6 things Australian traders will be talking about this morning

A night of heavy weakness in commodity markets has weighed on stocks in the US with losses of around 1% across the big indexes. Bonds have rallied as a result. Not necessarily because of a repricing of the risk of December Fed rate rise but certainly because of a changed global inflation outlook now crude oil has crashed to 6-year lows.

That commodity weakness has weighed on the Aussie dollar which has lost more than 1% since this time yesterday. That’s in keeping with overall US dollar strength last night but the selling in commodity currencies has been far greater than in other pairs.

The wash-up is that after a lacklustre performance yesterday, which included a sharp reversal from early gains above 1%, the ASX looks set to open slightly down if overnight futures trade is any guide. The Dec SPI 200 contract is down 17 points. But no one would be surprised if the market falls more than that.

Besides the 6% fall in crude, copper fell more than 1%, iron ore continues to tank and the overall CRB commodity index fell 2.55%.

First, the scoreboard (7.44am):

  • Dow: 17,718, -129.61 (-0.73%)
  • S&P 500: 2,072.68, -19.01 (-0.91%)
  • SPI200 Futures: 5,130, -17 (-0.3%)
  • AUDUSD: 0.7261 -0.0078 (-1.06%)

And now, the top stories:

1. Oil crashed overnight. With no adults in charge, the oil market is free to find its own fun at the moment. That’s after OPEC passed on a chance to send a signal that it might try to stabilise prices last week. So the production increase Friday and clear signal the Saudis want to keep trying to crush US shale producers caught traders on the hop.

The result is an overnight clearout of long positions and some heavy selling as traders look for the producers’ pain point. Crude has now crashed 6% to a 6-year low. Akin Oyedele has more.

And something to keep in the geo-political risk folder for 2016, Elena Holodny says there are a bunch of OPEC members are “at risk for a significant crisis” in the year ahead.

2. Aussie and Kiwi dollars the worst. The antipodean pair are getting crushed today and are down 1% and around 1.4% respectively. That gives them the honour of worst performer amongst the heavily traded currencies by the length of the Flemington straight.

For the Aussie, it had to happen. With all the chat about the Australian dollar outperforming commodities over the past month, forex traders were bound to notice sometime. And what better time to belt the Aussie lower then shortly after it’s failed at important resistance and on a day when oil, copper, and iron ore are all crashing again?

For the Kiwi, markets are worried about a rate cut this week and Raiko Shareef, BNZ’s Wellington-based currency strategist said the fall is a reaction to commodities but also “has been assisted by the modest decline in NZ short-end yields yesterday, ahead of Thursday’s RBNZ meeting”.

Oh, and the Canadian dollar fell to an 11-year low against the US dollar last night. Forex traders are hating commodity currencies today.

3. Bond market rally signals. Last week, bonds sold off heavily. German 10s lost something in the order of 40% of their capital value with a big 20-point sell off. Last night, German 10s rallied 9 points, 13.5% to a yield of 0.59%. US bonds rallied 4 points to 2.23% and rates around the globe rallied with them.

The key here, as Skye Masters, NAB’s head of interest rate strategy said, is that “the rally in bond markets has been led by the long end and so there has been a reasonable amount of curve flattening”. That’s important because as bond curves flatten, they reflect lower inflation risk (and chance of a big rate hike cycle) which is a result of the falling oil prices.

To put that in context, Reuters reported this morning that James Bullard, the Atlanta Fed president, said in a speech “if inflation stays low next year once oil and dollar stabilizes, it would be a blow to the Fed’s economic narrative”.

4. US corporate bonds are going to blow up. That’s the growing fear that’s permeating fixed income markets at the moment as the Fed moves toward tightening. But it’s not really about the Fed at all. It’s about how higher rates interact with earnings and balance sheet leverage.

Mike Bird reports that Laird Landmann at TCW, a major asset management firm in the UK, said in reference to the US corporate bond market that “people are going to be carried out on stretchers”.

“When earnings are coming down, leverage is high and interest rates are going up. It’s not good,” Landmann added.

The key here is it’s not just US corporate bonds at risk. Emerging market companies, especially in China, have had a huge increase in leverage over the past few years.

5. HSBC says China could be in a doom loop. I’m in the camp that says an absence of pricing power in the economy suggests a weakness in aggregate demand.

Ben Moshinsky reports that HSBC is worried that this could be a big issue, and a doom loop for China. The bank is worried that slowing demand leads to falling inflation which in turn leads to falling demand as people and companies forestall purchases. That leads to a “persistent output gap,” HSBC says.

That in turn means that prices continue to fall (PPI has been negative for almost 4 years and CPI inflation in China is falling) which “could have a negative impact on expectations and growth which may become a self-fulfilling prophecy”.

HSBC also highlights that leverage has increased in the economy.

6. China’s currency threatening markets. Given what HSBC said above, this is one to watch. Sure, it’s not getting a lot of press at the moment, nor are traders overly concerned. But they should be watching and talking about the continued weakness of the Chinese yuan over the past 5 weeks.

That weakness has taken the USDCNY rate back to levels seen in the August stock market rout. It also coincides with capital flows in China dragging foreign reserves to their lowest levels since early 2013. I’ve got more here.

And now from CMC Markets’ Ric Spooner is today’s Stock of the Day

NAB

It was a rough night for oil and iron ore. A couple of the potential consequences of this could be a weaker $A and even greater caution by the Fed due to the negative impact of lower oil prices on inflation. Both these possibilities may ultimately be supportive for some stocks outside the mining sector and leaves intact the possibility of a Santa rally driven by support for the banks and other yield stocks

I’ve identified a couple of potential points on the NAB chart as possible turning points to launch a year-end rally. The first would be the AB=CD level around $29.16. A second may be the previous peak around $28.95

NAB by the way announced details of the demerger of its UK banks yesterday. It’s proposing to divest 75% to existing shareholders who will receive one share in the new bank for every 4 NAB shares they hold. The other 25% will be sold via an IPO. Shareholders will be able to buy and sell their new UK shares on the ASX as Chess depository receipts.

Ric Spooner, chief market analyst, CMC Markets

You can follow Ric on Twitter @ricspooner_CMC

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