Daily Market Reports | Jun 29 2015
By Greg Peel
Turbulence
Friday’s sell-off on Bridge Street represented a new element in the macro picture, that of China. But between China and Greece, developments over the weekend cloud the issue of what happens now.
The Shanghai index began to tip over early in June and its correction has featured some solid down-days, including at least one 6% fall. While such moves have sparked nervousness and much debate, the general feeling was that a stock market that had doubled since only late last year was clearly due a correction, and thus the odd big fall should not necessarily suggest it’s time to panic.
That the ASX200 was last week pushing back up to the 5700 mark even as China’s stock market remained brittle is testament that no one was all that worried at the time. However late on Thursday in China’s session, the Shanghai index started diving and ended the day down 4%. On Friday it fell 7.4% as it approached the 20% correction mark. A 20% correction is said to signify a bear market.
This is a load of unsubstantiated rubbish of course, but enough to encourage some precursory selling in the Western world’s proxy for Chinese investment – the Australian stock market. Friday saw a 2.8% fall for the materials sector and 3.2% for energy, with industrials also copping a 2.8% beating. Rumours of private equity interest meant Woolworths had endured enough punishment, for now, hence consumer staples bucked the trend with a 0.6% gain.
And bizarrely, yet again, the sector that should be the least volatile was the most, with utilities falling 4% (including stocks going ex-div). Perhaps the market sees Chinese investors as the only supporters of Australian commercial property.
Whatever the case, yesterday the PBoC cut interest rates by 25 basis points for the fourth time since November. The borrowing rate falls to 4.85% and the deposit rate to 2.0%. The central bank also cut the reserve ratio requirement (RRR) by another 50 basis points for banks serving rural areas, agriculture and small business.
How these cuts impact on the Chinese stock market will become apparent later today when the Shanghai exchange opens.
Fat Lady Warms Up
On Saturday night, negotiations between Greece and its lenders again broke down as the Greek government left the table. Prime Minister Tsipras thus decided it was time to readdress his anti-austerity mandate by putting the question to his people. He called a referendum for this coming Sunday which will basically be a question of do we maintain the rage, and risk a Grexit, or do we bow to the creditors.
If he thought the creditors were going to sit back and wait for the result, and supply interim funding in the meantime, he was dead wrong. An angry European Commission has insisted there will be no bail-out extension beyond Tuesday night’s expiry. An angry IMF has insisted there will be no extension for repayment of the E1.6bn due on Tuesday — money Greece does not have.
On Saturday the people of Greece were queuing up to get what they could of their money out of ATMs. Yesterday those machines were running out of cash. In the wake of the weekend’s breakdown in negotiations, the ECB has refused to extend any further emergency funding to Greek banks. Tsipras has ordered the banks be closed tonight, and the stock market, in what is no doubt a precursor to currency controls.
Default looms on Tuesday night. EU representatives will continue to hold meetings during the week, but this time it won’t be about compromise, it is assumed. This time it will be about planning the Grexit.
Wall Street
In Friday night’s session Wall Street was still in watch and wait mode regarding Greece. Tonight’s action will determine the response to the weekend’s developments.
The Dow closed up 56 points or 0.3% but the gain was almost entirely attributable to one stock – Nike – following a very positive earnings report and a 4% share price jump. Otherwise, the S&P was flat at 2101 and the Nasdaq fell 0.6%.
The economic data release of the day was the fortnightly Michigan Uni consumer sentiment survey, which showed a rise to its highest level in five months, beating forecasts. While this news provided some support, no one was prepared to take on risk over the weekend. And the slide in the Shanghai index did not go unnoticed.
The US bond market was nevertheless prepared to be more introspective, focusing on the ongoing stream of pretty solid US data. The US ten-year yield rose 8 basis points to 2.48% to mark its highest close since last September. The market is still very long US bonds and a Fed rate rise looms ever nearer, but it will be interesting to see what happens in global bond markets this week.
The US dollar index rose 0.2% to 95.40.
Commodities
The Aussie dollar took a beating on Friday, in line with the local stock market. It was down 1% to US$0.7658 on Saturday morning and is lower still, at US$0.7613 in early trade this morning.
All round uncertainty led to a mixed session on the LME on Friday night and again, we must remember that the Greek breakdown and Chinese rate cut have occurred in the interim. Copper and tin rose half a percent and zinc fell half a percent, while aluminium and lead fell one percent and nickel fell two percent.
Iron ore fell US60c to US$60.70/t, closing the week exactly where it started.
The oil markets were deathly quiet on Friday night. West Texas was little changed at US$59.65/bbl and Brent down just a tad to US$63.17/bbl.
Gold was little changed at US$1174.20/oz.
On Saturday morning, before the weekend’s developments, the SPI Overnight closed up 10 points.
The Week Ahead
World markets are this morning suffering from vu-deja – that eerie feeling that nothing like this has ever happened before. As late as Saturday morning, the prevailing belief was that somehow, in some way, Europe would manage to once again kick the Greek can down the road. That expression is getting pretty tiresome, but I haven’t yet come up with another one.
But right now it is hard to see past at least a Greek default. Sunday’s Greek referendum seems irrelevant in that context, but were the Greek people to vote heavily in favour of capitulation, then perhaps the EU will be able to sort something out with regard remaining in the eurozone.
Meanwhile, all Asian region eyes will be on the Shanghai stock market today to see whether yesterday’s rate cuts are enough to stabilise the tumbling index.
The world will revolve regardless, and this week features some rather important data releases.
Tomorrow is the end of financial year in Australia, and the end of quarter anywhere else. Wednesday is the first of the month, and thus features global manufacturing PMI releases. Beijing now releases both its manufacturing and service sector PMIs on the first of the month, while HSBC still spreads its results two days apart. Friday sees the global round of service sector PMIs.
It’s a short week in the US, with markets closed on Friday for the Fourth of July long weekend. It’s also the first week of the month, which means jobs numbers. The ADP private sector number will be released on the Wednesday as usual, but the non-farm payrolls report is this month brought forward to the Thursday.
Other US releases include pending home sales tonight, and Case-Shiller house prices, Conference Board consumer confidence and the Chicago PMI on Tuesday. Wednesday it’s construction spending and vehicle sales, and Thursday factory orders.
A flash estimate of eurozone CPI is out tomorrow night, which will at least give us a guide to how the rest of the zone is faring.
Australia sees new home sales and private sector credit tomorrow, and the RBA governor will deliver a speech in London. On Wednesday it’s the manufacturing PMI, building approvals, house prices and the TD Securities inflation gauge. Thursday it’s the trade balance, and Friday sees retail sales and the services PMI.
Pass the ouzo.
Rudi will appear on Sky Business on Wednesday at 5.30pm and later on the same day, 8-9pm, to host Your Money, Your Call Equities. On Thursday he'll appear at noon and again between 7-8pm for the Switzer Report.
For further global economic release dates and local company events please refer to the FNArena Calendar.
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