Daily Market Reports | Nov 20 2015
By Greg Peel
The Dow closed down 4 points while the S&P lost 0.1% to 2081 and the Nasdaq closed flat.
Buy Australia
If the Fed decides to hesitate yet again in December it would be very ugly for global markets. Less than one month out from the next meeting, the world is baking in a Fed rate rise. But why is this a positive development?
It’s not about a strong US economy, as the US economy is far from strong. Keating would call it a rate rise the Fed has to have, just to have somewhere to cut from were it to become necessary down the track, and also to restore credibility in a central bank that has seem to have lost its rudder. And the “just get it over with” mantra from the markets is very robust.
Once it’s over with, attention then turns to the next Fed rate rise. While the minutes of the October meeting may have been hawkish in the sense a majority of FOMC members are now in the December hike camp, it was also more dovish on the wider picture as the Fed is even more emphatic that the tightening cycle to come will probably be the slowest ever seen in history.
That’s why the US dollar index is down 0.7%, to 98.97, over the past 24 hours. Forex markets have been pricing in a tightening cycle far more aggressive than the Fed is intending. And while a US rate hike means Australian stocks are less attractive to US investors on a narrower yield spread, a slower than expected subsequent tightening cycle means that first 25 basis points is neither here nor there. So if rates remain lower for longer and the US dollar is set for a correction, what do you buy?
How about a high-yield stock market in a safe jurisdiction offering the potential for a currency rebound on the back of a greenback correction.
Yesterday’s 2.1% jump for the ASX200 was indiscriminate. Every sector was up on relatively equal terms. Forget commodity prices, yesterday simply saw index buying – Buy Australia.
The Aussie dollar rose steadily at the same time, suggesting those buying stocks were acquiring the necessary local currency first. The Aussie’s rally continued through last night as the US dollar fell, taking the Battler up a full 1.3% over 24 hours to US$0.7196.
The ASX200 is up 5% in a mere three sessions. If you make 10% in a year on your portfolio you have a happy Christmas. Being Friday today, and given Wall Street was flat overnight, we’ll probably see some profits locked in. But was that a bloke in a red suit I saw down in Bridge Street watching the ticker yesterday?
Sun Rising
It was a session downunder in which no one was ever really going to care what the Bank of Japan did or didn’t do, except maybe the forex cowboys. The BoJ did nothing and surprised no one, given the market has now given away the idea of any tit-for-tat QE expansion from a central bank already expanded up to its eyeballs.
Having downgraded its economic growth and inflation expectations at its October meeting, and having since seen Japan fall into “technical” recession, the BoJ declared yesterday that the outlook for Japan in the December quarter is actually very rosy. Or cherry blossomy perhaps.
Never mind that Japan’s October trade data was very weak. Either way, the yen rallied last night as traders came to the conclusion there is simply not going to be any further easing in Japan. The rally played into the US dollar’s pullback.
Ill Health
US healthcare sector stocks were slammed last night on Wall Street. It is not an issue investors in Australian healthcare stocks – and there are many of those – should be concerned about, as the trigger is very much US-centric.
Major insurer and Dow component United Health last night suggested it might pull out of Obamacare. Now, I don’t pretend to fully understand Obamacare because US public health policy is so far removed from that we thank Gough for every day in Australia it might as well be on another planet. But I do understand that from the outset of the introduction of a policy which is as close to “universal health” as America is ever likely to get, it was assumed health insurers would greatly benefit on their bottom lines. But last night United Health issued a profit warning, and blamed the downgrade on lower than expected Obamacare-related earnings.
Hence last night the premium built into to the US healthcare sector started to unravel in a hurry, making the sector by far the worst performer on the day. The energy sector also had another weak session as the WTI price again traded below 40, albeit it has snuck back above that level once more. Otherwise, almost all other S&P500 sectors finished in the green last night to balance out for a flat overall result.
The best performer was utilities. In the face of an upcoming rate rise? Yes, because subsequent rate rises will be a long time coming.
There was actually a positive US data release last night as well, which, outside jobs, have been few and far between of late. After two months in negative territory the Philadelphia Fed activity index swung back into the positive (expansion) at plus 1.9 points.
Commodities
The weekly US inventory report released last night showed yet another big build in crude, and also a big build in natural gas in storage. West Texas dipped below the 40 mark once more but once more recovered, albeit expiry day for the December contract will have come into play. WTI is trading at US$40.49/bbl, down US40c, while Brent is steady at US$44.25/bbl.
The US natural gas price fell 3% to US$2.28/mmbtu.
Typically a 0.7% drop in the US dollar would be positive for metals prices, but keen buyers are thin on the ground in London at present. Base metals closed mixed on minimal moves last night.
After a brief respite iron ore continued its slide again, down US70c to US$45.10/t.
Gold is far more closely linked to currency moves, hence it’s up US$10.00 to US$1081.90/oz.
Today
The SPI overnight closed up 4 points.
This looks ambitious on a Friday after a 5% rally with some mixed commodity price moves overnight, but then the index does seem to be in a bit of a mood.
There are, unusually, no major economic data releases at home or abroad today.
There are still more AGMs to plough through locally nonetheless.
Rudi will appear on Sky Business Your Money, Your Call – Bonds tonight, 7-8pm.
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