Daily Market Reports | Dec 08 2014
By Greg Peel
It would appear Bridge Street suffered somewhat of a reality check on Friday. The ASX200 had rallied for three days straight and opened higher again on Friday morning, marking at its intraday high a 178 point rally from the depths of Monday’s close. The index was arguably oversold on Monday, driven down by foreign investors heading for the exits as the Aussie fell and threatened to fall further.
Yet the Aussie was down because commodity prices were down, and further down when it was revealed those low commodity prices had led to a big “miss” on Australia’s quarterly GDP. The latter led to expectations the RBA may further cut its cash rate, but while this might seem like good news for the economy, if indeed ultimately accurate, the circumstances under which the RBA might again cut clearly are not. We should consider, nevertheless, that the RBA may not need to cut if the Aussie continues its downward trajectory.
On Friday night the Aussie lost another 0.7% to US$0.8325.
The further fall in the Aussie can be attributed to either a 0.8% rise in the US dollar index to 89.33, or further falls in commodity prices, or both. A stronger US dollar mathematically weakens dollar-denominated commodity prices. However commodity prices will rise in defiance of the US dollar if that which drove the US dollar higher is positive news. One might consider an improving employment picture in the US to be such an example of positive news.
Friday night’s US jobs report, in isolation, was a cracker. Economists were forecasting 235,000 new jobs to be added in November but that number came in at 321,000. It was the biggest monthly jump in nearly three years, and ten consecutive months of 200,000 plus jobs growth represents the best streak in thirty years (population growth notwithstanding). Moreover, the previous two months' results were revised up by a net 44,000.
The unemployment rate was unmoved at 5.8%, but only because more Americans came out of the woodwork to look for work again. Perhaps the most promising news was a 0.4% rise in the average hourly wage. This was the best result all year in what remains a tepid year-on-year rate of 2.1%.
Importantly, it is this lack of wage growth which Janet Yellen has zoomed in on when she has reinforced her trademark dovishness these past few months, despite a slightly more hawkish tone from the FOMC as a group. If wage growth really does start to pick up, that first Fed rate rise will come sooner rather than later.
So we’re back to the same old debate, which has the market believing in a mid-year Fed rate rise one month, then a September rate rise the next, and then a March rate rise the next. The jobs report provided more fodder for the “March” camp, and so the US dollar rose on Friday night, and so did US bond rates. The benchmark ten-year yield gained 5 basis points to 2.31%.
But how does this impact US stocks markets? One would neither have been surprised had Wall Street rallied strongly on the economic implications of strong jobs growth, or fallen heavily on the implications of a rate rise around the corner. As it was, the Dow was up 90 points at midday, and 58 points, or 0.3% at the close. Another new closing high, of course, as was the case for the S&P, which gained 0.2% to 2075. The Nasdaq also added 0.2%.
It should be noted that at its pinnacle on Friday night, the Dow hit 17,991. It is typical of traders to take profits at or just before a “big figure” is achieved, for the simple reason many might say “if it gets to 18,000, I’ll sell”.
Returning to our earlier argument, one might expect a solid US jobs number to be positive for commodity prices, but instead commodities were sold off on the threat of a looming Fed rate rise (and a stronger greenback). On the LME, all metals were down bar zinc, with copper falling 0.5% and nickel falling 2.2%.
On oil markets, West Texas crude fell US$1.07 to US$65.72/bbl and Brent fell US75c to US$68.72/bbl.
Iron ore fell US20c to US$70.90/t.
The stronger greenback and implications of a rise in US rates sent gold down US$16.80 to US$1191.80/oz.
So where does Friday night’s action leave the Australian stock market this week? Typically, if Wall Street rises so do we. And the good news is a stronger greenback means a weaker Aussie, which the Australian economy is desperate for. But commodity prices remain outright weak, currency impacts notwithstanding. If the Fed raises rates, the Australian yield gap begins to close, making the carry trade less attractive. Were the RBA forced to cut rates, that gap would close further. A tighter gap means a lower Aussie, but it also means foreigners selling out of Australian investments.
The SPI Overnight closed up 27 points or 0.5%.
Wall Street aside, the Australian market has a bit to consider domestically this week.
Yesterday Treasurer Hockey released the long awaited recommendations of David Murray’s Financial Systems Inquiry. The FSI made recommendations regarding taxes and superannuation, but for a market perspective most attention was on anticipated recommendations which would result in Australia’s big banks needing to hold more capital.
At first glance (and awaiting clarification from analysts more expert in the field), it appears Murray has recommended the banks lift their tier one capital ratios to 10.0-11.6% from the current 8.3%. From existing bank ratios, this implies around a 1.4ppt increase. Banks should increase their average risk weightings to 25-30%, requiring a further one percentage point of common equity capital. Analysts were expecting 15-20%.
Murray did recommend so-called “bail in” bonds could be issued as a form of bank capital, but rating below senior debt (thus not tier one).
The bottom line, of course, is that these are merely recommendations which the Treasurer can choose to either adopt or ignore. One might argue the Treasurer has a bit on his plate at the moment, no doubt a lot of politics will come into a process which should realistically be apolitical. The share market, at this stage, is not expected to react significantly.
There is also much to consider this week on the economic data front.
We begin with ANZ’s job ads series today, which will provide some indication of employment trends before we see the November jobs numbers on Thursday. Increasing unemployment is the main argument of those assuming an RBA rate cut next year. On Tuesday we’ll see NAB’s monthly business confidence survey results, and on Wednesday Westpac’s consumer equivalent will provide retailers with some indication of the spending mood going into Christmas. Wednesday also sees the latest housing finance numbers.
China will also be back in focus this week. Today sees China’s monthly trade balance, Wednesday brings inflation numbers, and Friday sees industrial production, retail sales and fixed asset investment.
German industrial production, trade, and inflation numbers will be closely watched over the week.
It’s a quieter week data-wise in the US, highlighted by the release of November retail sales figures on Thursday, which include the critical Thanksgiving sales. Michigan Uni’s fortnightly consumer sentiment gauge is out on Friday.
Rudi has hung up the boots for this season’s television appearances, ahead of the Christmas break.
For further global economic release dates and local company events please refer to the FNArena Calendar.
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