Daily Market Reports | Sep 16 2016
By Greg Peel
The Dow closed up 177 points or 1.0% while the S&P gained 1.0% to 2147 and the Nasdaq rose 1.5%.
Seeking the Bottom
If you were a typical sports commentator, you’d say yesterday’s session on the local market was a game played in three halves.
It was expiry day for September quarter futures and index options, which can be blamed for early volatility that saw the ASX200 down 25 points very briefly before recovering to be only slightly down. That was the first half.
The second half saw the release of the jobs numbers late morning.
If we’re going to talk good news and bad news, yesterday’s local employment data for August provided a feast.
The good news is the unemployment rate fell to 5.6% from 5.7%. The bad news is 3,900 jobs were lost when economists had forecast a 15,000 gain. The decrease in the unemployment rate came courtesy of a decrease in participation, implying more people have given up finding work.
The good news is the loss of 3,900 jobs breaks down to a decrease of 15,400 part-time jobs and an increase of 11,500 full-time jobs. This mix bucks the trend of past months in which net job gains have all been about increases in part-time positions as full-time positions fell. But the bad news is this switch did nothing to improve the “underemployment” rate – the number of people who have jobs but would like more hours – which rose to a record 8.7%. As a consequence, hours worked fell by 0.2% to be up only 0.7% year on year.
The good news is these data justify an RBA rate cut.
It looked like the algos were in full swing on the data release given an initial plunge in the index (lower unemployment equals RBA rate cut less likely) followed by an equally sharp snap-back (fewer jobs, lower participation, higher underemployment, fewer hours worked equals rate cut more likely).
It pays to read the fine print before barging in, but no one’s told that to the computers yet.
From that point the dust settled, and the index proceeded to track a straight-line rally toward a close of up 12 to end the third and final half.
The low of the day was 5204, which is very close to technical support at 5200, but also an index option strike price and thus a magnet on expiry day. But if we’re trying to determine at what point the market has sold down yield stocks on Fed rate hike fears, we have perhaps found it in the banks, which rose 0.6% on the day to provide the bulk of the upside, but not in utilities and telcos, which continued to fall by 1.1% and 0.9% respectively.
The biggest winner on the day was materials, up 0.9% on the bounce in base metal prices, and the biggest loser was energy, down 1.2% on the lower oil price. While commodity prices are also under the spell of Fed policy, the metal price bounce was attributed to stronger Chinese data and the oil price drop was attributed to US inventory moves. Thus in both cases the fundamentals of demand-supply outweighed the esoterics of central bank intervention.
Today is another day, and after last night it looks like a September Fed rate rise is off the table once more. The futures are suggesting up 33 points. Will we finally see some support come in for beaten down yield stocks, or has that ship simply sailed?
The Growth Cycle
US retail sales fell by a greater than expected 0.3% in August to mark the first decline in five months. As the US economy is consumer-driven, retail sales are an important growth indicator.
But to add to the woes, industrial production fell 0.4% having risen in the past two months, the producer price index moved 0.0%, the Empire State activity index remained in contraction and expansion slowed for the Philly Fed activity index.
As has often been suggested by Wall Street commentators, if interest rates had already returned to normal by now the Fed would be talking rate cuts, not rate hikes. But all talk is of rate hikes and their timing, and on last night’s data it is assumed (until it isn’t again) September is off the table.
And maybe December too. Pass the champagne.
So the US stock indices rallied on the bad news is good news theme. However, the extent of the excitement over no rate hike is clouded yet again by another 3.4% jump in Apple shares – the third consecutive daily gain of around 3%.
The first two gains were courtesy of unexpected record sales for the new iPhone7. Last night’s gain came on news the iPhone7 Plus – same as the iPhone7 but with power steering and seven air bags – has sold out.
So Apple yet again led all three major stock indices higher, and yet again dragged other Big Tech names along with it. The sudden interest in Big Tech is not about the Fed not hiking, but about the Fed hiking eventually one way or the other. One by one equity strategists across the globe are suggesting it’s time to exit the search for yield and re-enter the search for cyclical growth. Record sales of iPhones (in contrast to the overall US August retail sales result) suggest Big Tech is a solid and, given these companies are now long established, safe place to be.
So just how much of last night’s rally can we really attribute to bad news is good news? Consider that the US dollar index fell, as one would expect, but only by 0.1%. Consider that gold dropped US$8.50/oz when it should have gone the other way, and that the US ten-year bond yield is up one basis point at 1.70% when it should have fallen.
While the stock market will remain its volatile self, particularly at this time of the year, other markets appear to be suggesting there can’t be much more to gain even if the next Fed rate hike is pushed further out in time. Might as well pack the bags now.
Commodities
And then we can look at commodities. West Texas crude duly recovered, but is only up all of US3c at US$43.71/bbl.
Having jumped up on Wednesday night thanks to China, base metal prices were all down 0.5-2%, except copper which held its ground, when no rate hike suggests the opposite. But again, it’s a fundamental issue – weak US sales, industrial production, regional activity…why would this inspire stronger base metal prices?
Iron ore is unchanged at US$55.50/t.
Gold is down US$8.50 at US$1314.10/oz.
The US dollar index is down only 0.1% at 95.25 but the Aussie has leapt back 0.6% to US$0.7516.
Today
The new December SPI Overnight closed up 33 points or 0.6%.
The changes to the S&P/ASX index components come into effect today so the index trackers will be busy. Following from yesterday’s local expiry it’s the quadruple witching expiry on Wall Street tonight, the August CPI will be released.
Rudi will make contact with Sky Business at around 11.05am, probably, via Skype-link, to discuss broker calls.
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