By Greg Peel
The Dow closed down 173 points or 1.1% while the S&P lost 0.8% to 1862 and the Nadaq fell 0.6%.
The Australian market picked up yesterday where it left off on Tuesday, this time seeing even rallies across all sectors rather than just materials, with the exception of a 1% fall for energy. Clearly the ASX200 is trying to establish a base here around 5200 but after a wild night on Wall Street last night, the trajectory from here is unclear. One thing we do know is that economic data are not a particular consideration right this instant given the substantial sell-off.
Westpac’s consumer confidence index, released yesterday, showed a tepid 0.9% rise for October but at 94.8, the index remains in pessimistic (sub 100) territory for the eighth straight month and confidence is 12.5% lower than a year ago.
China’s headline CPI fell to 1.6% in September, down from 2.0% in August and missing a 1.7% forecast. It’s the lowest read since January 2010. Aside from plunging energy prices, a bumper harvest in China this season has seen food prices fall but prices are expected to rise again from here towards the lunar new year spending frenzy. Thus Beijing is apparently none too concerned despite a 3.5% annual inflation target, thus economists are not expecting any panicked stimulus response.
Food prices were actually higher in Europe which helped to offset a 2.2% fall in the energy component of Germany’s September CPI, the flash estimate of which last night showed 0.8%, unchanged from both August and July.
Hey, remember Greece? Boy didn’t we have some fun with that little chestnut going back three or four years. Well guess what – Greece is back. I recall suggesting back then that it wouldn’t happen immediately at the time, but that eventually Greece would exit the eurozone and the zone itself would likely fracture. That possibility is now back in the spotlight as the economy that once nearly brought down Europe, and has not been able to recover since given it has been stuck with the euro, tries to get out of its now long established bail-out obligations. Last night the Greek ten-year bond yield jumped 110 basis points to 7.74%.
And it wasn’t only Greek bonds that were heavily sold. Last night the European Court of Justice began examining the question of whether it is permissible for the ECB to buy up state debt from eurozone members, which is the only real way the central bank can replicate US-style QE. What if the answer is no? Where does that leave Draghi’s “whatever it takes” pledge? One thing we do know – the Germans are dead against the idea.
After a lengthy period which has the ten-year yields of the Club Med economies follow down the German bund to levels equating to US yields, thus evoking an awful lot of head shaking around incredulous global markets, last night saw a rapid decoupling. With inflation remaining low, the German ten-year fell to 0.79% and the French equivalent remained steady at 1.13%. But Spain jumped 10bps to 2.10%, Italy jumped 16bps to 2.41% and Portugal jumped 27bps to 3.26%. Is the eurozone beginning to fracture?
As a result, the German stock market fell 2.9% last night, France fell 3.6% and even London fell 2.8%. The selling was accelerating as Wall Street rolled up the shutters, but before the open there was a raft of US economic data releases due.
Economists had expected September retail sales growth to be negative but not by as much as 0.3%. They had expected the Empire State manufacturing index to fall back to 21.0 having hit a five-year high 27.5 last month but it plunged to 6.2. Having only recently worried that inflation might suddenly take off, economists conceded a 0.1% fall in the September producer price index – the first fall in over a year – on the back of plunging energy prices. The best the Fed Beige Book could come up with last night is that all twelve districts continue to experience “modest to moderate” growth.
It was all too much for those hedge funds, being most of them, who have been playing the short bond trade on expectation of a Fed rate rise next year and rising bond yields in the interim. The hedge funds have watched the US ten-year peak out recently at 2.60% on such speculation before falling back again to 2.40% and then dropping to 2.20% this week. Last night, as the data hit the screens, they capitulated, and sparked a short-covering frenzy the likes of which craggy old fixed income traders have never seen before.
On the open, the US ten-year yield plunged 34 basis points to hit an intra-day low of 1.86%. If tumbling European stock markets and weak US data weren’t enough to put the frighteners through US stock traders, the bond markets were enough to send the Dow down 368 points from the opening bell, to below 16,000. But the capitulation in the bond market occurred before anyone had a chance to blink, hence the ten-year yield immediately V-bounced to back over 2%.
The stock market followed suit, such that after half an hour, the Dow was only down 111 points. It couldn’t get any more dramatic than this, could it? It was at that point news came across the wires that a second US citizen who had not been to West Africa had contracted Ebola. The patient is another nurse who tended the original US patient, now deceased, who had come back from West Africa. What’s more, before presenting at hospital the latest patient made a domestic flight, with a reported temperature of 99 degrees. US containment procedures, if they were ever sufficiently in place, appear to have broken down.
At lunchtime, the Dow hit a low of down 460 points. But while it wasn’t quite as sudden the second time around, another bounce saw the average finish the day down 173 points.
At the official close of the bond market, the ten-year yield had recovered to 2.09%, down 11bps from Tuesday night’s close. As I write, the yield continues to creep up in the after-market and has reached 2.14%.
Bank of America posted a better than expected earnings result last night, but it mattered not one zot. Of all sectors, banks were the most clobbered last night, with the bank index down 4%. That hasn’t happened in one session for three years. A combination of the weak retail sales number and crashing bond yields was to blame.
While mayhem was evident in the financial markets, commodity markets didn’t miss out either. West Texas crude hit a low of 80.01 before recovering to be down US81c to US$81.13/bbl. Brent fell US$1.34 to US$83.78/bbl.
Base metal traders lost their bottle, bearing in mind that when the LME closed, Wall Street had only just begun to recover from its lows. Tin fell 1%, aluminium 1.5%, copper 2.5%, lead 3% and nickel and zinc 4%.
Iron ore fell US90c to US$82.20/t.
The falls in commodity prices came despite a 1.2% plunge in the US dollar index to 84.82. US dollar strength, up to this point, has been a factor in commodity price falls. But fundamentals win in the end. The Aussie is up 1.4% to US$0.8828 because of the greenback, but presumably because the carry trade is back on after last night’s US bond market blood bath. Gold is up US$7.30 to US$1239.90/oz.
The SPI Overnight closed down 42 points or 0.8%.
Which is yet another slap in the face for those bargain hunters who have been picking up Australian stocks over the past two days, hoping the last of the selling was behind us. But where are we left?
The question now is: Did Wall Street witness the final capitulation last night that typically ends a correction? The bond traders are saying yes – we won’t see the US ten-year back under 2% now that the shorts have left the building, or jumped out of it. Stock traders are saying no – Dow down 460 is not the stuff of capitulation. That day is probably yet to come.
But if we recall, the Australian stock market sell-off began as a result of heightened expectations for a sooner-rather-than-later Fed rate rise. Last night’s US data are just another nail in the coffin of this expectation. And last night’s bounce in the Aussie dollar might be sending a message. If the carry trade is back on, now that interest rate differentials have widened even further, is Australia not, once again, offering value to foreign investors?
It will nevertheless be a brave trader who stares down this current burst of fear-induced volatility. Last night the US VIX volatility index hit a high of 31 before closing up 15% at 26. The VIX has not exceeded 30 since 2011.
And what is the fate of Europe?
Tonight sees the flash estimate of the eurozone-wide CPI for September, and the eurozone trade balance. In the US, industrial production and housing sentiment numbers are due along with the Philadelphia Fed manufacturing index.
It’s a busy day on the local corporate front. A handful of AGMs includes that of Ansell ((ANN)), and handful of quarterly production reports include those of Fortescue Metals ((FMG)) and Woodside Petroleum ((WPL)), and Ten Network ((TEN)) will release its full-year result.
Rudi will appear on Sky Business at noon and again on Switzer TV tonight for an extra long interview between 7-8pm.
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