US stocks drifted lower into week’s end as financials came under pressure and oil stocks drifted lower along with the oil price.
That mild weakness in US stocks shouldn’t hurt the local market when it opens this morning if SPI traders are to be believed.
The December SPI 200 future was unchanged. But the fact that financials were under pressure, oil stocks drifted with oil’s price, and gold was lower again means that these sectors could be under pressure in trade today.
On forex markets, the better than expected US CPI helped the US dollar strengthen and the Aussie dollar is back below 75 cents this morning.
Here’s the scoreboard (7.01am):
- Dow: 18123 -88 (-0.49%)
- S&P 500: 2139 -8 (-0.38%)
- SPI 200 Futures (December): 5,275 0 (+0.0%)
- AUDUSD: 0.7474 -0.0045 (-0.59%)
The top stories
The central banker’s central bank says markets are dissonant. The Bank of International Settlements is the central banker’s central bank. It’s the body that helps establish the rules in banking around capital and liquidity, and it’s the body that helps advise central banks around policy to help in their pursuit of monetary and financial stability.
It’s a normally reserved body. But in its quarterly review, released over the weekend, its headline article is simply framed, and titled, with a question “Dissonant markets?”
To highlight this the BIS said:
“While yields in core fixed income markets were reaching record lows further out the maturity curve, which would normally be associated with expectations of subdued growth, stock markets and other market segments showed renewed ebullience, highlighting the sense of dissonance.”
That’s a polite way of saying you can’t have it both ways.
On the low interest rates global bonds were trading at, it said “some observers wondered whether core fixed income markets might be overvalued. Defining overvaluation for government bonds is not straightforward, but a comparison with nominal GDP growth suggests that yields are on the low side.”
That’s something bond traders have just started to recognise and it’s a trend that looks like it might have further to go yet.
2. Buy this stock market pullback “aggressively”. Many economists have “physics envy”. They’ve tried every equation in their quest to understand finance and economics only to be rebuffed by irrational humans’ influence on markets and economics proving their models error prone.
But that doesn’t mean notions of physics are useless in markets, or trading. What else is break out or momentum trading other than Newton’s First Law of Motion in market action?
So I’ll give Fundstrat’s Tom Lee the benefit of the doubt when he invokes Newton’s First Law to show that investors should buy the current pullback in US stocks “aggressively”. Akin Oyedele reports Lee is bullish because he found that when stocks were up 5% or more by mid-September, they rallied into the year-end 87% of the time.
And UBS has a bullish take on things as well, Elena Holodny reports. Analyst Julian Emanuel says over the past 25 years, bull markets don’t end unless there is a recession. Elena has more here but, if I can editorialise, 25 years feels like an infinitesimally small sample size in the grand scheme of things.
3. Markets and Pundits Have a Data-Point Fixation. This is my favourite story from the weekend and one I couldn’t agree more on. Writing at Bloomberg Barry Ritholtz says “Data is the raw material we use as the basis for analysis… Data drives the economic world around us. It is how we understand complex, abstract things… Yet people often seem to overlook the weaknesses in data.”
His point, and I recommend you read the full article, is that the focus on each day, week, or month’s economic release as a single series – and the related focus on expectations – means traders, us in the media, and investors “forget the series, the continuum”. We see the data point not the data; the noise, not the signal.
Amen to that.
4. Australia’s big banks rescued the index last week but global financials dragged Friday after news of Deutsche Bank’s big fine broke. Deutsche Bank had a disastrous day. The German bank saw its stock fall nearly 10% in trading on Friday after reports that the Department of Justice was going to settle with the company for $14 billion over financial crisis-era mortgage backed securities.
That weighed on financials around the globe with that sector the worst performing on the S&P 500. Australia’s banks were a long way from that mess so weakness in financials offshore shouldn’t hurt too much here on the ASX. But it’s worth watching.
5. The upside of the market funk about rising long bond rates – bank profitability. Markets sense an inflection point in monetary policy and bond rates have been rising as a result. That’s put stocks under pressure and raised uncertainty across markets. But every cloud comes with a silver lining, according to Deutsche Bank.
Writing in the Bank’s db140weekender, Stuart Kirk says:
“As Bank of Japan rhetoric turns away from quantitative easing, Japan’s ten-year bond yield has risen 30 basis points since mid-July to zero. At the same time, US bank shares are up eight per cent. The connection? Higher yields mean Japanese banks earn more on the spread between deposit liabilities and bonds, so more capital stays home.”
That impacts yen-US dollar swaps, which impacts a premium traders pay to access dollars which in turn impacts the US term premium. It all means bonds in the US are rising too, which is good for US banks earnings, Kirk says. The rise in bonds is scaring the heck out of plenty of other traders though.
6. And here’s my look at the week ahead for traders and markets. I’m never short on a little hyperbole talking about the week ahead. There is always something big on the calendar. Usually, anyway. But it is no understatement to say this is the Ben Hur of big weeks for traders. Both the Bank of Japan and FOMC deliver their decisions this Wednesday. What they do, say, and intimate is going to have huge implications for traders across almost the entire global market spectrum.
We also hear from new RBA governor Lowe who is fronting parliament, and the RBNZ also has a meeting.
Key data for the past 24 hours (with thanks to BNZ markets)
NZ: ANZ consumer conf. index, Sep: 121.0 vs. 117.7 prev.
US: CPI, m/m%, Aug: 0.2 vs. 0.1 exp.
US: Core CPI, m/m%, Aug: 0.3 vs. 0.2 exp.
And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
JB Hi-Fi – Picture worth a thousand words?
JB Hi-Fi finished up 5.3% when it returned to trading on Friday following the Good Guys trading halt BUT… it finished on its low; 2.3% beneath its high and had a big volume day. Friday’s high is also looking like a rejection of last week’s peak around $31.23.
In short, there was plenty of profit taking going on at this early stage. Well received as the Good Guys acquisition has been, it may be that the stock struggles to get too far past the top of this range for a while. On the other hand, the bottom of the range is looking pretty well defined around $28.50.
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC
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