Tag Archives: Currencies

The Overnight Report: Now, Back To The US Economy…

By Greg Peel

The Dow rose 293 points or 1.8% while the S&P gained 1.8% to 1948 and the Nasdaq added 2.5%.

Weak

There are no two ways about it, yesterday’s Australian June quarter GDP report was a disappointment. The economy grew 0.2% in real terms from the March quarter for an annual growth rate of 2.0%, missing expectations of 0.4% and 2.2% respectively. The trend rate is considered in a post-GFC world to be 2.75%, and was previously 3.25%.

It gets worse in nominal, ex-inflation terms, which provides the true picture of national income growth. The nominal economy grew 1.8% in 2014-15, the lowest rate since 1961-62. Lower, that means, than the Keating recession of 1991-92.

We don’t have to look too far to nail down the culprit. A combination of falling mining investment and falling commodity prices is proving too significant a force for the non-mining economy to overcome at this stage. Growth came from household spending and government spending (mostly on lumpy defence) while weakness was felt in business investment and the rundown of business inventories.

And while household spending is a positive driver, the hangover from the GFC continues to be evident in the household savings rate, which ran at 8.8% annual growth in the June quarter. That’s good for future financial risk, but not good for immediate economic growth.

There are two factors that have the power to save the Australian economy – the Aussie dollar and fiscal reform. The currency is doing its bit, and as I noted yesterday the Aussie began and ended the June quarter at 76 with a trip to 81 in between, and today we’re at 70. The other factor relies on the commitment, foresight and courage of our politicians.

We’re all doomed.

W-Bounce?

I asked the question yesterday morning, with the Dow down over 400 points and the SPI futures suggesting a 62 point fall for the ASX200, whether this would actually be double-counting of the previous session in which the Chinese PMIs were released. Well at 11.30am we were down 75 points.

That’s when the GDP result was released, and while the Aussie enjoyed a 69 (handle) the stock index actually bounced, briefly, before the index dropped to 81 points down just before 1pm. At that point we were getting closer to the 5000 support level, at 5015, and it seems someone with some money said “While they’re all at lunch, start buying”.

Sandwiches were hastily thrust aside and others joined the rally in the afternoon, taking us back to be 5 points up on the day. Yes – to be down again would have been double-counting.

The good news is China is closed today and tomorrow, to honour a parade of missiles. Taking China off the screen does not solve any problems, but it does mean one less distraction as Bridge Street tests the waters to see whether the second wave of selling is now over, or whether there are some even slower sellers still waiting to pounce at higher levels. If the former is true we can book in a standard W-bounce, at least for now, until mid-month when the Fed meets.

Normal

It would be foolish to suggest Wall Street is taking its lead from Australia at the moment but it has seemed that way this week, basically because we see the Chinese data while they’re all asleep.

Last night Wall Street traders also decided to test the waters to see whether the second wave of selling might now be over. They did so from the open, sending the Dow up about 200 points into a void. There were a few wobbles, but the US indices largely held their ground throughout the day as everyone waited to see how the market-on-close orders would stack up this time around.

The imbalance was benign, and so it was safe to buy to the close. The Dow kicked up another 100 points in the last half hour.

For the first time in ten days, traders suggested the market felt “normal”. Volumes were on average, heartbeats had settled down and anxiety had subsided. Wall Street is no doubt now looking forward to the Labor Day long weekend. For many this means back-to-work next week, other than for those who cut short their summer holidays when all hell broke loose over a week ago. It also means back-to-school, which for many US retailers is almost as significant a consumer spending period as Christmas.

“Normal” also meant traders could concentrate on US economic data releases, which had garnered little attention during the turmoil.

The ADP reported 190,000 private sector jobs were added in August. This is a bit better than July, and around about expectation. Economists are forecasting Friday’s non-farm payrolls report to show 213,000 jobs added.

The US measure of June quarter productivity had originally been estimated at 1.3% growth, but last night was revised up to 3.3% growth. Read it and weep Mr Hockey (aka Dead Man Walking).

But the big talking point was the Fed Beige Book, which provides an anecdotal economic assessment of each of the twelve Fed regions. While it gave a nod to the impact of the stronger greenback and lower oil prices, most importantly it reported “increasing wage pressure due to labour market tightening” across several regions. Wage growth is the one thing that had been noticeably lacking in the US as 2015 played out, but now it seems inflationary pressure is building.

The Beige Book also suggested there were few signs of spill-over into the US economy from the Chinese turmoil. Such an observation only serves to reinforce the fact the China-triggered Wall Street sell-off was all about US stock market overvaluation and not about sudden China fears.

On this collection of positive US data, the Dow opened up 200 points. Yet on last night’s data alone, the Fed would raise. This confirms to me what I have suggested for a while now – when the Fed raises, Wall Street will rally. Maybe not in the first five minutes, but once the initial dust has settled.

Commodities

LME traders were encouraged by last night’s US data, while remaining wary that the number that matters is Friday night’s jobs report. Copper, nickel and zinc rose 1%. Short-covering in tin continued, for a second 3% gain.

Iron ore rose US10c to US$55.80/t.

Volatility continued in the oil markets. After Tuesday night’s 8% plunge, which followed two successive 6% gains, WTI initially attempted to rally but was sold off again when the weekly US crude inventory report showed an unexpected increase. But the sell-off proved short-lived, and in came the technical buyers. West Texas is up US$1.83 or 4% to US$46.05/bbl.

Brent is up US$1.92 or 4% to US$50.44/bbl.

The US dollar index fell on Tuesday night but rallied back on the strong US data last night, to be up 0.7% at 95.90. Gold is thus down US$6.10 at US$1133.80/oz.

The Aussie is up 0.3% to US$70.40 over 24 hours, having dipped below 70 briefly yesterday following the weak GDP report. We may assume the forex markets are mostly short Aussie.

Today

The SPI Overnight closed up 31 points or 0.6%.

The focus in Australia will be back on more immediate data today, with the release of the July retail sales and trade balance numbers. The August service sector PMI will also be released, as it will in Japan, and in the eurozone, UK and US tonight.

As noted, China is closed today and tomorrow.

The ECB will hold a policy meeting tonight.

The US will also see its July trade numbers tonight, along with August chain store sales.

Rudi will appear on Sky Business' Lunch Money, noon-12.45pm today.

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The Overnight Report: Second Wave Breaks

By Greg Peel

The Dow closed down 469 points or 2.8% while the S&P lost 3.0% to 1913 and the Nasdaq fell 2.9%.

Playing to Script

These are the August purchasing managers’ index (PMI) numbers out of China yesterday:

Beijing’s official manufacturing PMI fell to 49.7 from 50.0 in July, and official service sector PMI fell to 53.4 from 53.9.

Caixin’s independent manufacturing PMI fell to 47.3 from 47.8 and services PMI fell to 51.5 from 53.5.

According to the populist press, these numbers were the reason the Australian stock market yesterday (and Wall Street last night) fell precipitously once more.

Rubbish.

On Friday, August 21, Caixin published a flash estimate of its China manufacturing PMI for August. It suggested a fall to 47.1 from 47.7 in July. That data release triggered the big sell-off on Wall Street, which continued until Beijing implemented further monetary policy stimulus last week. So tell me: what exactly did we learn from yesterday’s numbers that we didn’t already know over a week ago?

Exactly. And indeed, on any other day the fact Caixin’s final result was 47.3, up from the 47.1 originally estimated, we might have even seen a rally. August 21 was simply the straw that broke the camel’s back of suspended disbelief in a slowing global economy, and in particular the overvaluation of US stock markets. Yesterday was simply representative of those investors who were too slow to get out on the first plunge taking a welcome opportunity to get out after a rebound.

Absolute text book stuff.

And which sectors were the hardest hit on the Australian market yesterday? None of them. Bar industrials (-0.8%), which carries several large cap defensives, every sector was down evenly around 2%. It was a market sell-off, and absolutely nothing to do with PMIs. The PMI releases simply waved the flag to say “Get out now!” given second-wave selling had already begun on Monday.

Meanwhile…

Meanwhile, back in the real world, yesterday’s Australian June quarter current account numbers disappointed. The trade deficit was wider than forecast because while imports were flat over the period, exports fell by more than anticipated. The net terms of trade fell by 3.4% to be 10.6% down year on year.

It’s a story of commodity prices and not of volumes. The good news is that even if prices remain low, which they likely will for some time, the positive effect of the now much lower currency is yet to flow through to dollar values. The Aussie began and ended the June quarter at around 76, with a little trip to 81 in between. This morning it’s around 70. And export volumes are soon to be significantly boosted by long awaited LNG exports.

In further good news, July building approvals jumped 4.2%, it was revealed yesterday, to be up 13.4% year on year. There is much talk the apartment building bubble must soon burst, but July saw an 11.7% gain in apartment approvals, to 27.6% growth yoy, while house approvals fell 2.6% but are up 9.6% yoy.

House prices rose 0.3% in August to be up 17.6% yoy, led by Sydney.

As commodity prices slide, LNG exports will boost the terms of trade (in dollar value) while housing leads the non-mining recovery, and the way things are going the Aussie will be back to the two-thirds level (~67) that thirty years ago, when I started in this game, was considered “fair value”.

Little wonder the RBA left rates on hold yesterday, as every man and his dog expected. Aside from a small nod to “softening conditions” in China and east Asia, Glenn Stevens’ statement was pretty much a carbon copy of the July offering.

Oh and by the way, the Australian manufacturing PMI came in at 51.7, up from 50.4. Given the history of this series it could be 41.7 in September, but let us not forget that Aussie.

And for the record, Japan rose to 51.7 from 51.2, the UK fell to 51.5 from 51.9, the eurozone ticked down to 52.3 from 52.4, and the US fell to 51.1 from 52.7. Some ups and downs there, but interestingly, of the global sub-set of manufacturers – Australia, China, Japan, the eurozone and UK – only China is contracting.

Same Pattern

Wall Street also suffered ongoing second-wave selling last night, which saw the Dow drop 200 points from the open and fall to down 500 points just before a slight kick at the close. The pattern is the same, in that the Chinese data simply provided the excuse, not the impetus.

The acceleration of selling throughout the session was fuelled by the oil price, which fell 8%. On any other day, an 8% fall in WTI would be the stuff of Armageddon, but given WTI has rallied 27% from its low in a heartbeat on short-covering, an 8% drop engenders no great shock.

What was most notable about last night’s session on Wall Street is that the volume was much lighter than it was a week ago, when the first wave struck. The fall in the indices did not suggest the same “Get me out!” levels of desperation as last week, more a dearth of buying interest. The smart money is waiting for the muppets to run back and forth in panic before the fear is shaken out and buying opportunities become more secure.

In the background, of course, is Fed debate, and thank God there’s only a couple of weeks to go before we’ll all be put out of our misery. The interesting point to note here is that the US ten-year bond yield closed last night at 2.17%, which is basically where it was at the end of June. The fives and thirties also are sitting around similar yields. The US bond market priced in a slower global economy long before the US stock market did. And as Fed speculation has ebbed and flowed, has just sat there.

Commodities

West Texas and Brent both fell 8% last night, with WTI falling US$3.88 to US$44.22/bbl and Brent falling US$4.42 to US$48.52/bbl. Once again, the press has cited “weak Chinese data”.

This would suggest the oil market assumed that Caixin’s 47.1 flash estimate would leap back up to over 50 as Chinese manufacturing surged in the last week of August, and that markets were simply stunned when this didn’t happen. In other words, rubbish.

WTI jumped 6% two days in a row on thin air short-covering and the sellers came back in last night. It’s common or garden volatility as is always the case when markets adjust to reality rather suddenly.

Base metal trading re-opened in London after a night off for the public holiday, and prices fell. See all of the above. The big moves were in copper, down 1.5%, and nickel, down 3%. Tin actually rose 3% following a surprise drop in inventories.

Iron ore was steady at US$55.70/t.

The falls in commodity prices belied a 0.7% fall in the US dollar index, but the standard converse relationship has been put aside in this volatile period. Gold, nonetheless, rose US$5.40 to US$1139.90/oz.

The Aussie is down 1.3% at US$0.7017, and not because the RBA didn’t cut yesterday.

Today

The SPI Overnight closed down 62 points or 1.2%. The question is whether this is just a double-up reaction to Wall Street’s reaction overnight to the Chinese data, given Bridge Street reacted yesterday.

Or are we going to retest the lows on heightened levels of fear? The Dow closed last night at 16,058, over 700 points above last week’s intraday low. The ASX200 closed yesterday at 5096, about 170 points above last week’s intraday low. The selling on Wall Street last night lacked conviction, and was more about lower prices than heavy volume.

We can put to bed a V-bounce, which no one had expected anyway, and now debate whether a W-bounce features a higher low or a lower low. At the moment the mood favours higher, but it depends on just how bold you want to be.

Australia’s GDP is out today. Look for 2.2%.

US private sector jobs numbers are out tonight ahead of Friday’s non-farm payrolls. If better than expected, Wall Street will lock in September. As to how the market reacts will be interesting.

Rudi will make two appearances on Sky Business today. First at 5.30pm (Market Moves) then again at 8pm when he will host Your Money, Your Call Equities.

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The Overnight Report: Second Wave

By Greg Peel

The Dow closed down 114 points or 0.7% while the S&P lost 0.8% to 1972 and the Nasdaq fell 1.1%.

Normal Programming

Yesterday Bridge Street witnessed what you might call a bog-standard second wave sell-off having rebounded sharply out of the depths of the correction last week. Markets never V-bounce off a bottom, they always suffer a choppy consolidation period and perhaps even a new low before an existing bull market trend can be re-established.

The clear case in point of such a second wave was provided yesterday by the energy sector. The oil price jumped 6% overnight, yet the local energy sector closed down 1.2%. This just goes to show we were seeing a combination yesterday of traders who bought perceived oversold stocks at their depths taking quick profits, along with Johnny-come-lately selling from investors who were caught in the headlights the first time around.

It was also the last day of the month, and as such a time to put to bed the worst month for the index since the GFC. Most of the damage was done from the opening bell, but there was some further choppiness as the day proceeded. Selling was relatively even across sectors with one exception. With a day’s delay, investors decided Woolies is very sick patient waiting for help to arrive in the form of a new CEO. The consumer staples sector outperformed to the downside with a 2.5% fall.

The lesson for Woolies is: never take the status quo for granted.

Yesterday’s private sector credit data were mildly encouraging, not that the stock market is focused on such trivialities as the local economy at present. Growth of 0.6% in July came in just ahead of forecasts, thanks to a better than expected gain in business credit, which rose 0.7% alongside housing credit’s 0.6% growth.

Housing credit is still running at 7.4% annualised growth to business credit’s 4.8%, which remains low by historical standards. Investor housing credit also rose by 0.6% in the month but – and this is the “but” FOMO buyers might want to pay attention to – it’s the slowest monthly pace of investor credit growth since October 2013.

[FOMO: fear of missing out]

June quarter data showed gross company operating profits fell 1.9%, split into a 1.1% gain for non-mining and a 9.8% plunge for mining. Net profits are down 3.9% year on year, but it’s all about commodity prices. Wages have only risen by a paltry 1.6% over the same period, but they did rise 1.1% in the June quarter, which is mildly encouraging.

Just Some Bad Apples

The Chinese government has confirmed it will no longer be sending in the Plunge Protection Team to prop up the stock market, as the source of the selling has been identified. Jolly good work chaps. Apparently some two hundred rogues were spreading false and malicious online rumours about the market, fuelling the panic.

And there we were all thinking it was a correction.

These despicable outlaws have now publicly confessed and expressed remorse for their actions. With the Communist Party’s PR exercise now over, it is unclear what their fate will be. But having informed the people it was all their fault, at least the families of the rumour mongers will now live.

Five Year Flop

A similar second wave of selling was seen on Wall Street last night, ensuring the worst month for the Dow in five years and the worst August in seventeen. But unlike the Australian market yesterday, the US market was keen to buy energy stocks on rising oil prices.

Having leapt 6% on Friday night, WTI jumped another 6% last night to mark a 27% rebound from the last intraday low. It looks like traders had set themselves particularly short, likely expecting to see the 2009 low price retested. While a 27% rebound in the oil price is very nice for global energy companies in the short term, it’s actually self-defeating in the longer term. If oil cannot sit at sub-50 prices for any length of time, requisite supply curtailment among high-cost marginal North American non-conventional producers will not transpire.

The rise in the WTI price nevertheless helped turn an initial 200 point drop in the Dow from the opening bell, and some renewed feelings of nausea among investors, into only a 100 point drop by the closing bell.

The mood on Wall Street is one of “this is what we expect to see anyway”, so there’s not too much concern. Tonight it will be September in the US, and we all know what that means. T minus 17 days and counting.

Commodities

The trigger for the oil price spike this time around was a US Energy Information Agency report noting US crude output in June fell 1.1% from May. But it’s all just an excuse really. And if WTI heads back to 60 from whence it fell, production will increase again.

West Texas rose US$2.77 to US$48.10/bbl and Brent rose US$3.04 to US$52.94/bbl.

The LME was closed last night for a UK public holiday.

Iron ore rose US20c to US$55.70/t.

Gold is steady at US$1134.50/oz and the US dollar index is off 0.2% to 95.97.

No one expects the RBA to cut today, but the Aussie is down 0.7% at US$0.7112.

Today

The SPI Overnight closed down 21 points or 0.4%.

Today is manufacturing PMI day across the globe, including in China.

Locally the focus will be on the June quarter current account and terms of trade ahead of tomorrow’s GDP result. Monthly building approvals numbers are also due, and the RBA will meet.

There are no earnings reports today (of any consequence).

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The Monday Report

By Greg Peel

Just A Flesh Wound

Another positive session on Bridge Street on Friday ensured the index actually finished up for the week, as did the grey hair count. But Friday’s session was all about commodity prices, and subsequent 3.7% gains for both the materials and energy sectors. Take those sectors out, and it was otherwise a typically quiet Friday featuring smallish moves.

The August reporting season effectively came to a close on Friday, and now that the volatility of last week appears to have settled down, at least for now, market attention can be concentrated on the score cards and assessments that will follow.

As FNArena’s Result Season Monitor winds to a close, we can note the beat/miss ratio is around 1.6 and the broker ratings upgrades to downgrades is around 3 to 1. If it wasn’t for what’s been going on in the macro realm this month, we might call it a successful season. If we compare it to the last February reporting season, it saw a beat/miss ratio of 1.1 and downgrades outnumbering upgrades almost 2 to 1.

The problem is that February’s result season occurred in a rally, after which the ASX200 closed at 5600 on its way to 6000. At that point, many an analyst was calling stocks overvalued, particularly yield stocks, hence the big downgrade count. In stark contrast, the August season occurred in a correction which accelerated as the month wore on. The index closed on Friday at 5260 having seen 4930, and at the back end of the season, a lot of those upgrades reflected oversold calls as a result of the market sell-off as opposed to micro valuation calls based on earnings results.

The good news for the beaten down commodity names is that commodity prices rallied strongly again on Friday night. The rallies were driven by a combination of short-covering and buying on a belief in oversold levels. At some point commodity prices will settle down again and consolidate, likely at levels lower than a couple of months ago but not as low as the depths of last week.

Relief

Wall Street, too, settled down a bit on Friday night and in S&P500 terms, finished the week higher. The Dow fluctuated on Friday between a hundred points down and unchanged, but in terms of last week, this was a quiet session.

All talk on the Street now is of whether the snap-back rally signifies a bottom is in place, or whether it is just a typical precursor to another leg down. Many assume it will all come down to the September Fed meeting on the 17^th.

But to that end, central bankers around the globe don’t seem too concerned about recent market volatility, and also believe the markets are overblowing China slowdown fears. That was the mood emanating for the Jackson Hole symposium on the weekend, which was attended, among others, by the vice chairman of the Fed, the vice president of the ECB and the governor of the Bank of England.

Fed vice chair Stanley Fischer suggested in an interview that nothing that occurred last week will stop the Fed raising at the September meeting. This did not mean the Fed had already reached that decision, he added (personally, I believe otherwise), and it will still come down to data releases over the next two weeks. This Friday night’s US jobs report will basically be the decider, he hinted.

He also gave the first indication of what the move might actually be, suggesting the existing zero to 25 basis point funds rate would be moved to 25-50 basis points. But the most interesting point to note is that despite yet another almost-confirmation from a Fed official, Wall Street didn’t blink. It closed flat. Just how worried is Wall Street about that rate rise? Not all, I suggest.

And as an added element, the BoE governor said he expected to raise UK rates fairly soon. The BoE went very close in the wake of the London Olympics, which provided a big boost to the UK economy, until it became clear it was just a bit of a honeymoon.

Commodities

West Texas crude jumped US$2.71 or 6.4% to US$45.33/bbl on Friday night, to mark a 20% rally from the intraday low of a week ago. Brent rose US$2.30 or 4.8% to US$49.90/bbl.

There is little doubt short-covering was heavily involved, and one outside trigger cited by traders was news Saudi Arabia had sent troops into northern Yemen. News of tropical storms hitting Cuba provided a reminder hurricane season has now begun. Traders also cite genuine buying from those believing last week saw oil trading at oversold levels.

Another seasonal issue for the US oil market is nevertheless the end of the summer driving season, now approaching, and the annual refinery maintenance season which typically follows. When refineries shut down, crude supply builds up in storage centres such as Cushing, forcing down prices until maintenance is complete.

So as with Wall Street in general, there is debate over whether oil has seen the bottom, or could yet plunge once more.

In mixed trade on the LME on Friday night, aluminium, lead and zinc surged 3% and tin 2%, while copper and nickel stayed put. Copper is the only base metal not to close higher for the week. Again, short-covering has been cited among metals, and also the fact it’s a long weekend in the UK and thus the LME is closed tonight.

Iron ore jumped US$2.20 or 4% to US$55.50/t.

With margin call selling now easing, gold found renewed support on Friday. It’s up US$8.90 at US$1133.70/oz.

Commodities rallied on Friday night despite another gain for the US dollar, which is up 0.3% to 96.11 on its index. The Aussie is steady at US$0.7165.

The Week Ahead

The SPI Overnight closed up 12 points on Saturday morning.

As noted, this Friday night sees the US non-farm payrolls report. If it’s positive, lock in a September rate rise.

Over the course of the week, the US will also see the Chicago PMI tonight, construction spending and vehicle sales on Tuesday, private sector jobs, factory orders and the Fed Beige Book on Wednesday, and the trade balance and chain store sales on Thursday.

This week also sees PMIs from across the globe, with manufacturing numbers mostly due on Tuesday and services on Thursday. There are a couple of public holidays about the place this week nonetheless so some dates vary. China is closed on Thursday and Friday.

After a big month of earnings releases, suddenly it’s a big week for Australian economic data.

We’ll see June quarter company profits and inventories today, and the current account including terms of trade tomorrow, ahead of the GDP result on Wednesday. Economists are forecasting 0.4% quarter on quarter growth and 2.2% year on year growth, down from 0.9% and 2.3% for the March quarter.

Monthly data this week include the TD Securities inflation gauge and new home sales today, building approvals, house prices and the manufacturing PMI tomorrow, and retail sales, the trade balance and the service sector PMI on Thursday.

The RBA will meet tomorrow and leave rates on hold, but commentary around China and market volatility will be interesting.

There are a handful of tardy results reports to trickle in this week, but more notably this week sees the ex-divs starting to build. We’ve already had some biggies during result season, but over the course of September a substantial number of stocks will go ex, keeping a lid on prices.

Rudi will appear on Sky Business on Wednesday at 5.30pm and on Thursday at noon. Also, on Wednesday late (9pm) he will host Your Money, Your Call Equities.

For further global economic release dates and local company events please refer to the FNArena Calendar.

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The Overnight Report: Crude Awakening

By Greg Peel

The Dow closed up 369 points or 2.3% while the S&P gained 2.4% to 1987 and the Nasdaq added 2.5%.

Reset

It was actually a very dull day on Bridge Street yesterday, which seems weird in the context of excessive global volatility this week. Sure, the index closed up 1.2%, and hooray to that, but it all happened at the opening bell and then nothing happened for the rest of the session.

Significantly, we can note that the ASX200 opened on Friday morning a week ago at about 5250. Yesterday the index closed at about 5250. Last Friday morning the Australian stock market was driving along happily and then hit a wet patch in the road, sending it swerving and fish-tailing and causing much panic among the occupants of the vehicle as the driver wrestled with the wheel, before regaining control. Hearts were beating fast, but the panic subsided.

Earlier in August the ASX200 broke down through the bottom of its longstanding trading range, being 5500, on the back of a Chinese devaluation that signalled to the world the slowdown in the Chinese economy is more significant than was assumed. The adjustment was worth 250 points. This week has seen market panic of the irrational kind, simply reflecting Wall Street’s failure to keep up with reality.

Wall Street had now adjusted.

Yesterday the Australian market opened up to about 5250 and then went nowhere, because we were back where we were a week ago. From here, it’s a case of now what? It would depend on what happened on Wall Street last night, and to that end, Australian investors sat tight yesterday and waited for the next signal.

There has, of course, been a result season going on in the background, but this has been completely swamped by macro volatility. We have also seen a couple of important Australian economic data releases this week but they, too, have been lost in the wash. Wednesday’s June quarter construction work numbers were better than expected, and, despite the dooming and glooming of the nightly news, yesterday’s June quarter capex numbers were also better than expected.

Private sector capex is still going down the tubes, and is forecast to go further down the tubes based on the capex intentions survey, but we knew that already. It’s all about the winding down of mining investment, stage one, and the winding down of LNG investment, stage two. Yesterday’s numbers showed no change to those forecasts. The difference lies in the non-mining sector.

Here we saw a 3.5% rise in capex in the June quarter, offsetting the 11% fall in mining to provide a net 4% fall. Moreover, the third estimate of FY16 capex intentions, which the June quarter survey provides, jumped 10% on the second estimate provided with the March quarter numbers. Such an upgrade is actually higher than one might historically see in “normal” times. Indeed, the 24% jump in manufacturing sector intentions (the balance being services) is a record.

Just goes to show what can be achieved when your currency depreciates by a third. Maybe the PBoC is on to something.

Short-Covering

Following this week’s data releases, economists will now be improving their Australian June quarter GDP expectations a little. Meanwhile on Wall Street, last night featured a revision of the US June quarter GDP result before the opening bell.

Just to recap, the US GDP is delivered in three goes, one, two and three months after the end of the quarter. In the case of the June quarter, last month’s first estimate represented April numbers extrapolated over three months. That suggested 2.3% annualised growth. Last night’s second estimate adds in May numbers, and extrapolates the two months over three. It came in at 3.7% growth, when economists had expected 3.3%.

Next month we’ll see the “final” revision over all three months, but the number can be revised again at the release of the first estimate of the September quarter GDP. So it’s all a bit uncertain, but suffice to say on last night’s number it looks like earlier expectations that the US economy would rebound out of the weather-affected March quarter, just as it has done last year, may have been accurate.

Thus from the opening bell last night, Wall Street was faced with the reality that Wednesday night’s session had featured heavy buying through to the close, and that the US economy is actually doing pretty well. Forget about Fed rate rise fears, everyone’s booked a rate rise in. There had been much talk over the past couple of sessions that US indices may be set for another leg down, but they were dismissed last night, at least by those with short positions.

The Dow opened up sharply and continued to rise through the morning to be up almost 400 points. While leading names were still being bought, as they were on Wednesday, it was notable that some of the biggest movers to the upside on the day were the most shorted names on the market. In other words, the shorts were covering.

Then the short-coverers met the too-slow-to-sell-the-first-time-around brigade early in the afternoon, and the Dow headed back down to almost square again, briefly. In the last hour the rally resumed and by the close, the day’s high was almost re-established.

Among the most shorted stocks on the US market are energy services names, just as they are in Australia. If ever there was a reason to cover shorts in this long beaten-down sector, it’s when the oil price bounces 10%.

Commodities

The trigger, supposedly, was now that OPEC member Venezuela, who needs about US$120/bbl oil to fund its budget commitments, has called for an emergency OPEC meeting, and also requested discussions with Russia, who is also haemorrhaging. The implication is that OPEC members would agree to production cuts.

It’s all well and good, but (a) it’s not going to happen, and (b) there is no OPEC. Saudi Arabia effectively disbanded the cartel when it dismissed production cuts late last year and started dumping cheap oil on the market in order to kill off US shale growth. And if you think Iran is going to stick to a quota, good luck with that.

Oil prices bounced last night because they had become oversold, just like stock markets. The relationship between oil prices and the US stock market is one of a “who’s leading who” constant feedback loop. The bounce in the stock market is really why oil bounced. Short-covering.

Rather significant too. The biggest intraday move since 2009 saw both West Texas and Brent crude prices up over 10%, and on our 24 hour snapshot, West Texas is up US$3.74 or 9.6% at US$42.62/bbl and Brent is up US$3.93 or 9.0% at US$47.60/bbl.

And to further dismiss the OPEC argument, we can note the same thing happened on the LME. Copper jumped 4%, as did zinc, and nickel 5%. Aluminium, lead and tin all rose 1.5-2%.

Iron ore rose US20c to US$53.0/t.

The gains came despite another 0.5% rise in the US dollar index, GDP supported, to 95.78. In this context, gold still managed to hold its ground at US$1124.80/oz.

The US dollar index, which doesn’t contain the Aussie, and the Aussie dollar, have been tracking each other all week, directionally. The Aussie is up 0.7% to US$0.7169.

Today

I suggested at the start of this Report that yesterday the Australian market adjusted back to where it was and waited for the next signal from Wall Street. That signal is positive, and commodity prices have all rebounded strongly. Hence, the SPI Overnight closed up 91 points or 1.8%.

Today is the last big day of the local results season, and hallelujah to that. Only a few stragglers will be left to report early next week as August comes to a close.

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The Overnight Report: And On The Seventh Day…

By Greg Peel

The Dow closed up 619 points or 4.0% while the S&P gained 3.9% to 1940 and the Nasdaq jumped 4.2%.

Tentative

Investors taking the punt on buying the Australian market on Tuesday will no doubt have felt comfortable when turning in for the night as Wall Street staged a decent comeback, only to awake to find the rally had failed miserably at the close. This was the situation as the ASX200 opened yesterday with a swift 86 point plunge.

Whether or not the earlier 5100 support level still remains viable given we’ve been well below 5000 this week, the drop through that mark from the open appeared to bring the buyers steamrolling back in. On Tuesday we ignored the Chinese casino altogether. Yesterday we ignored Wall Street as well, albeit tentatively, as the index banged its head against the flatline several times before finally punching through in the afternoon.

The drivers of yesterday’s ultimate 35 point rally, or 121 from the intraday low, were the same large cap and index-dominant sectors that had been most heavily sold – the banks, materials, energy and supermarkets. On a 2.8% gain, energy was the clear winner, as investors pondered the reality that even at current low oil prices, some oil & gas names had simply been sold down too far. And for a couple of days, WTI crude has managed to hold its ground just under 40.

We could also cite a better than expected result on Australian June quarter construction work done, released late morning, as a fillip.

Desperate

The afternoon rally in Australia came despite a near 4% fall in Shanghai in the Chinese morning session, again confirming we’ve learnt to ignore such frivolity. But interestingly, Shanghai did then proceed to correct on its own, to be up by a similar amount after lunch, before fading away late in the session to close down 1.8%.

We know that the Plunge Protection Team remains suspended, so Chinese investors appear to be working it out for themselves, but that did not stop another typical knee-jerk, scatter-gun response from the authorities after the final bell.

Last night the PBoC injected US$22bn of liquidity into the Chinese banking system, following on from the previous night’s interest rate and RRR cuts. And then the government announced another witch hunt in the stock market, this time promising to search out fraudulent activity at the stock market regulator itself, insider trading within at least one securities firm, and rumour mongering in general. The state-owned press called for government to “purify” the market.

The state media also stepped up its campaign against the evil foreign forces behind the Chinese stock market rout, and particularly blamed the Fed.

No doubt the Chinese punters we see each night on the news in front of the Shanghai ticker are engaged in heated debate over the monetary policy vagaries of the US Federal Open Market Committee and the ramifications for the Chinese domestic economy, as they clutch their porcelain cats with waving arms and buy any stock named “Lucky” as long as there’s an 8 in the price.

Rebound

Stability on the Chinese market, and the PBoC’s injection of liquidity, were not enough to overcome nervousness on European markets last night. The late plunge on Wall Street on Tuesday night had Europe spooked, sending the major indices down around another 1.5%. But whereas typically the mood in Europe dictates the opening on Wall Street, this time it was different.

The US indices rocketed up from the open, sending the Dow up over 400 points. The snap-back was aided by positive US data, in a week when up to now, no one has been paying any attention to economics. US new durable goods orders rose 2.0% in July. While this is less than June’s 4.1% jump, it was much better than economists had expected. And importantly, the core measure (ex transport and defense) jumped 2.2% -- its biggest gain in twelve months.

The opening spike nevertheless proved to be just that, and by lunchtime the Dow was only up around 100 points. Oh no, here we go again, thought Wall Street. But along came Bill Dudley.

In days gone by, the Fed’s Jackson Hole central bankers’ symposium was where Ben Bernanke chose to hint at fresh QE. Then he stopped attending, and indeed Janet Yellen is not there this year. Nor is Mario Draghi, who usually pops in. So the Hole has lost its importance of late. But last night New York Fed president William Dudley caused a stir when he responded, having been asked whether recent global market volatility would impact on a possible September rate rise, that the case for a September move was now “less compelling”.

And on that news, Wall Street began to rally again. Never mind that Dudley went on to say that there’s plenty of time between now and the September meeting (20 days) for data releases to make September compelling once more. Either way, commentators suggest Dudley’s comments spurred on Wall Street because it means a September hike is now off the table.

Hello? Did no one else pick the absolute clanger in Dudley’s statement? Since when was the case for a September rate rise ever compelling in the first place, as far as Fed rhetoric has suggested up to now? All we’ve heard is maybe/maybe not, depending on the data. Dudley’s comments only serve to reinforce my personal view that the Fed long ago decided to hike in September, and that the ensuing data would not determine if it would, only if it wouldn’t. So far the data have offered no reason not to go ahead.

Furthermore, the Fed has always been anxious not to spark severe market volatility with its rate hike announcement, which is why it has been at pains to insist the market should not be scared of a rate rise per se, because the tightening process will be a very long and incremental one. Well guess what? We’ve now had that volatility. It’s now out of the way. And assuming Wall Street doesn’t plunge another 10% between now and mid-September, that rate rise is locked in.

By the way, the US ten-year bond yield rose another 4 basis points to 2.17%.

Whatever the case, by late afternoon it was apparent that the published sell-on-close orders for the session were nothing like the magnitude of Tuesday night. A short-covering rally ensued. By the close, the Dow’s 619 point, 4% rally represented the biggest one-day percentage in four years and the biggest points gain since the wild volatility of November 2008, when the Dow was only half the value it is now.

After six days of heading down, Wall Street finally rose. Unlike Tuesday night, last night featured heavy volume, extensive breadth, and a clear feeling of buyer conviction. No one is prepared to call a bottom yet, as usually there has to be nervous, choppy activity and a possible retest of the lows before a bottom can truly be called. But let’s just say there were a lot of smiles on the NYSE floor at 4pm.

Commodities

This was not the case on the LME. Despite the overnight Chinese liquidity injection, and despite the strong US durable goods number, copper plunged 2.8% last night. Tin and zinc also fell around 3%, while aluminium and lead lost 1% and nickel, for once, was relatively steady.

Iron ore fell US20c to US$53.10/t.

West Texas crude fell again, but only by US42c to US$38.88/bbl, while Brent actually rose US22c to US$43.67/bbl.

Not helping commodity prices was a big jump in the US dollar index, by 1.4% to 95.31, which accompanied the “risk on” trade on the stock market.

To that end, gold fell another US$15.20 to US$1125.10/oz, likely still feeling the heat of margin call selling.

Today

The SPI Overnight closed up 83 points or 1.6%.

Locally, today sees the release of June quarter private sector capex numbers.

Tonight the US June quarter GDP number will be revised.

And it’s another enormous day for the local results season.

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The Overnight Report: Schrodinger’s Bounce

By Greg Peel

The Dow closed down 204 points or 1.3% while the S&P lost 1.4% to 1867 and the Nasdaq fell 0.4%.

Night Watchman

Beijing finally acted last night, as they had been expected to do so ever since Friday night. It took another 7.6% fall in the Shanghai index yesterday, on top of Monday’s 8.4% fall, to spur the authorities into action. Maybe that phone call from Washington helped too.

The PBoC has again cut its interest rates, by 25 basis points for the lending rate to 4.60% and the deposit rate to 1.75%. It has also cut the bank reserve requirement ratio by 50 basis points.

Yesterday’s second big plunge on the Shanghai exchange is further evidence Beijing has apparently held back its Plunge Protection Team this time around, having wasted billions in foreign exchange reserves vainly attempting to hold up the stock market previously. But PPT efforts are immediate, while monetary policy tweaks take some time to flow through an economy. So it will be interesting to see whether Chines investors, if that’s what you call them, respond positively or disappointedly to the news today.

Snap-Back

The important point to note here is that the PBoC’s announcement came after the close of the Shanghai Exchange last night, hence long after the close of the ASX yesterday. Thus despite what you might read in the popular press today, the rate cut had nothing to do with yesterday’s rebound on Bridge Street.

And given the Shanghai index opened sharply lower at 11.30am Sydney time yesterday, we can suggest that those buying Australian stocks yesterday had decided the Chinese casino is really not much of an indicator of anything. A 16% fall in the ASX200 through the 5000 strong support level (reflecting the Chinese slowdown, sure, but more immediately representative of Wall Street waking up to itself) is a buying opportunity, they decided.

At least in the banks. For it was the banks that stood out distinctively in yesterday’s 2.7% rebound for the ASX200, driving a 3.9% gain for the financials sector. Next closest was materials, meaning the big two miners specifically, with a 2.4% gain. Energy, which was summarily crushed on Monday, managed only a 0.6% rebound. The telco actually went backwards by another 0.8% (ex-div).

One might ask: Just what impact does a Chinese slowdown have on Australia’s banks (ANZ’s Asia exposure aside)? They don’t lend much to Australian resource companies, who suffer most from a Chinese economic slowdown. There is no flow of manufactured goods from Australia to China of any note. Australian banks are predominately representative of Australia’s domestic economy – mortgages and business lending. The Aussie is now down to 71, and that’s good for business.

But in the bigger picture, was yesterday’s snap-back rally representative of a cat that is alive and kicking, dead, or simply pining for the fjords?

Such snap-backs are part and parcel of big corrections, and never will a stock market crash to a point and then V-bounce straight back into a bull market. It must first consolidate, and that usually means falling further yet to test intra-day lows. Typically when a market has cemented a bottom, it is not immediately apparent until you realise it seems to have stopped going down.

Yesterday morning the SPI futures were calling a 181 point drop for the ASX200. The index did fall as many as 73 points from the bell, which took us well below 5000 support to an intra-day low of 4928. Remember that number. Then the buyers formed ranks and marched in. By midday, the rebound was in place. There was little movement all afternoon, despite the Shanghai index quietly sliding away.

Presumably the market was waiting, all afternoon, for the expected announcement from the PBoC.

Failed

And so it came, just in time for the open of the ridiculously volatile European markets. Germany duly bounced back 5% and France 4%, and even the usually more staid London market rebounded 3%. The buying carried over into Wall Street, and the Dow shot up as well, to be up 440 points late morning as the European markets closed.

But traders were not convinced. The snap-back lacked breadth, lacked volume, and thus lacked conviction. By lunchtime doubt had crept in, and old hands knew that reversals don’t happen so easily. The indices began to lose altitude.

The NYSE was one of the last financial exchanges to go electronic, but in true American anachronistic form, the opening and closing rotations are still conducted by designated market makers – humans. So as not to cause chaos at the final bell, the NYSE publishes the dollar amount of the balance of buy- and sell-on-close orders during the last hour of trade.

A typical session will see half a billion one way or the other. A summer session usually less. When the balance began building to the sell-side last night, to the tune of 1.5 billion, the US indices turned tail. When that figure hit 3.5 billion, the Dow turned negative, and kept falling to its 200 point loss.

The S&P500, which is what the professionals pay attention to, did not manage to rally back to the intraday high point reached on Monday night. This is a negative signal. The assumption now is that the intraday low must be retested, which is when the Dow was down 1100 points.

Or maybe not. It is a market after all.

What is interesting to note, nonetheless, is that the US ten-year bond yield shot up 14 basis points to close at 2.14%. The talk from the smart money – the bond traders – is that the global correction may not be enough to keep the Fed at bay next month, and if it is, it won’t prevent a December hike.

Commodities

The US dollar index has rebounded 0.6% to 93.97. The good news is that the Aussie lost big-time on the cross-rates on Monday, particularly the euro (See: Ansell), so it fell against the greenback despite a big fall in the US dollar index. On last night’s dollar rebound, the Aussie is down another 0.2% to US$0.7130.

Commodity prices inevitably rebounded last night after Monday night’s shellacking, and in response to the PBoC. Aluminium and copper managed 2% and zinc 1%, while the other base metals struggled to sub 1% gains.

Iron ore is unchanged at US$53.30/t.

West Texas crude bounced 3% but the US$1.24 gain still keeps it under 40 at US$39.20/bbl. Brent bounced 2% or US83c to US$43.45/bbl.

I mentioned yesterday that while gold might be a safe haven in times of market volatility, it is also the first asset to be sold to cover stock market margin calls. Gold is down US$14.80 to US$1140.30/oz.

Today

For what it’s worth, the SPI Overnight closed down 47 points or 0.9%. In times of extreme volatility, futures markets tend to go a little nuts, as was evident in yesterday’s 181 point overnight drop ahead a 136 point gain in the physical.

That said, we most likely need to go down again before we can go up again, if that makes sense.

Glenn Stevens will make a speech today, which will be interesting in the context. June quarter construction work numbers are also out, reminding us the Australian GDP result is due next week.

Today is the worst – if you look it at from the perspective of someone who has to report on every one of them – day in the reporting season, with an avalanche of reports due.

Overnight BHP Billiton ((BHP)) reported its worst profit in years, and its shares closed up 5.5% in London.

Strap yourselves in, take solace in the knowledge we’ve been here plenty of times before, and whistle a bit of Monty Python.

Rudi will appear on Sky Business' Market Moves tonight, 5.30-6pm.

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The Overnight Report: Multiple Contraction

By Greg Peel

The Dow closed down 588 points or 3.6% while the S&P lost 3.9% to 1893 and the Nasdaq fell 3.8%.

Don’t Panic

The important point to note here, before the inevitable comparisons are made with 2008, is that this is not a financial crisis.

There is a risk of currency crunches in smaller emerging markets putting pressure on cheap US dollar loans, there is a risk of emerging market oil producer countries coming under enormous fiscal pressure, and there is a risk that a wave of marginal US oil producers will default when oil price hedges roll-off shortly, pressuring US lenders.

But the same US banks that needed to be rescued in 2008 are now sitting on mountains of cash. Systemically important banks around the developed world, including the Big Four in Australia, are loaded with capital. If we look at this from the perspective of what is causing the panic across global markets, it is not China per se, even though China is a root source of the issue. It is Wall Street.

Is a manufacturing PMI of 49.1 the end of the world, particularly when China’s economy is transitioning towards a much greater service sector contribution (PMI>50) and consumer-driven GDP? No. Is an 8.5% drop on the day for a laughable casino known as the Chinese stock market, in which a very small proportion of the Chinese population invests, reason to run screaming? No. But what is alarming is when Wall Street falls over 500 points (to use the Dow as the reference) after several steep falls and then backs it up again last night, when in theory the US economy is currently one of the positive drivers among the major global centres.

With the exception of the energy sector, there is nothing wrong with US corporate earnings growth at present. What is wrong is that for three years in a row, Wall Street rallied 15% when earnings only rose 5%. This represents “multiple expansion”, empirically measured as increased price to earnings ratios, which imply investors are prepared to pay more for the same level of earnings than they did the year before. PE increases reflect sentiment, not reality. So if sentiment turns…

After the three years of rally from the US debt ceiling correction of 2011, this year has seen Wall Street top out into a stationary range. Despite constant talk of the market being long overdue a correction, investors have stoically held out on the expectation the reality would catch up with the sentiment. But from a global perspective, which plays into Wall Street earnings, it hasn’t. And the Fed wants to raise rates.

The sentiment had to give, meaning PEs had to come down. This is what we are now witnessing. The only problem is, it’s happening at a speed that is putting the frighteners through the market. And fear begets fear.

Technical Test

The Australian market has not rallied back from the GFC depths to the same magnitude of Wall Street, given the drag of a long period stuck with an overvalued currency. Therefore our PEs have not been as overly elevated, but that’s never going to be enough to stem the immediate panic of days like yesterday on Bridge Street.

It seems like an irrelevant aside right now but one may recall there is a local result season currently underway. At around about the halfway mark (on number of reporting stocks, not time), the FNArena Result Season Monitor is showing a beat/miss ratio of 1.5 to 1, and a broker ratings upgrade/downgrade ratio of 70/26. Now, stock analysts look at the micro picture of stocks and their sectors (bottom-up) and not the macro of overlaying global economic conditions (top-down) and one might suggest these upgrades may look a little foolish right now, but the point is there is nothing wrong with Australian corporate earnings at present either.

Yesterday’s 4% plunge saw every sector finish well into the red, but the emphasis was on the cyclicals while defensives “outperformed”, as they should during such times of panic. Energy copped the brunt with a 6.2% fall, and materials chimed in with 4.6%. At the other end of the scale were consumer staples, down 2.8%, healthcare, down 2.3%, and utilities, down 1.7%. By rights the telco should be defensive and the banks should fit somewhere in the middle, but unfortunately in market cap terms when you sell Australia, you must sell these big names. Hence telcos fell 3.0% and banks 4.6%.

The technicals come firmly into play at such times and here we note the ASX200 initially tried to recover early in the session after support at 5100 was breached, only to be swamped again as the Shanghai market opened. That level gave way without a fight and so the next level to watch was the oh so very familiar 5000 – the level that for such a long time was the brick wall of resistance through which the index would not pass until finally breaking through in 2013.

Yesterday the ASX200 marked an intra-day low of 5001 before closing slightly higher at 5014. The futures are suggesting we can kiss what should be a cement floor of support goodbye today, as the SPI Overnight closed down 181 points. But it may all come down to Beijing.

Beijing Phone Home

Despite a 500 plus point Dow fall on Friday night sparked by the weak Chinese PMI, Wall Street traders were convinced Beijing would respond with fresh monetary policy initiatives – rate cut, RRR cut or both – on the Sunday as the authorities have typically done at such times. But this didn’t happen. That’s why Australia was down 4% yesterday and Wall Street opened down over a thousand Dow points last night.

Fear was exacerbated by yesterday’s 8.5% plunge in Shanghai, which indicated Beijing’s Plunge Protection Team was also absent. What is Beijing playing at? Was the currency devaluation meant to be the final hurrah of stimulus? Or is the Chinese government again caught like rabbits in the headlights, set to react only when panic sets in?

It is understood Mr Obama was last night on the phone to Mr Xi.

Wild

The thousand point opening plunge for the Dow last night lasted all of five minutes. European stock markets were on their way to 4-5% losses but on Wall Street the smart money – mostly institutional investors according to commentary – said this is a great buying opportunity. Of particular note is that at this stage, the S&P500 had booked its long-awaited 10% correction.

At lunchtime, after Europe had closed, the Dow was almost back to square. There followed as wild a ride as any experienced around September 2008. Up, down and all around, it was the weight of sell-on-close orders that finally pushed the average to its second consecutive 500-plus point fall.

On Friday night Wall Street closed on its lows. While commentators are cautious in saying it, last night it looked like a capitulation trade. The session that suggests the bottom is near. But the caveat remains Beijing.

Reinforcing the argument that what we have seen in a week is simply the US stock market correcting rapidly, rather than slowly as it should have done on falling commodity prices and indications all year long that China’s economy was slowing, and on Fed rate rise speculation, is that the reaction in the US bond market was muted.

The US ten-year yield closed down 6 basis points at 2.00%. That is not the stuff of panic, or a flight to safety. Unlike the US stock market, the US bond market has been pricing in slower than expected global economic growth for some time.

Currency markets nevertheless saw further flights to safety. The US dollar index is down 1.5% to 93.37. The Aussie is down 2.4% to US$0.7146. When the dust settles, that is going to look very positive for the Australian economy.

We have seen a flight to gold but the flipside at such times is a need to sell other assets to cover stock market margin calls. Gold is down US$5.20 to US$1155.10/oz.

Commodities

The serious pain was felt in commodities, despite the fall in the US dollar. It must be remembered that volumes on commodity exchanges are thin at present due to the northern summer, in which end-user intermediaries are absent and speculative trading rules the roost.

Aluminium fell 1%, copper 2%, zinc 2.5%, lead 3%, tin 5.5% and nickel 6.5%.

Iron ore fell US$2.30 or 4% to US$53.30/t.

West Texas crude fell US$2.21 or 5.5% to US$38.02/bbl. Brent fell US$2.71 or 6% to US$42.62.

The next words you will hear with regard material and energy sector stocks around the globe will be “consolidation” and “rationalisation”. This time smaller producers are not going to make it.

Today

The SPI Overnight closed down 188 points or 3.7%.

There are a lot of earnings reports out today, but that’s probably not important right now.

An expression that hasn’t been heard for a while, that was popular to the point of tedium in 2008, is “Don’t try to catch a falling knife”. Calling a bottom is fraught with danger. And when it is in place, and confirmed, there will still be plenty of opportunity to buy at much lower valuations.

Don’t panic.

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The Monday Report

By Greg Peel

Manufactured Fear

The action on Bridge Street on Friday can be divided into three distinct periods. From the open, the ASX200 fell around 60 points on the lead from Wall Street which saw the S&P500 break down out of its 2015 trading range. At midday, the flash estimate of China’s August manufacturing PMI was released.

Caixin’s number, which includes a greater proportion of small and medium enterprise businesses than Beijing’s official numbers, ha been tracking lower than the official numbers of late. Being’s July manufacturing PMI came in a 50.0, smack on the neutral point of neither growth nor contraction. Caixin’s July number was into contraction territory at 47.8.

Economists had expected the Caixin number to come in at 47.7 for August so Friday’s flash estimate of 47.1 was not encouraging, and represents a six and a half year low. On that news, the ASX200 took its second leg down, to be down over 100 points on the session.

The third period began at 3pm, when buyers re-emerged. Let’s hope for their sake they were short-covering. Ultimately the ASX200 closed down 74 points, or 1.4%.

While a drop from 47.8 to 47.1 hardly seems like the end of the world, the point is that nothing Beijing has done so far to stem the tide of slowing Chinese growth appears to be working. Global markets have become all wound up with slowing global growth fears this last month, with China the particular target of concern, so Friday’s number was simply a last straw.

There was much speculation as the week ended that Beijing would jump in on Sunday with an interest rate cut, given Sundays are the government’s preferred announcement days. But this has not transpired, possibly because only the week before Beijing pressed the shock and awe button of currency devaluation, and this strategy has not had time to play out.

It nevertheless remained for the rest of the world to respond to the Chinese PMI result in the interim.

Correction

The Shanghai index fell 4.3% on Friday. Japan’s index fell 3%. The German and French stock markets fell 3% and even the usually more subdued London market took a 2.8% hammering.

This was the global picture facing Wall Street as it opened on Friday night. There was no enormous plunge from the open, but rather the indices tracked continuously south all session as investors sold and sold and sold. High-flying momentum stocks such as tech and biotech names were, as usual, among the worst victims. Recent success story Netflix was creamed. But the blue chips copped plenty of downside as well.

It was also an options expiry day, which was never going to help. When the dust settled, the Dow was down 530 points or 3.1%. The blue chip average was down 5.8% for the week and is now down 10% from its high, technically implying a “correction”, as opposed to a pullback.

For four years Wall Street has been waiting for a correction, which typically occur every eighteen months. But the focus is on the broad market S&P500 index, which fell 3.2% on Friday night to 1970, representing 5.8% for the week, but still only 7.7% from the high.

The tech-laden Nasdaq fell 3.5% to be down 6.8% for the week and is down 10% from the high, as is the Russell 2000 small cap index.

August’s breakdown on Wall Street has been building and accelerating for some time. Chinese growth has been an element of concern all year. The Chinese stock market crash caused initial angst, but ultimately Wall Street held its range. Greece caused angst for months before supposedly being resolved, and Wall Street held its range. Fed rate rise debate has raged all year and even as September shortened in the odds, Wall Street held its range.

The tipping point was the sudden Chinese currency devaluation, which signalled to the world Beijing was even more worried than was assumed. This occurred as the second wave of selling in oil markets was underway, culminating on Friday night when WTI traded briefly under forty dollars. Just when we thought it was safe to go back in the water, the Greeks are again going to the polls.

Friday’s Chinese PMI, as noted, was imply the straw that broke the camel.

Is it the capitulation trade? Does the S&P500 need to see the full 10% before this can be called? While having shifted swiftly to the sidelines on Friday night, into cash, safe currency havens like the yen and Swiss franc, and gold, traders were assuming Beijing would act over the weekend. This did not happen. There may be disappointment on Wall Street tonight.

Volatility

The VIX volatility index on the S&P500 started last week at around 12, where it’s been all year. On Friday night alone it jumped 46%, well into fear territory at 28.

Stock market outflows did not turn up in US bonds, as indicated by the US ten-year yield falling only 3 basis points to 2.05%. It went into cash, suggesting a shift to the sidelines to see what happens next. Many a trader has been pleading for a correction for the past couple of years so they can buy again at more realistic prices. Will they now buy?

The US dollar index fell a full percent to 94.80. The greenback has been the high flyer of late among the world’s largest trading currencies, so it now has the furthest to fall. The yen and Swiss franc are considered safe havens, and even the euro is a safer bet at present, with the Fed presumably still eyeing a rate rise. Will the stock market correction take September off the table?

These are the questions to which right now there are no obvious answers. On such uncertainty, stock markets are more likely to keep falling than stage a rebound.

Commodities

While commodity prices have been hit hard of late, they have already been weak for some time, unlike stock markets. Thus the panic seen across global stock markets on Friday was not matched in commodity prices.

They were nevertheless weaker, with copper down 0.5%, aluminium and nickel down 1.5% and tin and zinc down over 2.5%, albeit iron ore is steady at US$55.60/t.

Having traded briefly under forty, West Texas crude closed down US64c to US$40.27/bbl. Brent fell US84c to US$45.33/bbl.

Safe haven gold rose US$8.10 to US$1160.40/oz.

In isolation, the Aussie should have copped a hammering as China’s safe proxy currency, but a fall of only 0.3% to US$0.7319 reflects the big drop in the greenback.

By rights, Australia saw its China PMI reactions trade on Friday. But we only fell 1.4%. The rest of the world fell 3%. For a long time technical analysts have been targeting 5100 as the bottom of an ASX200 correction, were the index to break out of its range to the downside. That’s another 114 points down.

The SPI Overnight closed down 110 points or 2.1% on Saturday morning.

The Week Ahead

It’s going to be one of those weeks in which anything can happen and probably will.

It’s still three weeks to go to the Fed’s September meeting. Sometime next month Greece will go back to the polls, and it may be another month before a government is formed given no party will win a majority. In the meantime we shall have to wait to see whether Beijing simply sweats on its currency devaluation move as being the cannon required, or will panic and add further stimulus to the mix.

Is the Fed still data-dependent, or have things changed? This week sees the release of the Chicago Fed national activity index and flash manufacturing PMI tonight, new home sales, house prices, monthly consumer confidence and the Richmond Fed activity index on Tuesday, and durable goods and a flash services PMI on Wednesday.

On Thursday it’s pending home sales, along with the first revision of US June quarter GDP, while Friday brings personal income & spending and fortnightly consumer sentiment.

This week the countdown begins for Australia’s June quarter GDP result, due next week. On Wednesday we’ll see June quarter construction work done and on Thursday private sector capex.

This week is the final, and by far the most crowded, week of the local reporting season. It’s not shaping up as a great week for the micro stories to dominate given such a macro storm cloud. There are far too many stocks reporting this week to choose highlights. Please refer to the FNArena Calendar (link below).

Rudi will appear on Sky Business on Wednesday at 5.30pm.

For further global economic release dates and local company events please refer to the FNArena Calendar.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided. www.fnarena.com

The Fallout From The Fed Minutes…

By Kathleen Brooks, Research Director UK EMEA, FOREX.com

So, the Fed minutes were considered dovish, which is no surprise since the meeting at the end of July allowed an element of doubt to be thrown in about the prospect of a rate rise next month. The build up to the first rate hike from the US is starting to get tortuous, the market wants clear direction from the Fed, but the Fed is resisting it. Our view is that the decision will come down to the wire, with the market lurching at key employment, wage and inflation data between now and then.

The actual damage done from these minutes is a shift in Fed Funds futures. The Fed Funds futures market is now pricing in a mere 38% chance of a rate hike next month, compared with more than 80% of economists polled by Bloomberg looking for a rate hike. The market is a bit more optimistic of a rate hike in December, with a 66% chance of a move. However, recent events including a sell-off in stock markets and the Chinese currency devaluation has made the market less sure of a rate rise in 2015, and more likely to put their money on a rate rise in Q1, where there is an 83% chance of a rise according to Fed Fund futures.

This is significantly lower than expectations earlier in August, as you can see in the chart below, when the Fed Funds futures was pricing in a 55% chance of a rate rise on the 17^th September FOMC meeting.

From a market perspective, this caution on the prospect of a rate hike next month may trigger some interesting market developments in the next couple of weeks:

It could weaken the dollar index, which is testing a cluster of moving averages at 96.40. Below here opens the way to 94.60 – the 200-day sma – and also the lowest level since June.
A weaker dollar could fuel a short term recovery in commodity prices, Bloomberg’s commodity index is at its lowest level since 2002, and oil looks desperately oversold.
If commodity prices rally then it could be an Indian summer for commodity FX bulls.
It could keep the EUR above water. EURUSD has been stubbornly range-bound around 1.10 and has not fallen as much as expected. A weaker buck could support EURUSD downside in the next few weeks, with 1.0850 a medium-term support level. A break above 1.1220 – the high from 12^th August – is a bullish development that opens the way for more late summer upside from the euro.

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Re-published with permission. Views expressed are not by association FNArena's (see our disclaimer).

Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warrant that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, the author does not guarantee its accuracy or completeness, nor does the author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

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