Daily Market Reports | Jul 07 2016
By Greg Peel
The Dow closed up 78 points or 0.4% while the S&P rose 0.5% to 2099 and the Nasdaq gained 0.8%.
Finding Support
The local market traded down from the opening bell yesterday in line with offshore markets. Banks are in the frame once more – both globally as a result of Italian bank fears and domestically through ongoing talk of a Royal Commission – while dips in commodity prices saw pullbacks for both the materials and energies sector.
At midday the ASX200 was down 80 points and it looked like we may be in for another nasty capitulation session but at the support level on the charts of 5150, the buyers decided to move in.
Large caps were in favour as falls in the banks and resource sectors were pared, leaving financials down 0.8% on the day, materials down 1.1% and energy down 1.8%. But it was otherwise clear what investors were looking for.
In a world of record low interest rates, including negative ten-year bond rates in Japan and Germany, a new record low ten-year yield in the US, and in Switzerland, a fifty-year bond rate that has dipped into negative, the search for yield has become ever more inspired.
Yesterday saw only three sectors finish in the green on the local bourse – utilities, telcos and consumer staples.
There was also a growing indication, as the afternoon wore on yesterday, that the coalition is clearly leading the count to determine the undecided seats and there is a slim chance it may even get over the line for an actual majority. If it doesn’t quite make it, there may only be the need to bring a couple of cross-benchers onside and thus avoid having to deal with the left-leaning members. The Kat in the Hat is one candidate, and Mr X is a reasonable man. The chance of an unworkable government and ongoing uncertainty has reduced.
And that’s a relief for the stock market, even if it were Labor in the same position.
The buyers were confident to take the index back to the 5200 level yesterday, and with Wall Street turning around for a positive close last night, the futures are pointing up 35 points this morning.
Don’t Panic
The bank story and Brexit flow-on story was not getting any less alarming last night as the London stock market fell 1.2%, Germany 1.7% and France 1.9%. As is typically the case, such selling carried over the Pond.
The Dow was duly down 127 points around 11am. But at that point a Dutch EU official suggested that there should not be any problem in Italy citing exemption rules in order for the Italian government/central bank to bail out troubled Italian banks with liquidity injections. Interestingly, the Netherlands is one EU member that has already seen the prosecution of new “bail-in” rules with regard Dutch entities.
We recall from yesterday that Germany had suggested Italy cannot call an exemption and Italian banks would be forced into “bail-in” measures to avoid going under, which would have left mum & dad investors with haircuts on the bond holdings and fire up more EU unrest. Brexit, Germany believes, is not a “systemic event”. It seems not all agree.
At the point at which the Dow was down 127 points the US ten-year yield hit another new record low, down 5 more basis points at 1.32%. But the Italy news turned the US stock market around in a flash – driven by the banks – and at the same time the ten-year yield rebounded to close up 2bps on the session at 1.38%.
Not long ago it was oil, now it’s bond yields.
Oil actually did have a solid session nonetheless, recovering 2% on weekly data showing a bigger inventory drawdown than forecast, and on a slightly weaker greenback. The greenback also reversed on the Italy news and as such is down 0.2% over 24 hours at 96.00.
The other news of the day was the release of the minutes of the June Fed meeting. They revealed a split committee, but at the end of day the doves won over the hawks by suggesting it was not the time to raise US rates when rates across the rest of the world were heading the other way. And we recall that the June meeting was held pre-Brexit vote, when the US ten-year traded as high as 1.75%.
So if low global rates were a reason not to move higher in June, lower global rates surely prevent any hike late this month or perhaps in 2016 altogether. But tomorrow night sees non-farm payrolls, which could well throw the cat amongst the pigeons once more with regard the strength or lack thereof of the US economy.
On that note, Wall Street was heartened by the June services PMI number, which showed a much bigger than expected jump to 56.5, reversing apparent weakness in May.
We note the S&P500 is back at its favourite pivot level of 2100.
Commodities
West Texas crude is up US$1.05 or 2.2% at US$47.91/bbl.
The nickel price has been flying all over the shop of late, with volatility centred on whether the new Philippines government will force the closure of some smelters. Last night saw nickel jump 3% in an otherwise mildly weaker session for base metals.
Iron ore is unchanged at US$55.80/t.
The pressure may have eased on Italian banks but the incremental climb in the gold price continues. It’s up US$7.00 at US$1363.20/oz.
The Australian stock market bounced off its lows yesterday and the Aussie also began a rebound from the previous session’s falls which carried on offshore. It’s up 0.8% over 24 hours at US$0.7518.
Today
The SPI Overnight closed up 35 points or 0.7%.
The local construction sector PMI is out today and in the US, the ADP private sector jobs report for June will provide a precursor for Friday night’s non-farm payrolls.
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