The rally in stocks didn’t just stall last night – it went into full retreat. European markets were hammered lowered after Mario Draghi delivered a monetary Fiat, not the Ferrari the market expected. That put pressure on the US market which was then compounded by Janet Yellen again reiterating it’s time to raise rates. US stocks are off their lows but finished weak. That suggests a poor start on the ASX with futures down 68 points.
It’s a changed, changing, investment landscape folks.
Nowhere is that more evident than the ramp up in euro on Draghi’s disappointment. From a low of 1.0539 last night, the euro sits at 1.0950 this morning, up 3.4%. That hammering of the US dollar allowed most currencies to lift and the Aussie dollar is back at 0.7359, the highest levels since October, and closing in on solid resistance below 74 cents.
On commodity markets, there is big expectation OPEC could deliver something tonight and crude is up 3%. Copper rallied as well, but iron ore is still struggling.
All eyes on retail sales today in Australia and non-farm payrolls in the US.
First, the scoreboard (8.15am):
- Dow: 17,477, -252.01 (-1.42%)
- S&P 500: 2,049, -30.92 (-1.43%)
- SPI200 Futures: 5,164, -68 (-1.3%)
- AUDUSD: 0.7355 +0.0045 (+0.68%)
And now, the top stories:
1. QE is not QE, Mario Draghi disappoints. Draghi blew up European stock markets last night and caused the euro to surge because he didn’t deliver on his implied promise of shock and awe. The reason he achieved these counter-productive results was that even though the ECB extended their QE program till March 2017 and beyond, and even though he broadened the program to buy other debt, and even though he cut the ECB deposit rate from -0.2% to -0.3%, these measures fell way short of what the market expected.
Worse still, five members dissented in the decision and Bundesbank president Jens Weidmann went straight to Bild and said the measures announced were unneccesary.
The wash up for traders is that Draghi’s credibility is now shot and there is every chance that the ECB is done. That means no more stimulus, which in turn implies less support for European and global stock markets and less downward pressure on the euro.
2. Carnage in stock markets. It’s been a horror night for stocks, especially in Europe. The ECB’s faux easing has really kicked the chair out from under continental bourses. In Frankfurt, the DAX lost 400 points, 3.58%. In Paris, the CAC lost a similar amount while in London, the FTSE dropped 2.27%. In the US, markets were buffeted by this and Janet Yellen again reiterating rates are headed higher.
BUT, the key for traders is this. The Fed is about to embark on a path of monetary tightening. The ECB looks like it is not going to step into the breach and add additional global liquidity over and above what it is already doing. The dissents and the paucity of real measures announced overnight suggest that Dragi is done on the easing front for a while.
So the globe’s two biggest central banks are not going to prop up stocks. Think about that for a second, traders – it’s becoming a very different investment landscape.
3. Bond market crash. Just imagine for a moment that you woke up one morning to find that the ASX, Dow or FTSE were down 20%, or 42% – what would you do? How would you feel?
It’s a question some bond traders around the world can answer this morning after the combination of a recalcitrant ECB and Janet Yellen’s reaffirmation that rates in the US are on the way up combined to drive yields sharply higher.
German 10-year bonds are up 20 points, 41.59%! Italian 10s are 25 points higher (a 19.11% move) while Spanish bonds rising 22 points represented a loss in value of of 15.12% to holders of these bonds. In the US, 10-year bonds rose 15 points to 2.33% for a 6.9% loss and in the UK, rates rose 13 basis points to 1.89% for a 7.55% loss. Short end rates were also higher.
Australian rates have been driven higher as a result, with the 10s set to open at 2.83% while the 2s moved sharply up to 2.11%. That’s back toward the range top.
Again, higher rates mean a very different investment landscape if they persist.
4. A test of Australian economic strength. Yesterday we published a piece highlighting that it’s a Merry Christmas for the Australian economy as it completes another year without recession and once again confounds the doomsayers.
But in many ways, today’s release of the October retail sales report is every bit as important as the Q3 GDP released this week. How exactly did consumers kick off the 4th quarter? We’ll know at 11.30am AEDT. In the meantime, David Scutt has written a 10-second preview of today’s release.
5. Corporate bond defaults. This is something traders, investors and casual observers of markets need to get their arms around. Corporate debt is the big grey swan looming on the horizon for 2016.
Earlier this week, Paul Colgan highlighted that the colossal debt build-up in emerging markets since the GFC may be “the next shoe to drop”. Overnight, Matt Turner from Business Insider US saw Colgo and raised him $1 trillion.
Turner quotes UBS strategists who believe that there is a storm coming to global credit markets. You get a sense of the tone of the piece with this excerpt:
“Companies have binged on debt following the financial crisis, taking advantage of an extended period of low-interest rates.”
The key here folks is that it’s already quietly happening and hardly anyone is noticing. The FT reported Monday that global defaults have climbed to 6-year peak of $95bn.
And yes, that’s before the Fed has started raising rates. Watch this space. Very closely.
6. Crude oil could be about to surge. Late yesterday in Asia trade, news emerged that the Saudis might be bringing a deal to the table at tonight’s meeting to cut production by $1 million barrels a day. The hitch is it’s a rumour so far, and crucially, they apparently want non-OPEC members to join in.
I covered the implications for prices in my AxiTrader Asian Markets Wrap yesterday. But suffice to say if the Saudis can get a deal done, crude oil prices could roar.
Now imagine what that will do to global inflation, Fed tightening plans, ECB largesse and then think about the impact on markets as the wheels move and the cogs adjust. Tonight’s OPEC meeting could be the most important in years.
And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
I wrote yesterday about the possibility of CBA being positioned at a Fibonacci chart turning point that might signal the beginning of a pullback in stocks prior to the start of a Christmas rally. Following last night’s events the pullback scenario looks like being right.
The question now is where the buying levels might be if the Santa rally theory is going to play out.
The chart might (or might not) provide better clues depending on how any pullback plays out and what patterns it might form. However, at this stage a couple of the more obvious candidates might be around $76.80 which would pick up the bottom of the trend channel; the 61.8% Fibonacci retracement level and the 50 day moving average (not shown on the chart). The shallow correction alternative might be around $78.80 which picks up the 38.2% retracement and the 20 day moving average.
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC