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article 3 months old

The Outlook For 2017: International

This story was originally published on 6th December 2016. It has now been re-published to make it available to a wider audience.

Equity strategists and economists provide their views and forecasts for the global economy in 2017.

- Stronger global growth
- Trump offers hope, and risk
- Europe offers political risk
- Emerging markets to outperform


By Greg Peel

Strategists agree on at least one thing in their outlooks for 2017 – it will be a potentially more volatile year than 2016. That’s not particularly comforting for investors given the volatility experienced throughout the year now coming to a close.

2016 began with a collapse in commodity prices, particularly oil, and a collapse in global bank shares, given concerns over the potential bankruptcy of major European banking houses. The counter was a rush to the bottom among central banks in terms of policy easing, compounded by the Fed holding off, and holding off, and holding off again with a rate hike. Yield stock valuations soared globally.

In the middle of the year we had Brexit. No one saw that coming. Commodity prices managed to rebound somewhat on supply-side constraints, before surging ahead once more on Chinese government production restrictions and the anticipation of, and eventual delivery of, OPEC production cuts (effective from January).

Expectations for a Fed rate rise grew and grew thus when the whole Brexit scare proved (so far) to be misguided, we soon saw a violent shift in investor allocation as previously oversold commodity stocks rebounded strongly and previously overbought yield stocks were dumped.

Then along came Trump. No one saw that coming.

As had been the case with regard Brexit, the worst was feared and all and sundry were proved wrong. Trump would of course be great for America. Or at least Wall Street. Presumably.

And strategists are suggesting 2017 is going to be even more volatile?

The buzzwords for 2017 are “political risk”. Not that we haven’t experienced political risk in recent times. We recall that the word that gave us “Brexit” was “Grexit”. We recall that not so long ago, the US government shut down. But 2016 gave us Brexit, and Trump, and possibly a developed market-wide seismic shift in voter perception and power. The workers are revolting, against globalisation, the GFC and what has transpired in the eight years hence.

2016 was the year of Farage, Hanson and Trump, and the Orange by-election. 2017 could be the year of Marine Le Pen and a possible Frexit, another Far Righter in the Netherlands and a possible Nexit, and an Italian comedian offering a possible Italeave. Germany, too, goes to the polls next year.

But before we get to the potential collapse of the EU, we have Trump.

Trump won the US election on policies of building a wall on the Mexican border, locking up Hillary Clinton, tearing up the TPP, NAFTA and the NATO and Pacific alliances, declaring Beijing a “currency manipulator” and whacking a 45% tariff on Chinese imports, while cutting the US corporate tax rate from 35% to 15%.

“Lock her up” went out the window as early as Trump’s victory speech. The Wall will partly be a fence. The Japanese prime minister left New York happy he could work with a Trump presidency. To date, many of Trump’s campaign “promises” appear to have been watered down and the man does not even take office until late January.

Few believe a full 45% tariff on Chinese exports is even remotely likely. A 15% tax is a very long way down from 35%. There is much faith being placed in Trump’s infrastructure intentions, but even if they do ring true, Rome wasn’t built in a day.

In other words, despite a full sweep of houses for the Republicans – upper lower and White – no one is really sure just what a Trump presidency might bring.

Markets do not like uncertainty.

The Global Economy

Morgan Stanley believes the global recovery is likely to gain more momentum in 2017, driven by faster US growth, stable developed market growth and rebounding emerging market momentum. But the strategists warn that while global growth may become more balanced, material risks emanate from fiscal stimulus, faster Fed rate hikes and a wider globalisation backlash.

The good news is global GDP growth should push back towards its historical average, Morgan Stanley suggests, with faster growth in the US and Japan offsetting a slower Europe, and a rebound for commodity-exporting emerging economies offsetting a gradual slowdown for China.

The bad news is the 2017 outlook is subject to material uncertainty, thanks to a new US administration taking office, key ballots in Europe and the formal start of Brexit.

Commonwealth Bank’s economists agree with Morgan Stanley that the global growth rate should move towards its historical average, rising 3.3% in 2017 and 3.5% in 2018 on their forecasts. This is still short of the average of 3.7%, but well above the 2.7% assumed for 2016.

CBA suggests global economic policies, particularly fiscal policies, will spill over into financial markets next year. Already the UK government has announced a large fiscal stimulus package intended to ward off the negativities implied by Brexit. Meanwhile, Donald Trump is expected to “unleash a very large fiscal stimulus” in the US, CBA notes.

The economists also expect Europe to be the centre of political risk.

Citi’s global strategists note “easier” fiscal policy (stimulus) and a shift away from super-accommodative  monetary policy was already underway ahead of the US election but Trump has “potentially supercharged” this theme for 2017-18.

To gauge some idea of what might transpire, Citi is not alone in making the comparison to the last Washington outsider candidate who pledged to “make America great again”, Republican pin-up boy Ronald Reagan. While the period 1980-85 is not, by Citi’s admission, perfectly comparable, that experience suggests bond yields rise and the US dollar rallies well before fiscal deficits actually begin to widen (spending kicks in).

We have already seen substantial moves in both.

Goldman Sachs is another house assuming a pick-up in global growth next year. But Goldman does not believe stronger US growth will do much for asset classes beyond shift the narrative from “low-flation” and monetary accommodation towards reflation and rising rates. This will not change the fact that the trend growth rate of GDP appears to have fallen for both advanced and emerging economies during the post-GFC period.

Meanwhile, valuation levels for equities and especially bonds remain highly elevated by historical standards, Goldman notes, so expected returns appear to be low across most asset classes. In fixed income, yield is scarce, and in equities, growth is scarce.

Many of the fundamental drivers behind declining trends in developed market GDP growth are likely to remain weak for the foreseeable future, the investment bank believes. One of the sustained headwinds for economic growth in recent years has been the declining growth rate of the working age population. Productivity growth is also low, so has been no offset to the demographic drag.

Asset manager Blackrock is of a similar opinion.

Ageing societies, weak productivity growth and high levels of public debt will, in Blackrock’s view, limit the future pace of economic expansion and the ability for central banks to raise rates. The asset manager believes that from today’s depressed level, the average developed market ten-year bond yield will only rise by 50 basis points over the next five years.

On that basis, Blackrock does not see asset valuation multiples, elevated due to low interest rates, reverting to historical averages over the period. Equities should outperform fixed income over that time.

The United States

Morgan Stanley expects the US dollar to “break out” to the upside. Inflation will rise, and the Fed will be forced to tighten monetary policy more rapidly than assumed pre-Trump. While fiscal stimulus will help growth, it must not be forgotten that higher interest rates mean tighter financial conditions.

Current corporate debt levels are unprecedented outside a recession, Morgan Stanley points out. Stronger earnings will help but higher interest rates will not, and “the Fed could push us to the edge quicker”. To justify current Wall Street valuations, investors need to believe in modest growth, support from central banks and low defaults, and not just for the next year.

Markets anticipate defaults one year in advance, Morgan Stanley notes. Lower defaults in 2017 are “in the price”, rising defaults in 2018 are not.

The investment bank is presently tracking 2016 US growth at 1.6% year on year and has lifted its 2017 forecast to 2.0% and introduced an initial 2018 forecast of 2.0%. These numbers are consistent with Fed forecasting.

CBA had been forecasting 1.7% growth in 2017 but has now lifted that to 2.3% and has introduced a 2018 forecast of 2.6%, attributing the strength to “Trump’s fiscal pump-priming”. The economists expect promised cuts to personal and corporate taxes to be delivered in the first half of 2017, driving a pick-up in consumer spending and business investment.

There are nevertheless a couple of caveats.

Most of the value of the cuts to personal income tax will accrue to high income earners with high savings rates, CBA warns. And there is a risk in the form of the inevitable infrastructure time lag – large infrastructure projects are typically complex and take time to implement.

CBA, too, expects the fiscal boost to the US economy when it is already close to full employment will lead to higher inflation, a stronger US dollar and higher interest rates. The economists expect the Fed to lift its funds rate range by 50 basis points in 2017, to 1.00-1.25%, and another 50 in 2018, to 1.50-1.75%.

Goldman Sachs expects four Fed rate rises between now and end-2017.

These forecasts are in line with Morgan Stanley’s expectations of a “quicker” Fed. Prior to Trump’s election, and backed by constant talk from the Fed of “gradual” tightening and running the US economy “hot”, markets were pencilling in one 25 basis point hike in each of 2016, 2017 and 2018.

Morgan Stanley has retained its pre-Trump US stock market forecast, suggesting a base case 2300 for the S&P500 in twelve months (current level circa 2200). However the strategists now see more upside to their bull case than downside to their bear case. The same 2300 target is reached on a combination of a stronger earnings forecast and a lower PE multiple forecast, which the strategists see as “prudent”.

Morgan Stanley is the first to admit it had a bad year in 2016, following five consecutive years of portfolio outperformance. The strategists were caught out by “huge factor reversals, crowding and unwinds”, despite their overall market call a year ago proving to be quite accurate. Many an investor will have been caught in the same violently revolving door of rapid asset reallocation.

The strategists expect uncertainty and volatility will be a greater threat in 2017 given the Republican Sweep and impact this will clearly have on some policies. Big changes to interest rates, or moves in the US dollar or oil, and a different policy outlook will have a dramatic impact upon which market segments lead and lag the overall index. The strategists gut instinct is to “fade” current optimism about reflation and be prepared for a bit of legislative gridlock, despite the Republican Congressional majority, relative to current consensus banter.

“Fading” is trader-speak for incrementally selling into, or taking profits on, a rising market. Morgan Stanley’s best guess is to stay long the reflation trade until close to Trump’s inauguration and then fade it sometime after that.

China

Trump’s 2016 election shocked the world. In 2017, a five-year change to China’s top leadership team will take place, followed by a five-yearly government reshuffle in 2018. While there is little doubt ultimate leader Xi Jinping will be granted another go-round, the make-up rest of the seven member leadership team is considerably uncertain.

These pending changes should keep Chinese policy-makers risk averse in the meantime, CBA suggests, given no one wants questions raised over his/her running of the world’s second largest economy.

CBA is forecasting 6.8% GDP growth for China in 2017, slightly better than 2016’s expected 6.7%, and above consensus of 6.4%. Growth is then expected to moderate to 6.6% in 2018 as China gradually converges towards slower structural growth rates.

Heading into 2017, the Chinese economy should be boosted by a lower exchange rate and a stronger US economy providing support to export growth, CBA suggests. Import growth should remain moderate due to a cooling housing market and easing consumer spending. A big spike in government expenditure in 2016 should be dialled back in 2017.

Of course there remains one small issue that leads the CBA economists to warn the risk to their 2017 forecasts lay clearly to the downside. If Trump does indeed follow through with threats to name China as a currency manipulator and imposes a 45% tariff on imports from China, it could reduce China’s GDP by a full percentage point in the first year.

But if there is a major disruption to global trade flows, CBA would expect the Chinese government to renew policy easing to support economic growth.

Morgan Stanley’s strategists have lifted their rating on China to Overweight from Underweight.

Europe and the UK

In the wake of Brexit, the European economy has proven to be resilient, Morgan Stanley notes. Morgan Stanley is forecasting 1.4% GDP growth for the eurozone in 2017 and 1.6% in 2018. Slower consumer spending and sluggish investment activity will be offset by stronger net exports, thanks to the weaker euro, and stronger global demand.

The combination of a higher oil price and weaker euro will push European headline inflation materially higher, Morgan Stanley suggests, while core (ex food & energy) inflation will rise more gradually. The ECB will likely extend its bond buying program (QE) for another six months to September 2017 while leaving its cash rate unchanged, before “tapering” purchases thereafter.

CBA’s economists agree the lower euro will provide for stronger European exports, as will a stronger US economy. Some 14% of European exports are destined for the US. But household spending will remain resilient and business investment will further improve, in CBA’s opinion, leading to faster GDP growth than the ECB’s forecasts of 1.6% in each of 2017-18.

Once again, all forecasts come with the caveat of political risk.

CBA does not believe the ECB will increase easing measures in 2017, rather the central bank will begin tapering in the September quarter.

CBA does believe the much lower pound will crimp household spending and business investment in the UK, while improving net exports. Brexit uncertainty will also contribute to restraint. The Bank of England is forecasting a slowing in UK economic growth to 1.4% in 2017 and 1.5% in 2018, but given the UK government’s recently announced fiscal stimulus package, CBA forecasts a more confident 1.6% in both years.

Japan

Morgan Stanley believes stronger global growth in 2017 will be led by the US and Japan, with the weaker yen against the stronger US dollar proving supportive for the latter. The Bank of Japan is forecasting 1.3% GDP growth in 2017 and 0.9% in 2018, which in Japan’s case can be considered “strong”.

CBA agrees the Japanese economy will see strength next year thanks to modest further cuts in the Bank of Japan’s cash rate and further fiscal stimulus from the government. The BoJ will nevertheless be wary of cutting its cash rate too much further into the negative given the effect on pension returns.

Which brings us back to the developed world problem of an ageing population. Nowhere is this as more pronounced than in Japan. CBA’s GDP forecasts for Japan are lower than those of the BoJ – 0.9% in 2017 and 0.6% in 2018 – given an economic recovery cannot be sustained without a larger lift in real wages.

India

And now for the good news.

Back in the noughties, when the commodity super-cycle prevailed, India was invariably mentioned in the same breath as China as the new frontiers of global growth. But in the meantime India has wavered China has completely stolen the spotlight, through economic boom to globally influential slowdown.

The Reserve Bank of India is forecasting 7.9% growth in fiscal year 2017-18, up from 7.6% in 2016-17, in line with the CBA economists’ forecasts. If accurate, India would be the fastest growing economy in the world.

Unlike the developed world, India does not suffer from an ageing population. Solid growth in wages is leading to robust consumer spending, CBA notes, and the introduction of a GST should boost business confidence and investment, albeit low capacity utilisation and funding constraints will provide headwinds.

Morgan Stanley’s strategists have India as their “largest Overweight”. They believe concerns over India’s de-monetisation have been overdone.

While the Indian government could not be accused of being smooth operators when it comes to the recent assault on India’s black market cash economy, the combination, via banknote reissuance and banking sector initiatives, of forcing billions of rupees into the real economy and providing banking facilities for poorer regional areas for the first time should provide a significant boost to the Indian economy, it is generally believed.


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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

The local AGM season takes a bit of a breather until later in the week next week but from Thursday they start to come thick and fast once more.

There are still some straggler production reports to get through from the resource sectors and quarterly updates from the likes of Qantas ((QAN)) and REA Group ((REA)). There are also a further handful of earnings results.

CSR ((CSR)), Orica ((ORI)), BT Investment Management ((BTT)) and Xero ((XRO)) are all in the frame next week but the biggie in ANZ Bank ((ANZ)) on Thursday.

There are no corporate events on Tuesday that do not involve lunch and empty afternoon offices, being Cup Day. Victoria is of course shut, in case anyone doesn’t notice. The all-important Rate That Stops The Nation will still go ahead as usual, but all the money is on the favourite, No Cut.

It’s a relatively busy week for economic data with private sector credit, building approvals, the trade balance and manufacturing and services PMIs all due. After the meeting on Tuesday, the RBA will release its quarterly Statement on Monetary Policy on Friday.

As Tuesday is the first on the month, manufacturing PMIs will be published across the globe and services on Thursday, except for China’s official number which both land on the Tuesday.

Tonight’s US GDP release will be important in determining whether the odds of a December Fed rate hike will shift from a current 70% and so too will be Monday’s release of the personal consumption expenditure measure of inflation. In case anyone doesn’t realise, the Fed actually meets on Tuesday night, but few expect a pre-election rate hike (17%).

Other US data releases across the week include the Chicago PMI, personal income & spending, construction spending, vehicle sales, chain store sales, factory orders, trade and September quarter productivity. And being the first week of the month, the private sector jobs report is out on Wednesday and non-farm payrolls on Friday.

The Bank of Japan also holds a policy meeting on Tuesday. The Bank of England will wait until Thursday.

The eurozone’s September quarter GDP result is out on Monday.
 

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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

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

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

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

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

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

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

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

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


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The Overnight Report: Double Fizzer

By Greg Peel

The Dow closed up 163 points or 0.9% while the S&P gained 1.1% to 2163 and the Nasdaq rose 1.0%.

QQE?

If it’s not bad enough that half of media reporters and commentators, including on business television, cannot pronounce the word “quantitative” (here’s a clue guys, it’s not “quantative”), the Bank of Japan yesterday introduced a new monetary policy tool called quantitative qualitative easing, or QQE.

That’ll get some tongues twisting.

QQE will form part of a new package from the BoJ, which is really not a lot different to the previous package but for a bit of tweaking. Importantly, the BoJ did not cut its cash rate further into the negative. Aside from the current -0.1% not having worked, negative rates represent a tax on banks and entry in the great unknown that has investors very concerned.

The BoJ will retain its level of bond buying, or QE, but will drop the 7-12 year duration range so it can fiddle with the yield curve – QQE. By buying shorter durations the central bank will lower short term rates and thus steepen the yield curve out to longer term rates, which is positive for banks and wealth managers, and somewhat akin to the Fed’s “Operation Twist” of a few years ago. Purchases of stock market ETFs will also continue.

How was this received? Well, with a sigh of relief that there was nothing scary in there, and with a general shrug of fair enough, they’re at least trying to do what they can. The Nikkei closed up 1.9%, underscoring the belief this is a pro-equity policy move (in the form of TINA, of course).

The Australian stock market was already positive ahead of the BoJ’s announcement mid-afternoon, and kicked higher on the news to a solid close. Sector moves were relatively consistent, although it’s been a long time since we’ve seen industrials (1.3%) and consumer staples (1.0%) providing leadership. The banks (0.8%) provided the market cap clout.

The only loser on the day was telcos, given TPG Telecom’s ((TPM)) shock guidance has sparked a rethink for the sector. Selling continued in TPG yesterday, and peer Vocus Communications ((VOC)) is also being caught in the downdraft.

At the end of the day it was a strong session one might not normally expect ahead of a critical Fed meeting, but in retrospect the right move. For the time being the ASX200 has put 5300 behind it and will begin to eye off 5400 once again.

Mixed Messages

The Fed didn’t hike. Given a hike was only being ascribed a 15% chance ahead of the meeting this hardly comes as a surprise, but there would have been some nervous traders holding their breath given talk of the central bank trying to retake control with a surprise announcement.

Clearly Janet Yellen is not into surprises.

She is into repetition, nonetheless. Yes, she still expects there will be a rate rise in 2016. The November meeting is “live”, as is every meeting, but nobody expects a hike ahead of the election. So, it’s December. Lock it in.

Except that as ever, the Fed remains data-dependent. In this point the Fed’s focus has changed somewhat. No longer does the FOMC see the headline unemployment rate as a viable target, given the hidden rate of underemployment in that which is providing the clue as to just how much slack remains in the US labour market. So ignore the 4.9%.

Focus instead on the underemployment rate, participation rate and level of wage growth, which are all as important as that base number of jobs added the world focuses so heavily on each month.

So on the one hand Yellen remains hawkish – a rate hike is expected – but on the other dovish – employment is not yet where we want it to be. Then there are the “dot plots”, which this quarter suggest a sizeable cut to prior rate expectations for 2017-18, and also a cut to GDP growth expectations to benign levels of around 1.8%. From these we can deduce the Fed will deliver one rate hike this year, and then perhaps the next one will also take a year.

There were three dissenters among FOMC members, who wanted to hike now.

So it was a meeting of mixed messages, but in the end enough to provide a sigh of relief for equity markets. The thought of a December rate hike is not going to scare anyone given not so long ago the markets feared four rate hikes in 2016. And the lowering of rate and GDP expectations going forward means Fed tightening will likely be so gradual as to be almost imperceptible.

Might as well buy stocks.

Other markets reacted as would be expected. The US dollar index is down 0.5% to 95.48. Gold is up US$20. The ten-year bond yield is down 2 basis points to 1.67. The VIX volatility index fell 16% as fear subsided. The oil price is up 3%.

We can now spend the next two and bit months getting on with things, and if the world prices in a December hike and doesn’t fret about it, then we should not have to go through this tedious speculative process again this year. But of course, anything could change.

We could have a Trump presidency.

Commodities
As always, the shutters are coming down on the LME just as the Fed statement is being released, and ahead of the press conference. Thus we’ll need to wait until tonight to see just how base metal traders respond.

In the meantime, a mixed session had aluminium and nickel rising 0.7%, copper and zinc falling 0.7%, and lead dropping 2%.

Iron ore rose US10c to US$55.40/t.

West Texas crude has rolled over to the new November delivery contract which has probably played a part in a US$1.57 or 3.6% jump to US$45.62/bbl, otherwise due to the Fed, with November Brent only rising 2.1%.

Gold is up US$20.30 at US$1334.90/oz.

Alas, while the Fed outcome will be positive for the local stock market today, that “complication” is back in the form of a 1% jump for the Aussie to US$0.7632.

Glenn Stevens will be smiling wryly as he polishes his putter – not my problem anymore.

Today

The SPI Overnight closed up 32 points or 0.6%.

On the subject of the RBA, the new governor will today make his first testimony to the House of Reps economic committee.

There’s some data out in the US tonight, but December is a long way off.

Brickworks ((BKW)), Premier Investments ((PMV)) and OrotonGroup ((ORL)) will release earnings results today, there are a few more ex-divs, Scentre Group ((SCG)) will host an investor day and Suncorp ((SUN)) will hold its AGM.

Rudi will travel to Macquarie Park to appear on Sky Business twice today. First from 12.30-2.pm and later between 7-8pm for an interview on Switzer TV.
 

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article 3 months old

The Overnight Report: Double Header

By Greg Peel

The Dow closed up 9 points while the S&P was flat at 2139 and the Nasdaq rose 0.1%.

Poised

It was a wild old opening on the local market yesterday as the ASX computers worked through the process of matching out orders left over from Monday’s abbreviated session. When the dust settled the ASX200 came out relatively flat but for one rather notable move in the telcos sector.

One consistent theme of the August results season was some big drops among those “new world” and often smaller names that had been bought up into overvalued territory, thus risking a stampede to the exits on even the slightest hint of disappointment. Yesterday TPG Telecom ((TPM)) underscored that theme with its out-of-cycle report.

TPG has been among the popular stocks of 2016, rising over 30%. Yesterday’s result was largely in line with forecasts but weaker guidance came as somewhat of a shock, and the stock plunged 21% to basically wipe out the year’s gains. Subsequently, the telcos sector was the worst performer on the day with a 2.6% drop.

Despite no one expecting any shocks from the minutes of the September RBA meeting, released late morning, the stock market still fell in response. Perhaps some were hoping that while the September statement provided no suggestion of an imminent rate cut, the minutes might. They didn’t.

The board reiterated that “the current stance of monetary policy was consistent with sustainable growth in the Australian economy and achieving the inflation target over time”. This conclusion does not rule out another rate cut, but provides no reason to believe there’s one around the corner.

The index nevertheless climbed back in the afternoon to a slight positive close. The only other sector to finish in the red on the day was energy, down 0.9% despite a flat oil price. Materials rose 0.7% on better metals prices. These two sectors have been playing topsy-turvy for the past few days.

From a technical perspective, the index struggled back to close just over 5300 – a nice springboard position to contemplate the impact of whatever happens over the next 24 hours.

The Bank of Japan will deliver its policy statement at some time today. The BoJ is not into standard release times, and if you go to its website the scheduled time of release is “undecided”. With Tokyo a couple of hours behind Sydney, we may still be in the dark on the close.

In a tale of two central banks, it’s a case of whether the BoJ eases or remains on hold and whether the Fed tighten or remains on hold. While markets are mostly convinced the Fed will do nothing, the BoJ’s track record of surprising and the fact it is known the board members are split down the middle means nobody really has a clue what today might bring.

One More Sleep

It is really quite tedious the way these quarterly Fed meetings have become major market “events” but unfortunately that’s the world we now live in. Wall Street was expected to be quiet last night and it stuck to the script.

There was some surprise when data showed US housing starts dropped 5.8% in August, when only the night before the housing sentiment index surprised to the upside. But the drag came from the south, which suffered extensive flooding in the month.

The Fed funds futures are pricing in around a 15% chance of a rate hike. On the other hand, there are still those sticking to their guns that the Fed is set to spring a surprise, notably Barclays, Bank Paribas and US bond guru Bill Gross, formerly of Pimco.

What is agreed upon is that were the Fed to indeed surprise, the market would not like it. Were it not to hike, the market will probably just bungle along again towards the election.

There is no more that can be said at this point.

Commodities

It was zinc’s turn to have a pop on the LME last night, rising 2.3%. Nickel kicked on its recovery with a 1.4% gain while copper rose 0.6%.

Iron ore was unchanged at US$55.30/t.

West Texas crude is up US12c to US$43.30/bbl.

Gold is again little changed at US$1314.60/oz.

The US dollar index is up 0.1% at 95.98 and with no sign of an RBA rate hike, the Aussie is up 0.2% at US$0.7553.

Today

The SPI Overnight closed down 9 points.

I think we’re all aware there are a couple of central bank meetings coming up.

Kathmandu ((KMD)) and Nufarm ((NUF)) will release earnings results today and Newcrest ((NCM)) is among a small group going ex.
 

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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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The Overnight Report: Jittery

By Greg Peel

The Dow closed down 3 points while the S&P closed flat and the Nasdaq lost 0.2%.

No Hack

Futures traders had called for a flat opening on the local market yesterday and they were bang on – the market didn’t open at all. When it did eventually open at 11.30 the ASX200 immediately fell 23 points, probably driven by sellers who still haven’t been able to fill out the census and feared something sinister.

Just a technical glitch, the ASX declared, and quickly the index was back to flat again, before once again the exchange crashed at 2pm. No amount of scrambling from the geeks could prevent the umpires eventually abandoning play for the day.

The futures are showing down 5 points this morning, but the focus will be not on whether this proves accurate but on whether the exchange opens at all. The ASX has insisted this was not a hack, so presumably the geeks have put in an all-nighter and things should be up and running as normal.

Yesterday was not normal nonetheless, and there were likely a lot of players who elected to stand aside. There was a weakish lead from Wall Street to contend with but just as well this didn’t occur on a day promising elevated volatility. In the wash-up, the flat close was made up of a gain for materials balancing out a fall for energy, and falls in the consumer sectors of discretionary, staples and healthcare balanced by a small gain for the banks.

Beyond that, we can pretty much write yesterday off. We can assume a lack of volatility in the lead-up to the BoJ and Fed meetings on Wednesday and with Wall Street dead flat last night, not a great deal is expected today.

The Great Unknown

The flat close on Wall Street gave the impression the market did absolutely nothing last night as it awaits the central bank meetings but in fact the Dow was up a hundred points early, then down 50 and up 50 before finally going nowhere.

The initial rally was linked to the oil price. Venezuela declared last night a deal among OPEC members to freeze production is imminent, with OPEC set to hold an extraordinary meeting in Algiers this weekend. Those who are prepared to believe, or who just don’t want to be caught out, sent oil prices higher early in the session and the stocks indices followed.

Those who don’t believe there will be a wolf this time either then sent oil prices back down again, to flat, and dutifully the stock indices followed suit.

The only other news of influence on Wall Street last night was the monthly housing sentiment index, which showed a jump to 65 from 59 when assumptions were for no change. This 50-neutral index now suggests home builders are feeling more confident than they have so far this year.

Otherwise, it’s all about central bank speculation. Commentators agree that while the Fed’s decision is of vital importance, perhaps more important is what the Bank of Japan decides several hours earlier. The BoJ is known to be split down the middle on policy direction, leading to speculation it could either cut further into the negative or, given easing simply has not worked for Japan to date, surprise by going completely the other way, perhaps winding back QE.

It’s a great unknown, as is what the Fed might do. While few believe the Fed will hike based on the data, there are those who believe the FOMC will hike anyway just to save face and restore some credibility. What is agreed is that Wall Street has not priced in a September rate hike, and if there is one, the initial response could be ugly.

But then it may come down to what the BoJ does first.

Commodities

West Texas crude is up a cent at US$43.18/bbl.

There was suddenly a bit of action on the LME last night, with nickel jumping 4%. Zinc and lead rose 1% while copper slipped a little.

With China back on board, iron ore fell US20c to US$55.30/t.

Gold is relatively steady at US$1312.80/oz.

The US dollar index has dropped 0.2% to 95.86 but the Aussie has shot up 0.6% to US$0.7535, probably on vision of Malcom Turnbull strutting around the NYSE last night chatting to all and sundry.

Today

The SPI Overnight closed down 5 points.

It is hoped that at 10am, the ASX will open.

The minutes of the September RBA meeting will be released today, chronicling Glenn Stevens’ last meeting in the chair, with nothing of any great consequence expected.

TPG Telecom ((TPM)) will release its earnings results today.

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

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article 3 months old

The Monday Report

By Greg Peel

Oversold

The local market decided on Friday that the Fed was not going to hike this week or, if it does, relevant stocks have been sold down far enough to take that into account. With the FOMC meeting now only three days away, no US data releases with the power to make a difference in the meantime, and Fedheads “blacked out” from making comments, nothing will change from here.

But that doesn’t mean we know what the Fed is going to do. The odds still favour no hike, however there’s a lot of “But I wouldn’t be surprised if…” going around. Anyway, soon we’ll know.

We may not get much action between now and Wednesday, when the Bank of Japan meets, and Wednesday night, when the Fed statement is delivered, and to underscore that likelihood, the SPI futures closed unchanged on Saturday morning. Japan is closed today and there are no local data releases of note.

The RBA will release the minutes of the September meeting tomorrow but they are unlikely to tell us anything new.

It was a strong session on the local bourse on Friday nonetheless. Having been the biggest loser over the last couple of weeks, utilities finally bounced back with a market-leading 2.3% gain. Telcos (+1.6%) and the banks (+1.1%) joined in the yield stock recovery but the rally was market-wide. Materials did little and staples struggled to 0.5% but otherwise other sectors posted around 1-1.5% gains.

Energy posted a 1.2% gain but that could change today. The oil price was up on Thursday night and down on Friday night and energy stocks have returned to their earlier bad habit of flying up and down on every little swing in oil prices, usually to go nowhere much.

Otherwise we’re in for another week of central bank watching.

Apple’s Week

The US CPI rose 0.2% in August when 0.1% was expected, taking annual headline inflation to 1.1%. The core CPI, which in particular excludes weak oil prices, rose 0.3% to 2.3%.

Once upon a time, Ben Bernanke’s targets to trigger the normalisation of US rates were 5% unemployment and 2% inflation. Unemployment is at 4.9% and inflation is at 2.3%. By rights, we should be having a rate hike.

But it’s not that simple. For starters, the Fed prefers the PCE measure of inflation over the CPI and that’s still under 2%. And does it make sense to ignore oil prices as if they have no impact? On the labour front, the 4.9% unemployment rate masks a record low participation rate and a high percentage of Americans without a job who don’t even bother trying, suggesting there remains plenty of slack in the labour market.

This is why there is no cut and dry expectation on Fed policy.

Wall Street has adjusted just in case. Two Fridays ago Wall Street tumbled as Fedheads made the case for a rate hike in September. From that new base, last week saw the S&P500 climb back ten points. Seven of those ten points are entirely attributable to the 12% rally in Apple shares. So ex-Apple, Wall Street has still very much adjusted for the elevated chance of a rate hike.

Does this mean, therefore, that if the Fed doesn’t hike this week, and Janet Yellen does not say anything definite enough that would lock in a December hike, that Wall Street will rally hard?

Maybe, but again, we’ll just have to wait and see. And the BoJ meets first.

Friday night’s session on Wall Street may have been a little better but for another dip in oil prices, courtesy of another increase in the US rig count, and a US$14bn fine slapped on Deutsche Bank which dates back to mortgage lending pre-GFC. Deutsche shares plunged 9%.

Banks in general were sold down in sympathy, largely because of regulatory fears and not because of Fed speculation.

Thus the Dow closed down 88 points or 0.5%, the S&P lost 0.4% to 2139 and the Nasdaq dropped 0.1%. On Friday night Apple shares finally gave back 0.5%, just as the iPhone7 actually hit the stores.

Commodities

West Texas crude fell US54c to US$43.17/bbl.

Base metal moves in London were mixed, with no price moving more than 1%.

With China on a holiday, iron ore remained unchanged at US$55.50/t.

The interesting thing about these smallish moves in commodity prices is that the US dollar index was up a solid 0.8% on Friday night at 96.04. This was attributed to the bigger than expected gain in the CPI, which in theory strengthens the odds of a Fed rate hike.

It was enough to see gold down US$4.10 to US$1310.00/oz but the US ten-year bond rate remained unmoved at 1.70%.

The Aussie is down 0.3% at US$0.7489.

The SPI Overnight, as noted closed unchanged.

The Week Ahead

The Fed statement will be released on Wednesday night, Janet Yellen will hold a press conference thereafter, and updated FOMC forecasts will be published.

The Bank of Japan will meet on Wednesday. Japanese markets are closed today and Thursday.

US data this week include housing sentiment tonight, housing starts on Tuesday, house prices, existing home sales, leading economic indicators and the Chicago Fed national activity index on Thursday, and a flash estimate of September manufacturing PMI on Friday.

The eurozone and Japan will also flash PMIs on Friday.

In Australia we’ll see June quarter house prices tomorrow along with the RBA minutes. On Thursday RBA governor Phillip Lowe will make his inaugural testimony before the House of Reps economic committee.

On the local stock front, Orocobre ((ORE)) will report earnings today, TPG Telecom ((TPM)) tomorrow, Kathmandu ((KMD)) and Nufarm ((NUF)) on Wednesday and Brickworks ((BKW)) and Premier Investments ((PMV)) on Thursday.

There are still a few ex-divs to work through, particularly on Thursday.

Rudi will appear on Sky Business on Tuesday, through Skype-link, to discuss broker calls at 11.15am. On Thursday he'll return in the studio from 12.30-2.30pm and again between 7-8pm for the Switzer Report. On Friday, he'll repeat the Skype-link up to discuss broker calls at around 11.05am.
 

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

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article 3 months old

Next Week At A Glance

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


By Greg Peel

There’s only one event that matters next week – by Thursday morning our time the Fed will finally have put us out of our misery.

Briefly, at least. Assuming no rate rise, and we can’t be absolutely sure, attention will then turn to three months of debating a December rate rise. Along with the September policy statement, Thursday morning will feature a press conference from Janet Yellen, including a Q&A, and also the infamous “dot points”, which outline each FOMC member’s forecast of interest rate trajectory over the next couple of years.

But the day before the night of the Fed meeting, the Bank of Japan will also hold a policy meeting. Word is that the BoJ board is split down the middle between those believing a move further into the negative for the cash rate is the right thing to do and those who don’t.

So once again markets will find themselves completely beholden to central bank policy.

And the minutes of the September RBA meeting will be released next week.

Back in the real world of actual data (if data is ever actually real) the US will see housing sentiment and starts, house prices and existing home sales next week along with leading economic indicators, the Chicago Fed national activity index and a flash estimate of September manufacturing PMI.

It’s a quiet week for Australian data, with June quarter house prices the only real highlight.

On the local stock front, next week will feature earnings results from Kathmandu ((KMD)), Nufarm ((NUF)), Orocobre ((ORE)), Brickworks ((BKW)) and Premier Investments ((PMV)).

The ex-divs are starting to thin out now but there are quite a few on Thursday in particular.


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article 3 months old

The Overnight Report: Labor Day Lull

By Greg Peel

Odd Jobs

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

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

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

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

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

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

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

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

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

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

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

Brexit Worries?

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

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

The US PMI is out tonight.

Commodities

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

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

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

Iron ore fell US20c to US$58.80/t.

Gold is roughly steady at US$1326.70/oz.

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

Today

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

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

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

There are a few more stocks going ex locally today.

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

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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.
 

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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