Daily Market Reports | Jun 07 2013
By Greg Peel
The Dow closed up 80 points, or 0.5%, while the S&P gained 0.9% to 1622 and the Nasdaq added 0.7%.
Last night, at noon New York time, the dollar-yen broke down through its 50-day moving average. Then all hell broke loose. Currency traders suggest they’ve never seen anything like it before.
Abenomics has sent the US dollar from 80 yen in September to 104 yen in May, representing a 30% devaluation of the yen. Recent scepticism, and this week’s disappointing structural reform announcement in Japan, have seen the dollar slip back below 100 yen. The yen shorts began to get nervous. Last night the dollar broke the 50MA at 99 and plunged to 96 in a heartbeat. Forex traders were stunned, but managed to regroup and buy the dollar back to 97 yen. The US dollar index is down 1.2% at 81.52.
Why is this relevant? Well aside from anything else, moves in the US dollar impact both on the Aussie dollar and on US stock markets.
Global forex desks have been playing the Aussie short of late. Foreign investors have been exiting Australian assets and selling Aussie on departure. This dichotomy has been feeding on itself, as again witnessed yesterday with another 1% fall in the ASX 200 and another one cent fall in the Aussie to a nine-month low of around US$0.9430. This is about where the Aussie was overnight when the dollar-yen broke the 50MA. There followed the mother of all short-covering rallies, and the Aussie is now back over 96.
At noon on Wall Street, the indices were relatively flat as traders stayed out ahead of tonight’s jobs number. Thin volume was thus a factor when the dollar-yen began to fall and the S&P 500, which has been tracking the dollar-yen closely of late, also broke its 50MA and then broke 1600. In Dow terms Wall Street fell to be down 115 points by 1pm. But then the dollar found some buying, the Aussie found some selling (it had traded as high as 96.50), and the buy-on-the-dippers re-entered the stock market to force short-coverers into action. Three hours later the Dow closed up 80 points.
This is what happens when the lunatics take control of the asylum. Is any of this based on fundamentals? Of course not. The yen has been heavily sold and Japanese stocks heavily bought on Japanese QE. US stocks and bonds have been heavily bought on QE. Australian stocks and bonds have been heavily bought on the yield differential on offer (given no QE) over either the US or Japan, or most any other developed nation, which has kept the Aussie elevated. Even as Chinese data releases began to suggest slower than hoped for growth, Australian stocks were bought on yield alone, with the temptation of increased dividend offering from the likes of the banks and even resource companies too tempting to ignore.
It was a bubble. And when bubbles burst, they usually do so in spectacular style. The Aussie had become overvalued by any measure. Stock analysts were scratching their heads as to how the market could keep buying Australian stocks at such lofty valuations. Then the cracks started to appear in the Australian economic data. RBA rate cuts had made no difference up to May, but that one little cut in May became a bit of a last straw on the camel. And then the Fed started talking about winding back QE. And here we are.
It is best to stay clear of such madness until the orderlies can get the straitjackets on. In theory last night’s bounce in the Aussie should put a floor under Australian stocks today, but it is too early to suggest that the dust has settled. It’s Friday, stock brokers are shattered, and the only economic data release of note today is the May construction PMI. Tonight we see US jobs, and no one is really sure how Wall Street will react to either a good or bad number. The weekend brings a Chinese data dump (inflation, production, sales, investment). It’s also a long weekend in Australia and markets are closed on Monday. Bridge Street will be a ghost town by this afternoon, except in the restaurants and bars.
But what of Wall Street? Yet again the US stock market has shown the willingness of investors to buy the dip. Rightly or wrongly, those investors have decided that the US economy is in a better place now and if the Fed begins to taper, that is only testament. Australia is trying to go through a transition and the road is not an easy one, but at least perceived overvaluation is being stripped out of prices. It might be a cold winter down under, but just wait for the first budding in spring of a new government.
European stock markets were weak overnight, and the euro stronger, as both the ECB and Bank of England left their cash rates unchanged. No change was expected from either, but Mario Draghi disappointed markets by implying no further policy measures were needed at this point given the eurozone data were beginning to show signs of easing in contraction. This comment came after the ECB further lowered its growth and inflation expectations.
Traders on the LME were also disappointed, and sold base metals despite a much weaker US dollar. Copper fell 1.5%. Traders were nevertheless also squaring up ahead of tonight’s US jobs number, the weekend’s Chinese data, and the three-day Chinese holiday beginning Monday next week. The oils also squared up, but in this case covered shorts and bowed to the weaker greenback. Brent rose US75c to US$103.61/bbl and West Texas rose US94c to US$94.68/bbl.
The bounce in the iron ore price has proven short-lived, with spot down US$2.70 yesterday to US$113.90/t.
When currencies turn feral investors usually turn to gold, but gold managed only a US$9.20 rise to US$1411.90/bbl despite the 1.2% fall in the US dollar.
The SPI Overnight closed up 3 points. You’d think it was a quiet night.
Expectation tonight is for the addition of 165,000 US jobs. The first monthly estimate is always a chocolate wheel, and often stark revisions to the previous months’ numbers make it all a guess-and-giggle affair. The great unknown this month, however, is not what the jobs number is going to be, but just how Wall Street might react to good or bad numbers. If the number comes in bang on expectation, more than one trader might have a nervous breakdown.
The Queen turned 87 in New Zealand and Western Australia on Monday, but won’t turn 87 in all the other Australia states until next Monday (actually her birthday’s April 21, but don’t tell anyone). The ASX will thus be closed on Monday.
FNArena will also thus be “closed” on Monday, albeit fully accessible. Have a good weekend.
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