Quick Recap: Chinese stocks tanked again yesterday after news the government might have given up on its efforts to rein in Mr Market. That didn’t stop solid rallies in the ASX and most of the rest of Asia. Europe got a turbo boost as well after the PBOC cut the reserve requirement (RRR) for banks by 0.5% to 18% and dropped lending rates by 0.25% to 4.6%.
Initially that helped US stocks with the Dow and S&P up around 2% and the Nasdaq up 3% in early trade. But, in a sign that the underlying structure might have suffered serious damage, the sellers came aggressively into the close and the Dow and S&P both ended more than 1% lower. The Dow lost more than 200 points!
That snuffed out the solid rally on the SPI futures which had taken them to a high of 5,254. In the end, September futures are suggesting the ASX will open around 47 points, 1%, lower this morning.
Elsewhere in markets, crude rallied almost 3%, copper climbed 1.6% and the US dollar gained around 0.7% in DXY terms. Interestingly the Aussie dollar, which had benefited from the Chinese RRR move with a run up to 0.7250, is back in the low 71 cent region. That tells you the Chinese haven’t impressed anyone that the cut will work just yet.
The overnight scoreboard (7.11am AEST):
- Dow Jones -1.29% to 15,666
- Nasdaq -0.44% to 4,506
- S&P 500 -1.35% to 1,867
- London (FTSE 100) +3.09% to 6,081
- Frankfurt (DAX) +4.97% to 10,128
- Tokyo (Nikkei) -3.98% to 17,806
- Shanghai (composite) -7.63% to 2,965
- Hong Kong (Hang Seng) +0.72% to 21,404
- ASX Futures overnight (SPI September) -47 points at 5,080
- AUDUSD: 0.7125
- EURUSD: 1.1518
- USDJPY: 118.91
- GBPUSD: 1.5771
- USDCAD: 1.3342
- Nymex Crude (front contract): $39.63
- Copper (US front contract): $2.3060
- Gold: $1,140
- Dalian Iron Ore (September): 435 (it’s denominated in CNY, folks)
– Now the news. Yesterday’s bounce in stocks across the globe, in the US dollar, in commodities, and increase in bonds was a classic trading reaction to a market that had become acutely oversold. The rally was however, and remains, unlikely to be the end of the moves lower. That is because what has occurred over the past few weeks appears to be that traders have recognised the game might be up for central bank omnipotence. That means, in the words of Michael Covel, they can’t ‘goose’ stocks higher anymore. That’s a new paradigm for investors used to the ease with which they could simply buy the index and watch stocks go up in the post GFC, QE world. So, as both Gerard Minack and David Rosenberg pointed out within 24 hours of each other, life just got harder for lazy investors.
– Traders will be interested in the price action on US stocks. As the chart shows, the last hour of trade was extremely weak. That suggests (it’s hard to know conclusively) that the rally was a purely speculative one and that when it lost short term momentum, the punters squared up. That led to selling which fed on more selling. That’s consistent with the overall recovery yesterday being a trading reaction to oversold markets. But it likely complicates the game plan for Australian and Asian traders today.
– Take the SPI 200 futures for example. After a cracking rally yesterday the SPI rallied with Europe and the Chinese RRR cut to a high of 5,254. That’s bullish, that’s good. But in the end the September SPI finished at 5080, off 47 points. That’s bad right? I’ve asked but not answered either question because that’s the confusion that traders will now be afflicted with. Do they buy for another good day. Or do they sell because the US lead is going to knock Asia for six today? As trite as it is, no one really knows. We’ll be watching China today, we’ll be watching Hong Kong, we’ll be watching US and European futures and investors – keen to follow Minack and Rosenberg’s advice – will be looking for stocks that might stand out as good value even in these market conditions. Just like UBS, who yesterday said it’s time to buy the Commonwealth Bank.
– Whatever the outcome though, today or tomorrow, the CBA’s boss Ian Narev reckons we are all going to have to get used to more volatility. Mandlebrot would agree.
– Getting back to China and the NAB reckons the PBOC did what the market was looking for – on Monday! Ouch. Anyway, they did give them some praise saying “It is a positive step that Chinese policy makers have chosen to address the economy rather than prop up the equity market directly. The Chinese equity market does not make up a huge proportion of local wealth, the importance here is on household and consumer sentiment (released today).” But they also say the current pressures are more widespread, so the PBOC has more work to do.
– That means we’ll all be watching the RMB fix at 11.15am AEST today to see how far the USDCNY rate rises – how far the Chinese currency falls. We’ll all be watching Chinese interest rates as well, with offshore borrowing rates surging over recent days.
– Elsewhere, if I can editorialise, my take is that even though oil has had a solid percentage bounce off the lows, the fact that classic risk aversion and global growth bellwethers like the Aussie and Canadian dollars remain pressured suggests that the Chinese rate cut has left most traders and investors cold. Like the RMB devaluation, it speaks of a deep underlying weakness in the Chinese economy rather than offering a fix to what might be termed a ‘usual’ ebb and flow of the economy. That means fears about stocks and the global economy remain a clear and present danger to markets and top of mind to traders.
– It also means that even though house prices in the US remain strong, even though the employment market is also strong and even though consumer confidence printed a stunning 101.5 against expectations of a print of 93.3, markets are now betting the Fed might have missed its window of tightening. Indeed, Ray Dalio one of the best investors (traders, I’d say), in the world reckons the next move from the Fed is more QE. LORD.
– On the data front today, we have construction work done for the second quarter. That’s the first of the partials being released for the GDP numbers coming in early September. Kiwi trade is also out and we have Glenn Stevens speaking. But so close to Tuesday’s RBA meeting, he’ll likely try to be circumspect. Durable goods are the highlight tonight and the Fed’s Jackson Hole symposium kicks off.
And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
The gold price fell last night. However, if stock market volatility continues and markets wind back expectations for the timing and pace of Fed rate cuts, gold will be a medium term beneficiary. This could make any pullback that now develops a buying opportunity.
Alacer’s share price is also correcting. This is a Canadian company whose shares are also listed in Australia and whose principal asset is a low cost gold producer in Turkey. It also has a major project under way to produce gold from sulphide ore via a process known as “heap leaching”.
If you are in the camp that sees the current pullback in gold as a buying opportunity, the support level in this chart between about 2.87 and 2.93 may also be of interest. This includes the 20 day moving average, the 61.8% Fibonacci retracement and the high made at the end of July.
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC