Tag Archives: United States

article 3 months old

The Monday Report

By Greg Peel

Friday

Investors would have been relieved by Friday’s trade on Bridge Street which did not see any wild swings either way for a change. It was volatile, but in a tighter range and without much conviction. The ASX200 was down 40 early on and up 20 at lunchtime before meandering to a close of down 24.

For the first time in the week the banks were not a significant feature of index movement. Energy, healthcare and the telco saw falls of over 1% but all other sector movements were benign. Once again it was very “Friday”, ahead of a weekend featuring another round of Chinese data possibly set to scare the world again and ahead of a critical Fed meeting.

Wall Street

Wall Street’s Friday session was not dissimilar, the difference being the Dow opened lower on a weak lead-in from Europe before rallying hesitantly throughout the day to be up 102 points or 0.6% on a late kick. The S&P closed up 0.5% at 1961 and the Nasdaq rose 0.6%.

Once again traders had their focus firmly fixed on the oil price, such that a wobble in WTI mid-session was reflected in a temporary drop back to the flatline for the stock indices.

Oil opened lower from the outset, until the weekly US rig count showed a reduction of ten rigs. This was enough to promote a rebound but just when oil looked like heading into the green, out came a note from Goldman Sachs.

In 2008, Goldman Sachs famously called WTI at US$200/bbl as the US dollar collapsed on emergency Fed rate cuts and geopolitical tensions underpinned. The price ultimately peaked near 157 intraday. Last night’s note from Goldman called oil at US$20/bbl.

It is not the investment bank’s “base case” scenario, and indeed the analysts ascribe only a 50% chance of 20 dollar oil. For a while now we’ve heard many a commentator suggest oil in the thirties is not out of the question but this is the first call in the twenties from a major house.

Goldman’s base case has oil trading at US$38/bbl in one month and US$45 in twelve months. The analysts’ previous forecasts had US$45/bbl in one month and US$60 in twelve. So if we dismiss the 20 call for the moment (no doubt Goldman’s trading desk is short oil) we are still looking at a sizeable downgrade from the major house. It is not a call based on lack of demand, but on oversupply.

To that end, an oil price recovery still requires an awful lot of marginal supply to be shut down, and/or small oil companies going to the wall. The latter scenario interestingly brings us back to the Fed.

Wall Street is concerned that were the Fed to raise this week, collateral damage may be significant in emerging market currencies and in bank loans to small oil companies. There is a significant level of loans in the industry that at the time required oil price hedges in place before banks would hand over the money. Those hedges were typically for twelve months, beyond which hedging starts to become overly expensive.

It is now over a year since oil prices began to plunge, thus hedges have been rolling off. We’re not talking GFC II, but there remains concern a move towards normalisation from the Fed may set off a mini-crisis among regional banks in particular.

We enter the final week with the US bond market still suggesting no September rate hike (the ten-year yield fell 4 basis points to 2.18% on Friday night and has been as high as 2.50% this year when rate rise expectation was most rife) and the Fed futures market giving September less than a 50% probability. Those suggesting the Fed will raise this week are mostly stock market players.

Three more sleeps.

Commodities

Between a US rig count reduction and Goldman’s new price targets, West Texas was down US95c to US$44.78 on Saturday morning. Brent was down US62 to US$48.15/bbl.

Base metal trading was mixed and mostly insignificant. Lead traded a 1% drop with a 1% gain for tin.

Singapore had a holiday on Friday so iron ore is unchanged at US$58.50/t.

The US dollar index fell 0.4% on Friday to 95.18 which helped the Aussie up 0.2% to Saturday morning at US$0.7091.

Gold is relatively steady at US$1107.70/oz.

The SPI Overnight closed up 25 points or 0.5% on Saturday morning.

China

Yesterday Beijing provided a data dump of August numbers.

Industrial production grew by 6.1% year on year, up from 6.0% in July but below 6.3% forecasts. Retail sales grew by 10.8%, up from 10.5% and above 10.6% forecasts. Fixed asset investment grew by 6.3% year to date, in line with July and in line with forecasts.

The global proxy for trading China’s economy is the Aussie dollar. On Saturday morning the Aussie was at US$0.7091 as northern hemisphere traders hit the showers and this morning it’s at US$0.7084 as southern hemisphere traders pull on their boots. It’s an insignificant difference, reflecting a set of Chinese data that for once did not materially disappoint on a net basis.

The Week Ahead

It’s a Jewish holiday in the US tonight which takes a lot of Wall Street out of the scene. Wednesday night brings the Fed rate decision and a quarterly press conference from Janet Yellen. One might safely assume global markets will be dead quiet in the run-up but that hasn’t always been the case ahead of critical Fed meetings.

On Wednesday morning the US CPI is released for August, and inflation is the other big factor for Fed policy outside jobs. However, one presumes the fate of the world will not hinge on such late mail, and besides, the Fed prefers the personal consumption and expenditure (PCE) inflation measure as its benchmark.

Other US data releases this week include industrial production, retail sales, business inventories and the Empire State activity index tomorrow night, housing sentiment on Wednesday, housing starts on Thursday and leading economic indicators on Friday.

Friday is also the September quarter quadruple witching expiry of stock market derivatives.

The eurozone will see industrial production, trade, unemployment and inflation data across the week as well as the ZEW sentiment index on Tuesday, just to remind us Europe is still there. The Bank of Japan will hold a policy meeting on Tuesday but is likely to be in wait-mode like the rest of us.

The minutes of the September RBA meeting are due on Tuesday, an RBA Bulletin will be released on Thursday and on Friday, Glenn Stevens will provide a scheduled testimony to a parliamentary committee.

Australian data are thin on the ground this week. In the stock market, Thursday sees the quarterly expiry of ASX futures and index options and on Friday the pre-announced quarterly index promotions & relegations will take effect.

This week brings earnings results from New Hope Coal ((NHC)) today, OrotonGroup ((ORL)) on Thursday and Premier Investments ((PMV)) on Friday.

There are still a few more ex-divs to work through.

Oh, and Greece will hold an election on Sunday. I’m sure it will all go smoothly.

Rudi will appear on Sky Business on Wednesday at 5.30pm and on Thursday at noon.
 

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

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article 3 months old

Next Week At A Glance

For a more comprehensive preview of next week's events, please refer to "The Monday Report", published each Monday morning. For all economic data release dates, ex-div dates and times and other relevant information, please refer to the FNArena Calendar.


By Greg Peel

Beijing will release August industrial production, retail sales and fixed asset investment numbers on Sunday. Given the market has established for itself a “put option” of belief bad numbers will only prompt more stimulus from Beijing, we might consider good to be good and bad to be good too. But given elevated market fear, anything might happen on Monday.

As we entered September, it was considered two US economic releases will be of most importance to the Fed ahead of next week’s FOMC meeting. One was jobs, which featured a fall in unemployment into the Fed’s target zone, and other was inflation. Tonight sees the PPI and most importantly, Wednesday sees the CPI data. Mind you, Wednesday night is also when the Fed delivers its decision.

Further US releases during the week include industrial production, retail sales, inventories, housing sentiment and the Empire State activity index before the Fed meeting, and housing starts and leading economic indicators after the meeting. Next Friday is the quadruple witching derivatives expiry.

There’s plenty of data for the eurozone to mull over next week but given Mario Draghi has made his intentions clear, in stark contrast to Janet Yellen, their impact will be limited.

The Bank of Japan will meet on Tuesday and the Kiwi June quarter GDP result is due on Thursday.

The Australian market will also see a major quarterly derivatives expiry, on Thursday, in a week otherwise largely devoid of economic data releases. The minutes of the RBA meeting and an RBA Bulletin provide the highlights.

On the local stock front, the run of ex-divs begins to thin out next week while earnings results from retailers come to the fore.

Bring on the Fed.
 

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article 3 months old

The Overnight Report: Counting The Days

By Greg Peel

The Dow closed up 76 points or 0.5% while the S&P gained 0.5% to 1952 and the Nasdaq added 0.8%.

Back in your box

This week we have seen the ASX200 dip below 5000 on the open on Monday morning following weakness on Wall Street, but recover to close above that mark for the third time since the correction. This suggested 5000 is a floor, and it was thus no surprise the index took off on Tuesday.

But Tuesday also featured Woodside’s takeover bid for Oil Search, thus prompting outperformance for the energy sector. Meanwhile, investors decided that at these levels, the beaten-down banks looked attractive, particularly on a yield basis.

Having rallied over 2% on Tuesday, the banks rallied again by over 3% on Wednesday. The financials sector was far and away the major driver of the ASX200’s recovery to 5200. Then yesterday, the wheels fell off.

The biggest loss yesterday was reserved for the energy sector – the sector which had stuck its neck out a bit far earlier in the week. It fell 3.8%. Sure, the oil price fell again overnight, but while WTI has been to-ing and fro-ing of late with heightened volatility, it has really only oscillated around the mid-forty level without going anywhere much. Analysts do not expect Woodside’s bid to succeed but that matters not. Energy sector M&A has been anticipated for some time and the Genie is now out of the bottle.

Outside of energy, every sector copped a beating yesterday of 1.5 to 3% (excluding insignificant info tech). The banks lost 2.7%, but then the telco lost 3.0%. Materials fell 2.1% despite another tick-up in the ore price and stability in base metal prices. Yesterday was thus an index-selling day, rather than a sector-specific attack. The selling is thus not yet over, and it is likely the two dark clouds of China slowdown and Fed rate decision are ensuring enough fund managers are still not convinced the story has played out yet.

The good news is that yesterday took us back to just below 5100, and not all the way back down to 5000. While sell-on-close orders forced a late dip, the low of the day was actually just before midday, so we did not close on the low. If the index holds its ground today (SPI Overnight up 21 points), and being a Friday we should see less volatility, then we will have established a higher low. A positive sign, for now.

The Fed remains the swing factor. But one thing to remember is that the bottom of a correction is never immediately apparent at the time. More realistically, investors wake up one day to realise that the dust has settled and the market is actually moving up again.

Data

The ASX200 bottomed yesterday on the release of the local August jobs data. While the unemployment rate fell to 6.2% from 6.3% in July as expected, the actual jobs added figure was greater than expected. The jobs market is holding pretty steady for the time being.

The result sparked a big surge in the Aussie – unsurprising given everyone’s short. Market volatility and the China slowdown have recently heightened the possibility of another RBA rate hike, and this week’s RBNZ rate cut only served to further fuel that fire, but RBA rhetoric is suggesting nothing of the sort. The Aussie spiked on the release and kicked on overnight on a weaker greenback to be up 1.2% at US$0.7076 this morning.

Alongside the local jobs numbers yesterday we saw China’s August inflation data. The good news is China’s headline CPI jumped up to 2.0% annual growth from 1.6% in July. The bad news is most of that jump was due to a surge in volatile pork prices. Beijing does not publish a core (ex food & energy) inflation number so economists have to make their own calculations.

The other bad news is that the headline PPI fell for the 42nd consecutive month to be down 5.9% annually. That’s a drop from July’s 5.6% and the worst reading since September 2009’s minus 7% at the time commodity prices were crashing. The good news is this number will only encourage Beijing to steel its stimulus resolve.

Wall Street

Markets were weak across the Asian time zone yesterday and that weakness carried into Europe and the UK. But whereas this might typically prompt early weakness on Wall Street, instead the US stock indices rallied in the morning. The impetus for the rally was yet another volatile session for the oil price, which jumped 4%.

By 2pm the Dow was up around 190 points but that’s when the Nymex closed and oil trading went electronic. The WTI price drifted back a little, and so did US stocks, almost back to square. Late buying saved the day.

Fed, Fed, Fed – that’s all anyone can talk about. Until the September meeting is concluded next Wednesday night, we can’t expect any great market move beyond ongoing intraday volatility. Last night Goldman Sachs put out a note reiterating its call that the Fed will not raise in September, but in December. We might call this simply one view among many, except for the disturbing relationship Goldman has with the US Treasury and the Fed.

Last night the US ten-year bond yield rose 4 basis points to 2.20%.

Commodities

Latest prices have West Texas crude up US$1.60 or 3.6% at US$45.73/bbl. Brent is up US$1.27 or 2.7% at US$48.77/bbl.

Base metal trading was again subdued last night except for nickel and tin. Nickel decided to jump 4% and tin 2%.

Iron ore jumped US$1.60 to US$58.50/t.

The US dollar index fell 0.4% to 95.54 allowing gold to claw back US$4.90 to US$1110.30/oz.

Today

As noted, the SPI Overnight closed up 21 points or 0.4%.

It would not be surprising to see another very “Friday” session today, in which the week’s volatility wanes and no one wants to get excited either way ahead of the weekend.

On Sunday Beijing will release August industrial production, retail sales and fixed asset investment numbers.
 

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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 Overnight Report: What Goes Up

By Greg Peel

The Dow closed down 239 points or 1.5% while the S&P lost 1.4% to 1942 and the Nasdaq fell 1.2%.

Rising Sun

The Japanese stock market rose 7.7% yesterday. To put that into perspective, had the ASX200 rallied 7.7% yesterday we would have been back over 5500.

Commentary puts the Japanese surge down to a reaffirmation from Shinzo Abe that he still intends to deliver on his promise of a cut to corporate tax rates alongside maintaining significant monetary stimulus in order to revive the Japanese economy. He did not actually say anything new, and given the success of Abenomics has been clearly lacking to date, no doubt reaffirmation was a political move rather than a pragmatic one.

Abe nevertheless chose to speak at a convenient time, when the world had suddenly become excited about speculation Beijing is set to introduce another round of fiscal stimulus measures to support recent monetary measures. Although, as to whether stimulus speculation is the cause of recent global stock market strength, or just the excuse, is debatable.

More likely the bulk of the big rallies around the globe can be put down to investors suddenly deciding they’d better get in, on the assumption the bottom has now been established, lest the bargains they’d been waiting for quickly become bargains no more.

I tender as evidence, Your Honour, Australian banks.

Banking on it

I noted yesterday the local financials sector jumped 2.2% on Tuesday to provide the biggest points contribution to an index gain otherwise supported by energy, following the big merger offer. Yet banks have little connection to oil & gas, and realistically any connection to Chinese fiscal stimulus is also circuitous.

But yesterday the financials jumped another 3.1%. Daylight came in second, followed by the telco on 2.0%, with the resource sectors managing only around 1.5% each (albeit BHP went ex). The vast bulk of the hundred point rally for the ASX200 was attributable to the Big Four.

I suggest we’re probably seeing a kick-on in momentum from Westpac’s ((WBC)) strategy day on Monday, at which the bank announced some aspirational targets (too aspirational as far as most analysts are concerned) and did not announce a capital raising, as have its three peers. Given the banks were amongst the most heavily sold down in the correction, on a combination of the global macro story and the micro story of increased capital requirements, it stands to reason the banks should lead the rebound from “oversold” territory.

Let’s face it, investors found Australian bank yields very attractive at much higher share prices. They’re that much more attractive now, and no one wants to miss out.

As an aside, the value of Australian housing finance rose by 1.5% in July but the annual rate of growth slowed slightly to 15.0%. The value of loans to owner-occupiers rose 2.2% for a 14% annual growth rate. The number of loans approved over the past twelve months has only actually grown by 3.9%. The difference in number and value is a reflection of surging house prices, and the greater capacity of borrowers due to low interest rates.

Investor loans rose 0.5%, slowing annual growth to 16.5%. Lending to investors is quietly cooling, no doubt due to tighter capital requirements implemented by APRA but also due to the fact rental yields are now falling behind house values, making property investment less attractive.

Westpac’s index of consumer confidence fell 5.6% this month to a pessimistic 93.9. But Bridge Street was unfazed, as was the case with Tuesday’s similar NAB business confidence result, given the survey was conducted at the height of recent global market volatility.

Indeed, the consumer discretionary sector rose 1.6% yesterday. On any other day, such a weak confidence result would have garnered a diametrically opposite response.

So the market has been sold down on fear and over the past couple of days has rallied on fear – fear of missing out. It is not unusual at such times for markets to swing wildly between oversold and short-term overbought as a consolidation process following significant volatility.

And speaking of volatility…the SPI Overnight closed down 82 points.

Mood Change

For the best part of 2015 to date, Wall Street has traded on an underlying adverse economic theme that good news is bad news because good news means the Fed will raise sooner rather than later. Having not had a correction for four years, up until recently, the obvious trigger would be the day the Fed announced its hike, many a commentator suggested.

Well here we are, one week from a highly possible Fed lift-off, and the mood on Wall Street has largely swung around the other way. If fear of a Fed rate rise dominated earlier in the year, the fear now is that next week the Fed won’t hike. The cloud hanging over Wall Street at present is not what damage a rate hike might cause, but what damage ongoing monetary policy uncertainty might engender.

Indeed, commentators warning that the US stock market really needs to go back down to test recent lows before it can truly rise again are suggesting a trigger for a second leg down would be no rate rise and further non-committed waffle from an indecisive central bank. It would suggest either the Fed fears the US economy is not in as robust a position as has been assumed (June quarter GDP up 3.7%, unemployment 5.1%), or that the FOMC really has no idea what it’s doing.

And so it was that the Dow opened up over 200 points last night, riding a global wave that saw Australia up 2%, China up over 2%, Hong Kong up 4%, Japan up almost 8%, France up 1.4% and the UK up 1.4%. Germany had been up there too, but faded away at the close.

Arguably, yesterday’s rallies began on Wall Street on Tuesday night when the Dow jumped nearly 400 points. So it would have been double-counting for Wall Street to go again, rebound euphoria had created a short-term overbought situation, and it was time to take profits and apply caution ahead of next week’s Fed meeting.

And oil dropped 3.5% again, which is never a positive driver for the major indices.

Commodities

West Texas fell US$1.60 to US$44.13/bbl and Brent fell US$1.88 to US$47.50/bbl.

Base metals were nevertheless quiet, for once. All moves were negligible bar lead, which rose 1.4%.

Iron ore rose US50c to US$56.90/t.

It looks like gold traders have decided a September rate rise is booked in. The US dollar index is barely changed at 95.95 but gold has fallen US$15.80 to US$1105.40/oz.

The Aussie traded right up to 70.5 yesterday on short-covering as the local stock market surged, but has since been sold down again to be down 0.4% over 24 hours at US$0.6991.

Today

The SPI Overnight, as noted, closed down 82 points or 1.6%.

Australia’s August jobs lottery will be held today, while Beijing will release Chinese inflation data.

Sigma Pharmaceutical ((SPI)) will release its interim profit result today amidst another handful of stocks going ex-div.

Rudi will make his weekly appearance on Sky Business's Lunch Money at noon and appear again on Switzer TV between 7-8pm.
 

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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 Overnight Report: All Is Forgiven

By Greg Peel

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

W-Bounce

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

- Overnight Report, August 25

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

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

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

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

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

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

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

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

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

Let’s Get Stimulated

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

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

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

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

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

Back to Business

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

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

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

September rate rise? Bring it on!

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

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

Commodities

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

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

Iron ore rose US40c to US$56.40/t.

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

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

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

Today

The SPI Overnight closed up 45 points or 0.9%.

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

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

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

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

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

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

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article 3 months old

The Monday Report

By Greg Peel

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

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

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

No Clear Signal

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

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

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

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

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

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

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

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

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

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

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

Commodities

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

Iron ore fell US80c to US$55.00/t.

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

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

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

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

The Week Ahead

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

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

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

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

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

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

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

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

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

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article 3 months old

Next Week At A Glance

For a more comprehensive preview of next week's events, please refer to "The Monday Report", published each Monday morning. For all economic data release dates, ex-div dates and times and other relevant information, please refer to the FNArena Calendar.


By Greg Peel

US jobs numbers tonight. While one can usually toss a coin on whether monthly results are going to be good or bad, another coin can then be tossed on which way Wall Street will react to the result. The market seems to think tonight's jobs number will either mean a September rate rise or not, but would the Fed really be as flippant as to leave that decision all down to one number, with two weeks to go?

The US will thereafter enjoy the Labor Day long weekend which signals the end of summer holiday period. Look for volatility in a thin market tonight, and more considered approach on Tuesday night.

Next week the US will see consumer credit, trade and consumer sentiment numbers and the PPI.

China will release trade numbers on Tuesday and inflation numbers on Wednesday. Be very afraid.

Next week in Australia brings ANZ job ads, NAB business confidence and Westpac consumer confidence ahead of our own jobs numbers on Thursday. A good unemployment result will be all down to Joe Hockey's exceptional economic management skills, and a bad number will be Labor's fault.

Westpac ((WBC)) and Boral ((BLD)) will both hold investor/strategy days next week while Sigma Pharmaceuticals ((SIP)) will release its interim earnings report.

Quite a number of stocks will go ex-div next week.
 

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article 3 months old

The Overnight Report: Job Watch

By Greg Peel

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

Lacking Discretion

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

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

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

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

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

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

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

Whatever More It Takes

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

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

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

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

Payroll Roulette

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

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

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

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

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

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

Commodities

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

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

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

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

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

Today

The SPI Overnight closed up 20 points or 0.4%.

China is closed again today.

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

Everything hinges on tonight’s US jobs report.

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

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article 3 months old

The Overnight Report: Now, Back To The US Economy…

By Greg Peel

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

Weak

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

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

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

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

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

We’re all doomed.

W-Bounce?

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

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

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

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

Normal

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

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

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

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

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

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

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

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

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

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

Commodities

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

Iron ore rose US10c to US$55.80/t.

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

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

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

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

Today

The SPI Overnight closed up 31 points or 0.6%.

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

As noted, China is closed today and tomorrow.

The ECB will hold a policy meeting tonight.

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

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

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article 3 months old

The Overnight Report: Second Wave Breaks

By Greg Peel

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

Playing to Script

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

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

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

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

Rubbish.

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

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

Absolute text book stuff.

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

Meanwhile…

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

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

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

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

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

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

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

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

Same Pattern

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

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

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

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

Commodities

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

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

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

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

Iron ore was steady at US$55.70/t.

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

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

Today

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

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

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

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

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

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

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(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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