Daily Market Reports | Jul 10 2015
By Greg Peel
The Dow closed up 33 points or 0.2% while the S&P gained 0.2% to 2051 and the Nasdaq added 0.3%.
One Point
It seems like almost blessed relief that yesterday the ASX200 should close up a mere one point, evoking a longing for the days when stock markets used to just trudge along quietly with a modest upside bias over time.
Unfortunately the one point close belies the fact the ASX200 was down 86 points yesterday in the first half hour of trade, with an 11.3% overnight drop in the iron ore price front of mind, and a backdrop of a Chinese stock market that had so far failed to stop crashing despite desperate efforts from Beijing.
But there the Australian market finally bottomed, and with an hour to go before the opening of the China market began to rally back just as sharply as it had fallen, to be square as the bell rang in Shanghai. And it is remarkable to note that within that one point close for the Australian index, which didn’t move much from midday, that the biggest sector gain on the day was posted by materials. Sure, base metal prices had all staged a rebound overnight but iron ore had fallen 11% and yet the sector dominated by iron ore miners rallied 1.5% to the close.
Toto, I don’t think we’re in Kansas anymore.
Call that a market?
A couple of months ago, when Beijing finally began to take heed of screams from across the globe that China’s retail-driven casino of a stock market was in dangerous bubble territory, the government added a further block of Shanghai-listed stocks that could be short-sold. Now, after a 30% bust of that bubble, the government is arresting short-sellers.
A couple of months ago, Beijing clamped down on runaway margin lending. Now, Beijing has allowed just about any asset, including the family home, to be used as collateral for margin loans.
Before the Shanghai Exchange opened yesterday, further measures were implemented, adding to an already desperate raft of measures. When the Exchange opened, some 50% of listed stocks were suspended from trading by the government. For the 50% still available, the government had announced it would fund share purchases by fund state-owned financial institutions. At the same time, it banned investors holding a 5% or greater stake in any one company from selling shares for six months.
Of course the Shanghai index was going to stop falling yesterday. It had to stop falling, given it is not a market anymore, but an orchestration by a wannabe-capitalist government who cannot shake off its communist heritage. Yesterday was the culmination of a market equivalent of sending the tanks into Tiananmen Square.
And lo and behold, the Shanghai index rose 5.8%. Given the intraday gyrations seen these past few sessions of up to 7-8%, it’s hard to believe yesterday saw Shanghai’s biggest one-day rally, close to close, in six years.
And lo and behold, on the news of Beijing’s emphatic stock market intervention, the iron ore price, which had been hammered the day before on flow-on selling from the stock market, turned around. The futures began to predict a sharp snap-back rally, and the Australian materials index closed the session up 1.5% when, at 10am, it looked as if listed junior iron ore miners may not even see out the day.
This morning iron ore has risen 9.5% or US$4.20 to US$48.30/t.
In my opinion, the Chinese government has this week set its capitalist superpower aspirations back a decade. Earlier this year the IMF seriously contemplated adding the renminbi into its basket of globally significant currencies. It decided China’s financial market reform process had not quite reached a level of sufficient maturity, and thus did not include the renminbi, albeit hinting success might come at the next review.
Good luck with that now.
It would be of no surprise that if the selling were to resume in the Chinese stock market the Chinese government would simply shut down the market altogether, for a period. Intervention would thus be complete.
Commodity Surge
Iron ore trading is dominated by China but base metal markets are more globally influenced, which is why LME traders called “oversold” on Wednesday night after Chinese margin call flow-on had forced metal prices to tumble. A rebound which begun on Wednesday night carried on last night following confirmation the Chinese stock market had indeed managed to stage a rally.
Aluminium and zinc rose 1.5%, copper and lead rose 2% and nickel rose 5%. Only tin missed out this time.
Oil markets are still under the influence of stalled Iranian negotiations but the China effect was not lost on them either last night, helping West Texas up US77c to US$52.59/bbl and Brent up US$1.22 to US$58.47/bbl.
Gold managed to tick up slightly to US$1159.20/oz even as all commodities hit the headwind of a 0.3% rise in the US dollar index to 96.49.
The Aussie is also up 0.3% at US$0.7448.
Wall Street
The French and German stock markets also rallied strongly last night, both up around 2.5%, influenced by China but also by murmurings from Germany that some form of debt relief for Greece is not completely out of the question.
The interesting thing about the whole Greek drama is that in the background, the eurozone economy has been posting some very solid, consensus-beating data of late. QE appears to be working. It is therefore very much in the favour of Europe’s large export economies – Germany’s in particular – that Greece and all of the Club Med basket cases remain in the eurozone.
The euro is currently trading at US$1.10. Someone has calculated that were Germany the only eurozone economy, the euro, or realistically the Deutschmark, would be trading at US$1.80. That would cripple the German economy.
The “final” big meeting is on Sunday. This morning Tsipras submitted his “final” proposal. Tonight a rushed session of the Greek parliament will vote on the proposal, so as to smooth the path were the creditors to actually reach a deal.
The exuberant buying on European markets typically flowed into the morning session on Wall Street, sending the Dow up over 200 points. Then the Europeans packed it in for the day, and the Dow drifted all the way back to a close of only up 33. Wall Street is not prepared to be quite so exuberant just yet.
But it does seem that Beijing’s actions have finally proven sufficient to stem the flight to safety into US bonds. Last night the US ten-year yield jumped back 10 basis points to 2.30%, and traders went back to debating the timing of the Fed rate hike.
Today
The lack of follow-through on Wall Street is probably why the SPI Overnight closed down 21 points or 0.4%.
By the way, yesterday the ABS revised down its May unemployment rate to 5.9% from 6.0%, and then said the rate rose to 6.0% in June, not that anyone paid much attention.
Today sees housing finance numbers, which may draw some attention.
Global focus has now moved from the Greek farce to the Chinese farce. What will happen in today’s episode?
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