Daily Market Reports | Jun 12 2013
By Greg Peel
The Dow closed down 116 points, or 0.8%, while the S&P lost 1.0% to 1626 and the Nasdaq fell 1.1%.
It was not expected that the Bank of Japan would cut its cash rate or add to its extensive QE program at its policy meeting yesterday. However, it was expected the central bank would extend the duration on ultra-low interest rates to banks. The extension was not forthcoming, rather the BoJ spoke of an improving economy and expectations for inflation to begin to turn positive soon.
The statement came out mid-session in Japan, and the Nikkei fell 1.5%. European stocks then opened and fell 1%, and Wall Street opened and fell over 1%. But US Treasuries also found eager selling in a thin market from the open, sending the ten-year yield up 8 basis points to 2.29%, and buyers came into stocks, sending the stock indices back to the flatline.
Then the roles reversed. Buying came into the bond market, despite weak demand for a Treasury three-year auction, and by the closing bell the ten-year yield was down 2bps on the day to 2.19% and the stock indices were once again down around 1%.
What on earth’s going on?
The bottom line is that markets across the globe are not trading on fundamentals, they are trading only on central bank support, or potential lack thereof. There were no major economic releases to spark volatility last night, nor corporate activity. There was no actual talk from the Fed. Yet markets are acting like heroin addicts being told there might be some difficulty in finding the next fix, talking themselves into and out of worse case scenarios. All the while, in theory, it seems majority rule has not changed in the FOMC and the majority will keep QE going for now. Yet the seed of fear has been sown.
Traders put the sharp early US bond sell-off down to rumours the Fed was going to start tapering, and a lack of buying support from those who simply aren’t prepared to chance the Fed. But when the yield on the ten-year crosses over the yield on the S&P 500, buyers are found, as was the case eventually last night. There was also talk of disturbing scenes in Istanbul, as Turkish protests turned ugly, having an impact on confidence. Yet realistically Turkey is not going to have that much influence over global financial markets.
Free market capitalists are now really spitting chips, denouncing markets as now being firmly under central bank control. Those trying to leverage off central bank support are worried the show might be about to end.
The yen rallied sharply against the US dollar from yesterday on disappointment over the BoJ (one can gauge the madness when disappointment leads to the buying of a currency) sending the US dollar index down 0.7% to 81.07. This might have been a trigger for gold to bounce back but it didn’t, falling US$7.40 to US$1378.40/oz. Nor did the Aussie respond, falling 0.3% to US$0.9436.
The story continued into commodities. A weaker US dollar should be supportive for commodities, but not if central banks are either failing to extend support or preparing to wind it back. Base metals all fell around 2%, with copper down 1.5%. A 2.7% fall in nickel saw that metal break solid technical support. Chinese traders will not return until tomorrow.
Brent crude fell US99c to US$102.96/bbl and West Texas fell US72c to US$95.05/bbl. Oil was also impacted by an unexpected jump in US weekly inventories, and a downgrade in global demand growth expectations from OPEC. The escalating trouble in Turkey (not an oil producer of note, but part of the general Middle East disturbance) provided no support to prices.
Spot iron ore remains unchanged at US$110.90/t until China returns from its break.
The SPI Overnight fell 40 points, or 0.8%.
There are again no major economic releases due in the US tonight. Japan will release May inflation data and locally Westpac will release its May consumer confidence survey.
Until it is patently clear just what the Fed intends to do then it will be patently unclear as to which way global markets will run. Volatility will nevertheless be a given.
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