Quick Recap: Friday’s weaker than expected print of the Chinese ‘flash’ PMI set the scene for more concern about the strength of global growth and corporate earnings going forward. That, and weak PMIs in Europe, saw almost all stock markets around the globe finish sharply lower. That left US markets off more than 2% for the week while UK and German markets were down closer to 3%. That stock market weakness saw rates continue to rally with all developed markets seeing substantial downward moves last week. Commodities and the Aussie dollar remained under pressure but the euro is back above 1.10 and gold reversed sharply off the $1,077 low to finish the week at $1,099.
The overnight scoreboard (6.26am AEST):
- Dow Jones down 0.92% to 17,568
- Nasdaq down 1.12% to 5,088
- S&P 500 down 1.07% to 2,079
- London (FTSE 100) down 1.13% to 6,579
- Frankfurt (DAX) down 1.43% to 11,347
- Tokyo (Nikkei) down 0.67% to 20,544
- Shanghai (composite) down 1.29% to 4,070
- Hong Kong (Hang Seng) down 1.06% to 25,128
- ASX Futures overnight (SPI September) -49 to 5,467
- AUDUSD: 0.7271
- EURUSD: 1.0983
- USDJPY: 123.69
- GBPUSD: 1.5511
- USDCAD: 1.3043
- Crude: $48.14
- Gold: $1,099
- Dalian Iron Ore (September): 381
– Now the news. On the data front in the US, new home sales fell 6.8% in June, well below the market’s expectations of a 0.3% bounce. Westpac’s New Zealand based strategist Imre Speizer reminds us however that “this contrasts with other housing measure which rebounded from a weak Q1”. On the positive side in US, the ‘flash’ manufacturing PMI rose 0.2 to 53.8, slightly beating expectations. Speizer said “Eurozone PMIs disappointed, the composite, manufacturing and services measures all at two month lows, probably dampened by the Greek events.”
– That meant stocks were under pressure on both sides of the Atlantic. Commsec’s Craig James in his morning note today said that “investors have been disappointed so far by revenue estimates of the US companies reporting earnings results”. As I highlighted in our weekly diary of the week ahead in Australia, Maris Ogg, president of Tower Bridge Advisors, summed up the current market thinking by telling MarketWatch that:
Corporate earnings are showing that China is no longer growing at a 7% rate, and no longer fueling commodities demand. So, companies that were dependent on that growth, such as materials and industrials, are suffering. Meanwhile, the positive impact of lower oil prices has not materialized. Markets will need to adjust those expectations.
That means that stocks might continue to struggle. There’s a great long-term chart of the S&P 500 in the diary for those interested.
– The weakness offshore really hit local stock futures trade hard on Friday night with the SPI 200 September contract down a whopping 59 points. A big part of that is the lead from offshore but also that the miners, BHP and Rio, were hammered in London trade, falling 3.8% and 3.5% respectively. That sets up for a weak day for Australian stocks today.
– In Asia Friday, when Australian traders were leaving their offices, the Shanghai stock market was still doing remarkably well, holding onto some gains even in the face of the weak PMI print of 48.2. But as the Shanghai afternoon wore on, the selling accelerated into the close and the composite index finished off 1.28% to 4,045. That’s still around 700 points off the low of the past month. But it will be interesting to see where prices go this week.
– On commodity markets, it seems like everything is falling at once. That might lead to traders and market watchers thinking there is just one, or a couple of drivers. That would be naive, according to Stuart Kirk and his team from Deutsche Bank who said “investors are mistakenly looking for common factors such as impending US rate hikes, a rising dollar or slowing Chinese growth to explain idiosyncratic moves in basic material prices”. Of course, that doesn’t mean people don’t want to believe there is a common theme. Just that Kirk says there isn’t.
– Gold was the stand-out Friday. Both because it got hammered in our timezone down below an important technical level to the lowest level since 2009. It’s not out of the woods, as the chart below shows, but it found some support amidst the generalised stock weakness. Reuters released the results of a poll of investors on Friday which showed that gold was expected to average $1,193 an ounce in 2015 and then rally to an average of $1,250 in 2016. Interestingly, as Myles Udland reported over the weekend hedge funds have never hated gold so much. CFTC data released on Friday showed that the subset of hedge traders is “holding net shorts for the first time since the data started being recorded in 2006 (-11,345 contracts),” The NAB’s Ray Attril wrote this morning.
– I’ve left forex markets till last because in many ways they are the most boring, save for the Aussie dollar. Friday saw it make a new post 2009 low and sentiment is weak. But Westpac reckons perhaps most of the bad news is baked into the cake and it is harder than many think for the Aussie to head under 70 cents. Elsewhere, the euro traded above 1.10 again but couldn’t hold it. USDJPY is holding under 124, and the Kiwi is just below 66 cents. Sterling, which has a big GDP release this week, is at 1.55.
– On the data front today, there is nothing out in Australia. Tonight we get the German Ifo business index and the big one for the 24 hours to come is US durable goods orders.
And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
How much further can resource stocks fall? This is one of the key questions for the Aussie stock market at the moment.
From a chart point of view, this looks like an important week for Rio and other major mining stocks. A weak close and a move significantly below the 78.6% Fibonacci retracement level around $50.10 (see arrow below) would look bearish. This would leave the recent rally which peaked last week looking like a bearish retest of the major support trend line (blue line on the chart).
Under this bearish scenario, the 2012 low around $48.35 or the AB=CD level at $46.40 drawn on the chart are possible support levels.
The more positive scenario would be if Rio can form a base around the 78.6% retracement level above $50 this week. That would improve the odds of a rally above last week’s high at $53.80 in the not too distant future.
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC
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