Daily Market Reports | Sep 19 2014
By Greg Peel
The Dow rose 109 points or 0.6% while the S&P gained 0.5% to 2011 and the Nasdaq added 0.7%.
The Australian market staged somewhat of a comeback yesterday after seven consecutive days of falls. Bank stocks, most notably, found support. As to whether we can put that down to the Fed statement is a matter of conjecture.
The Australian market began falling when it was rumoured that the Fed would shift to a more hawkish stance with Wednesday night’s statement, removing the “considerable time” guidance with regard first rate rise post the end of tapering. Even when this rumour was challenged, it kept falling. And even when the statement was published with that phrase still in place, the ASX200 fell yesterday morning.
The conundrum with regard the statement is that while the language remained dovish, the FOMC members’ interest rate forecasts became on average more hawkish. On a statement to statement basis, Wall Street took this to be a net shift towards a tightening bias. US stocks rallied on the back of the assumption the first rate rise would still be no earlier than mid next year, while the US dollar surged on the back of the assumption once the first rate hike is made, tightening will move pretty quickly from there.
The jump in the US dollar affected a big fall in the Aussie dollar, and a weaker Aussie encourages foreigners to sell out of Australian stocks. So the same theme was in place yesterday morning, until the afternoon saw some buying. It might have been bargain hunting, but the issue is clouded by the SPI futures and index options expiry yesterday, which may have had some independent impact on the closing level of the ASX200.
Either way, we’ve seen a strong lead-in for Wall Street overnight so we should see a positive bias from the open today. The SPI Overnight sure thinks so, as it’s up 27 points, and the Aussie has rebounded a little, up 0.3% to US$0.8992.
We also had news of more stimulus from China yesterday. Following on from Beijing’s injection of US$80bn of liquidity into China’s five biggest banks earlier this week, which economists suggest is akin to a 50 basis point cash rate cut in anyone else’s terms, the PBoC yesterday cut its 14-day interest rate by 20 basis points to 3.50%. Analysts are now suggesting this is the beginning of further stimulus measures from Beijing, and that a cash rate cut is on the cards as the government attempts to restimulate a flagging Chinese economy and ensure its 7.5% GDP growth target is met.
I noted yesterday that the “smart money” on Wall Street always waits until the day after a Fed meeting to declare its hand, and the decision was obviously one of positive for stocks but at the same time negative for bonds. All of the Dow Industrials, Dow Transports and S&P500 hit new all-time highs last night. The US ten-year bond rate nevertheless added 3 basis points to 2.63%.
Now that the Fed has underlined the data dependence, rather than calendar dependence, of its policy, we can focus once again on US data. On Wednesday night we saw a healthy jump in housing market sentiment but last night it was revealed housing starts fell by a larger than expected 14.4% in August. This number is notoriously volatile, and the August drop follows a surge in July that was the biggest since 2007. Starts are up 8% year on year.
The Philadelphia Fed manufacturing index has fallen this month to 22.5 from 28.0 in July but this is a zero-neutral index, so numbers in the twenties suggest rapid-pace growth. Most importantly, the employment component within the index marked its highest reading since May 2011.
Aside from everything else last night, Wall Street was all hyped up about the pending IPO of Alibaba. Books are closed and the listing price is being calculated as we speak for the biggest offering in US history. Alibaba starts trading tonight, but last night it was assumed some of the buying in Nasdaq stocks represented the reinvestment of cash raised earlier this week to buy Alibaba shares that missed out due to trimmed allocations.
Having leapt on Wednesday night, last night the US dollar index settled back 0.4% to 84.27. The move was nevertheless influenced by a pre-emptive rally in the pound as forex traders bet on the Scottish independence vote coming in as a “No”. The votes are right now being counted, and it will be up to the Asian markets to provide first response. The result is expected around breakfast time in bonny Scotland so around 3pm Sydney time.
Commentators have pointed out the market has set itself for a “No” despite the surveys suggesting it was still too close to call even as the polls opened. If it’s a “Yes”, say goodnight to the pound and the FTSE.
Gold is as good as steady at US$1225.50/oz but last night base metal prices fell again. It was the first chance for the LME to respond to the Fed and the subsequent jump in the US dollar. Copper, nickel and lead are all down 1.0-1.5%.
It was a similar story for the oils, with Brent falling US$1.24 to US$97.73/bbl and West Texas falling US$1.01 to US$93.03/bbl.
Just when fingers were crossed the iron ore price may have bounced off its lows, last night iron ore fell US$1.20 to US$83.00/t.
As noted, the SPI Overnight, now trading as the December contract, rose 27 points or 0.5%.
Wall Street will see somewhat of a perfect storm tonight. The result of the Scottish vote will be in and Alibaba will list on the open. It’s quadruple witching, meaning quarterly stock and index options and futures and futures options all expire. The S&P500 will undergo a quarterly rebalance (promotion/relegation of stocks) at the close. And the iPhone6 will go on sale to all those people who’ve queued up for days and really should get a life.
Och, it’s a braw, bricht moonlicht nicht the nicht Jock.
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