The commodity rout we saw in Asia yesterday lacked the follow through that many feared overnight but prices for industrial metals and crude oil remain precariously placed near multi-year lows. That weakness, and the fears about global growth it speaks to, saw stocks generally lower across Europe and the US. Against this backdrop, and a stronger US dollar the Aussie is holding in well.
First the scoreboard:
- Dow: 17,792.68, -31.13, (-0.17%)
- S&P 500: 2,086.97, -2.20, (-0.11%)
- SPI200 Futures: 5,269 -16 (-0.3%)
- AUDUSD: 0.7187 -0.0051 (-0.7%)
And now, the top stories:
Stocks – After last night’s subtle drift lower there is some chatter that stocks might have hit a wall and are in need of fresh news to drive them higher after last week’s recovery from the Paris attack lows. With the S&P 500 stuck below 2,100, the DAX stalled after its breakout, the ASX200 looking similarly in need of a new push, and the Nikkei unable to break the glass ceiling at 20,000, the search for the next good news story is afoot.
Unfortunately for US traders the economic news last night was disappointing. Raiko Shareef from BNZ Wellington highlighted US PMI data had slipped below its EU equivalent
“The euro-zone composite PMI rose to 54.4, beating expectations to hit its highest level since May 2011. The upside surprise was evenly spread across manufacturing and services. On the other hand, the US Markit PMI undershot expectations, printing at 52.6 in November, its lowest since October 2013. However, this simply brings the index closer in line with the more widely-followed ISM, which sits at 50.1,” Shareef wrote.
That’s a challenge for stocks today and the ASX is pointing lower this morning based on futures trade.
US dollar surge – The US dollar surge has been accompanied by some extreme positioning in markets as traders buy dollars and sell virtually everything else. That’s driven Euro down toward a trendline which stretches back to 2000 and the Yen up toward highs again. The Australian dollar has resisted somewhat given the pick up in interest rates recently but overall trader bets are heavily skewed toward long dollars.
That’s a risk as we approach and ECB meeting on December 3rd where Bundesbank President Jens Weidmann is clearly going to bat up against Mario Draghi’s promise of QE. It’s also a risk if the Fed tightens in mid-December but releases a dovish statement.
Like commodities, below, we may have seen the pessimistic crescendo we need to see a reversal of fortune for the USD stuck below 100 in dollar index terms.
Here’s ANZ’s excellent chart showing the relationship between positioning and US dollar moves.
Industrial commodity rout – Yesterday’s big fall in commodities during Asian trade set up a very interesting night for European traders. Copper was hammered down to just a littleover $2 a pound, But the fact that European data printed a little better than expected and the fact that the selling was clearly originating out of Chinese exchanges gave traders some pause for thought.
Also throw in the fact that the Saudis say they are ready to work with other nations to stabilise prices and the big question for traders today is this: did we see the pessimistic crescendo in commodities we needed for the market to clear? Or, is this just a sign of things to come?
For context “pessimistic crescendo” is my term for panic selling. That’s what it felt like yesterday.
But the key for global markets generally could be the Saudis and oil because lower energy prices are driving lower inflation and if a floor comes in under oil then disinflation can start to wash through the data.
Woolies – Could Roger Corbett have timed his return any better? It’s a long way from $39 a share as the wild ride for Woolworth’s shareholders has continued lately due to both market and company specific factors. But it was the most recent falls, from $28 to $23 on company specific news around performance, profitability and strategy which were the most troubling as Woolies seemed to lose its way, in supermarkets, Masters and Big W.
So, yesterday’s news that former CEO Roger Corbett was returning to Woolies as an adviser to the Board was greeted with a sharp 3.9% rally back to $24.63. But before Corbett, his chairman Gordon Cairns gets to excited CommSec market analyst Steve Daglian says the rally came “after speculation two global private equity firms – TPG and Blackstone Group – are discussing plans to jointly acquire Big W.”
You’d be a brave trader to buy Woolies down here. But what was it Sir John Templeton said?
To buy when others are despondently selling and to sell when others are greedily buying requires the greatest fortitude and pays the greatest reward.
Ric Spooner has a look at the technicals for Wollies in Chart of the Day below.
Bond markets – Liquidity is disappearing in one of market’s great regulatory own goals. As we head toward the usually illiquid period at the end of the year there are growing concerns for the structure of US Treasury markets as the spread between the highly traded “on the run” securities and those of the older, less traded, “off the run” bonds widens. That’s something that we usually only see in times of market turmoil but at present it is a direct result of what looks increasingly like a regulatory own goal.
Isaac Chang, global head of fixed income at KCG, an electronic market maker, told the FT that the current breakdown in the treasury market is a direct result of increased capital requirements for banks.
“Lower turnover requires banks to hold on to positions in off-the-run securities for longer periods and as capital and balance sheet has got more expensive that cost has gone up,” he said.
Throw in foreign central bank selling US bonds and we get upward pressure on US, and global, interest rates. Indeed, last night in the US the 2 year note auction saw yields up near the all important 1% level with an average 0.948%. Why does that matter here at home you may ask. Because Australian 2-year rates are heading back to years highs as well.
Black Swans – SocGen has updated its list of things that could derail the global economy. Now of course this is a list about the economy, not markets. How it is supposed to work is that from the risks that SocGen identifies we can then infer what markets will be affected and what ructions we might see. A Brexit, Britain leaving the Euro, would really set the cat amongst the pigeons. So even though the list is largely unchanged from the last update, it still neatly summarises the things that traders are worrying about and investors will be talking about around the asset allocation table or monthly investment committee meeting.
But the very definition of Taleb’s Black Swans means you can’t predict them. So there is likely to be something out there no one is thinking or talking about.
And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
Woolies’ share price was up 4% yesterday in an interesting day’s price action. There are again press unsubstantiated press reports of private equity interest in the company. This is always likely to make short sellers nervous if nothing else. In other news, former CEO Roger Corbett has been appointed as a consultant for the 2nd time around after serving in this role between 2006 and 2011.
Perhaps of most immediate interest is that the company will hold its AGM on Thursday. Some may be positioning for the possibility that new Chairman Gordon Cairns might just use this as an opportunity to strike hard and early with strategy announcements designed to restore investor confidence.
Yesterday saw price gap above the 20 day moving average. Volume was above average although not exceptional at around 7m shares. If the share price can stay above the gap it will be a sign of short term strength. The 38.2% Fibonacci retracement level at $24.95 looms as a near term test. A bounce off that and a quick move back to fill the gap would be disappointing for bulls. The 50% retracement and bottom of the previous gap around $25.50 is the next feature on the chart landscape for the more optimistic scenario.
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC
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