Good morning. Here’s what’s happened.
– China’s stimulus on Friday drove Asian shares sharply higher yesterday but the reaction of the Aussie dollar, which fell back toward 86 cents, is the clearest sign that markets are nuancing what is happening in stock markets with Chinese stimulus, US and now Europe, with other markets. That is, markets recognise that free cash and money drops can goose stocks but there are already diminishing returns to the economy.
– Thus China stimulus does not equal Aussie dollar strength in any sustainable way because China is slowing and will continue to slow. Likewise, the lack of reaction from gold, crude and copper tells us also that in a global context, the money drops will struggle for traction economically.
– Even though the S&P is going to set another new closing high this morning, the correlation (close to one) of all markets is breaking down as traders differentiate the many trades on offer. It is setting up a huge 2015.
– Anyway, back to overnight trade and a quick look at the scoreboard.
US Markets were buoyed by the Chinese stimulus but thinnish pre-holiday trade and weaker than expected data. Chicago Fed activity index printed 0.14 (0.29 last) and the Markit services and composite indices undershot, printing 56.3 and 56.1.
- Dow Jones up 0.04% to 17,818 off the highs of the day
- Nasdaq up 0.89% to 4,755, strong all day
- S&P 500 up 0.27% to 2,069 for a new all-time closing high
European Markets – solid German Ifo (104.7 climate & 110 current assesment, expectations 99.7) with all reads better than expected.
- London(FTSE 100) down 0.31% to 6,730, struggled all day
- Frankfurt (DAX) up 0.55% to 9,786 on the Ifo data. Off highs at end of day
- Paris (CAC) up 0.48% to 4,368. After an early spike drifted off all day
- Milan (FTSEMIB) down 0.14% to 19,926, early spike gave way to weakness.
- Madrid (IBEX) up 1.16% to 10,643, spike and then held strength
– Interestingly though and something I noticed yesterday on ASX futures, the local market backed off again overnight after a good day on the physical which saw stocks surge more than 1% higher on the Chinese rate cut sugar hit. Overnight the Dec SPI 200 dipped 6 points to 5,348. It could be an interesting day for local stock traders.
– In Asia, the Chinese markets ripped higher on the stimulus with property developers the big winners. One cut begets expectations of another and given this is the first PBOC cut since 2012, expectations are that more will flow. Certainly that makes sense given the slowing economy. In Tokyo, we found out the election will be December 14 but otherwise it was a much quieter day than what we have seen lately.
Here’s the Asian Scoreboard:
- Tokyo (Nikkei Average) up 0.33% to 17,358, back in the black and off the lows
- Hong Kong (Hang Seng) up 1.95% to 23,893, PBoC afterburners still glowing
- Shanghai (Shanghai Composite) up 1.86% to 2,533 – 3,000 is a real chance over 12 months
– On Bond markets, there wasn’t a lot of action, with US 10s closing at 2.3%, German Bunds at 0.74% and UK Gilts closing at 2.05%. The big news, monstrous really, is that Spanish 10s are at 1.97% – under 2% for the first time in modern history.
– Currency traders are still trying to figure out what it all means but the price action in the Aussie, Canadian and Kiwi dollars suggests they don’t believe that the China stimulus will have any material impact on growth. The Aussie is back at 0.8611, well down on the 87 cent high early yesterday. Euro is a bit higher at 1.2437, up half a per cent on the US dollar and sterling is back atop 1.57 at 1.5703. USJPY reversed higher again and sits at 118.25 this morning.
– Iron ore dipped 33 cents for December delivery this morning to $69.63 a tonne. Newcastle coal rose 25 cents to $65 while copper dipped to $2.998. Nymex crude was 1% lower at $75.75 which, along with copper’s fall and gold dipping to $1,196, tells us the macro traders don’t go by the equation that stimulus equals growth. On the Ags, corn dipped 1.3%, soybeans were off a similar amount and wheat lost 0.81%.
– On the data front today, we get the minutes to the last BoJ meeting and a speech from governor Kuroda. There is nothing in Australia except for a speech from RBA deputy governor Phil Lowe before we get German GDP, UK inflation hearings and US GDP. It could be a huge night.
And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
If Medibank has a strong day when it lists today, one of the main reasons is likely to be the need for fund managers to own it just because it’s a big stock. Apart from index funds that track the performance of say, the ASX 200 index, a lot of active managers can also fall into this camp. They advertise their performance compared to the index. This means they often put limits on how much their portfolio can differ from the index itself.
Private investors and traders who don’t have to do this might keep an eye on Medibank’s smaller rival, NIB Holdings (NHF.ASX). It broke above its 200-day moving average when interest in the Medibank float got under way in earnest and then peaked neatly at the old trend line support and 78.6% Fibonacci retracement level at $3.38.
Yesterday NIB sold sharply, returning to the 200 day average, closing at $3.05. Perhaps those hedging the Medibank float were exiting positions.
Depending on your earnings forecast, NIB has traded in a range of about 17.5 to 20.5 times current year earnings in recent months. Yesterday it closed at around 18.5 times. At $2.15, Medibank will be valued much higher at 22.9 times earnings. Value hunters, might have a return to the bottom end of NIB’s PE range of 17.5 times on their watch list. This would see the share price back to the 78.6% Fibonacci retracement level around $2.85/$2.90
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC