Daily Market Reports | Nov 18 2014
By Greg Peel
The Dow closed up 13 points or just under 0.1% while the S&P rose just under 0.1% to 2041 as the Nasdaq fell 0.4%.
In April this year, the Japanese government increased its sales tax rate to 8% from 5%. The increase was well flagged, so Japanese consumers embarked on a spending frenzy in the lead-up, resulting in 1.6% quarter on quarter GDP growth for an annual March quarter rate of an extraordinary 6.7%. Markets withheld their responses nonetheless, knowing full well Japanese consumers would lock away their wallets in the June quarter.
And they did, to the tune of a 1.9% qoq contraction in GDP or 7.1% annualised. Net out the two, and the Japanese economy copped an unsurprising hit from a fiscal shock. Soon consumers would get used to 8% tax, it was assumed, and by the September quarter the GDP would be back in the black. Indeed, recent monthly numbers have looked relatively healthy, so economists forecast 0.5% qoq growth for an annualised 2.2%.
Yesterday those results were revealed as 0.4% qoq contraction for an annualised contraction of 1.6%. Japan is officially in recession. The world was surprised when out of the blue a couple of weeks ago, the Bank of Japan raised its monthly QE purchases to 80trn yen per month from a previous 60-70trn. The Japanese economy is looking better, isn’t it? Now we know it wasn’t.
The Abe government had planned another sales tax hike next year. Prior to the GDP release there was already talk of that being postponed. And talk of Abe calling a snap election in the hope of clearing out a few dissenters in parliament. That talk has once again intensified, but a recession is never a good starting point from which to sell one’s campaign. The next sales tax hike nonetheless now looks dead in the water.
The Nikkei responded with a 3% fall yesterday. Hong Kong chimed in with 1.2%. The Australian market fell 0.8% in what looked a lot like another Sell Australia trade, with big cap names, banks, the telco etc, sold down. Except the one sector that didn’t move was materials – not only home to a couple of well-known big caps but also source of all the iron ore and coal we export to Japan. This was no doubt a response to the confirmed FTA with China. The energy sector was hit 0.8% despite a big rebound in the oil price on Friday night.
It looked more like an “excuse” trade in a market that was struggling to justify the extent of the rebound from the October low, and becoming worried about Wall Street’s possible death stall at the top of its arc.
And Wall Street was at it again last night. The Japanese recession barely registered in US stock markets but nor could any notable gains be drummed up. The indices are currently breaking all sorts of low volatility records, meaning actual volatility (close-to-close and intraday moves) rather than VIX volatility (implied by option premiums). What will snap Wall Street out of its coma?
Not some weaker data releases, it appears. US industrial production fell 0.1% in October despite forecasts of a 0.2% gain. It was the second fall in three months. One didn’t need to look far, however, to note a 0.8% fall in oil and gas drilling, as US shale energy producers respond to falling prices. Not so clear was the November reading of the Empire State manufacturing index. It rose to 10.2 from 6.2 in October but this was shy of economist expectations.
It is of little surprise the yen has fallen heavily against the dollar since the Japanese GDP release, to mark a seven-year low. Not only was the GDP result itself a reason to sell the yen, but it is now assumed the BoJ will pump up the QE volume even further. The US dollar index is up 0.5% to 87.93. The Aussie is subsequently down 0.5% to US$0.8712, having risen to 88 during yesterday’s local session.
Gold fell back US$4.30 to US$1185.60/oz while the US ten-year bond yield is up 2 basis points to 2.34%.
After their big rallies on Friday night, driven by speculation OPEC will indeed cut production and the potential fast-forwarding of the Canada-US Keystone pipeline, the oils fell back a little last night. Brent was down US53c to US$79.12/bbl and West Texas was down US13c to US$75.50/bbl.
Base metals were mostly steady in London with the exception of nickel, which rose 1%.
Alas iron ore is on the slide again, falling US40c to US$75.40/t. Seems Shanghai is not quite as excited about an Australian FTA with China as they are in the Pilbara.
The SPI Overnight closed up 7 points.
China monthly property prices are out today, which is always good for a bit of fear-mongering, while locally the RBA will release the minutes of its Cup Day meeting, and no one will much care. We already know what they will say.
The eurozone ZEW investor sentiment index will be released tonight in the shadow of 0.2% September quarter GDP growth. At least Europe is hanging on grimly against recession.
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