Daily Market Reports | Jun 05 2015
By Greg Peel
The Dow closed down 170 points or 0.9% while the S&P lost 0.9% to 2095 and the Nasdaq fell 0.8%.
Freefall
What began with a technical trigger for the ASX200 has since deteriorated into freefall as investors across the globe exit government bond positions. The benchmark for this sell-off is Germany, as representative of the stronger members of the eurozone.
Mario Draghi indicated after the ECB policy meeting on Wednesday night that he had no intention of upping the ante on what is already an extensive QE program, and at the meeting the ECB lifted its 2015 eurozone inflation forecast to 0.3% from 0.0%. This implies that if anything, in due course the QE program will be reduced as the eurozone economy improves.
So call the sell-off in German bonds a form of pre-emptive “taper tantrum”, brought about by a very overcrowded market. Throw in the fact US investors are now largely resigned to a Fed rate rise this year, with specific timing no longer important, and it just comes down to who’s going to blink first in the US bond market. It is a given that US bond rates will rise when the Fed hikes its cash rate but markets move ahead of such developments, so when to bail?
Well, Germany seems to have forced the hand.
If a 20 basis move up in the German ten-year rate on Wednesday night was the butterfly, the typhoon yesterday was a 2.4% drubbing for the Australian utilities sector on the ASX. All other sectors (bar tiny info tech) were down around the 1.5% mark, which is implicit of “Sell Australia” or simple index selling and here the technicals also contribute. But all other sectors represent at least some opportunity for growth. Utilities, on the other hand, are the chug-along cash generators – not offering a lot in capital appreciation but providing a nice steady yield.
It was yield that took us up and it is yield that is bringing us down. Foreign investors are not waiting around to see if the US ten-year can hit 3% or if the Fed announces a rate rise, whichever might come first. They are selling their peripheral yield plays, established solely on the basis of rate differentials between Australia and the rest of the world, and the premiums quality Australian stocks offer above government paper.
At just above 5500, the ASX200 is down 4.7% from last Friday’s interim high and 8.6% from April’s post GFC high of not quite 6000. This is exactly the sort of move Wall Street has been looking for, almost pleading for, for itself the past couple of years of new all-time highs. It may not be very comforting downunder, but in historical market terms it is typical, very healthy for a bull market, and provides investors with a fresh opportunity.
Particularly if that opportunity has been missed up to now.
Closer to Home
If we leave global bond rates aside for a moment, yesterday’s domestic data were enough to inspire selling anyway. That is unless we take weak Australian data as increasing expectations of another RBA rate cut, which would offset some of that global interest rate differential squeeze.
Economists were forecasting 0.3% growth in Australian retail sales in April. The forecast takes into account April was before the last RBA rate cut and ahead of the federal budget release. So at 0.0%, it was a bit of a shocker. Economists can only assume that Australian consumers were so petrified about what Mr Hockey might deliver, given his previous effort, that they spent April hiding in the cupboard with all their cash clasped in their shaky hands.
It is very likely we’ll see a better sales result for May. But yesterday also featured another shocker, in the form of the April trade balance.
Forget Wednesday’s positive March quarter GDP result. That’s ancient history. It told of stronger than expected export volumes but given spot commodity price falls take a while to flow through to forward trade contracts, what it did not fully reflect were lower commodity prices.
Australia’s trade deficit widened in April thanks to a 5.7% in (the value of) exports and a 3.9% rise in imports. Iron ore exports fell 13% and coal exports fell 22%. Part of the plunge in coal export value can be attributed to the wild east coast weather in the month, closing ports, but the other part is prices, as is the case for iron ore.
The good news is that the lag in movement of contract prices from the movement of spot prices probably means April represents the nadir for iron ore pricing, and from here on the iron ore price rebound should flow through. Coal prices have seen little recovery.
The Australian economy needs the non-mining sectors to take the baton as the resource sector suffers the double-whammy of declining investment and lower commodity prices. Consumers are an important element. If April’s numbers are anything to go by, the prognosis for the Australian economy is bleak. Cue Stephen Sondheim:
Where are the clowns? There ought to be clowns.
Greece
And speaking of records, the broken one was still scratching away last night.
“Shocking, provocative, disgraceful and dishonourable”. No, this is not a description of Sepp Blatter. This was the response from members of Greece’s governing Syriza party when prime minster Alexis Tspiras showed them the reform ultimatum Greece’s creditors had handed him – deemed requisite for Greece to receive its next bail-out tranche.
“Such extremist proposals cannot be accepted by the Greek government,” Tsipras is quoted as telling his associates. “Everyone must understand that the Greek people have greatly suffered over the last five years and some have to stop playing games at their expense”.
Earlier this week, Tsipras assured IMF chief Christine Lagarde that Greece had the money and would make good on its E300m payment due tonight. Last night Athens informed the IMF this would not be the case. Instead, all four June payments will be bundled and the total of E1.6bn will be paid at the end of the month.
While such bundling has been suggested before now, this sudden shift has been taken as representing an angry backlash from Tsipras regarding the so-called austerity ultimatum. Commentators are suggesting a default has just become a little more likely.
And so it goes on.
Wobbly Wall Street
European stock markets traded lower on the latest development in the Greek drama and sentiment carried across the pond. News also came through that the IMF had cut its 2015 US growth forecast to 2.5% from 3.1% and that Christine Lagarde had told her chum Janet Yellen that the Fed should not raise this year.
But Yellen has already said it will, and last night’s US economic data provided another reason to believe it must.
Last night US March quarter productivity growth was revised to a negative 3.1%. Low productivity leads to higher wages. Higher wages lead to inflation. Inflation leads to a rate rise.
So there was cause enough for US stock indices to fall last night, but realistically the backdrop of bond market volatility is finally giving Wall Street the jitters. Last night the German ten-year yield came back a whole 5 basis points to 0.84%, allowing the US equivalent to fall back 6 basis points to 2.31%. But the seed is now sown, and with US jobs numbers out tonight, it makes sense for bond traders to square up beforehand.
The Dow has now fallen back through 18,000 and the S&P through 2100. Not that this hasn’t happened more than once already this year, but given what’s been going on in the Australian market, one feels something has to give on Wall Street fairly soon.
Commodities
No one was prepared to take any bets on US jobs on the LME last night either. Throw in Greece and the IMF cut to its US growth forecast and all base metal prices closed lower. Cooper led the charge with a 1.4% fall.
Ditto in oil markets, although for oil markets there is the added expectation of tonight’s OPEC meeting not bringing any cuts to production quotas, thus inspiring pre-emptive selling. West Texas fell US$1.63 to US$57.98/bbl and Brent fell US$1.66 to US$62.10/bbl.
Iron ore doesn’t pay much attention to such things. It’s up another US90c to US$63.50/t.
Gold fell US$8.50 to US$1176.10/oz. A 0.7% fall is not particularly remarkable, but last night gold broke out of its long-standing trading range. Goodbye 1200, hello 1100.
Commodity price moves leant little to the US dollar last night, as it ticked up only slightly on its index to 95.51. This means the 1.2% fall in the Aussie over the past 24 hours to US$0.7688 is all about yesterday’s data shocks, and subsequent expectations of another RBA rate cut ahead.
Today
The SPI Overnight closed down 17 points or 0.3%.
With the Dow down 170 and the futures down 17, one would normally assume a weak session today. I’m going to stick my neck out, however, and suggest we close higher today. Wall Street is following, not leading, global bond rates fell back a bit last night, and yesterday in this Report I said: “Maybe the day to buy is when the SPI Overnight closes down.”
But then again I wouldn’t be at all surprised if at 4.00pm we’re down another percent.
Australia’s construction PMI is out today, and S&P/ASX will announce its quarterly index changes, which may affect some non-macro argy-bargy amongst affected stocks.
US jobs tonight.
Long weekend for most of Australia. The ASX will be closed on Monday.
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