Daily Market Reports | Aug 24 2015
By Greg Peel
Manufactured Fear
The action on Bridge Street on Friday can be divided into three distinct periods. From the open, the ASX200 fell around 60 points on the lead from Wall Street which saw the S&P500 break down out of its 2015 trading range. At midday, the flash estimate of China’s August manufacturing PMI was released.
Caixin’s number, which includes a greater proportion of small and medium enterprise businesses than Beijing’s official numbers, ha been tracking lower than the official numbers of late. Being’s July manufacturing PMI came in a 50.0, smack on the neutral point of neither growth nor contraction. Caixin’s July number was into contraction territory at 47.8.
Economists had expected the Caixin number to come in at 47.7 for August so Friday’s flash estimate of 47.1 was not encouraging, and represents a six and a half year low. On that news, the ASX200 took its second leg down, to be down over 100 points on the session.
The third period began at 3pm, when buyers re-emerged. Let’s hope for their sake they were short-covering. Ultimately the ASX200 closed down 74 points, or 1.4%.
While a drop from 47.8 to 47.1 hardly seems like the end of the world, the point is that nothing Beijing has done so far to stem the tide of slowing Chinese growth appears to be working. Global markets have become all wound up with slowing global growth fears this last month, with China the particular target of concern, so Friday’s number was simply a last straw.
There was much speculation as the week ended that Beijing would jump in on Sunday with an interest rate cut, given Sundays are the government’s preferred announcement days. But this has not transpired, possibly because only the week before Beijing pressed the shock and awe button of currency devaluation, and this strategy has not had time to play out.
It nevertheless remained for the rest of the world to respond to the Chinese PMI result in the interim.
Correction
The Shanghai index fell 4.3% on Friday. Japan’s index fell 3%. The German and French stock markets fell 3% and even the usually more subdued London market took a 2.8% hammering.
This was the global picture facing Wall Street as it opened on Friday night. There was no enormous plunge from the open, but rather the indices tracked continuously south all session as investors sold and sold and sold. High-flying momentum stocks such as tech and biotech names were, as usual, among the worst victims. Recent success story Netflix was creamed. But the blue chips copped plenty of downside as well.
It was also an options expiry day, which was never going to help. When the dust settled, the Dow was down 530 points or 3.1%. The blue chip average was down 5.8% for the week and is now down 10% from its high, technically implying a “correction”, as opposed to a pullback.
For four years Wall Street has been waiting for a correction, which typically occur every eighteen months. But the focus is on the broad market S&P500 index, which fell 3.2% on Friday night to 1970, representing 5.8% for the week, but still only 7.7% from the high.
The tech-laden Nasdaq fell 3.5% to be down 6.8% for the week and is down 10% from the high, as is the Russell 2000 small cap index.
August’s breakdown on Wall Street has been building and accelerating for some time. Chinese growth has been an element of concern all year. The Chinese stock market crash caused initial angst, but ultimately Wall Street held its range. Greece caused angst for months before supposedly being resolved, and Wall Street held its range. Fed rate rise debate has raged all year and even as September shortened in the odds, Wall Street held its range.
The tipping point was the sudden Chinese currency devaluation, which signalled to the world Beijing was even more worried than was assumed. This occurred as the second wave of selling in oil markets was underway, culminating on Friday night when WTI traded briefly under forty dollars. Just when we thought it was safe to go back in the water, the Greeks are again going to the polls.
Friday’s Chinese PMI, as noted, was imply the straw that broke the camel.
Is it the capitulation trade? Does the S&P500 need to see the full 10% before this can be called? While having shifted swiftly to the sidelines on Friday night, into cash, safe currency havens like the yen and Swiss franc, and gold, traders were assuming Beijing would act over the weekend. This did not happen. There may be disappointment on Wall Street tonight.
Volatility
The VIX volatility index on the S&P500 started last week at around 12, where it’s been all year. On Friday night alone it jumped 46%, well into fear territory at 28.
Stock market outflows did not turn up in US bonds, as indicated by the US ten-year yield falling only 3 basis points to 2.05%. It went into cash, suggesting a shift to the sidelines to see what happens next. Many a trader has been pleading for a correction for the past couple of years so they can buy again at more realistic prices. Will they now buy?
The US dollar index fell a full percent to 94.80. The greenback has been the high flyer of late among the world’s largest trading currencies, so it now has the furthest to fall. The yen and Swiss franc are considered safe havens, and even the euro is a safer bet at present, with the Fed presumably still eyeing a rate rise. Will the stock market correction take September off the table?
These are the questions to which right now there are no obvious answers. On such uncertainty, stock markets are more likely to keep falling than stage a rebound.
Commodities
While commodity prices have been hit hard of late, they have already been weak for some time, unlike stock markets. Thus the panic seen across global stock markets on Friday was not matched in commodity prices.
They were nevertheless weaker, with copper down 0.5%, aluminium and nickel down 1.5% and tin and zinc down over 2.5%, albeit iron ore is steady at US$55.60/t.
Having traded briefly under forty, West Texas crude closed down US64c to US$40.27/bbl. Brent fell US84c to US$45.33/bbl.
Safe haven gold rose US$8.10 to US$1160.40/oz.
In isolation, the Aussie should have copped a hammering as China’s safe proxy currency, but a fall of only 0.3% to US$0.7319 reflects the big drop in the greenback.
By rights, Australia saw its China PMI reactions trade on Friday. But we only fell 1.4%. The rest of the world fell 3%. For a long time technical analysts have been targeting 5100 as the bottom of an ASX200 correction, were the index to break out of its range to the downside. That’s another 114 points down.
The SPI Overnight closed down 110 points or 2.1% on Saturday morning.
The Week Ahead
It’s going to be one of those weeks in which anything can happen and probably will.
It’s still three weeks to go to the Fed’s September meeting. Sometime next month Greece will go back to the polls, and it may be another month before a government is formed given no party will win a majority. In the meantime we shall have to wait to see whether Beijing simply sweats on its currency devaluation move as being the cannon required, or will panic and add further stimulus to the mix.
Is the Fed still data-dependent, or have things changed? This week sees the release of the Chicago Fed national activity index and flash manufacturing PMI tonight, new home sales, house prices, monthly consumer confidence and the Richmond Fed activity index on Tuesday, and durable goods and a flash services PMI on Wednesday.
On Thursday it’s pending home sales, along with the first revision of US June quarter GDP, while Friday brings personal income & spending and fortnightly consumer sentiment.
This week the countdown begins for Australia’s June quarter GDP result, due next week. On Wednesday we’ll see June quarter construction work done and on Thursday private sector capex.
This week is the final, and by far the most crowded, week of the local reporting season. It’s not shaping up as a great week for the micro stories to dominate given such a macro storm cloud. There are far too many stocks reporting this week to choose highlights. Please refer to the FNArena Calendar (link below).
Rudi will appear on Sky Business on Wednesday at 5.30pm.
For further global economic release dates and local company events please refer to the FNArena Calendar.
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