The Monday Report

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By Greg Peel

Capitulation?

It was a very choppy session on the ASX on Friday, which is not typical of a Friday. The index plunged 60 points from the open but immediately found buyers, who pushed the ASX200 back to the 4800 mark which signals the supposed bear market threshold.

The rebound didn’t hold, and we were down again mid-morning, before another brave assault was mounted and 4800 was again hit at lunchtime.

But it wasn’t to be. The index closed almost back at its lows again in what appeared to be a level of capitulation ahead of the weekend.

The banks (-1.6%) were hardest hit, and the biggest influence on the index, reflecting general bank selling across the globe. There is genuine, if not misplaced, fear that the likes of a Deutsche Bank could go down and send ripples across the global banking world a la 2008.

Given Friday night’s action in the northern hemisphere, it will be interesting to see how the local banks fare today.

The consumer sectors were among the bigger losers on Friday, both down 1.3%, while a coin toss decided Friday was a day to sell, rather than buy utilities. Telcos found some support and energy, for once, played no part.

If there were speculative buyers in energy on Friday, they’ve done well.

Bank on it

It was mid-week when Deutsch Bank threw up the idea of buying back its bonds but it wasn’t till Friday night when the bank’s intentions were truly translated into a market response. There had been a brief interruption in what might have been an earlier bank rebound in Europe when French bank SocGen posted a shocker of a result.

But the European banks all surged back on Friday night to send the relevant stock indices surging as well. The London market is usually the less volatile of the big three but it closed up 3%, with Germany and France both notching 2.5% gains.

It is typical for such a mood to carry across the pond but just to fan the flames, news came through that JP Morgan CEO Jamie Dimon had bought US$25m worth of the bank’s shares with his own money. The Dow component jumped 12% on the session and the US banking sector as a whole enjoyed a spectacular rebound.

Square-Up

Markets are closed in the US tonight for the Presidents’ Day holiday, and typically Wall Street traders are not inclined to want to take vulnerable positions home over a three-day break. The weekend, and tonight, bring with it potential for any sort of market-moving development.

So there was some surprise when traders piled into the US banks on Friday night. There may have been an element of short-covering, but banks aren’t usually popular stocks to short. On the other hand, oil futures are a very popular short trade.

On Thursday night West Texas crude hit a new thirteen-year low and threatened to drop through US$26/bbl. Then lo and behold, an OPEC oil minister chimes in with fresh talk of possible production cuts. It was also at that point, would you believe it, the S&P500 was threatening to breach important technical support at 1810.

Wall Street turned on a dime. Interestingly, the oil price stopped falling but didn’t post much of a rebound, unlike the US stock markets. But while every trader and his dog laughed off the UAE minister’s timing as being more than coincidental, no one wanted to carry heavy oil shorts through the long weekend. Just in case.

So on Friday night, WTI jumped 12%. Traders suggest the bulk of the rally can be put down to short-covering, but there were also some genuine bottom-pickers in there too. The oil price eased back a bit in electronic trade after Wall Street had closed but the move over the session, combined with the rebound in the banks, was enough to send the market as a whole on a flyer.

Wall Street broke a five-day losing streak in style as the Dow bounced 313 points or 2.0%, the S&P jumped 2.0% to 1864 and the Nasdaq rallied 1.7%.

The US ten-year bond yield, which had fallen like a stone all week to be as low as 1.53% at one point, jumped 10 basis points to 1.75%

The US dollar index rebounded 0.5% in the session to 95.96, sparking some profit-taking in high-flying gold. It fell US$9.80 to US$1238.50/oz.

Friday night basically saw a sharp reversal of everything that was going on all week. The question is: How much of that reversal can simply be put down to the fact the US is closed tonight?

Strong endorsements from the Deutsche Bank board and from the JP Morgan CEO corroborate a widespread call that bank selling across the globe has been overdone. No one, on the other hand, is willing to believe the veracity of any OPEC supply reduction talk. But there’s also the technical aspect. A bounce off 1810 for the S&P500 suggests a double-bottom has been established, and that can be a bullish sign.

Commodities

The late easing back in Friday night’s oil price rally meant that in the 24 hours from Friday morning to Saturday morning, West Texas crude gained US$2.16 or 8% to US$28.99/bbl and Brent gained US$2.08 or 7% to US$32.76/bbl.

Base metals had had a tough week but joined in the reversal trade to some extent on Friday night, ahead of the return of China today. Beaten-down nickel managed a 2% rebound while aluminium and copper both rose 1%, with tin and zinc missing out.

The Chinese were buying up iron ore ahead of the New Year break and it would appear the market is worried this will be followed up by selling as Chinese traders return today. Iron ore fell US$1.30 to US$43.20/t.

Gold has been noted above.

Despite wild fluctuations all week in the US dollar index, the Aussie has completely stalled. It is again steady at US$0.7103, reflecting a balance of cross-currency translations and a trade-off between the China connection and solid carry trade yields on offer.

The SPI Overnight closed up 87 points or 1.9%.

The Week Ahead

All eyes will be firmly fixed on the Shanghai stock market when it opens today around lunchtime local time. While the dragons have danced and the fireworks exploded, global markets have tanked.

To add fuel to the fire, Beijing will release China’s January trade numbers today.

Japan will release its December quarter GDP result today.

The US is closed tonight but the week follows up with housing sentiment and the Empire State index tomorrow, housing starts, industrial production and the PPI on Wednesday, leading economic indicators and the Philadelphia Fed index on Thursday, and the CPI on Friday.

Wednesday will also see the release of the minutes of the January Fed meeting.

The minutes of the February RBA meeting will be out tomorrow. Other than vehicle sales today, the only other economic highlight this week will be the jobs numbers on Thursday.

In the meantime, the local corporate reporting season shifts into top gear this week, and the next two weeks will see an avalanche of reports. Today’s highlights include Amcor ((AMC)), Aurizon ((AZJ)), Bendigo & Adelaide Bank ((BEN)) and Newcrest Mining ((NCM)).

There will be no appearances on Sky Business by Rudi this week.
 

For further global economic release dates and local company events please refer to the FNArena Calendar.

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