Daily Market Reports | Sep 16 2014
By Greg Peel
The Dow closed up 43 points or 0.3% while the S&P lost a point to 1984 and the Nasdaq plunged 1.1%.
Weak Chinese data? Well it might have been weak but it had nothing to do with yesterday’s 1% fall in the ASX200. Aside from healthcare (-0.1%), the materials sector (-0.4%) outperformed every other sector in the market. Hardest hit were the banks (-1.4%) which, notwithstanding ANZ’s Asian interests, have absolutely nothing to do with China.
We are simply witnessing a continuation of the unwinding of the “Australia” carry trade. The yield on the Australian ten-year bond has risen from 3.39% a month ago to a current 3.64%. Australia does not offer a very extensive bond market, but its stock market is world class. Thus the banks, Telstra and even the likes of Woodside have been offering solid yield proxies for investors from around the globe but right now the world is squaring up and booking profits.
The give-away is the Aussie dollar. Months of belligerent stoicism in the face of plunging iron ore, weaker coal and weaker energy prices has suddenly, in a blink, given way to a 3.5% crash in the space of one week. The trigger can be specifically traced to the night US economists announced “the word” from the Fed was that the “considerable time” phrase will be dropped from this week’s FOMC statement. End of story.
As to whether “the word” is accurate is still a matter of debate. There are plenty of commentators in the US who do not believe the Yellen-led Fed is about to become any less dovish than it has been all year, based on scepticism of the US economy looking at all strong enough to support a shift in policy. Scepticism is targeted at labour market “slack”, which is Yellen’s pet benchmark.
We must simply wait until tomorrow night to find out. But since the end of June, the US dollar index has risen 5%. The British pound has fallen 5% despite the fact the UK economy has been well ahead of the US economy in terms of recovery. Only 2% has occurred in September, representing sudden Scotland independence fears. The Aussie dollar has fallen 4% in the same timeframe (and is not in the US dollar index). Yesterday the Aussie traded as low as US$0.8985 before rallying a little last night to US$0.9029, down 0.1% over 24 hours.
Last night’s US data releases were mixed. The Empire State index of manufacturing activity in New York State jumped to 27.5 from 14.7 last month to mark its highest level since late 2009. Economists had expected 16.0. However US industrial production fell 0.1% in August to mark the first fall in six month. Economists had expected a 0.3% rise. Still, industrial production is up 4.1% year on year. We noted yesterday US retail sales are up 5% year on year.
Why the zero interest rate?
Further evidence of Wall Street squaring up ahead of what may be a game-changer tomorrow night was provided last night by a 1.1% fall in the Nasdaq and a 1.2% fall in the Russell 2000 small cap index. Fed stimulus has provided plenty of impetus for high-flying momentum names in the tech space in particular (call it a domestic “carry trade”), so if the game is to change then best to book those profits right now. The big ol’ stodgy blue chips are sitting on mountains of cash and will not be much impacted by a rise in US rates (except perhaps psychologically at first), hence the Dow was actually up last night in contrast. The S&P500 split the difference.
There is also an element at work this week among the US online stocks, being that of preparation for Friday night’s biggest IPO in history — Chinese online megastore Alibaba. Those wanting exposure to a company that controls 80% of Chinese e-commerce which, at this stage, is embryonic, are selling off their outperformers to raise the funds. It is suggested such cash-raising helped to exacerbate last night’s Nasdaq/Russell routs.
Speaking of China, London metal traders had their first chance to respond to the weekend’s weak Chinese data last night and thus there was blood in the pit, with copper falling 0.5%, lead, tin and zinc falling 1% and aluminium and nickel falling 2%.
But stop the presses! Iron ore soared last night, rising US$3.20 to US$85.20/t. Who likes a nice bottom?
Over in the oil pits, a bottom may also have been found for the time being after lengthy falls. West Texas crude rose US55c to US$92.81/bbl. It was expiry day for the Brent front month contract so we can dismiss its US29c fall to US$96.65/bbl.
Gold also took a breather last night, rising US$5.20 to US$1233.50/oz.
The SPI Overnight closed up 2 points.
The minutes of the RBA’s September meeting are due today but they're a bit dusty, having pre-dated the sudden correction in the Aussie. And if there is a shift in Fed policy tomorrow night, these minutes might as well be binned.
Beyond that we can strap ourselves in for this week’s triple-header – Fed tomorrow night, Scotland on Thursday night and Alibaba on Friday night.
I’ll order the pizzas.
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