– Maybe it was the ridiculous speed of the Yen’s depreciation, maybe it’s the more startling move in the Shanghai composite index which tipped 3,042 (yes through 3,000 – 46 weeks early) yesterday at one point, or perhaps it’s the proximity of the Fed meeting next week which just might drop the “considerable period” language from interest rates, but last night was very different to recent trade as stocks in Europe and the US pulled back.
– While one night’s move doesn’t mean this is all over, I would argue that, from a behavioural point of view, the fact that most trade recommendations for next year are similar, combined with increasing triumphalism in reports about the US dollar’s rise, and the Aussie and Yen’s fall, the market position is getting extreme in some contracts so a reversal of stretched trends is more likely than not. Indeed the NAB said in their morning report on why the Yen rallied overnight that, “there appears to be growing speculation that the JPY’s depreciation has come about too quickly. Japanese officialdom would be quick to agree, now sensitive to the complaints of Japan’s importers.”
– One thing to note however is that the more crude oil crashes, the better the outlook for a nation like the US in the years ahead, especially as it puts substantial dollars into the people’s pockets combined with rising employment data. Last night’s crash of 4.18% is therefore welcome in that sense. But it’s some way down the track that the benefits will be visible – for the moment oil is a drag on stocks and copper’s fall is an indication of weak global aggregate demand.
– So US stock markets were all in the red at the close this morning.
- Dow Jones down 103 points to 17,854
- Nasdaq down 0.83% to 4,741
- S&P 500 down 14 points to 2,061 for a loss of 0.69%.
– European Markets were down even though Shanghai gave Europe a strong lead. European traders focussed on the weak data (trade) in China and Japan (Q3 GDP) and downgrade of Italy’s sovereign rating by S&P over the weekend.
So, at the close.
- London(FTSE 100) down 1.05% to 6,672.
- Frankfurt (DAX) Stil above 10,000 but off 0.71% to 10,015
- Paris (CAC) down 1.01% to 4,375.
- Milan (FTSEMIB) a tiny 0.68% give back after Friday’s greater than 3% rise to close at 19,951
- Madrid (IBEX) down 0.88% to 10,805
– Locally the impact was that after a fairly positive day yesterday, futures traders have taken the SPI 200 March contract down 14 (Dec lost 34) to 5,313. Also worth noting as a change since yesterday’s local market close is that at around 4.30 pm Dalian iron ore for May was up 7 to 495 but it closed down for the day at 4.81. A loss of around $1.65 a tonne in ICE futures terms overnight for May and $1.20 for the March contract we usually watch to $69.32 a tonne. Just another weight.
– In Asia the data was weak yesterday with the second read of Q3 GDP in Japan missing by a mile printing -0.5% to an annualised -1.9%. In China the trade data showed a dip in exports to 4.7%, from 8.2% expected, and imports fell heavily into the red down 6.7% against +3.9% expected. But this drove more calls for stimulus. Interestingly and worth keeping at the back of your mind in this debate is that the rumours were flying thick and fast yesterday of an official downgrade to expected growth – this means more tolerance for economic weakness and a higher hurdle for stimulus. It will come but it’s not linear.
Anyway at the close:
- Tokyo (Nikkei Average) up 0.09% to 17,936
- Hong Kong (Hang Seng Index) up 0.19% to 24,048
- Shanghai (Shanghai Composite Index) up 2.80% to 3,020.
That will do for now and this link to a story in the FT about the problems that the bull market is causing for Beijing is worth a look.
– On markets there is a clear indication that stocks are not sustainable if you believe the price action in the 10-year sovereign bond market, which saw rallies in the US, Germany, UK, Spain and even the downgraded Italian sovereigns. That tells us two things: first, bonds are a safe haven if stocks go offered and second global growth is weak so rates stay low.
– Currencies did the opposite to what many expected, with the yen rallying from around 121.90 yesterday to sit at 120.68 this morning. Too far too fast is as good a reason as any for a pullback – but is it sustainable? The Yen’s strength helped Euro (1.2310) and GBP (1.5646) and even helped the Aussie at the margin though it is still below the level it opened at yesterday morning sitting at 0.8291 this morning.
– On commodities the move in Nymex crude and copper ($2.88) we highlighted above tells us more than the stock markets because with bonds it sums up what is happening in the world economy. When I see one of the best behavioural economists/portfolio managers in the world say that stocks are too high but what can you do about it in this world of free money – as James Montier did over the weekend – then that’s it for me. His sign of capitulation is my signal that the markets are in for a change. Commodities and bonds suggest that may be so. Gold is at $1203 – the bulls can sniff instability growing.
On the data front the best and most important data release of the month – the NAB Business survey – is out this morning before trade in Germany and France this evening along with UK industrial production and the Redbook Index in the US