A quick recap:
What an end to the week. As if Mario Draghi’s latest version of “whatever it takes” Thursday night wasn’t enough to get the bulls roaring, the Chinese decision to open up the monetary spigot Friday night saw stocks surge.
Not only did China cut the benchmark rate by another 0.25% to 4.35%, it also cut the bank’s requirement to hold liquidity on balance sheet (the RRR) by 0.5% to 17.5%. That potentially releases another flood of money into the Chinese banking system and the Chinese economy. Assuming the banks want to lend that is.
The net result was a solid continuation of Thursday’s rally. The Dow and S&P were both up around 1% while the Nasdaq roared back above 5,000 with a gain of 2.27%. In Europe the FTSE was up a little more than 1%, while the DAX in Frankfurt and CAC in Paris were up more than 2.5% apiece.
That’s good news for local traders, with the ASX 200 set to open sharply higher in trade this morning. December SPI200 futures closed trade on Saturday morning up 55 points (a little over 1%) suggesting a good day’s trade. Tempering that however, was the continuation of the weakness in iron ore and Nymex crude, dropping close to another $1 a barrel Friday.
On forex markets the Euro was hammered again and is breaking down below the trendline from this year’s lows. Sterling is going along for the ride and the yen has been hit with USDJPY back above 121. The Australian dollar has come under pressure as a result of the US dollar’s strength. Initially the Chinese move saw it soar up toward 73 cents but it was clobbered by the USD and no doubt some recognition that China is not cutting because the economy is in the pink of health.
On Bond markets, German 2 year Bunds rallied to -0.34% at one point but closed at -0.31% in line with Thursday’s close. US 2’s were off a few points to 0.64% while US 10’s sold off a little on the stock market rally, rising to 2.08%. Aussie 10’s are sitting at 2.68%.
On the data front today there is nothing out in Australia of note, while tonight we get German Ifo business conditions and expectations along with mortgage approvals in the UK.
But that doesn’t mean it’s going to be a quiet week. There is a two day Fed meeting starting Tuesday, Australia’s CPI is out Wednesday and US GDP is out later this week. You can find all the key data and events in my Australian Diary here.
The overnight scoreboard (7.55am AEDT):
- Dow Jones Industrials +0.9% to 17,646
- Nasdaq Composite +2.27% to 5,037
- S&P 500 +1.1% to 2,075
- London (FTSE 100) +1.06% to 6,444
- Frankfurt (DAX) +2.88% to 10,794
- Tokyo (Nikkei) +2.11% to 18,825
- Shanghai (composite) +1.32% to 3,413
- Hong Kong (Hang Seng) +1.34% to 23,151
- ASX Futures overnight (SPI December) +55 to 5,375
- AUDUSD: 0.7214
- EURUSD: 1.1001
- USDJPY: 121.43
- GBPUSD: 1.5316
- USDCAD: 1.3160
- Nymex Crude (front contract): $44.60
- Copper (US front contract): $2.35
- Gold: $1,163
- Dalian Iron Ore (January): 369 (denominated in CNY)
- US 10 year bond rate: 2.08%
- Australian 10 year bond rate: 2.68%
– Brian Belski was a lone voice during the stock weakness of August and September in calling the market a buy. I covered his research at the time so I was excited to see what he had to say on the present breakout rally in the US. But, Sam Ro, BI US’s deputy editor beat me to the punch. Ro reports that Belski says stock markets markets could fly. His theory is similar to one I posited Friday — market positioning and fear of missing out could drive the market higher.
“Fund managers will likely have an added incentive to position portfolios more aggressively between now and year-end to play “catch-up” — something we believe will be a strong positive for market performance.”
– That’s fundamental players. But technicians will be playing the same sort of game. The S&P, as the global stock benchmark, has seen a full reversal of the weakness in August and September and has managed to claw it’s way back into the black for the year, as Sam Ro highlights here. That’s important because it takes the market back above the 200-day moving average. Bulls will be emboldened and breakout traders will have already been long on this move.
Here’s the chart.
– The big question in global markets is: What does the Chinese move mean for emerging markets and it’s own economy? Certainly, taken together with the ECB promise of more QE the Fed will be under pressure to hold fire. On the flip side, the NAB’s co-head of global currency strategy, Ray Attrill, posed the other question in a note to clients this morning.
“Does China’s latest monetary policy easing, right on top of the ECB’s public commitment to intensified easing, reduce EM growth and asset market concerns to the point where the Fed will now find it easier to lift rates his year?”
But his questions didn’t end there.
“Or are these actions a case of The ECB and China getting its retaliation in first upon resigning themselves to the limited likelihood of the Fed moving anytime soon? Or, does the sixth PBOC easing in twelve months, with another cocktail of rate cuts plus RRR cuts, underscore the depth of, and concern for, the China slowdown? Do China’s actions increase or reduce the likelihood that its currency policy will soon have to resume supporting monetary policy with fresh depreciation?”
Unfortunately, Attrill reckons the answer is not yet clear.
“It would be disingenuous to suggest we got a clear answer to any of these questions on Friday,” he said, citing the price action in the Aussie, the rally on the Chinese news toward 73 cents and the collapse back to 72 cents as evidence of the confusion. Watch this space, and maybe the Aussie dollar, for clues.
And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
Woolworths’ shares jumped nearly 4% on Friday. This followed press reports that it might be considering getting private equity interests involved in Big W as part of its turnaround strategy. Woolies will also release their 1st quarter sales results on Thursday. The market expects these to compare poorly with Coles in terms of growth.
From a chart point of view, the current rally has plenty of upside momentum. The next significant hurdle will be resistance in the form of the 200 day (40 week) moving average and 38.2% Fibonacci retracement between about $28.15 and $28.30.
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC