– It’s been a wild and crazy night as Nymex crude fell below $54 for the first time in five years hitting a low of $53.60 before a few traders exploited the stretched nature of the short-term market and chased the price back to a $57.15 high. In the end though, crude is largely unchanged at $55.92 a barrel. Looks like it could be a low though.
– This incredible volatility fits the thesis we highlighted yesterday when ANZ’s Richard Yetsenga proposed that volatility would rise toward year’s end. Indeed, European stocks closed sharply higher because that’s where US stocks were at the end of the Euro day, but US stocks have back all their gains and are now lower on the day. Volatility and thin markets.
– Currency markets have climbed through massive ranges overnight as well as the US dollar was under pressure early. But a two-and-a-half cent range on USDJPY highlights that traders are edgy at the moment. Which helps explain how the S&P volatility index, the VIX, rose 14.5% to 22.45. Minsky!
– At the close, and just a day before the Fed announcement and US CPI, US stock markets have had a shocker and are now back in the red.
- Dow Jones down 0.65% to 17,069
- Nasdaq down 1.24% to 4,548
- S&P 500 off 0.85%, 17 points to 1,973
– European Markets bounced strongly on Tuesday, particularly in the last couple of hours into the close. In the UK, it was the oil and mining companies that drove the bullish bus. Reports are that “bargain hunters” were in but I doubt that – it just means the market rallied and we can’t find any good reason. But as is the way of European trade, it closed while the US was still open, so the sell-off in the US signals a weaker open tonight.
In terms of data last night, there was a lot of manufacturing and services “Flash” PMIs released and the summary would be that they were mixed. Scarily for the BoE UK, inflation printed -0.3% (yes, deflation) in November, taking the YoY rate down to 1%.
Anyway, at the close.
- London(FTSE 100) up 2.41% to 6,332
- Frankfurt (DAX) up 2.46% to 9,564
- Paris (CAC) up 2.19% to 4,093
- Milan (FTSEMIB) up 3.27% to 18,670
- Madrid (IBEX) up 1.8% to 10,082
– Locally, price action on the ASX saw the March SPI 200 contract rally 14 points to 5,115. There is no data out today, so offshore markets will drive the bus but have a look at Michael McCarthy’s chart of BHP below – interesting.
– In Asia yesterday, it was a tale of stimulus in China and a poor lead in Hong Kong and Japan. Stimulus of course was not forthcoming yet but the weak print in the ‘Flash’ manufacturing PMI of 49.5 has hopes raised in Shanghai once more. Shanghai bulls, you can’t keep them down.
At the close:
- Tokyo (Nikkei Average) down 2.01% at 16,755, strong yen will weigh
- Hong Kong (Hang Seng Index) down 1.55% to 22,671
- Shanghai (Shanghai Composite Index) up 2.32% to 3,022
– On bond markets, US bonds have joined the VIX in showing some fear is slipping into the market with US 10s closing the day at 2.05%, down 7 points. German bunds at 0.6% are at all-time lows while in the UK, Gilts are at 1.78%.
– On currency markets, what a wild and crazy ride it was overnight as the bounce in oil and stocks put pressure on the US dollar which finished our day on the back foot. Against the yen, it bottomed out around 115.5 before rallying back to 118 but at 117.21 this morning the yen is still stronger than many expected. The euro traded 1.2431-1.2569 and at 1.2496 it is poised to follow the yen and break out. GBP is at 1.5725 while the Aussie dollar at 0.8205 is relatively calm with a low at 0.8197 AGAIN. Someone is buying under 82 cents at the moment.
– As noted, crude had a big cycle to be largely unchanged on the day. Copper is at $2.86 a pound, gold can’t take a trick and is at $1,196 while on the Ags, corn fell 0.73%, soybeans sang 2.57% and wheat was 0.32% higher. On the bulks, March Newcastle coal fell 25 cents to $62.15 and iron ore for the same month dipped 81 cents to $66.88.
On the data front, there is nothing out in Australia. The Westpac MNI business survey drops in China and then tonight it’s the BoE MPC Cut and EU CPI, which will be huge. Then we head across the pond for the US CPI and tomorrow morning we’ll hear from the Fed with a lot of focus on the language of the statement.
And now from CMC Markets’ Michael McCarthy is today’s Stock of the Day
Have you noticed the silence from all those analysts that were bullish on BHP at $40? Now that the stock is trading around $27.50, they’ve gone to ground. Commodity prices have plummeted, and it’s natural that the world’s largest listed mining stock would pull back. However, the monthly chart below shows the dramatic nature of the sell-off in historic terms.
At yesterday’s close, BHP is trading on around 9x trailing earnings, or around 12x forward earnings (after adjusting for lower commodity prices). It has reduced debt, a strong balance sheet, and lower commodity prices are offset to some extent by increased production.
The essence of contrarian investing is going against consensus. The vast majority are now expecting further significant commodity price falls – straight to hell. Investors for the long term have BHP on the radar right now. If this bluest of blue chips pulls back further to the zone on the chart between $24 and $26.50, investors may wish to jump before BHP’s management pulls the trigger on a buy back.
Michael McCarthy, chief market strategist, CMC Markets
You can follow Michael on Twitter @MMcCarthy_CMC
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