A quick recap: The Fed might be a bit perplexed that in leaving rates on hold stocks have taken things so negatively. Following on from Thursday’s reversal into the close, stocks in the US were lower from Friday’s open. In the end the Dow was down a little under 300 points for a loss of 1.74%, the Nasdaq dipped 1.3% and the S&P 500 was down 1.6%.
While the stock performance in the US might have been complicated by the quadruple witching of options expiry, it’s still clear that in naming their fears, the Fed inadvertently gave them an increased presence in investors’ psyches.
The US performance was actually pretty solid performances compared to Europe, where stocks fell between 2.5-3.0% on the big markets. In the UK stocks dropped 1.34%.
That points to a big drop on the open for local stocks, with the December SPI futures down 76 points on Saturday morning, implying a 1.5% loss.
On forex markets, the Aussie dollar failed in the 0.7280 region for the second day running after the US dollar strengthened again and ECB member Benoit Coeuré seemed to highlight that the Euro shouldn’t be rallying. That saw the single currency drop from the mid 1.14s to below 1.13.
The US dollar’s rally, and concerns about global growth, weighed heavily on base metals and oil on Friday. Crude dropped around 5%, and copper, 2.7%. The fractious trade has emboldened the gold bulls who took the price up to $1139 an ounce.
Also Friday came news that France had lost its AAA rating with a downgrade by Moody’s to Aa2.
The overnight scoreboard (7.53am AEST):
- Dow Jones Industrials -1.74% to 16,384
- Nasdaq Composite -1.36% to 4,827
- S&P 500 -1.62% to 1,958
- London (FTSE 100) -1.34% to 6,104
- Frankfurt (DAX) -3.06% to 9,916
- Tokyo (Nikkei) -1.96% to 18,070
- Shanghai (composite) +0.42% to 3,099
- Hong Kong (Hang Seng) +0.3% to 21,920
- ASX Futures overnight (SPI December) -76 to 5,071
- AUDUSD: 0.7183
- EURUSD: 1.1285
- USDJPY: 120.12
- GBPUSD: 1.5520
- USDCAD: 1.3222
- Nymex Crude (front contract): $44.68
- Copper (US front contract): $2.39
- Gold: $1,139
- Dalian Iron Ore (January): 390 (denominated in CNY)
- US 10 year bond rate: 2.13%
- Australian 10 year bond rate: 2.73%
Now the news. So, it seems no-one wants their currency to appreciate at the moment. That makes sense, because as we have seen with the Australian economy a weaker currency can be a powerful force for growth.
Last Friday morning Fed Chair Yellen made it clear that the FOMC had taken the US dollar’s appreciation into account when deciding to leave rates on hold. On Friday night Elias Haddad, the CBA’s Sydney-based senior currency strategist reports that:
Remarks by ECB Executive Board member Benoit Coeure undermined EUR. Coeure warned the euro had a “fairly significant appreciation” in recent weeks against a basket of currencies and that the economic recovery in the Eurozone will likely be slightly slower than earlier forecast. Coeure also emphasised again the ECB’s readiness to extend QE beyond September 2016 if necessary.
Likewise Emma Lawson, the NAB’s Sydney-based currency strategist, noted the Brits are not keen on pound strength either:
The BoE’s Haldene also raised concerns about the level of GBP, noting that they “needed to take the effect of a strong pound seriously” and that the case for a hike is not pressing. This brought GBP off its highs.
The trouble is that currencies are effectively zero-sum games. If one side of a currency pair rises the other will fall. So, everyone can’t successfully pursue a weaker currency at the same time.
That’s setting up ‘currency wars”, Lawson says, via monetary policy:
Cue the increased probability of easier monetary policy in other markets to compensate for the Fed’s freeze. That pushes the USD higher, so the Fed baulks, and so we go. Currency wars through unconventional policy. And this time equities don’t like the thought of more QE because the underlying economies are tipping to worsen, not improve, given the incremental benefit of QE from these levels is questionable. We had a lot of this talk in the last 36 hours and it is only going to continue
– That’s a very important point about QE and its diminished marginal returns for the global economy and, crucially, for global markets. It’s also one made by Soc Gen’s strategist Kit Juckes who says the party’s over.
Making healthy investment returns when QE-inspired asset inflation is all but played out, emerging markets are slowing, Europe is stagnant and the Fed is showing a distressing lack of leadership, is going to be really, really difficult.
Juckes cites Peter Tchir’s analogy that central banks and markets are currently stuck in a ‘Hotel California’ mood. That is, ““You can check out any time you like, but you can never leave.” Yup.
– That means the false break higher last week in the S&P 500 and then Friday’s selling, which broke through the bottom of the recent pennant formation, will be worrying traders. Such a move is usually followed by more selling in the days following the break. It seems to me that in naming their fears the Fed has fed them and they have grown in traders’ and investors’ minds. Anyway it’s still just two sessions after the Fed’s decision’ so the situation remains fluid. Here’s the chart that traders will be watching tonight.
– All of this fractious and confused trade has put a bid back under gold and interest rate markets. US 10s are back at 2.13%, which has dragged Australian rates lower as well.
– On the data front today there is nothing out on the data front in Australia today.
It’s a holiday in Japan, while we get the MNI Business sentiment index is out in China. In Europe, Germany releases PPI and in the US we see the release of existing home sales.
And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
Retailer, Premier Investments is chaired by Solomon Lew while its CEO is former David Jones head, Mark McInnes. It owns the Sniggle and Peter Alexander chains and reported its profit on Friday. While solid enough, the result was a little below consensus expectations ($88.1m v $90m).
Premier is at the high growth end of Australian retailer stocks, thanks partly to an aggressive program to grow store numbers. This includes expansion in the UK and Asia.
This year’s results benefitted from an increase in profit margin as Premier moved into selling higher margin products. This is expected to continue but the weaker $A represents a potential headwind. As Mr. McInnes noted, a degree of “sticker shock” awaits Australian shoppers as they confront the price increases that will flow due to the impact of a weaker Aussie on import prices.
For Premier, this problem may be a few months away though, due to existing currency hedges.
From a chart point of view, Premier’s share price finished last week precariously placed. It’s showing signs of breaking the support of a triangle pattern. It’s also sitting on a PE multiple of around 18.5 times next year’s earnings which is pretty solid for a retail stock.
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