Daily Market Reports | Sep 02 2015
By Greg Peel
The Dow closed down 469 points or 2.8% while the S&P lost 3.0% to 1913 and the Nasdaq fell 2.9%.
Playing to Script
These are the August purchasing managers’ index (PMI) numbers out of China yesterday:
Beijing’s official manufacturing PMI fell to 49.7 from 50.0 in July, and official service sector PMI fell to 53.4 from 53.9.
Caixin’s independent manufacturing PMI fell to 47.3 from 47.8 and services PMI fell to 51.5 from 53.5.
According to the populist press, these numbers were the reason the Australian stock market yesterday (and Wall Street last night) fell precipitously once more.
Rubbish.
On Friday, August 21, Caixin published a flash estimate of its China manufacturing PMI for August. It suggested a fall to 47.1 from 47.7 in July. That data release triggered the big sell-off on Wall Street, which continued until Beijing implemented further monetary policy stimulus last week. So tell me: what exactly did we learn from yesterday’s numbers that we didn’t already know over a week ago?
Exactly. And indeed, on any other day the fact Caixin’s final result was 47.3, up from the 47.1 originally estimated, we might have even seen a rally. August 21 was simply the straw that broke the camel’s back of suspended disbelief in a slowing global economy, and in particular the overvaluation of US stock markets. Yesterday was simply representative of those investors who were too slow to get out on the first plunge taking a welcome opportunity to get out after a rebound.
Absolute text book stuff.
And which sectors were the hardest hit on the Australian market yesterday? None of them. Bar industrials (-0.8%), which carries several large cap defensives, every sector was down evenly around 2%. It was a market sell-off, and absolutely nothing to do with PMIs. The PMI releases simply waved the flag to say “Get out now!” given second-wave selling had already begun on Monday.
Meanwhile…
Meanwhile, back in the real world, yesterday’s Australian June quarter current account numbers disappointed. The trade deficit was wider than forecast because while imports were flat over the period, exports fell by more than anticipated. The net terms of trade fell by 3.4% to be 10.6% down year on year.
It’s a story of commodity prices and not of volumes. The good news is that even if prices remain low, which they likely will for some time, the positive effect of the now much lower currency is yet to flow through to dollar values. The Aussie began and ended the June quarter at around 76, with a little trip to 81 in between. This morning it’s around 70. And export volumes are soon to be significantly boosted by long awaited LNG exports.
In further good news, July building approvals jumped 4.2%, it was revealed yesterday, to be up 13.4% year on year. There is much talk the apartment building bubble must soon burst, but July saw an 11.7% gain in apartment approvals, to 27.6% growth yoy, while house approvals fell 2.6% but are up 9.6% yoy.
House prices rose 0.3% in August to be up 17.6% yoy, led by Sydney.
As commodity prices slide, LNG exports will boost the terms of trade (in dollar value) while housing leads the non-mining recovery, and the way things are going the Aussie will be back to the two-thirds level (~67) that thirty years ago, when I started in this game, was considered “fair value”.
Little wonder the RBA left rates on hold yesterday, as every man and his dog expected. Aside from a small nod to “softening conditions” in China and east Asia, Glenn Stevens’ statement was pretty much a carbon copy of the July offering.
Oh and by the way, the Australian manufacturing PMI came in at 51.7, up from 50.4. Given the history of this series it could be 41.7 in September, but let us not forget that Aussie.
And for the record, Japan rose to 51.7 from 51.2, the UK fell to 51.5 from 51.9, the eurozone ticked down to 52.3 from 52.4, and the US fell to 51.1 from 52.7. Some ups and downs there, but interestingly, of the global sub-set of manufacturers – Australia, China, Japan, the eurozone and UK – only China is contracting.
Same Pattern
Wall Street also suffered ongoing second-wave selling last night, which saw the Dow drop 200 points from the open and fall to down 500 points just before a slight kick at the close. The pattern is the same, in that the Chinese data simply provided the excuse, not the impetus.
The acceleration of selling throughout the session was fuelled by the oil price, which fell 8%. On any other day, an 8% fall in WTI would be the stuff of Armageddon, but given WTI has rallied 27% from its low in a heartbeat on short-covering, an 8% drop engenders no great shock.
What was most notable about last night’s session on Wall Street is that the volume was much lighter than it was a week ago, when the first wave struck. The fall in the indices did not suggest the same “Get me out!” levels of desperation as last week, more a dearth of buying interest. The smart money is waiting for the muppets to run back and forth in panic before the fear is shaken out and buying opportunities become more secure.
In the background, of course, is Fed debate, and thank God there’s only a couple of weeks to go before we’ll all be put out of our misery. The interesting point to note here is that the US ten-year bond yield closed last night at 2.17%, which is basically where it was at the end of June. The fives and thirties also are sitting around similar yields. The US bond market priced in a slower global economy long before the US stock market did. And as Fed speculation has ebbed and flowed, has just sat there.
Commodities
West Texas and Brent both fell 8% last night, with WTI falling US$3.88 to US$44.22/bbl and Brent falling US$4.42 to US$48.52/bbl. Once again, the press has cited “weak Chinese data”.
This would suggest the oil market assumed that Caixin’s 47.1 flash estimate would leap back up to over 50 as Chinese manufacturing surged in the last week of August, and that markets were simply stunned when this didn’t happen. In other words, rubbish.
WTI jumped 6% two days in a row on thin air short-covering and the sellers came back in last night. It’s common or garden volatility as is always the case when markets adjust to reality rather suddenly.
Base metal trading re-opened in London after a night off for the public holiday, and prices fell. See all of the above. The big moves were in copper, down 1.5%, and nickel, down 3%. Tin actually rose 3% following a surprise drop in inventories.
Iron ore was steady at US$55.70/t.
The falls in commodity prices belied a 0.7% fall in the US dollar index, but the standard converse relationship has been put aside in this volatile period. Gold, nonetheless, rose US$5.40 to US$1139.90/oz.
The Aussie is down 1.3% at US$0.7017, and not because the RBA didn’t cut yesterday.
Today
The SPI Overnight closed down 62 points or 1.2%. The question is whether this is just a double-up reaction to Wall Street’s reaction overnight to the Chinese data, given Bridge Street reacted yesterday.
Or are we going to retest the lows on heightened levels of fear? The Dow closed last night at 16,058, over 700 points above last week’s intraday low. The ASX200 closed yesterday at 5096, about 170 points above last week’s intraday low. The selling on Wall Street last night lacked conviction, and was more about lower prices than heavy volume.
We can put to bed a V-bounce, which no one had expected anyway, and now debate whether a W-bounce features a higher low or a lower low. At the moment the mood favours higher, but it depends on just how bold you want to be.
Australia’s GDP is out today. Look for 2.2%.
US private sector jobs numbers are out tonight ahead of Friday’s non-farm payrolls. If better than expected, Wall Street will lock in September. As to how the market reacts will be interesting.
Rudi will make two appearances on Sky Business today. First at 5.30pm (Market Moves) then again at 8pm when he will host Your Money, Your Call Equities.
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