Tag Archives: China and Emerging Markets

article 3 months old

The Overnight Report: Risk Reversal

By Greg Peel

The Dow closed down 45 points or 0.3% while the S&P lost 0.3% to 2132 and the Nasdaq fell 0.5%.

Cracks In China

Just when it looked like the Chinese economy may have bottomed out, suggesting stimulus measures were finally beginning to gain traction, along came yesterday’s trade numbers. Slight improvement in the September PMIs was encouraging but now China-watchers have been left scratching their heads.

Chinese exports fell 10.0% year on year in September when a 3% drop had been forecast, while imports fell 1.9% when a 1% gain had been forecast. Within the numbers, imports of iron ore and copper were lower than expected. Given the oil price rallied over the month, in equivalent terms the import result would have been weaker still.

The ASX200 had been expected to open weaker yesterday morning on the lower overnight oil price, and indeed the index fell around 25 points from the open. From there it tracked sideways until midday when the Chinese data were released. At 2pm the index hit bottom, down 54 points.

Following a slight recovery to the close, the energy sector finished down 2.0% and materials 0.9%. Most influential was a 1.1% fall for the banks, reflecting the flow-through from the Chinese economy to the Australian economy. Adding to weakness in resources was the decision by Citi to downgrade both the Big Two miners to Sell because they had rebounded too far, in the analysts’ view.

Two of the sectors finishing in the green by the close were the safety plays of utilities and consumer staples.

The Aussie took a dive, dropping close to the US$75c mark.

We recall that the sell-off experienced in the beginning of 2016 had a lot to do with fears of a Chinese slowdown – or at least a more dramatic slowdown than might otherwise be expected. Those fears were one reason, among others, the Fed started to back down on its intention to raise rates several times in the year. But as fears slowly abated, attention became squarely focused on the next Fed rate rise. China somewhat slipped into the background as Brexit and European bank issues took centre stage.

Now China is back in focus. Chinese data are not seasonally adjusted and are notoriously volatile, and October numbers will likely be even more distorted given the week-long holiday. But concern has been building over a bubbling Chinese housing market. Were the bubble to burst, demand for steel, copper and other materials would likely crash too. Yesterday’s weak trade numbers do little to ease tensions.

Mind you, we went through this exact same scenario shortly after the GFC. Massive government stimulus flowed straight into asset price inflation, sparking fears of a property bubble and bust and prompting endless talk of a Chinese “hard landing”. Years on, we don’t hear that expression much anymore. Beijing muddled through, and most likely will muddle through again. But there are concerns over just how much China’s debt to GDP has grown in the meantime.

Will China once more provide the Fed with an excuse not to hike?  One month’s data do not a summer make.

Risk Off

But what they have done is sparked a sharp risk reversal on Wall Street overnight.

As Fed rate rise expectations have grown over the past couple of months, US investors have been selling out of high-yield utilities, telcos, REITs and government bonds, and buying the banks and the US dollar. Last night investors bought utilities, telcos, REITs and bonds and sold banks and the dollar.

It was all about China. The Dow was down 184 points early in the session before rallying back to be almost square, and fading off again towards the close. The movement suggests traders first sold what they wanted to get out of, and then turned around and bought what they wanted to get back into. On one set of numbers, Wall Street reversed from “risk on” to “risk off”.

The sell-off in bonds – the US ten-year yield fell 4 basis points to 1.74% -- came just after it had looked like a breakout to 2% was on the cards. The sell-off in bank stocks comes before tonight when all of Citigroup, Wells Fargo and JP Morgan (Dow) report quarterly earnings. This is when the US earnings season really starts.

It seems like an overreaction to so swiftly change tack after months of rotating portfolios in the other direction. But given those months of rotation, it makes enough sense and is hardly too worrisome to think some profits might be taken the other way around on a heightened sense of caution. The Chinese data provided a prompt.

Commodities

Copper posted the biggest loss on the LME last night, unsurprisingly, in falling 2%. Lead, nickel and zinc all fell 1% but aluminium managed a 0.5% gain.

Iron ore always confounds, and it rose US10c to US$56.60/t.

On the back of the China data, and the fact US weekly oil inventories showed a much bigger build than anticipated, we should have seen WTI drop through the US$50/bbl mark. But the weekly data also showed US refining has slowed considerably, albeit largely due to seasonal maintenance shutdowns, so actually West Texas crude is up US25c at US$50.46/bbl.

We might also have expected that as part of this risk reversal trade, and the fact the US dollar index is down 0.4% at 97.56, would mean gold would be back in favour once more. But gold traders must be feeling a bit once-bitten at the moment. Gold is up US$3.40 at US$1257.50/oz.

Having fallen in the local session on the Chinese data, the Aussie has since rebounded right back on the weaker US dollar to be little changed over 24 hours at US$0.7567.

Today

The SPI Overnight closed up 11 points. Here we likely see a case of Australia having reacted first to the Chinese numbers, so to react to Wall Street’s reaction would be double counting.

If the US banks come out with solid earnings result tonight, last night’s action may just prove a bit of a blip. Then there’s a month-long US results season to get through which will no doubt draw the focus away from China once more.

Janet Yellen will speak tonight, which as always will be closely monitored.

And tonight’s US data include the all-important retails sales numbers along with inventories, consumer sentiment and the PPI.

China will release inflation numbers today. They’re typically not as powerful as trade numbers these days but everyone’s now on edge. China’s September quarter GDP result is due next week.

The RBA will publish its Financial Stability Report today.

Rudi will Skype-link with Sky Business today to discuss broker calls at 11.10am.
 

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

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

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

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article 3 months old

The Overnight Report: Putin On The Spin

By Greg Peel

The Dow closed up 88 points or 0.5% while the S&P gained 0.5% to 2163 and the Nasdaq rose 0.7%.

On The Money

The futures had suggested an 8 point gain for the local stock market yesterday and that’s exactly where the ASX200 closed. As to why the computers pushed the index up 27 points on the opening rotation is anyone’s guess. From there on, all we did is drift back.

We are seeing these sharp opening moves followed by immediate reversals time and time again. If the high frequency traders are putting in bogus bids/offers to push the market up/down, then selling/buying into the move, they are doing it very well.

The wash-up among the sectors yesterday indicated no clear trend whatsoever. Energy was down and materials up. Banks were up and industrials down. Telcos were up and utilities were down, again. The tepid US jobs report on Friday night has done little to change the status quo. A December Fed rate rise is still expected.

The consumer discretionary sector was the worst performer on the day, with a 0.9% fall, but that was all about individual stories in individual stocks.

Despite the quasi-holiday in the US last night, we should see some more definitive movement in the market today. For that we can thank Russia and China. The index shied away from 5500 yesterday but today may be different.

Blind Faith

Speaking at another informal meeting of oil producers last night, this time in Istanbul, Vladimir Putin said Russia was ready to “join in common efforts to limit oil production and urges others too as well”. At the same meeting, the Saudi oil minister suggested he was confident an agreement will be reached at the formal OPEC meeting in November and that it was “not unthinkable” oil could reach US$60/bbl.

What does one do with that information? OPEC has set production quotas throughout its history which members have famously never stuck too. Russia has offered to curb production several times over past years and never done so. But once again oil traders have decided they have no choice but to play it safe. Hence WTI has jumped 3%.

If it turns out the Saudis and Russians are simply gaming the market once more, then oil will come crashing back down again. But at least they’ll get to sell some oil at a better price for a couple of months. And there’s also the reality that were oil really to trade up to US$60, a lot of marginal US shale rigs would be brought out of mothballs.

But on a day when US banks and the bond market were closed, and only about half of the usual stock market participants bothered to turn up to play, Wall Street rallied on the energy sector’s lead. It was not too convincing nonetheless. On light volume, the Dow opened up 160 points and spent all day drifting back again.

A nod was also given to the US presidential debate the night before. While it is considered Clinton did not deliver a knock-out blow, it is suggested Trump did nothing to improve his position either. Hence the polls still favour Clinton and Wall Street is happy with the status quo.

Commodities

West Texas crude is up US$1.62 or 3.2% at US$51.20/bbl.

The Chinese are back. While they were off celebrating Golden Week, Fed rate rise speculation saw the US dollar on the rise and metals prices on the sag as a result. This, it appears, has provided Chinese traders with the opportunity to pick up some cheap supplies.

Aluminium, copper and lead all rose over 1% in London last night, while zinc played wood duck. Nickel shot up 4% but that came down to the Philippines issue. When Duterte is not off murdering drug dealers he is shutting down polluting nickel mines, and then he’s not, and then he is again. He shut one down yesterday so nickel is up 3.7%.

Iron ore jumped US$1.40 to US$55.80/t.

Metal markets were not fazed by the fact the US dollar index rose another 0.5% last night to 96.92. Indeed all oil-related currencies rose. The Aussie is up 0.3% at US$0.7605.

By rights gold should be lower, but after its big plunge last week gold has been inching back up since. It’s up US$3.10 at US$1259.40/oz.

Today

The SPI Overnight closed up 21 points or 0.4%. The energy sector rollercoaster should head up the hill today, providing for another opportunity to test resistance at 5500.

Housing finance numbers are out locally today along with NAB’s monthly business confidence survey.

Not much attention will be paid to Energy Resources of Australia’s ((ERA)) September quarter production report, given ERA is no longer producing, but it does signal the production report season is upon us.

More attention will be paid to the Telstra ((TLS)) AGM.

Rudi will link-up with Sky Business today, at 11.15am, via Skype to discuss broker calls.
 

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

Rotation

Friday’s trade on the ASX was a bit of a non-event ahead of Friday night’s US jobs number but behind the tepid close we still saw further evidence of investors reallocating their portfolios. The global interest rate cat is out of the bag and not showing any signs of wanting to go back in.

The biggest sector losers on Friday were once again the yield-plays telcos (-1.1%) and utilities (-0.9%), backed up by industrials (-0.5%) where many of the popular reliable-growth-and-yield names reside. On the flipside we saw energy up 0.7% with oil rising over the US$50/bbl mark, underscoring the ongoing move back into cyclicals.

Beyond that, it was all pretty quiet. The US jobs report was going to tell us whether perhaps the Fed might even be forced to raise in November, rather than December, given the urgency that appears to have crept into Fed rhetoric.

Benign

As it was, 156,000 new jobs in September in the US was one of those neither here nor there results. Forecasts were for around 175,000, and the so-called “whisper number” had suggestions as high as 200,000. I’ve never known these whisper numbers to meet their mark.

Had the result indeed been 200,000, then we would all have been talking about the possibility of a November Fed hike. Given it fell short of expectation, that isn’t the case. But the August result was revised up by about as much as the September result missed the forecast, which realistically implies “as expected” all up. That means the market is still assuming a December hike. The futures have this as a 66% chance.

The unemployment rate ticked up to 5.0% from 4.9%. Not so long ago 5% was the Fed’s prime target to trigger monetary tightening but that has since gone out the window on recognition of what that figure does not disclose. It does not disclose the level of long term unemployment – those who aren’t registered as job-seeking – and it does not disclose underemployment – those with a part-time job who’d like more hours. With the participation rate – those trying to find work – at an historical low, the Fed can justifiably point to “slack” in the labour market not revealed by that 5% figure.

And this year we have found Wall Street really not all that fussed about the actual number of jobs added. The number that really matters is wage growth, as it is the indicator of potential inflation – the other prime Fed target. Average wages grew by 0.2% in September to be 2.6% higher year on year. While this is not runaway stuff, the job of a central bank is to act against inflation before it does run away, when it is usually too late.

So put it altogether and Wall Street came out of Friday’s jobs result assuming December is still the date, which is how traders were positioned ahead of the result.

The Dow did initially fall over a hundred points on Friday night to midday. It remains difficult to know whether Wall Street is in a mood of bad news is bad news – i.e. a miss on the jobs number – or bad news is good news – i.e. a less trigger-happy Fed. But Friday’s trade was clouded by an announced earnings guidance downgrade by large cap heavy industrial Honeywell.

With Alcoa’s report tomorrow night unofficially kicking off the September quarter result season, this late “confession session” announcement from Honeywell saw its shares down 8% and shares of all similar companies in aerospace and other big-end industries taking a hit as well. A lot of the morning fall can therefore be attributed to these moves rather than jobs.

And then Wall Street came all the way back in the afternoon before closing only a tad weaker. We would have to think that investors, while not specifically happy with the idea of a December rate rise, are not going to be shocked into selling off if that is to be the case.

There’s still more data to flow before December of course, and the small matter of the US election. The weekend’s developments in the Trump camp had the peso soaring again this morning on the assumption The Donald’s chances are going down the gurgler. At midday Sydney time today the two candidates will hold another debate which, it is being said, will probably decide The Donald’s fate one way or other.

Wall Street is cringing at the thought of a Clinton presidency, four more years of Democrat rule and four more years of Congressional inertia on the assumption the Republicans will still win one or both houses. But more cringe-worthy is Trump. And more frightening.

Commodities

After its solid run up through the 50 mark, West Texas crude pulled back a bit on Friday night, dropping US95c to US$49.58/bbl.

Base metals were again mixed. Copper rose 0.5%, lead rose 1% and nickel fell 1%, with aluminium and zinc little moved.

Iron ore fell US10c to US$54.40/t.

The US dollar also fell back a little, down 0.2% to 96.49 on its index. But gold only managed a US$2.10 gain to US$1256.30/oz.

The Aussie was relatively flat on Saturday morning at US$0.7583 but is a little higher this morning.

The SPI Overnight closed up 8 points on Saturday morning.

On Saturday, Caixin released its take on China service sector PMI for September. It showed a drop to 52.0 from 52.1.

The Week Ahead

The minutes of the September Fed meeting are due on Wednesday. As usual, they will be closely scrutinised.

It’s a quiet week in the US data-wise until we get to Friday, when retail sales, business inventories and fortnightly consumer sentiment numbers are released. Tonight in the US is a quasi-public holiday for Columbus Day. The stock and commodity markets are open but with banks and bond markets closed, activity will be limited.

That will provide more time to discuss today’s debate.

Japan is closed today but China is back after its week-long break. Chinese trade numbers are due on Thursday and inflation on Friday.

Locally we’ll see data for housing finance and housing affordability tomorrow along with NAB’s monthly business confidence survey. Wednesday it’s Westpac’s monthly consumer confidence survey.

On the local stock front, this week brings the first of the resource sector quarterly production reports. Among those reporting this week are Iluka Resources ((ILU)), South32 ((S32)) and Whitehaven Coal ((WHC)), all on Thursday.

We are also now seeing the AGM season start to ramp up. Telstra ((TLS)) will meet tomorrow and CSL ((CSL)) on Wednesday.

Rudi will appear on Sky Business on Tuesday morning, via Skype-link, at 11.15am to discuss broker calls. On Thursday he'll appear in the studio, 12.20-2.30pm and he'll repeat the Skype-link again on Friday, at around 11.10am.
 

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)

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

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

It will be yet another highly anticipated US jobs report tonight. The number would need to be particularly soft for Wall Street to retreat from its general assumption of a December Fed rate hike. Expectations are it may be a solid result, nonetheless.

How will Wall Street respond? That is question no one can definitively answer.

China will be back on deck next week following the Golden Week break. We can expect some distorted data ahead for October. Next Friday sees September inflation numbers released but ahead of that, Caixin will release its take on the China service sector PMI tomorrow.

The Japanese market will be closed on Monday. Monday is Columbus Day in the US. Stock and commodity markets are open but bond markets and banks are closed.

The minutes of the September Fed meeting are due on Wednesday. Not quite as influential as non-farm payrolls but critical nonetheless will be Friday’s US retail sales numbers, along with inventories, consumer sentiment and the PPI.

Australia will see housing finance and the NAB business and Westpac consumer confidence surveys next week.

On the local stock front, the run of ex-divs is now all but over and now we head into both the resource sector quarterly production report season and the AGM season.

Among those reporting next week are South32 ((S32)) and Whitehaven Coal ((WHC)) and among those meeting are Telstra ((TLS)) and CSL ((CSL)).


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article 3 months old

The Monday Report

By Greg Peel

Volatility

It was a wild old week for the Australian stock market last week, featuring the two dominating themes of oil and banks coinciding with the end of the quarter. Markets fluctuated on the possibility of an OPEC production freeze on the one hand and cascading capital issues for Deutsche Bank on the other.

Friday ended on a sour note for the ASX200 as gains made on the Thursday, thanks to the OPEC news, were completely reversed by midday on Friday on fears Germany’s largest bank, and one of the world’s largest banks, was in trouble. A withdrawal of capital from the bank by hedge funds sparked fears another Lehman episode was upon us.

The index managed to bottom out around midday and slowly crept back to the close, to end the day down 0.7%. While most sectors finished in the red, the dominating move was in the banks, which closed down 1%.

On Friday night however, that which had bank investors bailing on global nervousness reversed course once more.

Not Lehman

Markets tend to panic first and ask questions later. On Friday night bank analysts in the US were hastily publishing research notes to point out that Deutsche Bank is not Lehman Bros.

Firstly, Lehman was an investment bank and not a commercial, deposit-collecting bank and as such did not have the Fed as an obligatory backstop. The Fed chose to let Lehman go under. Deutsche Bank is an investment and commercial bank and as such is ultimately supported by the ECB.

Secondly, Lehman traded on a tight liquidity position, holding just enough cash to get it through each day. Deutsche Bank’s cash position is, by contrast, not in question given it’s considered substantial. Lehman went down because it couldn’t cover its counterparty obligations – a liquidity issue.

Deutsche’s issue is one of plenty of liquidity but dwindling capital, due to a combination of not having built up an excess capital position post GFC as, for example, US and Australian banks have, being hit on loans to the energy sector when the oil price collapsed, being hit on loans to emerging markets due to both oil and a slowing of the Chinese economy, and in general seeing its share price halved over the course of the year.

When once a US$14bn fine from the US Department of Justice would have been lunch money for Deutsche, pre-GFC, in 2016 the reality is one of being able to pay. There is little doubt that while asset sales and other measures would help, Deutsche would have to go to the market to raise new equity. Given the sentiment surrounding Deutsche at present, such a raising would prove highly dilutive to existing shareholders.

But the obvious question is: is it in the interest of the US government to bring Germany’s largest bank to its knees and potentially trigger another global banking crisis? All for the sake of US$14bn? Of course not.

On Friday night it was rumoured the DoJ was prepared to reduce Deutsche’s fine. Numbers around US$5bn were being suggested. It may only be a rumour but it does make logical sense. Whatever the case, the market bought the story, and subsequently bought Deutsche Bank shares back up 15%.

And as such Wall Street rallied back again on Friday night, recovering Thursday night’s losses, with the banking sector leading the indices down and back up. The Dow closed up 164 points or 0.9%, the S&P rose 0.8% to 2168, and the Nasdaq gained 0.8%.

Commodities

West Texas crude rose US29c to US$48.03/bbl.

Lead jumped 3% on the LME to continue its recent volatility while nickel and zinc added 1% and copper 0.5%.

Iron ore fell US90c to US$55.20/t ahead of the week-long Chinese public holiday.

The US dollar index dipped slightly to 95.42 and gold is down US$4.00 at US$1315.90/oz. The Aussie is up 0.4% at US$0.7664.

And after Friday’s bank-related fall for the ASX200, the SPI Overnight closed up 30 points or 0.5% on Saturday morning, no doubt in anticipation of a reversal.

China

On Friday, Caixin released its independent measure of China’s manufacturing PMI for September which came in at 50.1, up from 50.0 in August.

On Saturday, Beijing released official PMI data for September showing manufacturing stable at 50.4, and services up to 53.7 from 53.5.

The Week Ahead

It’s Golden Week in China and markets will be closed all week.

The rest of the world will release manufacturing PMIs today and services PMIs on Wednesday.

It’s jobs week in the US. The ADP Private sector report is due on Wednesday and non-farm payrolls on Friday. Tonight it's construction spending and vehicle sales, Wednesday factory orders and the trade balance, Thursday chain store sales, and Friday consumer credit.

In Australia we’ll see the manufacturing PMI today, services on Wednesday and construction on Friday. Today also brings house prices and tomorrow it's building approvals and the ANZ job ads series. Wednesday it’s retail sales and Thursday the trade balance.

The RBA will meet tomorrow and leave the cash rate unchanged.

On the local stock front, the ex-divs are now beginning to dwindle. BHP Billiton ((BHP)) will hold an investor briefing on Wednesday and Bank of Queensland ((BOQ)) will report earnings on Thursday.

The public holiday in NSW today is not nation-wide and does not close the ASX. However most broking houses will be on holiday and little to no research will be published. FNArena will return to normal service tomorrow.

Also a reminder that as of tomorrow morning, the NYSE closes at 7am Sydney time.

Rudi will not make any appearances on Sky Business this week due to a well overdue breather. He'll be back next week.

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)

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

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

On Sunday summer time begins in relevant Australian states. From Tuesday morning the NYSE will close at 7am Sydney time.

Monday is a public holiday in NSW, the ACT, Queensland and South Australia. The ASX is open but there will be little in the way of any broker research. FNArena will publish the Monday Report as usual.

Next week is Golden Week in China. Markets will be closed all week.

Ahead of the holiday, Caixin will publish its September manufacturing PMI today and Beijing will publish the official manufacturing and service sector PMIs tomorrow.

For other markets, Monday is manufacturing PMI day, and Wednesday service sector PMI day.

The first week of the month is jobs week in the US. The ADP private sector number is due on Wednesday and non-farm payrolls on Friday. Other US data releases during the week include construction spending, vehicle and chain store sales, factory orders and trade.

A busy data week in Australia sees the manufacturing, services and construction PMIs, ANZ job ads, building approvals, retail sales and the trade balance. On Tuesday, Philip Lowe will release his first monetary policy statement as RBA governor and not wish to upset the status quo.

The number of stocks going ex-div is now beginning to dwindle while next week Bank of Queensland ((BOQ)) will deliver its earnings report and BHP Billiton ((BHP)) will hold investor briefings.


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article 3 months old

The Overnight Report: Oil In The Mix

By Greg Peel

The Dow closed down 258 points or 1.4% while the S&P lost 1.5% to 2127 and the Nasdaq fell 1.1%.

Lined Up

The Dow had rebounded 250 points, the futures were suggesting up 79 and as the opening rotation was completed at 10.30am yesterday on the local market, the ASX200 was up 56 points. And that was the end of it.

The sellers were lined up waiting and wasted no time in sending the index back down on a steady path towards the red. Perhaps these were sellers who were caught in the headlights on Monday and had failed to respond. Or perhaps there is sufficient belief the Australian yield trade no longer deserves a premium.

When we break down the sector action we see only four sectors actually finished in the red yesterday: energy, banks, telcos and utilities. Other than acknowledging Woodside’s dividend, energy is the odd one out. The other three are yield sectors. Oil prices began to slip in Asian trade late afternoon on the release of an IEA report – more on that later – putting pressure on energy stocks.

There was a short-lived blip in the downward trajectory yesterday when China released a monthly data dump showing positive, if not runaway, signs.

Chinese industrial production rose 6.3% year on year in August, above July’s 6.0% and ahead of 6.2% expectation. Retail sales rose 10.6%, above 10.2% in July and beating 10.3% expectation. Fixed asset investment rose 8.1% year to date, ahead of 7.9% to July and beating 8.0% expectation.

But as I have noted before, the local market is not paying that much attention to China at the moment, so down we went again.

It is also notable that the Dow futures had begun to drop in the afternoon as well, likely picking up on the oil theme, suggesting a weak start for Wall Street last night. And indeed, the Dow closed down 258 points, cancelling out Monday night’s rebound. The good news is the Dow was down almost 300 at one stage, so Wall Street did not close on its lows.

Many Factors

The bad news is that given stats released showing record initial sales for the new iPhone, Apple shares rose 2.5% on the day, being the only Dow component to finish in the green. Had America’s biggest company fallen along with the market in general, it would have been quite a bit worse.

Oil was the major talking point on Wall Street last night. The International Energy Agency yesterday cut its 2016 demand growth forecast by 100,000 barrels per day to 1.3mbpd, and 2017 to 1.2mbpd, citing weaker economic growth in China and India.

Oil prices subsequently fell 2.5% which is not that dramatic, probably because there is still an assumption there may be some sort of deal struck at the upcoming OPEC meeting. But all along the weak oil story has been one of a supply glut, while steady demand growth has been assumed. Now that demand is being questioned, it’s another story again.

Other than oil, lingering fears of a Fed rate hike in September are still weighing on Wall Street. This is evident in that fact the US dollar index is up 0.5% at 95.56, gold is down US$9.00 and the US ten-year yield, which did not fall back on Monday night, closed up 6 basis points at 1.73%.

And then there is the Donald Trump factor. Yet again last night a trader suggested on US business TV that the market is concerned about a Trump presidency, particularly now he is closing the gap in the polls to Clinton, and because he publicly lambasted the Fed and Janet Yellen and that is simply not something a president does.

America is back from holidays. It is the month of September. Volatility has returned.

Commodities

West Texas crude is down US$1.09 or 2.4% at US$44.97/bbl.

Nickel was again the big loser on the LME, falling a further 2%. Zinc fell 1%, lead rose 1% and aluminium and copper were slightly weaker.

Iron ore fell US$1.30 to US$56.20/t.

Gold is down US$9.00 at US$1318.40/oz.

The stronger greenback has the Aussie down 1.3% at US$0.7464.

Today

The SPI Overnight closed down 11 points or 0.2%. This muted response to the much bigger fall on Wall Street suggests Australia was leading yesterday’s action and thus we don’t need to double up and follow.

But given current skittish sentiment, anything could happen.

What will happen is Westpac will release its monthly consumer confidence survey today.

July industrial production numbers out of the eurozone will be closely watched.

There is another handful of stocks going ex today.

Rudi will be presenting in front of AIA members (and others) at the Chatswood Club tonight, 11 Help Street. Starts at 7.15pm.
 

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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

Following on from this week’s lack of action from the ECB, the Bank of England will have its chance to do nothing when it holds a policy meeting next week. It will be justified however, given last month saw a surprisingly extensive stimulus package from the BoE and UK economic data have looked nothing but solid of late.

There will be plenty to fuel further Fed debate towards the end of next week when a raft of US data hit the wires, including industrial production, retail sales, inflation, inventories, consumer sentiment and the Philly Fed and Empire State activity indices.

Friday on Wall Street sees the quadruple witching derivatives expiry.

After posting better than expected trade data this week, next week China will release its monthly round of industrial production, retail sales and fixed asset investment numbers.

Australian data releases this week include the NAB business and Westpac consumer confidence surveys, and on Thursday, the jobs numbers.

On Friday the changes to the components of the S&P/ASX indices, announced last week, become effective.

There’s another round of ex-divs set to handicap the local market next week and Myer ((MYR)) will post its earnings result.


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article 3 months old

The Overnight Report: Central Bank Tango

By Greg Peel

The Dow closed down 46 points or 0.3% while the S&P lost 0.2% to 2181 and the Nasdaq fell 0.5%.

Sell Australia

There were a lot of stockbrokers and traders running around yesterday morning shouting “What the hell just happened?” As the opening rotation concluded on the ASX, the index was down 66 points.

Initial selling took the ASX200 down through the 5400 support level so at that point technical selling was triggered. And of course, as has been the case all week and will continue to be the case, albeit on a diminishing basis throughout the month, the index started with an ex-dividend handicap.

But it appears the selling began in the futures, thus triggering selling in the physical market. A big Sell Australia order hit the boards, most likely from offshore. As it was, this order provided a re-basing of the index from which point we could say the session featured a 28 point rally.

Australia’s July trade data were released yesterday and they looked good at first glance. Exports were up 3% on better commodity prices and imports were down 0.4% on the stronger Aussie. But it was notable that one small and typically volatile component of exports – gold sales – had made a difference in leaping 21%.

Take out gold and exports were still up 2%, and that number should continue to be supported in coming months given big moves up in coal prices and the ramp-up of production and sales of LNG. Bear in mind there’s always a lag effect as contract prices are set before actual sales are completed.

China also released its trade data yesterday, in this case for August, as it only takes Beijing a week to tally up the trade activity of 1.4bn people or whatever the count is these days. Surprisingly, imports rose by 1.5% year on year having fallen 12.5% in July, when economists had expected a 4.9% fall. It was the first monthly rise in imports in almost two years.

Within that imports number was plenty of coal and iron ore. Exports fell 2.8% year on year, but again this was a better result than the 4.0% decline anticipated.

The interesting point about the Chinese trade data, or any Chinese data for that matter, of the last few months is that they’ve generally been pretty bad but haven’t caused any sort of angst for the Australian market. That’s because the assumption is bad numbers simply imply further stimulus from the PBoC and/or Chinese government. So how do we interpret good numbers?

Well if bad numbers evoke a benign response then presumably good numbers do too – it’s just a balance of how much stimulus is required. And as I suggested, we could argue the ASX200 rallied over the course of yesterday as both the local and Chinese trade numbers were published, just from a lower starting point.

All sectors took a beating yesterday, as one would expect from index selling, with the exception of healthcare, thanks to a solid result and 11% share price jump for Sigma Pharmaceuticals ((SIP)). The biggest losses were reserved for the resource sectors which of course contain some of the bigger market cap names. Iron ore and gold prices were also weaker, but a jump in the oil price could not save energy. Consumer staples also took a beating but Woolies went ex.

Another 13 point drop in the futures this morning suggests this bout of weakness is not yet over. On the back of an increased chance of a Fed rate rise in September (if Fedspeak is anything at all to go by), a decreased chance of another RBA rate cut (if we assume the GDP to be too strong), nothing yet out of Japan, perhaps not so much out of China, and as was apparent last night, nothing out of the ECB, the net central bank influence on the Australian market is presently negative, or at least potentially negative.

Not Even Discussed

A rate cut wasn’t expected from the ECB last night but there was an assumption something would be suggested, particularly an extension to the QE program which is scheduled to end in March. The eurozone economy is not exactly firing and Brexit remains a threat.

As it was, Mario Draghi said in his press conference that a QE extension “wasn’t even discussed”. That was enough to send the euro flying.

And enough to foster weakness on Wall Street. The major indices were further hit by a slump in Apple shares prompted by early reviews of the new iPhone7 failing to excite.

The counterpoint was a solid rally in energy stocks on the back of another 2.5% jump in oil prices. If we consider that the inventory data released on Wednesday night hit the wires after Wall Street’s close, oil prices were up over 5%.

There are two organisations which each week publish US oil inventory data – the American Petroleum Institute and the Energy Information Administration -- a day apart. Half the time the two sets of data don’t even come close to matching. But there was no doubting the correlation last night as the EIA numbers suggested the biggest weekly drawdown of crude since 1999.

This result left the oil market pondering whether there is a cyclical indicator here – have we finally reached the point where the supply glut is easing? The problem is, there was a hurricane in the Gulf, which cut off supply. So it’s difficult to tell. Now that Gulf supply is running again, next week’s data will be closely watched.

Commodities

Over 24 hours West Texas crude is up US$1.17 or 2.5% to US$47.31/bbl.

Once again there was not a lot of action in base metals and moves were again mixed. Nickel rose 1% and zinc fell 0.5%.

Iron ore fell US90c to US$57.40/t.

While the US dollar index was up only slightly at 95.04, the ECB’s lack of action was enough to send gold down US$6.80 to US$1338.20/oz.

The Aussie is down 0.4% at US$0.7639.

Today

The SPI Overnight closed down 13 points or 0.2%. The next level to watch for the ASX200 is 5350.

Australian housing finance data are out today and China will release inflation numbers.

There are only a handful of small ex-divs today and Premier Investments ((PMV)) will release its earnings report.

Rudi's link-up with Sky Business via Skype has been delayed this morning and should occur around 11.45am.
 

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

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

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

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article 3 months old

The Overnight Report: Labor Day Lull

By Greg Peel

Odd Jobs

The difference between 151,000 jobs added in the US in August and the 185,000 predicted led to a 1% rally for the Australian stock market yesterday. Go figure.

The point is Australian stocks sensitive to US interest rates – resource companies producing US dollar-denominated commodities and yield payers attractive to US investors – had been sold down last week on building speculation, post Jackson Hole, that the Fed was moving to raise its cash rate at the September FOMC meeting. The shortfall in jobs had many, but not everyone, in the market now assuming September is off the table.

So, as you were. Everything that was sold down came roaring back yesterday – the resource sectors, the banks, the telcos – to ensure the ASX200 made it comfortably back above critical support at 5400. Now we wait for the actual Fed meeting.

It was not, however, a good day for all sectors.

We’ve seen it in medical services, we’ve seen it in childcare, we’ve seen it in vehicle leasing and now we’ve seen it in residential aged care. Adding insult to the injury of disappointing earnings results last month, yesterday the three listed residential aged care stocks were absolutely trashed on the implication of likely new government regulations. At one point Estia Health ((EHE)) was down 30%, having already fallen a long way from its pre-result peak, and peers Japara Healthcare ((JHC)) and Regis Healthcare ((REG)) were not faring much better.

At the final bell each closed down 12%, 15% and 17% respectively. It was a capitulation. Not helping either recently was news the founder of Estia had sold his entire stake post-result.

In economic news yesterday, Australia’s service sector PMI went the same way as manufacturing PMI and collapsed, to 45.0 in August from 53.9 in July. Given tomorrow will see a GDP print in the order of 3% growth, we’ll also ignore this one.

Meanwhile, company profits rose over the June quarter by a greater than expected 6.9%, to be flat year on year. Manufacturing was the star performer with a 23% leap (See: PMI joke?) while mining chimed in with 14% thanks to the commodity price recovery. Construction fell 28% because the ongoing decline in resource sector construction out-weighed the residential construction boom.

The June quarter GDP remains on track to be over 3% (annual).

ANZ’s job ads series showed a solid 1.8% rebound in August after a weak July, to be up 8% year on year.

The RBA will meet today and do nothing, for the various reasons I outlined yesterday, and because Glenn Stevens is unlikely to do anything unexpected in his last statement.

Brexit Worries?

Caixin’s take on China’s service sector PMI showed a rise to 52.1 in August from 51.7 in July, in contrast to the official number. Japan still can’t take a trick – its equivalent fell into contraction at 49.6 from 50.4.

The eurozone saw a dip to 52.9 from 53.2 but the star of the show was the UK, which saw a jump back into expansion at 52.9 from 47.4. Once again we say Brexit Schmexit.

The US PMI is out tonight.

Commodities

Oil prices shot up by 5% at one point last night, in a thin market in the absence of the US, as it was reported the Saudis were set to make a “significant statement” at the G20 meeting. The assumption was an agreement between the Saudis and Russia to freeze production.

Prices soon retreated nonetheless when the announcement turned out to be one of agreeing to set up a working group to monitor the oil market. Led, one presumes, by Sir Humphrey Appleby. But West Texas crude is still up a net US87c or 2% at US$45.09/bbl.

Elsewhere, commodity markets were largely quiet in the absence of the US. In London, aluminium fell 1% and lead rose 1% but the other base metals moved little.

Iron ore fell US20c to US$58.80/t.

Gold is roughly steady at US$1326.70/oz.

The US dollar index is off 0.1% at 95.77 and the Aussie is up 0.2% at US$0.7584.

Today

The SPI Overnight closed down 20 points or 0.4%, probably suggesting yesterday’s bounce-back was a bit over-enthusiastic.

The last of the local GDP component releases is due today in the form of the June quarter current account, which includes the terms of trade.

As noted, the RBA statement will be released at 2.30pm today and the board will shoot off to the pub to toast Stevo.

There are a few more stocks going ex locally today.

Rudi will appear on Sky Business, via Skype-link, at around 11.15am to discuss broker calls.

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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