Daily Market Reports | Aug 27 2015
By Greg Peel
The Dow closed up 619 points or 4.0% while the S&P gained 3.9% to 1940 and the Nasdaq jumped 4.2%.
Tentative
Investors taking the punt on buying the Australian market on Tuesday will no doubt have felt comfortable when turning in for the night as Wall Street staged a decent comeback, only to awake to find the rally had failed miserably at the close. This was the situation as the ASX200 opened yesterday with a swift 86 point plunge.
Whether or not the earlier 5100 support level still remains viable given we’ve been well below 5000 this week, the drop through that mark from the open appeared to bring the buyers steamrolling back in. On Tuesday we ignored the Chinese casino altogether. Yesterday we ignored Wall Street as well, albeit tentatively, as the index banged its head against the flatline several times before finally punching through in the afternoon.
The drivers of yesterday’s ultimate 35 point rally, or 121 from the intraday low, were the same large cap and index-dominant sectors that had been most heavily sold – the banks, materials, energy and supermarkets. On a 2.8% gain, energy was the clear winner, as investors pondered the reality that even at current low oil prices, some oil & gas names had simply been sold down too far. And for a couple of days, WTI crude has managed to hold its ground just under 40.
We could also cite a better than expected result on Australian June quarter construction work done, released late morning, as a fillip.
Desperate
The afternoon rally in Australia came despite a near 4% fall in Shanghai in the Chinese morning session, again confirming we’ve learnt to ignore such frivolity. But interestingly, Shanghai did then proceed to correct on its own, to be up by a similar amount after lunch, before fading away late in the session to close down 1.8%.
We know that the Plunge Protection Team remains suspended, so Chinese investors appear to be working it out for themselves, but that did not stop another typical knee-jerk, scatter-gun response from the authorities after the final bell.
Last night the PBoC injected US$22bn of liquidity into the Chinese banking system, following on from the previous night’s interest rate and RRR cuts. And then the government announced another witch hunt in the stock market, this time promising to search out fraudulent activity at the stock market regulator itself, insider trading within at least one securities firm, and rumour mongering in general. The state-owned press called for government to “purify” the market.
The state media also stepped up its campaign against the evil foreign forces behind the Chinese stock market rout, and particularly blamed the Fed.
No doubt the Chinese punters we see each night on the news in front of the Shanghai ticker are engaged in heated debate over the monetary policy vagaries of the US Federal Open Market Committee and the ramifications for the Chinese domestic economy, as they clutch their porcelain cats with waving arms and buy any stock named “Lucky” as long as there’s an 8 in the price.
Rebound
Stability on the Chinese market, and the PBoC’s injection of liquidity, were not enough to overcome nervousness on European markets last night. The late plunge on Wall Street on Tuesday night had Europe spooked, sending the major indices down around another 1.5%. But whereas typically the mood in Europe dictates the opening on Wall Street, this time it was different.
The US indices rocketed up from the open, sending the Dow up over 400 points. The snap-back was aided by positive US data, in a week when up to now, no one has been paying any attention to economics. US new durable goods orders rose 2.0% in July. While this is less than June’s 4.1% jump, it was much better than economists had expected. And importantly, the core measure (ex transport and defense) jumped 2.2% — its biggest gain in twelve months.
The opening spike nevertheless proved to be just that, and by lunchtime the Dow was only up around 100 points. Oh no, here we go again, thought Wall Street. But along came Bill Dudley.
In days gone by, the Fed’s Jackson Hole central bankers’ symposium was where Ben Bernanke chose to hint at fresh QE. Then he stopped attending, and indeed Janet Yellen is not there this year. Nor is Mario Draghi, who usually pops in. So the Hole has lost its importance of late. But last night New York Fed president William Dudley caused a stir when he responded, having been asked whether recent global market volatility would impact on a possible September rate rise, that the case for a September move was now “less compelling”.
And on that news, Wall Street began to rally again. Never mind that Dudley went on to say that there’s plenty of time between now and the September meeting (20 days) for data releases to make September compelling once more. Either way, commentators suggest Dudley’s comments spurred on Wall Street because it means a September hike is now off the table.
Hello? Did no one else pick the absolute clanger in Dudley’s statement? Since when was the case for a September rate rise ever compelling in the first place, as far as Fed rhetoric has suggested up to now? All we’ve heard is maybe/maybe not, depending on the data. Dudley’s comments only serve to reinforce my personal view that the Fed long ago decided to hike in September, and that the ensuing data would not determine if it would, only if it wouldn’t. So far the data have offered no reason not to go ahead.
Furthermore, the Fed has always been anxious not to spark severe market volatility with its rate hike announcement, which is why it has been at pains to insist the market should not be scared of a rate rise per se, because the tightening process will be a very long and incremental one. Well guess what? We’ve now had that volatility. It’s now out of the way. And assuming Wall Street doesn’t plunge another 10% between now and mid-September, that rate rise is locked in.
By the way, the US ten-year bond yield rose another 4 basis points to 2.17%.
Whatever the case, by late afternoon it was apparent that the published sell-on-close orders for the session were nothing like the magnitude of Tuesday night. A short-covering rally ensued. By the close, the Dow’s 619 point, 4% rally represented the biggest one-day percentage in four years and the biggest points gain since the wild volatility of November 2008, when the Dow was only half the value it is now.
After six days of heading down, Wall Street finally rose. Unlike Tuesday night, last night featured heavy volume, extensive breadth, and a clear feeling of buyer conviction. No one is prepared to call a bottom yet, as usually there has to be nervous, choppy activity and a possible retest of the lows before a bottom can truly be called. But let’s just say there were a lot of smiles on the NYSE floor at 4pm.
Commodities
This was not the case on the LME. Despite the overnight Chinese liquidity injection, and despite the strong US durable goods number, copper plunged 2.8% last night. Tin and zinc also fell around 3%, while aluminium and lead lost 1% and nickel, for once, was relatively steady.
Iron ore fell US20c to US$53.10/t.
West Texas crude fell again, but only by US42c to US$38.88/bbl, while Brent actually rose US22c to US$43.67/bbl.
Not helping commodity prices was a big jump in the US dollar index, by 1.4% to 95.31, which accompanied the “risk on” trade on the stock market.
To that end, gold fell another US$15.20 to US$1125.10/oz, likely still feeling the heat of margin call selling.
Today
The SPI Overnight closed up 83 points or 1.6%.
Locally, today sees the release of June quarter private sector capex numbers.
Tonight the US June quarter GDP number will be revised.
And it’s another enormous day for the local results season.
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