An awful night for the bulls on global markets last night with stocks, crude oil and the US dollar lower.
Gold hit $1,200 as investors looked for a safe haven and the banks were hammered all around the globe.
At the close of play, the Dow had recovered a substantial part of its losses, finishing down just 177 points, 1.1%, while the S&P 500 dropped 1.45%. That’s meant the ASX 200 futures are well off their overnight lows. The March SPI 200 contract is down 1.3%, 64 points.
The question is how traders will react with only Australia and Japan open of the major markets in our time zone.
On forex markets, the Aussie dollar didn’t fall with stocks because the US dollar did. So it’s sitting at 0.7084 this morning. Crude fell 2.7% to $30.05 and copper dipped to $2.09.
Here’s the scoreboard (8.13am):
- Dow: 16,027, -177 (-1.1%)
- S&P 500: 1,852, -28 (-1.49%)
- SPI200 Futures (March): 4,859, -64 (-1.3%)
- AUDUSD: 0.7084, +0.0017 (+0.27%)
And the top stories:
1. Gold’s rally says everything you need to know about how bad things are getting in markets. Gold is up $150 from December’s lows as fear and concerns about the Chinese yuan devaluation grip markets. It hit a high of $1,200 last night and is at $1,193 this morning.
I’ve had a look at what it all means here.
2. Bank shares are getting hammered around the globe again. Last night Citibank fell 6.15%, Wells Fargo dropped 3.24% and in London, Barclay’s Bank fell 5.34%. In Europe more broadly the banks got slaughtered, as Will Martin put it overnight.
That’s important because while gold’s rally is telling us one thing about risk, or at least the risks investors see, the continued fall in bank stocks is telling us another thing. Banks are ubiquitous in the global economy and in global finance. They have tentacles, and loans, everywhere. They are thus exposed everywhere in the global economy. That is the risk.
Divyang Shah, global strategist at IFR Markets, told the FT that:
There is no single factor that stands out in explaining the weakness, with everything from exposure to oil-related debt, to declining revenue in an increasing negative bond yield environment, being thrown into the mix.
Some of this weakness is likely related to investors with exposure to bank debt using the credit default swap market to hedge, and this in turn feeding through into equity price weakness.
Or maybe it’s simply a dash for the exit from all those oil-rich investment and sovereign wealth funds that had been buyers of some of the big name banks during the height of the financial crisis.
We’ll be watching the banks on the ASX closely today.
3. If you are scratching your head why last night’s carnage happened on markets, you’re not alone. There is a lot of head-scratching about what exactly caused last night’s sell-off in stocks and markets more broadly. There is a lot of after-the-fact hypothesising but there doesn’t seem to be any one reason the selling took hold.
Rodrigo Catril, currency strategist at the NAB in Sydney, summed it all up nicely this morning:
We had a brutal price action overnight with risk assets hammered while safe haven assets were bid. There was no clear catalyst for the sell-off, however market uncertainty has remained high. Question marks still remain over China’s ability to control its currency, even though the fall in FX reserves released over the weekend was smaller than expected. Central banks’ ability to stem the rot has also been questioned, the BoJ move into negative territory has not had a lasting effect and this lack of belief was little help by the Bank’s release of “summary of opinions” from its last policy meeting. The comments revealed that some members within the committee feared negative rates could backfire as financial institutions worried about the risk of further cuts with one member noting that the BoJ’s introduction of negative rates could “lead to a competition with other central banks in other countries”. To this point, a few hours ago SNB’s Jordan was quoted saying that the current -0.75% rate could go “lower than where we are now”.
Uncertainty folks, it’s pernicious when it takes hold in the economy or markets.
4. Speaking of central banks, forex traders are blowing raspberries at the Bank of Japan. The alternate headline for this one could have been, “Here is the most important chart in the world right now.”
Bank of Japan governor Kuroda and his mates surprised markets by taking rates into negative territory two Fridays ago. It was a thinly veiled attempt to weaken the yen with little overall positive impact on the economy. It worked for a day or two with USDJPY rallying to a high toward 122. Since then, however, the yen has strengthened and USDJPY is at risk of breaking wide open to the downside.
Why does it matter you ask? Because there is a currency war going on, central banks – including the RBA – are using or threatening to use monetary policy to lower the value of their currency. If the yen strengthens, Japan and others might panic as they try to avert a weaker US dollar.
5. Bonds are rallying hard as well. US 10 year bonds are at 1.76% this morning. That’s down 10 points from where they were Friday. More importantly though is that the 10 year bond has just broken a trendline that stretches back to the 2012 low in yields. Of course, the rally in US 10s has been accompanied by a rally in the short end of the US curve and that has taken Australian rates lower as well today. Australian 10s at 2.58% are close to the 6 month low we saw in last year’s August market rout.
That’s the key to all of the above really, isn’t it? Last night’s moves are all correlated, risk off, moves with no real catalyst. Ask anyone to explain the 1987 crash and they might struggle to find a catalyst as well, so that fact is not uncommon. It’s just another sign the market ructions are taking on a life of their own.
6. Another prominent US forecaster just dropped his call for a March Fed rate hike. Akin Oyedele reports this morning that “It’s looking more and more like March is off the table for an interest rate hike from the Federal Reserve…Deutsche Bank’s chief US economist Joe LaVorgna thinks it will pass and wait another nine months before raising rates at its December 2016 meeting.”
LaVorgna also lowered his expectations for US economic growth and core inflation, now expecting full-year gross domestic product to grow 1.3%, down from his earlier forecast of 2%.
Catch me on Twitter.
And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
JB Hi-Fi (JBH: ASX)
JB Hi-Fi unveiled a pretty commendable profit result yesterday. It overcame the pressures of moderate take up of the latest iPhone plus heavy discounting by Dick Smith to produce sales growth of 7.7%. It also provided pleasing profit guidance for the current year in the range of $143-147m.
Good news was clearly anticipated, however. The stock price rallied hard in advance of this result. The profit result is looking like a classic case of buy the rumour, sell the fact. JBH is already down 10% from its peak.
At 15 times F16 earnings and given a very jittery overall market, this chart looks as though it has potential for a deeper correction over coming weeks. At this stage, the major support looks to be in the $19.60/$19.95 zone. This includes past peaks, the 200 day moving average and the 61.8% Fibonacci retracement. However, price action over coming weeks might yet create chart based reasons to buy above these levels, especially once the stock goes ex its 63c dividend.
Ric Spooner, chief market analyst, CMC Markets.
You can follow Ric on Twitter @ricspooner_CMC