The Overnight Report: The China Syndrome

This story features NUFARM LIMITED, and other companies. For more info SHARE ANALYSIS: NUF

By Greg Peel

The Dow fell 107 points or 0.6% while the S&P lost 0.8% to 1994 and the Nasdaq dropped 1.1%.

It didn’t help that the Chinese finance minister chose the G20 gathering to inform that the apparent slowdown in China will not elicit any major stimulus measures from Beijing. As Chinese economic indicators have slipped in recent months, the world has assumed the Chinese government would respond as always with some form of kicker, and last week’s US$80bn liquidity injection was seen as the support act before the main show. But Beijing “won’t make major policy adjustments,” said Lou Jiwei in Cairns.

This is not exactly music to the ears of Australia’s struggling miners. As the iron ore price slipped further below its previous 2012 low last week, the big miners held their ground, assuming a care package from Beijing at any moment. But the news from Cairns on top of another sizeable fall in the iron ore price on Friday broke the dam. Yesterday the ongoing reversal of the Australia carry trade lined up alongside another hit to the miners to create a 1.3% fall. Materials fell 1.8%, the banks 1.5% and the telco 1.1%. There’s your move right there.

The bad news is that iron ore is down another US$1.90 to US$79.80/t.

The ASX200 is now down 5.5% from its post-GFC intraday high posted last month. It took a lot of grafting to get to that point, and it’s rapidly taking no time at all to retreat. I recall an analogy involving stairs and elevators. This “adjustment” is currently feeding on itself, given the Aussie continues to fall. It’s down another 0.5% to US$0.8877 this morning. Only the brave need attempt to play bottom picker at this point. Friday’s bargain hunters would have been feeling bruised last night.

The silver lining, nevertheless, is that all those stocks the average longer term investor would be keen to have in a portfolio, particularly those providing reliable yield, are quickly retreating from levels of perceived overvaluation. And yields, for the new entrant, are rising. The heat is coming out of this market as the world takes the first step back to post-GFC normalisation, that is, the Fed looking towards its first rate rise. For those not loaded up on equities, this pullback can be embraced.

The China factor was not lost on Wall Street. The US is now talking about a likely shake-out for its own iron ore industry, pointing the finger not at China but across the Pacific at those wretched lost-cost Australian miners who are flooding the oceans with excess supply. On US bond markets, the prospect of lower global growth has stymied the sell-off for now, with the US ten-year yield retreating another 2 basis points to 2.57% last night. In the stock market, last week’s confluence of a dovish Fed statement, a No vote in Scotland and Alibaba euphoria has given way to the reality check of indices trading at all-time highs.

Last night’s US economic data releases provided little support either. The Chicago Fed national activity index showed a fall to minus 0.21 in August from plus 0.26 in July. Sales of existing homes fell in August for the first time in five months.

And with summer now a memory on Wall Street, traders are steeling themselves for “that time of year” – the September-October period that is more than often associated with volatility. In 2014 in particular, we have the completion of Fed tapering next month just ahead of the mid-term elections. And what happens if Obama cops a Republican majority in both houses?

A lack of Chinese stimulus was never going to be lost on metals traders. Aluminium managed to hold its ground last night, but copper, tin and zinc all fell 1.5% and high flying nickel came back to earth with a 4% thud.

Ditto the oils, with Brent falling US$1.48 to US$96.91/bbl and West Texas falling US91c to US$90.74/bbl.

Gold is steady at US$1215.10/oz.

The SPI Overnight fell a cautious 8 points, noting that the fall on Wall Street was already accounted for by the fall on Bridge Street yesterday. Yet with iron ore falling sharply yet again, it’s difficult to see any respite for the materials sector today.

There will be a great deal of nervousness on the local bourse this morning as traders await the release of HSBC’s flash Chinese manufacturing PMI. This will be followed up by flashes from the eurozone and US tonight.

The US will also see consumer confidence, the Richmond Fed index and the FHFA house price index.

Japan is closed today.

Locally, Nufarm ((NUF)) and TPG Telecom ((TPM)) will release full-year earnings while Telstra ((TLS)) will hold a shareholders meeting.
 

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available in the FNArena Cockpit.  Click here. (Subscribers can access prices in the Cockpit.)

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author's and not by association FNArena's – see disclaimer on the website)

All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided. www.fnarena.com

Click to view our Glossary of Financial Terms