By Greg Peel

The Dow closed down 239 points or 1.5% while the S&P lost 1.4% to 1942 and the Nasdaq fell 1.2%.

Rising Sun

The Japanese stock market rose 7.7% yesterday. To put that into perspective, had the ASX200 rallied 7.7% yesterday we would have been back over 5500.

Commentary puts the Japanese surge down to a reaffirmation from Shinzo Abe that he still intends to deliver on his promise of a cut to corporate tax rates alongside maintaining significant monetary stimulus in order to revive the Japanese economy. He did not actually say anything new, and given the success of Abenomics has been clearly lacking to date, no doubt reaffirmation was a political move rather than a pragmatic one.

Abe nevertheless chose to speak at a convenient time, when the world had suddenly become excited about speculation Beijing is set to introduce another round of fiscal stimulus measures to support recent monetary measures. Although, as to whether stimulus speculation is the cause of recent global stock market strength, or just the excuse, is debatable.

More likely the bulk of the big rallies around the globe can be put down to investors suddenly deciding they’d better get in, on the assumption the bottom has now been established, lest the bargains they’d been waiting for quickly become bargains no more.

I tender as evidence, Your Honour, Australian banks.

Banking on it

I noted yesterday the local financials sector jumped 2.2% on Tuesday to provide the biggest points contribution to an index gain otherwise supported by energy, following the big merger offer. Yet banks have little connection to oil & gas, and realistically any connection to Chinese fiscal stimulus is also circuitous.

But yesterday the financials jumped another 3.1%. Daylight came in second, followed by the telco on 2.0%, with the resource sectors managing only around 1.5% each (albeit BHP went ex). The vast bulk of the hundred point rally for the ASX200 was attributable to the Big Four.

I suggest we’re probably seeing a kick-on in momentum from Westpac’s ((WBC)) strategy day on Monday, at which the bank announced some aspirational targets (too aspirational as far as most analysts are concerned) and did not announce a capital raising, as have its three peers. Given the banks were amongst the most heavily sold down in the correction, on a combination of the global macro story and the micro story of increased capital requirements, it stands to reason the banks should lead the rebound from “oversold” territory.

Let’s face it, investors found Australian bank yields very attractive at much higher share prices. They’re that much more attractive now, and no one wants to miss out.

As an aside, the value of Australian housing finance rose by 1.5% in July but the annual rate of growth slowed slightly to 15.0%. The value of loans to owner-occupiers rose 2.2% for a 14% annual growth rate. The number of loans approved over the past twelve months has only actually grown by 3.9%. The difference in number and value is a reflection of surging house prices, and the greater capacity of borrowers due to low interest rates.

Investor loans rose 0.5%, slowing annual growth to 16.5%. Lending to investors is quietly cooling, no doubt due to tighter capital requirements implemented by APRA but also due to the fact rental yields are now falling behind house values, making property investment less attractive.

Westpac’s index of consumer confidence fell 5.6% this month to a pessimistic 93.9. But Bridge Street was unfazed, as was the case with Tuesday’s similar NAB business confidence result, given the survey was conducted at the height of recent global market volatility.

Indeed, the consumer discretionary sector rose 1.6% yesterday. On any other day, such a weak confidence result would have garnered a diametrically opposite response.

So the market has been sold down on fear and over the past couple of days has rallied on fear – fear of missing out. It is not unusual at such times for markets to swing wildly between oversold and short-term overbought as a consolidation process following significant volatility.

And speaking of volatility…the SPI Overnight closed down 82 points.

Mood Change

For the best part of 2015 to date, Wall Street has traded on an underlying adverse economic theme that good news is bad news because good news means the Fed will raise sooner rather than later. Having not had a correction for four years, up until recently, the obvious trigger would be the day the Fed announced its hike, many a commentator suggested.

Well here we are, one week from a highly possible Fed lift-off, and the mood on Wall Street has largely swung around the other way. If fear of a Fed rate rise dominated earlier in the year, the fear now is that next week the Fed won’t hike. The cloud hanging over Wall Street at present is not what damage a rate hike might cause, but what damage ongoing monetary policy uncertainty might engender.

Indeed, commentators warning that the US stock market really needs to go back down to test recent lows before it can truly rise again are suggesting a trigger for a second leg down would be no rate rise and further non-committed waffle from an indecisive central bank. It would suggest either the Fed fears the US economy is not in as robust a position as has been assumed (June quarter GDP up 3.7%, unemployment 5.1%), or that the FOMC really has no idea what it’s doing.

And so it was that the Dow opened up over 200 points last night, riding a global wave that saw Australia up 2%, China up over 2%, Hong Kong up 4%, Japan up almost 8%, France up 1.4% and the UK up 1.4%. Germany had been up there too, but faded away at the close.

Arguably, yesterday’s rallies began on Wall Street on Tuesday night when the Dow jumped nearly 400 points. So it would have been double-counting for Wall Street to go again, rebound euphoria had created a short-term overbought situation, and it was time to take profits and apply caution ahead of next week’s Fed meeting.

And oil dropped 3.5% again, which is never a positive driver for the major indices.

Commodities

West Texas fell US$1.60 to US$44.13/bbl and Brent fell US$1.88 to US$47.50/bbl.

Base metals were nevertheless quiet, for once. All moves were negligible bar lead, which rose 1.4%.

Iron ore rose US50c to US$56.90/t.

It looks like gold traders have decided a September rate rise is booked in. The US dollar index is barely changed at 95.95 but gold has fallen US$15.80 to US$1105.40/oz.

The Aussie traded right up to 70.5 yesterday on short-covering as the local stock market surged, but has since been sold down again to be down 0.4% over 24 hours at US$0.6991.

Today

The SPI Overnight, as noted, closed down 82 points or 1.6%.

Australia’s August jobs lottery will be held today, while Beijing will release Chinese inflation data.

Sigma Pharmaceutical ((SPI)) will release its interim profit result today amidst another handful of stocks going ex-div.

Rudi will make his weekly appearance on Sky Business's Lunch Money at noon and appear again on Switzer TV between 7-8pm.
 

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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By Greg Peel

The Dow closed up 67 points or 0.4% while the S&P gained 0.5% to 2102 as the Nasdaq jumped 0.8%.

Adjustments

Commonwealth Bank ((CBA)) shares recommenced trading yesterday having successfully put away the institutional allocation of its $5bn capital raising and despite the 10% discount offered on the rights issue, fell only 1%. This contrasts heavily with ANZ Bank ((ANZ)) which, the week before, placed new stock at a 5% discount and saw its shares open down 7%.

The vote of confidence in CBA prompted a vote of confidence in the banking sector in general yesterday, which ultimately finished up 0.5%. Buyers are clearly interested in returning following the capital raising sell-offs as yield once again becomes difficult to ignore.

However it must be remembered that index-tracking funds and other large institutional investors in the Australian market must hold the banks, which represent over a quarter of market capitalisation, and therefore must buy CBA to reweight their portfolios. Ditto ANZ. Something then must be sold to adjust across both sector and index weightings.

The ASX200 was off to a flyer yesterday, aided by some reasonable earnings reports, and at 11am was up 43 points. But that was the end of that. Perhaps it provided a good opportunity to sell whatever it is one chooses to sell to fund new CBA shares.

Japan would not have helped either, posting a June quarter GDP result of minus 0.5% quarter on quarter growth, down from plus 1.0% in March. While not unexpected, it does bring into question the success, or lack thereof, of Abenomics. The June quarter saw 1.6% annualised GDP contraction. Exports are down 16.5%. Household consumption is down 3.1%. Inflation is nowhere to be seen.

Massive debt-funded QE may have driven optimism two years ago but the subsequent fiscal trade-off of an increased sales tax has killed off the momentum. Japan is Australia’s second biggest trading partner.

Familiar Territory

Wall Street was stunned at the open of trade last night when the Empire State activity index came in at minus 14.9, down from plus 3.9 in July, when economists had expected a rise to plus 4.5. It is the worst reading since April 2009.

The Dow promptly fell 120-odd points on the news, but in contrast, the US housing market sentiment index saw a one point rise to 61 to mark the highest level in a decade. The Dow then ran all the way back, and more.

The argument is that the Empire State index is merely a measure of one manufacturing region – New York State – and not a national indicator, and moreover it can be, and has been of late, very volatile. Housing sentiment, on the other hand, is national.

Or you can argue that the opening plunge based on the Empire State result was overrun by those cheering on weak data, as it implies delay from the Fed. The US ten-year bond yield fell 5 basis points to 2.15%.

Or you can look at the reality, which is that every time the broad market S&P500 index falls below its 200-day moving average, the buyers step in. This has been the case all year. Hence the S&P first hit 2100 in January and last night returned to 2100, having done nothing but travel backwards and forwards across that mark for eight months, whatever has been thrown at it – Greece, China, you name it.

We could speculate that given January was around the time debate began in earnest over a first Fed rate hike, all Wall Street has done ever since is mark time until the policy change is confirmed.

Commodities

A slowing economy has not stopped China increasing its production of metals. Data over the weekend showed production of aluminium, copper and nickel all rose in July, a point which was not lost on the LME last night. Base metal prices were all flat to modestly weaker.

Iron ore fell US20c to US$56.00/t.

The pervading opinion in oil markets is now one of oil must go lower. For a while there, after the rebound, the pervading opinion was US$50-60/bbl for WTI was about right, but not so anymore. West Texas fell US22c last night to US$41.91/bbl and Brent fell US47c to US$48.72/bbl.

Gold rose slightly to US$1117.40/oz despite a 0.3% gain for the US dollar index to 96.82. The Aussie is steady at US$0.7373 ahead of today’s release of the RBA August minutes.

Today

The SPI Overnight closed up 11 points or 0.2%.

Aside from the RBA minutes the focus today and for the next two weeks will be on corporate earnings reports. Highlights today include Asciano ((AIO)), Challenger ((CGF)), Dick Smith ((DSH)) and QBE Insurance ((QBE)).

We have now passed the halfway mark, time-wise, in the result season, but only a quarter of reports are in. The rest now flow in an avalanche.

The score card to date, according to the FNArena Reporting Season Monitor, is beats and misses equally on par but FNArena database broker upgrades to downgrades running at 29/18.

Please note that CBA goes ex-dividend today, as do a number of other stocks, so the index will start with a handicap.
 

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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By Greg Peel

The Dow closed down 212 points or 1.2% while the S&P lost 1.0% to 2084 and the Nasdaq fell 1.3%.

China Cracks

What a difference a day makes. Yesterday global stock and commodity markets were all strong on the back of anticipation Beijing would shortly come in with hard hitting stimulus measures, given the weekend’s very weak Chinese trade and inflation data. But no one anticipated what came next.

Yesterday the PBoC devalued the renminbi by 1.9%. It is not the quantum that has spooked global markets – it has not been unusual for the euro, for example, to move by such an amount in a session in recent times – it is the implications that have frightened markets.

For years during the China boom of last decade, China’s trading partners cried foul over significant undervaluation of the renminbi, via the PBoC’s pegged currency policy, providing China with an artificial export advantage. In its attempts to reform its markets, thus to compete equally with Western open market economies, China has been revaluing that peg ever since, eventually wiping out what was once seen as 40% undervaluation.

But Chinese growth has now slowed. Beijing’s attempts to revive growth, through interest rate cuts, RRR cuts and various fiscal measures have, to date, failed. China’s export economy has suffered as all around its major trading partners have resorted to QE, which effectively promotes currency devaluation. China’s interest rates are not at zero but either way, China has no tradeable government bond. QE was never an option.

Instead, Beijing has simply devalued its currency. Given the government was intending to move the renminbi to full-float status as part of its ongoing reforms, such manipulation is a step backwards. But the PBoC pegs its currency every day, and has indicated it will now take direction from the CNY – the currency allowed to be traded outside China. Overnight the CNY has already anticipated another 2%-odd devaluation. The PBoC may well move again this morning. In a sense, China is trying to mimick some sort of “float”.

The ramifications, nevertheless, are worrisome. Firstly, commodity prices tanked overnight. They are US dollar-denominated and China has devalued the renminbi against the dollar, reducing the purchasing power of the renminbi to buy commodities in US dollar terms. The good news for the likes of Australia is that as a result, the Aussie dollar has also been sold down heavily, down 1.5% this morning to US$0.7303. The RMB-AUD effect is thus minimalized, with regard the trading price of iron ore, for example.

The Canadian dollar has seen the same sell-off for the same reason. From the outside looking in, less purchasing power in the renminbi leads to lower commodity demand from China. But from the inside looking out, if the export currency is also lower, equilibrium is maintained.

But the yen is another currency that was hit last night, and Japan is not an exporter of raw materials. It is an exporter of finished goods and thus a major competitor to China. The yen has been sold in anticipation the BoJ will now be forced to respond with more QE. Take it to the nth degree, and what markets really fear is an internecine escalation in the global currency war.

Result Concerns

On the local market yesterday, it was not a good one for earnings results. Cochlear ((COH)) disappointed and fell 7%. Domino’s Pizza ((DMP)) had a wild ride, plunging initially before recovering, while Transurban’s ((TCL)) result was not that well received either.

Yet we started to the upside, before swinging suddenly back to the downside. Leading that charge were the banks. After one day’s recovery from Monday’s big ANZ-inspired plunge, it seems the markets are not yet comfortable with bank valuations. Commonwealth Bank ((CBA)) reports today [and has done so, see below].

Then there’s the matter of the renminbi devaluation. It’s a bit difficult to know just what the impact will be on Australian exports – not only of commodities but also of tourism, education and so forth – given it depends on what the Aussie does. Indeed, the only two sectors to finish in the green yesterday were materials and energy, both up 1%, but possibly due to Monday night’s rally in commodity prices.

The situation was very different last night.

Commodities

Base metals rallied strongly on Monday night in expectation of Chinese stimulus, and collapsed last night when that stimulus turned out to be currency devaluation. Aluminium fell 1.5%, copper, lead and tin fell 2.5-3%, nickel fell over 4% and zinc fell almost 5%.

Iron ore returned to trading following the Singapore holiday, but only fell US40c to US$55.90/t.

Oil did not get off so lightly, with West Texas falling US$1.59 to US$43.21/bbl and Brent falling U82c to US$49.41/bbl.

Gold is not a commodity per se, and is up US$4.60 at US$1108.70/oz on a US dollar index which, on the balance of trading partner currency moves overnight, is flat at 97.17.

Wall Street

The US is the biggest loser. On the one-hand, weaker commodity prices on the back of reduced Chinese purchasing power impact on prices received domestically, given the US does not meaningfully export its commodities. But it does export manufactured goods and services to China, and here the reduced purchasing power effect is evident in the likes of Apple shares, which fell 5% overnight.

All up, the gains seen on Wall Street on Monday night were wiped out last night, when China did not do what anyone was expecting. But the other issue to consider is: what does this mean for Fed policy?

If China has now triggered another round of currency wars, it does not seem a good time for the Fed to be making its first rate hikes. US exporters are already crying foul over the strength of the US dollar. China’s move may well be the left-of-field event which prevents a first hike in September.

Which puts the Fed in a difficult position. Already it has been suggested that were China’s currency devaluation to continue, the US economy might head into recession. If the Fed has not raised rates by now, it has nothing to cut again to prevent such a result. That only leaves one policy alternative – a return to QE – and that’s really not what the Fed, or anybody else in the US markets – really wants.

The US ten-year yield closed down 10 basis points last night at 2.14%, having at one point seen 2.01%.

Today

The SPI Overnight closed down 28 points or 0.5%.

The world will hold its breath for another move from the PBoC.

Adding fuel to the fire will be today’s scheduled Chinese data dump of July industrial production, retail sales and fixed asset investment numbers.

In Australia, we’ll see the June quarter wage price index, which will be closely watched by the RBA, along with Westpac’s monthly consumer confidence survey.

It’s a big day on the earnings front. As we speak, CBA has gone into a voluntary trading halt. The bank has reported its FY15 profit and announced a greater than anticipated $5bn capital raising. The CBA board must be livid ANZ jumped the gun on them.

Today’s reporting highlights also include AGL Energy ((AGL)), Carsales.com ((CAR)), CSL ((CSL)), OZ Minerals ((OZL)), Primary Health Care ((PRY)) and REA Group ((REA)).

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

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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