Daily Market Reports | Apr 09 2014
By Greg Peel
The Dow closed up 10 points while the S&P gained 0.4% on the Nasdaq’s rebound of 0.9%.
Bridge Street did it again yesterday, turning an early 21 point loss in the ASX 200 into only a 3 point loss. Late in the proceedings the index was plus six, but at the risk of me sounding like a broken record, it could not escape the gravitational pull of 5400.
Consecutive dips and claw-backs over two sessions in which Wall Street delivered 160+ point Dow drops is impressive, but also testament to what is going on in the global stock market at present. Weakness this week in the US has not been about across-the-board selling but more a switching among sectors and geographies. Profits have been taken in runaway sectors such as social media and biotech as well as anything else that has run a bit far, and then funnelled into the knocked down emerging markets via US-listed exchange traded funds (ETF) or directly.
Emerging markets plunged earlier this year when Fed tapering began in earnest, on the assumption the money that had flowed out of the low yield environment of the US and into the high yield environment of emerging markets must now return, given tapering would naturally raise US yields and the US dollar. But guess what? The latter hasn’t happened. Why not? Well that is the question.
Initial moves were seen but in fact the US ten-year yield and the US dollar index have both hardly moved all year. Snow has complicated the issue but at the end of the day the bond market is suggesting it does not believe the US economy is recovering at a sufficient pace to justify Fed hawkishness. Last week’s jobs report was a case in point, given it merely corrected some of the weather impact but did not move forward. The US yield curve has flattened, which is opposite to what one might expect.
As a result, the emerging market sell-off now seems an erroneous reaction. Hence markets in Brazil and Turkey for example, have been rebounding. Australia, for all its sophistication, is a bridge to emerging markets and a high yield developed economy. Thus the Aussie earlier fell to 88c on anticipation of the impact of tapering and forex traders loaded up short for the move to 80c. The RBA kept talking about the currency being too high, even at that point.
The RBA has backed off on its Aussie rhetoric as the chance of the central bank actually cutting its cash rate any further is dwindling, if not zero. The Aussie has thus bounced, and given the level of shorts in the market, bounced hard. Last night saw another one cent leap to US$0.9360. It’s all part of the global switch but in the Aussie’s case also a short squeeze which may now have blown itself out. It’s not as if Australian economic data are an inspiration.
Yesterday NAB’s business confidence survey for March showed a rise in business conditions to plus one from zero in February and a fall in confidence to plus 4 from plus 7. The long run average for conditions is plus 5 and confidence plus 6. The honeymoon of the Coalition victory is well and truly over now, with confidence having fallen from plus 13 in September.
Just as the Aussie has rebounded, the Australian stock market has refused to fall. It is a net high yield investment for foreigners and locals alike. Nor is it rising, as there’s little incentive to do so.
The Wall Street pullback stabilised last night, if you could call minus 60 then plus 50 and finally plus 10 in the Dow stability. Indices are not going to “correct” any further, if at all, until the earnings season trend becomes apparent. Indeed last night’s stability was aided by a 0.9% rebound in the heavily sold off Nasdaq. When you see 20% falls in the likes of Facebook and Netflix, there has to be value apparent to some fans.
After the bell, Alcoa posted earnings per share of US9c versus expectation of US5c. It was a promising result, although Alcoa lacks the bellwether status it once enjoyed as first cab off the rank. The stock is no longer in the Dow. We have to wait until later in the week when JP Morgan leads out the blue chips.
The euro jumped against the US dollar last night, in another short squeeze move. Shorts have been building in the euro on ongoing talk of eurozone QE, which so far has amounted to nothing. Master of verbal policy, it seems like a wily Mr Draghi might just threaten QE every time the euro gets too high, just to bring it down again. The move last night meant the US dollar index fell 0.6% to 79.76, helping the Aussie higher.
And helping gold higher, by US$11.40 to US$1308.90/oz.
Base metal prices went a whole lot of nowhere but spot iron ore is up another US$1.00 to US$118.20/t. All the action last night was nevertheless in the oils.
Other markets have lost interest but energy markets still have their eyes firmly on the Black Sea. Tensions have begun to rise again in Ukraine as more ethnic Russians look to Crimea as the template for secession, and violence is again the result. Forget Libya. And to top things off, a US government oil report published last night suggested an easing in US production and a subsequent rise in prices ahead. Hence Brent jumped US$1.59 to US$107.67/bbl and West Texas jumped US$1.90 to US$102.34/bbl.
Futures traders have given up, it would appear, trying to call a lower Australian market each session so went the other way last night. The SPI Overnight closed up 24 points or 0.4%.
It is important to note that in US winter/Australian summer time the NYSE closes at 8am and so does the SPI Overnight. In the US summer/Australian winter time the NYSE closes at 6am and the SPI Overnight at 7am. Hence the SPI now has a chance to react to any after-the-bell developments on Wall Street, and like Alcoa, a lot of major US companies report after the bell.
Today in Australia sees the Westpac consumer confidence survey along with housing finance and investment lending data.
Rudi will appear on Sky Business at 5.30pm.
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