Ugliness on European stock markets, which fell around 1.5%, has given way to a rally on the Dow and S&P after weaker US data prompted a rethink of the path of Fed rate hikes in 2016.
That rethink found its greatest resonance in forex markets where the US dollar was crushed and it sent euro up above 1.11, USDJPY down below 118 and the Aussie dollar 2% higher at 0.7178.
The other big mover overnight was crude oil which ignored a big inventory build and rallied close to 9% last night. That’s dragged commodities higher and copper is up at $2.10 while all the volatility helped gold power through its 200-day moving average to sit at $1,141 this morning.
The wash up on all the action is that after a crushing day on the ASX yesterday, traders will look for better day today. The March SPI 200 contract is up 32 points, 0.7%. Energy should do well today while the positive US lead and rethinking of Fed actions could support Asian stocks more broadly.
Here’s the scoreboard (8.04am):
- Dow: 16,336, +183 (+1.13%)
- S&P 500: 1,910, +7 (+0.39%)
- SPI200 Futures (March): 4,859, +35 (+0.7%)
- AUDUSD: 0.7178, +0.0139 (+2%)
And the top stories:
1. Traders are rethinking their expectations about the Fed after this week’s PMIs. Data released last Friday showed US GDP growth in the fourth quarter of 2015 was just 0.7%. That was a sign expectations the Fed will hike rates four times this year might be at risk. This week we have seen the release of manufacturing PMIs in the US which are firmly in contraction territory at 48. But in modern developed economies, services are far more important and last night’s release of the Markit and ISM services PMIs showed they are slowing their rate of expansion.
Akin Oyedele reports that TD Securities’ Gennadiy Goldberg wrote to clients, saying “the ISM services sector gauge trimming its recent outperformance may go a long way in fanning fears of a more pronounced slowdown to US growth momentum heading into 2016”.
At the same time overnight we had comments from New York Fed president William Dudley that tighter financial conditions will be taken into account at the next FOMC meeting, MarketWatch reported.
So there is more recession chat, a rethinking of the path of US rate hikes, and a weaker US dollar. Watch this space carefully folks. The Fed, and expectations of its actions, is at the heart of all this market volatility in 2016.
2. Recalibrating the Fed meant the Australian dollar rocketed and the USD was crushed last night. There would have been a lot of swearing going on in bank trading rooms and central bank offices last night as the collapse in the US dollar appeared to undermine the work the ECB, Bank of Japan, and even our own Reserve Bank are doing to weaken their currencies. Euro was up above 1.11 at one point this morning while the Aussie’s high for this run has been 0.7188. That’s 184 points off yesterday’s post horror trade numbers low of 0.7004.
The key here of course, is that it’s the recalibration of Fed expectations which are far more important than any particular move the BoJ of ECB might make with tiered and negative interest rates for forex traders at the moment. Perversely, that means that means the BoJ is likely to double down, as governor Kuroda essentially promised yesterday.
It also means the door to an RBA rate cut might be a little more open than many think. Here’s the Aussie price action last night.
3. Australian banks got thumped yesterday, here’s a neat explanation why. It was ugliness all over the ASX yesterday but the walloping the banks got was really interesting. There are many reasons that this could be so. Investors could be worried about dividend policies, they may be concerned about the economic outlook, an increase in bad debts, or many of a myriad of other individual factors.
But it’s also important to note that it’s not just Australian banks which are getting slammed. It’s a global banking rout and what’s going on was neatly explained by Gary Greenwood, banks and specialists lender analyst at Shore Capital in the FT overnight. Greenwood said the selloff is a continuation of the recent trend and noted that:
Banks are very much levered plays on the economies that they are in and investors have gotten more nervous about those economies. When you look at how levered banks still are that makes them very difficult to value with conviction and therefore you just get indiscriminate selling regardless of price or valuation.
4. Wall Street’s all one way on China’s currency. Can they all be right? China in 2016 is not the Bank of England in 1992. That’s the message from legendary bond manager Bill Gross to the hedge fund managers who are lined up against China’s central bank, the PBOC, expecting the yuan to weaken significantly.
Linette Lopez has a closer look at what’s going including a comment from a money manager that those lined up against China are chasing their John Paulson moment. He means 2008, but if they don’t get it right they might channel some of Paulson’s losers since that big win.
But Brian Kelly, the founder of hedge fund Brian Kelly Capital, told Linnette that “I am short RMB via derivatives and I am in the camp that a 25%+ devaluation is likely in the next 12-ish months.” 25% from here is 8.25 – good luck guys.
5. 5% down, 6% up. Has oil finally found bottom? Dennis Gartman, the famous market letter publisher, once said that “markets that will not go down on bearish news are not bear markets.” That’s something that NYSE floor governor Rich Barry recalled overnight when he noted that the huge inventory build for oil should have smashed prices.
But they didn’t and Barry wrote: “When crude rallies on news of huge inventory levels, it means that we have seen the bottom in the commodity.”
It could be that traders are focused on a rumours out of Venezuela that the Russians, Saudis, and even Iranians might actually be having a meeting. But he has a good point.
On the other side of the coin, or Atlantic, US oil keeps flooding the market, Elena Holodny reports.
6. The volatility of volatility is going to rise in 2016. I went along to a couple of briefings from some big fund managers yesterday. State Street Global (SSGA) and Nikko Asset Management. SSGA was focused on the globe while Nikko segued nicely to what it means here in Australia. So they were different. But they also had a common theme – volatility.
State Street in particular has an interesting theory that we aren’t headed into a period of elevated volatility, rather, we are entering a period where the “volatility of volatility is rising”, according to Kevin D. Anderson, SSGA’s Head of Investments Asia-Pacific.
I’ll have more later today on what Anderson had to say and why he thought that. But to me that sounds scarier than just elevated volatility. Let me explain via reference to what I wrote at AxiTrader yesterday afternoon.
Volatility of volatility is “important because the behavioural psychology folks, the ones who work with finance and economics, have taught us that we humans don’t feel levels we feel change.
That means if we move into a heightened period of volatility people will get used to it and, in essence, that will cure itself…think Greece and other European crises of the past few years.
But, if volatility goes up and down, and up and down, and up and down, traders and investors will be constantly experiencing a regime change for volatility, fear and uncertainty – heightened, relaxed and back – which will mean it’s very difficult to get comfortable or set parameters on which they can invest.”
It’s just uncomfortable the whole time. 2016, what a year.
And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
Monday’s peak neatly rejected trend line resistance, leaving Telstra’s stock price in a holding pattern in the shape of an upward sloping channel.
The market appears to be looking for some insight into how Telstra is going to improve its growth prospects as the NBN gets rolled out and domestic competition intensifies. In the meantime, chart based traders have now had a couple of opportunities to buy off the channel support and take profit at the resistance.
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC
Business Insider Emails & Alerts
Site highlights each day to your inbox.