A quick recap:
For the second day in a row we see confirmation that the sweet spot is behind the US economy for this expansion. We also can see that traders on stock markets see that and the move in China and promise of more QE in Europe as confirmation that the global growth outlook has deteriorated.
Look no further for confirmation than the price action of the Australian dollar last night and its 0.7% fall back under 72 cents. The Aussie is the bellwether many traders use for global growth trades. Indeed, Alan Greenspan once said if he wants to know what people are thinking about growth he looked at the Aussie. Its failure this week has been a warning sign for stock bulls.
Likewise, the weakness of crude oil has also been a sign of the divergence between stocks taking the sugar hit of ECB and Chinese interest rate policy and what you might call the “real” economy. Now, last night’s further fall of around 1.75% has in some part been a result of the news about a US deal to get the debt ceiling deal done and agreement to sell 58 million barrels from its Strategic Petroleum Reserve, but it’s also a reflection of the global growth outlook.
That’s a threat to stocks at these valuations. Or at least it appears to be top of mind for traders and investors at the moment. Now of course the Fed might offer some conciliatory language of its own when its decision from this month’s meeting is released at 5am AEDT tomorrow. That could be the catalyst for the next leg higher. But heaven forbid if they continue to signal a tightening is on the cards… at least for stocks, which look precariously perched at the moment.
That’s not to say the falls of around 0.25% for the Dow, 0.3% for the S&P and 0.1% for the Nasdaq are scary. Certainly not – even though the S&P slipped back below its 200-day moving average last night, it still managed to climb back enough to close above it. So all is not lost.
But the data releases in the US last night do offer some cause for concern. Durable goods orders fell in September with the August data revised even lower. That’s not good news nor is the news that the massive services sector in the US has fallen back to a 9-month low, although the print of 54.4 is still the envy of the manufacturing sector. Consumer confidence also dipped in the US from 102.6 to 97.6, while the Richmond Fed manufacturing index dropped to -5 from -1.
It all adds up to an off-beat economic indicator signalling a recession in the US. Which means the Fed might have missed its chance to hike. If they signal that their intention has changed tomorrow morning, then stocks should get a lift. But the outlook has darkened in traders’, minds it seems.
Certainly that was the feeling in Europe last night with losses approaching 1%. In the UK, GDP came in weaker than expected in Q3 which, along with oil, hurt the FTSE, but the rest of Europe was also lower.
The wash-up for local traders after the ASX went nowhere again yesterday is that SPI200 Futures December contract is a little lower, down 21 points to 5,325. We get the NAB’s earning report today and news of just what it is up to with regard to life and UK operations. That could help the index but the fall in oil will hurt the energy sector most likely. Like the US market, the ASX has not yet broken back down but it is resting right on the top of the old trading box.
On other markets, as noted above, the Aussie dollar has been battling overnight and is back at the bottom of the last 10 days’ trading range near 0.7180. It looks vulnerable, particularly given the commodity backdrop and the chance that Australian CPI today reinforces some notions that the RBA has room to cut rates. The Kiwi has outperformed the Aussie, taking AUDNZD down half a per cent to 1.0618 while the other senior member of the “commodity bloc”, the CAD, has been hit hard by oil overnight and has lost 0.87% against the US dollar.
On the majors, the euro has held in relatively well even though Peter Praet, the ECB’s chief economist, says there are “no taboos” as Europe loads the QE bazooka again. Sterling only lost 0.34%, even with the little miss on GDP, and USDJPY is down 0.5%. This is a reflection of the US data. Commodity and currency markets seem to be reading the macro picture better than stocks, although it’s clear in the price action stocks are getting the lower growth message.
Beside the big dip in oil, copper in the US was actually up 1 cent to $2.36, gold is a couple of bucks higher at $1,167, but overall commodities as measured by the CRB index are down 0.5%.
On the data front today, Australian Q3 CPI is out at 11.30am AEDT. David Scutt has a fantastic 10 second guide here. The market is looking for a headline rate of 0.7%.
Offshore retail trade in Japan is out this morning and then tonight, German import prices and Gfk consumer confidence are out along with French and Italian CPI. In the US, oil traders will be watching the EIA stock change, trade balance and of course, the Fed decision and statement.
The overnight scoreboard (7.41am AEDT):
- Dow Jones Industrials -0.24% to 17,581
- Nasdaq Composite -0.09% to 5,030
- S&P 500 -0.26% to 2,065
- London (FTSE 100) -0.81% to 6,365
- Frankfurt (DAX) -1.01% to 10,692
- Tokyo (Nikkei) -0.9% to 18,777
- Shanghai (composite) +0.14% to 3,434
- Hong Kong (Hang Seng) +0.11% to 23,142
- ASX Futures overnight (SPI December) -21 to 5,325
- AUDUSD: 0.7187
- EURUSD: 1.1038
- USDJPY: 120.45
- GBPUSD: 1.5297
- USDCAD: 1.3270
- Nymex Crude (front contract): $43.24
- Copper (US front contract): $2.36
- Gold: $1,166
- Dalian Iron Ore (January): 365.5 (denominated in CNY)
- US 10 year bond rate: 2.04%
- Australian 10 year bond rate: 2.63%
– As a trader and strategist I think about markets a lot and there is one thing that hit me like a brick over the last couple of days and which I think might be constraining markets. It’s something I wrote about in my afternoon report at Go markets yesterday, but here’s a precis:
Unlike QEs 1,2 and 3 and the move by the ECB and BoC previously, traders clearly believe that the global economy is past the point where central bank easings can stimulate growth. Rather it seems to me, based on the price action, that traders are taking the view that central banks are chasing a slowing growth profile.
Which of course appears to be true; just look at last night’s US data and UK GDP.
That means that there is another big event risk that could be occupying plenty of time in fund managers’ offices and on dealing desks. That is, the real risk that if China downgrades growth, as it is expected to at this week’s plenum, markets go into a funk.
Now, it’s entirely reasonable that China will downgrade its expected growth rate for the next 5 years. But in a world where demand is slipping, it might be viewed as tantamount to an admission growth here and now is already slower in China, let alone the future.
Or perhaps markets are just a little nonplussed about the video China released on its future plans.
That’s why I spent so much time looking at the collapse in the price of oil over the past few sessions, and the Aussie dollar’s lack of follow through as good indicators of what traders and investors are thinking.
What the combined price action probably does is tell us more about what traders and fund managers are thinking than almost anything else at the moment. The collapse in crude has taken it below the September range lows. That’s an ominous sign not only for oil traders for markets in general because this move, while about supply and demand, is also about global growth. Of course, news yesterday that as part of the debt ceiling agreement, selling from the US strategic petroleum will occur, won’t have helped. But it’s about growth, earnings potential in this economy and valuations.
That doesn’t mean stocks can’t rally. It just means rallies might find plenty of sellers and hard-to-sustain gains.
– For the moment though the ASX is clinging to the top of the recent trading box. A break lower might signal some disappointment and technical selling by trader who follow that approach. Here’s the chart:
For me? My system says sell :S.
And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
Harvey Norman’s sales results yesterday were good enough to see a significant jump in the stock price. It continues to benefit from strong housing construction with like for like sales in its Australian stores up 7.1% compared to the September quarter last year.
However, the share price is still 20% below its peak in June, due partly to a market view that the construction boom is going to taper after the recent increases in mortgage rates and as the housing shortage in Sydney and Melbourne eases.
Sellers stepped in to cap yesterday’s rally at the 50 day moving average and recent high around $4.03. This saw the stock close back inside the trend channel that has defined it since early September.
This resistance and might now become a bit of a line in the sand to judge whether or not the market is prepared to become a bit more optimistic about Harvey Norman and the construction cycle.
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC