FYI | May 31 2007
By Greg Peel
Back in February, Australia was actually oblivious to the 9% fall in the Chinese stock market on the day, despite it occurring in the same time zone. It took a big overnight reaction from Wall Street before the connection became clear. Thus began the Shanghai Surprise.
Not so yesterday when a 6% fall in the Shanghai Composite in the morning session saw a cautious reaction from an Australian market that has already been struggling to break new ground recently. Despite Shanghai holding the 6% in later trade, Europe, too, suffered falls. Then all eyes turned to New York.
The initial reaction was indeed adverse, with the Dow falling 65 points from the bell. However, the release of the Fed minutes of its interest rate discussion earlier in the month turned things around. Ultimately the Dow put on a solid 112 points for the day. More notably, the S&P 500 broad market index (which is more indicative of US equities than the famous but only 30-stock Dow) rose 12 points to 1530 – it’s first move into virgin territory since the dotcom peak of 2000.
The US market has been pretty volatile of late, bouncing around on economic data that suggest an interest rate cut one minute and an interest rate hike the next. The confusion is largely being driven by that fine balance between inflation fears and economic performance. The US economy has been performing better than most may have expected according to recent data, and bond yields have improved sending money flowing back into the US dollar – all positive for equities. However, the Fed keeps spoiling the party by reasserting its inflation concerns.
So it was a case of take your pick last night. The minutes of the Fed meeting revealed the committee still thought inflation was “uncomfortably high”. This should have reignited rate hike fears and a sell off. However, the committee also suggested the US economy will continue to accelerate from here, and that is more indicative of a potential rate cut. What to do?
Well Wall Street didn’t ponder for long. The Shanghai Surprise might have sparked a bit of a global risk scare back in February, but it wasn’t long before new highs were being made in equities once again – both in China and the US. Is a 6% fall anything to be really worried about? And with M&A activity and private equity money abounding well…how could you sell?
So they bought it.
There wasn’t a strong reaction from the US dollar itself – experienced mixed trading against various currencies. This might have given more heart to the gold market – particularly as that market has done a satisfying job of holding above US$650/oz for several days now, and any rate cut talk should be positive, but traders have not forgotten what happened last time the Chinese stock market had a collapse – positions were liquidated and gold fell about US$40 very fast. Gold slipped to US$652.90/oz, and neither did it receive any direction from a relatively steady oil market.
Base metals were off only slightly last night (except lead) but the price of uranium futures surged US$5.10 to US$140/lb. Is this indicative of further strength in the market? Not really. The open interest in what has been a disappointing contract remained at a mere 17, and the price hike was more reflective of a wide bid-offer spread more than anything else. The physical market remains at US$122-125/lb.
A bounce-back in the SPI Overnight of 47 points should set the scene for a stronger opening on the local bourse today. It will be a couple of hours in before we can ascertain what Chinese thinking might be this morning. Also of interest today will be the carbon trading scheme report delivered to the government at some point today. As to when that will be made public is unclear. Given the task force contains representatives of Australia’s greatest polluters, one suspects there won’t be anything scary from a resource sector point of view included in the recommendations.