The Overnight Report: Buyers Evaporate

This story features CUSCAL LIMITED, and other companies. For more info SHARE ANALYSIS: CCL

By Greg Peel

The Dow fell 368 points or 2.1% while the S&P lost 2.1% to 2035 and the Nasdaq dropped 2.8%.

Alexis Tsipras has resigned as Greek prime minister and dissolved the government ahead of a fresh election next month. Oh God, here we go again.

The Bad Oil

Stop the world, I want to get off.

While it’s frustrating enough that the local market should fall 1.7% yesterday, it’s more frustrating that we were up so solidly on Wednesday. Clearly, no one has a clue at the moment. On Wednesday the market was led up by a strong snap-back rally in the energy sector, which appears to have been triggered by Woodside maintaining an 80% payout ratio when there were concerns this would be reduced.

But 80% of what? In another six months that yield will be worth tuppence ha’penny. One might have argued on Wednesday that energy stocks had reached oversold levels, but that opinion looked a bit foolish yesterday. From yesterday’s opening bell, the energy sector led the ASX200 lower. By lunchtime, energy was still the stand-out on a 4% plunge, while other sectors were weaker but by a much lesser magnitude.

By the afternoon, energy just kept falling and the session morphed into a general sell-a-thon. Materials copped 2%, to be the next worst behind energy’s 5.8% capitulation. The banks had been sold off on Tuesday afternoon, bought right back on Wednesday morning, and held reasonably steady yesterday morning until being sold down 1.7% by the close.

What changed in bank land between Tuesday and yesterday?

The end result is a clear breach of support at 5350, the last stop, technical analysts attest, before 5100. Next month is September, traditionally the worst month of any year and this time around, possibly including the first Fed rate rise, so that 5100 level is not looking overly pessimistic.

The good news, from a technical perspective, is that after the low is locked in at 5100 the pullback will be complete, and the next target is 5800. Just as well it’s that simple.

Going, Going…

After two days of selling, Wall Street had been building up to something more substantial. The falling oil price was driving it home, Fed confusion only adds to the uncertainty, and last week’s renminbi devaluations have heightened fears China is actually slowing much faster than the data indicate.

Emerging markets, in general, have become a major issue. A slowing China means pressure on the economies of all of China’s Asian neighbours. Plunging oil prices threaten to bring down the economies of oil-exporting nations such as Brazil and Russia. Saudi Arabia needs US$90/bbl oil to break even on its government spending commitments. Venezuela needs US$140/bbl – good luck with that. All other exporters lie along that curve between the two.

Lower oil prices should, in theory, provide a welcome boost to oil-importing economies. But two obvious examples are China and Japan. China’s GDP growth is slowing rapidly, and Japan’s was negative in the June quarter. Only Europe seems to be holding its own, but only just.

Then the fear is the Fed raises its rate next month, or even in December, and the resultant jump in the US dollar sends commodity prices lower still and, possibly, creates another Asian currency crisis. There is much concern now amongst US banks over the amount they have lent to small US shale oil producers who are now either under or close to being underwater. If one throws in the towel, hold on for the rush.

And to top things off, the Chinese stock market closed down 3.5% yesterday (most of which occurred after the close on Bridge Street) and now Greece threatens to throw Europe into turmoil all over again.

Cue Satchmo: And I think to myself…

The S&P500 broke down sharply through its 200-day moving average at 2078 early in last night’s session and this time, the buyers did not appear. There had been just too much pressure building. The next stop was 2044 which is the bottom of the trading range the S&P has been stuck in basically all of 2015. For a little while late in the session, that level held, but as the sell-on-close orders mounted, Wall Street breached the bottom of the range.

The S&P closed at 2035. It all sounds very frightening, but actually that’s only 4% from the peak. Commentators have been banging on for ages now that Wall Street is well overdue a 10% correction. The popular suggestion is that the Fed will trigger this. Now that we’re outside the range, it’s a new ball game. Wall Street is down for the year. The Dow closed below 17,000.

Commodities

What is the winner in all of this? Gold. It rose US$18.20 last night to US$1152.30/oz, aided by a 0.7% drop in the US dollar index to 95.74, and talk is now of the very familiar 1200 level been reached once more.

The oils fell again last night, although not so dramatically. West Texas has rolled over into the October delivery contract and in so doing won a reprieve on the curve as far as 40-breach fears are concerned, but a US36c fall last night still has WTI dangling at US$40.91/bbl.

Brent fell US70c to US$46.17/bbl.

Base metals fared a little better, thanks to the fall in the greenback. After a week of selling, copper rebounded 1.7%. Aluminium and zinc regained a percent but nickel and tin went the other way.

Iron ore fell US30c to US$55.60/t.

Falling commodity prices and Chinese slowing fears mean the Aussie is not blindly running in converse to the greenback, as it is down 0.2% at US$0.7337.

Today

The SPI Overnight closed down 66 points or 1.3%.

Reporting season highlights today include Coca-Cola Amatil ((CCL)), Insurance Australia Group ((IAG)) and Santos ((STO)).
 

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