Daily Market Reports | Jun 16 2015
By Greg Peel
The Dow closed down 107 points or 0.6% while the S&P lost 0.5% to 2084 and the Nasdaq fell 0.4%.
No Prisoners
It’s not often that the Saudi Arabian stock market is seen as an element of influence in global financial markets, let alone downunder. The Saudi influence on oil and OPEC is, of course, critical, but given the Saudi stock market is not open to foreign investors, it is not a market worth worrying about. Until yesterday.
The Saudi Arabian stock market is now to be opened to foreign investors. It’s a no brainer that the most dominant sector in that market is oil. If you are an international investor in the oil sector, Saudi oil companies would represent must-haves as a proportion of your portfolio. But in order to release funds to buy Saudi oil stocks, you’d need to first sell something else.
The ASX energy sector fell 2.6% yesterday. The majors all fell close to 3%, suggesting a blanket “sell Oz oil holdings” trade.
Energy was influential in sending the ASX200 down 53 points from the opening bell, but that took it under 5500 and it seems, for now, 5500 is the line of support. Just like 5600 and 5700 before it. The buyers came in, and the index climbed back steadily all day to a relatively flat close. Bank and industrials were nevertheless the only sectors to actually finish in the green.
As to why utilities was the best performing sector on the market on Friday, and the second worst yesterday (-1.2%), is anyone’s guess.
Take it or leave it
Northern hemisphere markets had their first chance to respond last night to the latest breakdown of talks between Greece and its creditors, on Sunday, at which the European Commission followed in the footsteps of the IMF in throwing up its hands.
There are three critical dates looming for Greece. On Thursday night the eurozone finance ministers are due to meet and the suggestion is an ultimate, take it or leave it deal will be offered to Greece at that time. On June 25, a eurozone leaders meeting is to be held in Brussels. Talk is Alexis Tsipras has his final hopes riding on this meeting, because on June 30, Greece’s bundled IMF repayment is due and its bail-out tranche expires. Thereafter, there will be no money to pay wages and pensions.
There is likely no money to pay the IMF either.
Global financial markets are beginning to realise that this time, it might just be real. A possible Grexit has been on the cards since 2011 and markets have simply become inured to the concept, watching the proverbial can being kicked for so long it seemed nothing particularly untoward would ever happen. This time, however, a Greek default is very much on the cards.
The Greek ten-year bond yield jumped 90 basis points to 12.7% last night and the Greek stock index fell 4.7%. The German stock index fell 1.9%, France 1.8% and London 1.1%. Most of the damage on the Greek market was in the banks, which are currently being supported by an ECB emergency lifeline. If this is pulled, given Greece’s failure to reach an agreement, then the current “walk” on Greek banks will turn into a “run”.
It is likely that before that can occur, the Greek government will be forced to implement “currency controls”, basically freezing the banking system. Rumours suggest, denied by Athens, the government is readying itself for implementation this weekend if it comes to that. Such an event occurred most recently in Cyprus, but Cyprus did manage to stay in the eurozone. In Greece’s case, currency controls may also be the first step in a preparatory, parallel reintroduction of the drachma.
It must be remembered nonetheless, that a Greek default on its IMF repayments does not automatically trigger a Grexit.
Mixed Messages
Selling in Europe flowed over into the US, sending the Dow down 200 points from the opening bell. Trading over the rest of the session then very much resembled Australia’s session yesterday, as buyers came in and steadily push stocks higher. But only half the loss was recovered in Wall Street’s case.
Safety buying was evident in US bonds, with the ten-year yield falling 3 basis points to 2.36%, and to some extent in gold, which rose US$4.90 to US$1186.20/oz. There was no specific collapse in the euro nonetheless, possibly because whatever fallout may occur from a Grexit would be international. The US dollar index is down slightly at 94.82.
Wall Street was also scratching its head over mixed US economic data releases last night.
Economists were expecting the Empire State activity index for June to rise to plus 5.7 from plus 3.1 in May, so a fall to minus 2.0 was a bit of a shock. They were also forecasting a 0.2% rise in industrial production in May, so were bewildered by a 0.2% fall. On the other hand, a rise in the housing market sentiment index to 59 in June from 54 in May represents a nine-month high.
Just when it seems US economic data are sufficiently robust to deem a Fed rate rise pending, a run of weak numbers pops out. While this is frustrating for markets trying to get a handle on the US economic trajectory, it must be even more frustrating for the Fed, which by all indications is now itching to just get the ball rolling.
Commodity Crunch
Sentiment with regard Greece also impacted on commodity markets last night. The LME shifted into sell-mode, with tin falling 0.5%, zinc 1.0%, aluminium, copper and nickel 1.5%, and lead 2.5%.
Iron ore fell US50c to US$64.50/t.
The oils were also sold down, and again Brent crude was sold down more. West Texas fell US43c to US$59.62/bbl and Brent fell US$1.26 to US$62.61/bbl, squeezing the spread further to US$3. When it hits US$2, we’ll be back to what used to be “normal”, many years ago.
With all that is going on in the northern hemisphere at present, the Aussie is looking like it might be a safe place to be. It’s up 0.4% to US$0.7765.
Today
The SPI Overnight closed down 3 points.
The RBA minutes are out today, and the markets will be looking for some further colour on the bank’s easing bias, or not, on “crazy” Sydney house prices and on that recalcitrant currency.
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