Daily Market Reports | Jul 28 2015
By Greg Peel
The Dow closed down 127 points or 0.7% while the S&P lost 0.6% to 2067 and the Nasdaq fell 1.0%.
Stock Picking
The Australian market opened lower yesterday following the fourth consecutive drop on Wall Street and at 28 points down in the first half hour, it looked as if the SPI futures overnight call of 49 points down was well underway. But clearly there are those who question the extent of Wall Street correlation, given recent weakness has mostly been driven by disappointing US earnings.
What followed was selective bargain hunting that first halted the slide before slowly building momentum to the closing bell. Large cap stocks seem to have been targeted given the banks, materials, healthcare and the telco all enjoyed rallies when industrials, the consumer sectors and energy all missed out.
The banks are enjoying renewed support after a long slide following the decision to reprice investor loan books to counter expected capital and macro-prudential tightening. Having taken a knife to their commodity price forecasts, offset by a weaker Aussie dollar forecast, resource sector analysts have begun to see value in certain materials names following steep share price falls.
But unfortunately these two themes may amount to nought today. The SPI Overnight is again calling a weak session, down 43 points, and this time might be more accurate.
Late Slam
When the bell rang at 4pm on Bridge Street yesterday, the Shanghai stock index had not moved much through its session so far. With the Chinese index having rallied back around 20% from its perilous low marked in the first week of July, thanks to significant government intervention, fear had subsided across the globe and allowed investors to refocus on the fundamentals.
But just as the bell rang on Bridge Street, something untoward was triggered in Shanghai. Two hours later, the Chinese market closed down 8.5% — its biggest one-day fall since February 2007. That session was known as the “Shanghai Surprise”, and the subsequent risk-off trade in the US revealed to the world that there were these things called “collateral debt obligations”, containing sub-prime mortgages, and apparently when investment banks tried to sell them, they could find no buyers.
The rest, as they say, is history.
The world is once again afraid of the Chinese stock market and worried that yesterday’s late rout is a precursor to a full-blown crash. Given the level of intervention undertaken by the Chinese government and central bank to date to engineer a rebound, stopping just a little short of forcing fund managers to buy at gunpoint, one wonders what Beijing can pull out this time if this really is another selling wave building.
Presumably, they will shut down the market altogether.
There are those who argue that China’s stock market is isolated from the rest of the global financial market given only the Chinese can own China ‘A’ shares. And given only 15% of Chinese own shares, the flow-on into consumer spending is limited. But it’s not that simple.
Firstly there’s the general hit to Chinese confidence, both at the business and consumer level, at a time the economy is struggling to gain traction. But more directly there is the margin lending issue, which sees Chinese buying not just stocks with borrowed money, but commodities as well. When the stock market falls, commodities are the first assets to be offloaded to cover the margin calls.
Five in a Row
This point was not lost on Wall Street last night, as the US indices posted their fifth consecutive session of falls. The benchmark S&P500 is now approaching its 200-day moving average and once again, commentators are suggesting the correction-that-never-comes might be about to arrive.
The mood was not helped by 2.5% drops for both the German and French stock markets, and 1% in London.
Certainly US investor confidence is enjoying no boost from economic data points and corporate earnings releases right now as a counter. Last night’s new durable goods orders numbers for June offered a glimmer of hope, given net orders rose 3.4%, beating 2.7% forecasts and representing the first rise since March, but economists were quick to point out the six months to June saw orders fall 2%.
US weakness is finally coming home to roost for the US dollar. The US ten-year bond yield fell 4 basis points to 2.23% last night on a flight to safety but the safe currencies du jour are apparently the yen and, believe or not, the euro. The US dollar index is down 0.7% at 96.53.
Beyond the data, Wall Street watched as oil prices continued to fall last night, with base metals hot on their heels. The counter to an oversupplied global oil market has always been assumed demand growth from China. Energy stocks led an already nervous market lower.
Commodities
West Texas crude has now fallen for eight sessions in nine, to its lowest level since March. Last night saw a US$1.09 fall to US$47.00/bbl. Brent chimed in with a US$1.77 fall to US$52.87/bbl.
In Australia we might at least be able to look forward to cheaper petrol again, as we did last summer, except that the Aussie was up in the 80s back then and this morning it is down 0.2% to US$0.7272.
Tin continues to play its own game, rising 1% on the LME last night, but copper, lead and zinc all fell more than 1% and nickel fell 3%.
Iron ore actually managed to rise US70c to US$51.40/t, but if the Chinese stock market continues to fall, US$50 can be kissed good bye.
Gold fell US$5.60 to US$1094.70/oz and is another commodity rife for margin call cash-raising.
Today
The SPI Overnight closed down 43 point or 0.8%.
Alacer Gold ((AQG)) will post an earnings report today.
Tonight sees the first estimate of UK June quarter GDP.
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