Daily Market Reports | Dec 18 2015
By Greg Peel
The Dow closed down 253 points or 1.4% while the S&P fell 1.5% to 2041 and the Nasdaq lost 1.4%.
Euphoria
The rebound rally that began on Wednesday in anticipation of the Fed rate hike kicked on yesterday, locally and around the globe, on confirmation of the Fed rate hike. If you’d just landed from another planet yesterday you perhaps were wondering why on earth a tightening of monetary policy is so bullish for markets.
When a central bank tightens policy to take rates back towards “normal” the implication is of an improving economy, and that is positive. When rates are above normal and policy is tightened, this implies an overheating economy and that is negative. But importantly yesterday the Fed finally ended the uncertainty that had prevailed all throughout 2015 as to just when tightening might begin. And perhaps most importantly, the Fed was at pains to point out the subsequent cycle will be “gradual”, suggesting ongoing accommodative support for markets.
Of course the flipside to the Fed rate hike is a stronger US dollar. There has been much discussion on whether the US dollar had already priced in, and perhaps even overpriced, the beginning of the tightening cycle. Many thought there may be a sell-off in the greenback but overnight the dollar index has risen 0.8% to 99.23.
Not good news for already beaten-down commodities.
But this was not the issue yesterday on Bridge Street, where all sectors finished with solid gains, bar one. Energy managed only a 0.2% rise given the oil price had once again tumbled overnight. Healthcare, up 2.7%, was the market leader. Analysts and traders yesterday tempered some of their initial fears over the MYEFO outcome, at least for some stocks in the sector, and some bargain hunting ensued following previous big knock-downs.
Commodities
It was the most anticipated rate hike in history, yet still commodities markets, most of which had closed on Wednesday night prior to the Fed statement release, reacted as if it were a toss of the coin decision.
We had actually seen a little bit of buying this week in base metals ahead of Wednesday night, as traders squared up, but last night saw falls of over a percent for aluminium, copper and nickel, close to 2% for zinc and 3% for lead. Individually, lead again suffered from the excess of inventories revealed the night before.
Iron ore trading is largely removed from either Fed policy or currency considerations. It’s up US30c to US$35.50/t, despite a report out from Goldman Sachs overnight suggesting the iron ore price could remain sub-40 for the next three years.
In the commodity du jour, West Texas fell US73c to US$34.92/bbl and Brent fell US40c to US$36.99/bbl for the new February delivery front month. These moves don’t seem that large, but given how far oil has fallen we note that is a 2% drop for WTI and 1% for Brent. The current critical level for WTI is 35, so closing (officially, the market continues on electronically) under that level is seen as bearish.
On Wednesday night gold jumped up ten bucks and last night fell twenty. Gold is down US$20.60/oz at US$1051.50/oz. We can only assume here that there was an initial counter-trade of “buy the fact” in anticipation of an aforementioned “sell the fact” counter-trade in the US dollar. Clearly this did not happen, so gold turned tail.
As a result of commodity price falls, and of the impact interest rate differentials have on currencies, the Aussie is down a solid 1.4% at US$0.7121, heading in the direction one would assume following a US rate rise.
Reality
After the party comes the hangover. Wall Street was set to go on with it last night but managed only a slight tick up from the opening bell before the oil price started heading south once more. Dutifully, stock markets followed.
Traders were largely unsurprised given the rallies into and after the Fed decision, suggesting consolidation thereafter is not unusual.
It was not lost on Wall Street nevertheless that oil names big and small were again getting hammered last night, and that the flow-on into selling of high-yield bond funds recommenced in a higher interest rate environment. While the rate hike removes uncertainty, and uncertainty is the enemy of stock markets, the reality is a stronger dollar is another kick in the teeth for commodities and adds another notch of risk to high-yield instruments.
The recommencement of high-yield bond selling also re-triggered a flight to the safety of Treasuries. The US ten-year yield is down 5 basis points to 2.24% which, following a rate rise, is the wrong way around.
And just to provide another kick in the teeth for the energy sector, the US natural gas price fell another 5% last night. While natgas comes under the same dollar influence, this is an individual story of a lack of demand for heating given an unseasonably warm start to winter, which in turn is being blamed on El Nino.
We recall that the past two winters in the US were unseasonably cold, leading to negative GDP results in each March quarter and, to a great extent, helping to keep the Fed on the sidelines until now. If El Nino brings a mild summer, presumably the March GDP will look like a cracker on a year on year basis, while natgas producers will be cycling two boom years of domestic gas sales and will suffer very bad “comps”.
In the major US data release of last night, the Philadelphia Fed activity index fell back into the negative (contraction) to mark three negative monthly results in four. With the rate rise in the bag, Wall Street is not much focused on data right at this moment, but it will become important again next year as discussion begins on the timing of the next hike.
Meanwhile, the acceleration of the sell-off to the close last night on Wall Street is not a good omen, and may just have put Santa back in his box again. We will, however, need this post-Fed dust to settle. Tonight in the US is the quadruple witching derivatives expiry and this will no doubt already have been affecting markets last night in the lead-up.
Today
The SPI Overnight closed down 42 points or 0.8%.
The Bank of Japan will hold a policy meeting of its own today but Fed tightening has affectively handed Japan an easing by default, so no change is expected.
As noted, quadruple witching in the US tonight.
Today sees the quarterly changes to the constituents of the S&P/ASX indices, announced two weeks ago, become effective.
And just a reminder for subscribers trying to contact Rudi via Editor Direct, he’s on his end of year break, and is somewhere in deepest, darkest Africa.
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