Daily Market Reports | Jun 04 2013
By Greg Peel
The Dow rose 138 points, or 0.9%, while the S&P gained 0.6% to 1640 and the Nasdaq added 0.3%.
It was a somewhat confusing picture for the Australian market yesterday. Firstly there was Friday night’s big fall on Wall Street to contend with, but then Bridge Street decoupled from Wall Street in May, and notwithstanding Friday’s fall in the S&P 500 was exacerbated by a major index rebalancing.
The decoupling has been all about foreign investors exiting Australian stocks, with US and Japanese investors particularly in the frame as bond yields in both centres rise. But it’s also been about China, and Australia’s role as a China proxy. Falling commodity prices have highlighted weakness in China, with a sliding iron ore price particularly of concern. Yet over the weekend, Beijing announced an increase in the May manufacturing PMI to 50.8 from 50.6.
This increase prevented a major slide from the open on Bridge Street yesterday, and indeed the ASX 200 pushed back to the flatline. Then out came HSBC’s independent measure of China’s manufacturing PMI, which showed a fall to 49.2 from 50.4, or from expansion into contraction. Japanese stocks also opened lower yet again, and ultimately fell another 3.7%.
Local data saw a strong read on March quarter corporate profits, which rose 3.0%, but resource sector profits rose 9.5% and construction (mostly mining) profits rose 5.7% and such numbers are not expected to repeat in the June quarter. Retail sales grew only 0.2% in April having risen 0.3% in March, which was disappointing, although the May rate cut is yet to appear in the numbers. There was a sharp rebound in Australia’s May manufacturing PMI, to 43.8 from 36.7 in April. The sector continues to contract as it has done for nearly two years, but at least the pace has slowed, if we can imply any trend over two months.
Retail sales and manufacturing data will become more important as growth in mining and mining construction eases. The big foreign sell-off in Australian stocks has been accompanied by a welcome fall in the Aussie dollar, which should help to provide impetus. Unfortunately, it has not been a good 24 hours for the Aussie.
The ongoing correction in Japanese stocks has been accompanied by a correction in the yen, in this case bouncing back against the US dollar after a huge slide. Last night the dollar fell back through 100 yen, which triggered a rush of further yen buying/dollar selling. The US dollar index is down 0.7% to 82.67, but most notably the Aussie has rebounded a full two cents since Friday night to US$0.9769.
Assisting the fall in the US dollar was last night’s US manufacturing PMI. It fell into contraction at 49.0 from April’s 50.7, marking three months of falls. Wall Street had opened stronger, but fell into the red on this news. But we must not forget that bad US data means less chance of an imminent Fed wind-back, and on that basis (and possibly reflecting the buy-side trade of Friday’s rebalance) the US indices rallied strongly to the closing bell.
On the subject of the Fed, last night Atlanta Fed president and non-FOMC member Dennis Lockhart suggested that mixed messages were emanating from the FOMC simply because the members were debating the QE wind-back issue. They are otherwise committed to record stimulus, he ensured, and “The bigger picture is any adjustment is not a major policy shift”.
Cue gold. The headless chook that is the precious metal lately responded to a weaker greenback and Fed reassurance by bouncing US$23.20 to US$1411.20/oz.
Over in Europe, the eurozone May manufacturing PMI rose to 48.3 from 46.7 and the UK number rose to 51.3 from 50.2. Throw in Beijing’s stronger PMI, which LME traders had yet to respond to, and the weaker greenback, and base metal prices all rose a percent, with nickel up 2%. The oils were also stronger, with Brent up US$1.19 to US$102.06/bbl and West Texas up US$1.29 to US$93.26/bbl.
And good heavens, spot iron ore is up US$1.50 to US$111.90/t.
With Australia currently decoupled from the US there’s no point in assuming a 140 point Dow rally will ensure a good day on Bridge Street. The SPI Overnight is down 2 points.
While Chinese data and Fed-speak are important underlying factors in global markets at present, the Japanese market is drawing all attention. For the most part global strategists remain positive on Japanese stocks, suggesting what we are seeing right now is an understandable correction after an unabated and astronomical run in stocks and a rapid collapse of the yen. Let the speculators panic and then allow the dust to settle. But right now traders on Wall Street note the S&P 500 is closely correlated to the dollar-yen.
The bounce in the Aussie over 24 hours suggests the great foreign exit may now stall, but nervousness remains and a stronger Aussie is not good news domestically. The March quarter current account is due out today including the quarterly terms of trade, which is of vital importance to the RBA who will today make a rate decision. Very few expect a cut.
It will nevertheless be interesting to read what the central bank has to say.
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