Daily Market Reports | Mar 14 2014
By Greg Peel
The Dow fell 231 points or 1.4% while the S&P fell 1.2% to 1846 and the Nasdaq dropped 1.5%.
Yesterday Beijing reported 8.6% year on year growth in Chinese industrial production over January-February, down from 9.7% in December. January and February numbers are aggregated in order to smooth the lunar new year disruption. Economists had expected a 9.5% rise. Retail sales grew by 11.8%, compared to expectations of 13.5%, and fixed asset investment grew 17.9%, down from 19.6% in 2013 and representing the weakest growth since 2002.
In short, the results were a lot worse than the market expected. Why, then, did the ASX 200 rally 28 points and why is the Aussie up 0.5%? Strange, and ready to be very much reversed this morning.
The reason the local markets were positive yesterday was the local employment data, which showed 47,300 new jobs added in February for an unchanged unemployment rate of 6.0% despite an increase in the participation rate to 64.8%. Economists had expected an addition of 15,000 jobs.
We are again reminded that industries like hospitality and banking don’t have the same emotional pull as tinned peaches, so headlines only rail against the collapse of manufacturing and don’t bother mentioning where jobs are being created rather than lost. However, economists were once again left shaking their heads yesterday at this notoriously volatile series, pointing out last month’s January numbers were much weaker than expected. The underlying trend is running at 14,000 new jobs per month, and population growth requires 18,000. This implies the unemployment rate must rise further, and there is an added drag in a structural downward trend in the participation rate due to the ageing population.
It’s all well and good to become excited over the (spurious) local data but to ignore China? Bridge Street seems to have been jumping the wrong way all week. We’ll jump right in here and look at this morning’s close in the SPI Overnight, which is down 58 points or 1.1%. Why? Because the Dow fell 230 points. Why? The Chinese data.
At least the Chinese data were very much a catalyst. Beyond that, tensions are rising to boiling point in the Crimea.
Russian troops are assembling on the other side of the Ukraine border, ready for what Putin clearly sees as an inevitable win in the referendum this weekend and justification to annexe the peninsula. The Ukrainian president has now warned of war. President Obama has told Russia to back down, and last night a normally conciliatory Angela Merkel warned that if Russia continued on its intended course it would not only be a catastrophe for Ukraine, but would cause “massive economic and political harm to Russia”.
Outside of activities in Eastern Europe, last night ECB president Mario Draghi rather surprised markets by appearing to change course. In recent months, European economic data have improved but inflation has fallen dangerously low, yet Draghi has constantly insisted there is no threat of deflation. This week’s eurozone industrial production numbers disappointed, and last night Draghi warned the strong euro was “weighing on inflation” and that the ECB stood ready to take action (some sort of QE) in the case of “material” risk. On that note, the euro fell 0.3% against the greenback.
It’s not really a change of course, of course, but rather more of the new language of central bankers who realise they can “talk down” a currency just as easily as actually doing something about it. Glenn Stevens tried it on last year and found it works, so he’s been doing it ever since.
Lost in the wash of last night’s focus on China and Europe were the US retail sales numbers for February, which showed a 0.3% gain compared to 0.2% expectation. It’s the first rise in the three months in which US shoppers have been trapped inside their snowbound houses.
Despite last night’s big fall, Wall Street is only 2% off its latest all-time high. Volumes have not been heavy, and while the VIX volatility index jumped 11% last night, that took it only to a highly complacent 16. But talk has now been rekindled of the old “necessary correction”, that which has not been seen since 2012. Maybe this time…
The US bond market is certainly battening down the hatches. Many an analyst in the US has pointed to the disparity between the stock and bond markets, suggesting that bond yields remain rather low at a time the stock market has been exploring fresh blue sky. One of them is wrong, is the suggestion, and it’s probably not the bond market. Crimea was cited as the main reason the US ten-year yield fell 8 basis points to 2.64% last night, with a pinch of China thrown in.
Similarly, gold is up another US$6.20 to US$1373.00/oz. The US dollar index is steady at 79.58 despite the fall in the euro and the Aussie, as noted, is up 0.5% to US$0.9029.
Have you been on holiday? If you have, you probably think iron ore’s a boring old market. It’s now sitting at US$111.50/t. Never mind that last night iron ore jumped US$4.10 and Twiggy Forest has spent the last week having heart palpitations. It appears now that iron ore simply fell into a destocking hole which has quickly been filled, rather than any underlying fear of the impact of Beijing’s crackdown on indebted steel mills.
Which cannot be said for copper, nevertheless. Copper was down another 1.5% last night, spurred on by the weak Chinese data and the prevailing threat of the end of copper financing as another Chinese shadow banking sleight of hand. The other metals were also weaker except for the current star of the show, nickel, which rose another 0.5%.
It has been revealed to the oil market that the US government chose this week to do a little “test sale” of its Strategic Petroleum Reserve. Nice time to do it when the world is on edge over Crimea, but I suppose that’s the point. So the sudden drop in the West Texas price this week has largely been government driven, and now things are back to normal. Last night WTI rose US29c to US$98.28/bbl while Brent, which stands to become more valuable if Russia turns off the energy export spigot, fell US98c to US$107.33/bbl.
As an aside, I mentioned a month or so ago that Australian investors should not pay any attention to a then soaring US natural gas price when assessing local producers and LNG hopefuls. The US gas market is a closed shop, and the price spike was all about the snow dump. Sure enough, natgas peaked at over US$6/mmbtu in February and last night closed at US$4.38/mmbtu.
The SPI Overnight, as noted, is down 58 points or 1.1%.
The Crimean referendum is on Sunday.
All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available in the FNArena Cockpit. Click here. (Subscribers can access prices in the Cockpit.)
(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author's and not by association FNArena's – see disclaimer on the website)
All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
