Daily Market Reports | Sep 16 2015
By Greg Peel
The Dow rose 228 points or 1.4% while the S&P gained 1.3% to 1978 and the Nasdaq added 1.1%.
Welcome Aboard
If Malcolm Turnbull is to restore confidence in the Australian market, as many a commentator has suggested, then he wasn’t exactly off to a flying start yesterday. But not even Malcolm has the power to turn back the tide of volatility still flowing through the local market as a result of global macro uncertainty.
We might again wonder what was going on in the market on Monday, before politics took the spotlight in the afternoon. The ASX200 opened up 60 points and yesterday closed down 78 points. Nothing (outside of politics) had changed in the interim, other than offshore markets had had a chance to respond to the weekend’s Chinese numbers which the Australian market didn’t seem to feel were a problem on Monday morning.
But while falls in the prices of oil, iron ore and base metals on Monday night showed up in falls in excess of 1% for the materials and energy sectors yesterday, every sector bar consumer staples fell at least 1%. This was thus another market sell-off, and simply another day of macro-related volatility. However there was a clear domestic bias to the final result, evoked by the minutes of the September RBA meeting, released yesterday.
While the board gave a nod to the China fears sweeping the globe at the meeting, it suggested the problems had “not impaired the functioning of other financial markets” and that Beijing’s stimulus measures had “not yet had their full effect”. But it was the domestic economic assessment that caused some ripples.
We note that the Shanghai index fell another 3.6% yesterday and was weaker when the ASX closed, adding fuel to the sell-off fire.
Only a month ago, at the August meeting, the RBA suggested: “Domestically, economic activity had generally been more positive over recent months”. But one month later: “Domestically, the national accounts were expected to show that output growth had been weak in the June quarter”. That’s quite a turnaround in a short space of time. June quarter growth was indeed weak, and we recall that the GDP result was released the day after the September RBA meeting.
So back in August, talk of another rate cut had subsided, and some economists were back to suggesting that it won’t be for a while, that the next move in rates will be up. On yesterday’s minutes we’re back to discussing just when the RBA might cut again. The impediment to a rate cut is nonetheless the soaring property market, but that barrier may now be in the process of being dismantled:
“There were indications that the measures implemented by APRA had slowed the growth in lending for investment housing.”
If the door is not yet fully ajar for another rate cut, it’s certainly not slammed shut.
So shouldn’t the stock market applaud the chance of another rate cut? Not if it is implicit of an Australian economy struggling not to slip backwards into contraction. The tenor of RBA rhetoric seemed to switch sharply from quietly confident to concerned from August to September, and there are many, the RBA itself included, who don’t believe another 25 basis points down from 2% would make the slightest bit of difference to business investment intentions.
If businesses aren’t investing for growth when cash is 2%, they’re not likely to suddenly all get up and cheer if it’s 1.75%.
But we needn’t despair. On Wall Street strength the SPI Overnight has closed up 56 points this morning.
Bonds Make A Move
Having hovered around the 2.18% mark for a few sessions lately, the US ten-year yield suddenly jumped 10 basis points to 2.28% last night. Does someone know something? The two-year yield jumped 7 basis points to 0.80% to mark its highest level in four years.
It certainly wasn’t anything to do with strikingly positive signs amongst last night’s US data releases. Industrial production fell 0.4% in August, albeit this was in line with expectations. Retail sales rose by only 0.2% but again that was in line with expectations. Not meeting expectations was the Empire State activity index, which only managed to tick up to minus 14.7 from August’s minus 14.9 when economists had forecast a return to zero.
No great incentive for a rate hike here, but then if the Fed is going to move, these late releases will not be the defining factor.
If the US bond market is suggesting the Fed is going to move, why did the US stock market rally? Shouldn’t a rate hike be “bad” news?
The two great uncertainties on Wall Street, for which there is no consensus view, are whether or not the Fed will hike on Thursday, and whether the US stock market will rise or fall on either outcome. Last night’s rally for US stocks suggests either that the stock market is in diametric disagreement with the bond market about a hike, or a hike will actually be positively received. Volumes were nevertheless light, thus most players are happy just to stand aside until the big announcement.
Which also means most commentators are trying not to read too much into last night’s stock rally and bond sell-off.
Commodities
The selling which gripped the LME on Monday night continued from the open last night before a square-up began, sparking some short-covering. Traders are basically jostling for position ahead of Thursday and only zinc finished lower, down 0.5%, while copper rose 0.7% and nickel rose 1.5%.
Alas, it had appeared only a few sessions ago that iron ore was setting to reclaim the 60-mark but last night saw another US$1.10 fall to US$56.40/t.
West Texas crude nevertheless rebounded, jumping US$1.00 to US$45.15/bbl, but again Brent exhibited dislocation in being barely changed at US$46.63/bbl. The spread is now under two dollars.
The US dollar index followed the lead from the bond market last night in rising 0.4% to 95.61, but commodity prices are not paying too much attention this week. Other than gold, which fell US$3.80 to US$1105.00/oz.
The Aussie is hanging on to its Turnbull adjustment and is steady at US$0.7139.
Today
As noted, the SPI Overnight closed up 56 points or 1.1%.
Tonight’s late mail for the Fed will be the US August CPI numbers, and the eurozone will also see inflation data. US housing sentiment will be in the frame as well.
There is another lump of stocks going ex-div on the local market today.
Rudi will make his usual appearance on Sky Business' Market Moves, 5.30-6pm.
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