Daily Market Reports | Dec 02 2014
By Greg Peel
The Dow closed down 51 points or 0.3% while the S&P lost 0.5% to 2057 and the Nasdaq dropped 1.2%.
While Friday’s oil-related rout on Bridge Street was very much concentrated in the energy sector, yesterday saw a general Sell Australia trade as foreigner investors piled in to ditch their downunder exposures. The impetus to sell can largely be traced back to the Aussie, which right now has been forgotten as a carry trade or high-yield currency and focused upon entirely in its former guise as a commodity currency.
Lower commodity prices mean lower GDP growth for Australia, and thus a lower Aussie. Whenever the Aussie falls, foreign investors lose on their Australian investments. As they sell, they have to also sell Aussie, and thus is created a negative feedback loop which results in the sort of rolling wash-out we saw yesterday. The ASX200 did not open down 2%, it fell steadily all day to the close.
The energy sector was again the biggest loser, falling 6.4% after falling 7.4% on Friday. Materials took a beating with a 4.9% fall, selling in supermarkets continues unabated, and the banks chimed in with a 1% loss. The Aussie, at its nadir, traded at around 84.20.
It was not a session in which anyone was going to pay much attention to economic data. Particularly September quarter data that is up to five months old. But Australian corporate profits rose 0.5% in the quarter, belying expectations of a 1.3% fall, albeit the June quarter’s 6.9% loss was revised to a 7.5% loss. Profits are nevertheless up 3.3% for the year. Inventories rose a better than expected 0.7%.
House price growth slowed in the month of November, falling 0.3% to an annual growth rate of 8.5%. Australia’s manufacturing PMI surprised with its first shift into expansion since July, rising to 50.1 from 49.4 in October. This number is nonetheless notoriously volatile.
China’s manufacturing data may have drawn more attention, and did little to buoy the mood. Beijing’s PMI fell to its lowest level since March at 50.3, down from 50.8 in October. HSBC’s equivalent matched its week-ago estimate at 50.0, down from 50.4, just avoiding the psychological impact of a plunge into contraction.
Japan saw a fall to 52.0 from 52.4, and the eurozone posted 50.1, down from 50.4 (Germany 49.5). Among the better performing economies, the UK marked a rise to 53.5 from 53.3 and while the US slowed to 58.7 from 59.0, that’s still a cracking pace.
PMI results may have been noted last night across the globe but the centre of attention was once again the oil price. I suggested yesterday that the plunge in oil late last week looked a lot like a capitulation trade, in which the bloodied longs throw in the towel and just sell at any price. This appears to have been the case, given for no other apparent reason oil prices bounced hard last night. West Texas rose US$2.75 or 4% to US$69.74/bbl and Brent rose US$2.78 or 4% to US$72.93/bbl.
The bounce was enough to turn Wall Street around from an opening fall in which the Dow was down 100 points. Wall Street was closed last Thursday when OPEC dropped its bombshell and very sparsely manned on Friday for the half-day session, resulting in little movement in the indices. With everyone back on Monday it was decided the weak oil price is initially not a good thing, and this was backed up by soft results from the Black Friday retail wrap-up.
Black Friday had begun with a flurry as usual and thus it appeared to those few on Wall Street the offset to cheaper oil was in play. But by day’s end the sales numbers were actually down on the year before, which contributed to Wall Street’s opening drop last night. No one is that much surprised nevertheless, nor concerned, given Black Friday has become a bit of an anachronism. Some stores now open on Thanksgiving itself and others start offering discounts in the days before, diluting the impact of the traditional Black Friday session.
The US indices did not remain at their depths for too long, as all eyes were turned to oil prices. The indices grafted back, recognising the balances at play. The rise in the oil price turned around the big energy and energy-support sectors but transportation stocks, including airlines, fell back hard. Late in the session it appeared the Dow may even close flat but a few late selling orders ensured a softer close, with the S&P down half a percent and the Nasdaq and Russell small-cap losing over a percent each.
The link from oil to other commodities through commodity basket fund trading, which I outlined yesterday, was apparent again last night. On the LME, copper bounced back 1.6% and the other base metals all posted gains around 1%, except a steady tin.
Another story was being played out altogether in the gold pit. The gold price is linked to the oil price via inflation implications but there have been all sorts of other things going on in the world.
The Swiss voted “no” in the referendum which would otherwise have forced the Swiss National Bank to hold 20% of its reserves in gold, and thus imply a need to buy rather a lot of gold. Expectation was for a “no” result, so the gold price did not much respond. But last night credit ratings agency Moody’s dropped its sovereign rating for Japan to A1 from Aa3, with a weaker Japanese economy making gold look like a safe haven for Japanese investors. And yesterday India eased its gold import restrictions, which have been put in place to support the rupee.
The US dollar also fell 0.4% to 87.97 last night, so all the ducks lined up to be positive for the gold price, including the rebound in oil. Gold has subsequently shot up US$45.00 or 4% to US$1211.80/oz. Silver has bounced 6%.
As noted earlier, the Aussie looked like it might even break 84 last night as foreign sellers jettisoned Australian assets, but the subsequent turnaround in oil and the fall in the greenback have bolstered the local currency once more, sending it back to its starting point. This morning the Aussie is steady over 24 hours at US$0.8508.
It would have been nice to keep the Aussie down as the offset against lower commodity prices, although the trend appears biased that way. Meanwhile, more good news for the local market came in the form of an US80c rise in the iron ore price last night to US$70.60/t.
The SPI Overnight rose a tentative 16 points or 0.3%. Will we see a solid rebound for the local energy sector today?
Australia’s September quarter current account is out today, which includes the balance of trade. This will be a trade off, given a quarter of falling iron ore prices was offset by rising Chinese import volumes, and a lower Aussie provided a helping hand.
October building approvals data is also due today and around 2.30pm, Glenn Stevens will call his PA and tell her just to send out last month’s policy statement. Cross out “November” and write “December”.
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