Daily Market Reports | Mar 10 2015
By Greg Peel
The Dow rose 138 points or 0.8% while the S&P gained 0.4% to 2079 and the Nasdaq added 0.3%.
Local Carnage
Bridge Street endured a fairly predictable down-day yesterday, triggered by Friday night’s better than expected US jobs number. The headline on the nightly news was of iron ore stocks leading the market down but this was a mere side show to the real event. The materials sector did indeed fall 1.7% on a new low for iron ore prices, and energy dropped 1.6% on another fall in the oil price, but these were not the big moves.
The big moves were in utilities, down 3.0%, and the telco, down 2.2%. The banks chimed in with a 1.1% fall but industrials also saw a 1.7% drop. The hardest hit industrials were those falling into the same category as all of the above – the yield payers. And we can throw in the REITs, and indeed we can throw in the two big miners and the LNG producers as well.
Yesterday’s drop was not about commodity prices, it was about interest rate differentials. We will likely see another rate cut in Australia but Friday night’s US jobs number suggests we may soon see the first US rate rise. The universal theme of the reporting season just past was overvaluation of yield stocks. A three to one ratio of ratings downgrades to upgrades from brokers is testament. If US rates begin to rise, yield stocks both in the US and elsewhere are less valuable.
Not that the end is nigh and the sky is about to fall. Yesterday was more of a slap on the face to wake the market up from its blind chase for yield. One interest rate rise in the US is not going to kill the goose, given low global interest rates will provide support to the yield story for a long time yet. But there is a point at which prices become just too rich.
Euro Bond Crash
And on the subject of low global interest rates, the ECB began buying eurozone sovereign bonds last night as part of its new QE program and despite yields having fallen a long way, they tumbled a lot further last night. The German ten-year fell 9 basis points to 0.312% and shorter maturities are all in the negative.
Yields across all of the larger eurozone economies were hit, while those of the peripheral basket cases were less impacted. The euro is now trading at a 12-year low at US$1.08, and the assumption is that parity is not far off. European funds will flow out of the continent in search of yield elsewhere, including Australia and the US. The US ten-year yield last night fell back 4 basis points to 2.20%.
Happy Birthday Rally
Renewed buying in the US bond market following Friday night’s big sell-off was matched by a turnaround in US stock markets following Friday night’s jobs-related plunge. While not a specific impetus for the bounce-back, much attention was paid last night to the fact it was the sixth anniversary of the post-GFC rally, with the Dow and S&P500 having hit their closing price nadirs on March 9, 2009.
The rally is now entering its seventh year, encouraging technicians to point out that while six-year bull markets have occurred before, seven-year runs are rare. And the anniversary also reminded Wall Street that we have still not seen a 10% correction since late 2011, and that’s also very rare. We spent an awful lot of time arguing this point a year ago, until the argument quietly fizzled out. While a US market PE of 17x is not a blow-out, it is on the expensive side of history, and that is encouraging the punters to talk correction once more.
Friday night’s response to Fed rate rise fears may have offered a precursor, but they were back in buying stocks again last night. Those debunking the historical arguments over too-long rallies and overdue corrections point out never before in history had the market been supported by QE. This time it’s different. And while the Fed may shortly lift it cash rate for the first time since the GFC, rates will still be historically very low.
Whatever the case may be, it is clear the market is just starting to get a little jittery.
Metal Bounce
Iron ore is down another US20c to US$58.00/t. While 20c is not much, the fact the iron ore price now has a 5 in front of it has the mining community rather concerned. Junior players are trading under water. It seems like a lifetime ago analysts were warning a break of US$120/t would be damaging, but it’s only been a year.
Base metals, on the other hand, staged a bounce last night. The US dollar index was steady at 97.64 but news from Chilean copper miner Antofagasta that it was forced to shut down production due to protesters – locals criticising the mines excessive water consumption – was enough to send the copper price up 2%. This supply-side disruption comes hot on the heels of BHP Billiton’s announced problems at Olympic Dam.
The copper bounce floated all base metal boats last night, albeit only mildly. Lead and zinc each gained 1%. Gold is steady at US$1166.40/oz.
China’s trade numbers, released on the weekend, showed a strong increase in crude imports which provided support for West Texas prices last night, even as ECB bond buying hit Brent. WTI is up US40c to US$50.00/bbl, even though the US does not export oil to China, yet, while Brent fell US$1.27 to US$58.52/bbl.
Today
A little stability may return to Bridge Street today given Wall Street did not go on with the selling last night. The SPI Overnight is up 12 points or 0.2%. Perhaps the bargain hunters will be lurking, particularly given yesterday saw half the country on holiday.
The NAB business confidence survey will be out today and one might predict that political instability will weigh on the numbers. China will release February inflation data today, and probably boost hopes of further PBoC easing measures.
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