6 things Australian traders will be talking about this morning

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Stocks in the US staged a solid recovery into the close after the S&P 500 was down around 1% at 6am AEDT.

But it’s closed up 0.24% with the recovery, and the volatile day’s trade it speaks to, suggesting after the big 5% falls in Shanghai yesterday things could have been much worse for traders in Asia this morning.

Likewise the recovery in the US, and the fairly muted selling in Europe, saw SPI200 futures swing from an overnight low of 4,825 to sit this morning at 4,880, up 14. Importantly, last night’s low was very close to the important trendline traders are watching. The one that stretches back to the 2009 lows. That could embolden a few buyers today.

On forex markets, it clear that the Chinese actions to stem the yuan’s weakness has had a big impact. The Aussie dollar is up 0.6% just under 70 cents. The euro is down 0.76%, and the Japanese yen is back near 118, a rally of around 1 big figure from yesterday’s low.

But while currency traders relax a little, commodity markets are under heavy selling pressure. Crude crashed again, down more than 5% for WTI and 6% for Brent. In an ominous sign for growth, Dr Copper is below $2 a pound.

So, the scoreboard (8.08am):

  • Dow: 16,398, +52 (0.32%)
  • S&P 500: 1,926, +4 (0.24%)
  • SPI200 Futures (March): 4880, +14 (0.2%)
  • AUDUSD: 0.6993, +0.0030 (0.6%)

And now the top stories – there are a lot of questions:

1. What exactly caused all this chaos in the first 6 trading days of 2016? Rich Barry is the floor governor of the New York Stock Exchange, so he’s well connected and knows a thing or two about markets. Myles Udland from BI US reports Barry offered 5 reasons traders think stocks have had a terrible start to 2016. One thing worth noting – he also says it’s more a lack of buying rather than any heavy selling which is driving stock market weakness at the moment.

2. What’s going on with the Chinese yuan? China introduced a bit of what traders call “two way” in the yuan yesterday with a stronger fix than many expected. That’s been important at changing perceptions of the path that offshore traders are expecting for the yuan. As a result, the USDCNH (the unofficial yuan rate) has seen a massive reversal as the yuan has strengthened in the past two sessions.

That was aided by a Reuters report that a Chinese official said that it is “ridiculous” to expect much more yuan depreciation.

China has the training wheels on at the moment when it comes to managing markets, both stock and forex. But it is certainly trying to do the right thing and not blow themselves or anyone else up.

3. China stocks might be a buy – some of them anyway. We’ve found someone who is not panicking amid all the carnage on Chinese stock markets. Eng Teck, senior portfolio manager at Nikko Asset Management based in Singapore, dropped us a line to say there is still some value in Chinese stocks. “Despite the bumpy ride with major transition underway, there is real opportunity for exposure to some very good companies trading at attractive valuation. The short term case for a bull market in China is not there, but there isn’t a bubble either,” Eng said. Eng prefers the Shenzen exchange to the Shanghai market.

Eng says Shanghai should range trade for a while. After all this volatility, wouldn’t that be nice?

4. Dr Copper says the world economy is in trouble. Copper has fallen below $2 a pound overnight. Many traders and investors will see this as an ominous sign for the global economy because copper has a reputation as the “commodity with a Phd”. That’s because it has always been so ubiquitous in so many parts of the global economy.

The move below $2 will be seen as a significant negative signal about the global growth outlook. Traders will also be watching the 13-year trendline very closely too. A break and all heck could break loose in base metal markets. Stocks, and markets more broadly, wouldn’t like that. Here’s the chart:

Nymex Copper Futures 1st contract (Reuters Eikon)

5. Crude oil crashed again last night. Nymex crude fell briefly below $31 a barrel last night as the new year’s reappraisal of global growth continues. Morgan Stanley says the “downturn is now deeper and longer than any of the previous downturns since 1970”. It’s so bad it has eclipsed the bank’s worst case scenario.

Bank of America Merrill Lynch looks like they might have been caught out too. They downgraded their oil price outlook for 2016 in a note overnight. But the average of $45 the bank expects leaves plenty of room to fall given current prices, if they persist. It means stocks might need to be downgraded again too.

But we needn’t worry. The boss of Shell says the oil price is coming back and current prices are unsustainable. One thing, though, traders might want to take note of – he was out selling a big merger and he was talking about prices in terms of the “decades” ahead.

6. Earnings season in the US kicks off tonight and it could be ugly. As if stocks aren’t under enough pressure at the moment, BI US deputy editor Sam Ro reports if expectations for a drop in earnings are fulfilled, this “will mark the first time the index has seen three consecutive quarters of year-over-year declines in earnings since Q1 2009 through Q3 2009”.

Yuk. Let’s hope the guidance is at least positive.

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

Harvey Norman (HVN.ASX)

Harvey Norman and JB Hi-Fi were bright spots in a gloomy trading session yesterday.

The downward correction in both stocks came to an abrupt halt with a large engulfing candle. This is a situation where the body of the day’s chart candle engulfs the previous candle’s body. The body represents the difference between the opening and closing price. When the close is near the day’s high, an engulfing candle indicates potentially bullish change of sentiment. Trading has turned around and ended with the buyers in charge.

It seems the market is expecting good sales figures when results are released next month and ongoing benefits from Dick Smith’s woes.

Ric Spooner, chief market analyst, CMC Markets

You can follow Ric on Twitter @ricspooner_CMC

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