Tag Archives: The Overnight Report

article 3 months old

The Overnight Report: Schrodinger’s Bounce

By Greg Peel

The Dow closed down 204 points or 1.3% while the S&P lost 1.4% to 1867 and the Nasdaq fell 0.4%.

Night Watchman

Beijing finally acted last night, as they had been expected to do so ever since Friday night. It took another 7.6% fall in the Shanghai index yesterday, on top of Monday’s 8.4% fall, to spur the authorities into action. Maybe that phone call from Washington helped too.

The PBoC has again cut its interest rates, by 25 basis points for the lending rate to 4.60% and the deposit rate to 1.75%. It has also cut the bank reserve requirement ratio by 50 basis points.

Yesterday’s second big plunge on the Shanghai exchange is further evidence Beijing has apparently held back its Plunge Protection Team this time around, having wasted billions in foreign exchange reserves vainly attempting to hold up the stock market previously. But PPT efforts are immediate, while monetary policy tweaks take some time to flow through an economy. So it will be interesting to see whether Chines investors, if that’s what you call them, respond positively or disappointedly to the news today.

Snap-Back

The important point to note here is that the PBoC’s announcement came after the close of the Shanghai Exchange last night, hence long after the close of the ASX yesterday. Thus despite what you might read in the popular press today, the rate cut had nothing to do with yesterday’s rebound on Bridge Street.

And given the Shanghai index opened sharply lower at 11.30am Sydney time yesterday, we can suggest that those buying Australian stocks yesterday had decided the Chinese casino is really not much of an indicator of anything. A 16% fall in the ASX200 through the 5000 strong support level (reflecting the Chinese slowdown, sure, but more immediately representative of Wall Street waking up to itself) is a buying opportunity, they decided.

At least in the banks. For it was the banks that stood out distinctively in yesterday’s 2.7% rebound for the ASX200, driving a 3.9% gain for the financials sector. Next closest was materials, meaning the big two miners specifically, with a 2.4% gain. Energy, which was summarily crushed on Monday, managed only a 0.6% rebound. The telco actually went backwards by another 0.8% (ex-div).

One might ask: Just what impact does a Chinese slowdown have on Australia’s banks (ANZ’s Asia exposure aside)? They don’t lend much to Australian resource companies, who suffer most from a Chinese economic slowdown. There is no flow of manufactured goods from Australia to China of any note. Australian banks are predominately representative of Australia’s domestic economy – mortgages and business lending. The Aussie is now down to 71, and that’s good for business.

But in the bigger picture, was yesterday’s snap-back rally representative of a cat that is alive and kicking, dead, or simply pining for the fjords?

Such snap-backs are part and parcel of big corrections, and never will a stock market crash to a point and then V-bounce straight back into a bull market. It must first consolidate, and that usually means falling further yet to test intra-day lows. Typically when a market has cemented a bottom, it is not immediately apparent until you realise it seems to have stopped going down.

Yesterday morning the SPI futures were calling a 181 point drop for the ASX200. The index did fall as many as 73 points from the bell, which took us well below 5000 support to an intra-day low of 4928. Remember that number. Then the buyers formed ranks and marched in. By midday, the rebound was in place. There was little movement all afternoon, despite the Shanghai index quietly sliding away.

Presumably the market was waiting, all afternoon, for the expected announcement from the PBoC.

Failed

And so it came, just in time for the open of the ridiculously volatile European markets. Germany duly bounced back 5% and France 4%, and even the usually more staid London market rebounded 3%. The buying carried over into Wall Street, and the Dow shot up as well, to be up 440 points late morning as the European markets closed.

But traders were not convinced. The snap-back lacked breadth, lacked volume, and thus lacked conviction. By lunchtime doubt had crept in, and old hands knew that reversals don’t happen so easily. The indices began to lose altitude.

The NYSE was one of the last financial exchanges to go electronic, but in true American anachronistic form, the opening and closing rotations are still conducted by designated market makers – humans. So as not to cause chaos at the final bell, the NYSE publishes the dollar amount of the balance of buy- and sell-on-close orders during the last hour of trade.

A typical session will see half a billion one way or the other. A summer session usually less. When the balance began building to the sell-side last night, to the tune of 1.5 billion, the US indices turned tail. When that figure hit 3.5 billion, the Dow turned negative, and kept falling to its 200 point loss.

The S&P500, which is what the professionals pay attention to, did not manage to rally back to the intraday high point reached on Monday night. This is a negative signal. The assumption now is that the intraday low must be retested, which is when the Dow was down 1100 points.

Or maybe not. It is a market after all.

What is interesting to note, nonetheless, is that the US ten-year bond yield shot up 14 basis points to close at 2.14%. The talk from the smart money – the bond traders – is that the global correction may not be enough to keep the Fed at bay next month, and if it is, it won’t prevent a December hike.

Commodities

The US dollar index has rebounded 0.6% to 93.97. The good news is that the Aussie lost big-time on the cross-rates on Monday, particularly the euro (See: Ansell), so it fell against the greenback despite a big fall in the US dollar index. On last night’s dollar rebound, the Aussie is down another 0.2% to US$0.7130.

Commodity prices inevitably rebounded last night after Monday night’s shellacking, and in response to the PBoC. Aluminium and copper managed 2% and zinc 1%, while the other base metals struggled to sub 1% gains.

Iron ore is unchanged at US$53.30/t.

West Texas crude bounced 3% but the US$1.24 gain still keeps it under 40 at US$39.20/bbl. Brent bounced 2% or US83c to US$43.45/bbl.

I mentioned yesterday that while gold might be a safe haven in times of market volatility, it is also the first asset to be sold to cover stock market margin calls. Gold is down US$14.80 to US$1140.30/oz.

Today

For what it’s worth, the SPI Overnight closed down 47 points or 0.9%. In times of extreme volatility, futures markets tend to go a little nuts, as was evident in yesterday’s 181 point overnight drop ahead a 136 point gain in the physical.

That said, we most likely need to go down again before we can go up again, if that makes sense.

Glenn Stevens will make a speech today, which will be interesting in the context. June quarter construction work numbers are also out, reminding us the Australian GDP result is due next week.

Today is the worst – if you look it at from the perspective of someone who has to report on every one of them – day in the reporting season, with an avalanche of reports due.

Overnight BHP Billiton ((BHP)) reported its worst profit in years, and its shares closed up 5.5% in London.

Strap yourselves in, take solace in the knowledge we’ve been here plenty of times before, and whistle a bit of Monty Python.

Rudi will appear on Sky Business' Market Moves tonight, 5.30-6pm.

 

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: Multiple Contraction

By Greg Peel

The Dow closed down 588 points or 3.6% while the S&P lost 3.9% to 1893 and the Nasdaq fell 3.8%.

Don’t Panic

The important point to note here, before the inevitable comparisons are made with 2008, is that this is not a financial crisis.

There is a risk of currency crunches in smaller emerging markets putting pressure on cheap US dollar loans, there is a risk of emerging market oil producer countries coming under enormous fiscal pressure, and there is a risk that a wave of marginal US oil producers will default when oil price hedges roll-off shortly, pressuring US lenders.

But the same US banks that needed to be rescued in 2008 are now sitting on mountains of cash. Systemically important banks around the developed world, including the Big Four in Australia, are loaded with capital. If we look at this from the perspective of what is causing the panic across global markets, it is not China per se, even though China is a root source of the issue. It is Wall Street.

Is a manufacturing PMI of 49.1 the end of the world, particularly when China’s economy is transitioning towards a much greater service sector contribution (PMI>50) and consumer-driven GDP? No. Is an 8.5% drop on the day for a laughable casino known as the Chinese stock market, in which a very small proportion of the Chinese population invests, reason to run screaming? No. But what is alarming is when Wall Street falls over 500 points (to use the Dow as the reference) after several steep falls and then backs it up again last night, when in theory the US economy is currently one of the positive drivers among the major global centres.

With the exception of the energy sector, there is nothing wrong with US corporate earnings growth at present. What is wrong is that for three years in a row, Wall Street rallied 15% when earnings only rose 5%. This represents “multiple expansion”, empirically measured as increased price to earnings ratios, which imply investors are prepared to pay more for the same level of earnings than they did the year before. PE increases reflect sentiment, not reality. So if sentiment turns…

After the three years of rally from the US debt ceiling correction of 2011, this year has seen Wall Street top out into a stationary range. Despite constant talk of the market being long overdue a correction, investors have stoically held out on the expectation the reality would catch up with the sentiment. But from a global perspective, which plays into Wall Street earnings, it hasn’t. And the Fed wants to raise rates.

The sentiment had to give, meaning PEs had to come down. This is what we are now witnessing. The only problem is, it’s happening at a speed that is putting the frighteners through the market. And fear begets fear.

Technical Test

The Australian market has not rallied back from the GFC depths to the same magnitude of Wall Street, given the drag of a long period stuck with an overvalued currency. Therefore our PEs have not been as overly elevated, but that’s never going to be enough to stem the immediate panic of days like yesterday on Bridge Street.

It seems like an irrelevant aside right now but one may recall there is a local result season currently underway. At around about the halfway mark (on number of reporting stocks, not time), the FNArena Result Season Monitor is showing a beat/miss ratio of 1.5 to 1, and a broker ratings upgrade/downgrade ratio of 70/26. Now, stock analysts look at the micro picture of stocks and their sectors (bottom-up) and not the macro of overlaying global economic conditions (top-down) and one might suggest these upgrades may look a little foolish right now, but the point is there is nothing wrong with Australian corporate earnings at present either.

Yesterday’s 4% plunge saw every sector finish well into the red, but the emphasis was on the cyclicals while defensives “outperformed”, as they should during such times of panic. Energy copped the brunt with a 6.2% fall, and materials chimed in with 4.6%. At the other end of the scale were consumer staples, down 2.8%, healthcare, down 2.3%, and utilities, down 1.7%. By rights the telco should be defensive and the banks should fit somewhere in the middle, but unfortunately in market cap terms when you sell Australia, you must sell these big names. Hence telcos fell 3.0% and banks 4.6%.

The technicals come firmly into play at such times and here we note the ASX200 initially tried to recover early in the session after support at 5100 was breached, only to be swamped again as the Shanghai market opened. That level gave way without a fight and so the next level to watch was the oh so very familiar 5000 – the level that for such a long time was the brick wall of resistance through which the index would not pass until finally breaking through in 2013.

Yesterday the ASX200 marked an intra-day low of 5001 before closing slightly higher at 5014. The futures are suggesting we can kiss what should be a cement floor of support goodbye today, as the SPI Overnight closed down 181 points. But it may all come down to Beijing.

Beijing Phone Home

Despite a 500 plus point Dow fall on Friday night sparked by the weak Chinese PMI, Wall Street traders were convinced Beijing would respond with fresh monetary policy initiatives – rate cut, RRR cut or both – on the Sunday as the authorities have typically done at such times. But this didn’t happen. That’s why Australia was down 4% yesterday and Wall Street opened down over a thousand Dow points last night.

Fear was exacerbated by yesterday’s 8.5% plunge in Shanghai, which indicated Beijing’s Plunge Protection Team was also absent. What is Beijing playing at? Was the currency devaluation meant to be the final hurrah of stimulus? Or is the Chinese government again caught like rabbits in the headlights, set to react only when panic sets in?

It is understood Mr Obama was last night on the phone to Mr Xi.

Wild

The thousand point opening plunge for the Dow last night lasted all of five minutes. European stock markets were on their way to 4-5% losses but on Wall Street the smart money – mostly institutional investors according to commentary – said this is a great buying opportunity. Of particular note is that at this stage, the S&P500 had booked its long-awaited 10% correction.

At lunchtime, after Europe had closed, the Dow was almost back to square. There followed as wild a ride as any experienced around September 2008. Up, down and all around, it was the weight of sell-on-close orders that finally pushed the average to its second consecutive 500-plus point fall.

On Friday night Wall Street closed on its lows. While commentators are cautious in saying it, last night it looked like a capitulation trade. The session that suggests the bottom is near. But the caveat remains Beijing.

Reinforcing the argument that what we have seen in a week is simply the US stock market correcting rapidly, rather than slowly as it should have done on falling commodity prices and indications all year long that China’s economy was slowing, and on Fed rate rise speculation, is that the reaction in the US bond market was muted.

The US ten-year yield closed down 6 basis points at 2.00%. That is not the stuff of panic, or a flight to safety. Unlike the US stock market, the US bond market has been pricing in slower than expected global economic growth for some time.

Currency markets nevertheless saw further flights to safety. The US dollar index is down 1.5% to 93.37. The Aussie is down 2.4% to US$0.7146. When the dust settles, that is going to look very positive for the Australian economy.

We have seen a flight to gold but the flipside at such times is a need to sell other assets to cover stock market margin calls. Gold is down US$5.20 to US$1155.10/oz.

Commodities

The serious pain was felt in commodities, despite the fall in the US dollar. It must be remembered that volumes on commodity exchanges are thin at present due to the northern summer, in which end-user intermediaries are absent and speculative trading rules the roost.

Aluminium fell 1%, copper 2%, zinc 2.5%, lead 3%, tin 5.5% and nickel 6.5%.

Iron ore fell US$2.30 or 4% to US$53.30/t.

West Texas crude fell US$2.21 or 5.5% to US$38.02/bbl. Brent fell US$2.71 or 6% to US$42.62.

The next words you will hear with regard material and energy sector stocks around the globe will be “consolidation” and “rationalisation”. This time smaller producers are not going to make it.

Today

The SPI Overnight closed down 188 points or 3.7%.

There are a lot of earnings reports out today, but that’s probably not important right now.

An expression that hasn’t been heard for a while, that was popular to the point of tedium in 2008, is “Don’t try to catch a falling knife”. Calling a bottom is fraught with danger. And when it is in place, and confirmed, there will still be plenty of opportunity to buy at much lower valuations.

Don’t panic.
 

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

Manufactured Fear

The action on Bridge Street on Friday can be divided into three distinct periods. From the open, the ASX200 fell around 60 points on the lead from Wall Street which saw the S&P500 break down out of its 2015 trading range. At midday, the flash estimate of China’s August manufacturing PMI was released.

Caixin’s number, which includes a greater proportion of small and medium enterprise businesses than Beijing’s official numbers, ha been tracking lower than the official numbers of late. Being’s July manufacturing PMI came in a 50.0, smack on the neutral point of neither growth nor contraction. Caixin’s July number was into contraction territory at 47.8.

Economists had expected the Caixin number to come in at 47.7 for August so Friday’s flash estimate of 47.1 was not encouraging, and represents a six and a half year low. On that news, the ASX200 took its second leg down, to be down over 100 points on the session.

The third period began at 3pm, when buyers re-emerged. Let’s hope for their sake they were short-covering. Ultimately the ASX200 closed down 74 points, or 1.4%.

While a drop from 47.8 to 47.1 hardly seems like the end of the world, the point is that nothing Beijing has done so far to stem the tide of slowing Chinese growth appears to be working. Global markets have become all wound up with slowing global growth fears this last month, with China the particular target of concern, so Friday’s number was simply a last straw.

There was much speculation as the week ended that Beijing would jump in on Sunday with an interest rate cut, given Sundays are the government’s preferred announcement days. But this has not transpired, possibly because only the week before Beijing pressed the shock and awe button of currency devaluation, and this strategy has not had time to play out.

It nevertheless remained for the rest of the world to respond to the Chinese PMI result in the interim.

Correction

The Shanghai index fell 4.3% on Friday. Japan’s index fell 3%. The German and French stock markets fell 3% and even the usually more subdued London market took a 2.8% hammering.

This was the global picture facing Wall Street as it opened on Friday night. There was no enormous plunge from the open, but rather the indices tracked continuously south all session as investors sold and sold and sold. High-flying momentum stocks such as tech and biotech names were, as usual, among the worst victims. Recent success story Netflix was creamed. But the blue chips copped plenty of downside as well.

It was also an options expiry day, which was never going to help. When the dust settled, the Dow was down 530 points or 3.1%. The blue chip average was down 5.8% for the week and is now down 10% from its high, technically implying a “correction”, as opposed to a pullback.

For four years Wall Street has been waiting for a correction, which typically occur every eighteen months. But the focus is on the broad market S&P500 index, which fell 3.2% on Friday night to 1970, representing 5.8% for the week, but still only 7.7% from the high.

The tech-laden Nasdaq fell 3.5% to be down 6.8% for the week and is down 10% from the high, as is the Russell 2000 small cap index.

August’s breakdown on Wall Street has been building and accelerating for some time. Chinese growth has been an element of concern all year. The Chinese stock market crash caused initial angst, but ultimately Wall Street held its range. Greece caused angst for months before supposedly being resolved, and Wall Street held its range. Fed rate rise debate has raged all year and even as September shortened in the odds, Wall Street held its range.

The tipping point was the sudden Chinese currency devaluation, which signalled to the world Beijing was even more worried than was assumed. This occurred as the second wave of selling in oil markets was underway, culminating on Friday night when WTI traded briefly under forty dollars. Just when we thought it was safe to go back in the water, the Greeks are again going to the polls.

Friday’s Chinese PMI, as noted, was imply the straw that broke the camel.

Is it the capitulation trade? Does the S&P500 need to see the full 10% before this can be called? While having shifted swiftly to the sidelines on Friday night, into cash, safe currency havens like the yen and Swiss franc, and gold, traders were assuming Beijing would act over the weekend. This did not happen. There may be disappointment on Wall Street tonight.

Volatility

The VIX volatility index on the S&P500 started last week at around 12, where it’s been all year. On Friday night alone it jumped 46%, well into fear territory at 28.

Stock market outflows did not turn up in US bonds, as indicated by the US ten-year yield falling only 3 basis points to 2.05%. It went into cash, suggesting a shift to the sidelines to see what happens next. Many a trader has been pleading for a correction for the past couple of years so they can buy again at more realistic prices. Will they now buy?

The US dollar index fell a full percent to 94.80. The greenback has been the high flyer of late among the world’s largest trading currencies, so it now has the furthest to fall. The yen and Swiss franc are considered safe havens, and even the euro is a safer bet at present, with the Fed presumably still eyeing a rate rise. Will the stock market correction take September off the table?

These are the questions to which right now there are no obvious answers. On such uncertainty, stock markets are more likely to keep falling than stage a rebound.

Commodities

While commodity prices have been hit hard of late, they have already been weak for some time, unlike stock markets. Thus the panic seen across global stock markets on Friday was not matched in commodity prices.

They were nevertheless weaker, with copper down 0.5%, aluminium and nickel down 1.5% and tin and zinc down over 2.5%, albeit iron ore is steady at US$55.60/t.

Having traded briefly under forty, West Texas crude closed down US64c to US$40.27/bbl. Brent fell US84c to US$45.33/bbl.

Safe haven gold rose US$8.10 to US$1160.40/oz.

In isolation, the Aussie should have copped a hammering as China’s safe proxy currency, but a fall of only 0.3% to US$0.7319 reflects the big drop in the greenback.

By rights, Australia saw its China PMI reactions trade on Friday. But we only fell 1.4%. The rest of the world fell 3%. For a long time technical analysts have been targeting 5100 as the bottom of an ASX200 correction, were the index to break out of its range to the downside. That’s another 114 points down.

The SPI Overnight closed down 110 points or 2.1% on Saturday morning.

The Week Ahead

It’s going to be one of those weeks in which anything can happen and probably will.

It’s still three weeks to go to the Fed’s September meeting. Sometime next month Greece will go back to the polls, and it may be another month before a government is formed given no party will win a majority. In the meantime we shall have to wait to see whether Beijing simply sweats on its currency devaluation move as being the cannon required, or will panic and add further stimulus to the mix.

Is the Fed still data-dependent, or have things changed? This week sees the release of the Chicago Fed national activity index and flash manufacturing PMI tonight, new home sales, house prices, monthly consumer confidence and the Richmond Fed activity index on Tuesday, and durable goods and a flash services PMI on Wednesday.

On Thursday it’s pending home sales, along with the first revision of US June quarter GDP, while Friday brings personal income & spending and fortnightly consumer sentiment.

This week the countdown begins for Australia’s June quarter GDP result, due next week. On Wednesday we’ll see June quarter construction work done and on Thursday private sector capex.

This week is the final, and by far the most crowded, week of the local reporting season. It’s not shaping up as a great week for the micro stories to dominate given such a macro storm cloud. There are far too many stocks reporting this week to choose highlights. Please refer to the FNArena Calendar (link below).

Rudi will appear on Sky Business on Wednesday at 5.30pm.
 

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

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided. www.fnarena.com

article 3 months old

The Overnight Report: Buyers Evaporate

By Greg Peel

The Dow fell 368 points or 2.1% while the S&P lost 2.1% to 2035 and the Nasdaq dropped 2.8%.

Alexis Tsipras has resigned as Greek prime minister and dissolved the government ahead of a fresh election next month. Oh God, here we go again.

The Bad Oil

Stop the world, I want to get off.

While it’s frustrating enough that the local market should fall 1.7% yesterday, it’s more frustrating that we were up so solidly on Wednesday. Clearly, no one has a clue at the moment. On Wednesday the market was led up by a strong snap-back rally in the energy sector, which appears to have been triggered by Woodside maintaining an 80% payout ratio when there were concerns this would be reduced.

But 80% of what? In another six months that yield will be worth tuppence ha’penny. One might have argued on Wednesday that energy stocks had reached oversold levels, but that opinion looked a bit foolish yesterday. From yesterday’s opening bell, the energy sector led the ASX200 lower. By lunchtime, energy was still the stand-out on a 4% plunge, while other sectors were weaker but by a much lesser magnitude.

By the afternoon, energy just kept falling and the session morphed into a general sell-a-thon. Materials copped 2%, to be the next worst behind energy’s 5.8% capitulation. The banks had been sold off on Tuesday afternoon, bought right back on Wednesday morning, and held reasonably steady yesterday morning until being sold down 1.7% by the close.

What changed in bank land between Tuesday and yesterday?

The end result is a clear breach of support at 5350, the last stop, technical analysts attest, before 5100. Next month is September, traditionally the worst month of any year and this time around, possibly including the first Fed rate rise, so that 5100 level is not looking overly pessimistic.

The good news, from a technical perspective, is that after the low is locked in at 5100 the pullback will be complete, and the next target is 5800. Just as well it’s that simple.

Going, Going…

After two days of selling, Wall Street had been building up to something more substantial. The falling oil price was driving it home, Fed confusion only adds to the uncertainty, and last week’s renminbi devaluations have heightened fears China is actually slowing much faster than the data indicate.

Emerging markets, in general, have become a major issue. A slowing China means pressure on the economies of all of China’s Asian neighbours. Plunging oil prices threaten to bring down the economies of oil-exporting nations such as Brazil and Russia. Saudi Arabia needs US$90/bbl oil to break even on its government spending commitments. Venezuela needs US$140/bbl – good luck with that. All other exporters lie along that curve between the two.

Lower oil prices should, in theory, provide a welcome boost to oil-importing economies. But two obvious examples are China and Japan. China’s GDP growth is slowing rapidly, and Japan’s was negative in the June quarter. Only Europe seems to be holding its own, but only just.

Then the fear is the Fed raises its rate next month, or even in December, and the resultant jump in the US dollar sends commodity prices lower still and, possibly, creates another Asian currency crisis. There is much concern now amongst US banks over the amount they have lent to small US shale oil producers who are now either under or close to being underwater. If one throws in the towel, hold on for the rush.

And to top things off, the Chinese stock market closed down 3.5% yesterday (most of which occurred after the close on Bridge Street) and now Greece threatens to throw Europe into turmoil all over again.

Cue Satchmo: And I think to myself…

The S&P500 broke down sharply through its 200-day moving average at 2078 early in last night’s session and this time, the buyers did not appear. There had been just too much pressure building. The next stop was 2044 which is the bottom of the trading range the S&P has been stuck in basically all of 2015. For a little while late in the session, that level held, but as the sell-on-close orders mounted, Wall Street breached the bottom of the range.

The S&P closed at 2035. It all sounds very frightening, but actually that’s only 4% from the peak. Commentators have been banging on for ages now that Wall Street is well overdue a 10% correction. The popular suggestion is that the Fed will trigger this. Now that we’re outside the range, it’s a new ball game. Wall Street is down for the year. The Dow closed below 17,000.

Commodities

What is the winner in all of this? Gold. It rose US$18.20 last night to US$1152.30/oz, aided by a 0.7% drop in the US dollar index to 95.74, and talk is now of the very familiar 1200 level been reached once more.

The oils fell again last night, although not so dramatically. West Texas has rolled over into the October delivery contract and in so doing won a reprieve on the curve as far as 40-breach fears are concerned, but a US36c fall last night still has WTI dangling at US$40.91/bbl.

Brent fell US70c to US$46.17/bbl.

Base metals fared a little better, thanks to the fall in the greenback. After a week of selling, copper rebounded 1.7%. Aluminium and zinc regained a percent but nickel and tin went the other way.

Iron ore fell US30c to US$55.60/t.

Falling commodity prices and Chinese slowing fears mean the Aussie is not blindly running in converse to the greenback, as it is down 0.2% at US$0.7337.

Today

The SPI Overnight closed down 66 points or 1.3%.

Reporting season highlights today include Coca-Cola Amatil ((CCL)), Insurance Australia Group ((IAG)) and Santos ((STO)).
 

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.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided. www.fnarena.com

article 3 months old

The Overnight Report: More Minutes Of Confusion

By Greg Peel

The Dow closed down 162 points or 0.9% while the S&P lost 0.8% to 2079 and the Nasdaq fell 0.8%.

Mystery

The motivation behind Tuesday’s sudden 2pm dumping of bank stocks on the local market will remain a mystery, other than perhaps someone, somewhere, decided to pocket the CBA div and switch into something else altogether. Yesterday the banks all flew back to Tuesday’s starting point immediately from the opening bell, and stayed there.

We can thus also throw out any theories that the Chinese market prompted the late fall on Bridge Street on Tuesday. Having fallen 6% on Tuesday, yesterday the Shanghai index was down another 5% at around lunchtime in Sydney. The ASX200 wobbled, but quickly regained its ground.

By the time Bridge Street was closing Shanghai had begun to recover, before ultimately closing up over 1%. The assumption is the government’s Plunge Protection Team, who had said they were not going to do anymore buying, had a change of heart.

Yesterday’s local market also featured another round of beats and misses amongst reporting stocks and some solid moves in either direction as a result. Woodside Petroleum ((WPL)) was one stock that surprised with a strong result and consistent dividend, helping the energy sector to join the banks with a 2% gain yesterday, thus reversing Tuesday’s oil price-related tumble.

Unfortunately that trade’s not looking so flash this morning.

Between the banks, energy and some surprise buying in supermarkets, yesterday the ASX200 recovered what it had lost on Tuesday. But hang on to your hats, the SPI Overnight closed down 48 points this morning.

Dovish?

One reason the SPI is down hard is because oil prices have turned tail again. Wall Street opened to the downside last night on some lingering concern over China but when the weekly US crude inventory data hit the wires, oil prices crashed once more and US stock indices followed suit.

Increasing US inventories do not bode well when the end of August signals the end of the US summer driving season and a seasonal drop-off in fuel demand through to November. WTI crude fell over 4% last night and just stopped short of reaching the thirties.

The Dow was subsequently down over 200 points in the morning session before someone accidently leaked the Fed minutes at 1pm, ahead of the usual 2.30pm release. Shortly after 2pm, the Dow was back in the green.

We could carefully deconstruct the minutiae of the language of the various FOMC member views minuted in July but realistically we’d only arrive at the same old conclusion – the Fed might raise in September, or might not.

The computers clearly decided the language was more dovish than hawkish (yes, language algorithms make these calls and respond in seconds, long before any human can get their head around the implications), and subsequently Wall Street rallied back on the assumption September is now less likely. But if commentary on US business television can be considered a reasonable sample set, it appears most still feel September will be lift-off month.

Either way, US stocks turned tail again in the afternoon and finished lower. If we look at it from a purely technical perspective, the S&P500 yet again fell through its 200-day moving average from the open last night, prompting the usual buying response. The fade-off in the afternoon took the S&P to a close of 2079, and right now the 200 MA sits at 2078.

The US bond market and currency markets clearly thought the minutes were more dovish than hawkish. The US ten-year bond yield fell 7 basis points to 2.12% and the US dollar index fell 0.6% to 96.45.

Commodities

Commodity prices and Fed policy are inexorably linked, even if central banks try to ignore volatile short-term fluctuations in food and energy prices. There is no denying structurally lower oil prices and their impact on inflation. The more oil falls, the more the market begins to feel a rate rise is off the agenda.

West Texas fell US$1.83 or 4.3% last night to US$40.55/bbl, and stock market traders stood and watched agape to see whether the thirties might be reached. It’s worth noting, nevertheless, that WTI rolls over to October delivery tonight and that month closed a little higher, at US$40.95/bbl.

Brent is already on October delivery and it fell US$1.68 or 3.5% to US$46. 87/bbl.

The panic apparent in iron ore futures prices on Tuesday night, as I noted yesterday morning, did not come to pass. Iron ore is down US10c to US$55.90/t.

The drop in the US dollar was never going to save oil prices last night but it did provide some support for base metals, which had been hammered on Tuesday night on Chinese stock market fears. Copper did fall another 0.3% and aluminium was largely steady, but the other metals all rebounded around 1%.

Gold traders looked at the Fed minutes, the fall in US bond yields and the drop in the US dollar and decided to buy. Gold is up US$16.60 to US$1134.10/oz.

All of a sudden there’s a lot of talk on Wall Street that gold might be the place to be. If the Fed does raise, and the US dollar jumps, the impact on emerging market currencies will be supportive of gold. If the Fed doesn’t raise, and the dollar falls, gold will be supported.

So the theory goes.

The Aussie dollar is a tad higher at US$0.7351.

Today

The SPI Overnight, as noted, closed down 48 point or 0.9%.

Thursdays are the shocker days in any result season, and today’s long list of reporters includes AMP ((AMP)), Brambles ((BXB)), Fortescue Metals ((FMG)), Origin Energy ((ORG)), Qantas ((QAN)) and Wesfarmers ((WES)).
 

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article 3 months old

The Overnight Report: China Slide

By Greg Peel

The Dow closed down 33 points or 0.2% while the S&P lost 0.3% to 2096 and the Nasdaq fell 0.6%.

China Syndrome?

A funny thing happened on Bridge Street yesterday.

On Monday morning, Commonwealth Bank ((CBA)) came out of its trading halt and largely held its rights issue discount from the open. On yesterday’s open, CBA mostly held a couple of dollars’ worth of dividend, and the banks were generally steady.

Energy stocks were hit early on the overnight fall in the oil price, but other sectors did little and as the index drifted back and forth around the flat line, on a mix of positive and negative individual earnings results, it seemed we were in for a flattish sort of session.

But at 2pm, on the dot, someone started selling the banks and the big miners. At that point the Shanghai exchange was closed for lunch (gosh, closing for lunch brings back fond memories, and some forgotten afternoons) and the Shanghai index was down around 2% -- a decent fall, but within the context the sort of daily volatility we’ve all now become accustomed to.

So what was the selling trigger? It was not the RBA minutes, as they’d come out in the morning and revealed nothing new. By the close on Bridge Street, the Shanghai index was down 4% -- okay, maybe enough to unsettle some nerves – and the ASX200 closed down 1.2%. But the damage was all in the banks, and to a lesser extent the big miners, which together represent a big chunk of the index. The energy names were already down, and did not get hit again after 2pm. The telco wasn’t hit, and indeed, no other sectors copped any sort of similar beating.

The Shanghai index ultimately closed down 6% after having really lost its bottle after lunch. The word had gone out, apparently, that the Chinese equivalent of the US Plunge Protection Team had decided not to support the market yesterday. So if your government says it is not going to make all the numbers on the roulette wheel red today for your benefit, it’s time to leave the casino.

If you watched the news last night and saw Australia down 1.2%, China down 6%, you’d say, well, that’s an easy one to explain. Is another currency devaluation on the cards? But looking at the course of the day’s trade on the ASX, the story doesn’t quite play out so simply.

What we do know this morning, however, is that the 6% fall in Shanghai did put the frighteners through the LME last night. Base metal prices have been slammed. Yet the SPI Overnight is calling the index up 10 points this morning.

Strange days indeed.

No Worries

And if China was to blame in any way for the Australian market’s late tumble yesterday, it seems Australia’s was the only market that cared. Hong Kong was down, fair enough, but Japan didn’t fall much, and nor did the European markets or, ultimately, Wall Street.

Wall Street instead put in a choppy summer session on light volume that was mostly introspective. The materials sector did cop selling on the plunge in the copper price, but a tick up in the WTI price helped energy rebound. A solid earnings report from Home Depot (Bunnings on steroids) was offset by a weak earnings report from Wal-Mart (Woolies on steroids), while a 0.2% rise in US July housing starts, to the fastest pace since October 2007, was the economic highlight of the day.

With the S&P back around 2100 and many a trader on a beach somewhere, the US indices drifted around last night without any particularly solid lead. China was noted, but largely shrugged off.

Commodities

Aluminium managed to put in a pretty solid performance last night in only falling 1%. All other base metals fell 2-3%, including a 2.6% fall for copper to a new six-year low.

Iron ore was unchanged in physical trading at US$56.00/t, but the late Chinese stock market slide saw iron ore futures slammed 2.5% overnight in China which suggests a different story by tomorrow.

West Texas crude managed to rise US47c to US$42.38/bbl, helped along by a research report from Citi suggesting it is time to start buying energy stocks as oil probably won’t fall much further. Citi commands respect in the energy space, having correctly called the initial oil price tumble to much disbelief at the time.

Brent fell US17c to US$48.55/bbl.

Gold is steady at US$1117.50/oz, but silver copped a 3% hammering. The US dollar index was up last night which doesn’t help the commodity cause, but only by 0.2% to 97.00.

The Aussie is down 0.5% to US$0.7340.

Today

The SPI Overnight, as noted, closed up 10 points.

Wall Street will be dealing with CPI data tonight along with the minutes of the last Fed meeting, but no one is expecting any new rate hike hints therein.

Ahead of that, it’s a big day on the local earnings front. Today’s highlights include Seek ((SEK)), Stockland ((SGP)), Seven West Media ((SWM)) and Woodside Petroleum ((WPL)).

In the latter case, keep an eye on the dividend.

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

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article 3 months old

The Overnight Report: Range-Bound

By Greg Peel

The Dow closed up 67 points or 0.4% while the S&P gained 0.5% to 2102 as the Nasdaq jumped 0.8%.

Adjustments

Commonwealth Bank ((CBA)) shares recommenced trading yesterday having successfully put away the institutional allocation of its $5bn capital raising and despite the 10% discount offered on the rights issue, fell only 1%. This contrasts heavily with ANZ Bank ((ANZ)) which, the week before, placed new stock at a 5% discount and saw its shares open down 7%.

The vote of confidence in CBA prompted a vote of confidence in the banking sector in general yesterday, which ultimately finished up 0.5%. Buyers are clearly interested in returning following the capital raising sell-offs as yield once again becomes difficult to ignore.

However it must be remembered that index-tracking funds and other large institutional investors in the Australian market must hold the banks, which represent over a quarter of market capitalisation, and therefore must buy CBA to reweight their portfolios. Ditto ANZ. Something then must be sold to adjust across both sector and index weightings.

The ASX200 was off to a flyer yesterday, aided by some reasonable earnings reports, and at 11am was up 43 points. But that was the end of that. Perhaps it provided a good opportunity to sell whatever it is one chooses to sell to fund new CBA shares.

Japan would not have helped either, posting a June quarter GDP result of minus 0.5% quarter on quarter growth, down from plus 1.0% in March. While not unexpected, it does bring into question the success, or lack thereof, of Abenomics. The June quarter saw 1.6% annualised GDP contraction. Exports are down 16.5%. Household consumption is down 3.1%. Inflation is nowhere to be seen.

Massive debt-funded QE may have driven optimism two years ago but the subsequent fiscal trade-off of an increased sales tax has killed off the momentum. Japan is Australia’s second biggest trading partner.

Familiar Territory

Wall Street was stunned at the open of trade last night when the Empire State activity index came in at minus 14.9, down from plus 3.9 in July, when economists had expected a rise to plus 4.5. It is the worst reading since April 2009.

The Dow promptly fell 120-odd points on the news, but in contrast, the US housing market sentiment index saw a one point rise to 61 to mark the highest level in a decade. The Dow then ran all the way back, and more.

The argument is that the Empire State index is merely a measure of one manufacturing region – New York State – and not a national indicator, and moreover it can be, and has been of late, very volatile. Housing sentiment, on the other hand, is national.

Or you can argue that the opening plunge based on the Empire State result was overrun by those cheering on weak data, as it implies delay from the Fed. The US ten-year bond yield fell 5 basis points to 2.15%.

Or you can look at the reality, which is that every time the broad market S&P500 index falls below its 200-day moving average, the buyers step in. This has been the case all year. Hence the S&P first hit 2100 in January and last night returned to 2100, having done nothing but travel backwards and forwards across that mark for eight months, whatever has been thrown at it – Greece, China, you name it.

We could speculate that given January was around the time debate began in earnest over a first Fed rate hike, all Wall Street has done ever since is mark time until the policy change is confirmed.

Commodities

A slowing economy has not stopped China increasing its production of metals. Data over the weekend showed production of aluminium, copper and nickel all rose in July, a point which was not lost on the LME last night. Base metal prices were all flat to modestly weaker.

Iron ore fell US20c to US$56.00/t.

The pervading opinion in oil markets is now one of oil must go lower. For a while there, after the rebound, the pervading opinion was US$50-60/bbl for WTI was about right, but not so anymore. West Texas fell US22c last night to US$41.91/bbl and Brent fell US47c to US$48.72/bbl.

Gold rose slightly to US$1117.40/oz despite a 0.3% gain for the US dollar index to 96.82. The Aussie is steady at US$0.7373 ahead of today’s release of the RBA August minutes.

Today

The SPI Overnight closed up 11 points or 0.2%.

Aside from the RBA minutes the focus today and for the next two weeks will be on corporate earnings reports. Highlights today include Asciano ((AIO)), Challenger ((CGF)), Dick Smith ((DSH)) and QBE Insurance ((QBE)).

We have now passed the halfway mark, time-wise, in the result season, but only a quarter of reports are in. The rest now flow in an avalanche.

The score card to date, according to the FNArena Reporting Season Monitor, is beats and misses equally on par but FNArena database broker upgrades to downgrades running at 29/18.

Please note that CBA goes ex-dividend today, as do a number of other stocks, so the index will start with a handicap.
 

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article 3 months old

The Monday Report

By Greg Peel

Oil Worries

It was the energy sector that took the big hit on the ASX on Friday, driven down by falling oil prices and the belief West Texas crude may be poised to fall into the thirties, thus revisiting GFC lows.

Energy fell 3.7%, and next worst performer on the day was materials with a 1% fall. The banks also fell 0.5% to round out a tough couple of weeks since the ANZ capital raising announcement. Commonwealth Bank ((CBA)) is also raising capital, and will come out of its trading halt this morning.

To add insult to the injury of bank sector woes, the Australian market in general copped an additional beating last week thanks to the sudden and poorly explained Chinese currency devaluation. Beijing has been at pains ever since to insist the devaluation is not about boosting China’s flagging export economy via currency wars but about moving the renminbi towards a marker-based pricing mechanism, as the IMF has entreated the Chinese to do so.

Fair enough, but the timing is certainly interesting. And while the last thing we need is for Beijing to begin disclosing possible policy moves a year ahead, a la the Fed, so we can all die of frustration debating the issue for the months and months preceding, it would be nice if Beijing at least made their explanations at the time of the event, rather than in a scramble a day or two later.

The local index attempted to stabilise after a torrid week on Friday morning, but was unable to hold out. When the ASX200 broke support at 5380, the technical sellers poured in in the afternoon.

As You Were

Australia has felt the pain but the US stock market did manage to recover ground last week after the initial renminbi volatility spike. Wall Street remains very much stuck in its 2015 range, and will no doubt remain stuck at least until the September Fed meeting.

On that note, Friday night featured a 0.6% rise in July US industrial production when 0.4% was forecast. The previous two months’ numbers were also revised upwards. The US producer price index rose a muted 0.2% in July after having risen 0.4% in June. The impact of lower oil prices is clearly evident in the annual headline PPI rate of minus 0.8% against the annual core rate, ex food & energy, of plus 0.9%.

Friday’s data sufficiently offset each other to provide no fodder for either side of the Fed timing debate, and no real impetus for Wall Street. It was only the news from Europe that provided a little boost as the week came to a close.

The Dow closed up 69 points or 0.4%, the S&P gained 0.4% to 2091 and the Nasdaq added 0.3%.

You might remember Greece? Well on Friday night the eurozone signed the deal that will see Greece receive E86bn over the next three years in bailout package number three. Packages number four, five, six and so on remain pending. As to whether this is enough to save Greece from economic disintegration in the meantime remains to be seen.

The deal’s approval was more of a rubber stamp than a source of great market relief but at least Greece might slip out of the news now for a while. The approval also managed to soften the blow from the eurozone’s June quarter GDP result, which showed an easing to 0.3% quarter on quarter growth following March’s 0.4%, for an annualised growth rate of 1.3%. Germany’s growth rate improved but not by as much as hoped, while France’s economy stagnated once more.

The best we can say of Mario Draghi’s QE package at this stage is that it has stopped the rot, and brought stability to the European economy if not raging growth. Of course, China’s currency devaluation is not going help an economy dependent on exports.

Commodities

It was a mixed bag on the LME on Friday night, with lead up around a percent, nickel a percent and a half and tin two and a half but aluminium, copper and zinc all fell asleep.

Iron ore remained unchanged at US$56.20/t.

The oils found some stability, having fallen 20% in a month and looking dangerous. West Texas was down slightly at US$42.13/bbl and Brent was down slightly at US$49.03/bbl.

Gold was steady at US$1113.70/oz as the US dollar index rose a tad to 96.52.

The Aussie is up 0.3% at US$0.7379.

The SPI Overnight closed up 9 points on Saturday morning.

The Week Ahead

US inflation – the weakness of which is the main reason supporting the “not in 2015” side of the Fed rate rise argument – will be in the frame again this week with the release of the US CPI on Wednesday.

The US will also see housing sentiment and the Empire State activity index tonight, housing starts on Tuesday, and existing home sales, leading economic indicators and the Philadelphia Fed activity index on Thursday. Wednesday also sees the release of the minutes of the last Fed meeting but any specific clues are unlikely.

The release of the minutes of the August RBA meeting is the only real economic highlight for Australia this week. Given the meeting pre-dated the Chinese currency revaluation, the minutes will not be of any great value.

Instead, the Australian market will be heavily focused on corporate earnings this week, as the gentle trickle of reports to date turns into a barrage.

Today’s highlights include Aurizon ((AZJ)), Charter Hall ((CHC)) and Newcrest Mining ((NCM)).

And a reminder that CBA recommences trading today following its announced 10% discounted rights issue.

Rudi will appear on Sky Business on Wednesday at 5.30pm.
 

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: Confusion

By Greg Peel

The Dow closed up 5 points while the S&P lost 0.1% to 2083 and the Nasdaq fell 0.2%.

Not a Devaluation

The PBoC is not deliberately devaluing the renminbi in a desperate attempt to revive China’s export economy, it is merely allowing the market to determine the exchange rate in a step towards floating the currency. At least that’s what the Chinese central bank has declared.

Yesterday the PBoC marked down the renminbi another 1.1% against the US dollar, representing the third “devaluation” in three days for a total 3.5%. Again, the reduction was in response to the market’s perceived level, but the good news this time is that the market did not sell down the renminbi any further, as it had done in each of the previous two days.

The market has been selling on the expectation the PBoC will ultimately “devalue” the renminbi by 10% to adjust for the perceived level of overvaluation of the Chinese currency against the global foreign exchange market. But yesterday the PBoC talked down such speculation, suggesting there is no reason for the currency to depreciate any further given a “strong” economic environment in China, a sustained trade surplus, sound fiscal position and deep foreign exchange reserves, all of which provide “strong support” to the exchange rate.

“Strong” economy? Suffice to say, economists are expecting the renminbi to eventually be devalued by 10%, just not all in one hit. China’s July producer price index, which fell 5.4% year on year to mark its biggest drop since 2009, is the biggest clue. Beijing is trying to head off deflation.

But how does the rest of the world respond? Well at the moment, it appears confusion reigns. After two days of steep falls, European stock markets managed to rally back somewhat last night. On Wednesday night the Dow fell 277 points before closing flat and last night rose 79 points before closing flat.

The Australian market was a rabbit in the headlights on Tuesday, freaked out on Wednesday, and attempted a comeback yesterday only to be slapped back to flat in the final hour of trade.

The problem here is one of disclosure, which is not China’s strong suit. The Fed has now learned to prepare markets for policy changes, to the point where we spend an entire, tedious, tiresome year discussing whether QE3 is coming, a taper is coming, a rate rise is coming…until everyone just wants to get it over and done with. Mario Draghi flagged QE for a good two years before he actually did anything.

The PBoC, on the other hand, feels no need to warn anyone of anything. The result is global market turmoil. One day the PBoC, too, will learn.

Choppy

The ASX200 chopped its way to be up 44 points just after 2pm yesterday as investors absorbed the China story, Wall Street’s impressive turnaround overnight and various local earnings reports. By the closing bell the index was up only 5 points.

The market was not thrilled with Telstra’s ((TLS)) dividend, sending the stock, and thus the telco sector, down 2%. After being trounced on Wednesday the resource sectors made a comeback, with energy rising 1.5% and materials rising 0.7% to be the leaders in the green of what was a very mixed bag of sector moves – not unusual in a result season.

Unfortunately for bargain hunters in energy names, West Texas crude last night traded under US$42/bbl briefly – its lowest level since March 2009 (when QE1 was introduced and the US dollar tanked).

We can again note that the support level for the ASX200 is 5380, which we’ve bounced off once, and yesterday we closed at 5387. The next level is 5100.

Sales Boost?

July US retail sales rose 0.6%. Although just shy of 0.7% forecasts, both the June and May numbers were revised higher, painting a brighter picture for the US consumer sector. At the same time, as noted, oil tanked again, and yet again bargain hunters in Wall Street energy names were forced to cut and run.

There is a growing concern weak energy prices are ultimately going to lead to deflation across the globe, and potentially in the US as well. For almost a year the expectation has been that US consumer spending would rise to provide the offset. This didn’t happen for months, but maybe it’s starting to happen now. But energy is an input into a lot more than just consumer petrol tanks, and thus consumer pockets via lower petrol prices. Hence the deflation concern.

Which brings us back to the Fed, and the aforementioned never ending debate over a September rate rise. Thank God there’s only one more month to go to find out. But at the moment, Wall Street, like Bridge Street, is just not sure what to do.

After its big fall on Wednesday night, last night the US dollar index was only a little higher at 96.39. The ten-year bond yield nevertheless bounced back 6 basis points to 2.19%. The US bond market, forever far less fickle than the stock market, also seems confused at present.

Commodities

With the dollar stable, base metals prices were mostly a little lower last night, with aluminium and nickel down around a percent.

Iron ore rose US40c to US$56.20/t.

West Texas closed down US$1.09 to US$42.24/bbl and Brent lost US61c to US$49.15/bbl.

The gold bugs are excited again, believing that Chinese investors, having been burnt in the property market, burnt in the stock market, and now finding their currency devalued from underneath them, will return to buying gold. But last night gold fell back US$10.90 to US$1114.60/oz.

The Aussie is 0.4% lower at US$0.7358.

Today

The SPI Overnight closed down 8 points.

The eurozone will release its first estimate of June quarter GDP tonight.

On the local earnings front, Automotive Holdings ((AHG)) and James Hardie ((JHX)) are today’s highlights.
 

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article 3 months old

The Overnight Report: Reversal

By Greg Peel

Float on By

Perhaps we can blame the IMF, which told Beijing recently, in rejecting China’s application for the renminbi to be included in the fund’s basket of global reserve currencies, that Beijing must first let the renminbi float. A PBoC devaluation is not a float, but the intention is to take a step towards such a goal. Yesterday the PBoC followed up Tuesday’s 1.9% renminbi devaluation with a further 1.6%.

The central bank did so because that’s where the market was indicating the renminbi should be. The Chinese currency is pegged only to the US dollar, and in revaluing the currency over the past several years against the greenback alone, the PBoC has failed to account for large valuation variances against other major currencies, such as the yen and euro. In devaluing, the PBoC is trying to find the right overall level.

The problem yesterday was that the PBoC responded to the market but then the market went again, selling the renminbi down further in what threatened to become a self-feeding spiral. Thus on the close of trade in China (long after the close on Bridge Street) the central bank intervened to stabilise the currency.

This is not a sinister response – every central bank, including the RBA, intervenes on occasion to prevent excessive currency volatility.

But it does show that Beijing is nervous, and highlights that the Chinese government is rather new to this game. The stock market debacle of last month was enough to give them the willies and so yesterday they got a little jumpy again. The issue for the rest of the world is one of just how bad is the Chinese economy right now? While the currency devaluation may have come at the IMF’s behest, there’s no masking the fact this is Beijing’s “shock & awe” stimulus tactic.

But as opposed to Beijing’s massive fiscal stimulus package of 2008, this form of stimulus is linked directly into the global financial market system. There is now great concern what the impact will be on Other Asia, which is so closely tied to the Chinese economy, and to emerging market colleagues such as Brazil, which is already struggling, and to the economies of China’s major export competitors such as Japan and Germany, who now see their respective QE measures – to date showing relative signs of success – undermined.

And what does it mean for Australia?

Delayed Reaction

I can admit now Tuesday’s action on Bridge Street had left me somewhat confused. In the wake of the first renminbi devaluation, why did the materials and energy sectors stubbornly rise 1% on the day, when all other sectors fell, as if the previous night’s jump in metal prices was all that mattered? Was a 1.5% plunge in the Aussie in sympathy really enough to negate the impact?

Looking at yesterday’s action I can only assume Bridge Street did not know how to respond. By yesterday morning, following big overnight falls in commodity prices and on Wall Street, it was clear. The materials and energy sectors both plunged over 3%.

It was a perfect storm. Chinese currency aside, we saw poorly received earnings reports from the likes of Computershare ((CPU)), CSL ((CSL)), Carsales.com ((CAR)) and REA Group ((REA)). And in opening lower from the bell, the ASX200 broke down out of its longstanding trading range. From there we could throw in the technical trade. First stop 5380, next stop 5100.

And where did we stop? 5380.

Bear in mind also that the biggest stock on the market – Commonwealth Bank ((CBA)) – was in a trading halt, having announced a 10% discounted $5bn rights issue.

Rebound

Mario Draghi must be shaking his head in despair. The QE package he introduced earlier in the year had, in the background of the whole Greek farce, been quietly working. Major export economy Germany, along with France and others, had begun to see economic improvement. And now this.

The German and French stock markets dropped over 2% each on Tuesday night, and another 3% plus each last night. When Wall Street opened, mid-session in Europe, the selling flowed across the pond.  In the first hour of trade in New York the Dow was down 277 points on heavy volume. But at the same time, the S&P500 reached the bottom of its 2015 trading range.

The selling suddenly stopped. On lower volume, Wall Street began to turnaround. Whether it be bargain hunting, short covering or both, the indices ran all the way back to square.

One consideration is that the renminbi devaluation may once and for all take September off the table as the Fed’s lift-off date. Maybe 2015 altogether. Although there is still debate. Whatever the case, the US dollar index fell 0.9% last night to 96.31, suggesting a delay is now the pervading expectation.

The US ten-year bond yield had seen its big fall the day before, and last night was only down another point to 2.13%.

The plunge in the greenback is not good news for the Australian economy. Having fallen a cent on the first renminbi devaluation, the Aussie fell another half a cent on yesterday’s second devaluation. If the Aussie could keep roughly in step with the renminbi, then the AUD-RMB trade impact would be negated. But alas, on the fall in the greenback the Aussie is this morning 0.8 of a cent higher than it was 24 hours ago, and about 1.3 cents higher than its nadir following the second devaluation. It is less than half a cent lower than where it was when the first devaluation was announced.

Commodities

Base metal prices fell again from the open on the LME last night, having plunged on Tuesday night, but then the buyers arrived. Aluminium, nickel and tin still closed lower on the day but copper rebounded 0.7%, lead 1.6% and zinc 1.8%.

Volumes were heavy, as at least some traders were prepared to “look through” the immediate impact of the renminbi devaluation to its intended goal – to stimulate China’s flagging export economy. Growth in exports means growth in raw material demand, albeit at a higher implicit price for the Chinese.

The oils also stabilised, with West Texas closing up US12c to US$43.33/bbl and Brent closing up US35c to US$49.76/bbl.

Iron ore ticked down US10c to US$55.80/t.

The US dollar drop finally sparked some life into gold, implicit of the Fed delaying its rate hike. Gold is up US$16.80 to US$1125.50/oz.

Today

The SPI Overnight closed up 24 points or 0.4%, suggesting that at this stage, the 5380 technical support level in the physical might hold.

Reporting highlights today include Crown Resorts ((CWN)), Fairfax Media ((FXJ)), Mirvac Group ((MGR)), Tabcorp ((TAH)) and the biggie, Telstra ((TLS)).
 

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