Stocks in the US had an ugly last couple of days to the week as the rate rise rally faded to leave the Dow down close to 400 points Friday and the S&P 500 36 points lower. That left the S&P 500 3.4% lower than its post-Fed hike high on Wednesday.
It knocked the ASX futures lower with the SPI200 March contract indicating a loss of around 0.8% when the market opens today. That follows a remarkable rally on the ASX Friday lifting the market off its lows and just back in the black.
Crude was down again Friday, iron ore bounced back and BHP was up 2.5% in London trade. On forex markets, the Aussie dollar had a good night rising, bond rates fell with stocks and copper is sitting at $2.11 a pound.
So, the scoreboard (7.50am):
- Dow: 17,128.55, -367.29 (-2.1%)
- S&P 500: 2,005.55, -36.34 (-1.78%)
- SPI200 Futures (March): 5021, -40 (-0.8%)
- AUDUSD: 0.7174 +0.0056 (+0.78%)
And now the top stories:
1. What’s next after stocks crash into week’s end? Markets get very thin from here and that means anything can happen as price movements can be influenced by much smaller volumes than usual. So, given the competing themes of a Santa Rally and a Fed hike, it could be a noisy holiday-interrupted last two weeks trade to 2015.
But traders will be wondering where to next. BI’s founder Henry Blodget wrote a piece over the weekend reminding those who think that Fed hikes are good for stocks that they might want to reacquaint themselves with the history books. He’s not saying stocks are going to crash from here and he’s not selling. But if this time ISN’t different, then stocks will swoon eventually.
2. Bond fund redemptions and junk bonds. Junk bonds are in the headlines again as investors rush for the exits as the outlook for global credit has been reassessed recently in light of the Fed tightening and the cycle ahead. BI UK’s Ben Moshinsky has a great explainer on why high yield bonds are freaking everyone out.
But Ben also reports that bond investors are withdrawing near-record amounts from bond funds in what the analysts from Bank of America Merrill Lynch are calling “bond carnage.” BoAML says there was $13 billion in outflows this week, the most since June 2013. Ouch.
3. Crude oil – how low can it go. Crude continued its fall Friday after the Baker Hughes rig count unexpectedly climbed by 17 in the US last week. That hurt stocks and reinforced notions of continued oversupply in the market. The target now is the GFC low but many are still calling for a move below that.
$25 was a bit of a base in 2002 and 2003 when oil started to rally and the 2001 low was $16.51.
4. China’s yuan devaluation is continuing. Bank of America Merrill Lynch’s Fixed Income Strategists wrote in a note Friday that “the event to define the year 2015 was the RMB move on August 11.” The event they are talking about is the surprise Chinese yuan devaluation which they said “raised the BofAML Global Financial Stress Index to crisis levels and ultimately led to the Fed postponing its September hike”.
So it is incredible that China has now let the yuan weaken through the levels of August recently and markets are hardly noticing. If the yuan is set weaker again today by China’s central bank, it will be the 11th day in a row which the FT says “will mark a record run of weakening”.
The key here is further weakening can exacerbate the run of capital outflows China has been experiencing, putting further downward pressure on the yuan in what could be a market destabilising negative feedback loop. One to keep watching.
5. The BIG argument – US recession in 2016? It’s incredible that as the Fed starts raising rates, people are already talking about a recession in the United States. I guess that’s because historically the point of tightening is to slow the economy.
But equally, the point of the Fed raising rates this time is that they have left rates at zero far longer than anyone thought and that rate now represents a level that is incompatible with current growth. That’s something that David Kelly, the chief global strategist at JP Morgan Funds, highlighted when talking to BI in the US. Kelly is of the opinion that the economy is strong enough to sustain not just the rate hike from the Fed seen on Wednesday, but a brisk pace of rate hikes going forward.
One of 2016’s big grey swans is a Fed that moves faster than market pricing now expects.
6. The Aussie dollar in 2016. Is the Aussie going to crash in 2016? Down to 65 cents as many believe? Rob Rennie, Westpac’s head of market strategy, told us last Friday that he thought 2016 would be a year when the Aussie might drift lower but it was a year that was likely to “frustrate” the bears.
The terms of trade has crashed, but it’s still well above long-run average levels. That and the fact the Aussie has fallen toward the GFC lows might help explain why it might be nearing a level where the Aussie starts to find support.
And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
Australian Agricultural Co (AAC.ASX)
News that the 163 members of the World Trade Organization have agreed to end agricultural subsidies has to be a plus for Australian exporters. I imagine there are plenty of ways of subsidising when you are not subsidising so I don’t suppose the world is going to go completely cold turkey on that most primordial of political instincts, the farming subsidy. Even so, the agreement is another step in the right direction and follows on from recent good news for agriculture in the form of major free trade agreements.
Australian Agricultural Co is a major cattle farmer but is vertically integrating, with the majority of its revenue now coming from processed beef. The thing about a lot of agricultural exporters is that they are at the mercy of the weather. AAC is down 15% on its recent peak but appears to be heading towards potential chart support in the $1.25 – $1.30 zone.
Ric Spooner, chief market analyst, CMC Markets