Tag Archives: The Overnight Report

article 3 months old

The Overnight Report: Stabilising

By Greg Peel

The Dow closed up 23 points or 0.1% while the S&P gained 0.3% to 2063 and the Nasdaq rose 0.6%.

Rollercoaster

Yesterday’s volatile trade on Bridge Street was basically a tale of two cities – Athens and Shanghai – or for all you Leaguies, a game played in two halves.

On Monday night stock markets in Europe had tanked on the news from Greece and Wall Street followed suit with a 2% fall. The ASX200 promptly fell 32 points from the open and it looked like we might be in for another shocker, but for the fact we’d already had our 2% fall in Monday’s session.

That fall arguably led itself more to China, Australia’s most critical trading partner, than to Greece, less than 1% of trade, or even Europe in general. So ahead of the Shanghai Exchange opening late morning Sydney time, why were we selling again?

Within half an hour the cavalry had arrived and the ASX200 began rapidly recovering, all the way to a 20 point gain by mid-morning. Then the Shanghai market opened, and promptly fell 5%. The ASX200 turned and fell to be down around 10 points. Shanghai then began to recover, and thus so did we. As momentum built to the upside in China, the ASX200 closed up 36 points, and closed the financial year, and everyone hit the showers.

Shanghai continued to rise to a 5.5% closing gain. This is the sort of result the world might have expected on Monday after Beijing’s rate cut, but it took an extra day for the Chinese market to bottom out below the 20% correction mark.

On the ASX, sector gains were relatively consistent at 0.5-1.5% other than tiny info tech and that enigma utilities, which closed flat. Given all the ex-divs on Friday, there’s probably not a great incentive to rush into utilities right now with a Fed rate rise looming.

No one is paying a lot of attention to domestic issues at present but yesterday’s private sector credit numbers for May indicated investor loan growth for housing may have now peaked, thanks to APRA’s clampdown. Overall credit rose 0.5% in May to be up 6.2% year on year. Investor loans grew 0.8% for 10.4% annual growth, but APRA restrictions in theory cap this growth rate at 10%, suggesting further growth is limited.

The good news is business loans grew 0.4% for 5.2% annual, continuing a gradually rising trend.

Underscoring a potential peak in the investor housing bubble are yesterday’s new home sale numbers for May, which showed an overall fall of 2.3% after four months of gains. However apartment sales continue to fire along, and that’s where the investors are mostly playing.

Greece

As I write, Greece’s bailout package has expired and the IMF repayment has not been made. Last night the Greek drama took a somewhat theatrical twist.

Ahead of expiry, Tsipras took what was basically his same proposed package back to the eurozone finance ministers and requested Greece be granted a two-year bailout extension. The ministers had already rejected the same package last week, so why on earth did Tsipras think the creditors would suddenly change their minds?

Because the creditors desperately want Greece to remain in the eurozone, as is evident by various leaders’ indirect appeals to the Greek people. If they’re so desperate, thought Tsipras, then at five minutes to midnight they must be ready to buckle.

They weren’t, of course. In the lead-up to Sunday’s referendum, we have the bizarre situation of Tsipras pleading with his people to vote “no” (we will not accept the creditors’ conditions) because then the creditors will simply have to buckle to keep Greece in the eurozone. Meanwhile, European leaders are pleading for a “yes” vote so that Greece can stay in the eurozone.

As it stands so far, “yes” is still winning in the polls, and last night’s “yes” vote rally in Athens saw greater numbers than Monday night’s “no” rally. While there will be more proposals and finance minister meetings between now and Sunday, Angela Merkel has said that no decisions will be made until after the referendum.

Presumably she’s banking on a “yes” result.

Wall Street

Having been thumped on Monday night, European stock markets traded lower again last night. Wall Street opened higher, over 100 points up for the Dow, but succumbed to the European influence to be flat by midday. Europe then closed and the Dow rallied back 100 points again, only to fade away to the final bell.

Being the end of quarter, and end of half year, late trading cannot be taken as particularly indicative. Tonight will tell more of a tale.

Both the Dow and S&P500 closed the first quarter in the red after nine consecutive quarters in the green. The broad market S&P – the “real” Wall Street index – closed up 0.2% for the first half of 2015. The Dow is down 1.1%.

Greece, China and of course, Puerto Rico still drove uncertainty last night but there is still a domestic story playing out underneath. The Case-Shiller 20-city house price index showed another gain in April, but the pace of growth continues to slow. The Chicago PMI improved, but remains under 50. On the other hand, the Conference Board’s monthly consumer confidence index jumped in June and beat forecasts.

At some point the global dust will settle and we’ll return to the more familiar but no less tiresome task of trying to second-guess the Fed.

To that end, the US dollar index jumped 0.7% to 95.56 last night as the euro traded lower, while the US ten-year bond yield remained steady at 2.34%.

Commodities

The jump in the greenback did not help commodity prices in this uncertain time. On the LME, aluminium, copper, lead and zinc all traded 0.5-1.5% lower while tin fell 3%. Having crashed 5% on Monday night, nickel recovered 2%.

Iron ore fell US$1.20 to US$59.30/t.

The oils may have come under pressure as well, except that nuclear negotiations between Iran and the West could not reach a conclusion and thus the deadline has been extended. No Iranian oil to flow just yet. West Texas rose US83c to US$59.06/bbl and Brent rose US$1.21 to US$63.25/bbl.

Gold fell back US$7.50 to US$1172.60 but despite the rally in the greenback, the Aussie dollar is up 0.3% at US$0.7705.

Today

The SPI Overnight closed down 31 points or 0.6%. Not sure what the futures market is anticipating there.

It’s the first of the month, so that means global manufacturing PMI releases today, including for Australia and China, both official and HSBC. Australia will also see house price, building approval and inflation numbers.

Tonight in the US the private sector jobs numbers for June are released, ahead of tomorrow night’s non-farm payroll data.

Happy New Year.

Rudi will appear twice on Sky Business today (and none tomorrow). First on Market Moves, 5.30-6pm, then later he will host Your Money, Your Call Equities.

Tomorrow he will present at Invast offices in Sydney.


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article 3 months old

The Overnight Report: Global Turmoil

By Greg Peel

The Dow fell 350 points or 2.0% while the S&P lost 2.1% to 2057 and the Nasdaq dropped 2.4%.

East Meets West

Last Friday the Shanghai stock market fell 7% to take its correction to close to 20%. On Sunday Beijing responded by cutting its interest rate for the fourth time since November. When Shanghai re-opened yesterday it did trade higher, very briefly. By early afternoon it was down 8%.

If there were no issue with Greece at present, one would not necessarily be surprised by the plunge on Bridge Street yesterday. If rapid-response monetary stimulus from Beijing is not enough to halt a Chinese stock market crash, what else can be done?

Beijing has been tacitly supportive of the runaway Chinese market, despite clamping down on margin lending loopholes and widening the opportunity for short-selling in order to prevent too much of a bubble. The Chinese have seen their property investments sour, so they turned to the stock market. Now that, too, looks like ending badly.

The good news is that after the Australian market closed, the Shanghai market staged a late rally to close down only 3.8%. That 3.8% still takes the correction over the 20% mark, but perhaps there is a ray of hope. Ignoring “bear market” suggestions, a market that doubles in less than a year can handle a 20% fall and still be well ahead. As long as the selling starts to abate.

The Australian economy needs a wealthy China, and a confident China. Yesterday the local market sold off across the board, with only a 3% fall for consumer discretionary standing out amongst what were otherwise fairly consistent sector falls of around 2%.

Of course, as traders remained glued to the Shanghai Exchange screen yesterday there was a big elephant standing behind them, called Greece. What will happen if Greece defaults to the IMF? No one knows – no common currency country has ever defaulted before. What happens if Greece exits the euro? No one knows.

Good news is good for stock markets and bad news is bad. But worst of all is uncertainty.

Greece

If the Greek economy fell in the forest, would anybody hear? No. There are twenty cities in China bigger, than Greece, which is why Wall Street, too, was less worried about Greece last night than it was about China. Greece is a minnow swimming in the same sea as a German whale in the eurozone waters. But the implication of a Grexit is that the eurozone experiment has failed, and that’s not what the German government, nor most of its fellow eurozone governments, wants to see. If Greece goes, who might be next?

The Greek crisis is thus more political than financial, but it still provides for uncertainty. It is notable that the euro was stronger overnight against the greenback, because a eurozone without Greece and its endless requirement for bail-out funds is a stronger economy.

The Greek banks are now closed for a week ahead of Sunday’s referendum. A “yes” vote means conceding to the creditors, copping the austerity, and staying in the euro. A “no” vote means telling the creditors to bugger off.

Alexis Tsipras was last night appealing to the Greek people to vote “no”, as he believes this is the best way to force the creditors into having to concede to a deal. European leaders were appealing to the people to vote “yes”, implying that’s the only way to stay in the euro. Recent polls suggest “yes” voters outnumber “no” voters two to one. If this is Sunday’s result, then the negotiations will start again. Presumably after Tsipras offers his resignation.

And then the whole sorry saga can drag on and on into eternity.

Puerto Rico

Bad luck, they say, comes in threes. With China and Greece causing a deal of concern on Wall Street last night, it was really not a good time for Puerto Rico, a member of the US commonwealth, to declare it was close to defaulting on its debt.

That’s its sovereign debt – government bonds – not an IMF obligation a la Greece.

Cleary Puerto Rico is also a minnow in the scheme of things, but that did not stop relevant US banks and bond insurance stocks from being carted last night, just to add to the maelstrom.

Wall Street is now down for the year, and unless tonight conjures up the mother of all window-dressing rallies for the end of quarter, it will be the first quarter in nine in which Wall Street has ended lower.

There was also much attention paid to the bond market, where the US ten-year yield fell 15 basis points to 2.33%. Such a rally in bonds lends itself mostly to Greece, with a bit of Puerto Rico thrown in. The German ten-year fell 12 basis points to 0.80% while the French dropped 5bps to 1.24%. The yields of Portugal, Spain and Italy all increased by 20-30bps, to illustrate contagion fear. However such moves are small compared to what was going on back in 2011-12 when last Greece was threatening to bring down the world.

The VIX volatility index on the S&P500 jumped a whopping 34% last night, just to underscore the uncertainty factor, but that only takes it to just under 19. It’s been wallowing around at a very complacent 11-12 up to now, and only when 20 is exceeded is it suggested markets are truly worried.

All this is going on in the lead up to what will no doubt be a much appreciated long weekend in the US, but before we get to that there is the small matter of the June jobs report on Thursday, and any subsequent Fed policy ramifications.

With the euro rallying, the US dollar index is down 0.5% to 94.90. If the world truly were panicked about Greece, gold would have rallied more than US$5.90 to US$1180.10/oz.

Commodities

In commodity markets, there was also more going on than just Greece.

The Shanghai Futures exchange last night announced it will accept three Norilsk nickel brands for delivery against its nickel contract, thus expending the pool of deliverable metal. Nickel subsequently fell 5% on the London Metals Exchange. Otherwise, tin was the only base metal to move significantly last night in the uncertain conditions, down 3%. All others were mixed on small moves.

Iron ore fell US20c to US$60.50/t.

For oil markets, Greece is one focus of attention but another is tonight’s deadline for Iran to reach an agreement with the West regarding its nuclear policy and resultant economic sanctions. If an agreement can be reached, Iranian oil exports will flow once more. If not, the deadline will be extended.

Last night West Texas fell US$1.42 to US$58.23/bbl and Brent fell US$1.13 to US$62.04.

Today

The SPI Overnight closed down 34 points or 0.6%. Presumably this reflects a 350 point plunge in Wall Street, but if so, how much is double-counting from yesterday?

The critical market today will again be the Shanghai stock market. Tonight Greece will be in arrears to the IMF. The Fed has said it will not step in and prop up Puerto Rico, just as it didn’t step in to prevent the city of Detroit defaulting on its municipal bonds.

Anything can happen, and probably will.

Locally we’ll see new home sales and private sector credit numbers today, in case they matter right now, and tonight Glenn Stevens will deliver a speech in London.

Tonight also sees a flash estimate of eurozone June CPI, in case that matters right now, and a consumer confidence survey will hit the wires on Wall Street.

And today is the end of financial year. Enjoy.
 

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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

Turbulence

Friday’s sell-off on Bridge Street represented a new element in the macro picture, that of China. But between China and Greece, developments over the weekend cloud the issue of what happens now.

The Shanghai index began to tip over early in June and its correction has featured some solid down-days, including at least one 6% fall. While such moves have sparked nervousness and much debate, the general feeling was that a stock market that had doubled since only late last year was clearly due a correction, and thus the odd big fall should not necessarily suggest it’s time to panic.

That the ASX200 was last week pushing back up to the 5700 mark even as China’s stock market remained brittle is testament that no one was all that worried at the time. However late on Thursday in China’s session, the Shanghai index started diving and ended the day down 4%. On Friday it fell 7.4% as it approached the 20% correction mark. A 20% correction is said to signify a bear market.

This is a load of unsubstantiated rubbish of course, but enough to encourage some precursory selling in the Western world’s proxy for Chinese investment – the Australian stock market. Friday saw a 2.8% fall for the materials sector and 3.2% for energy, with industrials also copping a 2.8% beating. Rumours of private equity interest meant Woolworths had endured enough punishment, for now, hence consumer staples bucked the trend with a 0.6% gain.

And bizarrely, yet again, the sector that should be the least volatile was the most, with utilities falling 4% (including stocks going ex-div). Perhaps the market sees Chinese investors as the only supporters of Australian commercial property.

Whatever the case, yesterday the PBoC cut interest rates by 25 basis points for the fourth time since November. The borrowing rate falls to 4.85% and the deposit rate to 2.0%. The central bank also cut the reserve ratio requirement (RRR) by another 50 basis points for banks serving rural areas, agriculture and small business.

How these cuts impact on the Chinese stock market will become apparent later today when the Shanghai exchange opens.

Fat Lady Warms Up

On Saturday night, negotiations between Greece and its lenders again broke down as the Greek government left the table. Prime Minister Tsipras thus decided it was time to readdress his anti-austerity mandate by putting the question to his people. He called a referendum for this coming Sunday which will basically be a question of do we maintain the rage, and risk a Grexit, or do we bow to the creditors.

If he thought the creditors were going to sit back and wait for the result, and supply interim funding in the meantime, he was dead wrong.  An angry European Commission has insisted there will be no bail-out extension beyond Tuesday night’s expiry. An angry IMF has insisted there will be no extension for repayment of the E1.6bn due on Tuesday -- money Greece does not have.

On Saturday the people of Greece were queuing up to get what they could of their money out of ATMs. Yesterday those machines were running out of cash. In the wake of the weekend’s breakdown in negotiations, the ECB has refused to extend any further emergency funding to Greek banks. Tsipras has ordered the banks be closed tonight, and the stock market, in what is no doubt a precursor to currency controls.

Default looms on Tuesday night. EU representatives will continue to hold meetings during the week, but this time it won’t be about compromise, it is assumed. This time it will be about planning the Grexit.

Wall Street

In Friday night’s session Wall Street was still in watch and wait mode regarding Greece. Tonight’s action will determine the response to the weekend’s developments.

The Dow closed up 56 points or 0.3% but the gain was almost entirely attributable to one stock – Nike – following a very positive earnings report and a 4% share price jump. Otherwise, the S&P was flat at 2101 and the Nasdaq fell 0.6%.

The economic data release of the day was the fortnightly Michigan Uni consumer sentiment survey, which showed a rise to its highest level in five months, beating forecasts. While this news provided some support, no one was prepared to take on risk over the weekend. And the slide in the Shanghai index did not go unnoticed.

The US bond market was nevertheless prepared to be more introspective, focusing on the ongoing stream of pretty solid US data. The US ten-year yield rose 8 basis points to 2.48% to mark its highest close since last September. The market is still very long US bonds and a Fed rate rise looms ever nearer, but it will be interesting to see what happens in global bond markets this week.

The US dollar index rose 0.2% to 95.40.

Commodities

The Aussie dollar took a beating on Friday, in line with the local stock market. It was down 1% to US$0.7658 on Saturday morning and is lower still, at US$0.7613 in early trade this morning.

All round uncertainty led to a mixed session on the LME on Friday night and again, we must remember that the Greek breakdown and Chinese rate cut have occurred in the interim. Copper and tin rose half a percent and zinc fell half a percent, while aluminium and lead fell one percent and nickel fell two percent.

Iron ore fell US60c to US$60.70/t, closing the week exactly where it started.

The oil markets were deathly quiet on Friday night. West Texas was little changed at US$59.65/bbl and Brent down just a tad to US$63.17/bbl.

Gold was little changed at US$1174.20/oz.

On Saturday morning, before the weekend’s developments, the SPI Overnight closed up 10 points.

The Week Ahead

World markets are this morning suffering from vu-deja – that eerie feeling that nothing like this has ever happened before. As late as Saturday morning, the prevailing belief was that somehow, in some way, Europe would manage to once again kick the Greek can down the road. That expression is getting pretty tiresome, but I haven’t yet come up with another one.

But right now it is hard to see past at least a Greek default. Sunday’s Greek referendum seems irrelevant in that context, but were the Greek people to vote heavily in favour of capitulation, then perhaps the EU will be able to sort something out with regard remaining in the eurozone.

Meanwhile, all Asian region eyes will be on the Shanghai stock market today to see whether yesterday’s rate cuts are enough to stabilise the tumbling index.

The world will revolve regardless, and this week features some rather important data releases.

Tomorrow is the end of financial year in Australia, and the end of quarter anywhere else. Wednesday is the first of the month, and thus features global manufacturing PMI releases. Beijing now releases both its manufacturing and service sector PMIs on the first of the month, while HSBC still spreads its results two days apart. Friday sees the global round of service sector PMIs.

It’s a short week in the US, with markets closed on Friday for the Fourth of July long weekend. It’s also the first week of the month, which means jobs numbers. The ADP private sector number will be released on the Wednesday as usual, but the non-farm payrolls report is this month brought forward to the Thursday.

Other US releases include pending home sales tonight, and Case-Shiller house prices, Conference Board consumer confidence and the Chicago PMI on Tuesday. Wednesday it’s construction spending and vehicle sales, and Thursday factory orders.

A flash estimate of eurozone CPI is out tomorrow night, which will at least give us a guide to how the rest of the zone is faring.

Australia sees new home sales and private sector credit tomorrow, and the RBA governor will deliver a speech in London. On Wednesday it’s the manufacturing PMI, building approvals, house prices and the TD Securities inflation gauge. Thursday it’s the trade balance, and Friday sees retail sales and the services PMI.

Pass the ouzo.

Rudi will appear on Sky Business on Wednesday at 5.30pm and later on the same day, 8-9pm, to host Your Money, Your Call Equities. On Thursday he'll appear 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: Deal Or No Deal?

By Greg Peel

The Dow closed down 178 points or 1.0% while the S&P lost 0.7% and the Nasdaq lost 0.7%.

Flat

A very lacklustre day on Bridge Street yesterday saw the ASX200 struggle over 5700 without great conviction before falling back to be little changed on the session. The telco gained some support, rising 0.9% as consumer discretionary copped a 1% sell-off, but elsewhere sector moves were mixed and negligible.

It would appear that we’ve reached another “where to now?” level having rebounded a couple of hundred points in the ASX200 following the 500 point fall from this year’s post-GFC high. Continuing to buy yield is a risky business as Fed rate rise talk heats up and right now, Greece is a watch and wait situation.

There are only four sessions left in FY15 which should imply some last minute argy-bargy, tax-loss selling, window dressing, and general volatility but we certainly didn’t see any of that yesterday.

Deflated

The enthusiasm generated early this week by a belief the Greek drama was about to come to a happy ending always seemed a little premature, given the response from the creditors to Tsipras’ latest concessions was one of “a step in the right direction” rather than “we’ve reached agreement”. This implied further concessions were still required, and Tsipras has already risked the rejection of the Greek parliament in bowing to creditor demands in any way, shape or form.

The latest eurozone finance ministers’ meeting broke up last night without resolution, and door-stop comments from ministers as they left the meeting were more indicative of ongoing stalemate than any progress having been made. The Austrian, Finnish and even Spanish (people in glass houses?) ministers all suggested Greece had not brought them anything new.

One would have to think Greece is at this stage moving closer to default than to receiving its bail-out funds. The risk for Greece is that a Grexit would prove more devastating to the Greek economy in the short term than the austerity the country is already suffering from. The risk for the creditors is that if they offer concessions to Greece, every subsequent eurozone member general election will install a left wing anti-austerity party which will queue up to receive the same treatment.

Notwithstanding the risk that continuing to support Greece will mean pouring money into a black hole for most of eternity, and having more of these tiresome bail-out negotiations every time.

But the biggest risk for the eurozone is that Greece exits, suffers near term hardship, yet thanks to a much devalued drachma is able to quickly rebuild a viable economy, free of lingering debt burdens thanks to IMF loan and sovereign bond default. That would signal the beginning of the end for the (failed?) experiment.

Jitters

The US March quarter GDP result was last night revised to minus 0.2% growth from a prior minus 0.7%. No one blinked because (a), the number matched forecasts and (b), it’s history. On Wednesday we’re into the September quarter.

It was a soggy day on Wall Street largely as the Greek news filtered out, but also because billionaire investor Carl Icahn appeared on CNBC as a “public service” to tell retail investors US stock markets were becoming overheated. No one is sure which company’s shares he’s looking to buy, but he did manage to get the Dow down 1%.

Icahn did say, nonetheless, that he still liked Apple, of which he owns a decent slice, and so Apple was the only Dow stock to finish in the green on the day. It’s not known whether Icahn was taking profits.

Granted, the Nasdaq and Russell have hit new all-time highs but the S&P500 has not moved since March. If Wall Street is overheated now, it must have been overheated then.

The US ten-year bond yield fell back 4 basis points to 2.37% last night as Greek risk heightened again and the US dollar index came off 0.2% to 95.28.

Commodities

Copper was the only base metal to post a positive move on the LME last night as all others fell. No move exceeded 1%, but Greek concerns were cited.

Iron ore suddenly decided to jump US$1.20 to US$61.70/t.

Gold is US$3.50 lower at US$1174.80/oz.

The weekly US inventory report, released last night, showed an unexpected rise in both crude production and gasoline supply. West Texas fell US86c to US$60.22/bbl and Brent fell US88c to US$63.59/bbl.

The Aussie is down 0.4% to US$0.7706.

Today

The SPI Overnight closed down 9 points.

Greek negotiations continue tonight.

Today is stock options expiry day on the ASX. This may spark some individual stock volatility, but stock options are nowhere near as widely held as index options, which expired last week and caused a lot of volatility.

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

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: No Fat Lady Yet

By Greg Peel

The Dow closed up 24 points or 0.1% while the S&P gained a point to 2124 and the Nasdaq rose 0.1%.

Step-Jump

It was not a very good day for day-traders yesterday on Bridge Street, which seems strange given the ASX200 closed up 74 points. But the 74 points was basically achieved on the opening rotation – the first half hour of trade – and the index wavered little from that level all the way to the closing bell.

Healthcare stood out with a 2% gain, while beleaguered consumer staples stood out with only a 0.4% gain, when all other sectors posted near to or above 1% positive moves. It was another “Buy Australia” session, likely replicating similar Greek-relief responses in trading around the globe, despite the fact the Australian market never really fell on Greece fears in the first place.

HSBC’s flash estimate of China’s June manufacturing PMI came out mid-session and had little impact on a market that had already made its trade for the day. The result could be interpreted as either good or bad. It was good, because the number rose to 49.6 from 49.2 in May, or it was bad because 49.6 means China’s manufacturing sector is still contracting, just at a slightly slower pace.

Japan was disappointed with its own manufacturing estimate, showing a dip into contraction at 49.9, down from 50.9.

Not Over Yet

European stock markets remained in a positive mood last night after Monday night’s big surges. The German index was up 0.7% and the French index up 1.1%. The Greek index, for what it’s worth, was up 6% last night following Monday night’s 9% gain. Everyone seems to be assuming a done deal.

Yet Angela Merkel did not seem particularly convinced when she was interviewed post Monday night’s developments, and on the other side of the coin, many left wing members of Greece’s parliament were downright angry. The Tsipras government is confident the Greek parliament will pass the new concessionary deal, but that appears far from certain, and indeed that concessionary deal is not yet bedded down.

Tsipras will meet again with the eurozone finance ministers tonight, and presumably the ministers will suggest that a deal is close, but we just need a few more austerity tweaks. The whole thing could yet again end in stalemate.

Even if a deal is reached, all that will be achieved is a staving off of the inevitable further into time, and a lingering source of future potential volatility.

Joseph Heller once satirised US post-depression subsidies for farmers, such that they were paid not to grow alfalfa. The more alfalfa they didn’t grow, the more they were paid. Tsipras intends to increase taxes on Greece’s rich. The more they are taxed, the more they can avoid.

The good news out of the eurozone last night, beyond the peripheral farce, was that the eurozone manufacturing PMI has reached a four-year high, according to last night’s flash estimate for June. It suggested a rise to 54.1 from 53.6. ECB stimulus, and a resultant weak euro, seem to be having the right effect.

Double Trouble

Over in the US, the day’s economic data releases were mixed.

A flash estimate of the US manufacturing PMI suggested a fall from 54.0 in May to a four-year low 53.4 in June. New durable goods orders fell a headline 1.8% in May, compared to 1.5% expectations, but stripping out lumpy aircraft orders left a 0.4% gain. New single-family home sales rose to a seasonally adjusted pace of 546,000 in May, compared to 525,000 expectations, to mark the fastest pace since February 2008. But this series is notoriously volatile.

There was no glaringly obvious trend in last night’s US data, yet it was still left to the Fed to cause ructions in the market.

Earlier in the month, the Fed’s policy statement and Fed chair Janet Yellen’s press conference gave markets the impression a September rate rise was now less likely than feared, and perhaps December would see lift-off. Last night Fed governor Jerome Powell suggested that it is possible there will be rate hikes in both September and December.

September is still a “coin toss” at this stage, he admitted, but assuming the jobs numbers continue their positive trend and inflation continues to tick up towards the Fed’s 2% target, then September is a goer. Powell also noted that critical to a September decision is the fact the US stock market is not in a bubble.

Last night the Nasdaq, small cap index and mid-cap index all hit new all-time highs. But the S&P500 and Dow are still just under, and indeed, to Powell’s point, Wall Street has not really gone anywhere much all year.

The Dow was up 70 points from the open last night, following Europe’s lead, but Powell’s comments took the wind out of the sails. Not that his two-hike view is a shock, and indeed it matches the view of many in the market.

But it was enough to send the US ten-year yield up another 5 basis points to 2.41%, and the US dollar index surging up 1.2% to 95.47.

Commodities

Such a jump in the greenback would usually spell trouble for commodity prices but last night’s trade on the LME was the first chance to respond to the news from Greece regarding a possible deal. Aluminium and zinc rose 1%, copper and lead rose 2%, and nickel jumped 3%.

Iron ore fell another US10c to US$60.50/t.

The oils were also stronger, despite the dollar. West Texas rose US84c to US$61.08/bbl and Brent rose US$1.14 to US$64.47/bbl.

The US Defense Secretary was in Estonia last night signing a deal that will see US military hardware and forces deployed in the country as a counter to Russian imperialism. This reminded oil markets that outside of Greece there is a cold war going on, resulting in sanctions against major oil and gas producer Russia.

The Aussie saw no relief from the US dollar surge either, and is steady at US$0.7733.

Today

The SPI Overnight closed up one point.

It’s a watch and wait story now on the Greek front.

Tonight will see the final revision of the US March quarter GDP result ahead of next month’s first estimate for the June quarter. Economists expect the minus 0.7% shock of the last revision to be improved to minus 0.2%. But it’s now ancient history.

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

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article 3 months old

The Overnight Report: Breakthrough

By Greg Peel

The Dow closed up 103 points or 0.6% while the S&P gained 0.6% to 2022 and the Nasdaq rose 0.7%.

Poised

The ASX200 stumbled its way quietly into the green and across the 5600 line yesterday on relatively muted trade following Friday’s big rally. With the Greek issue hanging thick in the air, investors were drawn to Australian yield stocks and away from cyclicals in a mixed bag of sector moves.

Utilities posted the biggest gain followed by the telco, with financials posting decent gains despite the drag from rumour-hit IOOF. Materials, energy, industrials and healthcare all closed in the red, as did a consumer staples sector which continues to be dragged down by Woolworths and talk of another German invasion.

Concession

No doubt spooked by the ever increasing flow of money out of Greece’s banks, Greek prime minister Alexis Tsipras put to Greece’s creditors over the weekend a deal which has eurozone finance ministers believing that perhaps by the end of the week, agreement could be reached. Instead of emerging from the meeting in an angry mood due to Greece’s failure to budge, as has been the case most recently, this time there was talk of a “credible and detailed” proposal.

And in a bizarre piece of theatre, the EU leaders, who had all hastily flown to Brussels for an emergency summit, sat down and discussed nothing.

They discussed nothing because there is nothing yet ready to discuss. Some eurozone ministers saw light at the end of the tunnel, given Greece had conceded to tax increases within its proposal, mostly for the wealthy. Others remain unconvinced, given there was no concession on the pension age, which has to date been a major stumbling block. But what at least emerged was small step in the right direction.

There will need to be further talks. The negotiations are expected to extend through the week as the people of Athens take turns in protesting against austerity on one day, and against a Grexit on another. Because further negotiations are required to tackle Tsipras’ detailed proposal, the EU leaders decided they would have to wait to see how it all goes.

Which suggests there was only one reason the leaders’ meeting was hastily organised to be held following the finance ministers’ meeting last night. Were the finance ministers’ meeting to yet again end in stalemate, the leaders would begin plotting the path for an orderly Grexit and containment of any fallout. Or if one wanted to be more sinister, one might suggest the leaders’ meeting was organised simply to scare Tsipras into believing Grexit discussions were indeed its sole purpose.

At a subsequent press conference, European Commission head Jean-Claude Juncker repeatedly responded to questions with a curt “that was not discussed”. Juncker suggested he trusted that a deal will be reached by week’s end. A deal will be reached, he said, because a deal must be reached.

So will the creditors meet Tsipras’ concessions with concessions of their own? One presumes this is what the prime minister is expecting. But while all might be looking promising this morning, there remains the small issue of any agreement between Greece and its creditors having to be put to the left wing majority Greek parliament, and to the sixteen parliaments of the other eurozone members. If Tsipras makes concessions that imply greater austerity, will the Greek parliament support them? If the creditors make concessions to Greece as a special case, will all the eurozone parliaments support them?

Just when we thought this movie might finally end with a bang, the projectionist is loading in yet another long and tedious reel.

Having fallen sharply in recent sessions, Europe’s stock markets took the glimmer of hope as a strong signal to rebound. Both the German and French indices soared 3.8%.

Watch this space.

Records

The positive mood flowed across the Atlantic and sent the Dow up 166 points by late morning. Aside from the Greek news, a 5.1% rebound in May for existing home sales, following a drop in April, was well received. It’s the fastest monthly sales rate since the last month of Obama’s first home buyer’s grant program back in 2009.

Wall Street did not manage to hold onto its gains nonetheless, and drifted off through the afternoon. However this did not stop both the Nasdaq and Russell 2000 small-cap index finishing in record territory. European markets may have suffered a deal of volatility on the Greek issue, but US markets have largely taken Greece in their stride.

There was obvious relief in global bond markets, which last week saw precautionary buying ahead of a possible Greek default. The yield on the German ten-year rose 13 basis points to 0.88%, and the yield on the US ten-year rose 9 basis points to 2.36%.

One might have expected the euro to respond in a similar vein to European stock markets, but instead the currency went on a wild ride last night on every snippet of information before settling largely unchanged against the US dollar. This would suggest the market had set itself long on a possible breakthrough being forthcoming. The US dollar index is up 0.3% to 94.36.

Which didn’t help gold. Gold found its way back to 1200 last week as the situation regarding Greece appeared to be deteriorating, so this morning it’s down US$14.40 to US$1185.90/oz.

Having enjoyed a level of support as a safe haven currency last week, the Aussie is down 0.6% to US$0.7728.

Commodities

Base metal traders were still waiting for the eurozone finance ministers’ meeting to break up as the  LME closed last night, and Chinese traders were absent due to a holiday. Lead, zinc and nickel fell over a percent while the others posted smaller, mixed moves.

Iron ore fell US10c to US$60.60/t.

The oils were quietly stronger as West Texas rolled forward into the August delivery front month, realigning with Brent. WTI rose US27c to US$60.24/bbl and Brent rose US46c to US$63.43/bbl.

Today

The SPI Overnight closed up 21 points or 0.4%.

Is this all the local market needs to encourage another leg up towards the 5700 mark, having rebounded from under 5500 to just over 5600? Not that Bridge Street has been paying a huge amount of attention to the Greek drama. And the Greek drama, make no mistake, is far from over.

Locally we’ll see a March quarter measure of house prices today before the flashers jump out from behind the trees. HSBC will provide its estimate of China’s manufacturing PMI for June and Japan, the eurozone and US will follow.

Closely watched durable goods data will be released in the US tonight along with new home sales, house prices and the Richmond Fed activity index.


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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

Restored

The wider world may have been worrying about Greece on Friday but clearly there were no concerns on Bridge Street, where an across the board rally restored the ASX200 to the level it had attempted to reach on Wednesday, being just below 5600. Wednesday’s attempt was thwarted by a big sell-off on Thursday, which appears to have been purely related to the expiry of futures and index options.

The index rallied 1.3% on Friday and there was little variation from this average among sector moves, suggesting this was very much a “Buy Australia” trade. This implies a level of foreign participation, which is fitting given it was foreigners who bailed out of the Australian market earlier in the month to send it hurtling down to just below support at 5500. The earlier support level of 5600 will now become resistance as the market looks for some stability.

Immediate stability may well depend on Greece.

Bewitched

In Australia, derivatives expiries are split into two sessions, being futures and futures and ASX index options on the second last Thursday of the month and stock options on the last Thursday of the month. While derivatives expire every month, quarterly contracts are still by far the most popular, thus June is one of four big expiries months and also end of financial year for most, thus offering potentially the greatest level of volatility, as was seen on Thursday.

While June is not EOFY in the US it is still a major expiry month, and on Wall Street all four equity derivative classes expire on the third Friday of the month. Hence the label “quadruple witching”. This occurred on Friday night, and while the US indices were soggy for most of the session, a late selling rush was attributed to expiry.

The Dow closed down 99 points or 0.6%, the S&P lost 0.5% to 2109 and the Nasdaq pulled back 0.3% from Thursday night’s all-time high. Sogginess on Wall Street was attributed to Greece.

The Greek situation is currently a very fluid one, with much development between the close of Wall Street on Friday and this morning. On Friday night the only news was that the ECB had been forced to extend emergency funding to Greek banks as a run on those banks accelerated in earnest. On Friday night it was assumed Greece and its creditors were still at a position of stalemate, with the creditors having now drawn a line in the sand and the Greek government having rejected that line.

It was also known that the EU leaders had brought a meeting previously scheduled for this Friday forward to tonight. With negotiations seemingly at an impasse and money pouring out of Greek banks, the assumption was that this would be a crisis meeting convened not to try to come up with a new deal to offer Greece, but to prepare for the fallout from a Greek default.

To that end, the US ten-year bond yield fell 8 basis points to 2.27% on Friday night.

White Flag?

However yesterday morning, the news was that the Greek prime minister would present a new deal to the creditors tonight. As a result, the eurozone finance ministers have hastily organised to meet again tonight, having met only on Thursday night, the sole purpose being to discuss what Tsipras is now offering. The finance ministers will meet ahead of the meeting of EU leaders.

This morning the news is that the new deal offered by the Greek government is, in Tsipras’ words, “mutually beneficial” to both parties. Tsipras has spent the past couple of weeks calling the creditors’ demands “absurd”, and last week the IMF withdrew from negotiations saying only that it expects its money on June 30. Has Tsipras being playing the game to the eleventh hour in the hope the creditors would buckle, only to find that ultimately it is he who must buckle?

The suggestion is that the new deal offers some ground on the particular sticking points of the creditors’ reform package, including an increase in the pension age and a broader based consumption tax. Maybe if the concessions are sufficient for an EU and eurozone not wishing to see an exit of one of its members, then the day might be saved.

However, this would mean tougher austerity ahead for Greece, and that’s exactly the opposite of the platform upon which the Greek left wing coalition was elected. Yet polls suggest 62% of Greeks want to stay in the euro, so we have a rock and a hard place situation, or a cake and eat it too. Were the creditors to accept Tsipras’ new proposal, the deal will have to be taken to each of the seventeen eurozone parliaments for approval. The questions then are (1), will every parliament provide approval – some leaders have been vocal on the “kick them out” side – and perhaps more importantly (2), will the left wing majority Greek parliament concede to tougher austerity measures and thus a betrayal of their electors?

If not, well, who knows what happens next. The process of parliamentary approval will probably take longer than the week available before the IMF repayment is due, but then if it looks like a deal may have been reached, the IMF can always hold out for a bit.

The ECB may be a creditor and at this stage the only lifeline Greece has ahead of a bank collapse, but the central bank is likely to take direction from what the politicians decide. No doubt the ECB will extend further emergency funds to Greek banks tonight ahead of the various meetings. As for tomorrow night, that remains to be seen. If there is no resolution, presumably currency controls will be put in place in Greece tomorrow night.

Watch this space.

Commodities

While Greece has been drawing the world’s focus, the Chinese stock market has been quietly plunging.

On Friday the Shanghai index fell 6.4%, bringing the fall from its peak a bit over a week ago to 11%. Once upon a time, this would have spooked the hell out of regional markets, including Australia’s. Readers may recall it was the “Shanghai Surprise” of February 2007 that set in train a serious of global sell-offs that also initially surprised, before ultimately leading the world to learn of things called “subprime mortgages” in the US.

But on Friday, all regional stock markets, including Australia’s posted solid gains. Given the Shanghai index has doubled and tripled in such a short space of time, driven by the end of China’s property boom and accommodative policy from Beijing, any correction would need to be rather substantial before global markets are really going to become concerned.

While the correlation is potentially a little spurious, it is interesting to note that in the time the Shanghai index has fallen 11%, the spot iron ore price has fallen 7%. On Friday the iron ore price fell another US20c to US$60.70/t.

Falling stock prices in China introduce a new concern for LME traders, who are already worried about Greece and Fed rate rise timing. On Friday night all base metals bar tin fell 0.5-1.5%, led by copper.

Over in the oil markets, amongst everything else going on in the world the Saudi oil minister suggested on Friday night that if were demand for oil to improve, OPEC would not hesitate in further increasing production. If so, this would rather put a cap on any potential oil price rise from here.

West Texas fell US$1.03 to US$59.46/bbl and Brent fell US$1.37 to US$62.87/bbl.

The US dollar index was relatively steady on Friday night at 94.09 and ditto gold at US$1200.30/oz. The Aussie was down 0.3% on Saturday morning at US$0.7772.

The SPI Overnight closed down 3 points.

The Week Ahead

Greece: see above.

It must be noted that the consensus view amongst fund managers has long been, and still is, that somehow, in some way, the Greek can will get kicked down the road. That’s why unlike years gone by when the potential for a Grexit sent markets spiralling, not a lot of angst has been evident this time around. On that basis, were a resolution to come out of tonight’s negotiations, any relief rally would be minimal given there has been no great sell-off so far.

If Greece does default, well, nobody knows.

Chinese markets are closed today for Dragon Boat Day, as you do.

Tomorrow sees a flash estimate of China’s June manufacturing PMI from HSBC, alongside equivalent flashes from Japan, the eurozone and US.

It’s a busy week of data in the US for the data-dependent Fed, and thus the market, to contemplate. Tonight sees existing home sales and the Chicago Fed national activity index, tomorrow brings new home sales, FHFA house prices, durable goods and the Richmond Fed activity index.

On Wednesday the US March quarter GDP is revised for the last time before the first estimate of June quarter GDP is released next month. Economists are forecasting a revision up to minus 0.2% growth from the previous minus 0.7%. Personal income & spending numbers are out on Thursday and consumer sentiment on Friday.

Australia will see a quarterly house price index out tomorrow in a week largely devoid of fresh data. As noted, stock options expire on Thursday.

On the local stock front, there is a large number of mostly REIT/infra names going ex-div on Friday.

Rudi will appear on Sky Business on Wednesday at 5.30pm and on Thursday at noon and again on Friday, 8-9pm, for Your Money, Your Call - Bonds versus 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: Lock The Doors Spiro

By Greg Peel

The Dow closed up 180 points or 1.0% while the S&P rose 1.0% to 2121 and the Nasdaq gained 1.3%.

Volatility

The interesting aspect to yesterday’s plunge in the ASX200 can be highlighted with hindsight, knowing that Wall Street rallied so strongly last night. While there is some confusion over news coming out of Europe this morning regarding Greece, the bottom line is Wall Street rallied last night as a next-day response (the big moves usually come the next day) to Wednesday night’s Fed statement and press conference, which implied to most that a September rate rise is no longer a given.

In other words, Bridge Street did not tumble yesterday because of the Fed. One might argue that Bridge Street tumbled due to the increasing risk of a Greek default, but if that were the case, why did we rally a percent on Wednesday? Nothing changed in between.

Hence we must assume the percent up-percent down moves the past two sessions were domestically driven. So, what changed from one day to the next? The banks, most notably, were darlings on Wednesday and pariahs on Thursday. Perhaps an explanation can be given by yesterday’s expiry of the June SPI futures contract and ASX index options – instruments used by large funds managers as hedging tools and others as speculative replicants.

It has been a horrendous two days for option market makers – those proprietary traders who are typically net sellers of calls and puts. As expiry approaches, each little move up or down in the index forces short option holders to buy going up and sell going down to ensure their risks are hedged. This necessity becomes even more self-defeating the act of buying pushes the index higher, requiring more buying, and vice versa on the downside.

Now we have the Dow up 180 points and the SPI Overnight – the new September front month – up 39 points. If Thursday cancelled out Wednesday and expiry is now over and done with, what happens from here should be more “real”. Mind you, we are about to head into the last week of trading before the end of the financial year, and that can also bring its own volatility.

Greek Drama

It wouldn’t be a good Greek drama without unconfirmed reports, denials, rumours and speculation, and last night saw plenty going on.

It is important to first appreciate that June 30 represents two critical events for Greece. One is the repayment date of its bundled IMF payments which if missed, sends Greece into default, and the other is the expiry of the current bailout tranche and potential payment date for the next tranche. It is assumed Greece cannot afford to repay the IMF unless it receives the next bailout tranche.

Why not just net them out then, I hear you think. Well the granting of the next bailout tranche is incumbent upon Greece agreeing to further austerity reforms, which it refuses to do.

As the eurozone finance ministers met in Luxembourg last night, a German newspaper reported, after the close of European trade but around mid-session on Wall Street, that the European Commission and ECB were considering breaking from the IMF to provide Greece with an extension of credit out to the end of the year. If this is the case, Greece could pay the IMF and avoid default, leaving more time for Greece to sort itself out and for negotiations to continue.

And we could then all be bored witless by Grexit talk right through to Christmas.

An already strong Wall Street popped further on this news, but it was quickly denied by the Germans. Christine Lagarde also made the point that there would be no extension granted for Greece to pay its IMF obligations. When the ministers emerged from the meeting, they did so with no deal of any sort having been achieved.

Then it got interesting. Reuters reported an overheard conversation in which one attendee was asked “Will Greece need to close its banks tomorrow [tonight]?” to which the response was “No not tomorrow, Monday”. We recall also that the ECB has been keeping the Greek banks, as opposed to the Greek government, on a separate liquidity drip to prevent their collapse while the credit negotiations have continued.

With all the talk of a Grexit being more likely, what had been a “walk” on Greek banks before this week has become more of a “trot” this week. The chances are, tonight that trot could become a fully blown run, forcing the banks to pull down their shutters over the weekend.

What we do know for certain is that the EU leaders’ meeting scheduled for later next week in Brussels has now been hastily brought forward to Monday. This would suggest it has become a crisis meeting with regard how to deal with a Grexit. The fact this meeting has been rescheduled is only more incentive for Greeks to try and get their euros out of the Greek banks tonight. The ECB could well shut off the tap next week.

Getting their euros out is one thing, but if currency controls are implemented, they may yet be subject to massive devaluation into drachma, unless they can be taken across the border. Look for Greece’s border crossings to be armed.

Or a deal will be reached. Chances? Well, a lot of people in the market still believe this is the only outcome, and clearly that would require capitulation from the lenders given the Greek government appears to be stubbornly defiant. But what message would that send to the rest of the eurozone periphery?

Who Cares?

If a deal is, by some miracle, reached, that would be positive for markets. If a Grexit occurs, is that negative? The common assumption is yes, for about five minutes. Then it becomes a positive, because the whole sordid, frustrating story will be over. The greatest enemy of markets is uncertainty.

This appears to be the way Wall Street was taking it last night. As the news out of Europe turned negative during the afternoon, Wall Street shrugged. The Nasdaq hit a new all-time high, as did the Russell 2000 small-cap index. The Dow and S&P held onto the bulk of their earlier gains.

Those gains represent a shift in expectation, in the wake of what was considered a dovish Fed statement and press conference, from a September first rate rise to a December first rate rise.

Such a view is supported by a 0.2% fall in the US dollar index to 94.04, and a sudden US$16.80 jump for gold to US$1202.00/oz. Or is gold jumping ahead of a Grexit? Doesn’t matter, it’s simply stuck at 1200 again.

But just to throw the spanner in the works, the US ten-year bond yield rose 5 basis points last night to 2.35%.

Commodities

It was the first chance for the LME to respond to the Fed last night, Greece notwithstanding, and nothing happened. Moves were inconsequential except for tin, which popped 3%.

Iron ore is unchanged at US$60.90/bbl.

The oils are a little stronger, with West Texas up US68c to US$60.49 and Brent up US47c to US$64.24//bl.

Today

As noted, the SPI Overnight closed up 39 points or 0.7%. The Aussie is 0.5% stronger at US$0.7798.

The Bank of Japan will hold a policy meeting tonight, although nothing new is expected.

Tonight is quadruple witching in the US, which involves the same type of index and option expiries the ASX saw yesterday. There is a suggestion last night’s big moves up on Wall Street may also have lent themselves to some expiry influence.

Locally, the quarterly promotions/relegations of stocks in the S&P/ASX indices come into effect this morning.

And unless he was bluffing, Alexis Tsipras meets with Vladimir Putin tonight.
 

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: Clueless

By Greg Peel

The Dow closed up 31 points or 0.2% while the S&P gained 0.2% to 2100 and the Nasdaq added 0.2%.

Excitement

Gotta love that red cordial.

Bridge Street was buffeted by the winds of exuberance yesterday on the thought that the biggest investor of them all might be interested in little old Australia. Not just an insurance partnership, it would seem, but perhaps banks as well and, gosh, who knows what else?

The financials led the charge yesterday with a 1.6% gain and to be fair, there has been much talk from stock analysts that following their solid correction, bank shares have returned to something estimating reasonable value. But falls in base metal prices and a near 4% plunge in the iron ore price overnight did nothing to prevent a 0.8% gain for the materials sector, and there was no rise in oil prices to justify a 1.6% jump for energy.

When the dust had settled only the fully valued healthcare sector missed out on the fun, falling 0.1%, while consumer staples remained flat on the news a failing supermarket chain had decided to pull the trapdoor underneath its CEO.

Insurance market analysts were quick to dismiss any notion yesterday, nonetheless, that Berkshire Hathaway’s partnership deal with IAG represented any form of endorsement of the Australian market in general by the great man himself. The deal is all about a safe and secure backdoor entry into China – the ultimate objective.

A 1.1% rally for the ASX200 represented a potentially risky trade yesterday, ahead of last night’s Fed statement release and press conference, and ahead of tonight’s meeting of eurozone finance ministers (See: Greece). The greater risk was and is to the downside.

Later This Year

That the US stocks markets moved only slightly last night and the US ten-year yield lost a mere point to 2.31% is testament to the fact last night’s Fed statement offered nothing new in the way of policy guidance, and Fed chair Janet Yellen was very careful to be vague at her press conference. “September, December, March…whenever it does happen…”

The US markets decided it was a rather dovish stance taken by Yellen, when no one would have been surprised if she had blurted out “Lift off in September!”. In her press conference Q&A, she variously waved around “later this year” and, as noted above, maybe not even until March as possible timetables. Thus market commentators remain split this morning between those believing there will not be a rate rise this year, and those still believing there not only be a rate rise in September, but in December as well. Yellen offered nothing that might bring those two camps closer together.

Or did she?

Personally, I suggest that behind the vagueness is a very specific intent. Yellen does not want to make the mistake made by her predecessor who, in 2013, sparked the so-called “taper tantrum” by being less guarded. Yellen, and other FOMC members, have been at pains to entreat the market not to worry the timing of the beginning of the tightening cycle, but of the timing of the cycle itself. The word they are yellin’ from the rooftops is gradual.

Which says to me they have every intention of implementing the first rate rise in September, and have done so for a while, so between now and then the clear intention is to play down the importance of that historical event in order to head off potential market volatility. Do not fear a little 25 basis point increase, they are saying, because the march back to “normalisation” from zero is a long one, and will be a very gradual one, but as someone once said, it must begin with the first step.

It may then be a second rate rise will not been seen this year, as the Fed hammers home this point and allows plenty of time for the dust to settle on the first hike.

Note that Fed policy meetings are held on a six-week rotation, not monthly like everyone else, meaning the only meeting between now and September will be in July. September is a quarterly meeting, meaning a press conference, and Yellen would not want to announce such a historical step without being in a position to field questions. The only reason a rate cut would not be forthcoming is if US economic data suddenly take a turn for the worse in between, and the June quarter GDP result proves a serious disappointment.

And just on that other source of potential market volatility, news just in is that Alexis Tsipras has organised an audience with Vladimir Putin on Friday night, after tonight’s eurozone finance ministers’ meeting. Clearly it is an attempt to gain some leverage with Europe, but then he has played the same fiddle before.

Ironed Out

The iron ore price pays little heed, if any, to US monetary policy. It fell another US$1.20 last night to US$60.90/t.

The LME pays no heed to Fed statements on the day of their release, because it closes beforehand. Thus last night base metal prices were relatively steady, moving slightly in either direction.

The oil markets “officially” close beforehand as well but continue on thereafter electronically, but little movement is evident anyway. West Texas is down US26c at US$59.81/bbl and Brent is down US3c at US$63.77/bbl.

Gold is the “commodity’ most impacted by monetary policy, and it’s up US$3.60 to US$1185.20/oz.

The US dollar is really the only financial instrument to have shown any significant response overnight, falling 0.7% on its index to 94.25 to imply forex markets read a dovish tone into the press conference.

The Aussie, nevertheless, is unchanged at US$0.7752.

Today

The SPI Overnight closed down 4 points.

New Zealand’s March quarter GDP result is out today. The RBNZ has already cut its cash rate this month of course, after previously hiking, proving yet again that central banks always go that one step too far.

An RBA Bulletin is out today but is unlikely to reveal anything new. It’s quarterly expiry day today on the ASX for SPI futures and index options, which can lead to some volatility.

The US CPI numbers for June are out tonight. The Fed doesn’t pay much attention to price inflation, preferring to assess the PCE (private consumption & expenditure) measure of inflation instead.

The fate of Greece will likely not be decided tonight as the eurozone ministers meet, but word is the EU is now preparing itself for a Grexit. A large crowd rallied in Athens last night in support of Tsipras’ defiance.

Rudi will make his weekly appearance on Sky Business' Lunch Money today, noon-12.45pm.
 

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article 3 months old

The Overnight Report: As You Were

By Greg Peel

The Dow closed up 113 points or 0.6% while the S&P gained 0.6% to 2096 and the Nasdaq added 0.5%.

Mirror

Yesterday’s trade on Bridge Street was largely a mirror image of Monday’s trade. On Monday the index fell sharply from the open only to graft back to a close of down 6 points. Yesterday the index opened sharply higher only to drift back to a close of down 6 points. Clearly there is not a lot that is clear to traders at present.

What was clear was a financials sector buffeted yesterday by a foreign invader. And bargain hunting in the banks continues to boot. What remains inexplicable is ongoing volatility in the utilities sector, which should be arguably the least volatile sector in the market. It rose 1.0% yesterday to post the largest sector gain, having fallen around a percent on Monday and risen around a percent on Friday while the index has not much moved.

The last two days’ trading suggests the local market is not prepared to either sell down or buy up dramatically while we have two potential volatility-producing events to consider this week, being the FOMC meeting and Greece. But having said that, last night Wall Street regained no more than what it lost on Monday night yet this morning the SPI futures are up an extraordinary 46 points.

Someone’s been on the red cordial.

The minutes of the June RBA meeting, released yesterday, were far from startling. There was nothing in them the June statement did not convey. The bottom line is the board intends to remain “accommodative” but having cut in May, any further move will depend on more data in the interim.

As for “crazy” Sydney house prices, the June minutes reiterated previous RBA commentary that “conditions in the housing market in Sydney and parts of Melbourne had remained very strong, though trends were more mixed in other cities,” suggesting the housing “bubble” is not an impediment to another rate cut, should one be deemed necessary.

Reversal

There was no new news on the Greek front last night other than an outburst from the Greek prime minister, who accused his creditors of pandering to the IMF for political gain and attempting to “humiliate an entire people that has suffered in the past five years through no fault of its own”.

No fault of its own? Systemic tax avoidance, corruption and bold-faced government book-cooking? Pull the other one Tsippy, it plays Nana Mouskouri.

But while it seemed that everyone worried about a possible Grexit and the fallout therefrom held sway in global markets on Monday night, last night it was the turn of those either believing, as many still do, a compromise will be reached or those believing any Grexit fallout would be minimal. Wall Street last night reversed its losses from Monday night, following modest rebounds on European bourses.

A 4 basis point drop in the US ten-year yield to 2.32% suggests the US bond market may still be concerned, but then given the big sell-off in bonds this month, it is just as likely the market is squaring up ahead of tonight’s Fed statement and press conference.

Wall Street’s economic data release of the day was difficult to read much into. After surging to their highest monthly pace since 2007 in April, US housing starts fell 11.1% in May. But permits, which are required before starts, rose 11.8% in May to, again, represent the fastest pace since 2007.

Traders largely fobbed off the numbers, noting housing start/permit data are notoriously volatile and subject to significant revision.

Adding some fuel to Wall Street’s fire last night was talk of a bit of an M&A frenzy in the health insurance space. Of five roughly equivalent insurance names, two pairs are rumoured to be in merger talks with each other but the fifth is not necessarily to be left out either.

Commodities

Global stocks market may have shrugged off Greece last night but LME traders didn’t, sending base metal prices southward for another session. Copper was down 1.3% on the day amongst moves of 0.5-1.5% down for all metals bar nickel, which fell 2%.

Is the iron ore rebound honeymoon over? Certainly market analysts have been warning investors not to expect the snap-back rally to be sustained. Last night iron ore fell US$2.40 to US$62.10/t.

Having risen by US$4.60 this time yesterday morning, this morning gold is down US$4.60 to US$1181.60/oz.

The spread reversal between the oils continued last night with West Texas trading up and Brent down, but given Brent rolled into the August front month delivery contract last night the spread will be off kilter until WTI follows suit next week. July WTI rose US45c to US$60.07/bbl last night and August Brent fell US21c to US$63.74/bbl.

Commodity prices were little impacted by a slight move up in the US dollar index to 94.92, while a lack of anything surprising in yesterday’s RBA minutes means the Aussie is a tad lower at US$0.7753.

Today

As noted, the SPI Overnight closed up 46 points or 0.8%.

Tonight the Fed will release its June policy statement and Janet Yellen will front the press. As an indication of just how uncertain Wall Street was about when the next rate rise might be, this morning on CNBC saw a floor trader suggest “not this year” while two fund managers agreed the first rise will come in September, followed by another in December, and four more in 2016.

But one of those fund managers suggested the Fed doesn’t know either, at this point. We can only hope Janet Yellen does actually set a date tonight so we can all get on with life, but she will likely just keep the ball in the air.

Rudi will appear on Sky Business' Market Moves today (5.40-6pm) and then later host Your Money, Your Call - Equities on the same channel, 8-9pm.
 

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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