A quick recap:
Stock markets roared higher and the euro got dumped aggressively overnight on the back of Mario Draghi’s strong hint that the ECB will be back with more QE and perhaps even lower rates (negative yes) at its next meeting in December.
The DAX in Frankfurt and the CAC in Paris were both up more than 2% while the US market is sharply higher as well with the Dow up more than 300 points at the moment and the S&P 500 up a very solid 25 points. The Nasdaq is also up more than 1.5%.
It’s a solid night and whatever fundamental concerns some commentators, traders and investor might have about the sustainability of such a move, it has some power behind it this morning.
That should fuel a sharp recovery on the ASX in trade today with the December SPI200 futures contract up 77 points or around 1.5%. Further market reaction to the CBA joining Westpac in jacking up its home loan rate could help as well today, as will an expected rally around the region. There is a real chance the ASX breaks up and through the recent range highs which could further turbo-charge the move.
Key to all this is what ECB boss Mario Draghi said last night. It just took one word – “re-examine” – to signal to the market that more QE could be on the table. As BI UK’s Mike Bird highlighted overnight, Draghi “noted that ‘monetary accommodation’ — or QE — will be ‘re-examined’ in December.” Cue the euro selling, and stock and bond buying.
The wash up is the euro is currently resting on its 200-day moving average and holding just above 1.11. That’s 220 points lower than where it was this time yesterday. Remember the days when central banks were the dampeners, not amplifiers, of volatility? But I digress. And it is clear that Draghi, and Europe, want a lower euro, so there’s every chance after some consolidation it continues to fall.
The euro weakness, US dollar strength, also put pressure on the yen, with USDJPY back above 120.50. Sterling held up reasonably well given many still think the BoE wants to move rates higher and the commodity bloc actually did pretty well. The Aussie held firm at 72 cents, the Canadian dollar strengthened a little and the Kiwi fairly ripped higher and is back near 68 cents, driving AUDNZD back down toward 1.06.
European interest rates were also lower on Draghi’s hints, with German 2-year rates rallying from -0.25% to -0.32%. Yes, that’s negative rates. US 2-year yields also rallied, falling to 0.59%. Australian 2s are at 1.79% by contrast.
On commodity markets, iron ore’s terrible week continues but Dr Copper rallied a little less than 1% while crude was up around 0.5%.
On the data front last night, the US labour market continued to be a bright spot with jobless claims printing a small rise of 259,000. But that was better than expected and the four-week average of initial jobless claims fell to the lowest level since 1973. Existing home sales were strong, while US house prices were also stronger than expected.
On the data front today, we get the release of a raft of manufacturing and services PMIs around the world with the highlight likely to be Chinese manufacturing PMI at 12.45pm AEDT. There is nothing out in Australia and besides the Markit PMIs around the globe, it is a very quiet day and night.
The overnight scoreboard (7.14am AEDT):
- Dow Jones Industrials +1.87% to 17,489
- Nasdaq Composite +1.65% to 4,920
- S&P 500 +1.66% to 2,052
- London (FTSE 100)+0.44% to 6,376
- Frankfurt (DAX) +2.48% to 10,491
- Tokyo (Nikkei) -0.64% to 18,435
- Shanghai (composite) +1.47% to 3,369
- Hong Kong (Hang Seng) -0.63% to 22,845
- ASX Futures overnight (SPI December) +77 to 5,309
- AUDUSD: 0.7211
- EURUSD: 1.1105
- USDJPY: 120.70
- GBPUSD: 1.5390
- USDCAD: 1.3100
- Nymex Crude (front contract): $45.41
- Copper (US front contract): $2.3850
- Gold: $1,165
- Dalian Iron Ore (January): 366 (denominated in CNY)
- US 10 year bond rate: 2.02%
- Australian 10 year bond rate: 2.61%
– Mario Draghi’s move last night was extremely bold. In the same way that he rescued the euro, and Europe, from crisis with his “whatever it takes” speech a few years back, he has once again sought to reinvigorate Europe with his words. By uttering the word “re-examine”, he effectively achieved two-thirds of his goals. That is, he’s driven the euro substantially lower (that increases competitiveness of the EU economy), he’s forced the term structure of interest rates lower (that makes lending more attractive than money sitting at the ECB) and with both of these markets have effectively snookered his opponents into following his words with action.
That’s certainly the take BI UK’s Mike Bird has in an excellent piece published overnight. If you are interested in the machinations of global central banks, then Mike’s piece is a must read.
– Volatility is volatility and this morning we are about to experience upside volatility on the ASX and across Asia. After August’s mini-crash and September’s consolidation, the rally looked like it was stalling in the US and here at home on the ASX. But with Draghi’s promise of QE in Europe comes further expectations that the Fed will delay its rate hike cycle into 2016.
So, one of the real weights on stocks globally and here in Australia may be lifting. That’s there is a real chance that the local markets is about to break its range top. That’s important because it is likely to see fresh buying from those who are short and also encourage the many bulls who have been nervous about the outlook. Traders will worry about the sustainability of the rally later. For today, the most available emotion is likely to be not wanting to miss the boat on what might end up being a decent rally into year’s end.
Here’s a chart of the ASX 200 in MT4 terms (cash and futures):
And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
Wesfarmers share price had a limited reaction to yesterday’s release of what was a pretty encouraging set of first quarter sales figures.
Its Coles food and liquor division encountered price deflation of 1.3%. This is good news for shoppers and points to the impact of Woolworths’ resurgent price competition. Despite this, food and liquor sales grew 4.7% over the year. This was above market growth and suggests that Coles’ competitive momentum is intact and that it is still taking market share from Woolworths.
Elsewhere, serial over achiever, Bunnings had sales growth of 11.6% while former serial underperformer, Kmart grew sales by 12.5%. This is the second quarter of good performance by Kmart suggesting that management has been able to turn this business around.
Despite yesterday’s limited response, the weekly chart below shows Wesfarmers share price trending up. The slow stochastic indicator in the box below the chart also indicates ongoing momentum for this up trend as it climbs away from the oversold zone below 20%. Wesfarmers is trading on a multiple of around 18 times forecast earnings for F16 and a prospective dividend yield of 5.1% before franking credits. However, if it continues to produce sales numbers like this, these estimates may well prove a bit conservative.
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC