Tag Archives: Energy

article 3 months old

Sobering Outlook For Oil

A lower-for-longer oil price is playing out amidst intense competition among exporters to regions with growth. How do Australian energy stocks fare in this world?

-US shale oil economics transforming the way the market views oil
-Strategic deals on oil on the rise with China and India
-Credit Suisse becomes very bearish on Oz oil stocks
 

By Eva Brocklehurst

Energy markets are changing globally. A lower-for-longer oil price is playing out amidst intense jostling among exporters to capture and retain a share of market in the growing regions of the world.

RBC Capital Markets explores the developments in the oil market over the past few years and remains modestly constructive on global oil, of the view that prices will grind higher. Fundamentals are improving but the market has to grapple with increasing supply from the US and producer hedging. The analysts believe the higher and faster prices climb into the end of this year the more pressure they could sustain next year because of this hedging activity.

RBC envisages West Texas Intermediate and Brent will average US$51/bbl and US$53/bbl, respectively, for the rest of 2016 before increasing to US$56.50/bbl and US$59/bbl on average next year.

The recent suggestion by OPEC (Organisation of Petroleum Exporting Countries) of a  pare-back production would mark the first time the cartel has actively sought to cut production since 2008. Moreover, to the analysts it signifies a sharp shift in the policy that was set primarily by Saudi Arabia nearly two years ago, to abandon the cartel's principles in favour of securing market share.

RBC observes that while many in the market have referred to this course of action as the “Saudi market share battle”, the actual growth in production from regional competitors such as Iraq, Russia and Iran suggests the Saudis have not been leading this battle for some time. Rather, the Saudis were dragged into a price war and forced to participate in order to prevent a loss of market share.

Furthermore, the broker asserts that the war being waged in Yemen has wounded Saudi Arabia in fiscal terms, while US shale oil economics have transformed the way the market now thinks about future cycles.

The US has pushed towards energy independence, using its domestic production boom, and now requires fewer imports. Although, to varying degrees, all major oil exporting countries have become casualties of the US energy independence, Canada has been able to grow its exports to the US at the expense of Saudi Arabia, Mexico, Venezuela and other heavy oil exporters.

The analysts suggest the focus has turned increasingly to China from the US as this has become the world's largest growth area for oil in recent years. Yet, Saudi Arabia's influence - it once had a stranglehold on crude imports to China - has waned significantly. Russia has dominated the incremental battle for market share and captured more than a quarter of the growth in Chinese imports.

The majority of countries use price to win share but others, such as Brazil and Venezuela, have captured a portion of this market thanks to strategic oil-for-loan deals with Beijing. RBC observes this trade is favourable for both parties as countries in financially precarious positions receive an injection of capital while China locks in a physical hedge at a relatively advantageous price.

With this as a backdrop there is a scenario – not inconceivable to the analysts -- in which China raises its appetite for country credit risk and increases loans to additional, financially precarious, oil-producing countries. Such a development would increase the share of the market set aside for deal obligations and cannibalise the remains of the pie for those that compete primarily on price.

Another example of such strategic arrangements is between the United Arab Emirates, which runs one of the world's largest sovereign wealth funds, and India, where UAE has made significant infrastructure investment over recent decades.

India has been the bright spot for Saudi Arabia as it has consistently represented 20% of the import market in that country, but it too has expressed interest in seeking similar agreements with India. India held strategic discussions with several Gulf nations this year to swap oil for food, as New Delhi's need for energy mirrors a need for food imports in the Middle East.

So, in RBC's summation, global oil balances have achieved a delicate state of equilibrium but the market remains fragile. At the very minimum OPEC is believed to have bought itself a price floor near US$45/bbl, at least until its meeting in November. Adding complexity, the path of US production remains extremely price dependent.

The analysts expect US production will claw its way back to be slightly positive in terms of growth next year. The long-term thesis for a supply-side shock stemming from significant reductions in capital expenditure -- leading to a shortage of new projects – remains a possibility.

Still, the analysts believe the market requires evidence that the surplus in global inventories is being ground down before prices can be sustained above US$60/bbl, estimated to happen in late 2017-2018.

What does this future outlook hold for Australian energy stocks? Credit Suisse has downgraded its forecasts for long-term Brent oil price to US$65/bbl from US$70/bbl. The broker does not expect the market to change its view immediately but, with valuations so stretched, cannot support a positive view on the sector. In fact, the broker believes playing the energy sector in Australia has rarely been tougher.

The Australian energy sector appears expensive and this is highlighted by calculating what oil price is implied by the current share price. Credit Suisse calculates that all Australian sector stocks are trading above the average implied by US peers and Woodside Petroleum ((WPL)) and Oil Search ((OSH)), in particular, look expensive.

A great deal of the relative differential to Santos ((STO)) and Origin Energy ((ORG)) can be explained by balance sheet concerns and a lack of certainty regarding some projects, the broker notes.

Credit Suisse has downgraded Santos and Oil Search to join Woodside among the Underperform ratings. The broker locates Origin Energy, Beach Energy ((BPT)) and WorleyParsons ((WOR)) at the top of a lowly rated sector. On operational assumptions Credit Suisse believes the large cap stocks are pricing in oil at US$68/bbl, US$67/bbl, US$61/bbl and US$59/bbl for Woodside, Oil Search, Santos and Origin Energy respectively.

The broker accepts that completely removing exposure to the energy sector is a risk many investors would be unwilling to contemplate but, despite also being uncomfortable about it, remains in inclined to that view.
 

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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.
 

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article 3 months old

The Overnight Report: Then Suddenly, Nothing Happened

By Greg Peel

The Dow closed up 15 points or 0.1% while the S&P rose 0.1% to 2139 and the Nasdaq fell 0.2%.

What Goes Up

Tuesday on the local market saw a rally led entirely by the resource sectors as China came back from holiday to buy up bulks and metals and Russia suggested it would be prepared to join with OPEC in oil production cuts. On Tuesday night the Dow fell 200 points for a number of reasons – one of them being a pullback in the oil price and another being a big miss on earnings from Alcoa.

I thus suggested in yesterday’s Report we would probably see the opposite yesterday, and indeed the only stand-out moves among the sectors yesterday was a 1.1% drop for materials and a 0.9% drop for energy.

But it was a lot worse early in the session. The ASX200 traded down as many as 46 points, led by resources, before the cavalry came over the hill and quickly pushed the index back up again to a fairly benign close. Aside from bargain hunting among resources, the banks managed to close on a slight positive and the early guide to AGM season appears to be one of capital management will buy you a bid.

Telstra’s ((TLS)) seen a bit of a revival since its AGM and yesterday CSL ((CSL)) confirmed its buyback, ensuring telcos and healthcare provided the offset yesterday against weak resources.

Consumer discretionary managed a slight gain. We might have expected more on the back of Westpac’s monthly consumer confidence survey showing a 1.1% index increase to 102.4, to mark three straight months of improvement, at a time the tinsel is going up and the muzak is becoming nauseatingly festive.

I made mention yesterday of general agreement among stock analysts that the housing boom is set to shortly cool and thus act as a drag on the economy, albeit there is disagreement about the timing. Market indicators such as finance, approvals and auction clearances are still positive but starting to now ease off.

Westpac’s survey yesterday nevertheless showed a 1.6% gain in the month in a sub-segment of expectations for rising house prices, to be 12% higher year on year. The proportion of respondents who think now is a good time to be buying a house has also been on the rise in recent months.

If your Uber driver tells you he’s just taken out a one million dollar mortgage to buy bed-sit in Blacktown, sell!

Shalom

Yom Kippur is not a public holiday in the US but it might as well be on Wall Street. That’s one reason why last night saw light volumes and little more than sideways trade all session, despite Tuesday night’s big plunge.

We may otherwise have expected a lack of activity ahead of the release of the Fed minutes at 2pm, but they failed to produce any excitement either. Basically they didn’t tell us anything we didn’t already know.

The case for a rate rise this year has strengthened, the FOMC believes. Indeed, September was a close call and three of twelve members dissented on the decision not to raise, and much has been made of the fact three is a lot. It was also noted that to not raise once by year-end after having talked rate rises all year, the Fed would lose credibility.

If it hasn’t already. It will still come down to the data, of course, but one presumes they would have to take a sharp turn for the worse to prevent the December hike that 70% of the market is predicting. Otherwise something out of left field is always possible, in Britain or Europe for example or even Russia. But these things we can never predict.

Assuming the majority of the market has now accepted a December hike and positioned accordingly, the focus between now and then is on two major issues – OPEC and the election.

Virtually nobody expects a production cut agreement in November will be reached but virtually nobody wants to take the risk. Hence the real risk is of an oil price tumble post meeting triggering another Wall Street sell-off.

There is the risk of the great unknown were Trump to be elected, but Wall Street has now shifted from being relieved Clinton will likely win to being rather concerned the Republicans could lose the House. Such concern was evident in the US healthcare and biotech sectors last night, which weakened on the fear Obamacare might be here to stay and the new administration will be able to clamp down on drug pricing.

As to how the Fed reacts to any such developments is unclear. The central bank is, of course, independent and apolitical. But it didn’t stop the FOMC overtly claiming Brexit risk as a reason to not to hike in June.

Either way, the US dollar continued to strengthen last night and an auction of ten-year bonds was settled at a lower price, such that the yield is up another 2 basis points at 1.78%. The past couple of months has seen the ten-year yield rise over 20 basis points. What does that tell us?

Commodities

West Texas crude is down US61c at US$50.21/bbl. Unless something is said between now and the OPEC meeting, oil is expected to hang around the 50 mark in the interim.

All base metal prices were positive last night despite another 0.3% rise in the US dollar index to 97.92, except lead, which fell 1.5%. Nickel was otherwise the only metal to gain in excess of 1%.

Iron ore was unchanged at US$56.50/t.

Gold is as good as unchanged at US$1254.10/oz.

The Aussie has bounced back 0.4% to US$0.7565.

Today

The SPI Overnight closed down 14 points or 0.3%, probably influenced by another dip in the oil price.

China’s September trade numbers are due today.

Iluka Resources ((ILU)) and South32 ((S32)) release production numbers today while Orora ((ORA)) and Transurban ((TCL)) are among those holding AGMs.

Rudi will travel to Macquarie Park to appear on Sky Business from 12.30 till 2.30pm.
 

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article 3 months old

The Overnight Report: A Bout Of Nerves

By Greg Peel

The Dow closed down 200 points or 1.1% while the S&P fell 1.2% to 2136 and the Nasdaq dropped 1.5%.

Erratum

In yesterday’s report I suggested Energy Resources of Australia ((ERA)) is no longer “producing” uranium. I said so in the knowledge the company was drawing upon stockpiles. It was a poor choice of words on my part.

ERA is indeed producing uranium via the processing of stockpiled ore. It is not currently mining uranium ore, which is really what I meant and should have said.

My apologies to ERA, Rio Tinto, and anyone who may have been misled by my semantical error.

Meeting Resistance

Yet again we saw a sharp move in the opening rotation of the local market yesterday and an immediate reversal at 10.30am. The ASX200 hit 5497 before pulling back sharply. But this time investors were keen to have another crack.

At midday the index had pushed back up to 5498, led by the resource sectors, which in turn were led by strong gains overnight in the prices of oil, bulks and metals. But clearly traders have set 5500 as the level to take profits on the rally we have seen from 5200 a month ago. By 3pm we were back to square.

In the final sector breakdown, resources were still the clear winners on the day. Indeed, of the top ten ASX200 up-movers on the day, all ten were either miners, oil & gas producers or companies servicing those sectors. Materials rose 0.9% and energy rose 2.3%.

The flipside saw a mixed bag of down-movers, mostly stocks that not so long ago had been high-flyers, including gold miners. The rout in the residential aged care sector continues, and indeed healthcare proved the worst performing sector on the day with a 0.9% drop.

There will be a few traders breathing a sigh of relief this morning that they had considered 5500 as a good level to take profits.

One theme popular among analysts at present, albeit drawing some level of disagreement on timing, is expectations of a cooling housing market. Housing is very important to the Australian economy given (a) it drives construction earnings, (b) it drives flow-on earnings in household goods and appliances, (c) it underpins bank earnings, and (d), higher house prices imply greater wealth and this makes consumers more confident.

The housing market has recently been the primary driver of the “non-mining” economy, allowing for positive GDP growth despite the ongoing decline in mining investment. That is why analysts are concerned – housing booms don’t last forever.

Yesterday’s data showed the volume of loans to owner-occupiers fell a greater than expected -3.0% in August. Since APRA clamped down on loans to investors, O-Os have picked up the ball and run with it. But now it seems they, too, are starting to back off. Loans to O-Os are -4.2% lower than they were a year ago.

Loans for housing construction rose 3.7% in August but are -1.7% lower than a year ago. We can conclude that the housing boom is indeed cooling, but slowly. Low interest rates continue to underpin.

Australian businesses remain confident, nonetheless. NAB’s survey for September showed a rise in the conditions index to 7.7 from 6.8 and a rise in the confidence index to 5.9 from 5.6. Slightly worrying, however, is a fall in capacity utilisation to 80.6% from 81.0%. After rising steadily over past months, utilisation appears to have peaked out. This does not bode well for ongoing business investment.

Potpourri

Why did Wall Street tumble last night? Take your pick.

Firstly, the rally over the past week has been led by the energy sector thanks to the price of WTI rising back over US$50/bbl, in turn due to talk of an OPEC/non-OPEC production freeze agreement. Last night WTI pulled back a bit. Hardly sinister nor any great surprise, but inevitably the energy sector saw selling.

Secondly, Alcoa reported a September quarter miss on both earnings and revenue and its shares fell 11%. Alcoa is always the first large cap company to report in every earnings season. Once upon a time the Alcoa result was considered an early indicator of how the season as a whole would play out.

Since the end of the commodity super-cycle, this is no longer the case. And Alcoa is not even a Dow component anymore. But with Wall Street heartened by the fact forecasts are for a net S&P500 decline of “only” -2% for the September quarter compared to -6% or more numbers of past quarters, such a weak start is just a little ominous.

Thirdly, Clinton is deemed to have won the second debate. Outside of oil, the swing towards Clinton has been cited as a reason for Wall Street strength given she represents the less dangerous status quo and Trump represents…well…who knows what Trump represents. But for Wall Street, “status quo” includes the Republicans retaining their majority in Congress so as to block anything fiscally unpalatable.

But now, as the Trump campaign quietly disintegrates, Wall Street has begun to fear the train crash may reflect on the Republican party in general, to the point the Democrats could win control of Congress. This has Wall Street worried.

While all of the above are contributing factors, perhaps the underlying macro reason for last night’s sell-off is the most influential.

Central banks across the globe are backing away from ultra-easy policy experiments. But the Fed is one step ahead, looking at a second tightening. Last night the US dollar index jumped 0.8% to 97.65. A strong dollar is not good for America’s multi-national exporters.

The expectation of a Fed rate rise has also had bond yields on the rise, and last night the US ten-year yield rose 4 basis points to 1.76%. This is the top of the range in place since the Brexit shock. If yields break out of the range, Wall Street fears a long-awaited rush to sell bonds may be triggered, sending the ten-year rapidly towards 2%.

That would not be good for stocks. Last night the VIX volatility index on the S&P500 jumped 16%, suggesting investors have again begun to seek downside protection.

So put it all together, and the fact the market was back to full participation last night following Monday’s holiday, and the Dow dropped 200 points – not quite the low of the day but not far off it.

Commodities

Throw a 0.8% jump in the greenback at commodities and price weakness is not hard to explain.

West Texas crude is down US38c at US$50.82/bbl.

Aluminium, copper and nickel all fell between -0.5 and -1% in London while lead fell -2.5% and zinc fell -3%. So much for China’s return.

But China’s return is clearly impacting on iron ore. It rose another US70c to US$56.50/t.

Gold has already had its big adjustment, but on dollar strength is down -US$6.50 at US$1252.90/oz.

The Aussie is down -0.9% at US$0.7538.

Today

The SPI Overnight closed down -45 points or 0.8%. Notwithstanding iron ore, the leading sectors to the upside yesterday may lead the downside today.

Westpac will release its October consumer confidence survey locally today.

With Wall Street on edge over Fed policy, the minutes of the September FOMC meeting will be released tonight.

CSL ((CSL)) will hold its AGM today.
 

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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

Material Matters: Coking Coal, Energy, Iron Ore, Global Miners And Nickel

Elevated coking coal prices; OPEC oil deal looking shaky; iron ore outlook; balance sheet metrics for global miners; nickel's bullish outlook dented.

-Coking coal prices expected to ease in 2017 but at slow rate
-High chance OPEC agreement fails to achieve price increases
-Weaker outlook for steel suggests Oz iron ore exports likely to slow
-Rio Tinto leader of the global diversifieds in de-leveraging
-Indonesian supply of nickel pig iron mitigating shortages from Philippines
 

By Eva Brocklehurst

Coking Coal

Coking (metallurgical) coal has stood out as the key performer among bulk commodities in the last quarter, with prices more than doubling, Commonwealth Bank analysts observe. While some factors are anticipated to be short term and spot prices likely to retreat, the analysts expect the coking coal price contract to be settled for the December quarter could range from US$120/t to US$200/t.

Supply-side reforms and the exit of loss-making capacity have helped reduce China's coal output by around 10% in the first eight months of 2016. National Australia Bank analysts expect that increased Chinese production and weaker steel output will put downward pressure on coking coal prices but at a slower rate than previously anticipated. They expect hard coking coal contract prices to average US$96/t in 2017.

Energy

The CBA analysts also question whether the surprising deal on oil production at OPEC (Organisation of Petroleum Exporting Countries) will really change prices. The accord implies a cut in production of 250-750,000 barrels per day from August levels but individual country quotas are still to be decided at the November meeting. Moreover, Iran, Iraq, Libya and Nigeria have all signalled plans to boost output before the agreement is in place.

In sum, the analysts suspect the agreement has a higher chance of failing and the US will probably deploy rigs and boost production at prices above US$50/bbl. Hence, an unintended consequence may become a reality – OPEC concedes market share to the US and prices remain subdued.

National Australia Bank analysts continue to expect a gradual decline in US production in coming months because of the lag between construction of rigs and eventual production from the wells, but note that production may not ease very much from current levels unless there is a negative price shock.

The analysts also note the ramp up in Australian LNG production is progressing slower than expected, particularly in Queensland, where two out of three terminals have been running well below capacity for much of the year. Prices are subdued but the analysts suspect they have reached a bottom and should slowly increase over the coming year.

Iron Ore

National Australia Bank analysts expect steel demand should soften in coming months as China's construction boom fades. The profitability of mills has improved since late 2015 when steel prices hit record lows in China. However, the analysts note that iron ore and coal prices have been trending higher since mid May which signals profitability has only recovered to the lower bounds of the trend between 2009 and 2014, meaning continued challenges for Chinese steel producers.

Imported iron ore has provided an increasing share of China's steel requirements in 2016 with domestic production contracting by 6.7% in the first eight months of 2016. The analysts expect that given a weaker outlook for the steel sector, in China and globally, Australian iron ore exports are likely to weaken.

Growth has already slowed, at 4.9% in the first seven months of 2016 versus double digit growth in the same period last year. Almost 82% of Australian iron ore was exported to China over this period. The analysts expect spot iron ore prices to average US$54/t in the December quarter and US$44/t in 2017.

Global Miners

Deutsche Bank examines major diversified miners as well as the pure plays in iron ore and copper, looking at the balance sheet metrics and ability to generate cash flow and dividends. Rio Tinto ((RIO)) is considered to be the furthest along the path to de-leveraging while Vale is at the other end of the range.

The broker expects BHP Billiton's ((BHP)) leverage will reduce by the largest amount in 2018. All stocks reviewed fall to ratios of less than twice net debt to EBITDA (earnings before interest tax depreciation and amortisation) apart from Freeport-McMoRan. This results in upside risk to credit ratings, in Deutsche Bank's view.

All companies make free cash flow in 2017 but South32 ((S32)), Fortescue Metals ((FMG)) and Vale are envisaged to have this fall in 2018 year on year. Both Teck and Fortescue are expected to be large beneficiaries if current spot prices for their key respective commodities persist.

Nickel

An environmental audit by the Philippines government instigated expectations that supply of nickel would be wound back, which would in turn increase deficits and the draw down of inventories to more reasonable levels, Deutsche Bank observes.

A more reconciliatory tone from the Philippines and a potential temporary lift in the Indonesian ore export ban has dented this bullish outlook. The broker suggests this means more, rather than less, supply will hit the market. There is a chance some of the Filipino mines will be able to continue should they present a credible plan to fix any environmental infringements.

Deutsche Bank mulls several scenarios, and in the one where Indonesia allows some low-grade exports in combination with a tough but fair closure program from the Philippines, envisages the market more balanced with inventories remaining high. This presents a downside risk case for the commodity and prices could fall below US$10,000/t once more.

CBA analysts observe that nickel pig iron (NPI) is a higher value product because it contains more nickel than nickel ore and therefore the re-emergence of Indonesia's nickel pig iron supply, as a result of Chinese investment, is mitigating some of the shortages after the closure of mines in the Philippines.

Most of the Indonesian supply to come online this year is already in production and therefore Chinese stainless steel mills will struggle to immediately replace any declines from Filipino imports with Indonesian imports. Still, the analysts believe there is scope for NPI imports to continue lifting in 2017.
 

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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.
 

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article 3 months old

The Overnight Report: Awaiting Jobs

By Greg Peel

The Dow closed down 12 points or 0.1% while the S&P rose one point to 2160 and the Nasdaq fell 0.2%.

Well Oiled

I suggested yesterday that outside the big moves we’ve being seeing in commodity prices, the rate-related theme remains the same for Australian stocks. Sure enough the telcos fell another 1.6% yesterday against the tide of the market and utilities were slightly weaker. Bucking the trend was consumer staples, up, 1.4%, given the supermarkets found some buying support.

I also suggested the selling in gold stocks would stop given gold had been steady overnight, but this was not the case overall. Yesterday’s top ten down-movers again included no less than seven gold producers. And fair enough too – gold is down another US$12 overnight.

The materials sector did manage to close up 0.6% nonetheless thanks to support for the Big Miners. The banks gained 0.7% despite an earnings miss from Bank of Queensland ((BOQ)). There has been talk recently from brokers that after a very poor year, perhaps now it is time to readdress Australia’s Top 20 big caps which have been cast aside in favour of small cap growth names. Those growth names have pushed far enough, and big caps like the miners, banks and supermarkets, are showing value.

So it is said.

The energy sector was nevertheless the predictable winner yesterday, rising 2.0% on the stronger oil price. WTI last night moved above the US$50 mark, so energy should also do well today.

Yesterday’s data release was the August trade numbers, which showed a narrowing of the deficit due to imports falling and exports remaining flat. The deficit is otherwise slowly reducing as the impact of higher commodity prices flows through on flatter export volumes. There is a considerable lag between delivery contract prices set and today’s spot price, so that trend is set to continue for now.

Taper Off

Wall Street traded in a straight line sideways all afternoon, just as one might expect ahead of yet another critical jobs report. But this lack of movement belies the fact the Dow was actually down a hundred from the open.

It is unclear just what was behind initial weakness. The weekly new jobless claims number was positive in the sense of a very low level of claims, suggesting tonight’s non-farm payrolls outcome might be better than the 170,000 expected. This would boost the chance of a December Fed rate hike.

So is that bad? Again we see a market split between “omigod, not a rate rise” and “for God’s sake just get it over with”. It may be that the nervous types sold stocks down early, or perhaps weakness had something to do with Hurricane Matthew, which is posing a serious threat to both life and the Atlantic coast economy.

Either way, mid-morning the ECB vice president announced the central bank had no plan to begin tapering bond purchases (QE) next March. It was this rumour perpetuated earlier this week, alongside Fed rate rise expectations, that provided a boost to the portfolio reallocation theme of which I spoke yesterday.

But why did the ECB wait days, not hours, to quash the rumour?

Whatever the case, the Dow immediately bounced back one hundred points. This implies Wall Street is still happier to suckle on the milk of easy global monetary policy for the time being.

The US ten-year yield continues to push higher nonetheless, up 3 basis points last night to 1.74%.

The other influence on markets this week other than monetary policy has been oil, and last night WTI traded above the US$50/bbl mark on news OPEC was planning yet another informal meeting this month ahead of the official November meeting. This might suggest a further nutting out of production freeze/cut measures and exemptions.

Commodities

West Texas crude is up US80c at US$50.53/bbl.

Base metal moves were mixed last night, with only a 1.7% gain for nickel exceeding 1%.

Iron ore is unchanged at US$54.50/t.

Gold is down another US$12.90 at US$1254.30/oz.

Gold is down on another 0.6% jump in the US dollar index to 96.68, driven by both the strong jobless claims number and the ECB’s announcement.

The Aussie is subsequently down 0.5% at US$0.7586.

Today

The SPI Overnight closed up 14 points or 0.3%. Looks like futures traders are expecting oil strength to pip gold weakness once again.

The local construction PMI for September is out today.

Then its jobs in the US tonight.
 

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article 3 months old

Material Matters: Iron Ore, Bulks, Gold, Oil And Steel

Iron ore exports down in August; Deutsche Bank raises forecasts for bulks & base metals; gold outlook & US Fed; oil outlook & OPEC; BlueScope Steel.

-Risks to the upside for iron ore producers if iron ore prices continue at current levels
-Demand concerns may weigh on bulks, base metals by the second quarter of 2017
-Gold prices likely to range trade but heavily dependent on US dollar
-Uncertainty over oil market balance in 2017
 

By Eva Brocklehurst

Iron Ore

Demand indicators for iron ore are robust although Ord Minnett observes the seasonal slow down into the year end is apparent. Meanwhile, Port Hedland and Brazilian iron ore exports rose in August, up 11% and 14% respectively month on month, while Chinese domestic output fell.

The broker believes the data points to a 1.5% increase in Chinese steel production growth in 2017. Ord Minnett observes spot iron ore averaged US$57/t in September and, while down on August's US$61/t, is still providing healthy margins for the major producers.

Macquarie suspects BHP Billiton ((BHP)), Rio Tinto ((RIO)) and Fortescue Metals ((FMG)) will report weaker iron ore shipments in the September quarter and reduces forecasts by 2%, 3% and 6% for the big three producers respectively.

Rio Tinto is expected to miss its 2016 shipment target of 330mt by 3mt. Fortescue Metals is still expected to achieve its FY17 guidance of 165-170mt. Roy Hill has indicated it shipped 14.1mt in the first half of 2016, in line with Macquarie's estimates.

The latest port data suggests the average shipping rate for the September quarter is is running around 3% below expectations. The broker makes only modest adjustments to forecasts as the rates are broadly within annual seasonal differences.

Iron ore prices continue to trade above Macquarie's forecasts for 2016 and 2017 and, therefore, the risk is to the upside for base case forecasts. BHP has the superior upgrade potential of the big three, the broker maintains, given a stronger exposure to coking coal.

Bulk And Base Metal Commodities

Deutsche Bank has raised its forecasts for a number of bulk and base metal commodities for 2016 and 2017 to reflect supply-side changes. These include China's policy on coal, the potential for the Organisation of Petroleum Exporting Countries (OPEC) to curb production, uncertainty regarding Philippine nickel exports and the slower ramp up of iron ore producer Vale's S11D project.

By the second quarter of 2017 the broker expects demand-side concerns will weigh, as a result of a significant slowing in Chinese construction activity. The broker suspects positive Chinese data could continue to support bulks and base metals over the near term. Deutsche Bank upgrades price forecasts by an average 3% for 2016 and 6% for 2017.

2017 iron ore forecasts are upgraded 7% to US$45/t, coking (metallurgical) coal by 25% to US$111/t, Newcastle thermal coal by 27% to US$63/t, copper by 1% to US205c/lb, manganese by 37% to US$3.8/dmtu, aluminium by 2% to US71c/lb, nickel 7% to US488c/lb and zinc by 22% to US113c/lb. Gold is unchanged at US$1,328/oz.

Gold

Citi remains sceptical of a gold price rally into the end of the year as prices in the year to date have largely traded sideways. Several structural drivers appear challenged, with stable mine supply coupled with subdued Asian retail demand.

The broker expects gold prices to average US$1,320/oz in the fourth quarter and gold to trade within a US$1,300-1,350/oz range until the US Federal Reserve meets and potentially raises rates in December, after which prices are expected to modestly decline throughout 2017. [Note: Citi is writing prior to this week's sudden US$40/oz drop in the gold price -- Ed]

The broker interprets the September statement from the Fed as indicating the case for a second rate hike has strengthened, pending confirmation from the data. Citi believes the US dollar could make or break sentiment on gold and this may have ramifications for the rest of the precious metal complex. Moreover, the US election is significant in that, absent an asset sell-off with a Trump victory, a stable US dollar could keep gold from rebounding aggressively in the fourth quarter of 2016.

In terms of central banks, Citi believes, outside of Venezuela, net movement of gold reserves should be minimal in the short term.

Energy

As oil prices rallied after OPEC announced a vague agreement to reduce total crude output, Citi observes uncertainty has increased, with Iraq's new oil minister claiming that third party estimates of the country's oil production were too low and this needed to be addressed for Iraq to accept any November agreement.

The broker does not believe the OPEC move is a game changer but probably raises the floor of the oil price to the mid US$40's a barrel from the low US$40's. Moreover, countries may try to push production as high as possible in the next two months before they are forced to freeze or cut.

Sticking with OPEC's forecasts, a cut in output to a production ceiling around 32.5-33mmb/d, presumably starting in January 2017, would imply inventory builds up through the first half of 2017 at 0.9mmb/d but this would be reversed in equal magnitude in the second half. At 33mmb/d Citi envisages the oil market would be over supplied into 2018.

Deutsche Bank believes the proposed production ceiling will tighten oil markets by 0.4mmb/d in 2017. This move offsets the broker's expectations for higher US oil supply from 2017 and has kept its oil market re-balancing thesis on track for a return to deficits in 2017.

Deutsche Bank retains its US$55/bbl Brent oil forecast for 2017 and Oil Search ((OSH)) its top pick in the sector as it has superior asset quality coupled with the lowest-cost proposed LNG projects globally.

BlueScope Steel

Australian steel spreads – the difference between the price of a commodity and the price of the raw material in that commodity - have fallen significantly, Morgan Stanley observes, largely because of higher coal prices and somewhat weaker regional steel prices. Spot spreads in east Asia have fallen to $183/t.

The broker envisages limited downside to first half guidance for BlueScope Steel ((BSL)) but significant downside potential in the second half should spreads remain at current levels, albeit this is not a base case.

The broker expects China's measures to relax its coal production cap should help moderate coal prices from October and, all else being equal, a move to US$140/t for coking coal is required for spreads to equal second half forecasts.

US steel spreads have also fallen in line with the company's guidance, currently at around US$325/t. The broker's US steel analysts continue to flag downside risks to US hot rolled coil prices although this may be offset to some extent by lower scrap prices.

A rebound in spreads is required to justify upside in the stock price, Morgan Stanley believes. Management is expected to reiterate first half guidance at the AGM in November.
 

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article 3 months old

The Overnight Report: Rates Moving Higher

By Greg Peel

The Dow closed up 112 points or 0.6% while the S&P rose 0.4% to 2159 and the Nasdaq gained 0.5%.

All About Rates

As global central banks look to shift away from ultra-easy monetary policy, the scramble amongst global investors to reallocate portfolios is on in earnest. No more was this in evidence than on the Australian stock market yesterday.

Aside from the direct impact of rising US rates or tapering ECB QE on Australian stocks with offshore exposure, rising global rates also eases the need for the RBA to cut further. That “complication” of a too-strong Aussie will be dealt with.

Already the yield-paying sectors have borne the brunt of portfolio reallocation, as investors move away from safety and guaranteed return into growth and risk. Gold is a beneficiary of low global rates, and thus a loser on the flipside. While yesterday did indeed see carnage amongst Australian gold producing stocks, the materials sector was not the biggest loser on the day.

That privilege was reserved for utilities, which suffered another 2.0% drop. Telcos fell 1.1%. The diverse industrials sector contains many a dividend payer and it fell 1.5%. Despite eight of the top ten biggest down-movers on the ASX yesterday being gold stocks, the materials sector clocked up only a 1.4% fall, as other commodities provided some balance.

On the other side of the ledger, the Australian company most leveraged to US interest rates, QBE Insurance ((QBE)), won the day with a 3.4% gain. In a similar position is registry company Computershare ((CPU)), which rose 2.2% against the tide. These moves helped the financials sector to a 0.4% gain to provide some offset. The Big Four banks saw mixed moves.

This new global paradigm is a tough one for Australian banks. US banks rose on Wall Street last night because banks are beneficiaries of rising rates. A steeper yield curve means a bank can borrow cheap and lend dear. But why is the theory not the same for Australian banks?

Well, it should be. But the problem is the local banks pay high yields, so they are under pressure as yield stocks like any other. They also lend most of their money based on short term rates – mortgage rates are based off the RBA cash rate -- and not off the long term government bond rate as they are, far more logically, in the US. RBA rate cuts have provided the opportunity for the local banks to reprice their mortgage books amidst otherwise tepid growth in general credit demand.

Rising global rates are therefore not great news for Australian banks, albeit not a disaster either.

On a more domestic front, yesterday’s August retail sales number showed a 0.4% jump after being flat in July, beating expectations of 0.2%. This provided some balance to the consumer discretionary sector yesterday, given higher rates, or no further RBA cuts, are a headwind for retailers.

The local service sector PMI was also released yesterday, which showed a jump back to 48.9 in September from 45.0 in August. A positive, no doubt, but as I have said often enough, Australian PMIs are so volatile they are pretty meaningless.

Rates and Oil

Not so meaningless is the US service sector PMI, given the US economy is 70% domestic consumption based. It shot up to 57.1 from 54.1 and thus provided further cause for Wall Street to believe a December Fed rate hike is locked in. Or maybe even a November hike, although that is seen as unlikely. Tomorrow night’s non-farm payrolls number could nevertheless be a determinant.

To that end, the ADP private sector jobs number for September came up short, showing a drop to 154,000 new jobs from 175,000 the month before. But as long as non-farm payrolls come in with something reasonable, Wall Street will still assume a December hike.

And that means banks are the stocks of preference. While fears over Deutsche Bank’s survival have not gone away, they have abated somewhat. This has allowed the US banks to regain some lost ground on the back of rate rise expectations. Last night financials were a primary driver of Wall Street strength.

The other primary driver was the energy sector. Financials and energy are the two biggest sectors in the S&P500. Weekly US oil inventory data showed a drawdown last night when a build was forecast. The WTI price shot up to US$50/bbl at one stage before settling just under that level.

Of course it could all come a cropper if two things don’t happen before year-end – a Fed rate hike and confirmation of an OPEC production freeze. And there’s the US election of course. But the question is: were the Fed to stay on hold, is that good or bad for stocks?

On the one hand there are those believing a rate hike would trigger a sell-off, and on the other those who believe a lack of action from the Fed would have markets turning tail on sheer frustration. The fact that Wall Street rallied last night on, in part, rate rise expectation, is evidence that investors are adjusting to the inevitable rather than running scared.

Hence we see the same ongoing portfolio reallocation pattern as is underway in Australia – sell yield, buy cyclicals. Were the Fed not to hike this would all swing back the other way, but it’s hard to see, given the TINA effect, what would actually send Wall Street crashing. Except maybe Deutsche Bank crashing.

Commodities

West Texas crude is up US$1.10 at US$49.73/bbl.

Base metals were steadier last night other than lead and zinc, which both suffered 1.5% falls.

With China absent, iron ore fell US50c to US$54.50/t.

Gold has managed to steady, dropping slightly to US$1267.10/oz.

The US dollar index is steady at 96.15 and the Aussie is steady at US$0.7621.

Today

The SPI Overnight closed up 25 points or 0.5%.

While gold stocks should stop falling today, the rate-related theme otherwise remains the same.

Australia’s August trade data are due out today.

Bank of Queensland ((BOQ)) will release its earnings result.

And it’s the turn of the Westpac and NAB CEOs to be hit over the head with a parliamentary wet newspaper.
 

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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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