Daily Market Reports | Mar 13 2014
By Greg Peel
The Dow closed down 11 points or 0.1% while the S&P was steady at 1868 and the Nasdaq rose 0.4%.
It was early last year when Beijing suddenly orchestrated a squeeze on Chinese short term interest rates and sent shockwaves around the global financial world. It was the government’s first indelicate step in smashing the country’s shadow banking system, beginning with restricting access to cheap funds for investment in non-bank wealth instruments and property speculation.
The move eventually became the shot over the bow China’s shadow bankers needed to realise the game would soon be up. Global markets recovered but Beijing pushed on, attacking corruption and pollution along the way. A combination of a maturing Chinese economy and government intent saw China’s 2013 GDP growth level at its lowest since the 1990s. In 2014, Beijing has not stopped pushing on with its guerrilla tactics against uncontrolled lending practices. While a Western government might first warn over-indebted corporations they would no longer be saved by the people, Beijing has simply stood back and let the first ever debt defaults transpire, even before the country has established any bankruptcy laws.
Solar panel manufacturers might be one thing but expediting the collapse of steel mills hits at the heart of China’s economic engine and thus those economies across the globe who rely on that engine. And then there’s copper – considered the world’s benchmark commodity. Chinese copper traders sitting on stockpiles used for no other purpose than collateral for shadow financing know they’re next in Beijing’s sights. The world knows that too, hence this week’s sudden copper rout.
Once the masters of the softly-softly approach, the Chinese government is now hell bent on reforming its economy and financial markets in a rapid pain for long term gain assault. Economists have for a long time insisted China must carry out reforms, and agree that once reforms have been implemented China will emerge a mature and stable economy that will still prove to be the global economic powerhouse of the twenty-first century. China will have “emerged”. But the question is one of how much short term damage will be wreaked along the way.
That is what markets are afraid of right now.
That and the Ukraine situation, which appears to be coming to a head. The Crimean referendum is to be held this week and presumably the local ethnic Russian majority will vote for alignment with the Motherland. Putin will have an excuse, but will still draw the wrath of the global community. The newly elected president of Ukraine is in Washington as we speak, being assured by President Obama that America stands in support. As to what happens next week is unclear.
These are the factors that could no longer be resisted by the Australian market yesterday morning as finally Bridge Street rolled over. Throw in an apparent easing in the pace of housing finance growth and a drop in consumer confidence into the pessimism zone and it looked for all the world by lunchtime we were in for one of those familiar snowballing shake-outs that have featured occasionally in recent months.
Typically those shake-outs last one or two days before buying re-emerges to drive the market higher once more. Up for grabs at lower levels are valuable bank dividends and more recently, increasingly valuable Big Miner dividends. The lower Aussie dollar enhances that value for offshore investors. But this time the buyers did not wait. Perhaps confident China will emerge from the dust of shadow banking a more stable economy, and believing that one way or another, the Ukraine will be sorted, the buyers piled in in the afternoon. A 1.2% fall became a 0.6% fall by the closing bell.
A similar pattern played out on Wall Street last night. The Dow was down around 90 points from the opening bell but managed to quickly recover by midday before drifting through the afternoon session. There were no major US data releases to consider.
As the stop-losses and technical panic subsided on the LME, copper managed to stabilise last night, rising 0.3%. Nickel and tin both managed gains over 1%. The iron ore price had stopped falling the night before, and last night bounced hard, rising US$2.50 to US$107.40/t.
Gold is looking to the Black Sea, and it rose US$18.90 to US$1366.90/oz. US bonds looked like a sanctuary once more and the ten-year yield fell 4 basis points to 2.72%. A turnaround in copper futures trading helped the Aussie to recover, rising 0.2% to US$0.8988 as the US dollar index fell 0.2% to 79.59.
An unexpectedly large jump in US crude supplies last week saw West Texas fall further, dropping US$1.88 to US$98.15/bbl. Brent is steady at US$108.31/bbl as traders wait to see what happens to European energy supply.
The SPI Overnight rose 2 points.
Strap yourselves in, today sees a Chinese data dump of industrial production, retail sales and fixed asset investment numbers for February. And Australia’s February jobs numbers are due.
Rudi is otherwise engaged today and will not make his weekly appearance on Sky Business at noon.
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