Daily Market Reports | Sep 22 2015
By Greg Peel
The Dow closed up 125 points or 0.8% while the S&P gained 0.5% to 1966 and the Nasdaq closed flat.
Jumping at Shadows
There was nothing particularly remarkable about yesterday’s significant sell-off on Bridge Street. The market remains very jittery, and technical analysts continue to suggest the index needs to drop to a new low before the bull market can re-establish, both locally and on Wall Street.
The likely trigger for the panic, which saw the big name sectors of banks, energy and materials hardest hit but selling otherwise market-wide, was an assumption by investors the Fed’s decision not to raise suggests the global economy is in a more parlous state than already assumed, and specifically the Chinese economy. A near 300 point fall in the Dow on Friday night confirms this assumption.
Except that it doesn’t. There is no reason to believe the Fed knows anything more about the state of the Chinese economy than the market does. A global correction in stock indices of around 15% is already an adjustment to the China reality. Under pressure from the likes of the IMF, the Fed is vacillating, and moreover by being worried about market uncertainty, is simply fuelling that uncertainty with its timid indecision.
There are two main reasons Wall Street dropped sharply on Friday night, and China is not one of them. Last night’s rebound confirms to a great extent that Friday’s trade was about disappointment in the Fed and, more influentially, about volatility independently driven by the quadruple witching derivatives expiry.
The good news is that the ASX200 hit a low yesterday at 2pm of down 143 points before recovering 39 points to the close. This still left us with a 2% drop, but a secondary phase of a correction is more likely to begin with a panicked close on the lows of the day. The other good news, technically, is that the ASX200 once again approached the 5000 support level, got as far as 5027, and then retreated once more. We did not see a lower low.
Such volatility is consistent with any market correction. Markets never V-bounce out of major pullbacks, and W-bounces aren’t clear cut either. What tends to happen looks more like WW, representing a volatile period of consolidation. That’s not to say we can’t yet see a lower low, and a close below 5000 would no doubt ensure one. But few disagree a lower low would still provide a bottom of the correction, and not the beginning of a bear market.
Or we may not see a lower low. If 5000 continues to hold, eventually this market is going to come to believe we must have already seen the bottom.
Of course, Wall Street will have a lot to do with it. As will ongoing Chinese data releases (such as this week’s Caixin flash manufacturing PMI release).
Disappointment
Wall Street market commentators appear to have a consensus view in the wake of the Fed’s decision of “we didn’t think they would but we were really hoping they would”.
Last night the Dow opened with a near 200-point rally to late morning, most likely representing Friday’s expiry factor. It didn’t help that last night’s August existing home sales number showed a greater than expected fall of 4.8%, but economists were none too concerned – July marked a post-GFC high in existing home sales.
It was at that point however, that Hillary Clinton entered the game.
A US drug manufacturer had been accused of price gouging on a particular drug. Presidential candidate Clinton tweeted that she intends to attack price gouging in the drug industry and will tonight outline her plans. In response, US biotech stocks were crunched. These high momentum plays are very susceptible to volatility.
So down everything came, until lunchtime. It was then Fed president and FOMC voting member Dennis Lockhart suggested he remained very confident that there will indeed be a Fed rate hike this year. On that note, the Dow rallied back to be up 150 points, before fading slightly at the close.
Can you believe it? A Fedhead calls a rate hike and Wall Street rallies. So diametrically opposite to what would have happened in the first half of this year.
And evidence Wall Street is not as worried about the Chinese economy as Friday night’s drop might suggest.
Biotech stocks nevertheless did not join in the rebound. Hence while the Dow closed up 0.8%, the Nasdaq closed flat on the session. The S&P split the difference with a 0.5% gain.
Commodities
Underpinning last night’s rally in US stock indices was a rally in oil prices. However, one would have to think these monotonous inter-day swings of 3,4,5% are becoming so regular as to become meaningless. Friday’s weekly US rig count showed a drop, so oil prices jumped last night.
West Texas is up US$1.56 or 3.5% at US$46.48/bbl and Brent is up US98c or 2% to US$48.72/bbl. The West Texas October delivery contract is set to expire, so that would also feed the volatility.
Base metal prices were evenly up and down by not too significant amounts last night on the LME, suggesting nothing in particular.
Iron ore was unchanged at US$57.10/t.
The US dollar index is up another 0.8% to 95.92, spurred on by Lockhart’s comments. Thus gold is down US$6.50 to US$1133.40/oz.
And the short-covering rebound in the Aussie appears now to have lost steam. The Aussie is down 0.8% to US$0.7129.
Today
The SPI Overnight closed up 28 points or 0.6%.
A June quarter house price index will be released locally today, and Japan will again be closed.
TPG Telecom ((TPM)) will release its FY15 result today.
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