By Greg Peel

The Dow closed down 179 points or 1.0% while the S&P fell 1.0% to 2078 and the Nasdaq fell 1.0%.

Tragedy

A dismal day on the local stock exchange was led out by BHP Billiton, which posted a 5.6% drop on news of a fatal disaster at a BHP-Vale-owned iron ore mine in Brazil. Early estimates suggest the mine may be closed for several years and cost US$1bn in clean-up and legal costs.

It was never set to be a good day for the materials sector anyway, as evidenced by falls in iron ore mining stocks across the board. The weekend’s Chinese trade data showed a big fall in imports in general and iron ore imports in particular. To date the sector has seemed not too concerned over the gradual fall in the iron ore price to below US$50/t as this has been largely anticipated and costs have been cut in preparation. But the weak Chinese numbers have crystallised the reality. The materials sector fell 3.7% yesterday.

The energy sector saw a 2.5% fall but elsewhere across the index, the other concern is that of rising US interest rates. Friday’s strong US jobs number has led to expectations the Fed will definitely raise in December, and attention now turns to just how fast the pace of subsequent hikes will be.

For years the Australian stock market has largely been a story of yield, given the fall in commodity prices. The banks, telco and utilities and any stock paying a solid dividend have been supported by those seeking a return in a low interest rate environment. Rates don’t get much lower than zero, hence Australian stocks have been very attractive to US investors. As the interest rate differential between Australia and the US begins to narrow, that attraction is incrementally eroded.

Yesterday saw the banks and telcos each down 1.6% and utilities down 2.2%. Only one sector managed to close flat on the session and that’s healthcare – defensive more so from its undeniable growth story than from its yield.

A US rate rise also alleviates some of the pressure on the RBA to cut its own rate, given the subsequent impact on the Aussie dollar, which will disappoint those sweating on further RBA support.

The ASX200 was technically damaged yesterday. The close below 5140 and the promise of further weakness today suggests, on the charts, that 4700 is the next target.

Adjustment Period

History tells us that a period of “normalisation” – lifting rates back to more normal levels – following a period of easing is typically accompanied by a stock market rally over the first four rate hikes. While normalisation implies the winding down of central bank support, that winding down is an indication the economy is growing again and, in normal circumstances, that is good for a stock market. But that does not mean the initial adjustment is not a difficult one.

It has been over ten years since the Fed commenced a tightening cycle – 2004, following the tech wreck and 9/11. Many commentators have alluded to the fact that not only is there a large cohort of younger market participants who can’t conceive that “social media” used to mean one landline telephone on the hall table, and who can’t read analogue time, they have never experienced a rate rise. Thus if the first move in a tightening cycle requires a bumpy period of portfolio adjustment and a rethinking of strategies, this time around that adjustment may be even more bumpy.

Throw in the fact that the UK is still hesitating on a wind-back of its QE program, Japan may yet increase its QE program, the eurozone is certain to extend its QE program in December, and China is all but certain to enact further stimulus measures, including a potential further devaluation of the renminbi, and there is only one way the US dollar can go.

The stronger US dollar is already impacting on large US multinationals, as this latest round of earnings reports confirms. The US manufacturing sector had been managing to get back on its feet post GFC but it is now faced with less competitive pricing power. In short, a Fed rate rise may imply a stronger US economy but a surging US dollar means the economy is dragging a heavy weight along with it.

Wall Street was somewhat stunned on Friday night by the shock jobs number, and its implications. With the weekend to think about it (and throw in the weak Chinese data), last night saw the Dow fall by as many as 243 points by midday. The combination of the stronger dollar (albeit last night the dollar index came back off a tad to 98.96) and further signs of weak Chinese demand sent all commodity prices lower again.

Stocks have managed to regain some ground to the close, falling an even 1% across the major indices. The S&P500 has broken support at 2100.

Santa? Please phone home.

There had been talk, in the wake of Wall Street’s 8% rebound out of the August depths, back to the level from which it had fallen, that perhaps this year the Santa rally came early. That rally was aided by a return to stability in Chinese markets, boosted by ECB QE, and confirmed by two weak US jobs reports for August and September that left Wall Street certain the Fed would not be raising in 2015.

Now that all has to be rethought. Once the difficult adjustment period is over, perhaps then can Santa hop back on the sleigh.

Commodities

The US dollar index was slightly lower last night but the weak Chinese trade data ensured falls across the board on the LME. Aluminium, lead, nickel and zinc were all down over 1% while copper and tin posted smaller falls.

A sad reality of the tragedy in Brazil is that prolonged closure of the mine reduces global iron ore supply, and hence is supportive for the iron ore price. Iron ore is up US30c to US$47.70/t.

Weakness in oil prices continued, with West Texas down US49c to US$43.94/bbl and Brent down US37c to US$47.23/bbl.

There was some respite for gold thanks to the dip in the greenback. It’s up US$3.40 to US$1090.70/oz.

The Aussie is relatively steady at US$0.7052.

Today

The SPI Overnight is down 52 points or 1.0%. If accurate this implies a fall through 5100 for the ASX200 and a move towards tenuous support at 5000.

Australian housing finance data – a hot topic at present – will be released today. NAB will publish its October business confidence survey.

Beijing will post China’s October inflation numbers later today.

The local market will see earnings reports from Incitec Pivot ((IPL)) and Eclipx ((ECX)).
 

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By Greg Peel

The Dow closed up 89 points or 0.5% while the S&P gained 0.3% to 2109 and the Nasdaq rose 0.4%.

Got Your Back

In October, the final paragraph of the RBA’s interest rate decision statement read:

“Further information on economic and financial conditions to be received over the period ahead will inform the Board's ongoing assessment of the outlook and hence whether the current stance of policy will most effectively foster sustainable growth and inflation consistent with the target.”

Yesterday’s equivalent paragraph read:

“At today's meeting the Board judged that the prospects for an improvement in economic conditions had firmed a little over recent months and that leaving the cash rate unchanged was appropriate at this meeting. Members also observed that the outlook for inflation may afford scope for further easing of policy, should that be appropriate to lend support to demand. The Board will continue to assess the outlook, and hence whether the current stance of policy will most effectively foster sustainable growth and inflation consistent with the target.”

The computers initially sold the ASX200 at 2.30pm yesterday, then bought it, and then the humans pushed the index a little higher towards the close. The close was nevertheless not the high of the day, which was achieved on the opening rally.

On a day in which such things are appropriate, the RBA seems to have given the market an each way bet. Economic conditions have “firmed a little”, which is positive, but there is “scope for further easing”, which is comforting too. We can all go long with an embedded put option.

Hence the market did not much respond to the RBA’s lack of rate cut yesterday, which was not expected anyway. The rally occurred from the opening bell, pushing back through the 5200 mark with only a slight stumble. We can perhaps conclude that it was those pesky Mexicans selling the market down on Monday, given in their absence yesterday everything sold down on Monday was bought back, albeit on lighter volume.

The banks led the selling on Monday but they were up 1.6% yesterday, and ditto the telco which rallied back 1.8%. The winner on the day was nonetheless energy, which jumped 2.6% despite oil prices being slightly lower overnight. Energy stocks had rallied around the globe on Monday night, so yesterday Australian names were also well sought after.

We’re now back over the 5200 break-out level and the futures are this morning predicting further gains, so perhaps we can write off Monday’s dour session as an aberration. Oil prices actually shot up last night.

The Chinese president provided further detail of the government’s new five-year plan yesterday, reiterating a goal to achieve no less than an average 6.5% annual growth. The only difference here from what was suggested last week is that the extra decimal point is missing. Last week it was 6.53%.

Xi Jinping also intends to have a fully-floating renminbi by 2020, and will open up more state-dominated sectors to the market, including utilities and telcos. The Chinese will also now be allowed to have two kids instead of one.

Xi did not provide a specific 2016 GDP growth target, but the assumption is that number would be more like the 6.5% general target than 2015’s 7.0%, which at the current rate likely will not be achieved.

High Tide

It’s hard to believe that the S&P500 is now within only 1% of its all-time intraday high, following last night’s positive session. The Dow still needs to push back over the 18k mark.

Last night’s rally was led by energy yet again, this time with the backing of a solid jump in oil prices. Oil rose on news militants were blocking supply in Libya and striking workers were blocking supply in Brazil.

Beyond energy, last night’s slew of US earnings results proved nothing to be excited about and factory orders were revealed to have fallen for the second straight month, by 1.0% in September. Data released in the last hour showed October to have been yet another record month for US auto sales, but Wall Street had already posted its rally by then and indeed drifted off towards the close.

The good news is the small cap index has begun to join in the rally in November, having worried traders all through October by remaining stubbornly weak. The bad news is the rally back to the highs is again evoking talk of an overbought market and stretched PE multiples.

But it’s November, and there follows December, so the mood remains one of “It’s meant to go up, isn’t it?”

Always dangerous of course.

Commodities

West Texas crude is up US$1.68 or 3.6% to US$47.82/bbl while Brent is up US$1.76 or 3.6% to US$50.55/bbl.

Another mixed session on the LME saw aluminium, copper and zinc all up around a percent while nickel and tin fell over a percent. Nickel is now below the psychological US$10,000/t mark once more, having last been this low in August when China growth fears were heightened.

Iron ore fell another US40c to US$48.70/t as its quiet slide continues.

The US dollar index is only 0.3% higher this morning at 97.18 but last night gold took a turn for the worse, having come under pressure this past week. It’s down US$17.30 at US$1117.30/oz.

An RBA rate cut was not widely expected yesterday yet the Aussie still shot up at 2.30pm, reaching well above the 72 level. Greenback strength overnight ensured the net gain over 24 hours is 0.8% to US$0.7194.

Today

The Mexicans are back today with hangovers so we’d best watch out.

It’s service sector PMI day across the globe today, including in Australia. Locally we’ll also see retail sales and trade numbers for September.

Tonight in the US sees the private sector jobs report for October.

The AGMs fire up again locally today after yesterday’s hiatus, while CSR ((CSR)) will report its half-year result.
 

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By Greg Peel

The Dow closed down 23 points or 0.1% while the S&P was flat at 2089 and the Nasdaq lost 0.4%.

Down, Down

Yesterday’s session on Bridge Street started with a good deal of promise. The Dow had closed up 200 points and oil prices had surged. Iron ore had fallen below US$50/t, which was not good news, but an oil price rebound suggested some balance between the resource sectors. The futures were suggesting a 40 point rally for the ASX200.

But we closed down 68 points. Indeed, the index only managed to rise around 20 points on the open before the selling began and throughout the session, built upon itself.

The issue was a micro-specific one, namely domestic earnings. The main culprit on the day was Woolies, which delivered a September quarter trading report full of smiles and upbeat banter, and a shocking profit guidance downgrade. Oh how the mighty have fallen. Woolies is still one of Australia’ biggest companies, hence its 10% fall alone had a sizeable impact on the index.

There was no back-slapping going on over at Coles, nonetheless. The market saw the issue not just as an individual problem but a problem for Australia’s under-attack supermarket duopoly. Wesfarmers shares fell 4% and the consumer staples index finished the day down 5.4%.

From the wider retail perspective, the Woolies’ profit warning came only a day after electronics retailer Dick Smith similarly issued a substantial profit warning, which on Thursday had wiped over 30% off Dick’s share price. There is not a lot of pre-Christmas excitement in retail land at the moment.

Then there were the banks. National Bank’s slightly disappointing profit result released on Wednesday had prompted a 2% fall, as investors mulled over the offset of the bank’s life insurance sale. Yesterday ANZ Bank came out with a result that was also slightly disappointing, and its shares fell 2%. Having looked more closely at NAB, investors yesterday sold the bank down another 4%. A delay in the carving off of NAB’s UK business is also disappointing.

The financials index fell 1.0% yesterday, adding to ASX200 weakness. Materials fell 1.5% as one might expect following another big drop in the iron ore price, but energy also fell, by 1.3%, despite a 6% jump in the West Texas crude price overnight.

Then there were the new home sales data. HIA’s numbers showed a 4% drop in new home sales in September, following a 2.3% rise in August. Is this the peak brokers have recently been lining up to warn about? The booming housing market has, to date, been about the only sector of the economy offering a growth offset to the impact of tumbling mining investment and commodity prices.

It was a bit of a mood-shift day, following on from the earlier excitement of global central bank stimulus and the break-up through the top of the previous trading range. Once the selling had begun it just carried on through to the close.

Except in Blackmores. The snake oil pedlar hit $200 briefly yesterday before dumbfounded profit-takers moved in.

Moderately Prosperous

The Chinese economy needs to grow at an average 6.53% over the next five years for the country to remain “moderately prosperous”, the Chinese prime minister declared last night ahead of the wrap-up of the Plenary Session. This suggests Beijing will lower its growth forecast in 2016 from 2015’s 7.0% target, which likely will be missed if the September quarter’s 6.9% year on year result is any guide.

And given the number in question runs to a second decimal point, we might conclude someone has actually crunched some numbers this time – some forward estimates as we would call them – rather than starting with a desired result and working backwards.

The prime minister also threw cold water on any suggestion of a big step-up in monetary policy stimulus, suggesting a move to some form of QE would only flood the economy with too much money. This implies that if we are to see anymore stimulus coming out of China other than incremental interest rate and RRR fiddling and a further move towards a floating currency, it would have come from the fiscal side.

On the subject of QE, the Bank of Japan holds a policy meeting today at which the impact of more ECB QE, Chinese rate cuts and, on the other hand, a possible Fed rate hike in December on Japan’s position in the global export economy will be discussed.

Destocking

The jury is still out on whether Wednesday night’s Fed statement assures a December rate hike or not. Certainly the Fed’s language is suddenly more specific, but I’m yet to see anyone on US business television suggest other than there definitely won’t be a rate hike in December.

Yet it seems the gold market, and the overbought US bond market, are not going to wait to find out. Last night gold fell another US$11.70 to US$1144.60/oz despite the US dollar index pulling back 0.4% to 97.24 after Wednesday night’s jump. The US ten-year yield rose 8 basis points to 2.17% following Wednesday night’s 6bps gain. And yet, last night’s first estimate of US September quarter GDP disappointed.

Having grown at an annual pace of 3.9% in the June quarter, the US economy grew at only 1.5% in the September quarter on first estimates. The main issue was a lack of inventory restocking, which suggests businesses lack confidence in sales growth.

But drilling down showed some positive aspects. Consumer spending rose 3.2%, suggesting cheaper fuel prices are finally starting to have an impact. Business investment in equipment rose 5.3% to more than offset a 4.0% drop plant investment, such as in oil rigs. Home construction spending rose 6.1%. All of these positives were offset by weak inventories.

And we must remember that this first estimate is merely an extrapolation across three months of the numbers crunched so far for the first month of the quarter. That’s why subsequent revisions of the GDP result can often be quite substantial.

One interesting number among the GDP data was the personal consumption expenditure (PCE) measure of inflation for the quarter. It came in at 1.2%, and we recall that (a) the Fed wants to see inflation rising to the 2% target if it is going to raise in December and (b), the Fed prefers the PCE measure over the CPI measure as a guide.

US pending home sales fell 2.3% in September to mark the second monthly drop in a row. This result surprised Wall Street given other home sale data have been positive of late.

All up, one might have expected these weak data releases to prompt selling on Wall Street, particularly after Wednesday night’s 200 point Dow surge. Indeed, the Dow was down almost a hundred points mid-morning, but the afternoon saw the buyers fighting back. Perhaps they see weak data as reason why the Fed will not raise in December.

Commodities

Last night provided the first opportunity for the LME to respond to Wednesday night’s Fed statement, and as might be expected the result was negative. If the Fed starts raising this means a stronger greenback, so all base metals fell 1-2%.

Iron ore fell another US50c to US$49.00/t. I think that’s now twelve days of falls in a row.

The oils came back a tad after Wednesday night’s rally. West Texas is down US17c to US$45.78/bbl and Brent is down US43c to US$48.60/bbl.

The Aussie is 0.3% lower at US$0.7076.

Today

The SPI Overnight closed down 14 points or 0.3%.

Australia’s September quarter PPI is out today, following on from Wednesday’s CPI number which fuelled much Cup Day rate cut expectation.

The BoJ will meet today as noted, and will have September inflation data to contemplate.

The US will see personal income & spending and consumer sentiment data tonight.

On the local stock front, another round of AGMs will wrap up the busiest AGM week of the year while there remains a final handful of quarterly production reports to get through. Macquarie Group ((MQG)) will report interim earnings.

Beijing will release its October manufacturing and services PMIs on Sunday.

And Summer time ends in the US on Sunday morning, so from Tuesday morning the NYSE will close at 8am Sydney time and the SPI Overnight session will also close at 8am.

I could say Happy Halloween but I don’t go in for that Seppo commercial crap. I shall be hiding inside tomorrow night with the lights off as usual when the greedy little sugar freaks come around.

Rudi will appear on Sky Business' Your Money, Your Call - Equities versus Bonds, tonight, 7-8pm.
 

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