The Overnight Report: Taken In Stride

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By Greg Peel

The Dow closed down 50 points or 0.3% while the S&P lost 0.2% to 1938 and the Nasdaq fell 0.1%.

Teetering

Tuesday night’s sell-off in copper provided a sufficient trigger to send the jitters through the local market yesterday morning, with China fears at the forefront of sentiment. The big miners, in particular, were clobbered, and just before midday the ASX200 was down 50 points.

As to what happened next was all going to come down to Caixin’s flash estimate of its Chinese manufacturing PMI. The manufacturing sector in China has now been outgrown by the service sector, but Australian raw materials don’t feed into services. And we recall that it was Caixin’s weak August estimate that set this recent correction in train.

August’s confirmed result was 47.3, and economists were forecasting a tick up to 47.5 in September on the support of Beijing’s various stimulus measures. Thus when the number came in at 47.0, all of Asia groaned.

The big miners were clobbered once more, sending the materials sector down 3.0% for the session. Resource partner energy copped a 2.2% sell-off. But most influential in the index’s final fall of 2.1% was a 2.5% carting for the banks.

Yet again the problem for the Australian market is shown up in such volatility for a sector that should be among the less volatile of any stock market. The Big Four are just too big a chunk of ASX200 capitalisation that by default they become a proxy for the Australian economy in general via the stock market. Thus “Sell Australia” means sell the banks.

There is not otherwise a lot of direct connection between Australian banks and Chinese manufacturing. Although we can make a connection via the RBA. If China’s economic slowdown forces the RBA to cut its rate again, that’s not good news for the banks. Banks like rising interest rates and a brighter economic outlook to raise longer date yields and provide greater net interest margins on lending.

Either way, the latest plunge on the local market took the ASX200 to a close of 4998. I have been suggesting for a while now that 5000 is the solid level of support which, if breached on a closing basis, would likely signal another down-leg through the previous intraday low of this correction (4928). So strictly, we’re there.

However…the good news is we did not close on the low of the session. That was 4988, at around quarter to three. In the context of a hundred point drop, a ten point recovery right at the death seems trivial, but what it showed was that the index was trying to get back over 5000. Indeed, three more little points, or maybe five more minutes of trading, and we may have been having a different conversation.

So, does 4998 mean a breach? I suggest it is not a “meaningful” breach, and today will tell. The SPI Overnight closed up 11 points so we may just be in for a reprieve. Despite a slight drop on Wall Street, most northern markets were stronger last night and seemingly less concerned over this latest weak Chinese data point.

Herby Rides Again

The Volkswagen scandal that rocked the car industry and the German and EU economies these past couple of days subsided somewhat last night on news the CEO of VW had fallen on his sword, taking the rap for the emissions fraud he insists he had no knowledge of. VW shares bounced 5% after having lost around a third of their value.

All German carmaker stocks bounced, as fear subsided that perhaps they’re all in on the game. Surely the likes of Merc and BMW can’t also be so mendacious? The relief rally filtered through to the European indices in general, and ECB president Mario Draghi also provided some confidence.

In light of heightened China fears and the subsequent decision by the Fed not to raise rates, Draghi told members of the European parliament last night the ECB stood ready to pump in more QE if deemed necessary, although not at this stage. Ultimately the German and French markets posted small gains, while London rebounded a full 1.6%.

Clearly Europe was not focused on, or at least as worried as Asian markets were yesterday about the weak Chinese PMI. Indeed, a flash estimate of the eurozone’s manufacturing PMI released last night also showed a weaker number, albeit the drop to 53.9 from 54.3 still keeps the sector in comfortable expansion territory.

Oil-Based

Similarly, a flash estimate of a US manufacturing PMI showed an unchanged 53.0. And similarly, Wall Street did not seem too perturbed about the China number, with the indices opening only a little bit lower and doing not much early in the session. It was Yom Kippur, and volumes were thin.

It wasn’t long before the Dow was down over 100 point nonetheless, but this was all to do with another 3.6% drop for WTI crude. Oil fell on the Chinese PMI, so in theory Wall Street did too, indirectly, but the afternoon saw a gradual rebound to a less intimidating close.

Wall Street has nevertheless done nothing but fall since the Fed made its non-decision last week. While it is easy to point to China, and the Fed’s highlighting of the China problem, the bulk of traders speaking on US business television suggest it is not China, but disappointment with the Fed that is reflected in the weakness.

The Fed’s October meeting looms large. Has the US central bank (a) been surprised by the quite visceral backlash to their indecision, and (b) surprised Wall Street did not rally on the news? Would a tweet from the likes of superstar bond trader Bill Gross suggesting “Get off zero now!” be enough to unsettle the FOMC? Or could the members point to yesterday’s Chinese PMI and say “See!”?

That meeting is not due till the end of October, so it’s just as well October’s not a scary month.

And just to top things off, the US government may once again shut down on October first, not due to budget wrangling, but due to deadlock over an abortion bill. How does one resolve such an issue?

Commodities

Base metal traders all but pre-empted the Chinese PMI on Tuesday night and in so doing, cleared out the stop losses and shook out the commodity funds. Thus while copper did fall again last night, it was only by 0.3%. Mario Draghi’s comments would have helped, and they also pushed up the euro and thus sent the US dollar index down 0.1% to 96.21.

Aluminium also dropped a little, but the other metals all rallied up to 1.5%.

Oil prices definitely fell on China fears, but given recent volatility, any little trigger will do. West Texas is down US$1.67 to US$44.69/bbl for the new November delivery front month and Brent, already November, is down US$1.18 to US$47.81//bbl. The recent range remains well and truly intact.

Iron ore fell US30c to US$56.80/t and has also been going nowhere fast of late.

Gold took the lower dollar and ECB QE talk as reason to rise US$5.60 to US$1130.30/oz.

The Australian stock market was not the only victim of China yesterday. The Aussie is down 1.2% to just over US$0.70.

Today

As noted, the SPI Overnight closed up 11 points, which would take us just a little back above 5000 in the index if accurate.

Japan is back on board today after a three day break, so it will be interesting to see how the Nikkei responds to the past three days’ global activity. Japan will also see a flash PMI of its own today.

Germany’s IFO business sentiment survey for September is out tonight, but I assume the survey was conducted before the VW scandal exploded.

Wall Street will see durable goods and new home sales.

Locally, Brickworks ((BKW)) will release its FY15 result today.

Rudi will make his weekly appearance on Sky Business, at noon (Lunch Money) and re-appear between 7-8pm on Switzer TV.
 

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