It was the day everyone’s been waiting for.
But after 40 sessions where the S&P 500 traded inside a 1% daily range, the big fall of around 2.5% in US stock markets still seems to have caught many traders by surprise.
Much of the blame has been handed to Boston Fed president Rosengren who said the market had been warned of a possible rate rise. But the odds of a September hike, as measured by the CME futures, have only risen to 24% so it must be more than that.
So perhaps something else is afoot.
Locally the US weakness had the SPI traders hitting the sell button aggressively with the September futures ending down 79 points after Friday’s 47-point fall.
Likewise, the Aussie dollar is down. Sitting at 0.7538 this morning it is almost 200 points below Thursday night’s high. Oil and gold are also lower.
Here’s the scoreboard (7.34am):
- Dow: 18085 -394 (-2.13%)
- S&P 500: 2127 -53 (-2.45%)
- SPI 200 Futures (September): 5,246 -79 (-1.5%)
- AUDUSD: 0.7540 -0.0100 (-1.3%)
The top stories
1. The big fall in US stocks means the ASX’s underperformance gap is closing. The ASX has had a shocker recently. After trading up to a high of 5574 on August 24 the physical market has drifted 4.2% lower by Friday’s close. That was while the S&P 500 traded a very quiet, stable, sideways pattern.
It raised questions about the underlying sentiment toward the ASX200 in the local market as it materially underperformed other benchmarks. In many ways, Friday’s fall in the US closes that gap between US and local indexes. But as the 79-point fall the SPI200 futures are suggesting shows, the ASX 200 remains under pressure.
Where are the buyers? When will they step back in?
2. A quick summary of Fed comments on Friday – September is live. We had three Fed speakers on Friday. Fed governor Daniel Tarullo, Bosten Fed president Eric Rosengren, and Dallas Fed president Robert Kaplan. On balance they weren’t overly hawkish at all by my read. But the market wanted to read Rosengren, who is seen as a dove, as hawkish, so all the ex-poste commentary is off Fed warnings.
Now readers know I think the Fed is closer to a move than current market pricing. But the reaction to Rosengren’s comment that “a reasonable case can be made for continuing to pursue a gradual normalisation of monetary policy” suggests that deep down, traders think that’s probably right.
The fact that Kaplan also said “I think the markets have gotten plenty of notice that we are looking for opportunities to remove accommodation,” even as he gave his own warning that the Fed could wait simply highlights the fact that September is live. I’m 60:40 for the hike.
Now we wait for Lael Brainard’s speech tonight.
3. As a result of the above, US Treasurys were under pressure for a second consecutive day. Friday’s selling has yields up 7 to 8 basis points at the long end of the curve with the 10-year yield now at 1.666%, its highest since late June. When bond prices fall, yields rise.
German and Japanese 10s have been rising as well and both are back in positive interest rate territory.
4. The return of volatility is not an end to complacency. I’ve read so many stories about complacency this, and complacency that recently while US stock markets have been fairly quiet. All this chatter has been winding me up in the same way as a tight range winds the rubber band of volatility ever tighter. Eventually the band unwinds and as those of us who have been around for a while know, low volatility at some point transitions to higher vol.
But it was never complacency from traders.
Journos and analysts bored with having nothing exciting to talk about wanted to call the markets complacent. But that wasn’t the case. I’m not sure I know any trader who’s shown smug or uncritical satisfaction with themselves or their achievements over the past 40 days. Bored with the low range in the S&P perhaps. But you couldn’t say that about Japanese bonds, gold, oil, the Aussie dollar and so many other markets, including the ASX200. So the focus was elsewhere as traders wait for the debate about the Fed and the US economy to be resolved.
So yeah – Friday saw US stocks break to the downside with a range bigger than 1% for the first time in around 8 weeks. But it wasn’t the end of complacency. It was just a range break.
5. Mortgage-backed securities are back in favour. I have to say as a former small bank treasurer I’ve always thought mortgage-backed securities are a great tool. They are self-liquidating so they provide the best form of funding for a bank and they also offer a pretty good pick up for wholesale players who buy them.
But as we saw in the pre-GFC years, in the wrong hands the securitisation technology, and the ratings that they generated, gave a false impression of risk. One that almost blew up the global economy.
But Bob Bryan reports, these toxic assets made famous by ‘The Big Short’ might actually be a good investment.
6. It’s a big week for markets – here’s my diary of all the key events and data. Whether it’s the NAB business survey, the August jobs report or Chris Kent’s speech there is plenty for local markets to watch this week. Internationally we have a Bank of England meeting as well as retail sales and CPI in the US. And tonight all eyes will be on Fed governor Lael Brainard’s speech.
It’s a huge week – here’s the diary.
Key data for the past 24 hours (with thanks to BNZ markets)
UK: RICs house price balance, %, Aug: 12 vs. 2.0 exp.
JP: GDP, s.a. q/q, %, Q2 F: 0.2 vs. 0.0 exp.
AU: Trade balance, AUDm, Jul: -2410 vs. -2700 exp.
CH: Trade balance, CNYb, Aug: 346 vs. 373 exp.
EZ: ECB main refinancing rate, 8 Sep: 0.0 vs. 0.0 exp.
EZ: ECB asset purchase, EURb, 8 Sep: 80.0 vs. 80.0 exp.
CA: New house price index, y/y, %, Jul: 2.8 vs. 2.5 exp.
And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
Scentre Group (SCG: ASX) – the yield sell off has been going on for weeks.
The yield related selling that emerged in the wider US stocks on Friday has been under way in many utilities and property stocks for some time.
Scentre Group which owns the Westfield shopping centres in Australia is a case in point. By Friday, it was down 15% from its peak in late July. It also hit the potential support including its 200 day moving average. However, given the selling momentum now in markets it’s a good chance of falling straight through this.
Given that the yield sell off in these sectors is now quite “mature”, forward looking traders might already be thinking about levels where these types of stock will represent decent value. The next major support for Scentre Group looks to be around the 61.8% retracement level $4.24/$4.32. At that price, it will have a dividend yield of about 5.1% which seems pretty reasonable even assuming some increase in bond yields over coming weeks. This is also the support that held SCP when the market sold off after the first Fed rate hike.
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC
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