– Those of you of a certain age will remember the robot from Lost in Space. If ever there was a week that screamed “Danger Will Robinson”, last week was it. Whether it was the acute volatility in Shanghai stocks, the continuation of the Greek drama — which is fast becoming a tragedy — and of course the disappointment of the negative print for US first quarter growth. The US dollar was also volatile, proving investor’s general fears are overriding their targeted fear of the Fed bond market’s rally.
– All because uncertainty has risen again. Have Shanghai stocks gone too far too fast? Are the Greek negotiators capable of doing a deal or is Grexit fast becoming a fait accompli? How will Greece pay its own wages bills, let alone the IMF repayments this week? Is the US economy going to be in a strong enough position to withstand what appears to be the Fed’s inevitable first tightening in the next few months? And what impact will that have on asset price valuations?
– Uncertainty is important because it is normally correlated with investors and traders reducing bets and taking money off the table. That’s what we have seen in the US this year with $US111 billion being taken out of the stock market, even as new highs are being made. That could prove problematic but so far the flow into other markets, including European stocks as the QE rotation continues, has kept overall global market sentiment looking okay. Ominously if one cracks they could all crack given this correlation and even though developed markets largely ignored China last week, further gyrations could have a different effect. The data for Friday is below.
– On the data front in the US Friday saw the release of the third read of GDP which showed growth fell 0.7% in Q1 this year. That’s a long way from the first estimate of around 2% growth. But the Fed has already told us they think this is seasonal (What ever happened to seasonals? They’re broken) and the economy is already looking stronger. It’s important to note that there’s a bright spot in that disappointing GDP report. But, the poor European lead and Asian volatility knocked US shares lower.
Here’s the overnight scoreboard (7.30am AEST):
- Dow Jones down 0.64% to 18,010
- Nasdaq down 0.55% to 5,070
- S&P 500 down 0.63% to 2,107
- London (FTSE 100) down 0.8% to 6,984
- Frankfurt (DAX) down 2.26% to 11,413
- Paris (CAC) down down 2.53% to 5,007
- Tokyo (Nikkei) flattish 20,563
- Shanghai (composite) after a wild rise down 0.15% to 4,613
- Hong Kong (Hang Seng) down 0.11% to 27,424
- ASX Futures Overnight (SPI June) -17 to 5,761
- US 10 Year Bond down 2.12%
- Australian 10 year bond 2.73%
- AUDUSD: 0.7649
- EURUSD: 1.0984
- USDJPY: 124.06
- GBPUSD: 1.5285
- USDCAD: 1.2443
- Crude: $60.28
- Gold: $1,189
- Dalian Iron Ore (September): 422
– Local stocks did really well on Friday, rising more than 1% on the back of strong gains in the banks and the miners. It was a very strong performance in the context of what was happening in Shanghai during the day and even though the futures indicate another down day the market is unlikely to fall out of bed without an offshore catalyst. There are of course more important local data points than usual released this week such as GDP, RBA, retail sales and a raft of other secondary, but vitally important, data. So it’s a big week for traders and for markets.
– Speaking of big… It doesn’t get much bigger than Shanghai’s early morning performance on Friday. Like a bear with a hangover, the market opened up down and kept falling. It hit an intraday low of 4431, down 189 points from the previous night’s close. That was around 4% lower on the day but it bounced back to close at 4,613. Amazing volatility and the market remains precarious. Students of history know that when a market goes parabolic the way the Shanghai market has over the past 12 months gravity inevitably exerts its pull. The when and where is the hard part. Friday’s price action showed the bulls aren’t done yet.
– On currency markets the US dollar has opened strong again this morning. For the Aussie dollar the data flow is going to be important and after Capex last week the bias from traders will be to look at data as half empty, not full. That puts the bias back toward and under 76 cents over the week. But with the RBA likely to hold tight tomorrow afternoon and retail sales hopefully supporting notions that the domestic economy is looking healthier, it could be a volatile one. Globally the Greek situation and the way it is playing out is exerting upward pressure on the US dollar which biases Euro, Yen and Sterling lower.
– On commodity markets oil was higher on the back of the US rig count, gold is at $1,189 and Dalian iron ore, like Shanghai stocks, proved that the bulls aren’t all dead yet.
– This week is a massive one for data and today we get the release of the AIGroup performance of manufacturing survey (Aussie PMI) at 9.30am. TD Monthly Inflation at 10.30am and then company gross profits and building approvals at 11.30am. Offshore its HSBC/Markit PMI data and we get releases from Japan, Korea and China in our timezone before Europe and the US tonight. German CPI is also out as is personal spending and consumption data in the US, along with the original PMI the ISM manufacturing index.
And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
After a nice rally to the channel resistance on the chart below, Qantas is again losing altitude and drifting back to the support line.
Qantas’s cost improvement process centred on a different approach to competition and capacity is likely to deliver improvements to the bottom line for some time to come and seems likely to keep its stock in favour.
However, this trend line support is getting elderly and starting to look like the type of situation that could set up for a minor false break. Of interest in that regard is the 50 day moving average (dark blue line) which is tracking just below the trend line and might provide a zone of support just as everyone is stressing about the trend line breaking. Below that, the previous lows around $3.20 provide a last line of defence which seem unlikely to be broken unless there is a major downgrade to Qantas’s outlook or a significant market sell-off.
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC