A very interesting night’s trade last night with markets coming back from the brink after what looks like the type of pessimistic crescendo needed to find a bottom.
The S&P finished at 1835, down 0.87% after making a low at 1810 during trade. Likewise the Dow recovered from being down heavily, crude bounced sharply, gold pulled back from its highs, and USDJPY rallied from its lows.
Some say the culprit was a tweet saying OPEC is going to finally get its act together. But it could equally have been that the S&P 500 futures found support at the recent low.
Either way, the ASX is likely to open down again with the March SPI 200 futures down 36 points. But it may not stay there. That depends on what offshore traders think they might do tonight and whether they move in here first.
Here’s the scoreboard (8.16am):
- Dow: 15,660, -254 (-1.6%)
- S&P 500: 1,828, -23 (1.23%)
- SPI200 Futures (March): 4,731, -36 (-0.8%%)
- AUDUSD: 0.7096, +0.0001 (+0.00%)
And the top stories:
1. Does the performance of Rio Tinto suggest an ASX bottom is near? The very bedrock of the ASX has been shaken in 2016. Our banks have been caught up in the global bank rout, our miners crushed by a weaker and weakening global – and Chinese – growth outlook and the associated collapse in commodity prices, and the AiGroup wants to get rid of dividend imputation to vote their members a big company tax cut from 30% to 20%.
But perhaps yesterday’s result from Rio Tinto, which saw underlying earnings cut in half and a “full-year net loss of $US866 million for the mining giant, compared to net earnings the previous year of around $US6.5 billion”, is the bell ringer for the market.
For me the key is that while it formally dropped its progressive dividend policy, something long anticipated, and the the stock fell 3.4% in London, that fall is well off the overnight low. It is also well above this year’s lows.
There is a lot of negativity baked in Rio and the ASX around 4,800. So the question for traders is could a bottom be in place for Rio, and maybe soon for the ASX?
2. Bank stocks got crushed again overnight. Citibank fell 6% last night, Wells Fargo dropped 2%, Barclays was 7% lower, and HSBC dropped 4.8% as the global bank rout continued.
Locally our banks have been caught up in the selling even though Australia’s monetary and economic settings are in a very different place and even though – as we saw with the CBA this week – earnings are still solid.
Why are banks getting hosed is a good question. It is in no small part related to negative interest rates and the imapct on NIM. Here’s how Robin Wigglesworth explained in the FT overnight:
Below-zero rates mess up the banking business model, and lenders in the eurozone and Japan have clearly underperformed their US counterparts. The former are trading at less than half their book value, while US ones are on average still comfortably above the 1 mark, despite a recent bout of negative interest rate policy speculation.
Clearly, as Australia’s banks face some economic headwinds and regulatory scrutiny they look to be in a very different boat. Their business model doesn’t look broken. But markets are markets and the downdraft is strong at the moment.
3. Here’s why central bank negative rate policy is failing, and will fail. Sweden took rates further into negative territory last night, and the Swiss National bank chief wouldn’t rule out further similar moves. And the Bank of Japan took rates into negative territory two Fridays ago.
It’s not working and I think I know why.
Let’s do a thought experiment, a simple one. Imagine you’ve just heard that a central bank has dropped ratea below zero – what is your first thought? Is it, “Heck, things must be bad” or is it “Sensational, I can borrow as much money as I can get my hands on and leverage up?”
I’m guessing most people’s reaction is the former.
That’s particularly the case because the reason rates are negative is because any, even a casual, observer knows rates are negative because everything central banks have done so far have failed to get traction. Negative rates are no different to deflation I reckon – they have the same behavioural impact on normal people.
As if on cue, Myles Udland reports PIMCO says negative interest rates are the problem, not the solution.
4. Janet Yellen says the stock market sell off is not her fault – she’s right. It is easy to blame the Fed for all the market ructions this year. Many have done it and last night lawmakers took aim at the Fed chair on her second day up on Capitol Hill. Bob Bryan from BI New York says “things got a bit testy” last night as republican Senator Heller launched into Yellen about the Decemebr rate hike. Remember folks, it was only 25 basis points, a rounding error on most hedge fund returns – in a good year anyway.
Yellen hit back noting that:
“The immediate market response — and for a number of weeks, the reaction to the Fed decision — was quite tranquil … I think [the decision] was well communicated and was expected. There was very little market reaction.”
She then went on to say the ructions of 2016 are not Fed policy.
What’s that old saying? Success has many fathers and failure is an orphan. But the reality is that markets have been undergoing a journey since the tops last year. It’s a journey of recognition that valuations that were stretched are still stretched.
If the Fed has any culpability for 2016’s ructions it’s that its rate hike acted, in a market sense, like the child who called out that the emperor had no clothes.
5. Speaking of nudity, Henry Blodget still thinks stocks could end up being down 50% from the highs. Stocks in the US are down 15% so far and BI’s founder has written another in his series of warnings that stock market valuations are stretched and stocks could fall 50%.
But, ahem, he also “noted that that would not be the worst-case scenario”. You can read the full piece here.
6. The yen and gold have rocketed higher in the past week and might signal the panic phase we needed for markets. USDJPY has fallen from 121.45/60 two Fridays ago after the BoJ moved rates into negative territory. Last night it traded a low of 111.02 – it’s at 112.28 now. That 8% fall, to the low, in a couple of weeks is exactly the type of panic yen-buying and position-squaring that might signal the end of the current market funk.
Likewise, gold rocketed up to $1,260 overnight after opening yesterday at $1,195. It’s back at $1244 now. But that is still a stellar rally.
But, even though I agree with Blodget that longer term stocks have further downside, the bounce in the S&P 500, USDJPY, crude oil, Rio Tinto, and the pullback in gold and reversal of last night’s bond rally suggest we might be getting ready for a recovery.
The question is will it be enduring or prove ephemeral?