Friday, it’s Friday. Read, work for eight hours, go home until Monday.
– Even though US stocks recovered a reasonable amount of early losses, bonds lost early gains and the US dollar reversed its early strength, last night’s trade looks like a night when we saw that the canary in the coal mine of global markets is looking a bit sick.
– Key to the price action was the continuing problems at Banco Espirito which saw its parent struggling with payments and reignited fears about European banking. Craig James from CommSec notes that banks in Norway and Spain also came under pressure.
– There is no point getting too bearish because one bank in a small European country is not the market, but this along with recent rallies in core bonds and sell-offs in peripheral bonds – and my sense of an asset allocation shift – suggests risk money is being taken off the table at the moment.
– To the markets specifically and the Dow recovered from a low of 16,805 to finish at 16,915, off 71 points or 0.42%. The Nasdaq was 0.52% and the S&P recovered to be down just 8 points for a loss of 0.4% at 1,965.
– Naturally, European stocks were hit harder than their US counterparts. The FTSE fell 0.69% to 6,672 and the DAX lost 1.52% to 9,659 as 10,000 becomes a bit of a memory. In Paris, stocks fell 1.35% while in Milan and Madrid the indices were 1.90% and 1.98% lower.
– As noted above, the impact of the shenanigans in stocks was that core bonds had a bid tone while the European periphery continues to look very wobbly. US 10s had a brief foray under 2.50 but sold off again to finish down just a point to 2.54%. UK 10s rallied 3 points to 2.63% while German 10-year Bunds also rallied 3 points, finishing at 1.20%. Italian and Spanish bonds, however, sold off 6 points to 2.83% and 2.81%.
– Obviously any real perspective says that the Italian and Spanish rates are still very low but it is the blowout in the spread to German Bunds which is the signal that markets are getting a little worried about things. This worry was confirmed to a certain extent with the very weak result in Italian industrial production released last night. It printed -1.8% against expectations of a rise of 1.1%.
– Looking locally, Futures traders on the ASX took the September SPI 200 contract 18 points lower to 5401 bid. It could be a poor end to the week’s trade today.
– In Asia, the Nikkei fell 0.57%, the Hang Seng was 0.27% higher while stocks in Shanghai hardly moved, down just one point at the close. That’s actually a pretty solid result after the Chinese trade data disappointed the market. There is nothing exciting to be released in Asia today so expect a little weakness on the back of US moves.
– On Currency markets, the Bank of England’s decision to leave rates at 0.5% was no surprise nor was its decision to keep its QE intact. Sterling, however, finished the day lower and is at 1.7130 this morning. Euro is at 1.3608 and the Aussie recovered from a low of 0.9358 and is at 0.9394 this morning.
– On Commodity markets, Iron Ore is trying to build momentum to crack $97 tonne and was up 55 cents to $96.32 tonne for the September 62% Fe contract. Newcastle Coal for September delivery lost another 20 cents to $69.75 tonne. Copper rallied 2 cents to $3.26 while Gold climbed in the uncertainty in markets to $1337 and Silver rose to $21.41 oz. On the Ags, concerns about solid crop yields saw Corn lose 0.87%, Wheat 0.51% lower and Soybeans drop 0.36%.
On the data front this morning, we get home loans in Australia before German CPI tonight.
And now from CMC Markets’ Michael McCarthy is today’s Stock To Watch
Arrium – Data Mining
China reported yesterday that iron import volumes were up 19% yoy. No surprise there – it’s the huge increase in production globally that has driven iron ore prices lower. More of a surprise to the market was the fact the value of iron ore imports to China is also up, by 5% yoy.
In other words, iron ore producers exporting to China are receiving more for their production than they did a year ago.
Arrium’s cost of production is estimated at U$86 a tonne. This explains the pressure on the share prices when iron ore fell below $90. From here, any falls in the AUD, or increases in iron ore prices, fall straight through to Arrium’s bottom line.
With debt refinanced in June, and yesterday’s China trade numbers confirming demand has kept up with production increases, the weekly chart is showing signs of basing behaviour just above a long term support level. Time to add Arrium to the list.
Michael McCarthy, chief market strategist, CMC Markets
You can follow Michael on Twitter @MMcCarthy_CMC