Daily Market Reports | Jun 22 2012
By Greg Peel
The Dow fell 250 points or 2.0% while the S&P lost 2.2% to 1325 and the Nasdaq dropped 2.4%.
HSBC pulled a swifty on me yesterday by moving the release of its flash estimate of China's June manufacturing PMI forward by a day. The estimate fell to 48.1 from 48.4 in May to mark the eighth straight reading under 50, implying contraction. The only saving grace is that the pace of reduction appears to be slowing.
It is of no great surprise the biggest factor within the PMI result was a fall in new export orders, to a low of 45.9 in June from 48.5 last month. China's biggest export customer is Europe, followed by the US in which consumer spending is again being reined in. The June reading is the lowest since March 2009 – the stock market nadir of the GFC. Total new orders also fell to a seven-month low of 46.8 from 47.9, albeit by implication new orders ex-export must be positive, suggesting China's domestic economy is providing a buffer just as Beijing has been attempting to orchestrate through its policy measures. Fiscal measures have included speeding up approvals on big projects, offering tax breaks, and extending subsidies to promote consumer spending.
Monetary policy measures have included reductions in the bank reserve requirement ratio through 2012 and a recent interest rate cut. With inflation under control in China, there is no one who doesn't expect more policy easing from Beijing. Indeed, consensus has the Chinese economy bottoming in the first half before recovering in the second. But it didn't stop the Australian market feeling depressed yesterday.
And the news didn't get any better as the sun set over Sydney.
A similar estimate of the eurozone's composite PMI, which aggregates both the manufacturing and services sectors, came out at 46.0 for June – the lowest level since June 2009. The good news is the reading is actually unchanged from May, suggesting the pace of contraction has not accelerated. But projections now have the eurozone GDP falling 0.6% in the June quarter, with even Germany registering a negative result.
Expectations are for the ECB to cut its cash rate next month. Meanwhile, an audit of Spanish banks has declared they will need up to a further E62bn of additional capital, which falls well short of the E100bn line of credit the EU set aside ahead of the Greek election. Spanish bond yields have been retreating since a ten-year yield peak of 7.28% was marked on June 18, and last night the tens fell 3bps to 6.66% following a well bid auction. The Spanish government was hoping to sell E2bn of three-year bonds but put away E2.22bn. That's the good news. The bad news is the settlement yield of 5.55% compares with 4.88% paid only a month ago.
The sun then rose over New York and the global mood shifted from bad to worse.
US new weekly jobless claims did manage to tick a little lower last week but the previous week's figure was revised up, suggesting no sign of improvement on the payrolls front. An improving mood in housing based on data earlier in the week was killed off by a 1.5% fall in existing home sales in May. The Philadelphia Fed manufacturing index has plunged to minus 16.6 this month from minus 5.5 in May to register its lowest result in ten months, confounding economists who had expected improvement to zero.
The only bright light was the release of the Conference Board's leading economic index from May, which indicated a rise of 0.3%. The implication is the US economy will not fall into a hole in the second half, but it won't improve much either.
Goldman Sachs picked a good day to release its latest target for the S&P 500, which it suggested will fall 5% to 1285. It had a good start on that last night, falling 2.2% to 1325 and taking out a few technical levels on the way. Such is the power of Goldman, nevertheless, that such predictions will always have an element of self-fulfillment.
And just to add insult to injury, ratings agency Moody's declared last night that it would announce downgrades to all major US banks at 4pm New York time, then didn't. US banks stocks were carted during the session in anticipation of the downgrades, which could see the Big Five hit by one to three notch moves. For some reason Moody's is delaying, and the agency is also expected to apply similar downgrades to UK banks any moment as well.
The impact should not, nevertheless, be overly great. Firstly, these downgrades have been touted and expected for some time. It's just a matter of degree. Secondly, the banks are ready for them, and while funding costs will rise, all the banks suggest they will not need any more capital. Thirdly, Moody's is always so far behind the curve its ratings become largely meaningless, even if the agency is not collecting illicit payments to provide such a service this time.
And I'll add a fourthly. I said last year when the US itself was downgraded that I can't really see any implication in everybody, and everything, eventually being downgraded. If every team in Britain's Premier League soccer is relegated to first division, and so on down the line, doesn't first division simply become the Premier League? If every sovereign and bank on the planet is downgraded collectively, the relativities are unchanged. One might say “but Australia has a lonely AAA rating”, which is true, but as we saw at the G20, no one considers Australia to be of any influence.
The culmination of all of the above was a big “risk off” session last night, highlighted by the second biggest fall for the US stock market in 2012. As is always the ironic case at such times, the world rushed into the US dollar, sending its index up a whopping 1.1% to 82.34. The move was not reflected in US bond yields – the ten-year fell only 2bps to 1.61% – but then US bonds are considered to be very overbought for one, and the Fed is not yet ready to start buying more for two. The latter point was reflected in a big victim of last night's move being gold, which plunged US$41.60, or 2.6%, to $1565.20/oz. Silver was hit even harder, dropping 4.4%.
Base metals movements have not been overly significant of late, but with another global recession threatening, the dam finally broke last night. Everything fell 2-4%. The mood carried over into oil, with Brent falling US$3.46 to US$89.23/bbl and West Texas dropping US$3.20 to US$78.25/bbl on the new August delivery front month.
The Aussie was slammed, dropping a full 1.6 cents to US$1.0033, while the SPI Overnight, which has rolled into the September front month, lost 48 points or 1.2%. Note that we responded at least to the Chinese numbers yesterday.
All a bit of a litany of disaster. A delayed response to the Fed's “no QE3 just yet” decision? Well even the Fed would not have known what numbers were about to drop across the globe last night. Aside from QE3 expectations, there are expectations the ECB will cut next month but also that some further stimulus measures must soon be undertaken to (a) save Spain and (b) support the new pro-growth push in Europe. In the UK, the Bank of England has been trying a new tactic – bypassing the stimulus bottleneck. Across the globe central banks have been doling out freshly printed funds to commercial banks so they can on-lend into the economy, only to see those banks hoard the cheap loans in order to support their own balance sheets. It's only taken four years to figure this one out, but now the BoE is providing QE funds to UK banks on a “lend it or lose it” basis, to ensure it is the economy, and not just the banks themselves, which see the stimulus.
The Fed is impressed by this fresh approach – Bernanke said so himself – and it would not be surprising if a similar tactic is announced at the next Fed meeting.
Anyway, TGIF.
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