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The Monday Report

Daily Market Reports | Sep 14 2015

This story features NEW HOPE CORPORATION LIMITED, and other companies. For more info SHARE ANALYSIS: NHC

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.

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

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