Daily Market Reports | Oct 02 2014
By Greg Peel
The Dow fell 238 points or 1.4% while the S&P lost 1.3% to 1946 and the Nasdaq dropped 1.6%.
On Monday last week, we saw a big fall on Bridge Street which was followed by a big fall on Wall Street that night, for the same reasons. On the Tuesday, the bargains hunters moved in on Bridge Street, deciding enough was enough. But on the Tuesday night, the Dow fell triple digits once more.
The ASX200 had rallied 52 points on the Tuesday, only to give back 40 on the Wednesday. Today we are looking at a possible repeat performance, testing the resolve of those who believe the normalisation of Australian stock valuations due to foreign selling has reached the “overdone” stage. Bridge Street opened solidly to the down-side yesterday – the first day of the new quarter – only to stage a spectacular turnaround to the tune of more than 90 index points. Once a trickle of buyers moved into the beaten down large caps and yield stocks, the floodgates opened.
But last night the Dow fell 238 points. A second slap in the face in just over a week for the bargain hunters, perhaps.
Last night’s fall on Wall Street is arguably attributable to three factors: US data, Hong Kong and Ebola.
The ADP private sector jobs report for September was released last night in the US and suggested 213,000 new jobs were added, to mark the sixth consecutive month of 200k plus gains. After the blip in August, economists are now forecasting Friday’s non-farm payrolls report to show 220,000 new jobs, setting US jobs growth back on trend. On the other hand, the US manufacturing PMI for September fell to 56.6 from 59.0 in August.
While the PMI has eased, August’s number was a bit of a stand-out and 56.6 still suggests a solid pace of expansion. So together these data points are “hawkish” with regard a data-focused Fed’s timing of the first rate rise, and thus, arguably, a negative for US stocks in the short term.
The only problem with this attribution is that the US ten-year bond yield tanked 10 basis points last night to 2.40%. Expectations of a Fed rate rise would push yields up, not down. This is a safe haven trade, which thus swings the emphasis onto the other two factors.
The student leaders’ deadline has passed in Hong Kong for Beijing to respond with a new deal on 2017 election candidature. The pro-Beijing chief executive of Hong Kong ignored the protests yesterday and celebrated Chinese National Day. The students thus have a new deadline. The chief executive must step down by today. Peaceful disruption continues to reign in Hong Kong, with the holiday providing for greater numbers of protesters and greater numbers of protest sites. How long can peace prevail?
An American man in Texas has Ebola, having returned from Liberia, and had contact with other Americans, including school children, prior to his diagnosis. While the medical response services in the US are slightly more sophisticated than those in Liberia, it is not the disease itself but the fear of catching it that is a concern for financial markets. When the SARS outbreak hit Hong Kong several years ago, the local economy took an enormous hit when the streets emptied, locals remained indoors, and hotel rooms and flights to Hong Kong were near empty.
SARS is an airborne disease able to spread easily, while Ebola is passed on only by bodily fluids. Ebola is more deadly but quickly contained through isolation. But is this comfort enough for the good folk of Texas, or indeed anywhere in the US where other visitors to East Africa may reside? Airline stocks, for one, took a big hit on Wall Street last night.
I am reminded of all the talk back from the beginning of this year about a correction being necessary on Wall Street and thus inevitable. I have pointed out time and again corrections never occur when you expect them, and it’s usually some left of field factor that provides the trigger. Well we’ve since had Ukraine and IS and now we have Ebola and Hong Kong. Still, US large cap stocks are proving relatively resilient, although the Russell 2000 small cap index is closing in on a 10% correction.
The Sell Australia trade also came somewhat out of the blue last month, despite being easy to justify in hindsight. As we saw yesterday on Bridge Street, such corrections are welcomed by those looking to pick up stocks, and particularly yield stocks, at more realistic valuations. But history shows that picking bottoms is always fraught.
Yesterday was September manufacturing PMI day around the globe. The scorecard reads Australia, 46.5 down from 47.3, Japan, 51.7 down from 52.2, China, steady at 51.1, the eurozone, 50.3 down from 50.7, The UK, 51.6 down from 52.2, and the US as noted, 56.6 down from 59.0.
A lot of “downs”.
The US dollar index was off a tad last night to 85.87 and the Aussie is 0.2% lower at US$0.8733, with yesterday’s weak retail sales number contributing. Gold is up US$5.80 to US$1213.80/oz, and does not seem to be participating in any global macro, geopolitical or biological developments.
While weak global trends should impact on base metal trading, things are quiet now on the LME with China on holidays. Copper gained 0.7% last night but aluminium fell 1%, with the others trading off small ups and downs.
The iron ore market is closed for the holiday.
The big falls on oil markets on Tuesday night brought in no bargain hunters last night, with Brent down US61c to US$94.20/bbl and West Texas down US58c to US$90.83/bbl.
We recall that yesterday morning, the SPI Overnight closed down 33 points. This proved a reasonably accurate opening call on the ASX200, which fell 54 points on the opening rotation. But the index closed up 41. This morning the SPI Overnight is down 36 points or 0.7%.
You decide.
The ECB and the Bank of England will hold policy meetings tonight, swinging the focus briefly back to Europe. This week’s worse than expected eurozone core CPI has markets anticipating more shock and awe from Mario Draghi but QE action two months in a row is not Draghi’s style. The BoE is getting close to its own rate rise, but perhaps not just yet.
In Australia today we’ll see building approvals, new home sales and the trade balance.
Rudi will appear on Sky Business at noon and again, between 7-8pm, on Switzer TV.
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