Daily Market Reports | May 21 2014
By Greg Peel
The Dow fell 137 points or 0.8% while the S&P lost 0.7% to 1872 and the Nasdaq dropped 0.7%. The Russell 2000 dropped 1.5%.
Bridge Street decided yesterday that Monday’s all-encompassing sharp sell-off was punishment enough, and very much a “stand aside” day as the snowball built. Yesterday saw dip-buying in several sectors including telcos, utilities and consumer staples, while materials and banks steadied. Bit of a defensive bent, it seems. Yesterday the local market was aided by stability on Wall Street, albeit on a day of very light volume. Last night was a different story.
There is no agreement among after-market commentators as to specifically why Wall Street took a dive last night, although none was surprised. Different factors were offered.
The small cap Russell 2000 fell straight from the bell after rallying on Monday night. This index has become very volatile of late, but the defining trend is down, and Wall Street is paying close attention. The Nasdaq also saw further selling in biotechs and other momentum stocks – another recent point of focus.
A round of late season earnings reports came out last night, mostly from retailers. And they were mostly awful. In response, shares of office supplies retailer Staples fell 13%, Dick’s Sporting Goods lost 18%, clothing and furniture retailer TJX Co fell 7.6%, and Urban Outfitters fell 8.8%. The names may not be familiar to Australians, but the trend is clear. The US is a consumer-based economy, and it seems forecasts for retail consumption were somewhat over-optimistic.
Adding insult to injury, Caterpillar (Dow) shares fell 3.6% after the company reported a sharp drop in global machinery sales in the three months to April.
If the above provided sufficient cause for weakness in the first half of the session, the half time entertainment did little to lift spirits. Philly Fed president and FOMC voting member Charles Plosser suggested the Fed may need to act sooner rather than later on interest rates were the US economy to accelerate. This is not what the nervous nellies want to hear.
Commentators argued after the bell whether Wall Street really did step up its selling based solely on Plosser’s comments or not. Plosser’s is a “what if” hypothesis, given at present there is little sign the US economic recovery is “accelerating”. And Fed chair Yellen is in charge, and more dovish than Noah. Plosser is a known hawk.
To add to the confusion, New York Fed president and FOMC voting member William Dudley said later in a speech that there will be “a considerable period of time” between the end of tapering and the first rate hike. As to what “a considerable period of time” is is anyone’s guess, given not long ago Yellen defined such as six months.
Wall Street did manage, nevertheless, to close off its lows. As to what the specific trigger was for last night’s weakness is by the by. Not only are several respected commentators now lining up to say “correction coming” (as many have been since late last year), some are talking “recession”. This may seem at odds with reasonable recent US economic data, but a typical sign the wider financial market is steeling itself for a recession ahead is rising bond prices and a flattening yield curve — which is exactly the case in the US at present. Last night the ten-year yield fell 3 basis points to 2.51%.
Or does strength in US Treasuries simply reflect global central bank and sovereign fund buying and a growing demand from ageing populations to lock in safe retirement yield?
No one is sure. What we do know is we’re still in May, and as yet we haven’t quite seen big selling. We’ve seen selling, but we’ve also seen new all-times highs for both the Dow and the S&P in the month. After the big rally of 2013, a decent correction would be healthy. The problem in the US is that the Fed just won’t get out of the way. The pace of interest rate hikes, suggested Dudley last night, will be determined by how the market responds. The market is meant to follow the Fed, not lead it.
The US dollar index is steady, yet again, at 80.05. Gold traders can be forgiven for having no idea, and gold is also steady again, at US$1294.20/oz.
The Aussie is the big mover over 24 hours, dropping a percent to US$0.9239. There was much discussion of the minutes of the May RBA meeting yesterday, in which the board suggested no change to the cash rate for some time yet. Given the meeting was held before the budget the minutes are, to some extent, redundant. It was comments from the RBA’s Guy Debelle in a speech yesterday that really set the Aussie off. Debelle suggested the local currency was likely to decline given an overall drop in capital flows into Australian assets.
Even Australians can do “Fedspeak”.
The iron ore price fell another dollar overnight to US$97.50/t just to keep everyone nervous, while base metals were all lower. Copper fell 0.7% and nickel saw a 1.8% pullback.
The Australian energy sector was slammed alongside the materials sector on Monday, despite oil prices remaining elevated and energy companies globally posting solid results recently. Last night was expiry night for the West Texas June contract, which always creates some argie-bargie, but July Brent rose US56c to US$109.88/bbl and July WTI rose US79c to US$102.90/bbl. With first LNG approaching in PNG and Queensland, the big gas companies had arguably become well valued ahead of Monday.
The SPI Overnight fell 23 points or 0.4%.
Pre-budget angst will be apparent in the result of Westpac’s May consumer confidence survey, out today, while tonight the minutes of the last Fed meeting will be released and the Fed chair will make a speech. Tonight could see more big downs, or big ups, post Yellen.
Rudi will appear on Sky Business at 5.30pm.
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