The Overnight Report: Confusion

This story features TELSTRA GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: TLS

By Greg Peel

The Dow closed up 5 points while the S&P lost 0.1% to 2083 and the Nasdaq fell 0.2%.

Not a Devaluation

The PBoC is not deliberately devaluing the renminbi in a desperate attempt to revive China’s export economy, it is merely allowing the market to determine the exchange rate in a step towards floating the currency. At least that’s what the Chinese central bank has declared.

Yesterday the PBoC marked down the renminbi another 1.1% against the US dollar, representing the third “devaluation” in three days for a total 3.5%. Again, the reduction was in response to the market’s perceived level, but the good news this time is that the market did not sell down the renminbi any further, as it had done in each of the previous two days.

The market has been selling on the expectation the PBoC will ultimately “devalue” the renminbi by 10% to adjust for the perceived level of overvaluation of the Chinese currency against the global foreign exchange market. But yesterday the PBoC talked down such speculation, suggesting there is no reason for the currency to depreciate any further given a “strong” economic environment in China, a sustained trade surplus, sound fiscal position and deep foreign exchange reserves, all of which provide “strong support” to the exchange rate.

“Strong” economy? Suffice to say, economists are expecting the renminbi to eventually be devalued by 10%, just not all in one hit. China’s July producer price index, which fell 5.4% year on year to mark its biggest drop since 2009, is the biggest clue. Beijing is trying to head off deflation.

But how does the rest of the world respond? Well at the moment, it appears confusion reigns. After two days of steep falls, European stock markets managed to rally back somewhat last night. On Wednesday night the Dow fell 277 points before closing flat and last night rose 79 points before closing flat.

The Australian market was a rabbit in the headlights on Tuesday, freaked out on Wednesday, and attempted a comeback yesterday only to be slapped back to flat in the final hour of trade.

The problem here is one of disclosure, which is not China’s strong suit. The Fed has now learned to prepare markets for policy changes, to the point where we spend an entire, tedious, tiresome year discussing whether QE3 is coming, a taper is coming, a rate rise is coming…until everyone just wants to get it over and done with. Mario Draghi flagged QE for a good two years before he actually did anything.

The PBoC, on the other hand, feels no need to warn anyone of anything. The result is global market turmoil. One day the PBoC, too, will learn.

Choppy

The ASX200 chopped its way to be up 44 points just after 2pm yesterday as investors absorbed the China story, Wall Street’s impressive turnaround overnight and various local earnings reports. By the closing bell the index was up only 5 points.

The market was not thrilled with Telstra’s ((TLS)) dividend, sending the stock, and thus the telco sector, down 2%. After being trounced on Wednesday the resource sectors made a comeback, with energy rising 1.5% and materials rising 0.7% to be the leaders in the green of what was a very mixed bag of sector moves – not unusual in a result season.

Unfortunately for bargain hunters in energy names, West Texas crude last night traded under US$42/bbl briefly – its lowest level since March 2009 (when QE1 was introduced and the US dollar tanked).

We can again note that the support level for the ASX200 is 5380, which we’ve bounced off once, and yesterday we closed at 5387. The next level is 5100.

Sales Boost?

July US retail sales rose 0.6%. Although just shy of 0.7% forecasts, both the June and May numbers were revised higher, painting a brighter picture for the US consumer sector. At the same time, as noted, oil tanked again, and yet again bargain hunters in Wall Street energy names were forced to cut and run.

There is a growing concern weak energy prices are ultimately going to lead to deflation across the globe, and potentially in the US as well. For almost a year the expectation has been that US consumer spending would rise to provide the offset. This didn’t happen for months, but maybe it’s starting to happen now. But energy is an input into a lot more than just consumer petrol tanks, and thus consumer pockets via lower petrol prices. Hence the deflation concern.

Which brings us back to the Fed, and the aforementioned never ending debate over a September rate rise. Thank God there’s only one more month to go to find out. But at the moment, Wall Street, like Bridge Street, is just not sure what to do.

After its big fall on Wednesday night, last night the US dollar index was only a little higher at 96.39. The ten-year bond yield nevertheless bounced back 6 basis points to 2.19%. The US bond market, forever far less fickle than the stock market, also seems confused at present.

Commodities

With the dollar stable, base metals prices were mostly a little lower last night, with aluminium and nickel down around a percent.

Iron ore rose US40c to US$56.20/t.

West Texas closed down US$1.09 to US$42.24/bbl and Brent lost US61c to US$49.15/bbl.

The gold bugs are excited again, believing that Chinese investors, having been burnt in the property market, burnt in the stock market, and now finding their currency devalued from underneath them, will return to buying gold. But last night gold fell back US$10.90 to US$1114.60/oz.

The Aussie is 0.4% lower at US$0.7358.

Today

The SPI Overnight closed down 8 points.

The eurozone will release its first estimate of June quarter GDP tonight.

On the local earnings front, Automotive Holdings ((AHG)) and James Hardie ((JHX)) are today’s highlights.
 

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available in the FNArena Cockpit.  Click here. (Subscribers can access prices in the Cockpit.)

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author's and not by association FNArena's – see disclaimer on the website)

All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided. www.fnarena.com

Click to view our Glossary of Financial Terms