The Monday Report

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By Greg Peel

Uncertainty

It was a wild old ride on Bridge Street on Friday – not very “Friday” at all. The ASX200 was down 50 from the open and then up 50 mid-session, before fading to close up 23. The only sector to finish in the red was energy, with a distinct 1.6% fall.

The volatility mimicked a similar response on Thursday on Wall Street to the Fed’s rate decision, or more accurately lack thereof. Wall Street ultimately closed lower on Thursday night but not with any great conviction, reflecting indecision about whether the Fed’s message was a good one (lower rates for longer supporting asset prices) or a bad one (US economy not strong enough, global growth concerns).

The ASX200 thus also opened lower, helped by weaker oil prices, but it seems the buyers thought “why do we need to go lower?” If it’s all about a slowing China well we’ve already adjusted for that issue. That’s why we’re holding above 5000 and not testing 6000 as we were earlier in the year. And the Aussie has come right back towards a more “fair value” level, offering long-awaited support for the Australian economy.

Which is exactly the way Glenn Stevens saw it as he testified before a parliamentary committee on Friday, which the RBA governor is obliged to do every six months (not quarterly, as I erroneously suggested last week). If Janet Yellen was playing up the China fear in her press conference, Glenn Stevens was playing it down. And between the US and Australia, it is Australia more directly linked to China’s economic performance.

The Australian economy is doing okay, Stevens implied, and we will eventually see the benefits of the weaker currency flowing through.

Frustration

The smart money had stood aside on Thursday night on Wall Street as the headless chooks ran around, and returned on Friday night to decide the response was to sell. While the reasons why it was a sell call are debatable, I think we can now finally put to bed the notion of “bad news is good news” for Wall Street. If that thematic were still the rule, the Dow would have been up 300 points on Friday night.

As it was, the Dow closed down 290 points or 1.7%. The S&P lost 1.6% to 1958 and the Nasdaq fell 1.4%.

The falls followed a lead-in from Europe of a 3% fall in Germany, 2.5% in France and 1.5% in the UK, which followed a 2% fall in Japan. Clearly the world was not enamoured with the Fed’s decision.

Why?

Is it because no rate rise implies the US economy is not strong enough? No. Apparently the FOMC’s decision was a very close run thing and thus the deciding factor was concerns over global growth, meaning China and emerging markets, and market volatility, which in theory is meant to be no concern of the Fed’s. So were markets down because if the Fed is worried about China, perhaps the world should be more worried about China than it previously has been?

There is certainly an argument here, and that’s the way commodity markets saw it on Friday night as well. But there’s also the argument that the volatility the Fed is worried about is just as much to do with Fed uncertainty as it is to do with China. In other words, the Fed has said “we won’t raise while the markets are volatile” yet by not raising it has assured that markets will remain volatile on ongoing uncertainty. Investors are frustrated, and have decided to sell rather than go through another tiresome round of “will they/won’t they?”

From Wall Street’s perspective, Friday night’s move was also clouded by the fact it was quadruple witching derivatives expiry, which can move markets substantially independent of any fundamental influences. Friday saw one of the heaviest volume days for the year on the NYSE, and that’s all about expiries. Thus if the selling was all about quadruple witching, we’ll have to wait to tonight to see what Wall Street really thinks.

The US ten-year yield lost another 9 basis points on Friday to 2.13%, so we’re back below the starting point of selling ahead of what the US bond market clearly assumed would be a rate rise. But there is also another influence on US bonds we should consider.

Someone out there holds more US bonds than anyone else, and is currently spending a lot of money propping up its economy and share market and thus needs some funds. Weakness in US yields has been attributed to the added element of Chinese sales.

Spooked by the 300 point Dow fall, the local SPI futures closed down 76 points on Saturday morning. That would take us back down to 5100, which is still 100 points above what has so far proven impenetrable support at 5000. If Friday was a buy, then today is a buy on the opening drop, assuming nobody’s changed their minds over the weekend.

And a weekend is a long time in markets.

The good news is that the weekend brought Alex Tsipras and his Syriza party re-election in Greece, with only a handful of seats lost. This suggests a vote to suffer the strict austerity regime placed upon Greece by its creditors, even though Syriza was first elected on exactly the opposite ticket.

The main opposition was pro-austerity anyway, so that wasn’t an issue. But with the majority of Greek voters now resigned to their lot, presumably the rumblings of discontent will subside and the word “Grexit” will be consigned to the shelf.

The IMF-EU-ECB will also be heartened that Greece’s ultimate submission has sent a message to any other eurozone anti-austerity groups that “you can’t fight the troika”.

Commodities

Oil was the main focus on Friday night, as West Texas once again plunged 4% or US$1.99 to US$44.92/bbl and Brent fell 3% or US$1.50 to US$47.74/bbl. The falls carried on from the immediate post-Fed response on Thursday night.

But WTI finished the week exactly where it had started. It was bid up all week on an expected Fed rate rise, and sold off when that didn’t happen. Had the Fed raised, it would have removed uncertainty and settled markets but also sent a message that global growth is not a worry. The opposite was true. So oil prices fell back, as did base metal prices.

LME prices had been largely stronger ahead of the Fed meeting, and on Friday night copper and zinc fell 3%, lead and nickel 2%, tin 1.5% and aluminium 0.5%.

The US dollar actually recovered on Friday night all it lost on Thursday night post the Fed’s non-decision. The dollar index rose 0.8% to 95.15. This would not have helped commodity prices.

Iron ore ticked up US30c to US$57.10/t.

And gold rose again, by US$7.70 to US$1139.90/oz. Call that a delayed response to no rate rise.

The Aussie is up 0.2% at US$0.7187, despite the US dollar gain. One wonders how long the short-covering support will last.

As noted, the SPI Overnight closed down 76 points or 1.5%.

The Week Ahead

It won’t just be the week ahead, but the quarter ahead, in which we’ll be debating whether the Fed might raise.

Shoot me now.

Is the Fed still “data-dependent”? And if so, whose data? America’s or China’s? On Wednesday we’ll see Caixin’s flash estimate of Chinese manufacturing PMI for September, and if you recall, it was Caixin’s August estimate that sent the proverbial hurtling into the fan a month ago.

Flashes will also come from the eurozone and US, with Japan a day later. Japan is closed until Thursday.

The US will also see existing home sales tonight, FHFA house prices and the Richmond Fed index tomorrow, new home sales, durable goods and the Chicago Fed national activity index on Thursday, and a flash services PMI estimate, fortnightly consumer confidence and another revision of June quarter GDP on Friday.

A quiet week economically for Australia sees a June quarter house price index tomorrow as the only highlight.

On the local stock front, TPG Telecom ((TPM)) will release its FY15 result tomorrow, Nufarm ((NUF)) on Wednesday and Brickworks ((BKW)) on Thursday.

The ex-div season starts to wind down with only a handful this week, but from now the AGM season starts to ramp up, with Suncorp ((SUN)) among the early birds this week. Telstra ((TLS)) will also begin a series of shareholder meetings across the country today.

Rudi will appear on Sky Business on Wednesday at 5.30pm and on Thursday at noon and again between 7-8pm for the Switzer Report. On Wednesday night, 8-9.30pm, Rudi will host Your Money, Your Call Equities on the same channel.
 

For further global economic release dates and local company events please refer to the FNArena Calendar.

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