By Greg Peel

The Dow closed up one point while the S&P fell 0.3% to 2198 as the Nasdaq dropped 1.0%.

Don’t Panic

Yesterday’s action in the local market was straightforward. The prices of oil, iron ore and base metals fell sharply overnight. The energy sector was thus down 1.9% and materials 2.8%. Funds from sales in those sectors were rotated into the banks, which rose 0.6%.

There’s little point in discussing the session further given last night OPEC agreed to production cuts and metals prices have managed a reasonable rebound.

We’ll discuss the Great Building Scare instead.

You’ve seen the headlines – the Australian housing market is about to crash. Or maybe not. Residential approvals plunged 12.6% in October to be down 25% year on year. The plunge was driven by apartment approvals, down 23.5% in the month, with detached house approvals slipping only 2.5% to be down 5.7% year on year.

Never mind apartments – non-residential approvals crashed 46.9%. We need to consider the “lumpiness” of this number however, given you don’t just decide to build a new office block every month. Year on year, non-res approvals are up 9.2%.

It looks for all the world like we should be running scared; that the warnings of an apartment bubble are ringing true. But as the CBA economists point out, net annual approvals stood at 233,000 in October, not too far below the peak of 241,000 in October last year. Recent months have seen annual approvals of between 230-240k.

As CBA notes: “This fact indicates that in the big macro picture, the construction sector will still be motoring along at historically high levels and not too far from full capacity in the coming twelve months.  It must be borne in mind that the huge inner-city apartment blocks can have demolition and construction periods of between 2 and 3 years”.

CBA’s view is consistent with the views of stock market analysts. Although there is variation in expected timing, all expect the housing market to “cool off” (not crash) at some point next year or into 2018. The lag effect of approval to construction to sales, and the subsequent lag into spending on household goods required to fill those dwellings, mean the sky is not about to fall in tomorrow. But the cool-off is coming.

Commodities

This time, there really is a wolf.

OPEC has agreed to cut oil production by 1.2 million barrels per day. The market was hoping for one million but prepared for less or nothing. In order to appease OPEC members with varying individual problems, the cuts will not be consistent in percentage terms. Saudi Arabia will carry the biggest load, cutting by 500mbpd. Iraq will cut by a lesser amount and Iran will actually be granted a small increase, but only to a capped level. Cut numbers vary among other members.

Inspired by OPEC’s actions, Russia has agreed to meet the cartel on December 9 to discuss stretching the production cut to “non-OPEC”, which includes Russia as the major player and others such as Mexico but does not include the clear beneficiary of OPEC cuts – the US.

West Texas crude is up US$3.74 or 8.3% at US$49.05/bbl. Brent is up US$3.96 or 8.5% at US$50.47/bbl.

Over on the LME, prices managed to stabilise after Tuesday night’s rout. Aluminium and zinc bounced 1%, nickel 1.5%, copper 2.5% and lead 3%.

The same could not be said for iron ore nonetheless, which fell another US$2.90 or 4% to US$72.20/t. As I pointed out yesterday, we were in the low seventies last week. The blip up to 80 was just that – a speculative blip – and these sharps ups and down have been an occasional feature of the iron ore market all the way back from 40.

The bottom line is the iron ore price remains much higher than it was earlier in the year, and much higher than anyone expected at that time it would be. Ditto coal.

The OPEC decision, and last night’s US economic data which we’ll get to in a moment, lit a fire under the US dollar. It’s up 0.5% on the index at 101.48.

Not good news for gold, which is down US$16.00 at US$1173.00/oz.

The commodity price fall from yesterday weighed on the Aussie dollar and the building approvals number likely had some questioning this newfound belief the RBA will next be hiking rates. Throw in the surge in the greenback overnight and the Aussie is down 1.2% at US$0.7389.

Oiled Up

Obviously, the oil price had a major impact on Wall Street last night. Energy provided the positive balance in the Dow.

US consumer spending rose 0.3% in October and September’s gain was revised up to 0.7% from 0.5%. Incomes rose 0.6% in October. The core PCE measure of inflation, preferred by the Fed, rose 0.1% to be up 1.7% year on year.

The ADP private sector report for October showed an addition of 216,000 jobs, much higher than the 160,000 forecast. This bodes well for Friday’s non-farm payrolls report. There were some trades-off nonetheless, given September’s 147,000 gain was revised down to 119,000.

These data are positive on balance. But the Fed beige Book, released last night, suggested there were no signs of Trump euphoria in the anecdotal assessment of the twelve Fed regions. Growth remains “modest” as it has been all year.

Wall Street pulled back from its highs on the release of the Beige Book, but otherwise what we see in the wash-up was a repeat of what we saw immediately following Trump’s election. Resources and industrials traded higher but Big Tech was sold off. Hence the Dow flat and the Nasdaq down. The US dollar rallied, gold sold off, and the US ten-year yield jumped 7 basis points to 2.37%.

Maybe it was just a last-day-of-the-month trade for the purpose of books close. We’ll need to see how December plays out.

One thing is certain, nonetheless. You have to go a long way to find someone who is not bullish the US stock market in the medium term.

Today

The SPI Overnight closed up 18 points or 0.3%.

Today is the first of the month, which means manufacturing PMIs from across the globe including those of Australia and China. China will also release its service sector PMI.

Locally we’ll also see the long awaited September quarter private sector capex numbers, along with monthly house prices.

With November now out of the way, the AGM season slows right down to a trickle of latecomers. Today’s corporate highlight will be CSL’s ((CSL)) R&D Day.

Rudi will travel to Macquarie Park and join others in the studio to appear on Sky Business today, 12.20-2.30pm.

 

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By Greg Peel

The Dow closed up 23 points or 0.1% while the S&P rose 0.1% to 2204 and the Nasdaq gained 0.2%.

Communication Failure

Having finally pulled back from the Trump euphoria highs on Monday, yesterday the local market went into consolidation mode. A lacklustre session suggested traders are not prepared to go out on a limb ahead of the week’s big events, being the OPEC meeting tonight and the Italian referendum on Sunday.

There was one stand-out sector move on the day nonetheless, being telcos. It was not about sector gorilla Telstra, but about the once high-flying Vocus Communications ((VOC)), which ran up 50% from August last year to June this year and has since plummeted to well below the August 2015 price. Vocus had already fallen a long way since August 2016 and yesterday dropped 24% following the company’s AGM.

The initial plunge from August had been triggered by a profit warning and big plunge for peer TPG Telecom ((TPM)). Yesterday the boot was on the other foot, with TPG dropping 7% in sympathy. The telco sector as a whole fell 1.5% in an otherwise unremarkable session.

Perhaps worthy of remark, nevertheless, was a 0.6% fall in energy and a 0.9% fall in materials despite oil, iron ore and base metal prices rising overnight. I did say “ring the bell” yesterday when iron ore hit US$80/t. Well, I was right. Iron ore futures began falling in yesterday’s session and the spot price has plunged 6% overnight.

The sellers were ahead of the game, moving in on the big miners yesterday. The oil price had ticked up but the signs of an OPEC deal being reached have begun to turn, hence nervousness likely explains a retreat from oil & gas stocks.

Last night saw a wholesale sell-off in commodity prices, with the exception, funnily enough, of thermal coal. It was steady, but a 5 point gain for the SPI futures overnight appears stoic ahead of what should be further falls in the resources sector today.

Holding Firm

It would not have been a surprise to see Wall Street down meaningfully last night on the assumption Monday night’s apparent post-Trump rollover from all-time highs might have gained some traction last night as slow movers jumped in to lock in profits. Indeed, the US indices did open lower but they were quick to recover.

For once it was not about politics, central banks or oil cartels. It was all about actual economic data.

The first revision of the US September quarter GDP saw a rise to 3.2% from 2.9% when 3.0% was expected. The consumer spending growth component of the measure was revised up to 2.8% from a prior 2.1% to mark the fastest pace since 2002.

On the subject of US consumers, I suggested yesterday last night’s Conference Board monthly consumer confidence survey would be interesting, being the first post-election. Well despite Trump losing the popular vote, the confidence index surged to 107.1 from 100.8 in October to mark its highest level since July 2007, which was just before the global wheels fell off.

On the subject of those wheels beginning to fall off in 2007, last night saw the Case-Shiller 20-city house price index for October hit an all-time high. Yes, that means house prices in America’s biggest cities are now higher than they were in 2006 – the peak of the housing bubble that ultimately brought the world undone.

Should we be thrilled or very afraid? Thrilled seems to be the go for now. While Wall Street closed only mildly higher last night, the fact the selling did not continue after Monday’s dip was a positive sign.

Oil remains a concern, however.

Commodities

The OPEC oil ministers are already in Vienna ahead of tonight’s official meeting. The ministers are running to and fro holding pre-meeting meetings as they try to negotiate some sort of deal. Right now, the sign are not good. Iran, for one, will stand firm on its desire to return to pre-sanction production levels.

Which puts an OPEC-wide cut in doubt. But also in doubt is a pure binary outcome – production cut or no production cut. With US$45/bbl for WTI the pivot point between the outcomes, 55 and 35 are seen as the two price point possibilities. However there are possibilities in between – production freeze instead of cut, a cut of less than the one million barrels per day hoped for, a cut but with exemptions -- who knows? Anything could happen tonight and probably will.

Oil traders have decided to sit on the pivot point. West Texas crude is down US$1.56 or 3% at US$45.31/bbl.

The rallies we have seen these past months in bulk and base metal prices has been to a large part justifiably driven by supply-side constraints meeting better than expected demand. But the rallies we have seen in the last couple of weeks have, despite efforts to the contrary from Beijing, been driven by pure speculation. Speculative bubbles, particularly in commodities, inevitable burst.

Base metal prices began to roll over in Shanghai and the selling gained momentum as trading opened on the London Metals Exchange. On the LME, aluminium closed down 1.5% last night, copper 2.8%, nickel 4.7%, zinc 5.9% and lead 6.7%.

On the Singapore exchange, spot iron ore fell US$5.10 or 6.4% to US$75.10/t.

There was no currency effect – the US dollar index fell 0.4% to 100.98.

That fall did not manage to inspire gold, which has dropped back US$3.30 to US$1189.00/oz.

The Aussie is relatively steady at US$0.7482, trading off the US dollar dip against commodity price falls.

The good news is despite some rather spectacular price falls last night, they really only represent a blow-off from the sharp run-up over the past week in particular. It is not the end of the world.

Today

The SPI Overnight closed up 5 points.

Today sees local data for monthly building approvals and quarterly private sector capex.

A load of data releases in the US tonight includes personal income & spending, the Fed Beige Book and private sector jobs numbers.

The local session will also see earnings reports from Aristocrat Leisure ((ALL)), Collins Foods ((CKF)), Freelancer ((FLN)), SAI Global ((SAI)), SMS Management & Technology ((SMX)) and Touchcorp ((TCH)). Medibank Private ((MPL)) will host an investor day and there is a rush of last minutes AGMs to round out the month.

Tonight, all eyes will be on Vienna.
 

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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By Greg Peel

The Dow closed down 54 points or 0.3% while the S&P lost 0.5% to 2201 and the Nasdaq fell 0.6%.

Inevitable

Yesterday marked 20 days since Trump was elected and the ASX200 had spent that period tracking a relatively direct trajectory higher, from the 5150 low, hit when we all thought a Trump presidency would be a disaster, to a high just above established resistance at 5500. Since the dust settled, new news out of the Trump camp has been very limited.

There had to be a point at which the election victory itself was priced in ahead of the new administration actually taking office. While most analysts remain bullish in the medium term, there was no surprise yesterday that 5500 ultimately proved a good level from which to take near term profits. Volume was relatively weak, suggesting a lack of fresh buyers rather than aggressive selling explains the acceleration in the afternoon.

The biggest decliners yesterday were the biggest movers from Trump Day One. The energy sector was always set to fall on a 4% drop in the oil price overnight, thus energy was the biggest loser with a 1.9% fall. Commodity prices had been positive overnight, but a 1.3% drop for materials is indicative of just how far that sector has run.

The banks had already stalled late last week and they were a big influence on the ASX200 in falling 1.0%. A positive response to the Metcash ((MTS)) result (one of the most shorted stocks on the market) and more takeover talk in the bookie space meant only small falls for the consumer sectors. On the other side of the coin, the biggest losers in the Trump trade, and previously on Fed rate hike fears, were the winners yesterday. Telcos and utilities bucked the trend with small gains.

Traders who started the selling yesterday were possibly thinking Wall Street must be close to its own rollover, and maybe the four-day holiday in the US would provide time to reflect and think maybe I’ll take some profits on Monday. And so it came to pass. It is thus noteworthy that despite the record run being broken in US indices last night, the SPI Overnight is only down 5 points this morning.

We got there first.

All out, all change

The most notable moves in US markets since the election have been a strong rally in cyclical stocks, particularly transports, infrastructure stocks, banks and small caps, a sell-off in yield stocks, a sell-off in bonds and a sell-off in gold. Last night on Wall Street the aforementioned stock market winners were the losers, yield stocks found some support, the US ten-year bond yield dropped 5 basis points to 2.32% and gold rallied nine dollars.

No one was the least bit surprised. And as was the case in Australia yesterday, volumes were not indicative of aggressive selling, merely a squaring up of positions.

Indications are that the annual Thanksgiving retail spree has gone rather well, but having been big winners since the election, retail stocks were among the biggest losers on Wall Street last night. Somewhat of a “sell the fact”, it would seem. Tonight’s monthly survey of consumer confidence might be interesting, being the first from the Conference Board post-Trump.

The Trump vacuum is likely to continue through to January, notwithstanding any reaction that might follow the President Elect’s major cabinet appointments such as Treasury Secretary. The focus in the meantime can return to the Fed meeting – not that anyone is expecting a surprise – the Italian referendum this weekend, and the OPEC meeting tomorrow night.

What to expect from OPEC?  If anyone tells you they know, they don’t. The underlying feeling in the oil market is that there will be some sort of agreement reached. It would not be too big a sacrifice to freeze production at current levels given current levels from the likes of Saudi Arabia are at record highs. But what the market really wants is a production cut.

On that point the Saudi oil minister has thrown the market into confusion by suggesting that the oil market would manage to rebalance by itself next year if there were no production cuts forthcoming. Is he hinting at no agreement being reached? Last night saw the WTI price chop around as each little rumour and speculative comment impacted. The net result was a rebound from Friday night’s fall, so optimism continues to reign, it appears.

Except that the market has set itself short, as the open positions data suggest. This implies a limit to the downside on no agreement, and more upside on an agreement being reached, if not for the fact WTI is already priced for a good chance of agreement. All very confusing, so we’ll just have to hang on until tomorrow night.

Commodities

West Texas crude is up US87c or 1.9% at US$46.87/bbl.

In yesterday’s Report I highlighted falling Chinese lead inventories and constrained global zinc production as reason why those two metals shot up on Friday night. Last night they kicked on with it – lead is up another 3% and zinc 2%. Other base metal moves were small.

Ring the bell, iron ore is back over 80. It has added another dollar to US$80.20/oz. Does anyone remember when 86 was the critical level to hold when the price dropped out of triple digits? That was over two years ago. We last saw 80 in a blink during iron ore’s spectacular drop from 120 in May 2014 to 40 in August 2015.

The US dollar has been another big winner post-Trump, and the market has been waiting for it to roll over. Last night the index dipped 0.1% to 101.34 and that was enough to see gold recover US$8.70 to US$1192.30/oz.

The Aussie has been a big “loser” on the exchange rate, albeit tempered by the commodity price surge. The Aussie is up 0.5% at US$0.7476.

Today

The SPI Overnight closed down 5 points.

Tonight in the US sees the second revision of the September quarter GDP number. Rather old news, both in time and in respect of subsequent world-changing events. But the expectation is for a tick up to 3.0% from 2.9%.

Locally, ALS Ltd ((ALQ)) will post its earnings report today and there are a handful of AGMs. Perhaps the most interesting will be that of Vocus Communications ((VOC)), which has been having a tough time of it of late. As of last week Vocus was almost 9% shorted, so a positive meeting might elicit a sharp move.

Rudi will connect with Sky Business today via Skype at around 11.15am to discuss broker calls.
 

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By Greg Peel

Breather

Apologies if I led anyone astray in suggesting the Australia’s private sector capex numbers were due out yesterday. It appears at some point the ABS decided to shift the release to next week, not the day after the construction numbers, which has always been the case. I was caught out earlier in the year as well when the ABS shifted the employment numbers to a week later than they had always been published each month.

It’s a pity, given on a day in which there is no Wall Street to write about, there’s not a lot to say about the local market either, which after two sessions of solid rally took a breather yesterday, a decision made easier by the Thanksgiving holiday in the US.

The ASX200 did spike up on the open, by the 16-odd points needed to ring the 5500 bell, but this resistance level may require a bit of work to break. It proved the trigger for profit-taking after the run-up from the 5150 Trump low.

There was not a lot going on amongst the sectors yesterday. Materials was the worst performer with a 0.6% drop, thanks to the plunge in the gold price. Gold miners dominated the top ten decliners board. Energy also eased back 0.5%. Consumer staples won the day with a 0.6% gain.

All other sector moves were minimal. The corporate story of the day was that of Boral ((BLD)). It dropped 19% or over a dollar to $4.99 after coming out of a trading halt. The halt was all about the company’s major US acquisition, and the price plunge was all about the capital raising required to fund it. That raising includes a rights issue and placement at $4.80, so $4.99 is actually not that bad, and Boral shareholders will gain back the drop on discounted rights.

The SPI Overnight is up 13 points this morning. Wall Street was closed and European markets did little, so perhaps we can only turn to some further metal price rises to inspire a push through 5500 today.

Commodities

Iron ore has become exceedingly volatile of late, rising another US$2.00 last night to US$79.60/t.

Base metal prices mostly continue to press higher. Aluminium slipped 0.5% last night but copper and lead rose 1% and zinc rose 2%.

Gold is down another US$3.20 to US$1183.90/oz.

The oils were again barely moved. West Texas crude is at US$47.96/bbl. The OPEC meeting is next Wednesday.

The US dollar index is up less than 0.1% at 101.73 and the Aussie is 0.3% higher at US$0.7406 with commodity prices continuing to provide the offset to greenback strength.

Today

As noted, the SPI Overnight closed up 13 points or 0.2%.

Wall Street will open for a half-day session tonight, closing at 1pm NY time. Only those drawing the short straws will be in attendance, with everyone else enjoying a four-day break.

There are a few more AGMs locally today.

Rudi will hook up with Sky Business later this morning to discuss broker calls, at around 11.05am, through Skype.
 

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By Greg Peel

The Dow closed up 21 points or 0.1% while the S&P rose 0.1% to 2166 and the Nasdaq fell 0.2%

Easing Back

It appeared as if the ASX200 would give back yesterday all that was gained last Friday as the Trump rally starts to wane and commodity prices took a turn for the worse. But positive news for the banking sector helped to reduce the losses by the closing bell.

The financials sector closed down 0.5% but that’s actually a gain net of both ANZ Bank ((ANZ)) and Westpac ((WBC)) going ex, which was worth around 15 index points. The good news relates to capital requirements.

APRA announced that the new Basel 4 rules will require no significant lift in capital for the banks. In terms of APRA’s intention to ensure Australia’s banks are “unquestionably strong” and requiring of more capital than Basel 4 dictates, the regulator will consult with the banks all of next year and changes would not come into force until a year after that. Up till now, it was assumed new requirements would be known early next year.

On the resource sector front, gold stocks were unsurprisingly hammered yesterday and falls in base metal and coal prices also helped to offset another big jump for iron ore. The materials sector proved the worst performer on the day with a 1.3% drop. Elsewhere, telcos finally caught a bid, rising 1.0% despite an 0.8% fall for utilities, and industrials was the only other sector to finish in the green.

After an initial drop, the local market saw a bit of a kick from the release of Japan’s September quarter GDP result. The June quarter had seen 0.7% growth and economists had forecast a lift to 0.9% for September, but the number came in at 2.2%. Japan these days lives in China’s shadow but remains one of Australia’s most significant trading partners, and buyer of bulk minerals and gas.

On that note, Australia’s biggest buyer yesterday provided a monthly data dump around midday local time, after the Japanese release. Chinese industrial production grew 6.1% year on year in October, flat on the September result. Economists had forecast 6.2%. Retail sales grew 10.0%, down from 10.7% in September. Economists had forecast 10.7%.

On the other hand, fixed asset investment rose 8.3% year to date, up from 8.2%. While the numbers are incremental October does represent a turnaround from earlier weakness, and two months of growth have now been booked. Growth suggests Chinese infrastructure spending is making its mark, and infrastructure is a major consumer of steel, copper and other materials.

The Chinese numbers provided some disappointment and some level of hope. The ASX200 dropped to the low of day shortly after before beginning its afternoon recovery. Metal markets were far more encouraged overnight by the numbers, but still we see the futures suggesting a weak open this morning.

Caution sets in

The rush to exit the bond market continued in the US overnight. The US ten-year yield jumped another 10 basis points to 2.22%. The US dollar also accelerated its post-Trump rally in rising 1% to 100.09 on its index.

Strength in the greenback and weakness in bonds reflect expectations of a Trump-led jump in US economic growth on the back of increased spending. Such a scenario is also good for the stock market in general, albeit mixed across sectors, but the 100 mark for the dollar index is considered a bit of a tipping point, beyond which Wall Street will start to worry about the negative impact on US exports.

Add in concerns that Trump’s intention to whack tariffs on Chinese goods is likely to prompt a tit-for-tat backlash from China, or at least a shift away from American goods to Chinese knock-offs, and last night we continued to see falls for Big Tech names and others fearing a loss of Chinese business.

Meanwhile, beneficiaries of higher US rates and renewed US infrastructure spending once again found buyers last night, being banks and large industrials. But just how far can this Trump rally run? The Dow was up almost 90 points early on but faded as the day progressed.

Wall Street now wants to see who will be given the important roles in the Trump Administration, such as Treasury Secretary, which JP Morgan’s Jamie Dimon has supposedly shied away from. Otherwise commentary suggests that while a Trump presidency should prove longer term bullish for the US stock market, in the near term markets will need to settle down and possibly pull back.

Commodities

Volatility in base metal markets continued in London overnight. Having responded negatively on Friday night to increased margins on metal contracts, prices last night flipped back the other way on ongoing growth in Chinese fixed asset investment, ignoring the drag of the greenback.

Copper and aluminium were little changed but nickel rose 1%, lead rose 4% and zinc, which has been the best performer this year on dwindling supply, jumped 5.5%.

Iron ore was unchanged at US$79.70/t.

Gold continued to sink, falling another US$5.30 to US$1218.50/oz.

Wes Texas crude rose US33c to US$43.51/bbl.

Today

The SPI Overnight closed down 7 points.

The minutes of the November RBA meeting, held at a time Hillary Clinton was seen as a shoe-in, will be released today.

Tonight the eurozone September quarter GDP result is due and retail sales numbers are out in the US.

On the local stock front, Ozforex ((OFX)) will post its earnings result, BlueScope Steel ((BSL)) will host an investor day and Nine Entertainment its AGM and Incitec Pivot ((IPL)) goes ex.

Rudi will connect with Sky Business, via Skype, to discuss broker calls at around 11.15am.
 

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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