A quick recap: The volatility in price and sentiment continued in markets overnight with oil crashing almost 4%, the Aussie dollar trading below 70 cents, the FTSE finishing up 1.62%, yet the S&P 500 dropped 0.2%, while stocks in Shanghai and on the ASX finished down more than 2% yesterday.
Of course it’s the global economy again which has kept traders worried with the 6 and a half year low on the Chinese manufacturing PMI released yesterday being reinforced by weaker than expected results in Germany, a flat result in the US and ECB President Draghi’s comments on the impact of emerging markets turmoil. French PMI was better than expected however, so it’s not all bad news.
The data is feeding investors’ concerns about the economic outlook, but as the fractious trade is showing, sentiment is very short term, and as a result trade is whippy.
Volkswagen remained in the news with the CEO resigning and the shares finding a bid tone as bottom fishers came buying. The shares closed up around 6%.
Elsewhere gold remains friendless but the Euro bounced back from early weakness when it appeared Mario Draghi is not in any rush to further QE. Bonds were becalmed and copper flat.
The overnight scoreboard (6.57am AEST):
- Dow Jones Industrials -0.31% to 16,279
- Nasdaq Composite -0.08% to 4,752
- S&P 500 -0.2% to 1,938
- London (FTSE 100) +1.62% 6,032
- Frankfurt (DAX) +0.44% to 9,612
- Tokyo (Nikkei) Closed – last at 18,070
- Shanghai (composite) -2.16% to 3,116
- Hong Kong (Hang Seng)
- ASX Futures overnight (SPI December) +11 to 5,005
- AUDUSD: 0.6993
- EURUSD: 1.1186
- USDJPY: 120.21
- GBPUSD: 1.5244
- USDCAD: 1.3327
- Nymex Crude (front contract): $44.69
- Copper (US front contract): $2.30
- Gold: $1,130
- Dalian Iron Ore (January): 378 (denominated in CNY)
- US 10 year bond rate: 2.15%
- Australian 10 year bond rate: 2.70%
Now the news. US stocks fell and then recovered into the close, where oil is back lower to retest support and where the Aussie is wondering also if it has any friends below 70 cents, the stand out for me is the latest missive from Bill Gross, formerly of PIMCO now of Janus Capital. My colleague from BI US Myles Udland highlights Gross’s bit of a rant at the Fed saying they should raise rates now because they are ruining capitalism. Hard to disagree because the incentive structure that zero interest rates and QE have established is counter productive when the Fed delays a 0.25% hike because of market turmoil and worries abroad. That’s enough from me, here’s Gross’ advice for the Fed:
My advice to them is this: get off zero and get off quick. Will 2% Fed Funds harm corporate America that has already termed out its debt? A little. Will stock and bond prices go down? Most certainly. But like Volcker recognised in 1979, the time has come for a new thesis that restores the savings function to developed economies that permit liability based business models to survive — if only on a shoestring — and that ultimately leads to rejuvenated private investment, which is the essence of a healthy economy. Near term pain? Yes. Long term gain? Almost certainly. Get off zero now!
– It’s another day of no data in Australia today although Alex Heath, Head of Economic Analysis at the RBA, will be speaking at the UDIA lunch in Perth. We might get something from that on housing. But, overall traders here at home are going to be looking at their charts and offshore moves as a guide to trade today. In that vein I offer this chart of the daily moves in the ASX 200 and overnight futures combined. What it shows is that the local market has really just been trading in a range for the past few weeks. What it also shows is that yesterday’s low was right in the support zone. That means today might be a good day on the local market.
– On forex markets the Aussie dollar was hit hard with a 50 point drop after the Chinese flash PMI missed yesterday. It rallied in early European trade before the sellers came again and it was briefly below 70 cents earlier this morning. It’s a big underperformance relative to the Euro which pushed back up to 1.1180 overnight. But what the price action for the Aussie reflects is that with commodity prices under pressure again and with worries over China intensifying again, the Aussie, and the commodity bloc more broadly, is back under pressure. The market is very short, so that could offer some support, but its clear sentiment has turned again for the Aussie and only a turn in the US dollar can lift it, and the other commodity bloc currencies, it seems.
– On crude oil markets CommSec’s Craig James reports that:
World oil prices fell sharply on Wednesday. Prices had initially risen around 2% after US data showed a fall in crude stocks of about 2 million barrels in the past week. But prices retreated after other data showed a sharp rise in US East Coast distillate inventories to 4-year highs. Brent crude fell by US$1.33 or 2.7% to US$47.75 a barrel while US Nymex crude fell by US$1.88 or 4.1% to US$44.48 a barrel.
– On the data front today there is nothing in Australia, Japan is back and we get its flash manufacturing PMI and then tonight we get the Gfk consumer confidence and Ifo index inGermany. The EU announces its targetting LTRO program tonight and then in the US we get one of the big releases for the month with Durable goods oirders out. The market is looking for a small rise of 0.1%. The Chicago Fed activity index is out as are new home sales. Janet Yellen is speaking around 7am tomorrow morning.
And now from CMC Markets’ Michael McCarthy is today’s Stock of the Day
Transpacific – Avoid glamour traps
If you have ever been seduced (as an investor) into a “sexy” investment such as an internet start-up, a brilliant new engine manufacturer or (ahem) Planet Platinum, you may have sworn off glamorous stocks forever. Investors in this tent may wish to take out the HB pencil and the calculator and do the numbers on Transpacific Industries (TPI).
The chart below shows the recent fall from grace of this waste management company – a halving of the share price from $1.20 to 60 cents. Recent is the operative word. In 2007, TPI hit a high of $14.56. In other words, its share price is just 4% of its peak price.
The company is transformed from those heady days. After a forced post GFC de-levering of their balance sheet, and divestments, the company has transformed its operations over the last two years. The $24 million loss for 2015 announced a month ago contained a $77.5 million impairment charge. With much of the hard work done, TPI may be about to reap the earnings benefit, yet analysts are forecasting a fairly modest increase in EPS from 2.9 cents to 3.5 cents. Rubbish!
Michael McCarthy, chief market strategist, CMC Markets
You can follow Michael on Twitter @MMcCarthy_CMC
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