Like any elastic band stretched too far, markets snapped back to reality last night after the weak Chinese trade data gave traders an excuse to reacquaint themselves with reality.
That’s seen crude oil collapse 4%, copper drop 3% and iron ore futures in the US fall 4% as well.
The change of heart was more mild on stock markets where, with 40 minutes of trade left, the Dow is down 0.4%, the Nasdaq is down 0.85% and the S&P 500 is off 0.75% after finding the air above 2000 a little thin. European shares were also lower – BHP and Rio were hammered in London – and the major indexes were all down a little under 1%.
That sets up an interesting day’s trade for the local market after it failed at resistance yesterday. The March SPI 200 is down 20 points, 0.4%, but things could get much worse by the close of trade.
On forex markets the turmoil has not hurt the Aussie dollar – strangely. It tested ~70 cents but is back at 0.7440 this morning and looking okay for the moment. The Canadian dollar has not been so lucky given oil’s fall and euro is back at 1.10 after some strong German data. But it’s USDJPY that’s the most interesting forex move. The yen is stronger again, USDJPY 112.55, which tells us that macro traders are worried once more.
The gold price at $1260 suggests that is also the case.
Here’s the scoreboard (7.20am):
- Dow: 16,985, -89 (-0.52%)
- S&P 500: 1,985, -17 (-0.83%)
- SPI200 Futures (March): 5,091, -20 (-0.4%)
- AUDUSD: 0.7440, -0.0027 (-0.33%)
The top stories:
1. The ASX200 failed to break important resistance yesterday. Marcus Padley was talking to Ticky Fullerton on ABC’s “The Business” yesterday and you could hear the disappointment, perhaps resignation, in his voice that the local stock market couldn’t break the big resistance zone it traded into yesterday. Specifically Padley said that if the ASX could have closed above the one-year downtrend line it would have changed a lot of traders’ outlooks.
But it didn’t and the small falls in US and European stocks, the 3% fall in crude and copper, the 4% drop in iron ore, and the 8.5% drop in BHP and 9.5% drop in Rio during London trade suggest a tougher day ahead for the local market.
Here’s the chart of yesterday’s failure:
2. The IMF is about as bearish on the global economy as I’ve seen them. “Global economic recovery continues, but we are clearly at a delicate juncture, where risk of economic derailment has grown.” That’s the stunning conclusion to a speech given overnight in Washington by David Lipton, first deputy managing director of the IMF. That conclusion is actually quite sanguine compared to the overall tone of the speech. Here’s how he kicked off:
The IMF’s latest reading of the global economy shows once again a weakening baseline. Moreover, risks have increased further, with volatile financial markets and low commodity prices creating fresh concerns about the health of the global economy.
It doesn’t get any better from there and Lipton said that “what may be most disconcerting is that the rise in global risk aversion is leading to a sharp retrenchment in global capital and trade flows”. Traders agree. It seems like China’s trade data yesterday and the big miss is one of the things that undermined sentiment and the risk rally overnight.
The WSJ also has a great article on this very topic and says “The International Monetary Fund is sounding louder and louder alarms about the state of the global economy. The problem is, few major economies seem to be hearing them.”
The problem in all this and the apparent disconnect between what the IMF is warning and policy makers are doing was neatly summed up by Lipton. “Winston Churchill said, ‘I never worry about action, but only inaction.’ This is one of those moments where action — concerted action — is needed.”
3. Let’s talk about that China trade data. Even for a holiday-affected month, Chinese trade data for February was a surprise. As David Scutt wrote yesterday, “from a year earlier exports fell by 25.4%, more than doubling expectations for a decline of 12.5%. Not only was it far steeper than the 11.2% contraction seen in January, it was also the largest seen since May 2009.” Imports also dropped more than expected with a decline of 13.8%.
Annette Beacher, TD Securities’ Singapore-based head of Asia-Pac macro strategy, warned against placing too much emphasis on the data because of the lunar new year holiday. But the data is the data and traders have no choice but to accept it at face value. Thus this morning the risk rally looks tired, and while the bears aren’t exactly crushing it, they’ve had the whip hand overnight.
Beacher is right. China’s data is the excuse many are using for the pullback overnight but the reality is that some of the rallies we have seen in the past few days were ridiculous and unsustainable.
4. HSBC says gold is up because of negative interest rates. Since negative rates went mainstream with the ECB and Bank of Japan – two of the big four central banks – I’ve had a working hypothesis that negative rates are good for gold. I mentioned it in my weekly What to Watch video on Monday. Put simply, gold always had a cost to store and now money comes with a cost – negative interest rates. Add all the uncertainty and why wouldn’t you buy gold?
This combination of uncertainty and negative interest rates is a theme that James Steel, HSBC’s chief precious metals analyst, picked up on. In a note to clients he wrote, “The imposition of negative rates is a sign of distress, which is gold-bullish. Furthermore, the uncertainty surrounding the long run impact of negative rates as outlined in the BIS report is also supportive of gold.”
Will Martin has more here – including a link to that BIS report.
5. The Mr Miyagi market. Do you remember Pat Morita as Mr Miyagi in “The Karate Kid”? I know I’m aging myself but the first lesson for his new charge was to teach him to “wax on, wax off”. It’s a good analogy for this market, and sentiment in 2016.
Risk on, risk off. Traders are alternating between rout and recovery, greed and fear.
It’s against this background that a tweet from the Wall Street Journal caught my eye this morning. It seems to sum the current malaise up quite nicely.
The Journal quotes David Lefkowitz, senior equity strategist at UBS Wealth Management in New York, who says “we’ve reversed some of the irrational or fear-driven components of the selloff, but the reality is…there are some legitimate headwinds.” Yup!
6. Some light amongst the uncommon darkness of this morning’s note. Wow, this feels like a bearish note this morning. I didn’t set out to be overly bearish but this is a reflection of my, and the markets, last 24 hours. But for all the headwinds, one of the reason that markets were able to snap back so strongly was that traders simply got too bearish in January and February. Or at least too bearish relative to the data. So as the data improved, or in fact was simply not as bad as forecast, bearish bets were exposed and shorts had to scramble.
The FT reported this morning that “investors and financial markets have been too quick to believe the worst about the health of the global economy, raising the danger of a self-fulfilling and unwarranted downturn, leading economists said on Tuesday.”
Those economists are Adam Posen, formerly of the Bank of England and Olivier Blanchard formerly of the IMF. Writing in their new gig at the Peterson Institute they are not as bearish as the market. “The probability of another 2008 [financial crisis] is inconceivable. The banks are clearly much stronger than they were,” Blanchard said
Posen added, “most of the major economies, starting with China and the US, are growing more sustainably now than a decade ago, at their slower rates. All the more reason then not to allow ourselves to be distracted by a financial market tail wagging the macroeconomic dog.”
And the overnight data round-up (courtesy BNZ Markets)
AU: RBA’s Lowe: “lower AUD would be helpful”
AU: NAB business conditions, Feb: 8.0 (5.0 prev)
AU: NAB business confidence, Feb: 3.0 (2.0 prev)
CH: Trade balance (US$,b), Feb: 32.6 (51.0 exp)
JP: Consumer confidence index, Feb: 40.1 (42.2 exp)
GE: Industrial prod. (s.a, m/m, %), Jan: 3.3 (0.5 exp)
EZ: GDP (s.a, q/q, %), Q4: 0.3 (0.3 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
Amongst all the talk of what lay behind extraordinary jump and quick retreat in Fortescue’s share price, it continues to chart quite nicely. Yesterday it retreated neatly from the 38.2% Fibonacci retracement and came to rest at the support now formed by its past resistance line.
The interesting test will now be Monday morning’s gap and the 38.2% retracement of the rally. These form potential support around $2.53/$2.58. If that’s taken out, Fortescue looks set for a deeper correction.
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC