Daily Market Reports | Mar 14 2016
By Greg Peel
Determination
The Australian market appeared similarly confused as to how to interpret Mario Draghi remarks on Thursday night following the ECB’s surprisingly extensive stimulus package announcement. European markets had sold down heavily but while Wall Street also tumbled on the open, the buyers soon returned with gusto.
Buyers also reappeared on Bridge Street at midday on Friday to send the ASX200 up to a positive close from a 32 point drop. The biggest move among sectors was a 0.9% gain for consumer staples. We might assume last week’s strength in the Aussie will ease some of the food deflation pressure the supermarkets have been suffering of late.
The Aussie has become somewhat of a concern, rising yet another 1.6% to Saturday morning at US$0.7562. Will the RBA be forced into action? Rebounds in commodity prices have driven short-covering in the Aussie and central bank easing all over the globe is making our 2% cash rate ever the more attractive to foreign investors.
The saviour could be the Fed, were it to raise its own cash rate this week. But that’s not going to happen. The Aussie will likely find resistance once the shorts have all been cleared out but to fall back to 70c would require an indication from the Fed that rate hikes are still very much expected in 2016.
In the meantime, the local market seems fairly determined it is going to push up to previous resistance levels and, if all goes well, perhaps make another shot at 5400.
Rethink
The German stock market jumped 3.5% on Friday night. On Thursday night the DAX initially rallied 2.5% on the ECB’s bigger than expected stimulus package, but then crashed to be down 2.5% following Mario Draghi’s press conference in which the ECB president declared he “did not anticipate the need for further rate cuts”.
European markets interpreted this statement to imply the ECB has now thrown everything at it, and that’s all there is. But another interpretation, and no doubt what Mario Draghi was trying to say, is that such an extensive stimulus package should be enough to support the eurozone economy. It does not mean the ECB has no further “whatever it takes” capacity.
Wall Street initially fell along with Europe on Thursday night before rallying back to be flat on the session. European investors had a night to think about it, and decided on Friday night their initial interpretation might have been a bit short-sighted and unnecessarily panic-driven. So the DAX jumped 3.5%. We might therefore conclude with some rough maths that the fresh ECB stimulus was worth a net 1.5% rally in Germany.
France chimed in with a 3.3% rally on Friday night and London rose 1.7%. Wall Street shot up from the open and largely held that gain throughout the session. The Dow closed up 218 points or 1.3%, the S&P gained 1.6% to 2022, and the Nasdaq rose 1.9%.
Oil Talk
The headlines suggest Wall Street rallied because oil did, because that’s been the correlation throughout 2016 to date. I believe, however, that the correlation is beginning to fade somewhat now oil appears to be consolidating around the high thirties for WTI. West Texas rose US67c on Friday night, which is not typically worth 200 Dow points even if it is off a low base. Wall Street was more likely embracing ECB QE.
Oil found renewed strength on Friday night because the International Energy Agency suggested oil prices may now have seen a bottom. Iran’s return to the market has been less dramatic than Iran implied it would be, and despite all the spurious chatter about meetings, it does actually appear supply from producers outside OPEC has begun to fall. Within OPEC, all of Nigeria, Iraq and the UAE saw reduced production in February.
A chastened Goldman Sachs also agreed on Friday night oil might have seen the bottom. Goldman sent oil tumbling earlier in the week by suggesting the rebound was all about short-covering and was unfounded on supply-demand realities, but on Friday night forecast a range of US$25-45/bbl for the June quarter, up from a previous US$20-40/bbl. The investment bank has now qualified its earlier call be suggesting simply that oil will take time to recover from the lows given the extent of inventory rundown required, so don’t expect any major rally from here.
Commodities
West Texas crude rose US67c to US$38/bbl on Friday night and Brent rose US28c to US$40.36/bbl.
Aluminium was flat on the LME but the other base metals posted modest gains as traders awaited Saturday’s Chinese data dump. Copper rose 1% and zinc 1.5%.
The pullback from iron ore’s single-day near 20% jump last week continues, with the metal falling US$1.30 on Friday night to US$56.10/t.
Despite the US dollar index remaining flat at 96.21, gold has fallen back US$16.10 to US$1251.70/oz, retracing Thursday night’s ECB-inspired jump.
The SPI Overnight closed up 42 points or 0.8% on Saturday morning.
Slow Start
Data released by Beijing on Saturday showed industrial production up 5.4% year on year for the January-February period, down from 5.9% in December and missing forecasts of 5.6%. Retail sales rose 10.1%, down from 11.1% and missing 10.8% forecasts. Fixed asset investment rose 10.2% year to date, down from 11.1% but exceeding forecasts of 9.5%.
Beijing combines data for January and February rather than the usual monthly numbers because of the New Year interruption. That interruption can often to lead to misleading results in trend terms, but there are no real surprises in this data dump from a trend perspective. Subsequent months will nevertheless reveal whether China’s own stimulus measures are having an effect, such that Beijing’s 6.5-7.0% GDP target for 2016 can be achieved.
The Week Ahead
The Bank of Japan will no doubt be frustrated but hardly surprised by the ECB’s stimulus step-up last week. The BoJ meets tomorrow but no one is expecting any further plunge into the negative for Japanese rates, especially given the Fed will release its quarterly policy statement on Wednesday night.
No one is expecting the Fed to hike this month but the focus will be on the so-called quarterly “dots”, which represent forecasting from each of the FOMC members and thus provides an indication of net dovishness/hawkishness. At this stage the Fed futures market has a June rate hike at 43% chance. Janet Yellen will hold a press conference post release.
The Bank of England also holds a policy meeting this week, on Thursday night, but no one seems to care. Of more interest is the growing wave of Brexit support now Mad Boris has thrown his weight behind the campaign.
The RBA will release the minutes of its March policy meeting today. With all that’s transpired in the past two weeks, including the Aussie shooting up to 75 from 70, these minutes are a bit stale.
US data releases this week include retail sales and inventories, housing sentiment, the PPI and Empire State activity index tomorrow night, industrial production, CPI and housing starts on Wednesday, and leading indicators and the Philadelphia Fed activity index on Thursday.
Friday it’s fortnightly consumer sentiment and the quarterly quadruple witching expiry of equity derivatives.
The highlight of Australia’s economic data week will be the jobs numbers on Thursday.
On Friday the quarterly changes to the S&P/ASX indices will become effective.
Note that the US went on to summer time on the weekend, so as of tomorrow the NYSE will close at 7am Sydney time.
Rudi will appear on Sky Business through Skype-link on Tuesday, 11.15am, and in the studio as guest on Thursday from 12.30 till 2.30pm, and again through Skype-link on Friday, 11.15am.
For further global economic release dates and local company events please refer to the FNArena Calendar.
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