A quick recap: A very interesting night to start the final quarter of the year’s trade. After some solid gains in Japan and Australia, Europe opened strongly in the black. But, that ebullience proved ephemeral and stocks slid across most of the day. In the end only the UK managed to stay in the black with the rest of Europe finishing in the red.
Across the Atlantic all three Major indices rallied from their midday lows (when Europe exited) with the S&P 500 and Nasdaq ending in the black, while the Dow was down a smidge. Part of that early weakness was the release of data in the US. Both the Markit PMI and ISM both disappointed. Markit Economics Purchasing Manager’s Index (PMI) was 53.1, the lowest since March. The Institute of Supply Management’s PMI was 50.2%, the worst since May 2013. That continues to feed the narrative that some parts — manufacturing — of the US economy are struggling at the moment.
Also out last night was a note from UBS, who became the second major brokerage house this week, after Goldman Sachs, to lower their end of year target for the S&P. Though they only shaved 100 points, 2%, from their previous target of 5,225. The bank now expects the S&P to end at 5,125.
For local traders, after two stellar days of trade on the ASX the wash up for today is likely to be a down day. It’s also likely to be a very low volume day, with the Melbourne Grand Final public holiday (what an economic disaster) taking a large chunk of the market out. December SPI 200 futures are suggesting a five point fall today but it could be more than that by day’s end with Sydney out on Monday for the Labour Day holiday.
On forex markets it was a bit of a wild ride for the Canadian dollar which had a bit of a run while crude oil rocketed higher last night. But that rally was unsustainable and its run above $47 last night proved unsustainable — it’s back at $45 this morning. The Aussie is largely unchanged from yesterday after trying to rally but hitting resistance at 0.7070/80. Part of that reversal was the uptick in the US dollar as traders await the non-farms tonight. FOMC voter Jeffrey Lacker said October is a live meeting. His comments were reinforced by those of San Francisco Fed President Williams, who said it is appropriate to raise rates this year. Solid non-farms will see the US dollar do well tonight.
Besides crude’s wild ride the rally in base metals from the previous night was reversed with copper losing 3 cents and the complex overall coming under reasonable selling pressure. Gold is sitting around the $1,110 region.
On the data front today we have Australian retail sales for August at 11.30am AEST. The market is looking for a bounce back from last month’s surprise fall in sales. My bet is we’ll see it. David Scutt has a preview to the release you can read here.
Offshore non-farm payrolls tonight, released at 10.30pm AEST, is the big one. China is on holidays again. Fed vice chair Stanley Fischer is also speaking tonight.
The overnight scoreboard (7.03am AEST):
- Dow Jones Industrials -0.08% to 16,272
- Nasdaq Composite +0.15% to 4,627
- S&P 500 +0.2% to 1,923
- London (FTSE 100) +0.18% to 6,072
- Frankfurt (DAX) -1.57% to 9,509
- Tokyo (Nikkei)+1.92% to 17,772
- Shanghai (composite) Closed – last at 3,053
- Hong Kong (Hang Seng) Closed – last at 20,846
- ASX Futures overnight (SPI December) +5 to 5,008
- AUDUSD: 0.7023
- EURUSD: 1.1188
- USDJPY: 119.91
- GBPUSD: 1.5126
- USDCAD: 1.3263
- Nymex Crude (front contract): $45.06
- Copper (US front contract): $2.3093
- Gold: $1,113
- Dalian Iron Ore (January): 366.5(denominated in CNY)
- US 10 year bond rate: 2.04%
- Australian 10 year bond rate: 2..61%
Now the news. The volatility is continuing. Up, down, sideways. Fear, uncertainty, the odd panic and then calm, for a minute or two. It makes traders nervous and it makes for fractious trade and trading conditions. It has also changed trader’s outlook for stocks and what was uniform positivity six months ago seems more like outright loathing these days. That’s an oversimplification but Bank of America Merrill Lynch analysts reckon that Wall Street strategists are flashing a “contrarian buy signal”. BI US colleague Myles Udland covered the BoAML note overnight.
Udland says key to the BoAML outlook is “when the indicator is at current levels — with about 53% of Wall Street strategists recommending an underweight allocation to stocks — BAML says the expected 12-month return for the S&P 500 is 18%. So far this year, the S&P 500 is down about 7%.”
There you go, it might be time for a bounce. Non-farms tonight could be a game changer after two months of weak sentiment. Here’s the BoAML chart.
– On the economic front, the outlook remains uncertain for the US economy. We know most of the rest of the world seems to have been downgraded lately but the Atlanta Fed’s cool GDP forecaster is flashing a warning sign for GDP growth for the quarter just ended. The Atlanta Fed’s GDP Now model just downgraded expectations for third quarter growth in the US economy, Udland reported this morning. You can read his full piece here but the key is we just lost 1% in annualised growth, according to this measure, with a new forecast of just 0.9%.
My friends over at Forexlive reported this morning that Goldman Sachs and Barclays are also cutting their forecasts for Q3 GDP.
And now from CMC Markets’ Michael McCarthy is today’s Stock of the Day
ANZ – Gap Filler
While some share market bulls are getting excited about a “double-bottom” formation in the Australia 200 index, more diligent investors with a technical bent may have discovered a “triple bottom” in ANZ. Combined with the announcement of a succession plan for CEO Mike Smith, and a propensity to gap fill, ANZ should be on the radar of every investor who is yet to fill their boots with Australian bank stocks.
Assuming zero growth in dividends, ANZ’s dividend yield with franking at $27.60 is 9.3%, and it has a trailing P/E ratio of 10x. Unless you fear a housing market meltdown, these numbers are compelling in a blue chip stock. Investment metrics? Tick.
Now, have a look at the daily chart. Note the gaps in share price between one close and the next day’s opening (circled). Some shares are gap fillers, some are not. The reasons are complex, but the evidence is on the chart. ANZ is a gap filler. Sometimes the price will retrace immediately (purple circles) and in other cases it may take weeks or months (green circles).
Now, take a look at the mack daddy of a gap formed on August 4 between $32.50 and $29.97. Filling this gap gives a target of $32.50, compared to current trading just above the triple bounce off $26.45.
Trade, invest, or both?
Michael McCarthy, chief market strategist, CMC Markets
You can follow Michael on Twitter @MMcCarthy_CMC