– A huge night last night with stocks in Europe and the US lower, German 10 year Bunds sharply higher and the Euro breaking up and through resistance, suggesting this US dollar reversal has legs. Iron ore was off, the Aussie dollar stable and indications are the selloff on the ASX looks set to continue today.
– The catalyst for these moves was the very weak print for US Q1 GDP at just 0.2%. The market had expected 1.1% — or at least the economists had — but anyone looking at the Atlanta Fed’s GDP Now indicator would have been well placed for this lower-than-consensus result. We already knew the Fed thinks this is temporary and their statement last night reiterated that view. The Fed said “economic growth slowed during the winter months, in part reflecting transitory factors.” That’s important because if the data does not start to lift off, expectations of the beginning of the Fed tightening cycle will drift out to 2016.
– It’s this very reappraisal of the growth profile and Fed tightening plans which helped propel the Euro up and through the 1.1050/90 resistance zone that has contained it since the lows earlier this year. That is a big move and the weekly charts suggest this rally could have considerable upside. If that’s the case, and the Pound and others are also breaking out against the US dollar, the Aussie dollar — which lagged last night — will get dragged along for the ride. That’s bound to complicate things for the RBA next week.
– While the focus, in terms of events, was on the US last night the more interesting moves were happening in European bond and stock markets. German Bunds, along with bonds in the UK, Spain and Italy sold off sharply. Some say it’s because well regarded bond manager Jeff Gundlach said he was shorting Bunds, but it feels like something bigger. Perhaps a reaction to crude’s break higher and what that means for inflation. I’m not really sure but the fact it happened a night after the US 10’s sold off for no obvious reason I’m concerned. Financial market blow up usually starts in bond/credit/interest rate markets. Watch this space.
Here’s the overnight scoreboard (7.24am AEST):
- Dow Jones down 0.41% to 18,035
- Nasdaq down 0.63% to 5,023
- S&P 500 down 0.37% to 2,106
- London (FTSE 100) down 1.2% to 6,946
- Frankfurt (DAX) down an incredible 378 points or 3.21% to 11,432
- Paris (CAC) down 2.59% to 5,039
- Tokyo (Nikkei) flat at 20,058
- Shanghai (composite) flat after a wild ride at 4,476
- Hong Kong (Hang Seng) down 0.15% to 28,400
- ASX Futures (SPI June) -44 at 5,783 YUK!
- AUDUSD: 0.7988
- EURUSD: 1.1113
- USDJPY: 119.05
- GBPUSD: 1.5424
- USDCAD: 1.2015
- Crude: $58.55
- Gold: $1,204
– The price action on the ASX 200 yesterday was appalling. Commentators are blaming offshore sellers for the big reversal which saw stocks down 109 points for a loss of 1.9%. Today isn’t shaping up any better after the big loss on futures and performance of our miners in offshore trade last night.
– In Asia yesterday it was a wild ride that ended in no change. Key to the big fall, recovery and late afternoon pullback in Shanghai was one of China’s top economic officials’ hosing down rumours of a large-scale QE program. That’s important because it highlights restructuring is continuing with specific targets rather than a blanket easing of policy. For the moment anyway…
– On commodity markets iron ore was hammered in Asian trade yesterday. Dalian iron ore fell 17 points at on stage which has translated into a $2.50 a tonne fall on Nymex 62% Fe overnight. The June contract closed at $53.25. That might help explain why the Aussie dollar lagged the Euro overnight — Aussie dollar, iron ore hedge fund. However, the big news in commodities is the continued recovery in crude. Nymex May delivery jumped 2.66% to $58.53 a barrel — this is changing the inflation outlook and will continue to if the recovery is sustained. Gold is at $1204 and copper $2.78.
– On the data front today we get private credit and the import and export price indices in Australia. The BoJ has a policy announcement and tonight we get German retail sales, EU CPI and the all-important US personal spending and consumption data, along with the employment cost index.
And now from CMC Markets’ Ric Spooner is today’s Stock of the Day:
Insurance Australia Group (IAG.AX)
IAG fell 4% yesterday after announcing it had so far received nearly 30,000 claims as a result of last week’s storms. These are estimated to have a net cost of $250m. What really unsettled the market though were unexpected upward revisions to claims from previous events including Cyclone Marcia in February.
Given current downward momentum, I’m putting this stock on the watch list with a view to potential buying opportunities based on supports at lower levels. The first would be trend line support for the major sideways pattern that’s been in place for 2 years. This cuts in around $5.40. If this is not rejected there are a couple of Fibonacci levels not too far below it. One is an ab=cd projection at around $5.30. The other is the 38.2% retracement of the whole major uptrend at around $5.14.
Ric Spooner, chief market analyst, CMC Markets.
You can follow Ric on Twitter @ricspooner_CMC