Daily Market Reports | Jun 09 2015
By Greg Peel
Stall
I suggested on Friday morning that despite a big fall on Wall Street on Thursday night, we might just see the ASX200 close higher on the session after a week of carnage. A fall of 5 points meant I was wrong, but not too far off the mark in principle.
The index appeared to completely stall on Friday, as if battle weary participants had called a ceasefire to bury their dead. Evidence of bargain hunting finally emerged, as the ASX200 flipped back and forward across the flatline for most of the session. The close of down a mere 5 points belied some more distinct moves within sectors.
Healthcare was the most highly sought after sector, rising 1.0%. The buyers liked the consumer sectors and industrials as well, but another 0.6% fall for the banks ensured an offset. Resource sectors were flat.
The situation now for Australian financials is an interesting one. Our banks have been creamed on the rise in US bond yields, given the attractiveness of solid dividend yields has been undermined for foreign investors. Yet as US bond yields rise, US bank share prices are rising with them. The US yield curve is now steepening (longer term rates moving up against shorter term rates) as Wall Street prepares for the Fed to begin “normalising” policy.
“Normal” is the key word here, because in a normal monetary policy world, one absent of any QE, rising rates and steepening yield curves provide banks with a greater earnings opportunity as they borrow short term and lend long term, into mortgages for example. For the past three or more years, Australian bank stocks have not performed as “normal” bank stocks. They have performed as utilities, or even, dare I say, fixed income instruments, as if those wonderful yields are a constant. Now they are returning to reality.
Onward and Upward
If we cite rising US bond yields as the most direct driver of last week’s 5% drubbing on Bridge Street, then Friday night’s surge of 10 basis points to 2.40% for the benchmark US ten-year yield would suggest a continuation of the theme today. Until, at least, the market is satisfied the interest rate differential shift has been sufficiently priced in.
The US bond market is already in nervous sell-off mode, so all it needed was a reasonable non-farm payrolls result on Friday night and they’d be off again.
Economists had forecast 210,000 jobs to have been added in May in the US, but the number came out as 280,000. The unemployment rate ticked up to 5.5% from 5.4% but only because the participation rate ticked up, suggesting more Americans are feeling confident enough to go back into the market to find a job. Wages also rose in May, at a 2.3% annualised growth rate, meaning increased employment is not about workers conceding to take lower wages just to get a job.
It was a trifecta of good news for the US economy – rising employment, rising participation, rising wages. It is evidence that expectations of a rebound out of the weak, weather-impacted March quarter may well be justified. But it also means the Fed will be getting closer to making the big move.
This is a worry for the stock market but not as much of a worry as it might have been earlier in the year. Earlier in the year, we might have seen the Dow down a couple of hundred points on this strong jobs number, but in the interim Wall Street has come to accept that the Fed will eventually raise, so there’s no point in losing sleep over it. Exactly the same scenario played out in 2013 when it was all about the tapering of QE, and then in 2014 Wall Street started hitting new all-time highs.
On Friday night the Dow closed down 56 points or 0.3%, the S&P dipped 0.1% to 2092, and the Nasdaq actually rose 0.1%.
Commodities
The strong jobs number also sent the US dollar index up another 0.9% to 96.35. While not good for commodity prices in isolation, a stronger US economy is indeed good for commodities. Next week sees a raft of Chinese data for May, and the Greek spectre is still floating around, so traders were reluctant on Friday night to get too carried away.
Base metal prices closed mixed on smallish moves, with a 1% fall in lead cancelling out a 1% gain in nickel.
Iron ore rose US30c to US$63.80/t.
Having broken out of its trading range the night before, gold might have been set for a big drop on the solid jobs number but then gold always seem to take a day or two to think about such matters. It fell US$3.80 to US$1172.30/oz.
OPEC held its six-monthly meeting on Friday night and surprised no one by making no cuts to current production quotas. It was when OPEC surprisingly announced no cuts in its previous meeting back in December that oil prices collapsed.
Oil prices initially fell on the OPEC announcement but quickly recovered, likely because they were sold down earlier in the week in anticipation. Gasoline prices also jumped in the US on Friday night to provide added impetus for crude. This year’s US summer driving season may yet be a good one. West Texas rose US99c to US$58.97/bbl and Brent rose US$1.15 to US$63.25/bbl.
The US dollar rally sent the Aussie down 0.8% to US$0.76.26 by Saturday morning.
China
Beijing released China’s May trade numbers yesterday and again they were indicative of a slowing domestic economy.
Exports fell 2.5% year on year in the month but this figure was better than expected, following falls of 6.4% in April and 15% in March. However imports fell a hefty 17.6% year on year in May when a 10% fall was forecast. It’s the seventh consecutive month of falling imports.
The numbers suggest Beijing is struggling to transition from an export economy to a domestic consumption economy and that stimulus measures to date are yet to prove effective. Commentators suggest time is still required for stimulus measures to have their impact. The government’s decision to cut import tariffs on some consumer goods should drive a modest import pick-up soon, but clearly further fiscal and monetary policy measures are needed if Beijing is going to hit its target of 7% growth in 2015.
Greece
German chancellor Angela Merkel would like Greece to remain in the eurozone but warned last night that “time is running out”. Greece’s creditors have offered the country a new lifeline, albeit one previously discussed, which would see Greece given a nine-month extension on the IMF repayments due this month, that Greece likely cannot pay this month, and also given E10.9bn in additional bailout funds which the creditors had set aside as an emergency fund for Greece’s banks.
The catch, of course, is that Greece must agree to a set of reforms, which include increasing sales taxes, cutting pensions and making it easier to hire and fire workers. Greek prime minister Alexis Tspiras has labelled these reforms variously “absurd” and “irrational” and was happy to tell the G7 leaders as much in a speech at their meeting in Bavaria.
In response, Tspiras received a visceral bollocking in a speech from European Commission head Jean-Claude Juncker, and the ire of every other leader in the room, including President Obama. Leaders are united in urging Greece to concede to reforms.
Tsipras has since said he is prepared to “make concessions”. If his stance up to now is anything to go by, his idea of “concessions” is the creditors capitulating and letting Greece have the money without reforms.
And so it goes on.
Having become more confident last week that a deal was close to being reached, European stock markets turned tail again last night as it appears ever more likely a Grexit is the only outcome. Last night the German DAX fell 1.2% and the French CAC 1.3%. The DAX is now in correction territory.
Down for the Year
The dour mood carried cross the pond and saw the Dow falling steadily to be down 89 points around lunchtime. From there a rally was attempted and all bar around 20 points of the fall was recovered, but late selling sent the average back down again.
The Dow closed down 82 points or 0.5% and has wiped out all previous gains for 2015. The S&P fell 0.7% to 2079 and the Nasdaq dropped 0.9%.
Aside from Greek fears and week Chinese data, Wall Street was last night still coming to terms with Friday night’s positive jobs number, and its implications for Fed rate rise timing. Having jumped sharply on Friday night, last night the US ten-year bond yield slipped back 2 basis points to 2.38%.
But the US dollar index, which jumped on Friday night on the jobs result, fell back 1.2% to 95.23 last night. The fall has been linked to an offhand remark made by President Obama to his G7 chums that he thought the dollar was too high.
And hence the Aussie is up 0.9% from Saturday morning at US$0.7696. It’s thus basically a tad higher than where it was when local markets closed on Friday.
Commodities
The weak Chinese trade data did not have as much impact on the LME as one might expect, given base metal prices again showed minimal movement. The exception is nickel, which jumped 2%.
Iron ore was steady at US$63.80/t.
Gold was steady at US$1173.70/oz.
The oils were weaker on the weak Chinese data. West Texas fell US71c to US$58.26/bbl and Brent fell US50c to US$62.75/bbl.
The SPI Overnight closed down 24 points or 0.4% last night for a 28 point fall since the market was last open.
The Week Ahead
Greece will no doubt continue to be a source of nervousness and of back and forth news as the week progresses.
China’s economy will continue to be in the spotlight this week as inflation numbers are released today and industrial production, retail sales and fixed asset investment numbers on Thursday.
With the strong jobs number still resounding on Wall Street, this week’s important data releases begin on Thursday with retail sales and inventories followed by the PPI and consumer sentiment on Friday. More grist for the Fed rate rise mill.
It’s a busy shortened week this week locally. Today kicks off with the housing finance, the ANZ job ads numbers and NAB’s monthly business confidence survey, the first post-budget. The same is true for Westpac’s consumer confidence survey out tomorrow. On Thursday it’s the May jobs numbers.
Rudi will appear on Sky Business on Wednesday at 5.30pm and on Thursday at noon. On Wednesday he’ll be back as host on Your Money, Your Call, 8-9pm.
For further global economic release dates and local company events please refer to the FNArena Calendar.
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