There are two pieces of massive news overnight which shaped and will shape the performance of markets and the economy in the months ahead.
– First, the European Commission has substantively downgraded the economic forecasts for the year ahead compared to the last update in May. Westpac New Zealand’s economist Imre Speizer said that “GDP growth was revised down to 0.8% (1.2%) in 2014 and 1.1% (1.7%) next year”. They also said the next update of GDP for the EU would show zero growth.
– Also out were media reports that ECB president Draghi has lost the support of the national governors of the member banks and will be confronted this week about his leadership style. Like any organisation, when it becomes internally focused it loses its way – no wonder European growth is so weak.
– The other piece of extraordinary news was not the fall in the price of crude with Nymex down 1.95% to $77.24 a barrel (Brent fell to $82.54), well below the average of more than $100 a barrel for the past few years. Rather the big – HUGE – news was the price cut the Saudis have pushed through for the US. No doubt like Australian miners they have competitors, including shale oil, in their sights but it’s a game changer for the price at the moment. It is also really positive for global growth over time.
– In the US, the unexpected jump in the trade deficit above $43 billion from $40 billion last month “has analysts knocking about 0.4% off their estimates for Q3 GDP ahead of the next revisions”, according to the NAB Economics and Strategy team.
– It all tied up into a small gain for the Dow, up 0.09% to 17,383 but the Nasdaq is down 0.34% to 4,623 and the S&P 500 dipped 0.29% to 2012.
– In Europe, stocks were much weaker with the FTSE down 0.52%, the DAX down 0.93% and the CAC in Paris fell 1.53%. Stocks in Milan and Madrid were 2.24% and 2.12% lower respectively.
– The impact locally on the SPI 200 traders overnight was a small fall of 5 points on the December contract to 5499 bid.
– In Asia yesterday, after having Monday off, traders bought with gusto at the open, taking the Nikkei above 17,000 for the first time since 2007. But it closed the day at 16,862, still up an incredible 2.73%. Lower oil makes it hard for the BoJ to kick inflation higher, however, but the JMMA PMI yesterday showed the positive impacts of yen weakness. In China, stocks were far quieter with the Shanghai B flat, gaining just 1 point at 2,431. Stocks in Hong Kong dipped 0.29% to 23,846.
– On Bond markets, the EC downgrade of growth saw German 10s rally 4 points to 0.77%, Spanish bonds rise but UK 10-year Gilts slip 4 points to 2.23%. US 10s remained flat at 2.34%.
– On Currency markets, the euro continues to confound anyone with a focus on fundamentals, rallying to 1.2544 this morning. Sterling is at 1.5998, and the yen might have made a short term top – it sits at 113.64 this morning. On the Aussie, the buyers were back near the lows for the year and it is up a little under a cent from where it was post-11.30am yesterday at 0.8736. If you are wondering why, I’ve had a look here.
– On Commodities, the iron ore and coal prices were down again for the Dec contracts at $77.82 and $63.15 a tonne. As noted above, crude continues to fall out of bed, gold is at $1,167 an ounce, copper did what it should have for the past week and dipped back, closing at $3.01 a pound. On the Ags, corn fell 2.41%, wheat fell 1.16% and soybeans dipped 0.24%.
On the data front today, in Australia we get the AiG performance of services, HSBC China services PMI (which we will cover here at BI Australia) and then the global services PMI data over the next 24 hours from HSBC and Markit. EU retail sales are interesting, as is the ADP employment change data in the lead-up to non-farms on Friday.
And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
Last week, the market pushed Woolworths shares up to around 17.4 times expected earnings for 2015 with the price peaking at the 40 week moving average.
But Woolworths disappointed investors this week announcing same store sales growth of 2.1% in its Food & Liquour business. Coles blitzed them with 4.3% growth and the WOW share price is under pressure retreating yesterday to around 16.25 times earnings.
If you are in the camp that thinks that in these low interest times, a PE of 16.25 and a dividend yield of around 4.5% will prove too tempting for yield starved investors, then the current support may be of interest. It includes trend line support and the 38.2% Fibonacci retracement just below at $32.91. For good measure the swing down from ‘B” to “C” is about the same size as the swing down to “A”
However, many might consider that given Woolies’ competitive challenges and ongoing problems with Big W and Masters, a valuation more like 15 times earnings and a dividend yield of 4.75% is appropriate.
If you are in that camp, the 50% retracement level at $31.06 comes into focus.
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC