Daily Market Reports | Jul 09 2014
By Greg Peel
The Dow closed down 117 points or 0.7% while the S&P fell 0.7% to 1963 and the Nasdaq dropped 1.2%.
We entered this week with the Dow at a new record high over 17,000 and the ASX 200 back at its post-GFC high ground above 5500. The US earnings season began this morning and the local earnings season starts with a trickle at the end of this month. Suddenly, everyone’s become defensive.
Yesterday’s small move down in the ASX 200 belies the fact two sectors enjoyed solid gains against the tide: healthcare, up 0.8%, and utilities, up 0.6%. One might argue whether healthcare really can still be considered “defensive” in this day and age – the budget as proposed certainly knocked a few names for six – but interestingly the same pattern played out on Wall Street last night.
Bridge Street did not seem at all interested in the NAB business confidence survey for June, released yesterday, which showed surprising improvement. The index of current business conditions rose to plus 2 from minus 1, above the long-run average of zero, while the look-ahead confidence index rose to plus 8 from plus 7, above the long-run average of plus 5. While it can be argued the biggest victims of the budget, as proposed, are households, the flow-through of that impact should in turn impact on businesses.
The result supports the notion Australia’s economy is managing to bungle its way through this transition away from mining investment, but no doubt the jury will remain undecided until we see the “real” numbers of the results season, which continues through to end-August.
There was much talk on Wall Street last night of a New York Times front page article which suggested just about every asset class across the world is in a bubble. US stock indices certainty retreated last night, led by renewed selling of momentum stocks, but this was the case on Monday night as well so we can’t point the finger at the NYT. We note that while the larger cap indices fell 0.7%, the Nasdaq fell 1.2% and the Russell small cap index fell 1.2%.
Just as was the case in April, biotech, internet, cloud and social media names are being thumped, as investors assess the wisdom of holding stocks with high double-digit and triple-digit PEs ahead of earnings season and amidst growing fear of a Fed rate rise sooner rather than later. This time around the momentum sell-off has been sparked by last week’s solid US jobs number.
By contrast, the winners last night were the defensives such as utilities and healthcare. And also US bonds. The ten-year yield fell 5 basis points last night to 2.56%, to be back at the level established in February when everyone began to worry about the snow. A feature of the so-called “unloved” rally on Wall Street to date has been the counterintuitive popularity of defensive stocks. The same can be said of Australia.
Of course it’s all about the search for yield when interest rates are so low. Last night a couple of non-FOMC Fedheads expressed their own views on the interest rate question, from either side of the argument. The Richmond Fed president suggested the Fed needs to be pre-emptive, and reduce monetary stimulus ahead of a potential inflation threat, while the Minneapolis Fed president argued inflation will likely remain under the Fed’s target through to perhaps 2018.
If we were playing QI at this point we’d be tempted to hold up the “Nobody Knows” card. We might also be tempted to suggest that with a stoic Janet Yellen at the central bank helm, the opinions of non-voting Fed members are about as useful as a Brazilian goalie.
What we do know is that after the bell this morning, Alcoa reported an earnings result that smashed forecasts out of the park, and backed it up with a “beat” on revenue as well. Alcoa shares have nevertheless rallied 50% this year on rising aluminium prices, so the shares are up only 1.4% in the after-market. Wall Street is looking ahead to the Wells Fargo result on Friday to usher in the true economic bellwether results.
Back on the subject of central banks, we recall that Glenn Stevens has adopted the Draghi approach in trying to talk down the currency in the hope no action will need to be otherwise taken and last week managed to evoke a one cent fall with his tough words. I noted at the time that Draghi eventually found this approach to be futile and was forced to cut rates. I note today the Aussie has been creeping up ever since that fall, and has now recovered half the ground lost on the Stevens rant. It’s up 0.3% to US$0.9400 over the past 24 hours, while the US dollar index is steady at 80.18.
Gold is down another tad to US$1318.70/oz.
It was a mixed bag on the LME last night, with everything up bar copper, which was steady, and tin, which fell 0.8%. Aluminium rose 0.8% and the nickel traders flipped a coin and decided that up 2% would be the result last night after down 2% the night before. Spot iron ore recovered the US60c it lost the night before and is back at US$96.50/t.
It appears that Libya’s two main oil terminals will shortly be back in business, now that a truce has been reached with the rebels. At least with this set of rebels, until another bunch comes along. Last night Brent crude thus fell US$1.16 to US$108.87/bbl while West Texas was basically steady at US$103.40/bbl.
The SPI Overnight fell 24 points or 0.4%.
Australian business may be sanguine about the budget but have Australian consumers recovered from the initial shock? We recall that Westpac’s consumer confidence index plunged in May on budget speculation and held that level in June on the budget announcement. Will today’s July survey result show any improvement?
Beijing will release China’s June inflation numbers today.
The minutes of the last Fed meeting are out tonight, and recent history suggests they are usually more dovish than the statement on the day. Could they halt this latest Wall Street pullback?
Rudi will not appear on Sky Business at 5.30pm today. Instead he'll be presenting to investors and PhillipCapital clients between 6.30-7.30pm (event until 9.30pm).
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