Daily Market Reports | Nov 07 2014
By Greg Peel
The Dow closed up 69 points or 0.4% while the S&P gained 0.4% to 2031 and the Nasdaq added 0.4%.
The local market limped its way through the session yesterday, failing to be inspired by either a strong finish on Wall Street or news of further Chinese stimulus. Hanging over the market were the five-year low for iron ore prices, which impacted on the materials sector, and some renewed selling the banks following CBA-inspired strength the day before.
The unemployment rate came out at 6.2%. No one knows what that means.
Yesterday the People’s Bank of China pledged to maintain “modest” policy support to help the Chinese economy battle increasing near term headwinds but insisted it would not flood the markets with cash. That said, the 770bn renminbi (US$126bn) the central bank has pumped into the market via three month loans to banks is greater than the 700bn renminbi the market had anticipated.
The real central bank action was over in Europe last night. The ECB left its cash rate unchanged at 0.05% but at his press conference, Mario Draghi reiterated that the central bank will “not hesitate” to use unconventional measures, including full-blown QE, to support the sagging eurozone economy. One wonders how bad things have to get before Draghi deems it time to pull out the big guns – purchases of eurozone member sovereign bonds – or whether indeed he would have done that by now were it not for a resistant Bundesbank.
At least he didn’t suggest sovereign bond buying was not possible. The euro thus fell further in the session, to more than a two-year low against the greenback.
Initially it appeared Wall Street was disappointed in a lack of actual QE announcement from the ECB, given an early sell-off, but this was short-lived, and through the afternoon the familiar theme of “what else would you buy?” underpinned the US stock market. By the close the Dow had hit yet another new all-time high, the thirty-seventh for 2014. The S&P500 followed suit.
US chain store sales rose to an annual rate of 4.6% in October. Given some of those stores sell petrol, removing the impact of lower prices at the pump makes that figure 6%. Wall Street is becoming increasingly excited about the approach of Christmas, believing retailers will be the significant end-beneficiaries of this year’s fall in oil prices.
US productivity rose 2.0% in the September quarter, and unit labour costs grew 0.3%, against forecasts of 1.5% and 0.5% respectively. Weak growth in labour costs is consistent with Janet Yellen’s dismissal of inflation concerns, and while 2% productivity growth is nothing spectacular, it’s not too bad.
Glenn Stevens would weep for 2%.
The fall in the euro last night helped the US dollar index to 88.01, up 0.6%. The BoJ is printing money, the PBoC is printing money, and the ECB is printing money and ready to print a lot more. The Fed is about to stop printing money. It’s a bit difficult to see the US dollar headed anywhere but up. That should be good news for the Aussie, which after its big fall on Wednesday night is 0.1% lower this morning at US$0.8571.
Gold is stead at US$1144.10/oz and the US ten-year yield is up 3 basis points at 2.38%. The big plunge to below 1.9% witnessed last month clearly does appear to have been a capitulation wash-out of the longstanding shorts (long yield), so now the bond market is back to being more staid and sensible and hence more familiar. We are still only at 2.38% nonetheless, when earlier this year the ten-year hit 2.6% when it seemed the first Fed rate rise might be nearer and hit 3% at the beginning of the year to reflect the announced tapering of QE throughout 2014 to now.
Which means the US-Australia interest differential is still a yawning gap in carry trade terms, encouraging US and other foreign fund managers to buy Australia. But the risk element in any carry trade is the currency, which in the Aussie’s case is looking more and more vulnerable. The ASX200 is sitting at its favourite level of 5500, wondering whether strength on Wall Street is a reason to buy or weakness in the Aussie is a reason to sell in the short term.
Last night OPEC cut its global oil demand forecast out to 2017, while noting energy output from the likes of US, Canada, LatAm and Russia continues to rise. Don’t mention Australian LNG. The news, and the stronger greenback, helped West Texas down US80c to US$78.01/bbl and Brent down US44c to US$82.80/bbl.
LME traders brushed off the stronger US dollar and preferred to square up ahead of tonight’s US jobs numbers. All metals bar zinc were slightly higher, with tin up 1.5%.
The news doesn’t get any better for Australia’s junior iron ore producers, with the spot price falling again last night by US40c to US$75.60/t to yet another new five-year low.
The SPI Overnight closed up 28 points, or 0.5%.
Australia’s October construction PMI is out today along with the RBA’s December quarter Statement on Monetary Policy. On Saturday China will release its October trade balance.
The German economy will be in the spotlight tonight with the release of industrial production and trade numbers but the big one will be, as always, the US non-farm payrolls report.
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