Quick Recap: US stocks had one of their best days in years last night with the three big indices finishing the day either side of plus 3%. The Dow was up more than 600 points. European markets missed the post-lunch rally and finished down across the board but the ASX SPI 200 futures had a ripping night with the September contract rising around 100 points to set up another good day after the 0.69% rise in trade yesterday.
Part of the US stock rally could have been that New York Fed President Bill Dudley said the case for a September rate hike was now “less compelling” but his full comments were far more even-handed. But after the battering, traders have taken any hint that the Fed might hold fire helped the recovery and, unlike yesterday, the rally was strong all the way into the close.
Interestingly, commodities such as oil and copper were lower again, below $39 a barrel and back at $2.25 respectively. Gold quickly lost its lustre, falling another $17. That’s hurt the Aussie dollar and commodity currencies a little while the US dollar was generally stronger across the board with the euro down close to 2% and GBP 1.5%. The yen gave back 1% and is at 120.
Thus a one sentence summation of last night is that we have price action which suggests the market funk is finished but the concerns about global growth continue to linger.
Eyes will be on Shanghai again though as the authorities’ efforts to rein in the selling seem to be struggling.
The overnight scoreboard (6.43am AEST):
- Dow Jones +3.95% to 16,285 with a gain of 619 points
- Nasdaq +4.24% to 4,697
- S&P 500 +3.9% 1,940
- London (FTSE 100) -1.68% to 5,979
- Frankfurt (DAX) -1.29% to 9,997
- Tokyo (Nikkei) +3.2% to 18,376
- Shanghai (composite) -1.3% to 2,926
- Hong Kong (Hang Seng) -1.52% to 21,080
- ASX Futures overnight (SPI September) +89 to 5,214
- AUDUSD: 0.7114
- EURUSD: 1.1312
- USDJPY: 119.89
- GBPUSD: 1.5461
- USDCAD: 1.3312
- Nymex Crude (front contract): $38.83
- Copper (US front contract): $2.2680
- Gold: $1,124
- Dalian Iron Ore (September): 425 (it’s denominated in CNY, folks)
– Now the news. Part of markets stabilising is the volatility we have seen in the past 36 or so hours. That may sound strange but think about any time you flicked a metal ruler or pinged a Newton cradle – what you get is a flurry of motion and swings back and forth and then the amplitude of the moves reduces and eventually you get either the ruler, or the cradle, back at rest.
In a market sense, stock, bond, commodity, or currency that is exactly what we see often happens and it’s what we’ve seen over the past week or so.
But it is the very increase in volatility that sows the seeds for the return to normal. That’s because vol forces marginal players into action, in the latest case, selling stocks, buying euro, Bonds and so on. Once the marginal players have moved, which is often where the big prices drops or increases come from, then the longer term players can re-enter the market. Equally though, as I heard Michael Pascoe tells James Valentine on ABC 702 yesterday, when compared to the total store of wealth in the stock market, it’s all about value – not that many shares change hands daily. It really is the marginal players setting the price. So now, with the worst of this move in volatility behind them traders are now looking to get back into the market but conditions are still thin – plenty of people scared away by the vol – and you get the 4% moves we saw in the US overnight.
Volatility begets volatility, volatility clusters, but eventually things calm down.
– That’s not to say that things are now getting easier than early this week. China is still having a battle royale with market forces as it tries to stop the Shanghai stock market from falling. But given Shanghai fell again yesterday, all eyes – especially our own uber China watcher David Scutt – will be glued to China again today at the open of futures and physical trade and of course the RMB set at 11.15am AEST.
– It’s all a bit confusing but Emma Lawson, the NAB’s Sydney-based currency strategist, has summed up the situation beautifully in her morning note today.
After big moves there can often be big reversals. It doesn’t mean that the underlying issue is resolved but rather is often a factor of positioning, liquidity and uncertainty. We have a jumble of all three going on.
China’s equities ended down, helping drive down European equities, and European EM currencies, but the US had a very strong upswing. That could be because markets thought that the Fed wasn’t going to hike, except bond yields were higher. Growth pricing wasn’t exactly surging as oil prices and iron ore were lower. And despite the Fed pricing change (less priced for September), the USD was stronger, with the EUR and JPY under pressure in particular. The lack of consistency points to the positioning, liquidity and uncertainty described above.
What we do know is that the Fed is less certain of its hiking cycle now, and the ECB are wary about meeting its inflation target and are willing to do more QE. The difference in the currencies is that one is going to potentially do nothing but the other is going to potentially ease further. Cue the EUR decline. And the rollercoaster continues. It will be interesting to see the developments next week as the Northern Hemisphere returns to work and the central banks report. We have the unwinding of positions of the past few weeks, an increase in liquidity and more clarity on what the central banks are thinking.
– Looking at the local market and it’s clear that the US move is going to give the ASX a turbo boost today. Yesterday’s move was already solid given the weak lead from the futures market the night before, with the 0.69% gain belying the 1% down indication. Key to the local move was, as Chris Pash reported yesterday, broad based with 9 of the 10 sectors in the index higher. Energy could suffer a little today given crude went backwards but the banks might run today. Futures are indicating around a 1.5% lift, so it should be a good day.
– Moving away from markets to the real economy for a second and it is worth noting, again, that the US economic strength is incompatible with zero per cent interest rates. We had another pointer last night with the release of durable goods orders for July which came in a solid 2% print against expectations of a 0.4% fall, with the ex-transportation numbers a sold 0.6% versus 0.4% expected. Bob Bryan from BI US went around the grounds to wrap what’s going on in the real US economy in a piece overnight. He highlights:
There are numerous explanations for the sell-off in the markets, but none of them are because of the American economy.
Unemployment is still down around its pre-recession levels, the housing market is still improving with more being built and increasing values, consumer confidence is very healthy, and GDP is still growing.
None of that’s changed.
What he said.
– That is certainly the take of forex and bond traders as well. Now that a lot of the euro short overhang cleared, the single currency was free to fall again. So, having hit a high above 1.17 the other night it is back at 1.13 this morning. Likewise, sterling selling resumed and USDJPY buying was back. The US dollar, like Austin Powers, has its mojo back. Yeah baby. That hurts the Aussie dollar and it weighs on commodity prices. Which is partly why oil, copper and base metals were down last night. Gold was down because fear has receded. Likewise bonds in the US and elsewhere sold off. US 10s are back up at 2.18% while Australia’s 10 year bonds are back at 2.72%.
– On the data front today, the vitally important Capex numbers are out at 11.30am AEST today. Capex has been in a downtrend since 2012 and the market is looking for further weakness again today. We know from yesterday’s construction data that this part of the Capex picture is unexpectedly strong but non-construction by most estimates is still languishing. The Fed’s Jackson Hole symposium kicks off tonight but the big focus is US GDP at 10.30 AEST. The market is expecting no change on the last reported 2.2% annualised rate.