Daily Market Reports | Dec 17 2014
By Greg Peel
The Dow closed down 111 points or 0.7% while the S&P lost 0.9% to 1972 as the Nasdaq fell 1.2%.
“Despite the depreciation of the exchange rate, the Australian dollar remained above most estimates of its fundamental value, particularly given the significant declines in key commodity prices over recent months. Members agreed that further exchange rate depreciation was likely to be needed to achieve balanced growth in the economy.”
So said the RBA minutes, released yesterday. The RBA also suggested that housing was being supported by consumption but would be tempered by rising unemployment, which would weigh on consumptions and sentiment. Throw in recent moves by APRA/ASIC to put a lid on housing investment loans, and one might suggest the scene is set for a rate cut next year. Certainly the RBA does not believe a rate rise from the Fed is an issue, noting this will be largely balanced by easier monetary policy in Europe and Japan.
Monetary policy is also an issue in China, where yesterday HSBC’s flash estimate of December manufacturing PMI came in at 49.5, down from 50.0 in November, and marking the first drop into contraction in seven months.
Before the Chinese PMI was released, oil prices had fallen sharply once more, copper had suddenly plunged 2% and iron ore had ticked lower. The last couple of sessions on Bridge Street have seen bargain hunters moving into resources, particularly energy, but yesterday those sectors bottled again. Energy fell 2.1% and materials 1.9% to account for the bulk of the ASX200’s 0.7% fall.
The problem for the Australian economy is that we’re not getting the corresponding fall in the Aussie that once upon a time would have been a given – frustrating not just the RBA. Not only is Australia seeing a collapse in its terms of trade, the US dollar is meant to be strengthening on the back of Fed rate hike expectations. But it’s not. As each day goes by, those rate hike expectations are being questioned, given the global backdrop.
The Russian central bank’s midnight announcement of a cash rate increase to 17% from 10.5%, implemented to defend the collapsing ruble, has highlighted the potential negative global impacts of a much lower oil price. No doubt when Putin invaded Ukraine, he didn’t have 50 dollar oil in mind. The combination of Western sanctions and the collapsing oil price have sent the ruble and the Russian stock market spiralling, forcing the Russian central bank to call on its extensive reserves of petrodollars to try and stabilise the Russian economy.
Is this 1998 all over again, when Russia defaulted on its sovereign debt?
The fear in Europe is that Russia will go a step further and implement currency controls. Last night the Russian Economic Minister assured there was no such plan in discussion. Having fallen sharply for two sessions in a row, last night European stock markets bounced hard on this news, with the UK, German and French markets all closing up over 2%. It was a rock and roll ride nonetheless, with most of the gains coming late in the session.
This meant a weak open for Wall Street, which saw the Dow down 100 points from the bell. Oil prices also opened lower but began to turn around. There followed a parabolic rally on Wall Street, which saw the Dow up 247 points before midday. And yet the Dow still finished down over 100. On December 5 the Dow hit 17,991 and all talk was of a push through 18,000. Last night the Dow closed at 17,068 and now all talk is of a drop through 17,000.
I suggested on Monday that there could be some volatility this week. Not only do we have the conflicting forces of a desire to take profits (and lock in tax losses) on the one hand, and a desire to window-dress returns on the other, the sudden drop for Wall Street over this past week is causing havoc with regard Friday night’s quadruple witching expiry. Option positions that were not worth thinking about a week ago are now very much in play, and the sort of whipsawing we’re seeing suggests there are a lot of market makers short options at these levels. And there are three more sessions to go.
Economic data don’t seem to be drawing much attention right at the moment but here goes. Following on from China’s flash PMI of 49.5, Japan saw a rise to 52.1 from 52.0, the eurozone saw a rise to 50.8 from 50.1, and the US saw a fall to 53.7 from 54.8.
The eurozone’s ZEW investor sentiment index rose to 11.0 from 4.1 last month, the eurozone’s October trade surplus rose more than expected, and US housing starts fell 1.6% in November but held above the million mark for the third consecutive month.
Drawing more attention was the West Texas crude price, which is up US51c to US$55.96/bbl. Brent is nevertheless down US67c to US$59.86/bbl.
It was not a good night on the LME. Economic fears for emerging markets, which includes Russia and still includes China and its now contracting PMI, sparked commodity fund liquidations and technical seeling which saw lead, nickel and tin all down over 2% and aluminium and zinc down around 1%. Copper, which fell 2% on Monday night, posted a 0.4% drop.
Iron ore fell US50c to US$68.10/t.
The Fed will release its latest policy statement and hold a press conference tonight. There is much speculation the words “considerable time period” will finally be omitted with regard the first rate hike, as we move ever closer to the expected timeframe, but by the same token, commentators are increasingly suggesting the Fed may not even move in 2015 at all if the global slowdown continues. The US bond market is certainly leaning that way, with the ten-year yield down 5 basis points last night to 2.07%.
The US dollar index fell 0.4% to 88.11, gold is down US$12.00 to US$1194.10/oz, and the Aussie is down 0.2% to US$0.8207.
The SPI Overnight was up 16 points at 7am Sydney time but closed down 17 points, or 0.3%, at 8am.
Tonight’s Fed statement, and press conference, will focus global attention.
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