Daily Market Reports | Sep 26 2014
By Greg Peel
The Dow fell 264 points or 1.5% while the S&P fell 1.6% to 1965 and the Nasdaq dropped 1.9%.
I suggested yesterday that the Australian market is not currently “coupled” with the US market to the extent it might normally be given the impact of interest rate differentials. There is no doubt US bond yields must rise sooner rather than later, and that which will drive such an increase – stronger US economic data leading to a Fed rate rise – should also drive US stocks higher (perhaps after a bit of an initial adjustment). But rising US bond yields imply less value for offshore investors in Australian yield stocks, many of which are mega-caps on an Australian scale.
In other words we could go down even as Wall Street goes up. Yesterday we saw a very half-hearted rebound from Wednesday’s drop, despite the biggest move up in the Dow in five weeks, possibly because Monday’s rally was scuttled on Tuesday. Uncertainty surrounding the banks is not helping at present, with the RBA encouraging APRA to start curbing housing investment loans (reduces bank earnings) and the Murray Inquiry looking to build in bigger risk buffers (increases bank capital requirements).
Last night the Dow was down 260 points, to be back below 17,000 once more. Normally the ASX200 would be carted as well in response. But the US ten-year bond yield fell 6 basis points to 2.61%, suggesting support for Australian yield stocks. We know there are bargain hunters lurking in the Bridge Street shadows, just looking for the right moment, but it comes down to what, exactly, sent Wall Street tumbling last night after having rallied strongly the night before.
Indeed the SPI Overnight is suggesting a 53 point or 1.0% fall today, but then the SPI has not proven a reliable indicator of late. The Aussie is nevertheless down another cent to US$0.8790, and a weakening Aussie provides ongoing incentive for foreigners to exit.
US new durable goods orders fell 18.2% in August, it was revealed last night. See that number pop up on the screen and you be screaming at your broker to sell. But this fall follows a 22.5% jump in July, and if we strip out the lumpy aircraft order component that provides the volatility, orders rose 0.7% in August and the result was roughly in line with economist expectations.
So we can’t really blame durable goods for Wall Street’s plunge.
Apple’s much vaunted launch of its iPhone6 range has not gone smoothly. The company has been forced to withdraw an update to its iOS8 operating system which was causing iPhone issues such as lost signals. Apple shares fell 3.8% last night, possibly triggering pent up selling in the tech/internet space as evidenced by the 1.9% fall in the Nasdaq, feeding into the 1.6% fall in the S&P500.
But perhaps the real trigger last night was more about geopolitics rearing its ugly head again.
Russian courts have been given the go-ahead to seize foreign assets under a draft law intended as a response to Western sanctions. You freeze us then we’ll freeze you and pretty soon the whole world freezes over. It had gone pretty quiet over Ukraine way this month so it was always a reasonable bet something was in the offing. It was all too quiet.
Arguably the most influential trigger for last night was an announcement from the Iraqi prime minister at the UN assembly that the country’s intelligence force had identified “credible” information about imminent IS plots to launch attacks on the subway systems of New York and Paris. US officials have already been alerted but as yet the plans have not been thwarted, he noted.
Cue Satchmo: And I think to myself, what a wonderful world…
Global markets have to date mostly shrugged off the IS issue, US air strikes and new Coalition of the Willing, given it offers very little direct danger to global finance. But if these sad, bitter, intellectually disadvantaged fanatics start suicide-bombing the world then markets will respond to the threat.
Another political issue of sorts which is building is that of China’s Qingdao port scandal, or the Case of the Missing Copper. It appears Chinese metal traders, who use metal stockpiles as collateral for bank loans, have been using the same stockpiles over and over again to secure multiple loans. This is no small bikkies, as fraudulent loans are said to potentially stretch into the billions.
Copper fell 0.6% last night in a session which saw further general retreats in the base metal space. Zinc fell 0.7%, aluminium, lead and nickel all fell over 1% and tin took a 3.5% hiding.
Aiding the general metal sell-off is the steadily rising US dollar, which last night added another 0.2% on its index to 85.19. In a speech last night, ECB president Mario Draghi reiterated his pledge to use unconventional monetary measures were disinflation to provide an increasing threat, and subsequently sent the euro lower.
Oil prices also fell, with Brent down US10c to US$97.00/bbl but West Texas down US$1.36 to US$91.52/bbl.
Normal programming has been restored in Shanghai, with the iron ore price down another US80c to US$78.60/t.
Gold is up US$3.70 to US$1220.60/oz.
So if we add it all up – geopolitical threats, weak commodity prices, another big fall in the Aussie and a big drop on Wall Street, one would have to assume the bargain hunters will remain in the shadows today and the 53 point fall in the SPI might just prove relatively accurate.
Japan’s August CPI is out today and tonight the third revision of the US June quarter GDP is due, along with consumer sentiment.
Rudi will make an appearance on Your Money, Your Call – Fixed Interest today, Sky Business, 7-8pm.
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