The Overnight Report: Eyes On China

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By Greg Peel

The Dow closed down 78 points or 0.4% while the S&P lost 0.5% to 2080 and the Nasdaq fell 0.4%.

China Slam

It was a relatively benign first hour of trade on Bridge Street yesterday, suggesting the market was not quite sure how to assess overnight developments. It was sure that a $7bn lawsuit against BHP Billiton ((BHP)) was not good news, hence that stock unsurprisingly closed down 3.6% on the day, sending a materials index, also hit by lower base metals prices on Friday night, down 2.4%.

But the Shanghai index had suddenly fallen 5.5% on Friday evening after the close on the ASX, and it was anticipated the renminbi was about to be included in the IMF’s basket of global reserve currencies. Should Bridge Street be nervous?

The answer came at 11am local time when the daily fix by the PBoC for the renminbi was lowered, meaning devaluation. The last time the PBoC devalued the renminbi the Chinese stock market reacted badly, but at the time it was already in crashing mode. Either way, a wave of selling hit both the Australian and Japanese stock markets ahead of the open in China.

Whether or not the fact it was the last day of the month had anything to do with it, the ASX200 did not recover by the close. As it was, the Shanghai index was indeed down another 3% after the close on Bridge Street, but from there it recovered to be up slightly on the session. Nothing, it would seem, to be concerned about there.

Nor was there anything to be concerned about in yesterday’s Australian data releases.

September quarter company profit growth came in at a better than expected 1.3%, with the non-mining sector posting an encouraging 4.4%. Private sector credit grew by 0.7% in October to mark a solid 6.7% annual rate, with business credit leading the way – also encouraging. TD Securities’ November inflation gauge showed 0.1% growth at the headline, for 1.8% annual, and 1.6% annual for the core rate. The numbers are edging up to the RBA’s target 2% without running away.

Aside from the macro, yesterday on the local bourse was an interesting one for those who keep an eye on stocks that are heavily shorted.

At almost 25% shorted according to ASIC data, and thus top of the pops, supermarket try-hard Metcash ((MTS)) enjoyed a 12% share price bounce on short-covering yesterday after posting a better than expected half-year result. Slapped down ambulance chaser Slater & Gordon ((SGH)), 16% shorted, jumped 34% just by reiterating guidance. But troubled electronics retailer Dick Smith ((DSH)), 11% shorted, could not even encourage the shorters to cash in by issuing yet another profit warning. Dick shares fell 58%.

[Note: All major short positions are tabled in FNArena’s weekly Short Report.]

Hangover

Consumption is the driving force of the US economy and thus Christmas retail sales are of vital importance. Returning from the long weekend, Wall Street traders are still trying to assess the success or otherwise of this year’s Black Friday sales. What initially seemed like discouraging results have been tempered by the news, according to a survey, that more Americans shopped on line on Friday than in stores. Yet last night was Cyber Monday, the “traditional” online shopping day, so until the full picture emerges in a few days Wall Street is biding its time.

It was also the last day of the month, and no one seemed much in the mood to buy. Selling quietly accelerated to the close. The Dow closed the month pretty much where it started, despite some ups and downs.

The day’s data releases were mixed. The Chicago PMI dropped sharply back into contraction in November at 48.7, down from 56.2 in October. Pending home sales ticked up 0.2% in October after two months of declines.

As the new month dawns tonight, Wall Street will be looking ahead to Friday’s jobs number and its implications for monetary policy. Consensus suggests that as long as the result is not a shocker to the downside, a Fed rate hike is baked in.

Commodities

Commodities markets are similarly on watch, not just for US dollar implications but also for today’s PMI data out of China. The greenback is up only slightly at 100.18.

After several volatile sessions, the base metal market quietened down last night. Aluminium dropped 0.8%, nickel rose 0.8% and lead jumped 1.6%, but all other moves were negligible.

The same cannot be said for iron ore unfortunately, which fell another US70c to US$42.80/t.

The oils had a quiet night, with West Texas down US22c to US$41.62/bbl and Brent down US31c to US$44.55/bbl.

Gold managed to rally back US$8.30 to US$1064.90/oz, but closed down 6.7% for the month.

The Aussie dollar did not much react yesterday to reasonable local data but is up 0.5% over 24 hours at US$0.7232, despite little movement in the greenback.

Today

The SPI Overnight closed up 2 points.

It’s a big day for data today.

Locally, the September quarter current account will be released which includes the terms of trade. Monthly building approvals are also due, as is the local manufacturing PMI.

The RBA will issue its statement this afternoon which will be highly scrutinised, despite no one expecting a rate cut.

It’s PMI day across the world today, with manufacturing numbers also due from Japan, the eurozone, UK and US. But all eyes will be on four numbers out of China – Beijing’s official November manufacturing and service sector PMIs, and Caixin’s independent equivalents.

ALS ((ALQ)) will hold an investor day today.
 

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