Mixed fortunes in overnight trade

There was no real direction or trading conviction overnight – European markets added value in the most part, while the US markets were subdued on a lack of macro news.

Rio Tinto
Source: Bloomberg

Considering the excitement in the US markets on the back of Friday’s non-farm payrolls, I see the slight contraction overnight as a positive for market leads today. With the US market gearing up for the third quarter earnings season next week, upside potential is likely leading into the releases. For those in the Asian region, we will get a read from Alcoa on Thursday morning.

Asia today looks to be back to normal trading conditions, with mainland China back online after the week-long National Day celebrations. The protests in Hong Kong have been peaceful in the most part and have petered out, allowing working conditions to return. We will be waiting to see the actual cost of the protests in the trade balance numbers and other activity gauges in early November.

The pop in European indices is also interesting, considering the main driver overnight looks to be rising expectations of ECB stimulus. German factory orders fell to their lowest reads since 2009, and went hand in hand with the slide in German confidence and business conditions. France remains in a deep contraction – its manufacturing gauge is stuck in sub-50 reads, which is leading to political infighting and social unease. On the headline figures, Europe remains in need of assistance and the ECB looks to be the main source as structural change at the country level looks unlikely.

Ahead of the Asian open

‘Central bank Tuesday’ sees the BoJ and the RBA releasing their respective interest rate decisions. Neither bank is expected to move on rates, meaning all attention will be focused on the statements. The RBA is more likely to have some ‘surprise’ developments, considering there are growing expectations that the period of stable rates may end due to the fall in the AUD and moves in the housing market.

However, I see flat wage growth, hopelessly low personal lending and inflation beginning to fall. Together with sliding commodity prices and wages, I believe the statement will probably support maintaining the status quo. It is also becoming apparent  the housing market is beginning to plateau. The threat of macro-prudential regulations is also applying a gentle brake.

We’re currently calling the ASX 200 up eight points to 5300, which is very flat considering the slide in yesterday’s trade. With all states back on deck after Labour Day holidays, volumes will return to normal. Some of yesterday’s trade will be mopped up, meaning more upside potential is on the cards.

I also think it is worth looking at what might happen in Rio this morning, considering the speculation in the market about a possible merger with Glencore. Bloomberg has released an article saying Glencore is ‘laying the groundwork for a merger’ by approaching RIO’s largest shareholder, Chinalco, while also canvassing other majors on the register. There are a lot of conditions around how, when and if the deal would proceed, but the movement in RIO’s ADR suggests the market is very aware a deal could be reached. A 20% spike in intraday trade before settling up 6.6% yesterday means we are in for an interesting move on the open.

The fall in commodity prices over the past 10 months, combined with falling share, prices will likely bring more deals like this to the table.

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