Daily Market Reports | Mar 02 2016
By Greg Peel
The Dow closed up 348 points or 2.1% while the S&P gained 2.4% to 1978 as the Nasdaq surged 2.9%.
Bank on it
It appears there were two particular drivers of yesterday’s rally in the local market which ultimately led the ASX200 to a 0.9% gain: stimulus in China, and no stimulus in Australia.
We can draw this conclusion from looking at yesterday’s sector movements. Commodity prices had a relatively quiet overnight session and yesterday’s local December quarter trade data were nothing to be happy about, ditto the Chinese PMIs, but materials rose 1.9% and energy 1.8%. The banks rose 1.6%, providing the bulk of the index gain.
Moreover, the index rally would have been a lot stronger if not for Telstra going ex-div, sending the telco sector down 4.4%.
It was still a choppy session nonetheless, in which we actually reached the day’s closing level in the morning before twice stumbling back to square ahead of a final rally back again, which took us almost to 4925 resistance.
The PBoC cut its bank reserve ratio requirement by 50 basis points overnight, suggesting Beijing is still ready and willing to provide more stimulus beyond renminbi devaluation. That’s good news for the local resource sectors.
But during the morning we saw the local December quarter current account numbers, including the terms of trade. The trade deficit widened further in the quarter as the value of exports fell. This was not a shock, given the falls in commodity prices over the period. But as commodity prices fell through 2015, it was always notable that the volume of exports of iron ore and coal continued to grow.
Not so in the December quarter. We saw both value and volumes down.
By late morning we saw China’s PMI data. Beijing’s official manufacturing PMI fell to 49.0 in February from 49.4 in January to mark the seventh consecutive month of contraction. Caixin’s independent equivalent measure fell to 48.0 from 48.4. Beijing’s official service sector PMI fell to 52.7 from 53.5.
Both the local export data and the Chinese PMI numbers were enough to cause individual stumbles in trading yesterday on the way to a final rally. It appears prior Chinese stimulus ultimately trumped all.
It was the 1.6% rally in the banks that really drove the index. The market went very quiet at 2.30pm yesterday, and then kicked on to the close. While no one was expecting the RBA to cut its cash rate, there was clearly expectation the language of Glenn Stevens’ statement could well be more dovish, given local data releases over the month (note that building approvals fell 7.5% in January) and a fears of a global recession.
As it was, the March statement was as good as identical to the February statement. The RBA believes the current rate is appropriate, but given low inflation there is scope for more easing if needed. This will likely be determined by the labour market, were recent strength to evaporate.
No cut on the horizon then. Rate cuts are bad for banks, as they squeeze net interest margins, particularly when we’re down at such low numbers. Ergo, no dovishness on the RBA’s part is good news for banks, and for the Aussie, which is up 0.6% at US$0.7176 for the same reason.
Around the Grounds
Incidentally, Australia’s manufacturing PMI showed a healthy gain to 53.5 from 51.5, marking the eight consecutive month of growth. This would be great news were Australia’s manufacturing sector not a mere shadow of its former self.
The Australian result was actually a global stand-out. Beyond China, Japan’s manufacturing PMI fell to 50.1 from 52.3, the eurozone fell to 52.1 from 52.3, and the UK dropped ominously to 50.8 from 52.9. It was left to the US to provide some good news, which it did with a big gain to 49.5 from 48.2. But that’s still contraction.
New Month
I suggested yesterday that the weak session on Wall Street overnight was more about end of month squaring than much else, particularly given it flew in the face of the entrenched oil price correlation. Well last night the Dow jumped 350 points and while WTI crude was stronger, it was only modestly so.
There were, admittedly, some stronger US economic data releases last night. One was the aforementioned manufacturing PMI which, while still indicating contraction, at least indicated a solid slowing in the rate of contraction. There was also a positive reading on construction. The better the data, the more chance of the Fed raising again.
And if the Fed raises rates, that’s good for the banks, as discussed earlier. So last night the US banks led the strong rally on Wall Street.
But wait! Aren’t we meant to be in “good news is bad news’ mode? Well in the case of last night, apparently not. The banks led out all the cyclical sectors with strong gains, while the underperforming sectors were the defensives such as utilities and telcos. Such a spread is emphatically indicative of a “risk-on” rally.
And why, suddenly, should Wall Street be “risk-on”? Well it’s a new month, the bad news is largely baked in – to date – China is stimulating and once the S&P500 breached 1950 to the upside, it was technically on for young and old. A close above 1975 was also going to be technically bullish, and the broad index closed at 1978.
Confirming the ‘risk-on” play was a 9 basis point jump in the US ten-year bond yield to 1.83%, and a 14% drop in the VIX volatility index to a confident 17.7.
Commodities
West Texas crude is up US65c at US$34.40/bbl and Brent is little changed at US$35.96/bbl.
Chinese stimulus and better US data were good for base metals, and they all rose 0.5-1.5%.
Iron ore jumped US$1.50 to US$50.40/t.
All of the above came despite a 0.2% gain in the US dollar index to 98.39. Gold fell a tad, to US$1234.90/oz.
Today
The SPI Overnight closed up 92 points or 1.9%, so strap in. While there are several stocks going ex-div today, there are no Telstra-style biggies.
It’s GDP day today. We’re looking for 2.6% annual, up from 2.5% in the September quarter.
February private sector jobs numbers are due tonight in the US, and the Fed will release its Beige Book.
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