Stocks were mixed in Europe but have drifted lower in the US overnight even though China’s central bank, the PBOC, cut the RRR by 0.5% to release more cash into the economy.
No doubt the weakness in stocks reflects the recognition China needs a boost but equally the data in the US last night showed the US economy itself is showing signs of slowing.
The wash up is that US markets are down around 0.7%. But the local market is only off a smidge with the ASX March SPI 200 futures index down 12 points, 0.2%, after what was a very ordinary day’s trade locally yesterday where the early strength evaporated.
On forex markets, it’s funny how proximity focuses traders’ minds. So it was last night that the euro came under pressure again as the ECB’s next meeting – the one where they are widely expected to cut – on March 10 gets closer. But the fact that the yen strengthened, USDJPY back below 113 down 1%, tells us the stock market weakness in the US is not isolated. The Aussie was calm however, holding around the 0.7130 region.
On commodities, we saw some solid gains in crude with Nymex up 3.2%. Gold surged to $1238 and copper held $2.12.
Here’s the scoreboard (8.17 am):
- Dow: 16,516, -123 (-0.74%)
- S&P 500: 1,932, -16 (-0.71%)
- SPI200 Futures (March): 4,862, -12 (10.2%)
- AUDUSD: 0.7138, +0.0009 (+0.12%)
The top stories:
1. It’s RBA day, no change today but the odds are shifting. No one believes the RBA is going to cut today. The prevailing market view is that the preconditions just aren’t there yet. But the inventories and company profits data yesterday, and the Dun and Bradstreet Business Expectations survey today, suggest the economy is slipping.
Nothing today. But the odds that Goldman Sachs’ Tim Toohey is right about the RBA cutting again this year are growing.
2. China cut its RRR as it glides the yuan lower. China has been a paradigm of restraint. While Japan, the ECB, the RBA and even the Fed before the recent rally in the US dollar, have used exchange rate policy to bolster their economies, China has been a good global citizen and not joined the party. Of course, some of that is self-interest around an appearance of stability and capital flows, but since the GFC, China has remained a good global foreign exchange citizen.
But last night, have guided the yuan to its weakest levels since the lunar new year, and after watching Shanghai stocks collapse again yesterday, the PBOC cut the RRR to release cash into the economy. That’s what any other central bank would have done. I’ll stop now or I’ll get on my high horse. But suffice to say I believe China knows exactly what it is doing.
Okay, one more thing. The RRR cut works like quantitative easing. It gives banks more money to use, to lend. It’s just that China isn’t in the parlous state the US, UK, Europe and Japan have found themselves in – that’s a great thing.
Also on China, Deutsche Bank says $328 billion has been moved out of China in secret.
3. US stocks are reversing off really important resistance levels. The big “W” chart pattern that everyone has been watching in the S&P is flashing an ominous warning for traders. By extension that means the ASX as well.
After breaking up and through the top of the W last week, the S&P 500 has now closed lower two days in a row. That suggests a false break. It’s not over yet but remember what John Hussman thinks is eventually going to happen when the bottom of the W breaks – 1987 or 1929?
For the moment though, 1926/34 is the key support for the market.
4. Here’s a hedge fund manager explaining why even though markets have settled down, there is still plenty of fear. Julia La Roche says London-based hedge fund manager Russell Clark, the founder of $2.75 billion Horseman Capital Management, says that he’s more uncertain about the direction of the market than at any time he can remember.
Here’s an excerpt (you should read the whole piece):
The future for me is now more uncertain than at any time I can remember. Or to fully quote the Chairman of the Board from Margin Call, “I’m here to guess what the music might do a week, a month, a year from now. That’s it. Nothing more. And standing here tonight, I’m afraid that I don’t hear – a – thing. Just… silence.”
5. Here’s the best explanation I’ve read of why stocks stopped rallying – and it’s from the Bank of England governor. I mentioned yesterday that Mark Carney had neatly explained why stocks have stopped rallying and risk has gone off over the past six months. I took a pass on the full speech yesterday after reading it again. Carney nails it with a thesis that is familiar to readers of this note. The wealth channel only pushes asset prices higher for a certain period. Then we get diminishing returns and then none from added QE.
It really is the best speech by a central bank governor I have read in so, so long. You can find my piece here.
6. The ex-BoE governor just called out governments around the world for a lack of courage to get the economy started. I was on Sky Business yesterday afternoon and was asked about the message from the G20 meeting. I said the clear line of thought was that monetary policy couldn’t do it alone. But I also said governments around the world were too captivated by the political, not economic, cycle and thus too “gutless” to do what’s necessary.
On reflection, when I came off air, I thought that might have been a little harsh. But Oscar Williams-Grut reported overnight that Mervyn King – the former governor of the Bank of England, agrees with me – although he put it more politely.
King says governments around the world need “the courage to undertake bold reforms” to prevent the global economy falling into another financial crisis.
Amen to that. You can read more here.
And the overnight data round-up (courtesy BNZ)
NZ: ANZ activity outlook (net%), Feb: 25.5 vs. 34.4 exp.
NZ: ANZ inflation expectations (%), Feb: 1.39 vs 1.64 prev.
NZ: Building consents (m/m%), Jan: -8.2 vs. 2.3 exp.
JP: Industrial production, (y/y%), Jan P: -3.8 vs. -3.8 exp.
JP: Retail sales (y/y%), Jan: -0.1 vs. 0.1 exp.
UK: Mortgage approvals (‘000), Jan: 74.6 vs 74.0 exp.
EC: CPI, (y/y%), Feb A: -0.2 vs 0.0 exp.
EC: Core CPI (y/y%). Feb A: 0.7 vs. 0.9 exp.
US: Chicago PMI, Feb: 47.6 vs 52.5 exp.
US: Pending home sales (m/m%), Jan: -2.5 vs. 0.5 exp.
Have a great day. You can catch me on Twitter.
And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
Harvey Norman, like JB Hi-Fi, has enjoyed a good run due to the closure of Dick Smith. Pressure on profit margins will be reduced. Prospects for moderate growth look decent, even allowing for the likelihood that housing construction will peak and perhaps soften.
The stock has had a bit of a rollercoaster ride in the last couple of days. It staged a reversal yesterday finishing up 6% after being 8% higher at one stage. However, it’s running into a zone of chart resistance between about $4.90 and $5.00. Yesterday’s peak neatly rejected the lower bound of that zone. At 17 times F16 earnings, HVN might find this resistance heavy weather for a while.
Support looks not far under Friday’s low and broadly between $4.30 and $4.45 with the 50 day moving average forming the lower part of that range.
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC