The Overnight Report: China Watch

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By Greg Peel

The Dow rose 241 points or 1.4% while the S&P gained 1.3% to 2104 and the Nasdaq added 1.2%.

Rebound

A nervous start on Bridge Street yesterday suggested potentially another bad session following Friday’s carnage, as bottom-of-the-range support threatened to give way. Very weak trade and wholesale inflation data from China over the weekend was not good news at this time.

But the weakness proved short-lived, and by lunchtime the ASX200 had recovered enough ground to put it back above the psychological 5500 level. Leading the turnaround was a quarterly update from National Bank ((NAB)).

Interestingly, the other three banks typically report their quarterlies after Commonwealth Bank ((CBA)) has published its earnings report each season, but clearly this season has required a different approach. With NAB having jumped the gun on a capital raising last month, ANZ obviously decided to get in before CBA with its raising last week.

ANZ also provided its quarterly numbers with the raising announcement, and they were not good. The bad debt reduction cycle has finally turned, it seemed, which is something analysts have been warning of for some time. Maybe NAB then decided to bring forward its own quarterly report, ahead of CBA’s result release tomorrow, to right the banking sector ship.

NAB surprised to the upside. Critically, increased bad debts did not feature, as they had for ANZ. The result was a 0.8% rebound for the banking sector following Friday’s 3% rout.

The other driver of yesterday’s local rebound, aside from the worst session in six years on Friday prompting a little bit of bargain hunting on Monday, was the old Wall Street theme of “bad news is good”, applied to China. Fresh stimulus has been expected from Beijing ever since last month’s GDP result release, as monthly Chinese data have continued to disappoint. The weekend’s trade and wholesale inflation numbers were so bad, the only assumption can be that Beijing is set to respond with something substantial.

The Shanghai index led the charge, with a 4.9% rally yesterday. The Australian materials and energy sectors managed small gains.

And Another Rebound

Following seven down-sessions in row for the Dow, the worst run since the 2011 US debt crisis, the US stock market had hit “oversold” territory as far as many were concerned and was rife for a rebound. Such snap-backs often occur without an obvious trigger, but there were a handful of drivers last night.

Firstly, expectations of Chinese stimulus. This led to rebounds in commodity prices, including oil, and thus the US materials and energy sectors were supported. Then there was the announced takeover of aerospace components manufacturer Precision Castparts by Warren Buffet, potentially his largest ever outlay. While Buffett is a long-term investor, his 21% premium provided a vote of confidence against those believing Wall Street to be overvalued.

Then there was Fedspeak.

In another session of “if you’re all going to say something different at the same time why don’t you all just shut up,” Fed vice chairman Stanley Fischer said one thing and Atlanta Fed president  Dennis Lockhart said another. Fischer kicked off by suggesting the Fed won’t move on rates until inflation has returned to more normal levels, closer to the 2% target. Lockhart countered by reiterating his view the US economy is now resilient enough to handle a rate hike and that “the gyrating needle of monthly data” should not be a “decisive factor in the decision making”.

Market reports overnight and this morning suggest Fischer’s comments were the primary driver of last night’s Wall Street rebound, again drawing on the “bad news is good news” theme of a delayed rate hike. I think that’s rubbish.

Firstly, the Dow jumped nearly 200 points from the opening bell and only continued to rise after Lockhart made his counter-comments. Secondly, the US ten-year yield is up 6 basis points to 2.24% — the wrong way around.

Thirdly, US inflation has not been at 2% since early 2012 and having fallen to near zero in the interim, has taken a long time to grind back to around 1.6% (core) where it is now. With wage growth negligible and commodity prices, particularly oil, remaining under pressure, it would likely be a long time yet before the 2% mark is revisited. The Fed is not prepared to wait that long.

Finally, I believe the “bad news is good news” theme no longer rules after almost a year of rate rise debate. Such responses have not been seen on markets these past couple of months. Wall Street is not just ready for a rate rise, it is impatient to get it over and done with.

And Yet Another Rebound

Coming back to the more pervasive China stimulus theme, short-covering was evident on the LME last night as all base metal prices leapt 2-3%.

Iron ore remains closed.

West Texas crude rose US$1.00 to US$44.80/bbl and Brent rose US$1.64 to US$50.23/bbl.

Gold jumped US$10.30 to US$1104.10/oz, which you could argue represents expectations of a rate hike delay. Or you could argue it speaks to renewed demand from China, or that gold just wanted to get back to 1100, or that gold never seems to know what it’s doing anyway.

The US dollar index did slip a bit, nonetheless, by 0.4% to 97.15.

The Aussie is steady at US$0.7415.

Today

The SPI Overnight closed up 36 points or 0.7%.

NAB will publish its monthly business confidence survey today.

Today’s earnings result highlights include those of Cochlear ((COH)), Domino’s Pizza ((DMP)) and Transurban ((TCL)).
 

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