Daily Market Reports | Apr 06 2016
By Greg Peel
The Dow closed down 133 points or 0.8% while the S&P lost 1.0% to 2045 and the Nasdaq fell 1.0%.
Market Worries
“The Australian dollar has appreciated somewhat recently. In part, this reflects some increase in commodity prices, but monetary developments elsewhere in the world have also played a role. Under present circumstances, an appreciating exchange rate could complicate the adjustment under way in the economy.”
This is the critical paragraph from yesterday’s RBA monetary policy statement, with the rest of the statement remaining little changed from previous months. Glenn Stevens has acknowledged that while stronger commodity prices are a welcome driver of a stronger currency, the “race to the bottom” among Australia’s trading partners has left the local currency sitting out like a shag on a rock through no fault of its own.
A weaker Aussie is important to aiding the transition away from dependence on mining investment in the Australian economy, hence recent strength is “complicating” the issue. This could be the first signal the RBA is prepared to act from an exogenous perspective, simply to bring Australia into line with the rest of the world. We note that even New Zealand has bowed.
The Aussie initially rallied on yesterday’s statement release because there was no rate cut – not that anyone was expecting one. Only then did the forex cowboys actually read the statement, and in so doing realise it was actually dovish. The Aussie is down 0.8% over 24 hours at US$0.7541 despite the US dollar being steady.
Yesterday was not a day, nevertheless, in which any hope of an imminent rate cut was going to make any difference to sentiment. The writing was on the wall at the close on Monday, when an attempt to rally above the 5000 mark failed. Markets that fail to go up tend to go down instead. And we’ve seen this movie all too often now – once we fall through 5000, we pretty quickly get down to 4900 or 4800, before returning.
Consumer discretionary is one sector that does not like a weaker currency, which may go some way to explaining that sector’s 2.1% fall yesterday. Although I’d suggest there was a delayed response to Monday’s weak retail sales data in play as well.
The banks don’t like lower rates, but there’s a lot more going on in the banking world at present than this concern alone. A 3.3% fall in the energy sector yesterday reflected a lower oil price, and for the banks this means an increased threat of default on energy sector loans. But we also had APRA releasing its discussion paper on Net Stable Funding Ratios on Monday, which by yesterday had bank analysts suggesting the majors will need to raise billions more in debt funding in order to comply. Throw in APRA’s warning that the current lending scene is beginning to look a lot like 2007, and there’s plenty of reason the banks were down 1.4% yesterday.
Including ASIC’s accusation Westpac has been rigging the bank bill swap rate settlement.
Despite an unchanged iron ore price overnight and mixed metal price movements, the materials sector fell 1.5% yesterday. Perhaps the ongoing insistence of analysts that the recent commodity price rally has no substance on a supply-demand basis is weighing. Or perhaps yesterday was just another day to sell everything. Only the telcos came out almost unscathed.
Not helping the mood was the release of Australia’s service sector PMI. It fell into contraction in March at 49.5, down from 51.8 in February. The service sector is the Australian economy’s underlying growth engine. The services PMI result is in stark contrast to the manufacturing PMI which is showing frenetic expansion, but the service sector is many multiples larger than the manufacturing sector in this country.
Around the Grounds
Which is not the case in Germany. If it wasn’t bad enough last night that the eurozone’s services PMI disappointingly fell to 53.1 from 53.3, data showing a 1.2% fall in German manufacturing orders when a 0.2% gain was expected caused ripples across the continent. The German stock index fell 2.6% last night, while France chimed in with a 2.2% fall and the UK 1.1%.
The UK services PMI showed a gain to 53.7 from 52.7 while Japan again disappointed with a drop to 50.0 from 51.2. The winner on the night was the US, which posted a welcome return to expansion with a rise to 51.8 from 49.5.
IMF chief Christine Lagarde last night warned that global growth was slowing. The IMF has a habit of telling everyone what they already knew some six months after they originally knew it. Lagarde also suggested that while fiscal policy needs to play its part, negative interest rates represent “net positives” for the global economy. This is not an opinion held by the majority of the market.
The impact of Lagarde’s comments was a fall in the German ten-year bond rate to 0.10%, dragging the US equivalent down 5 basis points to 1.73%. There is now talk of the German rate going to zero or lower, and the US rate thus testing GFC lows of 1.3%.
Healthy Pullback?
Oil prices opened lower last night, which, combined with the weak data out of Germany and Lagarde’s warning ensured a weak open on Wall Street. Tax policy was also in play, with Pfizer pulling out of a multi-billion dollar bid for global peer Allergen now the US government has clamped down on the practice of tax “inversion” – acquiring an offshore based company in a lower company tax regime and shifting headquarters.
Wall Street now anticipates more such takeover bids will be abandoned and takeover premiums will evaporate. Interestingly it was another session in which Wall Street ultimately ignored the oil price. WTI had already begun to bottom out and turn around when news came through of an explosion at an Iraqi oil well. Oil prices closed higher on the session but the selling in US stocks accelerated towards the bell.
The stronger service sector PMI was lost in the wash. Like Australia, the US service sector is much bigger than the manufacturing sector.
Last night’s weakness did not seem to bother too many traders, however, a lot of whom have been expecting a pullback following the sharp rebound from the February lows. Arguably Wall Street is consolidated back to a more measured platform from which to assess earnings results, which start to flow next week.
Commodities
West Texas crude is up US$1.06 or 3% at US$36.52/bbl while Brent is up US83c or 2.2% at US$38.34.
Yet another mixed night of trading on the LME saw copper and lead steady, aluminium down 1%, tin down 1.5% and zinc down 2%, while nickel rose 1%. If these ongoing ups and downs were consistent across the base metals then fair enough, but the reality is each metal is more often going up one night and down the next.
Iron ore remains unchanged at US$54.00/t.
Gold has jumped US$15.90 to US$1231.20/oz. It’s nothing to do with the US dollar index, which is steady at 94.63. It no doubt has a lot to do with the head of the IMF being keen on negative cash rates.
Today
The local energy sector should in theory find support today from a bounce in the oil price. Otherwise the SPI Overnight closed down 18 points or 0.4%.
Caixin will publish its China service sector PMI today, not yesterday as I erroneously assumed, because of the holiday in China on Monday. Renewed focus on the strength or lack thereof of the European economy will centre on German industrial production numbers.
The minutes of the last Fed meeting will be published tonight but they have already been superseded by the Fed chair herself, and Yellen will speak again tomorrow night.
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