Daily Market Reports | Sep 05 2014
By Greg Peel
The Dow closed down 8 points while the S&P lost 0.1% to 1997 and the Nasdaq fell 0.2%.
A surprisingly weak session on Bridge Street yesterday contrasted with the surprisingly strong session on Wednesday to take us back to exactly where we started the week. While there may have been some mining tax element to Wednesday’s lift, yesterday looked more like a portfolio sale from the open with all the big names hit indiscriminately. Telstra was as equally weak as BHP despite the telco not being much exposed to the new low in iron ore prices, while the banks all held hands and jumped.
Bucking the trend were the consumer sectors, in the wake of a positive July retail sales number. At 0.4% growth the result was bang in line with expectations but a 5.9% annual rate is encouraging and suggests Australians are over their post budget blues. Staples was the only sector to finish in the green yesterday and discretionary held on to be flat.
While the July trade balance registered the fourth consecutive month of deficit it did narrow to a better than expected $1.36bn after June’s $1.56bn, and featured a rise in exports of 1.0% and in imports of 0.3%. Meat and gold were big contributors on the export side but while coal remains subdued, the value of iron ore exports still managed to increase as higher volumes outweighed lower prices.
The head of the Bank of Japan talked up his country’s rosy economy yesterday while making no change to policy, leaving economists to wonder just what data he might actually be looking at. Japan appears to be struggling to rebound from its tax increase but Mr Kuroda spoke enthusiastically about rising incomes and household and corporate spending.
Not something his counterpart Mario Draghi can mimick. Draghi may perhaps have been getting tired of everyone calling him Mister “All talk and no action” before he announced last night what can roughly be described as QE measures, continental style. The ECB cut its cash rate to 0.05% from 0.15% last night, close enough to call it “zero”, and announced a plan to buy asset-backed securities and covered bonds.
The ECB cannot buy government bonds, which is the primary strategy of Fed QE, as there is no one eurozone bond but rather seventeen of them. So instead the central bank is buying non-government paper in the same way the Fed has supplemented its purchases with mortgage-backed securities.
Given Draghi’s aforementioned reputation, currency markets were caught out by the announcement and subsequently the euro fell below US$1.30 for the first time in over a year. The yield on the German ten-year bond fell 2 basis points to 0.97%, France saw an 8bps drop to 1.30%, Italy 15bps to 2.35% and Spain 12bps to 2.20%. We note that Australia is sitting at 3.42%.
The US dollar index was nevertheless the big talking point, soaring 1.1% to 83.78 last night. It was all about the euro of course, and not about anything particularly US-centric. Thus, alas, the Aussie is unmoved at US$0.9345 despite the greenback’s leap. What one gains on the Dixie swings one can lose on the cross-rate roundabout.
Perhaps more interesting still was the reaction in the US bond market. All year US bond yields have confounded expectation by falling even as Fed QE is tapered, but it’s all about relativities and falling yields elsewhere, particularly in Europe. Yet last night when euro-yields fell once again, the US ten-year yield rose 4 basis points to 2.45%.
Bond traders are now looking sideways at each other with expressions of, “Are you thinking what I’m thinking?”
It’s been a very long time since the US dollar index has jumped 1% in a session and since US bond yields have diverged from bund yield (German) movements without a domestic catalyst. The membrane of the US bond bubble is now quite transparent and bond traders are taking a couple of steps back. Watch out, they’re saying, it might be about to blow.
Let’s tie this in with the US stock market. Last night, following the ECB announcement, the German DAX closed up another 1.0% and the French CAC 1.7%. On Wall Street, the 11.30am NY turnaround (at the European close) was yet again in play. When the European stock markets were threatening to break down due to Russian sanctions, Europeans would sell down Wall Street in the morning and the Yanks would buy it back in the afternoon. The formula is still holding, but in reverse.
Lately, as European stock markets have rallied, Europeans have bought up Wall Street in the morning and the Yanks have sold it down in the afternoon. Fuelling the European rebound has first been ceasefire talk in Ukraine, and now the ECB. One presumes the ECB has now sent a signal that it will counter the impact of sanctions if this ceasefire business proves a charade.
The S&P500 cannot get past 2000. Either Wall Street is simply consolidating at this level, preparing for the next move up, or it is a near term point of no return. Tapering will be completed next month. Last night the US August services PMI showed a rise to 59.6 from July’s 58.7 when economists had expected a fall to 57.2. The ADP private sector jobs number came in at 204,000 – a little below 215,000 forecasts but not enough to derail expectations of the seventh consecutive monthly addition of 200k plus jobs in the non-farm payrolls number.
As has oft been the case of late, it is nigh on impossible to predict how Wall Street will react to tonight’s non-farm payrolls, be they good, bad or indifferent. What we do know is that the case for a sooner-rather-than-later Fed rate rise is building. The US dollar is rising. US bond yields look like they may have turned. And the US stock market is struggling at the highs.
Maybe yesterday’s local portfolio seller was on to something.
The big rise in the US dollar elicited an unsurprising fall in gold last night, of US$7.30 to US$1262.10/oz, while the oils also responded text book style as Brent fell US53c to US$101.83/bbl and West Texas fell US60c to US$94.51/bbl.
It was a different story on the LME, however. A stronger greenback may imply a mathematical reduction in dollar-denominate commodity prices, but base metals prices have wallowed of late given weakness in the European economy despite analyst bullishness. Let us not forget Germany is the world’s biggest manufacturer. Hence fresh stimulus from the ECB, indicating Draghi’s “whatever it takes” mantra is not just rhetoric after all, can only be perceived as positive on the LME. All metals rose last night, by varying degrees.
If only the same could be said for iron ore. The downtrend for iron ore has now accelerated since the breach of the two-year low. Last night saw the price drop another US$1.40 to US$84.30/t. At this level, and taking into account grade discounts, Australia’s pure-play iron ore miners are either close to, or have reached, cash burn.
For the second morning in a row, the SPI Overnight has closed unch. Wasn’t much of an indicator yesterday morning.
US jobs tonight, but before that we’ll see the local construction sector PMI and S&P/ASX will announce which stocks will be promoted to/relegated from their indices.
The reaction to tonight’s combination of US job additions, unemployment rate and workforce additions (participation rate) are going to be very interesting. If you’re keen, 10.30pm Sydney time on US business television.
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