The Overnight Report: Harbingers Of Death

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By Greg Peel

The Dow closed down 312 points or 1.9% while the S&P lost 2.6% to 1881 as the Nasdaq fell 3.0%.

Oops

Yesterday’s action on Bridge Street just goes to underscore the fact the market is being run by a bunch of Nervous Nellies at present, who can become equally as nervous about missing out on the upside as they can about getting out on the down.

The lead-in of a flat session on Wall Street and lower commodity prices – base metals were net lower, iron ore and gold were lower and the oils were only a tick up – ensured the ASX200 went nowhere for the first half hour but suddenly the announcement of a planned merger between fibre cable company Vocus ((VOC)), which had recently swallowed up peer company Amcom, and junior telco M2 Group ((MTU)), which had lost a battle for iiNet with TPG Telecom ((TPM)), set the world on fire.

At any other time we might assume M&A in the telco sector would do little more than fire up the telco sector but yesterday we saw a flood of buying across the board. Leading the charge was energy, with a 2.2% gain, possibly because if there is any sector for which analysts anticipate a round of consolidation, its Australia’s gas industry. Why consolidation among telcos would imply the same in LNG is by the by.

The somewhat astounding aspect to yesterday’s close on the high for the ASX200, up 71 points, was nevertheless that the bad news out of China released around midday caused no more than a brief dip in the rally.

Australia is supposed to be the China proxy. The Aussie is down 0.5% to US$0.6990 but in stock market terms it was left to Japan, down 1.3% yesterday and London, down 2.5%, Germany, down 2.1% and France, down 2.8% last night to provide a China-based response. There followed a 2.6% plunge on Wall Street.

Red faces today? Yesterday’s data showed Chinese major industrial companies saw their profits fall 9% year on year in August, marking the fastest decline in four years.

Yesterday BHP Billiton ((BHP)) rose 1% and overnight in London the shares are down 6%.

Oops indeed.

One might argue that August was the month Beijing really brought out the big guns of stimulus – including the currency devaluations – and they have to be given time to have an impact. We note China’s own stock market actually closed up 0.3% yesterday. Admittedly there was more to last night’s Europe/US sell-off than just Chinese profits, given a couple of Fedheads got involved. But the fact the SPI Overnight has closed down 104 points this morning might be taken as proof the local market got it rather a lot wrong yesterday.

October?

Wall Street opened lower on the flow-on from Europe and an undertone of further China slowdown fears. Then along came New York Fed president William Dudley who, speaking to the Wall Street Journal, reiterated Janet Yellen’s insistence that the Fed was still on track for a rate rise in 2015, and went as far as to suggest it could come as early as the October meeting.

Now, I have been noting since the Fed’s non-decision earlier this month that Wall Street has swung around in sentiment from being negative about a rate rise to being positive, on an “end the uncertainty” basis. So why did the Dow drop 300 points last night?

Three reasons, basically. Firstly, the sell-off in biotechs that began on Friday night turned into a flood last night, sending the Nasdaq down 3%. Biotechs are both a momentum trade and an anti-beneficiary of higher rates.

Secondly, commodity prices were already weaker overnight, with copper, iron ore and oil all down on the China data. Higher US rates mean a stronger US dollar, and even if that implies a stronger US economy, it also mathematically implies pressure on commodity prices. The materials sector was among the hardest hit on Wall Street last night, although ironically, the US dollar index is actually 0.3% lower this morning at 95.97.

The third reason is technical. Ever since Wall Street bottomed out from its correction in late August and attempted to recover, trader after trader has suggested the market needs to go back down to test the August 24 intraday lows before a true bottom can be called. And even if it gets down there, it could go further to test the October 2014 bottom.

On August 24 the Dow opened down 1000 points and reached 15,370. That’s another 4% down from here. The S&P500 on the day hit 1867, but the 2014 bottom was 1831. If ever there was a precursor to such bottom retesting as far as technicians are concerned, last night the Dow, S&P, Nasdaq and Russell 2000 all simultaneously posted a “Death Cross” (50-day moving average crosses down through 200-day moving average) for the first time since…you guessed it…August 24.

So drag out the Ouija board and dust off the crystal ball – it could all be about to get spooky.

Even Chicago Fed president Charles Evans’ suggestion later in the afternoon that the Fed should be in no hurry to raise interest rates failed to stop Wall Street continuing its slide last night. The only ray of hope is that the Dow did venture below 16,000 briefly before jumping back at the close to 16,001.

So the conclusion is that while Wall Street really does want to get this rate hike over and done with, the implications for the likes of biotechs and commodities is in the meantime enough to force a clear-out, and the technicals will likely feed on themselves.

Interestingly, the US ten-year yield fell 7 basis points last night to 2.10% when a rate hike would imply the opposite. Is the bond market remembering that China held back the Fed this month, so ever weaker Chinese data should ensure a further delay?

Commodities

Tin bucked the trend in rising 2% on the LME last night and zinc and lead were steady, but aluminium, copper and nickel all fell over 1%.

Iron ore fell US20c to US$56.00/t.

West Texas crude fell US87c to US$44.47/bbl and Brent fell US$1.24 to US$47.36/bbl.

Despite a dip in the US dollar, gold fell US$13.70 to US$1132.60/oz on renewed rate rise expectations.

Today

As noted, the SPI Overnight closed down 104 points or 2.0%. If accurate, that would take the ASX200 back down to very familiar territory just above 5000, for about the umpteenth time. If the Dow is going to crack through 16,000 because it is foretold in the chicken entrails, then presumably the local index will breach 5000, and then it’s next stop 4800 according to the local technicians.

House prices and consumer confidence will be on show in the US tonight.

Locally, as Australia struggles to emerge from what has been a particularly long winter, Kathmandu ((KMD)) will report its FY15 result today.
 

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