The Overnight Report: Of Cars And Copper

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By Greg Peel

The Dow closed down 179 points or 1.1% while the S&P lost 1.2% to 1942 and the Nasdaq fell 1.5%.

Hesitant

The ASX200 shot up 59 points out of the blocks yesterday in another bout of what has now become familiar whiplash volatility. It looked like we might be in for another one of our total reversal sessions following the drubbing on Monday, but this time it wasn’t to be so.

The index faded and faded as the day wore on, suggesting the opening rally was more about sellers backing off than buyers arriving in force. Just after 3pm, the index was up a mere 6 points. Then it looks like someone put in a sizeable late sell order, given a close of up 37 seemed to run counter to the mood over most of the day.

That buyer might be feeling a little sheepish this morning.

The ultimate close was a bit of a mixed bag on a sector basis. Yet another pop for the oil prices sent energy up 2.7%, while an unchanged iron ore price was enough to see a 0.3% fall in materials – the only sector to finish in the red. With utilities, the telco and consumer staples also closing up around 1.5% we might suggest yield was the story yesterday, albeit the banks only managed 0.6%.

Recent extreme volatility in bank share prices may well have scared off more conservative investors.

It will all be a different story today nonetheless, with northern markets copping a thumping overnight. I have been suggesting these past few days that weakness on Wall Street post-Fed has been more to do with the derivative expiry and Fed disappointment than it is to do with renewed China fears, given there’s nothing much new about China fears. Well, it looks like commodity traders have had a think about it, thanks to Janet Yellen’s highlighting of the issue, and decided to get out.

Commodities

The benchmark commodity for global economic growth is copper, and last night it fell 3.4% on the LME, having been down as much as 4.5% at the afternoon “close”. At just over US$5000/t copper is near its six-year low, but has not yet fallen back to its August low.

Commentators were scratching their heads as to why commodity prices suddenly decided to give way last night, but realistically we’d have to assume a bit of building angst since the Fed made the historical decision of allowing the rest of the world to dictate US monetary policy. Stop loss breaches and commodity fund selling did the rest (commodity funds much constantly buy and sell to maintain basket weights and in so doing feed volatility somewhat self-destructively).

The likely trigger was a report out from the Asian Development Bank which featured a downgrade to the bank’s 2015 China growth forecast to 6.8% from 7.4%. My only comment here is where on earth did 7.4% come from? Even Beijing’s target is 7.0%. And the rest of the world’s economists had already pencilled in numbers around 6.8% in January.

But that’s markets for you.

Beyond copper, the other base metals all fell around 1.5%.

Iron ore was again unchanged at US$57.10/t, but that hasn’t stopped BHP Billiton ((BHP)) being thumped 5% overnight, Rio Tinto ((RIO)) 3.5%, and London-based Glencore 10%.

West Texas crude is down, but only by US65c to US$45.83/bbl. And Brent is up US27c at US$48.99/bbl.

Commodity price falls have helped the Aussie down 0.6% to US$0.7089, and the Aussie, and commodities, were also under pressure from a 0.4% gain in the US dollar index to 96.32.

Gold is thus down US$8.70 at US$1124.70/oz, and silver fell 3%.

That was all about weakness in the euro, and that is all about cars.

Bugs in the system

What started as an embarrassment has now led to a major mea culpa as the number of vehicles Volkswagen will have to recall due to emissions fraud has risen to 11 million globally.

VW shares fell 15% in Germany last night and traders began to wonder whether the leading carmaker (briefly the biggest company in the world after the fall of Lehman) is alone in its software manipulation. When you think VW, Mercedes Benz, BMW, Audi and Porsche, you realise that auto-making is a significant contributor to Germany’s GDP.

The DAX thus fell 3.8% last night, dragging the rest of Europe and the UK down with it. Auto-makers were a target globally, including Ford, which fell 2.8%.

Thus on a combination of copper and cars, Wall Street was trashed on the open. The Dow was down close to 300 points by lunchtime.

However volume was light, which is in sharp contrast to near-record volumes recorded last Friday, expiry day, when last Wall Street tanked. It was more a case of no buyers than many sellers. Hence the indices did manage to recover some ground in the afternoon.

Bonds nevertheless became a safe haven once more, with the US ten-year yield falling 9 basis points to 2.12%.

It should also be acknowledged that the European car crisis, if we want to call it that, has come on top of ever-building migrant crisis. Last night EU countries agreed to resettle 120,000 Syrian refugees between them, to take the pressure off the landing destinations of Italy and Greece. It is a humanitarian crisis, but it also represents a heavy cost burden for EU countries struggling to reignite growth.

Today

The SPI Overnight closed down 66 points or 1.3%.

If accurate, we’ll be heading toward 5000 again, but we’d need another drop of over 100 points in the ASX200 to breach that level today. It is likely all going to depend on today’s release of Caixin’s flash estimate of its China manufacturing PMI for September, due around midday.

Caixin’s final August result was 47.1, and the forecast for September is 47.6. If this is accurate, then we may see some market relief, although sub-50 still means contraction. But improvement would go some way to suggesting Beijing’s desperate stimulus attempts might just be showing signs of effect.

Realistically, for earlier interest rate cuts and currency devaluations, it’s very early days for a flow-through impact.

Japanese markets will again be closed today, which is probably a blessing for the world’s other major auto-maker.

Locally, Nufarm ((NUF)) will release its FY15 result.

Rudi will appear on Sky Business twice today. First as guest between 5.30-6pm (Market Moves) then later as host on Your Money, Your Call Equities (8-9.30pm).
 

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