Daily Market Reports | Aug 28 2015
By Greg Peel
The Dow closed up 369 points or 2.3% while the S&P gained 2.4% to 1987 and the Nasdaq added 2.5%.
Reset
It was actually a very dull day on Bridge Street yesterday, which seems weird in the context of excessive global volatility this week. Sure, the index closed up 1.2%, and hooray to that, but it all happened at the opening bell and then nothing happened for the rest of the session.
Significantly, we can note that the ASX200 opened on Friday morning a week ago at about 5250. Yesterday the index closed at about 5250. Last Friday morning the Australian stock market was driving along happily and then hit a wet patch in the road, sending it swerving and fish-tailing and causing much panic among the occupants of the vehicle as the driver wrestled with the wheel, before regaining control. Hearts were beating fast, but the panic subsided.
Earlier in August the ASX200 broke down through the bottom of its longstanding trading range, being 5500, on the back of a Chinese devaluation that signalled to the world the slowdown in the Chinese economy is more significant than was assumed. The adjustment was worth 250 points. This week has seen market panic of the irrational kind, simply reflecting Wall Street’s failure to keep up with reality.
Wall Street had now adjusted.
Yesterday the Australian market opened up to about 5250 and then went nowhere, because we were back where we were a week ago. From here, it’s a case of now what? It would depend on what happened on Wall Street last night, and to that end, Australian investors sat tight yesterday and waited for the next signal.
There has, of course, been a result season going on in the background, but this has been completely swamped by macro volatility. We have also seen a couple of important Australian economic data releases this week but they, too, have been lost in the wash. Wednesday’s June quarter construction work numbers were better than expected, and, despite the dooming and glooming of the nightly news, yesterday’s June quarter capex numbers were also better than expected.
Private sector capex is still going down the tubes, and is forecast to go further down the tubes based on the capex intentions survey, but we knew that already. It’s all about the winding down of mining investment, stage one, and the winding down of LNG investment, stage two. Yesterday’s numbers showed no change to those forecasts. The difference lies in the non-mining sector.
Here we saw a 3.5% rise in capex in the June quarter, offsetting the 11% fall in mining to provide a net 4% fall. Moreover, the third estimate of FY16 capex intentions, which the June quarter survey provides, jumped 10% on the second estimate provided with the March quarter numbers. Such an upgrade is actually higher than one might historically see in “normal” times. Indeed, the 24% jump in manufacturing sector intentions (the balance being services) is a record.
Just goes to show what can be achieved when your currency depreciates by a third. Maybe the PBoC is on to something.
Short-Covering
Following this week’s data releases, economists will now be improving their Australian June quarter GDP expectations a little. Meanwhile on Wall Street, last night featured a revision of the US June quarter GDP result before the opening bell.
Just to recap, the US GDP is delivered in three goes, one, two and three months after the end of the quarter. In the case of the June quarter, last month’s first estimate represented April numbers extrapolated over three months. That suggested 2.3% annualised growth. Last night’s second estimate adds in May numbers, and extrapolates the two months over three. It came in at 3.7% growth, when economists had expected 3.3%.
Next month we’ll see the “final” revision over all three months, but the number can be revised again at the release of the first estimate of the September quarter GDP. So it’s all a bit uncertain, but suffice to say on last night’s number it looks like earlier expectations that the US economy would rebound out of the weather-affected March quarter, just as it has done last year, may have been accurate.
Thus from the opening bell last night, Wall Street was faced with the reality that Wednesday night’s session had featured heavy buying through to the close, and that the US economy is actually doing pretty well. Forget about Fed rate rise fears, everyone’s booked a rate rise in. There had been much talk over the past couple of sessions that US indices may be set for another leg down, but they were dismissed last night, at least by those with short positions.
The Dow opened up sharply and continued to rise through the morning to be up almost 400 points. While leading names were still being bought, as they were on Wednesday, it was notable that some of the biggest movers to the upside on the day were the most shorted names on the market. In other words, the shorts were covering.
Then the short-coverers met the too-slow-to-sell-the-first-time-around brigade early in the afternoon, and the Dow headed back down to almost square again, briefly. In the last hour the rally resumed and by the close, the day’s high was almost re-established.
Among the most shorted stocks on the US market are energy services names, just as they are in Australia. If ever there was a reason to cover shorts in this long beaten-down sector, it’s when the oil price bounces 10%.
Commodities
The trigger, supposedly, was now that OPEC member Venezuela, who needs about US$120/bbl oil to fund its budget commitments, has called for an emergency OPEC meeting, and also requested discussions with Russia, who is also haemorrhaging. The implication is that OPEC members would agree to production cuts.
It’s all well and good, but (a) it’s not going to happen, and (b) there is no OPEC. Saudi Arabia effectively disbanded the cartel when it dismissed production cuts late last year and started dumping cheap oil on the market in order to kill off US shale growth. And if you think Iran is going to stick to a quota, good luck with that.
Oil prices bounced last night because they had become oversold, just like stock markets. The relationship between oil prices and the US stock market is one of a “who’s leading who” constant feedback loop. The bounce in the stock market is really why oil bounced. Short-covering.
Rather significant too. The biggest intraday move since 2009 saw both West Texas and Brent crude prices up over 10%, and on our 24 hour snapshot, West Texas is up US$3.74 or 9.6% at US$42.62/bbl and Brent is up US$3.93 or 9.0% at US$47.60/bbl.
And to further dismiss the OPEC argument, we can note the same thing happened on the LME. Copper jumped 4%, as did zinc, and nickel 5%. Aluminium, lead and tin all rose 1.5-2%.
Iron ore rose US20c to US$53.0/t.
The gains came despite another 0.5% rise in the US dollar index, GDP supported, to 95.78. In this context, gold still managed to hold its ground at US$1124.80/oz.
The US dollar index, which doesn’t contain the Aussie, and the Aussie dollar, have been tracking each other all week, directionally. The Aussie is up 0.7% to US$0.7169.
Today
I suggested at the start of this Report that yesterday the Australian market adjusted back to where it was and waited for the next signal from Wall Street. That signal is positive, and commodity prices have all rebounded strongly. Hence, the SPI Overnight closed up 91 points or 1.8%.
Today is the last big day of the local results season, and hallelujah to that. Only a few stragglers will be left to report early next week as August comes to a close.
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