Daily Market Reports | Jun 29 2016
By Greg Peel
The Dow closed up 269 points or 1.6% while the S&P gained 1.8% to 2036 and the Nasdaq jumped 2.1%.
Consolidation
The local market opened with steep falls yesterday, sending the index down 86 points. But as so often has occurred recently, regardless of Brexit, as soon as the opening rotation was complete there was a sharp reversal.
There followed a stumbling rally back throughout the session to finish the day down 33 points. Interestingly, the index turned on 5050 – representing the low end of the technical support range – before closing at 5100 – being both the centre of the technical support range and basically where we closed last Friday after the initial Brexit drop.
Three sessions have given us a big fall, a slight recovery, and then a loss of that recovery. With the SPI futures showing up 83 points this morning, we should now recover some of that initial, panicked drop.
At the final bell the selling on the session was relatively even among sectors, unlike Monday’s recovery which featured mixed moves. The stand-outs yesterday were nevertheless utilities, which didn’t move and have remained steady throughout the turmoil, and, funnily enough, the banks, which have copped the brunt of the selling to now. Other than the connection via global interest rates, is there a reason Australia’s banks should suffer from a Brexit?
The question now, as we assume a solid rebound today, is whether or not rebounds across the globe last night represent a simple snap-back from oversold conditions, driven by short term traders looking for quick profits, or genuine buying, driven by investors believing there is value to be had at these lower levels.
It is pretty much a given volatility is not about to go away. Last night David Cameron met, no doubt rather uncomfortably, with EU counterparts. The issue for the EU is to get things rolling asap; to get Britain to clear its desk and leave the building quickly so as to avoid a lingering departure that only provides time for further nationalistic rumblings to fester on the continent.
Fair enough.
The issue for Cameron is to mitigate the fallout and promote stability in the UK before the next step is taken, lest further turmoil result. He will do so as leader until a new prime minister is chosen to take Britain forward.
Fair enough.
Cameron is doing the honourable thing. He’s probably also doing the sensible thing. But the EU is not happy. In theory it could be three months before Article 50 is invoked to set the exit wheels in motion. The EU has said it will not negotiate anything until this happens.
Therefore, we are reminded of those hazy, crazy days of Grexit fears over the past few years. The story that just kept on giving. So many in the market just wanted Greece to go and go now because the endless to-ing and fro-ing and uncertainty kept rekindling volatility and driving everyone insane.
Welcome to Brexit.
How’s the Cat?
The pound stabilised last night and finally recovered a little. The London stock market snapped back by 2.6%, France by 2.6% and Germany by 1.9%.
There was not any initial selling on Wall Street for a typical “Turnaround Tuesday”. Instead the indices opened up and hovered for a while, before a big “program trade” – basically meaning buy the index – gave Wall Street a kicker in the afternoon.
As is always the case, the question was asked as to whether the rebound is genuine or just the sort of “dead cat bounce” that is often seen in such circumstances and proves unsustainable.
Typically a dead cat bounce would feature a violent snap-back on low volumes, suggesting the bulk of investor money is still hiding on the sidelines. But last night volumes were solid on Wall Street. The VIX volatility index on the S&P500 fell 21% to 18.75, leaving it almost back where it was last Thursday when everyone assumed the vote would be “stay”. This implies the protection hastily bought last Friday has now been unwound as it is no longer necessary.
These factors point to it not being a dead cat bounce but a more sustainable consolidation. However, all agree that the volatility is far from over, so it’s not time to breathe a comfortable sigh of relief.
The US ten-year bond yield did not reverse – it’s unchanged on the session at 1.46%.
What did support the Wall Street rebound was oil. Having fallen fairly sharply since Friday, WTI rebounded 3% last night. There were also strong moves up in base metal prices, and safe haven gold gave back US$12.60 to be trading at US$1311.60/oz.
No one paid much attention to the final revision of the US March quarter GDP last night. It came in at 1.1%, up from a prior 0.8%, in line with expectation. Not only is March now a long time ago, the world has changed somewhat in the meantime.
Commodities
West Texas crude rose US$1.50 or 3.2% to US$48.11/bbl. Aside from being a recovery rebound, expectations are for tonight’s weekly US inventory numbers to show a big drawdown.
The US dollar index finally ticked back last night, by 0.2% to 96.11, which would have provided some support for commodities (ex-gold, which is playing a different game at the moment). Indeed on the LME, aluminium, copper and lead all rose 2% and nickel and zinc jumped 4%. What is interesting here as that the Brexit-related falls in base metal prices had been relatively muted in the first place.
Iron ore rose US20c to US$53.40/t.
The Aussie is relatively steady at US$0.7354.
Today
The SPI Overnight closed up 83 points or 1.7%.
The US will see personal income and spending numbers tonight and the Fed’s preferred PCE measure of inflation. But when Janet Yellen coincidentally speaks tonight, there will likely be a different focus of attention than US inflation.
Australia will see new homes sales data today.
We now have two more sessions before the curtain comes down on FY16. That in itself can promote a level of volatility. Fund managers will have welcomed the overnight bounce in markets as a chance to at least recover some returns to put in their marketing material. Others will be last minute tax-selling.
Today sees a huge number of local stocks go ex-dividend. Most of them are REITs or utility/infra funds, meaning some decent cash going out of the market as a downward adjustment from the opening bell.
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