Tag Archives: China and Emerging Markets

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

As always, it is difficult to know just how Wall Street will respond to a good/bad/indifferent jobs number tonight, and even more difficult to know what the Fed might think. Typically, the smart money stays out of the market on jobs day given potentially wild volatility before moving in response in the next session.

In this case, the US Labor Day long weekend will mean we’ll have to wait until Tuesday night. US markets are closed on Monday night.

This means the US services PMI for August will be published on Tuesday, while all others will post on Monday.

The Fed Beige Book will be published on Wednesday but then attention will move to the ECB, which will hold a policy meeting on Thursday.

Following on from yesterday’s PMIs, China will be in the frame once more with Caixin’s services PMI and official trade and inflation data due next week.

The RBA will hold a policy meeting on Tuesday. While economists are still predicting further cuts it is unlikely the RBA will double up in September, particularly given the chance the Fed might go the other way.

The Australian June quarter current account and trade balance are also out on Tuesday ahead of Wednesday’s GDP result. On a monthly basis, we’ll also see ANZ job ads, trade and housing finance data next week.

On the local stock front we’ll see off-cycle earnings reports from Kathmandu ((KMD)), Sigma Pharmaceutical ((SIP)) and Premier Investments ((PMV)). There will also be a lot of stocks going ex-dividend.


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article 3 months old

The Overnight Report: Mixed Messages

By Greg Peel

The Dow closed up 18 points or 0.1% while the S&P was flat at 2170 and the Nasdaq rose 0.3%.

Holding On

Yesterday’s weakness on the local market was all about the resource sectors, which in turn is all about Fed policy. Lower commodity prices ensured both energy and materials fell 1.7% although in the case of materials, we have to count back the effect of BHP Billiton ((BHP)) going ex.

Having had a solid run from the Brexit rebound on better than expected commodity prices, the resource sector names have now suffered an investor exit. While demand/supply fundamentals still underpin – oil being the obvious case in point – commodity prices have over that period been supported by the assumption the Fed would not be raising its cash rate in September and perhaps not in December either.

Now that assumption has reversed, the US dollar has thus risen, and dollar-denominated commodity prices have come under mathematical pressure. We note also the next worst performing sector on the local market yesterday was utilities, down 0.5%, which suffers via the the Australia-US interest rate differential.

Elsewhere, sector moves were mixed and less dramatic. It is notable that the ASX200 was down 32 points late morning before turning around to come back almost to square mid-afternoon, ahead of a final drift-off. At its nadir the index hit 5405 and technically, 5400 is the support line.

Whereas the month of August was dominated by individual stock moves during results season, September has opened with a return to the macro influence of economic data. Australia’s data releases were quite mixed.

The mass media were calling the June quarter private capital expenditure result (-5.4%) another shocker – sky’s falling and all of that – but indeed quite the opposite is true. We know that resource sector spending is continuing to fall as mining investment exits its boom and LNG projects reach completion. But the fall in June quarter “mining” spending was actually not as great as forecast.

We are looking to non-mining spending to carry the can and indeed it rose during the quarter. The other important element of yesterday’s capex data is capex intentions, and here we saw an upgrade to FY17 spending intentions. The June quarter represents the third estimate, and things are heading in the right direction.

We know that the decline in “mining” spending will soon exhaust itself. While it won’t reverse, it will stop dragging down the net numbers, It’s then up to non-mining to drive economic growth. Here, a lot depends on just how sharply the housing boom cools off, and on the positive side, just how helpful other sectors can be, for example, inbound tourism.

Because Australian consumers are not exactly doing their bit at the moment. Retail sales growth was flat in July when 0.3% growth was forecast. Following only 0.1% gains in both May and June, annual sales growth has fallen to a tepid 2.7%.

Aside from being a reflection of stiff retail competition (down, down etc) in dollar terms, weak sales growth is a reflection of just how misleading the current unemployment rate is. The ongoing increase in part time jobs at the expense of full-time jobs – both counted equally as a “job” in the official unemployment rate number – is resulting in weak wages growth and subsequently, weak consumption.

What is the RBA to do? The capex data were pleasing but the sales data were not. And Sydney/Melbourne house prices continued to rise in July despite assumptions a peak must surely soon be reached. Having staved off concerns over a housing investment bubble via stricter lending standards, the RBA is now faced with owner-occupiers piling in to fill the gap. These O-Os, as they’re called, are more likely to stretch their budgets to accommodate a hefty mortgage than investors who at least pick up rent, and negative gearing.

Can the RBA afford to cut rates again?

The central bank can probably afford to ignore yesterday’s Australian manufacturing PMI for August which indicated a collapse into contraction at 46.9, down from 55.4. I’ve said this before, but it seems very strange that every other economy on the planet manages to only ever post incremental monthly PMI changes but Australia’s manufacturing PMI leaps all about the place like a cricket on steroids. Maybe it’s because Australia’s manufacturing sector is so tiny, or it’s just too small a sample, but either way, credibility is lacking.

It’s a different story in China, albeit there are other doubts about the value of Beijing’s data. Beijing’s official manufacturing PMI sparked all sorts of excitement yesterday by rising back to 50.4 from 49.9 in July. Big whoop. Aside from Caixin’s equivalent falling to 50.0 from 50.6, Beijing is trying to shift away from being an export economy. Beijing’s service sector PMI fell to 53.5 from 53.9.

And that’s more concerning.

PMI Plunge

Japan’s manufacturing sector managed to slow its pace of decline in August. The PMI rose to 49.5 from 49.3, but Japan is totally reliant on exports so it’s hardly a good result. The eurozone equivalent slipped to 51.7 from 52.0 which we might say was all about Brexit but if it is, the Poms have clearly made the right decision.

The UK PMI shocked everyone in rebounding to 53.3 from 48.8.

The US equivalent, on the other hand, fell to 49.4 from 52.6, when economists had forecast 52.0.

On this news, early in the session on Wall Street, the US dollar index plunged 0.4% and stayed there. The Dow plunged a hundred points. But hang on, if the Fed is data-dependent then surely here is clear evidence a rate rise is not a good idea. Subsequently, the US stock indices rallied back again.

It’s just what we need – more confusion over what the Fed might do this month. And tonight we have the jobs report.

In the meantime, last night represented the 39th consecutive session in which the neither the Dow nor S&P has moved more than 1%.

Commodities

The US dollar index is down 0.4% at 95.64 on the assumption a September rate rise is by no means a given, if indeed it ever was. This is good for commodity prices.

All base metals moved to the upside in London, with lead, nickel and zinc each rising more than 1%.

Gold rose US$5.10 to US$1313.60/oz.

Iron ore dropped US60c to US$58.40/t but as I often note, iron ore does its own thing. But clearly no one told the oil market a weaker greenback is a good thing.

West Texas crude has lost another 3%, down US$1.30 at US$43.53/bbl. Once 45 was breached it was going to take more than Fed policy to calm the nerves.

The Aussie has matched the greenback’s fall in rising 0.4% to US$0.7550.

Today

The SPI Overnight closed down 12 points.

US jobs tonight, which is about all that really matters, but note that S&P/ASX will announce pending index component changes today before they become effective in two weeks.

And Fortescue Metals ((FMG)) goes ex.

Rudi will Skype-link with Sky Business to discuss broker calls at around 11.05am.
 

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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

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

There are still plenty of reports to get through over the last three days of the month and thus the local earnings season, but nothing like the volume we’ve seen in the latter part of this week. Life returns to normal with September.

Then we can all get some sleep.

We need to keep an eye on dividends from here nevertheless. We’ve already seen many a stock go ex as earnings season has progressed but the pace picks up a bit next week and continues into September, acting as a natural drag on the index.

As to whether the world will look different next week or not will come down to Janet Yellen’s speech at Jackson Hole tonight. My tip is no change. Wall Street will have time to ponder any ramifications over the Labor Day long weekend. US markets are closed on Monday night.

Then it’s jobs week. US non-farm payrolls are out next Friday following private sector numbers on Wednesday.  Data across the week include personal income & spending, house prices, pending home sales, consumer confidence, construction spending and chain store and vehicle sales.

Thursday is the first of the month so that means manufacturing PMIs from across the globe and both manufacturing and the service sector PMI from Beijing.

Australian data next week include the manufacturing PMI as well as building approvals, private sector credit and retail sales.

On Friday, pending changes will be announced to S&P/ASX index components ahead of becoming effective two weeks hence.


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article 3 months old

The Monday Report

By Greg Peel

Shanghai-ed

The triple treat high on Wall Street on Thursday night and stronger oil price ensured the ASX200 was off to a solid start on Friday morning. The opening rotation had the index up over 40 points to almost reach 5550.

There was always a risk Friday would bring some selling ahead of the weekend break given a largely steady week of trading but as it was, the index suffered a sudden drop late morning.

I have been noting so far this month that the local market has not seemed to pay any attention to Chinese data releases, which have all been to the weak side. Whether this be due to comfort in the knowledge Beijing will simply step up the stimulus pace or whether there have just been other overriding factors to consider, such as local earnings, is unclear. But it would seem that on Friday, all that changed.

Chinese industrial production rose 6.0% year on year in July when 6.1% was expected, down from June’s 6.2%. Retail sales grew 10.2% when 10.5% was expected, down from 10.6%. And fixed asset investment grew 8.1% in the year to July, down from 9.0% to June and missing 8.8% expectation.

The market has been assuming that at some point, Chinese data would begin to reflect the monetary and fiscal stimulus policies the PBoC and government have in place. Clearly there’s no sign yet. Breaking down that fixed asset number we see private sector investment grew 2.1% to July, down from 2.8% to June, and government investment grew 21.8%, down from 23.5%.

Private sector investment growth is negligible, and even government spending has waned. What will Beijing do?

The two sectors most directly linked to the Chinese economy – energy and materials – still managed to post the biggest sector gains on Friday, as the index bottomed out at the flatline and kicked again late afternoon to close 22 points higher. Energy rose 1.7% on the oil price pop and materials rose 1.3% despite little support from metals prices.

Elsewhere, consumer discretionary was again a winner, along with healthcare, while the telcos came under further pressure and selling in utilities – the proceeds of which still appear to be rotating into the more cyclical sectors -- continued.

Other than the release of minutes from policy meetings, there’s not a lot of central bank action to move markets this week ahead of next week’s infamous Jackson Hole gathering hosted by the Fed. There’s a fair bit of US data to get through, but for the local market it will be all about earnings results. The season steps up to full pace as the week progresses.

Not 1999

It looked more like a typical Friday session in summer for Wall Street on Friday night. Having hit the triple-high in all three major indices for the first time since December 1999, it was always a chance a breather would ensue.

The Dow closed down 37 points or 0.2% while the S&P lost 0.1% to 2184 and the Nasdaq gained 0.1% to another new all-time high.

There was, inevitably, much comparison being made on Wall Street on Friday with what transpired the last time the triple-high was achieved. Triple-highs had been achieved over a hundred times ahead of 1999, but because what followed was the Tech Wreck, and the complete routing of the Nasdaq, it’s taken this long to happen again.

Should we be worried that the biggest drop in stock markets prior to the GFC might repeat based on this triple high phenomenon? Well, consider that back then the concept of “online” was still a mystery to most people and tech stocks were trading on a Tomorrowland basis – don’t ask, just get on, as this thing is BIG.

The IPOs came fresh and fast from start-up dotcoms that had no more to offer than an idea, and given actual earnings were but a pipe dream at that stage, average PE ratios were off the scale and largely meaningless. Today’s Wall Street PEs are reasonable in historical terms. Back then the Fed funds rate was 5% and today it’s 0.5%. Back then there were more dotcom offerings than you could poke a stick at. Most disappeared the following year. Those that survived have gone on to be household names – such as the likes of Amazon and eBay for example.

So there is no basis to be worried about any sort of repeat performance, unless of course something altogether different transpires that no one ever saw coming.

Back in the real world, Wall Street was shocked by the July retail sales number released on Friday night. After three months of solid growth, including a 0.8% jump in June, economists had been predicting a bit of an easing in the pace of growth, to 0.4%. So the flat result was a surprise.

Month on month numbers are typically volatile, and at an underlying annual growth rate of 2.3%, retail sales are helping to support the US economy without knocking it out of the park. Hence we see a GDP growth rate around a mere 1%. But of course, just as commentators had been pointing to improving US data, including retail sales, as reason the Fed may yet hike this year, now that’s all out the window once more.

The US ten-year yield fell 6 basis points to 1.51% on Friday and the US dollar index fell 0.2% to 95.68.

The US stock indices held their ground. It may have been a weak result for July retail sales, but last week featured a lot of surprisingly good (or less-bad) results from longstanding US retail names and on Friday JC Penney joined that group, enjoying a 6% share price jump on its quarterly earnings result.

The oil price also jumped another 3%, despite data showing the US oil rig count climbed for the seventh week in a row. The shorts continue to jump out of oil as the Saudis talk their now hackneyed talk once more of possible production freezes. No one believes a freeze will transpire but no one’s prepared to take the risk were it to be true.

Commodities

West Texas crude rose US$1.24 or 2.9% to US$44.69/bbl.

Over in London, it appears metals traders were very much focused on the weak Chinese data. Throw in the weak US retail sales number, and nickel fell 4%, copper 2% and zinc 1.5%.

Iron ore rose US60c to US$60.20/t.

Gold is slightly lower at US1335.70/oz.

The Chinese numbers also had a notable impact on the Aussie, which is 0.7% lower at US$0.7650.

The SPI Overnight closed down 11 points or 0.2% on Saturday morning.

The Week Ahead

Earnings, earnings and more earnings to hit the local market this week – too many to offer weekly highlights. Among today’s reporters are Ansell ((ANN)), JB Hi-Fi ((JBH)) and Newcrest Mining ((NCM)), while National Bank ((NAB)) will provide a quarterly update.

Local data this week include tomorrow’s minutes of the August RBA meeting, which gave us a cut, and the June quarter wage price index on Wednesday.

US data this week include the housing sentiment index and Empire State activity index tonight, CPI, housing starts and industrial production tomorrow, the minutes of the Fed meeting on Wednesday and the Philly Fed activity index on Thursday.

Tomorrow night also sees the monthly ZEW investor sentiment index for the eurozone, which presumably will provide some indication of what Europe thinks about a Brexit.

Rudi will appear on Sky Business on Tuesday, via Skype-link, to discuss broker calls at 11.15am and repeat it all again on Friday, at around 11.05am.
 

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

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article 3 months old

The Overnight Report: Going Nowhere

By Greg Peel

Alpha

It seemed like a quiet session in the local market yesterday as the index grafted slowly to a small gain following no real lead from offshore and minimal change in commodity prices. As calm descends on offshore markets, the local market is able to focus more specifically on earnings season.

The result is a lot going on under the surface of the index move, within sectors and individual stocks – the latter known as “alpha” movement which is not related to the market as a whole. Here there were some noteworthy moves yesterday.

Following on from Bendigo & Adelaide Bank’s ((BEN)) well-received profit result on Monday, yesterday ANZ Bank ((ANZ)) provided a quarterly update that was also well-received, mostly as it appears the bank may not be forced to raise new capital. Again all the banks were sought after, to provide a 1% gain for the financials sector and the bulk of index upside.

I have highlighted an apparent theme lately of rotating out of expensive defensives and into cheaper cyclicals, but perhaps this theme is a more simple one of rotating out of anything expensive into anything cheap. As market commentators have observed, results in line with expectation are evoking selling in a stock while even not so good results are encouraging buying as long as that stock was considered cheap beforehand.

The banks are a case in point – neither Bendelaide’s nor ANZ’s reports were anything to be too excited about, but buying has followed. Fund manager IOOF Holdings ((IFL)) copped a 7% trashing for a benign result, while market darlings in utilities and healthcare – Transurban ((TCL)) and Cochlear ((COH)), also saw selling following their results.

Sector moves were therefore a bit of a mish-mash yesterday. The result season is very much in its infancy, so really the games have only just begun. Woe betide any expensive stock that posts a miss.

And returning to the “China? Who Cares?” theme, yesterday we saw the Chinese headline CPI come in at a 1.8% annual rate for July, representing the third straight month of easing inflation. The PPI fell 1.7% to continue its unbroken four-year deflation trajectory, although the pace of deflation appears now to be slowing.

While slowing Chinese inflation should be bad news from an economic perspective, the fact it provides scope for further PBoC action is the countering good news.

Unproductive

Last night saw the release of June quarter productivity numbers in the US. Productivity (GDP per man hours worked) fell 0.5% when a 0.3% gain was expected.

This represents not only a big surprise, but the third straight quarter of productivity reductions. The only times a three-quarter decline has been booked in recent decades were in recessions. There are plenty of economists who have been warning for a while that the US is at risk of falling into recession.

The very weak June quarter GDP result gave weight to such an argument, and now this productivity number has provided a red flag. It is anticipated the relatively strong run of jobs numbers is soon to come to an end.

But does Wall Street care? Clearly not. If jobs numbers start to fade and/or the US falls into recession, there will be no Fed rate hike. And perhaps, if the situation warrants, QE will be reintroduced. The downside, therefore, is limited. And the need for yield is further underscored.

Markets that can’t seem to go up will typically go down instead. However this is not the case on Wall Street at the moment. Rather, the market has gone up and everyone’s happy for now, leaving volumes to drop away during the holiday period. It is not advisable to sell into a market when no one’s around.  A market rising on low volatility is considered bullish, despite being boring.

Commodities

There was not much going on in commodity markets last night either.

Base metal price moves were again mixed and minimal.

Iron ore is unchanged at US$61.40/t.

West Texas crude is down US10c to US$42.75/bbl.

The US dollar index is down 0.3% at 96.10 and gold is up US$5.60 at US$1340.60/oz.

The Aussie is up 0.2% at US$0.7668.

Today

The SPI Overnight closed up 10 points or 0.2%.

Westpac will release its monthly consumer confidence survey today while June housing finance numbers are also due. RBA governor Glenn Stevens will be making a speech today.

The biggest stock on the market will release its earnings result today, being Commonwealth Bank ((CBA)). The banks have seen some buying these past couple of days so CBA will not want to disappoint.

AGL Energy ((AGL)), Fairfax Media ((FXJ)) and OZ Minerals ((OZL)) are among others reporting today.
 

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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: And Pause

By Greg Peel

The Dow closed down 14 points or 0.1% while the S&P fell 0.1% to 2180 and the Nasdaq lost 0.2%.

Step-Jump

It was actually a very dull day on the local bourse yesterday. The index opened up 40-odd points and that was the end of that. Among the sectors, yesterday’s 40 point rally for the ASX200 looked very similar to Friday’s 20 point gain. Again we saw cyclicals in favour and defensives not so.

Energy was again the winner on the day with a 1.5% gain despite only a slight tick up in the oil price, while materials traded off a big jump in the iron ore price against a big drop in the gold price to rise 0.7%. Telcos were again sold off and utilities slightly, while consumer staples managed only a minimal gain as consumer discretionary jumped a further 0.9%.

The most notable sector on the day was financials, which as I have oft suggested straddle the line between defensive (yield) and cyclical (economic growth). A 1.1% jump was largely due to a surprisingly good result from Bendigo & Adelaide Bank ((BEN)) despite a further squeeze on margins. Bendelaide rose 4% and provided impetus for gains amongst the Big Four as well.

ANZ Bank ((ANZ)) will provide a trading update today and Commonwealth Bank ((CBA)) will publish its profit result tomorrow.

We can put the rally on the day down to the solid US jobs number, and its implications for an improving US economy. But does China’s economy not matter to us anymore? Yesterday Beijing published weak trade data for July and the Australian market shrugged.

Imports to China fell 4.4% year on year in July when a 3% fall was forecast, marking 21 consecutive months of declines. Exports from China fell 12.5% when a 7% fall was forecast, marking twelve months of declines in thirteen.

The data suggest China’s economy continues to slow. Once upon a time the Australian market would have reacted poorly to such numbers, but now we seem to take it in our stride. Why? Well, central banks again. Weaker data simply reinforce the assumption the PBoC and the Chinese government will up the ante on monetary and fiscal stimulus.

At 5537, the ASX200 is still 50 points shy of the end-July high which was followed by a sudden plunge at the start of August when, among other things, the oil price looked to have broken down. Another 2% jump for oil overnight suggests that was just a mirage, and the futures are suggesting further gains for the index today.

Summer Returns

Having recovered from the Brexit scare, Wall Street proceeded to spend a long period in the doldrums just under fresh highs as it traded sideways for a couple of weeks. While the extent of the tight range broke records, traders were not too surprised given it is the height of summer in the US and participation is at a low ebb.

We then saw the brief oil scare followed by Friday night’s rally on strong jobs numbers. Having set new highs, last night Wall Street went back to the beach.

With the earnings season now tailing off and another month’s job numbers in the bag, Wall Street is bereft of further impetus. Traders continue to point to a historically long period without any decent sized pullback which suggests, given new highs, that one must soon be nigh, but this is now a long held assumption with so far no result.

Traders thus concede it is the TINA factor preventing meaningful downside. Yes, stocks might be on the expensive side, particularly where yield is the attraction, but in the unprecedented low interest rate world there is no alternative investment and historical comparisons of PE have to be rethought.

So the general feeling is the market will probably finish the year higher than it is now. We have to get through the historically volatile months of September and October nonetheless, and maybe, just maybe, that’s when the pullback will finally materialise. But there is still plenty of cash on the sidelines, and traders are only praying for a pullback so they can pick up favoured stocks at more attractive prices.

Another constant talking point is the VIX volatility index, the one month benchmark measure for which is sitting at the very low end of its range. This suggests complacency via a lack of demand for put option protection. The contrarian trade is to sell when the market reaches its greatest level of complacency. The VIX is currently at 11.5 and a level of 10.5 is considered the trigger point for this play.

Commodities

If they were yawning on Wall Street they were seriously nodding off on the LME last night. Base metal price movements were all positive but minimal.

There was more excitement on the Nymex as West Texas crude rose US88c to US$42.85/bbl.

Iron ore rose US70c to US$61.40/t.

The US dollar index ticked up 0.1% to 96.34 and gold is steady, after Friday’s night’s drop, at US$1335.00/oz.

Forex was another market to ignore weak Chinese data yesterday given the Aussie is up another 0.5% at US$0.7654. Glenn must be looking forward to passing the baton on that little “complication”.

Today

The SPI Overnight closed up 11 points or 0.2%.

China will release July inflation data today and locally, NAB’s monthly business confidence survey is due – the first to really have taken in the new gridlock parliament.

ANZ will provide an update today as noted and on the earnings front, we have reports due today from Cochlear ((COH)), Carsales.com ((CAR)), REA Group ((REA)), IOOF Holdings ((IFL)) and Transurban ((TCL)) among others.
 

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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

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

We’ve had an RBA cut, a lack of action from the BoJ and extensive action from the BoE and tonight, the US jobs report may or may not fuel further Fed speculation. The RBNZ is a chance of cutting rates next week and the following week sees the ECB in the frame.

The world is being run by central banks.

While this bodes well for global stocks the truth will out in the local market next week as reporting season shifts into second gear.

Bank results feature next week as Bendigo & Adelaide Bank ((BEN)) and Commonwealth Bank ((CBA)) report earnings and ANZ Bank ((ANZ)) provides a quarterly update. Classifieds also feature with results from Carsales.com ((CAR)), REA Group ((REA)) and Fairfax Media ((FXJ)) while Cochlear ((COH)), Transurban ((TCL)), AGL Energy ((AGL)) and Telstra ((TLS)) provide other highlights.

On the data front, China is back in focus next week with trade, inflation, industrial production, retail sales and fixed asset investment numbers all due.

It’s a quieter data week in the US until retail sales on Friday, while locally we’ll see ANZ job ads and the NAB business and Westpac consumer confidence surveys as well as housing finance.

The RBA governor will speak on Wednesday.
 

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article 3 months old

The Monday Report

By Greg Peel

Scripted

I suggested on Friday morning the local market would likely open to the upside on overnight strength before fading in the afternoon as traders took profits following a week-long rally, unless Beijing had something to say about it. Well Beijing did have something to say about it, but the market still played to script.

China posted GDP growth of 6.7% in the June quarter, in line with the March quarter result and beating expectations of 6.6%. Industrial production grew 6.2% year on year in the month of June, up from 6.0% in May and beating expectations of 5.9%. Retail sales rose 10.6%, up from 10.0% and beating 9.9%. Fixed asset investment grew 9.0% year to date, down from the 9.6% pace in May and below 9.4% expectations.

On face value, these appear to be a pretty encouraging set of numbers with the exception of fixed asset investment. To the ASX200, they were worth 20 points at midday, taking the index from up 20 points, and ready to fade, to up 40 points. But then the sellers arrived on cue.

Economists do not, however, suggest these were numbers out of China that offer relief. Within the GDP result, growth in private investment, representing 60% of all investment, fell to a record low for the quarter. This leaves the government to carry the can. On that note, the 9.0% growth rate in fixed asset investment to June is the lowest since 2000, suggesting the government is easing off on the infrastructure stimulus.

The June retail sales number was indeed encouraging, but in a way China’s economy is a bit like Australia’s in that it is trying to transition away from a previous model. Can the growth of China’s consumer economy offset the slowdown in the export-driven sectors? Not if private investors are not on board. Beijing can beef up the stimulus again, as everyone expects it will, but just how many airports and railway lines can you build for the sake of it?

Local traders may have had a closer look at the Chinese data, after the computers had had first shot, and decided they were not so hot after all. The index faded all afternoon.

But importantly, the index has clearly breached the 5400 resistance level, meaning that will now become support. Wall Street took a breather on Friday night and the local futures finished down 11 points on Saturday morning, so 5400 will now be the pivot level for the decision as to whether we have reason to push higher.

That will likely come down to the US earnings season now underway and the local earnings season due to start next month.

Almost

Had the S&P500 closed even a tenth of a point higher on Friday night, it would have been the first Monday to Friday run of all-time highs for the index since 1998. But alas, the S&P closed down two points at 2161. The Dow closed up 10 points but that only marked four days of rally. The Nasdaq lost 0.1%.

The fact the 1998 record was not achieved underscores the reality that markets do not usually go up five days in a row. Wall Street was all set for a similar session of Friday profit-taking after a very strong week, but instead hung in there. It is a positive sign.

Traders have also pointed to other positive signs in the Russell small cap index catching up to its large cap counterparts post Brexit and indeed outperforming on the upside. This suggests the rally has breadth. And a further six basis point gain for the US ten-year bond yield to 1.59% equates to over 20bps from the Brexit low and an indication the safe haven money is coming back out again.

The ongoing element traders have been pointing to for several post-GFC years is the level of cash still on the sidelines. If investors decide they have no choice but to deploy that cash in a low interest rate world, stock market upside could be substantial.

The US CPI rose 0.2% in June, in line with expectation. The increase was largely due to the oil price which many believe should ease off after the summer driving season. Annual inflation is only 1.0%, reflecting the initial big drop in oil prices. Core inflation, without oil, is 2.3%. This should be enough to prompt the Fed into hiking but for three reasons.

Firstly, the Fed prefers the PCE measure of inflation, and that is still running under 2%. Secondly, the Fed did not hike in June because of Brexit risk, and despite the rebound in markets a rate hike is not expected at the July meeting either, on a “too soon” basis. Thirdly, wages fell 0.2% in June. Lack of wage growth suggests a subdued inflation outlook.

But US retail sales jumped 0.6% in June when 0.1% was expected. It’s the third consecutive solid gain.

The big earnings result on Friday night came from the banks. Citigroup posted a beat and Wells Fargo posted in line. The shares of both closed down on the day, but this was more a case of a Friday after a week-long rally and the fact JP Morgan’s solid result on Thursday night had traders amped up for strong beats on Friday night.

As of this week, the earnings reports will come thick and fast, with a lot of Dow names in the frame. If Wall Street is to hang on to or exceed new all-time highs, it will need the run of results to be as positive as the early numbers have suggested.

Commodities

Since we’re focusing on records today, we can also note the 0.6% jump in the US dollar index to 96.69 on Saturday morning ended the strongest week for the dollar against the yen since 1999. The yen has been plunging basically since “Helicopter” Ben Bernanke met with officials in Tokyo early in the week, sparking speculation the BoJ may be prepared to use “helicopter money” as a last ditch effort to soften the yen and boost the Japanese economy.

Helicopter money directly refers to hand-outs of printed money to the populace as a form of stimulus, analogously dropped from helicopters. In the GFC, the famed “Pennies from Kevin” is a local example. But it can also mean other drastic stimulus measures, such as the BoJ buying government bonds and then forgiving the debt. Whatever the case the policy is highly inflationary, but given a low inflation world and over two decades of deflation in Japan, hyperinflation is not considered a risk.

The jump in the greenback on Friday night helped aluminium, copper and nickel down around 0.5% on the LME and lead down 1.5%, with zinc rising 0.5%.

Iron ore fell US20c to US$57.80/t.

Oil traders cited the better than expected China GDP and US retail sales in sending West Texas crude up US73c to US$46.23/bbl, despite the US rig count marking its sixth week of gains in seven.

Gold held its ground against the strong greenback in rising US$2.50 to US$1337.10/oz.

The Aussie is down 0.7% on the strong greenback at US$0.7580.

The SPI Overnight closed down 11 points or 0.2% on Saturday morning.

The Week Ahead

All eyes will be on the ECB on Thursday night when it holds a scheduled policy meeting. But given the wold has quickly recovered from Brexit fears, and the Bank of England elected not to react, it is likely Draghi will keep his powder dry.

The US will see housing sentiment tonight, housing starts on Tuesday and existing home sales, the Chicago Fed national activity index, the Philadelphia Fed activity index, FHFA house prices and leading economic indicators on Thursday. Friday sees a flash estimate of July manufacturing PMI, and Japan and the eurozone will offer the same.

Japan is closed today.

The minutes of the July RBA meeting are due tomorrow and otherwise, NAB’s June quarter business confidence summary on Thursday provides the local data of note this week.

It will be a bit different on the local stock front however, as the quarterly reporting season ramps up.

Western Areas ((WSA)) will report quarterly production today, Rio Tinto ((RIO)) and Oil Search ((OSH)) tomorrow, BHP Billiton ((BHP)) and Woodside Petroleum ((WPL)) on Wednesday, South32 ((S32)) on Thursday and Santos ((STO)) and OZ Minerals ((OZL)) on Friday, among others during the week.

Rudi has returned from two weeks of touring Victoria and Queensland. He will appear on Sky Business via Skype-link on Tuesday, 11.15am, to discuss broker calls. On Thursday he'll return to the studio at Macquarie Park, 12.30-2.30pm and on Friday he'll do the Skype-link again around 11.05am.
 

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

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article 3 months old

The Overnight Report: Caution At The Top

By Greg Peel

The Dow closed up 25 points or 0.1% while the S&P was flat at 2152 and the Nasdaq fell 0.3%.

Struggling

On a technical basis, the ASX200 trading at over 5300 since Monday suggests further upside towards 5800 is on the cards. The index still has to get through brick wall resistance at 5400, and thereafter there has to be a fundamental reason to support further gains.

With the world now settling down again following immediate Brexit fears, albeit still wary of further possible bouts of volatility, the local market may need to wait until the reporting season next month to find a new driver. Meanwhile, yesterday’s session may have been positive but there remained an air of caution.

The big movers yesterday were the resource sectors, thanks to big commodity price jumps. Materials was up 2.0% and energy 1.5%. But only three other sectors finished in the green yesterday – the banks, telcos and utilities. All offer yield as their primary attraction, not cyclical growth.

It was not a straight line rally yesterday either. After a spurt up on the opening rotation, interest faded. Late buying then righted the ship. There were also the Chinese trade numbers for June to consider.

Exports fell a slightly worse than expected 4.8% year on year following May’s 4.1% drop. Imports fell 8.4% compared to 0.4% in May, when a 5.0% fall was expected. While the numbers are not very positive there is no great panic, given Beijing is expected to rev up the stimulus any moment now beyond renminbi devaluations.

The index closed yesterday at 5388. Following a flat session on Wall Street and the futures up only 8 points this morning, today is unlikely to be a day to retest 5400. We also had oil falling back last night.

The local June jobs numbers are out today but nothing particularly market-moving is anticipated. There will likely be some caution in the market today ahead of tonight’s Bank of England policy meeting.

For so long, we’ve not been particularly interested in BoE meetings. The UK’s economic surge following the London Olympics brought expectations of a likely rate hike from a post-GFC 0.5%, but that surge soon faded and for the past few years the UK has simply bungled along, stuck on the same cash rate.

Tonight is expected to see a rate cut. BoE guvna Mark Carney has already hinted at one and the local market is pricing in an 80% chance. The risk to global markets, both to the downside and upside, is either no cut or a full 50 basis points to zero. A 25bps cut will no doubt be a non-result.

Let’s see some results

If Australia now needs to wait for results season, the same is true on Wall Street where quarterly results are now trickling through. So far we’ve seen earnings beats from Alcoa and rail company CSX, while fast food conglomerate Yum Brands is up around 5% in the aftermarket as we speak, having reported after the bell.

It’s early days, and as late as last night analysts were still downgrading their expectations for JP Morgan’s result, due tonight. JPM will be the first of the big banks and first Dow stock to report.

Having hit new highs in the S&P and Dow, Wall Street stalled last night. In Tuesday night’s session we saw a rush out of the safe havens of gold and Treasuries but last night gold clawed back ten dollars and the ten-year yield fall back 4 basis points to 1.47%.

This week’s US Treasury auctions of three-years and ten-years struggled to find any buyers. Last night’s thirty-year auction was a different story. Buying interest was the strongest it has been since September last year for a yield of 2.17%. That’s not a lot more than the current inflation rate but if we bear in mind last night Germany issued its first ever ten-year bund with a negative coupon, and that Swiss fifty-year bonds are currently trading negative, a 2% thirty year backed by the US economy looks like manna for pension fund managers at this time.

But that 2.17% settlement rate is still the lowest on record. Welcome to the new normal.

The latest Fed Beige Book was released last night. This anecdotal assessment has had US economic growth fluctuating between “modest” and “moderate” for so long now traders have stopped taking any interest. Never has a publication been so aptly named.

Commodities

It was that time of the week last night when the US weekly oil inventory numbers are released, and as usual they surprised. The drawdown on crude was not as big as expected and persistently high levels of gasoline stocks in the middle of summer have the market concerned.

Having jumped 6% on Tuesday night, West Texas crude is currently down US$1.51 or 3.2% at US$45.11/bbl. Having tried and failed at 50, it looks like 45 will be the pivot level for WTI for the time being.

Copper kicked on with a further 1% gain last night on the LME but nickel and zinc fell back 1%.

Iron ore fell US10c to US$58.70/t.

Gold is up US$9.60 at US$1342.30/oz with the US dollar index down 0.2% at 96.35.

The Aussie is off 0.2% at US$0.7606.

Today

The SPI Overnight closed up 8 points.

As noted, the local jobs numbers are out today but the big drawcard is the BoE meeting tonight.

Iluka Resources ((ILU)) and Transurban ((TCL)) will post quarterly reports today.
 

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article 3 months old

The Monday Report

By Greg Peel

Breather

The local stock market took a breather on Friday, following two weeks of Brexit volatility and election uncertainty and ahead of Friday night’s US jobs report. Nothing new is known about potential Brexit fallout, but by Friday it at least looked like the Coalition would be able to form some sort of government.

By this morning it looks quite possible the Coalition will be able to form a majority government. This reduces the risk of a possible credit rating downgrade. On Friday night the Aussie went soaring, up 1.2% by Saturday morning to US$0.7564 despite the US dollar index being little changed.

But during Friday’s local session, it seems everyone went to lunch. The only movement of any note was a further 0.6% drop for the utilities sector, as “overbought” calls continues to hit home.

Yer Kidding

The US added 287,000 jobs in June, trashing estimates of 170,000. Mind you, estimates have been none too flash of late, given 170,000 was about the assumption for May as well, minus the 35,000 striking Verizon workers. May’s number came in at 38,000.

It was assumed the May result would be revised up with the June result, being such an anomaly, but instead it was revised down, to 11,000. We now have two consecutive anomalies, so economists prefer to average out to provide a three-month running indicator, which after the June result is 147,000 per month. Late in 2015, when the Fed decided to hike, that average was running at 200,000 plus.

Not only were more jobs created in June, but more hopeful workers re-entered the market, meaning the unemployment rate rose to 4.9% from 4.7%. Average wages rose 0.1% for a 2.6% annual rate.

Under normal circumstances, Wall Street would take the June jobs numbers as reason to expect a Fed rate hike in July. The response in the stock market would then be torn between good jobs result means economic growth, which is good, and good jobs result means higher borrowing rates, which is bad. But no one expects the Fed to hike in July because despite stock markets rallying across the globe, Brexit still provides for uncertainty.

So the Fed won’t hike this month. Maybe September, if the data continue to look positive in the meantime, but even then, probably not. So what does this mean? It means you can have your cake, being strong jobs growth, and eat it too, because the Fed will keep rates low. There is no reason not to buy stocks.

The Dow closed up 250 points or 1.4%, rising back over the 18,000 mark. The S&P rose 1.5% to 2129. The all-time closing high is 2130. The Nasdaq gained 1.6%.

But was this a “risk on” rally? No. Not only did investors buy stocks on Friday night, they also bought bonds and gold – the safe havens. The US ten-year yield fell 2 basis points to 1.37% and gold rose US$5.60 to US$1365.40/oz. Typically on a positive jobs number, and thus increased Fed rate hike expectations, investors would sell bonds and gold and buy stocks. In this case, stocks were bought because there is no alternative.

It’s hard to find any commentator that doesn’t believe US stocks can continue to rally under such circumstances. It is even more difficult to find anyone who is not nervous, given the lack of any fundamental drivers. The VIX volatility index fell back to 13 on Friday night, suggesting abject complacency.

Fundamentals will come home to roost from this week, however, as we enter the US June quarter reporting season. Alcoa reports tonight, and then there’s a gap to week’s end when the first of the big banks report.

As has become the trend, earnings forecasts are weak going into the season, offering up the opportunity of a “beat”, but a bit of a hollow one. Net S&P500 earnings are forecast to fall 5%.

Commodities

The US dollar index was steady on Friday night at 96.28, which is again not what one would expect from such a stellar jobs number. Base metal traders were therefore able to see the result as economically positive, hence we saw copper up 0.5%, aluminium and nickel up 1.5%, and zinc 2.5%.

For the oil market it’s a case of being torn between good economic data and the risk of further oversupply as US rigs kick back into gear above US$50/bbl. So oil prices did nothing, with West Texas steady on US$45.16/bbl.

Iron ore was unchanged at US$55.20/t.

The Week Ahead

After a flat close to last week, the SPI Overnight closed up 61 points or 1.2% on Saturday morning.

The Bank of England will hold a scheduled policy meeting on Thursday night. Given post-Brexit indications from Mark Carney, the market will be very surprised if there is no rate cut from 0.5%. Zero is a possibility.

This week will bring China back into focus.

Over the weekend we saw the release of China’s June CPI, which fell to a five-month low 1.9% from 2.0% in May. On Wednesday we’ll see June trade numbers and on Friday, industrial production, retail sales and fixed asset investment numbers.

And we’ll see the June quarter GDP result. The market is forecasting 6.6%, down from 6.7% in May.

In the US, the Fed Beige Book will be released on Wednesday ahead of CPI, retail sales, business inventories and consumer sentiment numbers on Friday.

In Australia we’ll see the NAB business confidence survey tomorrow and Westpac consumer confidence survey on Wednesday, followed by the June jobs numbers on Thursday.

On the local stocks front, this week heralds the beginning of the quarterly reporting season, which includes resource sector production reports and many a trading update from non-resource companies.

This week’s highlights include production reports from Alumina Ltd ((AWC)) tomorrow and Iluka Resources ((ILU)) and Whitehaven Coal ((WHC)) on Thursday. Transurban ((TCL)) will also report on Thursday.

Rudi will not make any appearances on Sky Business this week as he'll be presenting to investors on Gold Coast and in Brisbane.
 

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