Daily Market Reports | Oct 17 2014
By Greg Peel
The Dow closed down 24 points or 0.2% while the S&P closed flat at 1862 and the Nasdaq also closed flat.
I suggested yesterday it would be a brave trader who was prepared to take on global volatility even though, in theory, that which set off the Australian market pullback in the first place arguably no longer applied. So rah-rah to the local market yesterday, which recovered from an 83 point fall in the ASX200 by midday to close up 9. And despite a 1.4% drop for the materials sector.
The surprise mover yesterday was the energy sector, which gained 1.4% in the face of yet another fall in oil prices the night before. But aside from “bargain hunting”, the impetus was provided by a strong quarterly production report from Woodside Petroleum ((WPL)) which featured the second upgrade in production guidance in three months and, blow me down, higher than expected LNG sales prices. LNG may still be trading mostly on the old oil-indexed pricing system but the demand-supply balances for each are chalk and cheese.
It rather puts oil price-related falls for Australia’s LNG aspirants into perspective.
It was a similar story on Europe’s major bourses last night. The German and French stock markets had both been slaughtered the night before but despite a recovery on Wall Street from 460 down to 170 down for the Dow, the selling in Europe continued from last night’s opening bells.
A flash estimate of eurozone CPI for September suggested 0.3% growth, down from 0.4% in August and 1.1% in September 2013. Five of the seventeen zone member economies posted outright deflation, meaning negative growth. The 0.3% read is the lowest since 2009 and it is now assumed the eurozone will fall into “triple-dip” recession.
That assumption is backed up by European trade data for August. Eurozone exports fell 0.9% (seasonally adjusted), having fallen 0.3% in July, and imports fell 3.1% having risen in each of the previous three months. The 28-member EU saw a 2.1% fall in exports and a 4.0% fall in imports.
European bond yields continued to move up last night. The benchmark German ten-year recovered 5 basis points to 0.78 following Wednesday night’s rout in the US bond market but France rose 11bps to 1.25%, Spain 10bps to 2.20%, Italy 13bps to 2.55% and Portugal 17bps to 3.44%. Greece is up another 111bps to 8.96%. Three years ago the line in the sand was deemed to be 7%, beyond which the cost of debt would exceed Greece’s income.
But stock markets recovered from their mid-session depths, leading the French CAC to recover to only 0.5% down and the German DAX to finish up 0.1%.
We recall, nevertheless, that the European markets close at 11.30am New York time so they were at their depths when the opening bell rang on Wall Street, when traders said oh no, here we go again. The Dow fell 206 points.
Yet in contrast to Wednesday night’s weak US retail sales number, which was largely responsible for sparking the sudden collapse in bond yields and the plunge in stocks, last night’s industrial production release showed a 1.0% rise in September, trashing expectations of 0.4% and representing the biggest monthly gain in nearly two years. Alongside the IP number comes capacity utilisation, which measures how much of US productive capacity is actually being put to work in the current economy. That rose to 79.3%, the highest level since June 2008, albeit still 0.8ppt below the long-run average.
Not so positive were the Philadelphia Fed manufacturing index, which fell back to 20.7 from 22.5 last month, but this result is nowhere near as weak as the Empire State equivalent was the night before. And housing sentiment has fallen back to 54 from 59 in September (50-neutral), but then September saw an unusual surge.
All eyes, of course, were on the bond market, after Wednesday night’s extraordinary behaviour. And to a less bizarre extent we saw the same action again, with the ten-year yield plunging 11 basis points to 1.98% early in the session But again we saw a V-bounce, all the way back to 2.15% for a 6bps gain on the close-to-close.
So who led whom? It was at that point stock indices also bounced, sending the Dow all the way back to a brief positive before settling slightly lower on the day. Perhaps the clue lies in the S&P500.
Back in April, when last Wall Street saw a pullback, the S&P bottomed at 1814 intraday. On Wednesday night, it hit 1820 intraday before the bounce. On September 19, the S&P hit an all-time intraday high of 2019. The fall from 2019 to 1820 represents a 9.86% fall or, if we care to round that up, a 10% “correction”.
In other words, commentators have been calling for an overdue correction all year and there it is. The great majority of those calling for that correction have always suggested it would provide a great opportunity to buy at more realistic valuations. It is also interesting to note the April sell-off was sparked by tech stocks and small caps, which plunged when the first talk of a sooner-rather-than-later Fed rate rise emerged. But in all the volatility of the past week, the Russell 2000 small-cap index has actually rallied better than 1% three days in a row.
Having crashed on Wednesday night, last night the US dollar index recovered 0.1% to 84.92. After a brief moment in the sun, the Aussie once more fell victim to “commodity currency” status and fell back 0.8% to US$0.8756.
To that end, the weak European data had base metal prices down again last night, with only aluminium bucking the trend with a 0.4% gain. Copper fell 0.5% and nickel, tin and zinc all fell 1%.
And just when we thought it might be all over for the iron ore price collapse, iron ore is down US$1.70 to US$80.50/t.
All focus is on oil prices nevertheless, and after a wild week of plunges the oils managed a rebound last night. Brent rose US$1.70 to US$85.82/bbl and West Texas rose US$1.42 to US$82.55/bbl. Problem is, last night saw the expiry of the Brent November delivery contract. This clouds the issue of whether we actually saw a rebound or just a square-up to roll over into the December contract.
Gold is unchanged at US$1239.90/oz.
The SPI Overnight closed up, for once, by 10 points.
So the debate now is: Is that it for the Wall Street correction? Not surprisingly, there is little agreement. Older hands would like to see some proper consolidation to form a base before the bull market can re-establish. Others warn the volatility probably ain’t over yet. We may see a correction of the correction before falling once more, and given next month the US economy goes it alone for the first time since March 2009, without the support of Fed bond purchases, this could be the critical test.
Coincidentally, Janet Yellen is speaking at a function tonight.
Locally, Santos will publish its quarterly production report.
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