The Overnight Report: Schrodinger’s Bounce

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By Greg Peel

The Dow closed down 204 points or 1.3% while the S&P lost 1.4% to 1867 and the Nasdaq fell 0.4%.

Night Watchman

Beijing finally acted last night, as they had been expected to do so ever since Friday night. It took another 7.6% fall in the Shanghai index yesterday, on top of Monday’s 8.4% fall, to spur the authorities into action. Maybe that phone call from Washington helped too.

The PBoC has again cut its interest rates, by 25 basis points for the lending rate to 4.60% and the deposit rate to 1.75%. It has also cut the bank reserve requirement ratio by 50 basis points.

Yesterday’s second big plunge on the Shanghai exchange is further evidence Beijing has apparently held back its Plunge Protection Team this time around, having wasted billions in foreign exchange reserves vainly attempting to hold up the stock market previously. But PPT efforts are immediate, while monetary policy tweaks take some time to flow through an economy. So it will be interesting to see whether Chines investors, if that’s what you call them, respond positively or disappointedly to the news today.

Snap-Back

The important point to note here is that the PBoC’s announcement came after the close of the Shanghai Exchange last night, hence long after the close of the ASX yesterday. Thus despite what you might read in the popular press today, the rate cut had nothing to do with yesterday’s rebound on Bridge Street.

And given the Shanghai index opened sharply lower at 11.30am Sydney time yesterday, we can suggest that those buying Australian stocks yesterday had decided the Chinese casino is really not much of an indicator of anything. A 16% fall in the ASX200 through the 5000 strong support level (reflecting the Chinese slowdown, sure, but more immediately representative of Wall Street waking up to itself) is a buying opportunity, they decided.

At least in the banks. For it was the banks that stood out distinctively in yesterday’s 2.7% rebound for the ASX200, driving a 3.9% gain for the financials sector. Next closest was materials, meaning the big two miners specifically, with a 2.4% gain. Energy, which was summarily crushed on Monday, managed only a 0.6% rebound. The telco actually went backwards by another 0.8% (ex-div).

One might ask: Just what impact does a Chinese slowdown have on Australia’s banks (ANZ’s Asia exposure aside)? They don’t lend much to Australian resource companies, who suffer most from a Chinese economic slowdown. There is no flow of manufactured goods from Australia to China of any note. Australian banks are predominately representative of Australia’s domestic economy – mortgages and business lending. The Aussie is now down to 71, and that’s good for business.

But in the bigger picture, was yesterday’s snap-back rally representative of a cat that is alive and kicking, dead, or simply pining for the fjords?

Such snap-backs are part and parcel of big corrections, and never will a stock market crash to a point and then V-bounce straight back into a bull market. It must first consolidate, and that usually means falling further yet to test intra-day lows. Typically when a market has cemented a bottom, it is not immediately apparent until you realise it seems to have stopped going down.

Yesterday morning the SPI futures were calling a 181 point drop for the ASX200. The index did fall as many as 73 points from the bell, which took us well below 5000 support to an intra-day low of 4928. Remember that number. Then the buyers formed ranks and marched in. By midday, the rebound was in place. There was little movement all afternoon, despite the Shanghai index quietly sliding away.

Presumably the market was waiting, all afternoon, for the expected announcement from the PBoC.

Failed

And so it came, just in time for the open of the ridiculously volatile European markets. Germany duly bounced back 5% and France 4%, and even the usually more staid London market rebounded 3%. The buying carried over into Wall Street, and the Dow shot up as well, to be up 440 points late morning as the European markets closed.

But traders were not convinced. The snap-back lacked breadth, lacked volume, and thus lacked conviction. By lunchtime doubt had crept in, and old hands knew that reversals don’t happen so easily. The indices began to lose altitude.

The NYSE was one of the last financial exchanges to go electronic, but in true American anachronistic form, the opening and closing rotations are still conducted by designated market makers – humans. So as not to cause chaos at the final bell, the NYSE publishes the dollar amount of the balance of buy- and sell-on-close orders during the last hour of trade.

A typical session will see half a billion one way or the other. A summer session usually less. When the balance began building to the sell-side last night, to the tune of 1.5 billion, the US indices turned tail. When that figure hit 3.5 billion, the Dow turned negative, and kept falling to its 200 point loss.

The S&P500, which is what the professionals pay attention to, did not manage to rally back to the intraday high point reached on Monday night. This is a negative signal. The assumption now is that the intraday low must be retested, which is when the Dow was down 1100 points.

Or maybe not. It is a market after all.

What is interesting to note, nonetheless, is that the US ten-year bond yield shot up 14 basis points to close at 2.14%. The talk from the smart money – the bond traders – is that the global correction may not be enough to keep the Fed at bay next month, and if it is, it won’t prevent a December hike.

Commodities

The US dollar index has rebounded 0.6% to 93.97. The good news is that the Aussie lost big-time on the cross-rates on Monday, particularly the euro (See: Ansell), so it fell against the greenback despite a big fall in the US dollar index. On last night’s dollar rebound, the Aussie is down another 0.2% to US$0.7130.

Commodity prices inevitably rebounded last night after Monday night’s shellacking, and in response to the PBoC. Aluminium and copper managed 2% and zinc 1%, while the other base metals struggled to sub 1% gains.

Iron ore is unchanged at US$53.30/t.

West Texas crude bounced 3% but the US$1.24 gain still keeps it under 40 at US$39.20/bbl. Brent bounced 2% or US83c to US$43.45/bbl.

I mentioned yesterday that while gold might be a safe haven in times of market volatility, it is also the first asset to be sold to cover stock market margin calls. Gold is down US$14.80 to US$1140.30/oz.

Today

For what it’s worth, the SPI Overnight closed down 47 points or 0.9%. In times of extreme volatility, futures markets tend to go a little nuts, as was evident in yesterday’s 181 point overnight drop ahead a 136 point gain in the physical.

That said, we most likely need to go down again before we can go up again, if that makes sense.

Glenn Stevens will make a speech today, which will be interesting in the context. June quarter construction work numbers are also out, reminding us the Australian GDP result is due next week.

Today is the worst – if you look it at from the perspective of someone who has to report on every one of them – day in the reporting season, with an avalanche of reports due.

Overnight BHP Billiton ((BHP)) reported its worst profit in years, and its shares closed up 5.5% in London.

Strap yourselves in, take solace in the knowledge we’ve been here plenty of times before, and whistle a bit of Monty Python.

Rudi will appear on Sky Business' Market Moves tonight, 5.30-6pm.

 

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