Daily Market Reports | Dec 17 2015
By Greg Peel
The Dow closed up 224 points or 1.3% while the S&P gained 1.5% to 2073 and the Nasdaq rose 1.5%.
Must Be Christmas
Well, someone obviously waved a flag yesterday morning and declared it time to buy. These sudden snap-back rallies have become rather regular of late, following periods of snowballing anxiety which in 2015 for the most part have centred around commodity prices. We had a bounce in oil on Tuesday night, and iron ore at least didn’t fall further. Wall Street was positive ahead of last night’s Fed decision.
So first we saw the bottom pickers come in, then the short coverers, and the momentum traders. There are some big short positions being carried by the market at present across a range of sectors, but otherwise it was simply the beaten-down names amongst the large caps that were again the centre of attention in yesterday’s rally.
I noted yesterday that Macquarie had capitulated and dropped its commodity price forecasts earlier in the week, slashing target prices for resource sector stocks and flipping many a recommendation to an equivalent Sell from Buy. Well hot on the heels have come Deutsche Bank and Credit Suisse, conducting similar exercises with similar results. The materials sector nevertheless jumped 3.2% yesterday, but it was all about the BHPs and Rios and not the suite of junior miners in tenuous financial positions.
It should also be noted that brokers tend only to revisit their commodity price forecasts quarterly, thus this week’s mining stock target price cuts to a large extent represent a catch-up with the market. This also means that among the many recommendation downgrades there were also upgrades for stocks brokers felt had been oversold in the crowd.
A 3.4% jump for the energy sector yesterday was understandable after two sessions of oil price rallies, representing a 10% rebound from low to high. Alas, last night oil fell 4%.
The other stand-out mover among the sectors yesterday was consumer staples (3.4%), but there are some very big short positions out there on Woolworths. There are even bigger short positions on Primary Health Care but as that stock continued to cop the brunt of the MYEFO fallout yesterday, shorters saw no great incentive to take profits. The result was an against-the-trend 0.2% fall for the healthcare sector.
It was potentially a risky trade yesterday to be so bullish ahead of a Fed meeting, but given the world was so convinced the Fed would raise, while remaining dovish in its commentary, the potentially greater risk was to wait for the fact and miss out. The market backed a “have your cake and eat it too” result from the Fed, with the “cake” being the end of interminable uncertainty a rate rise would bring and the “eat it too” being the promise of still-easy policy for some time to come.
And So It Was
It was arguably the most anticipated Fed meeting in history. The last time the Fed raised its funds rate was in June 2006. The excitement ahead of the 2pm announcement was palpable. The response when the statement hit the wire was of almost complete silence.
There were no headless chooks this time. No frantic to-ing and fro-ing as the computer algos battled in out at humanly imperceptible speeds. The Fed funds rate has been raised to a range of 25-50 basis points from the 0-25 range that has prevailed for six years. The key word in the FOMC statement with regard ongoing rate rises was “gradual”.
This is exactly what everyone was expecting, so nobody batted an eyelid. Initially, stock and bond markets did not move. Only when Janet Yellen commenced here press conference, and when everyone had actually had a chance to read the full statement, did the buyers come into the stock market. I’m not sure, but as I watched the action on tele I think I might have seen a big guy in a red suit in the background on the NYSE.
I was definitely a “cake and eat it too” result. The only mild surprise is that the statement outlined a whole range of factors which informed the FOMC’s decision beyond the supposed twin mandates of employment and inflation. These included issues in offshore markets.
Many a commentator has criticised the official US unemployment rate of 5% as being fanciful, given it excludes so many willing workers out of a job. Janet Yellen addressed this issue in noting wider measures of actual unemployment had also been trending lower. In terms of headline inflation being zero when the Fed would like to see 2%, the Fed chair yet again suggested low oil prices – the reason why current US inflation is zero — were “transitory”.
This prompted an interesting question from the floor in the Q&A session, pointing out that the Fed had called oil price weakness “transitory” back when oil was US$60/bbl. With oil now at US$35/bbl, the obvious question was “How long does ‘transitory’ last?” Yellen was unrelenting, suggesting that oil prices would eventually stabilise. But in headline terms, the Fed does not see inflation actually reaching 2% before 2018.
Thus the assumption of a very “gradual” pace of tightening from here. The Fed will nevertheless remain data-dependent, Yellen pointed out.
As Yellen spoke, the US stock indices moved higher in a relatively orderly fashion. There was an initial “sell the fact” move in the US dollar, but as I write the dollar index is 0.2% higher at 98.45. The US bond market was pretty well set for a rate rise, thus the ten-year yield is only up 2 basis points at 2.29%.
Thank God that’s over. It’s a nice way to cap off a year of frustrating uncertainty and allow for a relaxed Christmas break. Of course, in 2016 we’ll be back to the sport of pre-guessing the Fed once more in terms of exactly when the next rate rise will be. But now that the wheels are in motion, hopefully the lesser significance of the next hike will not lead to the extreme levels of anxiety we’ve seen in recent years over will they/won’t they raise, will they/won’t they taper, will they won’t they go again with more QE.
It would be nice to think that eventually, the Fed ceases to be the primary driver of financial market sentiment.
Commodities
Wednesdays bring a Fed statement every six weeks but every week Wednesdays bring the weekly US crude inventory numbers. Surprise, surprise, last week’s inventory increase was bigger than expected. So much for a bottom being evident following the oil price rally of the last two days. Last night West Texas fell US$1.62 or 4.4% to US$35.65/bbl and Brent fell US$1.16 or 3% to US$37.19/bbl.
It was all about inventories and nothing to do with the Fed. Prices fell well before the Fed statement release.
Lost in the wash of Fed anticipation last night were actual US data releases, which saw better than expected results for both housing starts an industrial production. These numbers were what LME traders had to hang on to last night given the shutters came down just before the Fed statement release.
All base metals traded higher, bar lead, with nickel the winner on a near 3% gain. Copper was up 0.7%. Lead fell 2% on announced record-high inventories.
Oil might have been down again but if you’re trying to balance a national budget, the good news is iron ore is up US70c to US$38.20/t.
Gold is also up, by US$10.50 to US$1072.10/oz, which seems counterintuitive, but is likely a “buy the fact” response.
It looks a bit like “buy the fact” in the Aussie too, given the market has been short for so long on an expected Fed rate rise. It’s up 0.5% at US$0.7222.
Today
Looks like we could be going on with it. The SPI Overnight closed up 54 points or 1.1%.
But a warning. Today is the expiry day for December quarter futures and options and only this quarter does the ASX set what is usually two rounds of expiries together, accounting for all of futures, futures options, index options and stock options simultaneouly. In other words, “quadruple witching”.
We could well see some volatility.
Otherwise, today is the first day of the rest of our lives. Enjoy.
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