Quick Recap: It’s been another tough night for stock traders as global markets are once again a sea of red this morning. The Dow lost close to a per cent, the S&P and Nasdaq a little less. In Europe it was carnage, however, with the ‘best’ performing major index I watch down 1.75% and the worst – the technically terrible looking DAX – off 2.14%. That’s hurt the ASX as well, with the September SPI 200 contract suggesting a 38 fall at the open of trade this morning.
But, in no small measure it was the crash in crude oil which is the big story of the night. The Nymex crude front contract fell 4.9% to $40.53. That’s a new 6-and-a-half year low. The big drop seems to have been catalysed by a surprise increase in inventories in the US by 2.6 million Bbls last week when analysts were tipping an 800,000 fall. That’s some miss and a big shock to traders who were tentatively looking for a bounce.
That’s blunted the warning in the Fed minutes overnight which showed that FOMC members are ready for lift off with the start of their tightening cycle now live and likely at the September meeting. One member was even ready to raise rates last month. But the deflationary pulse from oil, the fact that July CPI printed 0.1% last night, not the 0.2% expected, and the reality that the minutes also showed enduring concerns over inflation tempered the hawkishness saw interest rates rally and hurt the US dollar.
That allowed the euro to rally back over 1.11, yen to head back under 124 and the Kiwi to hold 66. The Aussie is going nowhere fast at the moment.
But with all the uncertainty, gold has benefited with a very solid rally to $1,34 this morning.
The overnight scoreboard (7.13am AEST):
- Dow Jones -0.93% to 17,343
- Nasdaq -0.8% to 5,019
- S&P 500 -0.83% to 2,079
- London (FTSE 100) -1.88% to 6,403
- Frankfurt (DAX) -2.14% to 10,682
- Tokyo (Nikkei) -1.60% to 20,222
- Shanghai (composite) +1.24% to 3,794 (some turnaround)
- Hong Kong (Hang Seng)-1.31% to 23,167
- ASX Futures overnight (SPI September) -48 to 5,304
- AUDUSD: 0.7349
- EURUSD: 1.1119
- USDJPY: 123.83
- GBPUSD: 1.5680
- USDCAD: 1.3114
- Nymex Crude (front contract): $40.55
- Copper (US front contract): $2.2800
- Gold: $1,134
- Dalian Iron Ore (September): 440(it’s denominated in CNY folks)
– Now the news. The Fed minutes showed the FOMC is ready to launch its tightening campaign. That’s incredibly hawkish and should have helped the US dollar and hurt bonds. But as the NAB’s Sydney-based strategist Emma Lawson points out this morning, “the Fed spent a long time discussing inflation, in which they are not totally convinced that it shall meet their 2% target at the going rate. And that is partly due to declining energy prices, and partly due to the stronger USD.” She added that:
There were perhaps more concerns about inflation than market participants had expected. The concerns about the labour market were mostly gone, so we turn to inflation.
This concern was added to in light of the earlier release of the CPI data, adding to confirmation bias.
So it’s inflation, not employment, that the market is focusing on, it seems.
– Yesterday, Chinese stocks had a wild day. Down 5.1% at one point early doors the index managed to run hard into the close to finish up 1.24%. If this were a free market the price would have fallen further and many more investors would have sold and been wiped out. The Chinese authorities don’t want that, so even though they have their training wheels on when it comes to markets, and even though the government IS the bid in the stocks market, as we saw again yesterday afternoon as the sellers were chased out of the market again.
– But it might not be all bad news for China with the UK Telegraph’s influential finance columnist Ambrose Evans-Pritchard saying, in a column this morning, that “warnings of a Chinese collapse this year will look silly by Christmas.” He admits he is sticking his neck out and it is certainly a position counter to what has become conventional wisdom. But it is a view well grounded in the monetary reality that like the Fed, BoE, BoJ and latterly the ECB, the PBOC has a massive war chest of cash it can deploy into the economy if necessary. Oh, and of course the government has stepped back the reform process, so it’s “stimulus as usual”.
– Looking at the local market now and the ASX futures are implying a poor start to trade with September futures off 38 points. Yesterday’s 1.45% push higher was a remarkable turnaround particularly for the banks which rallied hard. Equally, however, as Chris Pash highlighted yesterday, the “rally was led by energy stocks, with Santos up 3.42% to $6.04 and LNG 3.56% to $2.750.” That makes last night’s crash in oil a clear and present danger to the sector and the market today.
– Speaking of crude it looks like it might have sucker-punched a few traders and analysts. Traders, because there were some signals on the daily technical charts that crude might have been about to make a $2+ advance, and analysts because there was a surprise build in inventories, a big one, when they had expected a draw. That combination looks to have blindsided the market and we got a massive fall of 5%. The longer term outlook remains fragile – here’s the chart:
– Gold’s rally might actually be one of the more interesting moves in a very interesting night. It suggests that there is a growing level of uncertainty in markets and thus a bit of a fear trade. It’s a macro indicator and gold hasn’t broken higher yet. But it bears watching. Likewise, the continued fall in copper and other base metals tells us the market is getting bearish on growth and is worried about deflation.
Here’s the gold chart:
– On bonds, Westpac’s Wellington-based strategist Imre Speizer said “US 2yr treasury yields fell from 0.73% to 0.65% while the 10yr fell from 2.23% to 2.12%. US CPI was slightly below estimates, but the main cause of the bond rallies was the equivocal FOMC minutes. Futures markets are now giving a September hike less than a 40% chance. Australian 3yr government bond (futures) yields fell from 1.97% to 1.90%, while the 10yr yield fell from 2.82% to 2.73%.”
– On the data front today, we get a speech in Asia from the Minneapolis Fed president Narayan Kocherlakota and then the RBA FX transactions this afternoon. Tonight, it’s German PPI, a speech from San Franscisco Fed president John Williams (also in Asia) and UK retail sales. Tonight in the US we see the release of the Philly Fed index, jobless claims and existing home sales.
And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
I featured Newcrest as a stock to watch last week. However, despite a good profit result and a stronger gold price, it produced a disappointing false break above its 20 day moving average. Weaker copper prices are probably not helping.
This chart might still be worth keeping an eye on though. If it can rally above yesterday’s high on the back of a stronger gold price last night, this would see continued bullish divergence with the RSI which is making higher lows (see box below the chart). That would in turn create the possibility of completing a bullish double bottom pattern with a break above the recent high.
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC
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