Good morning! Here’s your first Christmas present.
– The US economy is growing at its fastest pace in a decade, according to the Commerce Department which last night released the third read of Q3 GDP with an upward revision to 5% (against expectations of 4.3%). That’s not a typo. It is super strong growth which has been fueled by consumption and consumers in particular. The US economy is heating up, as BI US wrote overnight.
– You can’t underestimate the impact of this surge in GDP on global markets. It’s no surprise the Dow is above 18,000 this morning, the euro is below 1.22, and the yen closing in on 121 because the US economy is back in the ascendancy and it appears that QE worked, or is at least working. That means that even the recalcitrant ECB board members fighting Mario Draghi’s efforts to do a Euro-style QE must see the error in their ways and at least give him a chance at getting the economy moving. The corollary of this is that it should reinforce the primacy of the US dollar into 2015 which will further depress the prices of the euro, GBP and here at home, the Aussie, which will also help economically. A stronger US dollar will also keep the lid on commodity prices and while that may lead to some disinflationary issues, it is a global tax cut which is also longer term positive.
– Of course the resurgent US economy reinforces that the Fed will be tightening in 2015 – as they have told us – so this is a headwind for an ebullient stock market. But that doesn’t necessarily mean we can lock in a stock market fall in 2015. Stocks can rally on stronger growth and the Fed can rally, as Henry Blodget wrote recently. 2015 is shaping up as a cracking year for traders with trends, counter trends, the odd surprise and maybe even a mini crash or two.
– To the scoreboard and with 20 minutes of trade left, US stock markets are off their highs but still in record territory.
- Dow Jones up 0.45% to 18,040
- Nasdaq don 0.28% to 4,769
- S&P 500 up 0.26% to 2,084
– European markets just rallied all day, so it wasn’t the US impact. Data in the UK (Q3 GDP disappointed with the yoy rate dipping to 2.6%) and France (0.3% Q3 GDP growth) combined with the failure to elect a new President in Greece, but no one cared. Perhaps they know that as long as the German court case goes the way of the ECB’s OMT in January, the ECB has no choice but to buy more bonds.
Anyway, at the close.
- London(FTSE 100) up 0.32% to 6,598
- Frankfurt (DAX) up 0.57% to 9,922
- Paris (CAC) up 1.42% to 4,315
- Milan (FTSEMIB) up 1.46% to 19,352
- Madrid (IBEX) up 1.03% to 10,478
– Locally, this means the Santa whipsaw rally continues with traders overnight driving the SPI 200 futures contract for March up 32 points to 5,369. It should be a solid end to the year if the US markets are driving higher and as I noted yesterday, when it comes to the US and trends associated with it, Newton’s First Law of Motion is working.
– In Asia yesterday, the Shanghai market weighed in with an accelerated collapse into the close. Around 4pm Sydney time, the market was down around 0.75% but by end of trade it had sunk 3.03% to 3,032 on volume of 437 million shares. There was no obvious catalyst but with liquidity tight it is easy to get a cascade lower when there is a dash for cash. Hong Kong stocks were down 0.32% and Japan had the day off for the Emperor’s birthday.
– On rates markets, it’s worth noting that the big upward revision to US GDP drove US 10s up 10 points to 2.26% – still super low but repricing higher it seems.
– On currency markets, the US dollar was in the ascendancy again, driving euro to 1.2175, GBP at 1.5510, USDJPY at 120.75 and the Aussie at the low for the year of 0.8092. It seems only position squaring is going to alter this trend anytime soon.
– On commodity markets, there was life in the dead cat with crude surging 3.09% to $56.97 a barrel. Gold is becalmed at $1,174, copper at $2.8625 a pound and in the Ag pits, corn was up 0.49%, soybeans rose 0.28% and wheat rose 1.72%. On the bulks, iron ore dipped with March 2015 down 84 cents to $66.71 while Newcastle coal for the same month closed at $62.20 a tonne.
Data is light tonight with Jobless Claims in the US before the Christmas holiday but tomorrow, Japanese CPI and unemployment is out.
20 Seconds is going to take a holiday now until January 12. Merry Christmas and Happy New Year to you and yours.
But before we go here is the last Stock to Watch for the year from CMC Markets’ Michael McCarthy.
Transfield Services (TSE) shareholders had a wild ride in the second half of 2014.
Like many companies exposed to the commodity mining cycle, its shares languished over 2013 and the first half of 2014. In August, it announced an 85% jump in NPAT, and the share price came back to life – for a short period. Then Spanish group Ferrovial indicatively bid $1.95 a share (later $2.00). As is the current fashion, the bid was highly conditional, looking more like an attempt to gain a free option over TSE than an old school takeover bid.
On Monday, TSE rejected the bid, and Ferrovial walked away, citing valuation differences. These likely related to a number of key contracts that are up for renewal in 2015. The ensuing sell off saw TSE touch a key pivot point at $1.45. At yesterday’s close, TSE is trading on around 8x 2015 earnings. While there remains significant risk, the lower share price may make the risk worthwhile. Of course, another takeover bid from an international group looking to participant in the Federal government’s infrastructure program could bring another sharp appreciation.
Michael McCarthy, chief market strategist, CMC Markets
You can follow Michael on Twitter @MMcCarthy_CMC