Daily Market Reports | Mar 16 2016
By Greg Peel
The Dow closed up 22 points or 0.1% while the S&P lost 0.2% to 2015 as the Nasdaq fell 0.5%.
Just a Head Fake?
“Members judged that there were reasonable prospects for continued growth in the economy and that it was appropriate to leave the cash rate unchanged at an accommodative setting.”
So said the minutes of the March RBA meeting, released yesterday. With that, the local market tumbled.
As to whether we can blame the minutes is nevertheless questionable. At two weeks old, they might as well have been two years old given what has transpired in the interim, including the surprisingly strong local GDP result, the rebound in commodity prices and, subsequently, the Aussie dollar, and shock and awe from the ECB. Two weeks ago Glenn Stevens’ policy statement was near word for word a repeat of his February statement. But things have now changed.
So it would have been naïve to be have been disappointed that there was no hint of an RBA rate cut in the minutes. And given the banks fell 1.4% yesterday to provide the greatest impact on the ASX200, and banks don’t like lower rates, it seems more a case of a sudden burst of uncertainty in the local market.
There has been much talk of late of the commodity price rebounds, particularly in oil and iron ore, being unsustainable blips. Oil has simply seen a short-covering snap-back. Iron ore has simply jumped on hurried Chinese restocking that will shortly end. With falls in the prices of both overnight, it was no shock that yesterday saw the energy sector down 3.6% and materials down 2.4% following their recent sharp recoveries.
But the selling was market-wide, with only the telcos holding their ground. I suggested yesterday that the local market had reached a point of indecision, as there appeared to be nothing in the near term to justify ongoing upside. And when markets can’t find a reason to go up, you can always count on them going down instead, until a new pathway is established.
Regarding commodity prices, Goldman Sachs has recently articulated that which I have been implying in this Report for a while, in that the only catalyst for higher oil prices is lower oil prices. Things won’t get better unless they get worse first, and stay that way for a while. Oversupply in all commodities must lead to capitulation and closures among miners/drillers. That requires a prolonged period of pain at lower prices. Only when supply is actually abandoned, and not simply put on hold, can prices rise once more.
Meanwhile there was no surprise yesterday when the Bank of Japan held its cash rate steady at minus 0.1%, while nevertheless tempering its view on Japan’s economy. There was some surprise that the BoJ statement this month omitted the line suggesting further cuts if necessary that had been present in previous statements. It would appear the central bank is not prepared to go more negative.
Low Volume
The oil rally appears now to have fizzled out as hopes fade – if there really were any in the first place – of production freezes from OPEC and non-OPEC producers. WTI fell 2.3% overnight and initially took Wall Street with it, with the Dow falling by a hundred points at its low.
Also driving weakness was a disappointing US February retail sales result. Not only did February sales fall 0.1%, January’s tepid 0.2% gain was revised down to a whopping 0.4% fall.
(And we always joke about Chinese data.)
Retail sales represent around 25% of all US consumer spending, and these numbers are setting the scene for another disappointing March quarter GDP number this year, despite the lack of weather impact this time around. But elsewhere the US housing sentiment index held steady at a slightly optimistic 58, and the Empire State activity index has flipped over to plus 0.6 in March from minus 16.6 in February, so not all is doom and gloom.
How does a data-dependent Fed see the US economy? Well that we will find out tonight. With the combination of Fed statement, revised forecasts and Janet Yellen press conference all having the potential to move the markets sharply tonight, traders decided to square up positions last night and took the indices back towards flat. Volumes, however, were anaemic, suggesting most of the world is on the sidelines.
Commodities
West Texas crude is down US84c at US$36.45/bbl and Brent is down US82c at US$38.77/bbl.
The iron ore retreat has gathered pace. Spot iron ore down US$3.80 to US$51.70/t. We’ve now taken out that ridiculous jump last week.
LME traders chose to prepare for the Fed meeting with some selling of their own. Copper was little changed but nickel fell 1%, aluminium 1.5%, zinc 2% and lead 3%.
Gold is steady at US$1233.10/oz.
The US dollar index is steady at 96.63 but as commodity prices retreat, so does the Aussie. It’s down 0.7% at US$0.7458.
Today
The SPI Overnight closed down 6 points.
Fed meeting tonight. Enough said.
Sigma Pharmaceuticals ((SIP)) will deliver its earnings result today.
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