Daily Market Reports | Sep 17 2015
By Greg Peel
The Dow closed up 140 points or 0.8% while the S&P gained 0.9% to 1995 and the Nasdaq added 0.6%.
Trigger Happy
Well, everything that was a screaming sell on Tuesday was a screaming buy yesterday on Bridge Street, for reasons only the maniacal herd could probably explain. It was almost a mirror image reversal, not just in ASX200 points but in sector moves as well. What had changed?
Not much. Commodity prices were weak on Monday night and rebounded a little on Tuesday night except for iron ore, which fell sharply again. But the materials sector was up 1.5% yesterday. Oil recovered a little and yet energy jumped 2.6%. And commodities don’t have a lot to do with why the banks rallied 1.9% or the telco 1.8%, having done the opposite on Tuesday.
The only difference was that Wall Street was down on Monday night and up on Tuesday night. It was up again last night and what is really going on is not to do with sentiment driven by some distinct macro influence, but merely positioning, squaring up or just moving to the sidelines ahead of not only the Fed meeting tonight, but the quadruple witching September derivative expiry on Friday night.
On that last point, it should be noted that September SPI futures and options and ASX index options expire today, in a bit of local witching. This can go a long way to explaining the past two days of seemingly mindless movement. We are very near the critical 5000 mark where there are no doubt a lot of options positions struck. The market-makers who sold those options have to madly hedge as expiry approaches, selling into falls and buying into rallies.
Such action becomes increasingly self-perpetuating, and loss-making, as options hedging itself moves markets and by doing so ensures the need for more hedging, thus exacerbating volatility. The official term is that market-makers are “short gamma”. Market parlance calls it “Bad Greek”.
It should also be noted that Tuesday’s plunge took the ASX200 down to 5018 – close to the now well established support level of 5000. Each time the index has bounced off near-5000 levels, it has done so with air of “this is it!” in terms of calling the market bottom.
Amidst a down 80/up 80 couple of sessions we can still derive no implied response to a new prime minister, except perhaps in media stocks, but it’s fair to say the global macro far outweighs any domestic fiscal considerations at this time. All things being equal, we probably would have seen a positive stock market response on Tuesday, but things are far from equal at the moment.
There’s this one little factor called the Fed.
Coin Toss
Okay let’s get this out of the way. My tip: They raise, by 25 basis points to a 25-50bps range, Yellen’s press conference rhetoric is nevertheless dovish, emphasising a very gradual approach to normalising, and Wall Street rallies.
My only caveat is that having already rallied strongly for two days, we might see some “sell the fact” into an initially positive reaction.
But there are plenty on Wall Street who think that if they raise, Wall Street tanks. And there are plenty who emphatically believe they won’t raise.
CNBC surveyed US economists last night and the situation is beautifully summed up by two particular responses. On they will/they won’t, economists are as good as 50-50. When asked what is the greatest threat to the US economy at present, the percentage of those surveyed who believe it’s US interest rates came in at a grand total of – wait for it – zero. The greatest threat is global weakness, according to the largest percentage at 45%.
That will do for now. By this time tomorrow, we’ll know.
For those stuck in a year-long mindset, last night’s rally on Wall Street can be put down to a weak US August CPI reading, implying no rate rise. It’s rubbish.
The headline CPI fell 0.1% to an annual 0.2%, as expected, which is all down to oil prices. The core CPI, ex food & energy, remained at a steady 1.8% annual. The Fed is targeting 2%. And the Fed doesn’t really pay much attention to CPI as an underlying inflation measure.
If the market thought the CPI data would ensure no rate hike, then the US ten-year yield would not have jumped another 10 basis points to 2.28%.
Aside from the squaring up and positioning ahead of tonight following a solid market correction, and ahead of Friday’s expiry, Wall Street rallied again last night because oil rallied – at one point by 6%.
Commodities
It is interesting to note that the high mark for oil in 2008, at around US$157/bbl, was marked shortly after Goldman Sachs called 200 dollar oil. When earlier this week Goldman called 20 dollar oil, many a veteran Nymex trader smiled and thought “we’ve now seen the bottom”.
The oil market is short, so any little thing will trigger a short-covering, snap-back rally, as we have seen several times these past weeks. Last night it was lower than expected US weekly crude inventories, and news that after all this time, the US will have “boots on the ground” in Syria, albeit only in an “assist and advise” role.
Syria does not produce oil but is inexorably part of the whole Middle East geopolitical equation, although on any other day such news would not have sparked a 6% price jump. You need current volatility for that. Prices eased back for their highs so over 24 hours, West Texas is up US$1.98 or 4.4% to US$47.13/bbl and Brent is up US$2.13 of 4.5% to US$49.88/bbl.
It must be noted that Brent last night rolled into the November delivery front-month, so for the next week the WTI-Brent spread is impacted by a timing difference.
It was a very quiet session on the LME last night as traders squared up ahead of the Fed meeting. Copper rose 1% and lead 2%, with the others all making sub-1% moves.
Iron ore fell US40c to US$56.00/t.
Perhaps there were a few investors out there who decided whatever tonight brings, it might be safer just to shift into gold. Gold jumped US$14.90 to US$1119.60/oz last night, despite the US dollar index falling only 0.3% to 95.32.
The world is also short Aussie, so aside from Tuesday’s Malcolm rally another 0.8% gain over the past 24 hours to US$0.7195 is also likely pre-Fed square-up.
Today
The SPI Overnight closed up 35 points or 0.7%.
You know what’s happening tonight. If you’re really keen, 4am Sydney time.
Before we get there, New Zealand will release its June quarter GDP today (if only the Kiwis were as slow on Eden Park) and an RBA Bulletin will be released.
OrotonGroup ((ORL)) will release FY15 earnings today.
Futures and index options expire today.
Rudi will make his weekly appearance on Sky Business' Lunch Money, noon-12.45pm.
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