Quick Recap: Besides the Kiwi, which benefited from a huge 14.8% rally in prices at last night’s Dairy Auction, Sterling, which lifted after stronger than expected UK inflation, and Oil, which just lifted, it is a sea of read across global markets this morning.
Yesterday’s late afternoon crash in Shanghai stocks after the government appeared to signal it would be reducing support “lowered risk appetite and weighed on hard commodities,” BNZ’s Kymberly Martin reported this morning.
That set the wheels in motion for a big drop in copper (a new 6 year low) and base metals to fall. It also appeared to weigh on stocks in the US and Europe which ended in the red after some choppy trading while the Aussie and Canadian dollars also finished weaker.
Strangely, very strangely, the “risk off” tone Martin alluded to did not help bonds, with the 10’s in the US and Europe higher on the night.
Equally strange, in the context of the sea of red last night was the 15 point rally in the SPI 200 futures contract which suggests the ASX might be able to buck the trend in trade today. We’ll see. But perhaps traders think yesterday’s loss was too large and the banks will be back in favour?
The overnight scoreboard (6.53am AEST):
- Dow Jones -0.19% to 17,511
- Nasdaq -0.64% to 5,059
- S&P 500 -0.26% to 2,096
- London (FTSE 100) -0.37% to 6,526
- Frankfurt (DAX) -0.22% to 10,915
- Tokyo (Nikkei) -0.32% to 20,554
- Shanghai (composite) -6.12% to 3,749
- Hong Kong (Hang Seng)-1.43% to 23,474
- ASX Futures overnight (SPI September) +15 5,283
- AUDUSD: 0.7340
- EURUSD: 1.1026
- USDJPY: 124.38
- GBPUSD: 1.5660
- USDCAD: 1.3052
- Nymex Crude (front contract): $42.37
- Copper (US front contract): $2.2970
- Gold: $1,117
- Dalian Iron Ore (September): 435.5(it’s denominated in CNY folks)
– Now the news. Let’s talk about Shanghai first. The government has done everything it can to wash volatility out of the stock market. But it is becoming clear that Chinese authorities are still neophytes when it comes to understanding the dynamics of free markets. Yesterday David Scutt reported that some part of the weakness in stocks was being laid at the feet of regulators after a Bloomberg report said the CSRC was going to withdraw support now that volatility had reduced. The lesson, perhaps learnt yesterday, is that volatility has only reduced because the support is there and the 60 million terrified retail stock holders feel safe in that support. Take it away and they want their money out of the market it seems. But the Chinese authorities haven’t just chased out volatility, or at least tried to – they have also chased away anyone with the chutzpah to actually be a two-way speculator on the market. That makes the government the bid and it means the selling is simply backed up behind a dam. It’s still there and I doubt they legislate that 60 million retail investors can’t sell. So authorities are snookered for now.
– They might also be snookered by the economy. Sure the house price data was not as terrible as it might have been when it was released yesterday. But BI US colleague Linnette Lopez has had a look at some research from one of the market’s “rockstar” China analysts. It’s not far from a doomsday scenario it seems. Link here but you might want an adult beverage close at hand.
– Turning to the US and it’s fair to say that all eyes will be on the CPI and Fed minutes tonight. CPI will indicate if US inflation is on track for the Fed’s 2% target and the minutes because we’ll get an insight into the thinking at the last meeting before the recent macro-market turmoil. That implies the minutes might be more hawkish than current market sentiment given they pre-date the China ructions. This reality and the proximity of the data is just as likely as China to have weighed on stocks overnight. That’s because with housing starts rising at their quickest rate in almost eight years at a 1.21 million annual rate the Fed remains front and centre. Important in this context is that Home Depot last night said it sees “the continued recovery of the U.S. housing market.”
– On Forex markets commodity weakness weighed on the Aussie and the US dollar put pressure on the rest of the majors except for Sterling where the BoE was back in focus. The NAB’s Sydney based currency strategist Emma Lawson wrote this morning that:
In the UK, the questions surrounding the BoE’s next hiking cycle returned, after a higher than expected pick up in inflation. Now don’t get excited, headline inflation remains at 0.1%yoy, but that is better than flat or negative as it has been. And, the core was a whole +1.2%yoy (0.9E, 0.8P) and with the comments from the BoE regarding the possibility of hiking, this brings the debate back on the table, despite the Governor’s will they – won’t they approach of late. It helped GBP outperform on the night.
– For the Kiwi, which was the only other currency to resist the US dollar last night BNZ’s Martin wrote this morning that “NZD/USD remained well supported in the run-up to last night’s dairy auction, on the basis that prices would likely bounce. The 14.8% gain in the GDT Index was probably at the high end of expectations, and NZD got a small 30pt lift back to 0.66.”
– Copper’s fall is another pointer to the hits that global sentiment is taking from the rerating of Chinese growth. What we have seen over the past 6-8 weeks is concern about China’s stock market and incredulity about China’s officially published 7% growth rate morph into full blown skepticism that the economy isn’t in a relative tank toward something in the low 6% high 5% growth rate, perhaps lower. That requires a rerating of previously established demand and price expectations for commodities. Which is why traders have been aggressively selling commodities again… they are just taking some money off the table and in some cases placing a few bearish bets. So Comex Copper is making fresh 6 year lows.
– On the data front today we get NZ PPI this morning along with Japanese trade and the Westpac leading index of economic growth in Australia. Tonight is EU current account. But nothing matters except US CPI and the Fed minutes. That’s of course unless the RMB moves materially and Shanghai stocks crash again. That would make it an interesting day.
And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
Human nature being what it is, property problems are usually close to the heart of cyclical downturns in most economies and it seems China is no exception. Property gluts usually take some years to resolve and include a fairly protracted bottoming out period. But you have to start somewhere and it’s interesting to see that property prices have been up for the last 3 months in China. The improvements are concentrated in the major cities with only 31 of 70 cities showing an increase and many of the 2nd tier cities still well oversupplied. Even so a “beginning of the end scenario” on China’s property glut would be a mild positive for forward looking Australian iron ore stocks.
BHP is heading into its profit report next week with its chart interestingly placed. Recent lows have been showing declining momentum and displaying bullish momentum with the RSI shown in the box below the chart. The latter has started making higher lows.
The chart itself looks a candidate for a common basing pattern known as a “3 drives to a low”. This would need to be confirmed by BHP actually making a 3rd low around supports. If it just keeps dropping the pattern is negated. However, the pattern would be confirmed if price bounces off the downward sloping trend line or out of the Fibonacci projections just under that and between about $24.20 and $24.40. These project that the final drive lower will be the same size as drive 2 and 1.27 times the length of the last corrective rally.
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC