– One heck of an interesting close in US markets, with a bounce in the price of crude in New York sparking a recovery in stocks and the US dollar. Crude was already having a good day but from a little before 2pm New York time, it rocketed from $46 to $49 a barrel. It’s back at $48.13 now but that move has left it up 5% and dragged the S&P 500 from support at 1,988 all the way back to 2,011.
– The move in crude also reverberated in bond and currency markets. US 10s had been down at 1.788% but are now back at 1.849%. At the same time USDJPY was down around 116 before rallying back to 117.35 now.
– What drove the move in crude is difficult to know. The trader in me says this is a nice little short squeeze instituted by someone who knew that driving crude higher would profit in other markets like stocks, bonds and currencies. It’s what I would have done if I had a big fund and if that’s the case they are making out like bandits this morning. Equally however, there is much bad news in the price of oil already, given recent price action making it vulnerable to a squeeze. Which reinforces to me that this is just a squeeze – a good one, but a short one.
– The reason it doesn’t look like the start of oil’s grand recovery can be seen in last night’s data and the Fed’s Beige Book this morning. French inflation was 0.1% better than expected year on year (yoy) in December, printing 0.1%, while Italian CPI yoy printed -0.1%. There is little demand to drive prices in Europe. But perhaps it’s the big miss in US retail sales which printed -0.9% for December against expectations of a fall of 0.1% which is the starkest example that even in the US, which is growing nicely, consumption is still struggling. Indeed, the Beige Book used “modest” and “moderate” as the adjectives to describe growth across the various Fed districts.
– Disinflation and deflation tells us there is little pricing power for companies and this suggests that demand is lacking all over the globe. Which means that central bankers are failing, as I wrote yesterday.
So at the close, the scoreboard in the US reads:
- Dow Jones down 1.06% to 17,427
- Nasdaq down 0.48% to 4,639
- S&P down 0.59% to 2011 (it bounced of the 1,990 support zone last night with a low of 1,988)
– European markets were lower overnight, even though the ECJ decided the ECB’s OMT (the bond buying programme that halted the Euro crisis) was indeed legal. I thought this might have had more impact, given it will underpin Mario Draghi’s move to QE this month, but even the euro hardly budged.
Anyway, at the close:
- London(FTSE 100) down 2.36% to 6,388
- Frankfurt (DAX) down 1.25% to 9,817
- Paris (CAC) down 1.57% to 4,223
- Milan (FTSEMIB) down 1.59% to 18,411
- Madrid (IBEX) down 1.2% to 9,846
– Locally, the impact of overnight moves has been fairly muted, all things considered, and the SPI 200 March futures contract has fallen only 18 points to 5,284. The miners were hosed yesterday and they may see a respite, but the selling in the banks as well suggests some deeper thinking about Australia’s overall economic prospects.
– In Asia yesterday, the markets dipped into the red after lunch in Shanghai and Hong Kong no doubt as early European weakness fed east. At the close, the Hang Seng was down 0.43% to 24,113 while in Shanghai, the close of 3,222 was 0.41% lower on the day. Tokyo was a different story with the stronger yen (lower USDJPY), which rose sharply over the day with the crash in copper weighing on the Nikkei (down 1.71% at 16,796).
– On bond markets, there were solid rallies with US 10s finishing at 1.85% but well off the lows for the day. German 10s rallied down to 0.43% and UK 10-year Gilts closed down 8 points to 1.51%.
– On currency markets, there was US dollar carnage against the yen at one point as it traded down to 116.02 before the crude oil rally saw it bounce sharply to 117.25 this morning, down half a per cent on yesterday. Euro is actually up at 1.1785, which is a sign that much bad news is priced in, while GBP is also higher at 1.5221. The Aussie was poleaxed at one point yesterday, with the fall in copper focusing attention on the most liquid risk asset on the planet – the Aussie – which underwent heavy selling. It traded down to 0.8066 but is back at 81.51 this morning.
– On commodity markets, copper recovered a little from the Asian lows but it is still down 4.5% since this time yesterday, at $2.52 a pound. Oil is now at $48.26, up 5.16%, and gold is sitting at $1,231. On the bulks, March iron ore is down 10 cents a tonne to $66.85 while Newcastle Coal for the same month has dipped another 65 cents to $56.45 That’s a new low for this run.
On the data front today, we get employment in Australia. The market consensus says it should print an increase of 5,000 but which many pundits think could show big negatives. That’s a huge number for the Aussie and stocks. Elsewhere there is more CPI data, with Spain releasing its December data, and German GDP. In the US, we get PPI which is expected to fall 0.4% on the month. Jens Weidmann is also speaking tonight, which will be interesting in light of the ECJ OMT decision.
And here’s Ric Spooner from CMC Markets with the Stock to Watch
BHP is in the news this morning after being hammered in London trading. For investors, the good news is that it has recovered in US trading and may actually end up fairly close to yesterday’s Australian close.
Despite this recovery, BHP remains in a classic “impulsive downtrend” from a chart point of view. The clue to this is that the corrective rallies are weak, ending well short of the previous lows (see dashed lined on the chart). This is exactly the sort of situation to which the old adage “the trend is your friend” applies.
The black numbers on the chart suggest that BHP is in the last, 5th leg of an impulsive 3rd wave lower based on Elliot wave theory. This means the next corrective rally could be quite a large one. However, as long as this correction ends below the dashed red line at $35.14, there could be more downside to come. In the big picture this could all be an AB=CD pattern (see blue numbers). A CD swing that equals the AB swing would take BHP back to the November 2008 lows around $20.
If all this pans out, traders looking to apply the trend as your friend theory, would see the next major corrective rally in BHP as an opportunity to sell.
Ric’s on Twitter: @ricspooner_CMC