Daily Market Reports | Dec 11 2014
By Greg Peel
The Dow closed down 268 points or 1.5% while the S&P lost 1.6% to 2026 and the Nasdaq fell 1.7%.
When Westpac and the Melbourne Institute conducted their December consumer confidence survey at the beginning of the month, the weak GDP result had just come out. Mass media was dooming and glooming and highlighting the fall in commodity prices and the fall in the Aussie. Consumers see a lower currency as a negative with regard their spending power. The stock market had just copped a big sell-off, and there remained total uncertainty over Hockey’s budget.
Little wonder confidence fell 5.7% to its lowest level in three years, to be down 13.3% year on year. At 91.1, the index has been in the pessimistic zone (<100) for ten months now. Within the survey, unemployment expectations rose by 4.5%.
When the dust settled on Bridge yesterday afternoon it was the consumer staples sector that was worst hit, down 1.6%, with consumer discretionary down only 0.3%. At 11am the ASX200 had been down 60 points and set for another rout, but that’s when the buyers emerged, looking for bargains in the beaten-down energy and materials sectors. Financials continued their slide (0.6%) in the wake of tighter investment loan scrutiny announced by APRA/ASIC, while healthcare dropped 2.1% on the government’s latest GP policy roll of the dice.
By day’s end, a 0.5% fall for the index was not too bad. During the session Beijing released China’s November inflation numbers, and they can be interpreted in one of two ways, which harks back to the days of “bad news is good news” on Wall Street when more QE was anticipated.
China’s CPI fell to an annualised 1.4% growth from 1.6% in October, below expectations of a steady 1.6%. China’s PPI saw 2.7% contraction, down from 2.2% in October, marking the 33rd consecutive month of contraction linked mostly to the cooling of China’s property market.
The numbers imply China is slowing at a faster rate than assumed. At the CPI level we have to consider, nonetheless, that lower energy prices are playing a part. Food prices have also been on the decline, and food is the biggest cost in the average Chinese household budget. But the flipside is that these weak numbers give Beijing not only the incentive, but the scope to ease monetary policy more aggressively. All economists assume further Chinese interest rate cuts in 2015. And it must not be forgotten that China is the world’s biggest importer of oil.
Last night OPEC issued its latest global oil demand forecasts, cutting its earlier 2015 number by 280,000bpd to a level last seen in 2004 (just as the China story was warming up). The bloc insisted it was not going to cut production as a result. This was enough to set the oil markets off again, with West Texas falling US$2.83 or 4.4% to US$60.93/bbl and Brent falling US$2.48 or 3.7% to US$64.26/bbl. WTI did trade very briefly at a number under 60 last night before stabilising, but traders warn a breach of 60 opens a technical chasm.
Call me a sceptic, but does anyone audit OPEC’s demand numbers? The point of OPEC not cutting production in the face of plunging prices is to turn the screws on excess North American shale production, and one might assume lower demand forecasts would be an effective way of adding to the fear. OPEC forecasts a 1.13mbpd global oil production surplus next year. However it must be said that lower demand expectations out of Europe and Asia are not surprising.
The little game the Saudis are playing is nevertheless not without its dangers.
For starters, most OPEC members run oil-backed budget deficits which are based on forecast longer term oil prices, including Saudi Arabia itself. Venezuela, for example, is probably technically insolvent at spot oil. Russia is in financial trouble. And what’s more, the world’s biggest oil producers also manage the world’s big sovereign wealth funds (Canada included), which invest petrodollars around the globe to ensure reliable income sources.
Any commentator will tell you lower energy prices are a boon for the US (outside the energy sector itself), and for major oil importing economies such as Europe, China and Japan. So if low oil prices are so good, why did the Dow tank 268 points last night? Two reasons are worth considering.
Firstly, sovereign wealth funds are having to liquidate assets as their funding source collapses in value. Secondly, and closer to home for Wall Street, US banks are being sold off in the anticipation of rolling loan defaults ahead from smaller energy sector players, including contractors. In the case of the former, this is evidential. In the latter case, there is contention.
Most high-yield loans to energy sector companies in the US have been approved on the basis of hedged oil production out to one or two years, it is noted. Thus immediate defaults are not anticipated. Oil prices would have to stay this low for a lot longer before we saw any crisis, and presumably the time in between would allow space for work-outs and other refinancing options.
But there is little doubt the “contagion” story is currently gripping global markets. This is the initial response. When oil prices stabilise, and right now that point is not in sight, markets will be able to reflect on the benefits of a new low cost global economy, whether that point is fifty dollar oil or seventy dollar oil. Santa is clearly holding back right now, with two weeks to go before Christmas, probably wishing his sleigh ran on diesel and not costly reindeer feed.
The issue for Australia’s economy is more problematic. Australian consumers produce only about a quarter of GDP, with the other three quarters driven by exports of iron ore et al. Between 2015-20, LNG is supposed to grow to challenge iron ore as our biggest export. The prices of both have plunged. The US is 75/25 consumer, and Beijing is desperately trying to lift China’s ratio.
After a few sessions of mixed moves, base metals all lined up last night to fall as one. Copper lost 0.8%, and zinc fared worst with a 2% drop.
Iron ore fell US50c to US$68.90/t.
Unfortunately we did not see the Aussie respond as it should to even lower commodity prices last night, given the US dollar index dropped 0.5% to 88.36. The Aussie remains steady at US$0.8307. Gold is also steady at US$1229.80/oz, but the rout in equities is sending investors back into US bonds yet again. The ten-year yield fell another 5 basis points to 2.17% last night.
The December 1 low for the ASX200, marked after the first big energy sector sell-off following the OPEC meeting, is 5207. We may see that today. The SPI Overnight is down 58 points or 1.1%.
Jobs numbers today. The ABS will probably insist they’ve got it right now but no one will be confident. Any shocks either way will probably be dismissed by all except the mass media.
US retail sales numbers for November are out tonight, which include the critical Thanksgiving sales period.
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