Daily Market Reports | Dec 04 2015
By Greg Peel
The Dow closed down 252 points or 1.4% while the S&P lost 1.6% as the Nasdaq fell 1.9%.
Commodity Crunch
The driver of weakness in the local market yesterday was writ large in sector moves by the closing bell. With both WTI oil and iron ore set to fall into the thirties, the energy sector lost 2.2% and materials 1.8% while almost all other sectors saw insignificant moves. Healthcare was the only other sector to see a plus 1% drop.
Bargain hunters were nevertheless waiting when the ASX200 fell 58 points on the open, quickly halving that drop ahead of the release of the local October trade data. The deficit revealed in the numbers was enough to bring in the sellers once more before again the buyers fought back, and we saw a net 30 point drop by the close.
September’s trade deficit was $2.4bn and economists were looking for $2.6bn for October, thus the result of $3.3bn came as somewhat of a shock, particularly in the wake of the “beat” on September quarter GDP due to a better than expected contribution from exports. Exports of goods and services fell 3.0% in October while imports rose 0.2%.
Breaking down exports reveals goods down 4.1% and services up 0.1%, while within goods, metals exports were down 6%. The bottom line is that the deficit blow-out can simply be blamed on the iron ore price. Elsewhere, there is good news in that while rural exports did sag in the month, annual growth in rural exports is running at 11.4% with more to come thanks to recent free trade agreements. And the lower Aussie dollar is clearly having a positive impact on tourism.
Not Happy Mario
At the same time that the world was quietly becoming convinced the Fed will hike in December, the world had more assuredly assumed the ECB would announce extended QE at its December meeting last night. QE has been duly extended out to March 2017, but the quantum is what caught markets by surprise.
It was assumed the QE program would not only be extended in time but also in quantum, but the ECB left its monthly bond purchase target unchanged at E60bn. It was also assumed the central bank’s deposit rate would be cut by 20 basis points but it has only been cut by 10, to minus 30 basis points. The response to these numbers was the biggest move the euro has seen against the US dollar in either direction since 2009. Every man and his dog was short.
The euro jumped over 3% against the greenback, sending the US dollar index down a whopping 2.3% to 97.66. There was carnage in European stock markets, with Germany and France both down 3.6% and London down 2.3%. The carnage was also evident in European bond markets, more closely linked to monetary settings. The German ten-year yield jumped 13 basis points to 0.60%. That’s a 42% jump.
The sell-off in European bonds flowed over the Pond on the carry trade connection, sending the US ten-year yield up 15 basis points to 2.33%.
I noted in yesterday’s Report that not everyone in Europe thought it a good idea were the ECB to go “shock and awe” on its easing, given recent positive signs in the economic data, and it appears Mario Draghi is of a similar mind. He is keeping his powder dry and, as always, promised he can do more “if necessary”.
Terror-Fied
It has been suggested that the Pakistani-born husband and wife team who carried out the mass shootings in San Bernardino were “radicalised”, suggesting America’s 355th mass shooting for 2015 was not the act of the usual home-grown nutter but indeed an act of terror. While commentators suggest last night’s sell-off on Wall Street was predominantly about the ECB, they concede an element of fear related to the shootings.
Meanwhile Wall Street also had economic data to deal with. The US November service sector PMI tumbled to 55.9 from 59.1 in October when economists had forecast 57.5. While 55.9 is nothing to shirk at, the easing in the pace of growth is the biggest since 2008. Factory orders posted a gain in October, but missed expectations.
A good time to tighten monetary policy? On that subject, Janet Yellen was providing a testimony to a House Economic Committee last night and once again her rhetoric implied the Fed has already decided to hike this month. With reference to San Bernardino, Yellen agreed terrorism had the potential to impact on the US economy but that there was no sign of such at this time. She also said that were the Fed to raise its cash rate, it could always cut it again if needs be.
Tonight sees the US non-farm payrolls report for November and economists are forecasting 200,000 new jobs. The market is assuming it probably doesn’t matter what the result is.
Commodities
If there was any market that specifically exhibited a terrorism-related response last night it was the oil markets. As soon as police officials used the word “radicalised” on live news broadcasts, oil prices jumped. West Texas is up US$1.05 at US$41.12/bbl and Brent is up US$1.26 to US$43.87/bbl.
WTI has avoided a 30 handle for now. Iron ore is also hanging in there, but fell another US30c last night to US$40.30/t.
Fear of a rising US dollar has been a big driver of commodity price falls most recently, so one would expect the big drop in the greenback to spark some short-covering. However the flipside of the dollar fall is disappointing stimulus from the ECB, which is itself disappointing for commodities markets. The oils rose on the terror element but last night in London, zinc fell 1.5% and nickel and tin 1% while the other base metals were relatively steady.
The winner on the currency move was gold, up US$11.60 at US$1064.50/oz.
The Aussie had fallen under 73 in yesterday’s trade on the release of the weak trade data, but the greenback’s fall has meant a 0.7% rise over 24 hours to US$0.7357.
Today
It just goes to show how dependent markets remain on central bank support, all these years after the fall of Lehman. The world has baked in a Fed rate rise and just wants to get it over with, knowing subsequent hikes will come very slowly. But the focus is now on Europe following in the footsteps of the US response to the GFC, and the world did not get what it wanted last night.
The SPI Overnight closed down 67 points or 1.3%.
Today sees retail sales data in Australia. Tonight sees the US jobs report which would typically be “all-important”, but one gets the feeling this one isn’t.
No one is expecting production cuts to be announced at tonight’s OPEC meeting, but then everyone expected more from the ECB.
On the local stock front, quarterly changes to the S&P/ASX stock indices will be announced today, becoming effective in two weeks’ time.
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