Stocks are down around the globe, oil has crashed, gold is higher and the Australian dollar is under more pressure as we open trade in Australia today after markets had another night to forget.
In what is almost the perfect the storm for traders, increased uncertainty about the Chinese economy and the weakening yuan combined neatly with the North Korean nuclear test yesterday to increase uncertainty both within the region and across markets more broadly.
Coming on top of the Iran-Saudi face off, it’s just another point of stress for traders as 2016 begins and they have not taken it well. That’s seen the Dow lose close to 300 points, the S&P 500 is down 1.2% and back below 2,000 while stocks in Europe were all down 1%.
Locally however, after another bad day’s trade on the ASX yesterday where the 200 index lost 1.2%, futures traders were more sanguine overnight with the March contract down just 8 points. I wouldn’t bet on that being the extent of the sell off today though. BHP fell hard in London, Brent crude closed down 5.9% at a fresh 11-year low but perhaps a weaker Aussie dollar might mitigate.
So, the scoreboard (8am):
- Dow: 16,869, -289 (-1.7%)
- S&P 500: 1,990, -26.49 (1.31%)
- SPI200 Futures (March): 5068, -8 (0.2%)
- AUDUSD: 0.7068, -0.0098 (1.37%)
And now the top stories:
1. BHP and Rio may be about to tap the market for billions so they can buy distressed assets. The AFR reports this morning that BHP and Rio are channelling their inner Warren Buffett and looking to raise $30 billion to buy undervalued assets in the current market commodity rout. That’s the view of analysts at Bank of America the paper reports. They say “BHP could raise as much as $US15.4 billion and Rio $US5.7 billion to curb reliance on debt”.
That’s not good for the stock price short term, BHP was down around 5% in London trade. But longer term this could be a great opportunity for both companies and their shareholders.
2. Ahem, the Fed’s move in December was a closer call than many thought. The minutes to the Fed’s December meeting are out and there is a little bit of a surprise in them. You’ll recall that was the meeting where the Fed finally delivered on its promise to raise rates. But the minutes show that “some members said that their decision to raise the target range was a close call, particularly given the uncertainty about inflation dynamics, and emphasised the need to monitor the progress of inflation closely”.
With crude crashing again, perhaps the 4 hikes the Fed suggested in its dot plot might be difficult to deliver?
3. What exactly does North Korea’s test mean? This is the fourth time the North Koreans have tested a bomb and traders will be wondering what it actually means. Normally this might be shaken off but with so much uncertainty around the test has more resonance than normal.
Here are a few explainers to help figure things out:
- North Korea says it let off a hydrogen bomb
- There’s a disturbing reason scientists are worried about the bomb North Korea says it just set off
- These maps show just how enormous North Korea’s previous 3 nuclear tests might have been
- And from the WSJ – North Korea Hydrogen-Bomb Test Would Signal Dangerous New Phase
4. China’s yuan move yesterday was the real nuke that hit markets. I don’t want to downplay the potential impact of North Korea miniaturising an H-bomb to the point they can put it on a missile. But the big news for markets yesterday was really the weaker Chinese yuan fix and then the release of services PMI which fell to the weakest level in 17 months of just 50.2.
The yuan matters because the Chinese central bank caught traders with a head fake with the big move in the yuan fix from 6.5169 Tuesday to 6.5314 yesterday. David Scutt has a great explainer here.
And in case you missed it yesterday afternoon, Scutty reckons government intervention is the only thing keeping China’s stock market afloat.
5. Crude oil is crashing hard. Crude hit its lowest level in 11 years in Brent crude terms and lowest since the GFC in the US terms, WTI, I usually talk about.
That matters for stocks, with the energy sector a big drag. And it matters for central banks who keep saying that inflation will soon head back toward 2%. Already the Fed minutes show the worries about lowflation, the persistence of inflation below central bank targets.
Traders will be wondering when crude’s drop will end.
6. The Australian dollar has collapsed 3% this week. The Aussie dollar has had a hard week and last night broke the uptrend since the low below 69 cents last August. The obvious question traders are asking is how low can it go.
And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
So here we go again. Is this just another episode of volatility or the beginning of a 2016 bear market? Probably just more volatility, symptomatic of a well valued market in a low growth environment I reckon. You can never be sure of course and as usual, the big bank stocks will probably be a handy guide to whether the selling is getting a bit more serious.
Westpac has traded in a pretty neat trend channel since late September. A clear break below the channel support would be a warning sign. More serious would be taking out the 78.6% Fibonacci retracement and support around $30.
Ric Spooner, chief market analyst, CMC Markets