A quick recap: Stocks were lower in the US and Europe again last night. But, while Europe finished very weak, with losses around 2%, US markets managed to rally in the last 3 hours of trade. That saw them finish in a much better position than where they were around lunchtime and well off the lows with falls of less than half a per cent at day’s end.
In Europe, with the VW CEO gone, the news is he is likely to be replaced by the head of Porsche. But the bad news is that the VW impact is hurting other carmakers with a magazine publishing claims that a BMW X3 had much worse emission than the EU limit hit its share price. In Tokyo yesterday, carmakers were similarly pressured with big price falls.
On forex markets, it was a wild night with the Aussie dollar trading down to 0.6939 before rallying more than 1 cent off the low in pre-Yellen trade. It’s fallen since then and is back below 70 cents. Euro was strong early but lost a cent from the high while the Kiwi was the best performer in forex markets.
The Norwegian krone had a bad night after the Norges Bank unexpectedly cut rates by 25 basis points from 1% to 0.75%. Taiwan also cut rates yesterday. The drop of 12.5 basis points to 1.75% is the first cut since 2009.
Clearly the world’s growth outlook is not too healthy.
But in a speech this morning Fed chair Janet Yellen said she thinks a rate hike later this year is still appropriate.
Looking at commodities, gold is above $1,150 for the first time in weeks, crude rallied more than 1%, copper was a little higher and the CRB index rose around 0.6%
In other news, US durable goods weren’t very strong, nor was the Chicago Fed national activity index, although housing remains solid with strong new home sales.
The overnight scoreboard (7.31am AEST):
- Dow Jones Industrials -0.48% to 16,201
- Nasdaq Composite -0.38 to 4,734
- S&P 500 -0.34% to 1,932
- London (FTSE 100) -1.17% to 5,961
- Frankfurt (DAX) -1.92% to 9,427
- Tokyo (Nikkei) -2.8% to 15,571
- Shanghai (composite) +0.89% 3,143
- Hong Kong (Hang Seng) -0.97% to 21,095
- ASX Futures overnight (SPI December) +2 5,059
- AUDUSD: 0.6982
- EURUSD: 1.1186
- USDJPY: 120.16
- GBPUSD: 1.5207
- USDCAD: 1.3341
- Nymex Crude (front contract): $45.10
- Copper (US front contract): $2.31
- Gold: $1,130
- Dalian Iron Ore (January): 378 (denominated in CNY)
- US 10 year bond rate: 2.12%
- Australian 10 year bond rate: 2..66%
Now the news. Janet Yellen’s speech this morning at 7am AEST has been a bit of a game changer for markets. Forex markets, as the only big one open, has seen a swift reaction to the message Yellen delivered that the Fed is still on track to hike rates in 2015.
Her message was that the economy is strong enough on the employment and inflation front to get moving.
“Most FOMC participants, including myself, currently anticipate that achieving these conditions will likely entail an initial increase in the federal funds rate later this year, followed by a gradual pace of tightening thereafter,” Yellen said. She added that it was best not to delay “too long”.
– The question for traders now is what impact will Yellen’s words have on stocks today in Asia and then in Europe and the US tonight. Yesterday the ASX bounced nicely off the bottom of its recent trading range. That’s still the key level to watch. The SPI 200 futures for Dec are somehow up 2 points this morning and well off the overnight low of 5,009 with a last trade at 5,060. US futures in night trade will be very important in what could be very cautious trade today.
A lower Aussie and more interest rate cuts, as suggested by the ANZ yesterday, should provide some local insulation to any fractious trade in Asia today.
Here’s my latest chart of the ASX200 – futures and cash.
– On forex markets, the volatility tells us that traders are still skittish. Just check out the screenshot above from my Reuters terminal this morning of US dollar story headlines. You can see in the changed sentiment about the euro and the dollar how the ebb and flow of trade is really just a bit of dancing on the spot. Indeed, for all the big moves last night, most of the major currencies were not far from where they where this time yesterday.
What is important about this is that markets, and not just forex markets, still don’t have a strong idea of what the dominant trend is. Different messages on tightening and the US dollar from the Fed and QE to infinity or not from Mario Draghi are simply complicating things.
– It’s similar with commodity markets. Oil and copper are bouncing up and down on the spot. But perhaps there is a message in gold getting a bid tone again. Perhaps uncertainty is enough to help even the most neglected of risk protection assets. I don’t have an answer but I am watching the price action in gold as an indicator of what’s next.
– On the data front today, Japanese CPI is the big one in Asia. There is nothing in Australia or China but tonight we get a speech from Jens Weidmann, the Bundesbank president. In the US there will be some interest in the latest GDP revision but it’s the third read.
And now from CMC Markets’ Michael McCarthy is today’s Stock of the Day
How’s your diet going? Chances are, if you’re observing an eating regime, that nuts are an important part of the program. Foods regularly go in and out of dietary fashion. Nuts are not only in fashion right now, Select Harvest’s (SHV) almonds, oats, dried fruits and seeds speak directly to aspiring Asian consumers and investors looking for agricultural exposures.
Given the merger and acquisition interest in groups like Graincorp and Bega Cheese, it’s surprising to find SHV trading around 12 times earnings. This looks cheap in a sector subject to takeovers. SHV paid 50 cents per share in dividends last year, albeit without franking, and consensus forecasts are for a further 12% increase in profitability over the next twelve months.
In other words, here is a stock trading at levels that could represent good value, in a sector where many investors are underweight, and may be subject to a takeover bids. The question is, why haven’t more investors diversified into SHV?
Michael McCarthy, chief market strategist, CMC Markets
You can follow Michael on Twitter @MMcCarthy_CMC
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