iron ore rose US20c to US$55.70/t.

Gold is steady at US$1134.50/oz and the US dollar index is off 0.2% to 95.97.

No one expects the RBA to cut today, but the Aussie is down 0.7% at US$0.7112.

Today

The SPI Overnight closed down 21 points or 0.4%.

Today is manufacturing PMI day across the globe, including in China.

Locally the focus will be on the June quarter current account and terms of trade ahead of tomorrow’s GDP result. Monthly building approvals numbers are also due, and the RBA will meet.

There are no earnings reports today (of any consequence).
 

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

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

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

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article 3 months old

The Monday Report

By Greg Peel

Just A Flesh Wound

Another positive session on Bridge Street on Friday ensured the index actually finished up for the week, as did the grey hair count. But Friday’s session was all about commodity prices, and subsequent 3.7% gains for both the materials and energy sectors. Take those sectors out, and it was otherwise a typically quiet Friday featuring smallish moves.

The August reporting season effectively came to a close on Friday, and now that the volatility of last week appears to have settled down, at least for now, market attention can be concentrated on the score cards and assessments that will follow.

As FNArena’s Result Season Monitor winds to a close, we can note the beat/miss ratio is around 1.6 and the broker ratings upgrades to downgrades is around 3 to 1. If it wasn’t for what’s been going on in the macro realm this month, we might call it a successful season. If we compare it to the last February reporting season, it saw a beat/miss ratio of 1.1 and downgrades outnumbering upgrades almost 2 to 1.

The problem is that February’s result season occurred in a rally, after which the ASX200 closed at 5600 on its way to 6000. At that point, many an analyst was calling stocks overvalued, particularly yield stocks, hence the big downgrade count. In stark contrast, the August season occurred in a correction which accelerated as the month wore on. The index closed on Friday at 5260 having seen 4930, and at the back end of the season, a lot of those upgrades reflected oversold calls as a result of the market sell-off as opposed to micro valuation calls based on earnings results.

The good news for the beaten down commodity names is that commodity prices rallied strongly again on Friday night. The rallies were driven by a combination of short-covering and buying on a belief in oversold levels. At some point commodity prices will settle down again and consolidate, likely at levels lower than a couple of months ago but not as low as the depths of last week.

Relief

Wall Street, too, settled down a bit on Friday night and in S&P500 terms, finished the week higher. The Dow fluctuated on Friday between a hundred points down and unchanged, but in terms of last week, this was a quiet session.

All talk on the Street now is of whether the snap-back rally signifies a bottom is in place, or whether it is just a typical precursor to another leg down. Many assume it will all come down to the September Fed meeting on the 17th.

But to that end, central bankers around the globe don’t seem too concerned about recent market volatility, and also believe the markets are overblowing China slowdown fears. That was the mood emanating for the Jackson Hole symposium on the weekend, which was attended, among others, by the vice chairman of the Fed, the vice president of the ECB and the governor of the Bank of England.

Fed vice chair Stanley Fischer suggested in an interview that nothing that occurred last week will stop the Fed raising at the September meeting. This did not mean the Fed had already reached that decision, he added (personally, I believe otherwise), and it will still come down to data releases over the next two weeks. This Friday night’s US jobs report will basically be the decider, he hinted.

He also gave the first indication of what the move might actually be, suggesting the existing zero to 25 basis point funds rate would be moved to 25-50 basis points. But the most interesting point to note is that despite yet another almost-confirmation from a Fed official, Wall Street didn’t blink. It closed flat. Just how worried is Wall Street about that rate rise? Not all, I suggest.

And as an added element, the BoE governor said he expected to raise UK rates fairly soon. The BoE went very close in the wake of the London Olympics, which provided a big boost to the UK economy, until it became clear it was just a bit of a honeymoon.

Commodities

West Texas crude jumped US$2.71 or 6.4% to US$45.33/bbl on Friday night, to mark a 20% rally from the intraday low of a week ago. Brent rose US$2.30 or 4.8% to US$49.90/bbl.

There is little doubt short-covering was heavily involved, and one outside trigger cited by traders was news Saudi Arabia had sent troops into northern Yemen. News of tropical storms hitting Cuba provided a reminder hurricane season has now begun. Traders also cite genuine buying from those believing last week saw oil trading at oversold levels.

Another seasonal issue for the US oil market is nevertheless the end of the summer driving season, now approaching, and the annual refinery maintenance season which typically follows. When refineries shut down, crude supply builds up in storage centres such as Cushing, forcing down prices until maintenance is complete.

So as with Wall Street in general, there is debate over whether oil has seen the bottom, or could yet plunge once more.

In mixed trade on the LME on Friday night, aluminium, lead and zinc surged 3% and tin 2%, while copper and nickel stayed put. Copper is the only base metal not to close higher for the week. Again, short-covering has been cited among metals, and also the fact it’s a long weekend in the UK and thus the LME is closed tonight.

Iron ore jumped US$2.20 or 4% to US$55.50/t.

With margin call selling now easing, gold found renewed support on Friday. It’s up US$8.90 at US$1133.70/oz.

Commodities rallied on Friday night despite another gain for the US dollar, which is up 0.3% to 96.11 on its index. The Aussie is steady at US$0.7165.

The Week Ahead

The SPI Overnight closed up 12 points on Saturday morning.

As noted, this Friday night sees the US non-farm payrolls report. If it’s positive, lock in a September rate rise.

Over the course of the week, the US will also see the Chicago PMI tonight, construction spending and vehicle sales on Tuesday, private sector jobs, factory orders and the Fed Beige Book on Wednesday, and the trade balance and chain store sales on Thursday.

This week also sees PMIs from across the globe, with manufacturing numbers mostly due on Tuesday and services on Thursday. There are a couple of public holidays about the place this week nonetheless so some dates vary. China is closed on Thursday and Friday.

After a big month of earnings releases, suddenly it’s a big week for Australian economic data.

We’ll see June quarter company profits and inventories today, and the current account including terms of trade tomorrow, ahead of the GDP result on Wednesday. Economists are forecasting 0.4% quarter on quarter growth and 2.2% year on year growth, down from 0.9% and 2.3% for the March quarter.

Monthly data this week include the TD Securities inflation gauge and new home sales today, building approvals, house prices and the manufacturing PMI tomorrow, and retail sales, the trade balance and the service sector PMI on Thursday.

The RBA will meet tomorrow and leave rates on hold, but commentary around China and market volatility will be interesting.

There are a handful of tardy results reports to trickle in this week, but more notably this week sees the ex-divs starting to build. We’ve already had some biggies during result season, but over the course of September a substantial number of stocks will go ex, keeping a lid on prices.

Rudi will appear on Sky Business on Wednesday at 5.30pm and on Thursday at noon. Also, on Wednesday late (9pm) he will host Your Money, Your Call Equities.
 

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

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article 3 months old

The Overnight Report: Crude Awakening

By Greg Peel

The Dow closed up 369 points or 2.3% while the S&P gained 2.4% to 1987 and the Nasdaq added 2.5%.

Reset

It was actually a very dull day on Bridge Street yesterday, which seems weird in the context of excessive global volatility this week. Sure, the index closed up 1.2%, and hooray to that, but it all happened at the opening bell and then nothing happened for the rest of the session.

Significantly, we can note that the ASX200 opened on Friday morning a week ago at about 5250. Yesterday the index closed at about 5250. Last Friday morning the Australian stock market was driving along happily and then hit a wet patch in the road, sending it swerving and fish-tailing and causing much panic among the occupants of the vehicle as the driver wrestled with the wheel, before regaining control. Hearts were beating fast, but the panic subsided.

Earlier in August the ASX200 broke down through the bottom of its longstanding trading range, being 5500, on the back of a Chinese devaluation that signalled to the world the slowdown in the Chinese economy is more significant than was assumed. The adjustment was worth 250 points. This week has seen market panic of the irrational kind, simply reflecting Wall Street’s failure to keep up with reality.

Wall Street had now adjusted.

Yesterday the Australian market opened up to about 5250 and then went nowhere, because we were back where we were a week ago. From here, it’s a case of now what? It would depend on what happened on Wall Street last night, and to that end, Australian investors sat tight yesterday and waited for the next signal.

There has, of course, been a result season going on in the background, but this has been completely swamped by macro volatility. We have also seen a couple of important Australian economic data releases this week but they, too, have been lost in the wash. Wednesday’s June quarter construction work numbers were better than expected, and, despite the dooming and glooming of the nightly news, yesterday’s June quarter capex numbers were also better than expected.

Private sector capex is still going down the tubes, and is forecast to go further down the tubes based on the capex intentions survey, but we knew that already. It’s all about the winding down of mining investment, stage one, and the winding down of LNG investment, stage two.  Yesterday’s numbers showed no change to those forecasts. The difference lies in the non-mining sector.

Here we saw a 3.5% rise in capex in the June quarter, offsetting the 11% fall in mining to provide a net 4% fall. Moreover, the third estimate of FY16 capex intentions, which the June quarter survey provides, jumped 10% on the second estimate provided with the March quarter numbers. Such an upgrade is actually higher than one might historically see in “normal” times. Indeed, the 24% jump in manufacturing sector intentions (the balance being services) is a record.

Just goes to show what can be achieved when your currency depreciates by a third. Maybe the PBoC is on to something.

Short-Covering

Following this week’s data releases, economists will now be improving their Australian June quarter GDP expectations a little. Meanwhile on Wall Street, last night featured a revision of the US June quarter GDP result before the opening bell.

Just to recap, the US GDP is delivered in three goes, one, two and three months after the end of the quarter. In the case of the June quarter, last month’s first estimate represented April numbers extrapolated over three months. That suggested 2.3% annualised growth. Last night’s second estimate adds in May numbers, and extrapolates the two months over three. It came in at 3.7% growth, when economists had expected 3.3%.

Next month we’ll see the “final” revision over all three months, but the number can be revised again at the release of the first estimate of the September quarter GDP. So it’s all a bit uncertain, but suffice to say on last night’s number it looks like earlier expectations that the US economy would rebound out of the weather-affected March quarter, just as it has done last year, may have been accurate.

Thus from the opening bell last night, Wall Street was faced with the reality that Wednesday night’s session had featured heavy buying through to the close, and that the US economy is actually doing pretty well. Forget about Fed rate rise fears, everyone’s booked a rate rise in. There had been much talk over the past couple of sessions that US indices may be set for another leg down, but they were dismissed last night, at least by those with short positions.

The Dow opened up sharply and continued to rise through the morning to be up almost 400 points. While leading names were still being bought, as they were on Wednesday, it was notable that some of the biggest movers to the upside on the day were the most shorted names on the market. In other words, the shorts were covering.

Then the short-coverers met the too-slow-to-sell-the-first-time-around brigade early in the afternoon, and the Dow headed back down to almost square again, briefly. In the last hour the rally resumed and by the close, the day’s high was almost re-established.

Among the most shorted stocks on the US market are energy services names, just as they are in Australia. If ever there was a reason to cover shorts in this long beaten-down sector, it’s when the oil price bounces 10%.

Commodities

The trigger, supposedly, was now that OPEC member Venezuela, who needs about US$120/bbl oil to fund its budget commitments, has called for an emergency OPEC meeting, and also requested discussions with Russia, who is also haemorrhaging. The implication is that OPEC members would agree to production cuts.

It’s all well and good, but (a) it’s not going to happen, and (b) there is no OPEC. Saudi Arabia effectively disbanded the cartel when it dismissed production cuts late last year and started dumping cheap oil on the market in order to kill off US shale growth. And if you think Iran is going to stick to a quota, good luck with that.

Oil prices bounced last night because they had become oversold, just like stock markets. The relationship between oil prices and the US stock market is one of a “who’s leading who” constant feedback loop. The bounce in the stock market is really why oil bounced. Short-covering.

Rather significant too. The biggest intraday move since 2009 saw both West Texas and Brent crude prices up over 10%, and on our 24 hour snapshot, West Texas is up US$3.74 or 9.6% at US$42.62/bbl and Brent is up US$3.93 or 9.0% at US$47.60/bbl.

And to further dismiss the OPEC argument, we can note the same thing happened on the LME. Copper jumped 4%, as did zinc, and nickel 5%. Aluminium, lead and tin all rose 1.5-2%.

Iron ore rose US20c to US$53.0/t.

The gains came despite another 0.5% rise in the US dollar index, GDP supported, to 95.78. In this context, gold still managed to hold its ground at US$1124.80/oz.

The US dollar index, which doesn’t contain the Aussie, and the Aussie dollar, have been tracking each other all week, directionally. The Aussie is up 0.7% to US$0.7169.

Today

I suggested at the start of this Report that yesterday the Australian market adjusted back to where it was and waited for the next signal from Wall Street. That signal is positive, and commodity prices have all rebounded strongly. Hence, the SPI Overnight closed up 91 points or 1.8%.

Today is the last big day of the local results season, and hallelujah to that. Only a few stragglers will be left to report early next week as August comes to a close.
 

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article 3 months old

The Overnight Report: And On The Seventh Day…

By Greg Peel

The Dow closed up 619 points or 4.0% while the S&P gained 3.9% to 1940 and the Nasdaq jumped 4.2%.

Tentative

Investors taking the punt on buying the Australian market on Tuesday will no doubt have felt comfortable when turning in for the night as Wall Street staged a decent comeback, only to awake to find the rally had failed miserably at the close. This was the situation as the ASX200 opened yesterday with a swift 86 point plunge.

Whether or not the earlier 5100 support level still remains viable given we’ve been well below 5000 this week, the drop through that mark from the open appeared to bring the buyers steamrolling back in. On Tuesday we ignored the Chinese casino altogether. Yesterday we ignored Wall Street as well, albeit tentatively, as the index banged its head against the flatline several times before finally punching through in the afternoon.

The drivers of yesterday’s ultimate 35 point rally, or 121 from the intraday low, were the same large cap and index-dominant sectors that had been most heavily sold – the banks, materials, energy and supermarkets. On a 2.8% gain, energy was the clear winner, as investors pondered the reality that even at current low oil prices, some oil & gas names had simply been sold down too far. And for a couple of days, WTI crude has managed to hold its ground just under 40.

We could also cite a better than expected result on Australian June quarter construction work done, released late morning, as a fillip.

Desperate

The afternoon rally in Australia came despite a near 4% fall in Shanghai in the Chinese morning session, again confirming we’ve learnt to ignore such frivolity. But interestingly, Shanghai did then proceed to correct on its own, to be up by a similar amount after lunch, before fading away late in the session to close down 1.8%.

We know that the Plunge Protection Team remains suspended, so Chinese investors appear to be working it out for themselves, but that did not stop another typical knee-jerk, scatter-gun response from the authorities after the final bell.

Last night the PBoC injected US$22bn of liquidity into the Chinese banking system, following on from the previous night’s interest rate and RRR cuts. And then the government announced another witch hunt in the stock market, this time promising to search out fraudulent activity at the stock market regulator itself, insider trading within at least one securities firm, and rumour mongering in general. The state-owned press called for government to “purify” the market.

The state media also stepped up its campaign against the evil foreign forces behind the Chinese stock market rout, and particularly blamed the Fed.

No doubt the Chinese punters we see each night on the news in front of the Shanghai ticker are engaged in heated debate over the monetary policy vagaries of the US Federal Open Market Committee and the ramifications for the Chinese domestic economy, as they clutch their porcelain cats with waving arms and buy any stock named “Lucky” as long as there’s an 8 in the price.

Rebound

Stability on the Chinese market, and the PBoC’s injection of liquidity, were not enough to overcome nervousness on European markets last night. The late plunge on Wall Street on Tuesday night had Europe spooked, sending the major indices down around another 1.5%. But whereas typically the mood in Europe dictates the opening on Wall Street, this time it was different.

The US indices rocketed up from the open, sending the Dow up over 400 points. The snap-back was aided by positive US data, in a week when up to now, no one has been paying any attention to economics. US new durable goods orders rose 2.0% in July. While this is less than June’s 4.1% jump, it was much better than economists had expected. And importantly, the core measure (ex transport and defense) jumped 2.2% -- its biggest gain in twelve months.

The opening spike nevertheless proved to be just that, and by lunchtime the Dow was only up around 100 points. Oh no, here we go again, thought Wall Street. But along came Bill Dudley.

In days gone by, the Fed’s Jackson Hole central bankers’ symposium was where Ben Bernanke chose to hint at fresh QE. Then he stopped attending, and indeed Janet Yellen is not there this year. Nor is Mario Draghi, who usually pops in. So the Hole has lost its importance of late. But last night New York Fed president William Dudley caused a stir when he responded, having been asked whether recent global market volatility would impact on a possible September rate rise, that the case for a September move was now “less compelling”.

And on that news, Wall Street began to rally again. Never mind that Dudley went on to say that there’s plenty of time between now and the September meeting (20 days) for data releases to make September compelling once more. Either way, commentators suggest Dudley’s comments spurred on Wall Street because it means a September hike is now off the table.

Hello? Did no one else pick the absolute clanger in Dudley’s statement? Since when was the case for a September rate rise ever compelling in the first place, as far as Fed rhetoric has suggested up to now? All we’ve heard is maybe/maybe not, depending on the data. Dudley’s comments only serve to reinforce my personal view that the Fed long ago decided to hike in September, and that the ensuing data would not determine if it would, only if it wouldn’t. So far the data have offered no reason not to go ahead.

Furthermore, the Fed has always been anxious not to spark severe market volatility with its rate hike announcement, which is why it has been at pains to insist the market should not be scared of a rate rise per se, because the tightening process will be a very long and incremental one. Well guess what? We’ve now had that volatility. It’s now out of the way. And assuming Wall Street doesn’t plunge another 10% between now and mid-September, that rate rise is locked in.

By the way, the US ten-year bond yield rose another 4 basis points to 2.17%.

Whatever the case, by late afternoon it was apparent that the published sell-on-close orders for the session were nothing like the magnitude of Tuesday night. A short-covering rally ensued. By the close, the Dow’s 619 point, 4% rally represented the biggest one-day percentage in four years and the biggest points gain since the wild volatility of November 2008, when the Dow was only half the value it is now.

After six days of heading down, Wall Street finally rose. Unlike Tuesday night, last night featured heavy volume, extensive breadth, and a clear feeling of buyer conviction. No one is prepared to call a bottom yet, as usually there has to be nervous, choppy activity and a possible retest of the lows before a bottom can truly be called. But let’s just say there were a lot of smiles on the NYSE floor at 4pm.

Commodities

This was not the case on the LME. Despite the overnight Chinese liquidity injection, and despite the strong US durable goods number, copper plunged 2.8% last night. Tin and zinc also fell around 3%, while aluminium and lead lost 1% and nickel, for once, was relatively steady.

Iron ore fell US20c to US$53.10/t.

West Texas crude fell again, but only by US42c to US$38.88/bbl, while Brent actually rose US22c to US$43.67/bbl.

Not helping commodity prices was a big jump in the US dollar index, by 1.4% to 95.31, which accompanied the “risk on” trade on the stock market.

To that end, gold fell another US$15.20 to US$1125.10/oz, likely still feeling the heat of margin call selling.

Today

The SPI Overnight closed up 83 points or 1.6%.

Locally, today sees the release of June quarter private sector capex numbers.

Tonight the US June quarter GDP number will be revised.

And it’s another enormous day for the local results season.
 

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