Daily Market Reports | Sep 04 2015
By Greg Peel
The Dow closed up 23 points or 0.1% while the S&P gained 0.1% to 1951 and the Nasdaq fell 0.4%.
Lacking Discretion
There were actually a lot of similarities between Wednesday morning’s trade on Bridge Street and yesterday morning’s trade on Bridge Street. On Wednesday morning, second-wave selling, spurred on by weakness on Wall Street, sent us down 70-odd points from the open. At 11.30am, the disappointing GDP was result was released but the index initially bounced before heading south again.
By yesterday morning at 11.30am we were down 50-odd points before the retail sales result was released. The difference is we were actually up 70 points from the opening bell, so this time we fell 120 points to 11.30am. When the disappointing retail sales number came out the index briefly bounced, before heading south again.
On Wednesday afternoon, the buyers arrived and pushed us back to flat for the session. Yesterday afternoon, those buyers were otherwise occupied. The late buying on Wednesday, and a positive session on Wall Street, encouraged buying from the open yesterday. But the sellers were biding their time. The index was not bought up from the open, it simply “fell into an upward hole”, as we say in the market, where the offer prices had been pulled right back.
Then someone said “Now!” and in they came. Yesterday morning told us the second wave of selling is not yet exhausted, as we might have hoped by Wednesday’s close. By lunchtime, the damage had already been done. All sectors had fallen by fairly even percentages, indicating “market” selling. The drift-off in the afternoon reflected the weak retail sales number, such that the consumer discretionary sector closed down 3.2% when all about lost about 1.5% (except consumer staples, which likely saw some switching to be down only 0.3%).
The consumer sectors saw switching because the 0.1% fall in retail sales in July, against expectations of a 0.4% rise, was split into a 0.6% fall for discretionary and a 0.5% gain for staples. The fall in discretionary was largely due to a big fall in spending on household goods. This is the element that took economists by surprise, but on reflection, they have realised that household goods spending was the driver of solid retail sales numbers in both June and May. In the first month of the new financial year, it appears households took a breather.
So we might conclude that yesterday’s sales numbers were not quite as bad as they appeared at face value.
That just leaves us with the question of whether or not the general selling is now exhausted. It would be foolish to call this, particularly ahead of the US jobs report tonight, the Fed meeting in a couple of weeks and, let us not forget, another Greek election soon to be held.
Whatever More It Takes
With Greece under a current caretaker government, China has been able to hog the spotlight this past month and send global markets into a spin. Such volatility has not been lost on the ECB, which held a policy meeting last night.
Mario Draghi did not name China specifically at his press conference, but cited a slowdown in emerging markets and a further decline in oil prices as posing fresh risks to a European economy already being propped up by QE. Lower oil prices should ultimately help the oil-importing eurozone but the payback is weak oil-producing trading partners and the deflationary impact of lower fuel costs.
The ECB’s last QE program began in March and at the time, it was slated to last through to September. So the central bank must now decide what to do next and as Draghi declared last night, an increase in QE is on the cards if deemed necessary. For a long time now, the ECB president has promised to do “whatever it takes”.
The response was a big drop in the euro and a big rise across European stock markets, including 2.7% in Germany, 2.2% in France and 1.8% in the UK.
Payroll Roulette
The buying carried across the pond onto Wall Street and by 11am in New York, the Dow was up 200 points. But given a 200 point gain in the previous session as well, it was time for the sellers to act.
The difference last night is that the sellers weren’t representing second-wave investor selling on general fear but rather traders squaring up ahead of tonight’s US non-farm payrolls report and the volatility that may well transpire. The Dow retreated in an orderly and almost leisurely fashion to be roughly square on the session, without heavy volume.
It’s also a long weekend in the US, when typically Wall Street clears out by lunchtime on Friday. So not much point in holding risky longs heading into tonight.
Square is the safest place to be when no one can tell you (a) how Wall Street will react if tonight’s number is good/bad or (b), how the Fed will react if the number is good/bad. There are plenty of opinions, but no consensus. The general feeling is that a forecast of around 220,000 means 170,000 is bad and 250,000 is good. But it has also been noted that seasonally, August tends to deliver a weak number. In fact, August jobs numbers have disappointed for eleven of the past twelve years.
But then if it’s bad, does Wall Street rally on the assumption the Fed won’t raise this month, and vice versa if it’s good? Such volatility will likely be on display, but we know that the smart money tends to stay out on the day as the headless chooks go berserk and come in the next trading day following more thoughtful consideration. My consideration would be what difference will it make in the scheme of things if the Fed raises in September, October or December? It’s going to raise either way. Get it over with.
And I’m prepared to bet a lot of people on Wall Street feel this way, and that ultimately a September rate rise will prompt a rally, if not on day one, particularly now that the market PE has come back to reality thanks to China.
Commodities
The oil market mimicked the US stock market last night in initially lapping up the promise of more stimulus from the ECB before fading away on a square-up. West Texas closed up US60c to US$46.65/bbl and Brent closed up US11c to US$50.55/bbl. You might be forgiven for thinking oil finally had a quiet night after the madness of the past couple of weeks, but actually WTI was up 6% at lunchtime.
The LME also saw fairly similar action, albeit there was divergence amongst metals. Initial price strength faded late in the day but still left copper up 2%, aluminium up 1.5% and nickel up 1%, while lead, zinc and tin were flat to slightly weaker.
With China on holiday, iron ore is unchanged at US$55.80/t.
Talk of more QE in Europe sent the euro plunging, as noted, hence the US dollar index rose 0.5% to 96.37. And hence gold fell US$8.90 to US$1124.90/oz.
We might say the stronger greenback is the reason why the Aussie is down 0.3% at US$0.7017 this morning, but over the past month there has been no direct (inverse) correlation whatsoever. On yesterday’s weak retail sales number, the Aussie took another little trip into the 69s before scrambling back to safety above 70. Having fallen 36% from 110, it seems at the moment that 70 is a bit of a line in the sand for the Little Battler.
Today
The SPI Overnight closed up 20 points or 0.4%.
China is closed again today.
The eurozone’s June quarter GDP result will be revised tonight, but is irrelevant after last night.
Everything hinges on tonight’s US jobs report.
Note that locally, the S&P/ASX will announce this quarter’s promotions and relegations into/out of their indices, including the ASX200, before the changes take effect in two weeks.
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