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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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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By Greg Peel

The Dow fell 368 points or 2.1% while the S&P lost 2.1% to 2035 and the Nasdaq dropped 2.8%.

Alexis Tsipras has resigned as Greek prime minister and dissolved the government ahead of a fresh election next month. Oh God, here we go again.

The Bad Oil

Stop the world, I want to get off.

While it’s frustrating enough that the local market should fall 1.7% yesterday, it’s more frustrating that we were up so solidly on Wednesday. Clearly, no one has a clue at the moment. On Wednesday the market was led up by a strong snap-back rally in the energy sector, which appears to have been triggered by Woodside maintaining an 80% payout ratio when there were concerns this would be reduced.

But 80% of what? In another six months that yield will be worth tuppence ha’penny. One might have argued on Wednesday that energy stocks had reached oversold levels, but that opinion looked a bit foolish yesterday. From yesterday’s opening bell, the energy sector led the ASX200 lower. By lunchtime, energy was still the stand-out on a 4% plunge, while other sectors were weaker but by a much lesser magnitude.

By the afternoon, energy just kept falling and the session morphed into a general sell-a-thon. Materials copped 2%, to be the next worst behind energy’s 5.8% capitulation. The banks had been sold off on Tuesday afternoon, bought right back on Wednesday morning, and held reasonably steady yesterday morning until being sold down 1.7% by the close.

What changed in bank land between Tuesday and yesterday?

The end result is a clear breach of support at 5350, the last stop, technical analysts attest, before 5100. Next month is September, traditionally the worst month of any year and this time around, possibly including the first Fed rate rise, so that 5100 level is not looking overly pessimistic.

The good news, from a technical perspective, is that after the low is locked in at 5100 the pullback will be complete, and the next target is 5800. Just as well it’s that simple.

Going, Going…

After two days of selling, Wall Street had been building up to something more substantial. The falling oil price was driving it home, Fed confusion only adds to the uncertainty, and last week’s renminbi devaluations have heightened fears China is actually slowing much faster than the data indicate.

Emerging markets, in general, have become a major issue. A slowing China means pressure on the economies of all of China’s Asian neighbours. Plunging oil prices threaten to bring down the economies of oil-exporting nations such as Brazil and Russia. Saudi Arabia needs US$90/bbl oil to break even on its government spending commitments. Venezuela needs US$140/bbl – good luck with that. All other exporters lie along that curve between the two.

Lower oil prices should, in theory, provide a welcome boost to oil-importing economies. But two obvious examples are China and Japan. China’s GDP growth is slowing rapidly, and Japan’s was negative in the June quarter. Only Europe seems to be holding its own, but only just.

Then the fear is the Fed raises its rate next month, or even in December, and the resultant jump in the US dollar sends commodity prices lower still and, possibly, creates another Asian currency crisis. There is much concern now amongst US banks over the amount they have lent to small US shale oil producers who are now either under or close to being underwater. If one throws in the towel, hold on for the rush.

And to top things off, the Chinese stock market closed down 3.5% yesterday (most of which occurred after the close on Bridge Street) and now Greece threatens to throw Europe into turmoil all over again.

Cue Satchmo: And I think to myself…

The S&P500 broke down sharply through its 200-day moving average at 2078 early in last night’s session and this time, the buyers did not appear. There had been just too much pressure building. The next stop was 2044 which is the bottom of the trading range the S&P has been stuck in basically all of 2015. For a little while late in the session, that level held, but as the sell-on-close orders mounted, Wall Street breached the bottom of the range.

The S&P closed at 2035. It all sounds very frightening, but actually that’s only 4% from the peak. Commentators have been banging on for ages now that Wall Street is well overdue a 10% correction. The popular suggestion is that the Fed will trigger this. Now that we’re outside the range, it’s a new ball game. Wall Street is down for the year. The Dow closed below 17,000.

Commodities

What is the winner in all of this? Gold. It rose US$18.20 last night to US$1152.30/oz, aided by a 0.7% drop in the US dollar index to 95.74, and talk is now of the very familiar 1200 level been reached once more.

The oils fell again last night, although not so dramatically. West Texas has rolled over into the October delivery contract and in so doing won a reprieve on the curve as far as 40-breach fears are concerned, but a US36c fall last night still has WTI dangling at US$40.91/bbl.

Brent fell US70c to US$46.17/bbl.

Base metals fared a little better, thanks to the fall in the greenback. After a week of selling, copper rebounded 1.7%. Aluminium and zinc regained a percent but nickel and tin went the other way.

Iron ore fell US30c to US$55.60/t.

Falling commodity prices and Chinese slowing fears mean the Aussie is not blindly running in converse to the greenback, as it is down 0.2% at US$0.7337.

Today

The SPI Overnight closed down 66 points or 1.3%.

Reporting season highlights today include Coca-Cola Amatil ((CCL)), Insurance Australia Group ((IAG)) and Santos ((STO)).
 

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available in the FNArena Cockpit.  Click here. (Subscribers can access prices in the Cockpit.)

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author's and not by association FNArena's - see disclaimer on the website)

All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.

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