Daily Market Reports | Oct 03 2014
By Greg Peel
The Dow closed down 3 points while the S&P was flat at 1946 and the Nasdaq closed up 0.2%.
On balance it was a relatively resilient performance from the Australian market yesterday given the carnage around the region. The 90 point turnaround seen on Wednesday looked in grave danger after the Ebola-driven 238 point Dow fall on Wednesday night. At lunchtime yesterday the ASX200 was down 51 but we managed an afternoon graft-back to only 36 down, despite the Nikkei plunging 2.6% and the Hang Seng copping yet another 1.3% fall.
Our last big sell-off was in April, when the dam broke for US momentum stocks, and back then the index bounced neatly off 5300. Yesterday we closed at 5297, and Wednesday’s turnaround was triggered after the index fell through the 5300 mark. So we can safely say right now that 5300 is our inflection point. As to whether it proves to be a floor is another matter, with SPI Overnight closing down 19 points this morning.
Local economic data releases are a bit lost in the wash of global macro movements at present but yesterday’s building approvals release showed 0.3% growth in August to 14.5% year on year, beating expectations of 1.0%. All the action is on apartment blocks while single home construction is more muted. Non-residential construction is down 23.6% year on year with vacant office blocks a primary driver.
Australia’s trade balance marked a small deficit in August. The dollar value of exports fell 2%, which is hardly a shock given commodity prices, but the volume of iron ore and coal exports increased to provide hope. The collapsing Aussie may well explain a 3% drop in imports, but the currency should work in favour of export competitiveness and push the trade balance back into surplus in 2015, CBA’s economists suggest.
The stock market may not be predominantly focused on the data but the currency market is, and yesterday’s building numbers in particular were enough to set off a short-covering scramble in an Aussie overdue a short-term correction. The Aussie is up 0.8% to US$0.8805, all of which occurred in the local session.
It would seem the first recorded case of Ebola in the US put the frighteners through European markets last night, presumably given the number of European aid workers/physicians active in West Africa and the subsequent threat of bringing the disease home. London fell 1.7%, Germany fell 2.0% and France, home base of Medecins Sans Frontieres, plunged 2.8%.
It would not have helped that the ECB provided no fresh relief at its policy meeting last night despite ever weakening eurozone economic data. Having announced the planned implementation of unconventional (QE) measures at last month’s meeting it was never likely the ECB would move again so soon. But Mario Draghi did use his press conference to add more policy colour, declaring that the central bank’s asset-backed purchase program would last at least two years and that long term refinancing operations will have a “sizeable impact” on the ECB’s balance sheet.
This news was enough to spark a bounce in a euro that’s been sold down heavily these past three months, and thus to affect a 0.3% fall in the US dollar index to 85.62.
European stock selling spilled over into Wall Street in the US morning session to see the Dow down another 130 points by midday, but as so often has been the case these past months, the close in Europe brought a halt to proceedings. It was around this time a Reuters report hits the wires with the latest update on the Hong Kong protests.
The protesters’ deadline for the resignation of territory chief executive Leung Chun-ying came and went last night as numbers swelled and student leaders became more agitated. Since the outcry over the police use of tear gas last weekend the government has gone deathly quiet, unnerving a world wondering just what Beijing’s ultimate response to the situation might be, with memories of Tiananmen clear in many minds. But the Reuters report suggested Leung appeared ready to allow the anger to subside as long as there was no looting or violence. “We have to deal with this peacefully,” said a government source, “even if it takes weeks or months”. The chief executive has now agred to hold talks with the protest leaders.
So no tanks. While markets continue to contemplate just what impact weeks of stalemate might imply for the global economy, at least there is some relief that a violent end appears a remote possibility. On that note Wall Street began to turn, led by the small caps.
Last night the Russell 2000 small cap index confirmed its “correction”, in semantic terms, by falling beyond 10% from its high. Indeed it was down 11% when the buyers emerged and, not unlike the present situation in Australia, decided enough is enough. The index subsequently bounced hard, and closed up 1.0% for the session.
This turnaround was enough to drag the large caps along to a flat close. US bonds also tracked the stock market last night, turning a 2.38% low in the ten-year yield into a close at 2.44%, up 4 basis points on the session following Wednesday night’s 10bps plunge.
Thin trading on the LME, with China absent, is taking its toll on base metal prices. The downside trend is being exacerbated and last night saw falls of around 1% for aluminium, copper, lead and zinc. Iron ore rose US50c to US$78.80/t.
We are seeing an interesting development in the oil market. Last night Saudi Arabia announced it was cutting its crude export prices to the US, Europe and Asia. Analysts suggest the Saudis are looking to clear out excessive inventories through discounting ahead of responding to lower prices with OPEC production cuts. Given diminishing reliance on imported crude, the US is not as heavily impacted by OPEC discounting as is Europe, and on the wider scheme of things, the US economy is strengthening and the eurozone economy is weakening.
Last night Brent fell US42c to US$93.78/bbl while West Texas rose US54c to US$91.37/bbl. That’s a US$2.41 spread, which is far more “normal” on a historical basis than the spread of US$27 seen a few years ago. At this rate, Brent will be trading below WTI even as Russian energy exports hang in the balance.
Gold is steady at US$1213.00/oz.
As noted, the SPI Overnight closed down 19 points or 0.4%, suggesting the bargain hunters will again have to play contrarian if 5300 is to hold for the ASX200.
It’s service sector PMI day across the globe today, including in China despite the holiday. And tonight it’s the all-important US jobs report. Economists are looking for 220,000 but they were last month as well, when the number was closer to 150,000. So it’s always a lottery, and watch out for a big revision on that August number when the September number is released.
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