Daily Market Reports | Jan 27 2016
By Greg Peel
The Dow closed up 282 points or 1.8% while the S&P gained 1.4% to 1903 and the Nasdaq added 1.1%.
Happy New Year
And here we are, back at that familiar level of 5000 for the ASX200. When I left for my break just before Christmas we were at 5140, so clearly it’s been a quiet January.
No?
Fair enough. One could have been holidaying on a rock in the ocean and still not managed to avoid the news the Chinese stock market had again collapsed and the benchmark oil price had fallen to US$26 a barrel.
In the former case, the Chinese stock market itself is basically a joke and realistically not much of an indicator of the true Chinese economy but the sell-off was triggered by weak data. That said, I imagine the 2015 GDP result of 6.9% was seen as reasonable, if it can be trusted. I see this morning the head of China’s Bureau of Statistics is now up on supposed corruption charges.
In the latter case, it must be said there were plenty of calls for oil in the twenties as we headed into Christmas, and so it came to pass. The good news is that we will now see the long assumed disappearance of smaller, high-cost US producers, thus meaningfully reducing supply. Had oil continued to hover around US$40, the story could have dragged on all through 2016.
The bad news is we have now seen the first trickle of small US banks getting into trouble over their loans to said oil producers, with Texas being the unsurprising starting point. As to just how bad this story can get is as yet unknown, but it is unlikely to impact on the major US banks and is not, alone, the stuff of another GFC.
While locally the focus tends to be on China, one doesn’t have to look far to see what’s been driving Wall Street in 2016. The S&P500 has to date registered 97% correlation with the WTI oil price. Earnings season has begun in the US but that doesn’t seem to matter much right now. Tonight brings the first Fed rate decision post the December hike, but nothing untoward is expected.
Shortly the local market will enter the February result season, and that will no doubt tell a tale. In the meantime, here we are at 5000, again.
Wishful Thinking?
Two or three times late in 2015 there was talk from OPEC officials of possibly conceding to production cuts. Those officials tended to be non-Saudi, and each time a Saudi official quashed expectations with a largely “She’ll be right mate” attitude, while Saudi Arabia continued to pump oil as fast as it could.
Last night’s latest production cut talk came from Kuwait’s OPEC governor, who suggested OPEC would be willing to cooperate with non-OPEC members if non-OPEC members were willing to do the same. Such members include Russia and Brazil, who are bleeding heavily, but also includes the US, which is the heart of the problem.
The chances of the US agreeing to sanctioned production cuts are zero, so it’s all just pie in the sky. Meanwhile, one would hardly expect Iran to finally return to oil exporting and immediately take a haircut. And the history of OPEC suggests production cuts, while always agreed to, are never adhered to. The only way global oil production can be reduced is through natural selection. The oil price will only ever go back to US$40 once a lot of the marginal production in North America is idled once and for all.
And this is what is likely to happen in 2016.
In the meantime, West Texas is up US$1.36 or 4.9% at US$31.26/bbl and Brent is up US$1.53 or 5.11% at US$31.63/bbl.
As a result, Wall Street rallied overnight. There were a couple of positive earnings results in the mix to help things along, but basically it was just that 97% correlation.
Commodities
Outside of oil, there were some solid moves up in other commodity prices. The usual short-covering and technical trading were cited on a volatile LME for snap-back rallies in base metal prices. Aluminium jumped a percent, copper, lead and nickel rallied around 2%, tin was up 3% and nickel almost 5%.
Iron ore fell US30c to US$40.80/t.
Gold also went for a run, up US$14.30 at US$1122.20/oz despite the US dollar index being only 0.3% weaker at 99.04.
The Aussie is up 0.9% at US$0.7013.
Today
The SPI Overnight closed up 54 points or 1.1%.
Today sees the release of the local CPI numbers for the December quarter, which will no doubt fuel debate about whether or not the RBA will be back in cutting mode in 2016.
And the other endless debate will also rage in 2016. Not of when the first Fed rate hike will be, but when the second rate hike will be. And the third… The Fed will release its first statement for 2016 tonight.
Happy New Year. I hope it’s a good one.
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