The Overnight Report: China Slide

This story features COMMONWEALTH BANK OF AUSTRALIA, and other companies. For more info SHARE ANALYSIS: CBA

By Greg Peel

The Dow closed down 33 points or 0.2% while the S&P lost 0.3% to 2096 and the Nasdaq fell 0.6%.

China Syndrome?

A funny thing happened on Bridge Street yesterday.

On Monday morning, Commonwealth Bank ((CBA)) came out of its trading halt and largely held its rights issue discount from the open. On yesterday’s open, CBA mostly held a couple of dollars’ worth of dividend, and the banks were generally steady.

Energy stocks were hit early on the overnight fall in the oil price, but other sectors did little and as the index drifted back and forth around the flat line, on a mix of positive and negative individual earnings results, it seemed we were in for a flattish sort of session.

But at 2pm, on the dot, someone started selling the banks and the big miners. At that point the Shanghai exchange was closed for lunch (gosh, closing for lunch brings back fond memories, and some forgotten afternoons) and the Shanghai index was down around 2% — a decent fall, but within the context the sort of daily volatility we’ve all now become accustomed to.

So what was the selling trigger? It was not the RBA minutes, as they’d come out in the morning and revealed nothing new. By the close on Bridge Street, the Shanghai index was down 4% — okay, maybe enough to unsettle some nerves – and the ASX200 closed down 1.2%. But the damage was all in the banks, and to a lesser extent the big miners, which together represent a big chunk of the index. The energy names were already down, and did not get hit again after 2pm. The telco wasn’t hit, and indeed, no other sectors copped any sort of similar beating.

The Shanghai index ultimately closed down 6% after having really lost its bottle after lunch. The word had gone out, apparently, that the Chinese equivalent of the US Plunge Protection Team had decided not to support the market yesterday. So if your government says it is not going to make all the numbers on the roulette wheel red today for your benefit, it’s time to leave the casino.

If you watched the news last night and saw Australia down 1.2%, China down 6%, you’d say, well, that’s an easy one to explain. Is another currency devaluation on the cards? But looking at the course of the day’s trade on the ASX, the story doesn’t quite play out so simply.

What we do know this morning, however, is that the 6% fall in Shanghai did put the frighteners through the LME last night. Base metal prices have been slammed. Yet the SPI Overnight is calling the index up 10 points this morning.

Strange days indeed.

No Worries

And if China was to blame in any way for the Australian market’s late tumble yesterday, it seems Australia’s was the only market that cared. Hong Kong was down, fair enough, but Japan didn’t fall much, and nor did the European markets or, ultimately, Wall Street.

Wall Street instead put in a choppy summer session on light volume that was mostly introspective. The materials sector did cop selling on the plunge in the copper price, but a tick up in the WTI price helped energy rebound. A solid earnings report from Home Depot (Bunnings on steroids) was offset by a weak earnings report from Wal-Mart (Woolies on steroids), while a 0.2% rise in US July housing starts, to the fastest pace since October 2007, was the economic highlight of the day.

With the S&P back around 2100 and many a trader on a beach somewhere, the US indices drifted around last night without any particularly solid lead. China was noted, but largely shrugged off.

Commodities

Aluminium managed to put in a pretty solid performance last night in only falling 1%. All other base metals fell 2-3%, including a 2.6% fall for copper to a new six-year low.

Iron ore was unchanged in physical trading at US$56.00/t, but the late Chinese stock market slide saw iron ore futures slammed 2.5% overnight in China which suggests a different story by tomorrow.

West Texas crude managed to rise US47c to US$42.38/bbl, helped along by a research report from Citi suggesting it is time to start buying energy stocks as oil probably won’t fall much further. Citi commands respect in the energy space, having correctly called the initial oil price tumble to much disbelief at the time.

Brent fell US17c to US$48.55/bbl.

Gold is steady at US$1117.50/oz, but silver copped a 3% hammering. The US dollar index was up last night which doesn’t help the commodity cause, but only by 0.2% to 97.00.

The Aussie is down 0.5% to US$0.7340.

Today

The SPI Overnight, as noted, closed up 10 points.

Wall Street will be dealing with CPI data tonight along with the minutes of the last Fed meeting, but no one is expecting any new rate hike hints therein.

Ahead of that, it’s a big day on the local earnings front. Today’s highlights include Seek ((SEK)), Stockland ((SGP)), Seven West Media ((SWM)) and Woodside Petroleum ((WPL)).

In the latter case, keep an eye on the dividend.

Rudi will make his weekly appearance on Sky Business' Market Moves tonight, 5.30-6pm.
 

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