A quick recap: Stocks had a great day in Europe on Friday night with rallies of 2.5% or more across the board. But that positive tone evaporated in the US in afternoon trade with the S&P 500 and the Nasdaq finishing in the red. But with Nike up around 9% and Friday’s heavy selling concentrated in biotechs, the Dow managed to finish up 100 points and strongly in the black.
Westpac’s Wellington-based strategist Imre Speizer summed up the fractious price action nicely, saying this morning:
Fed Chair Yellen’s earlier reassuring message on the US economy and inflation was cited as a catalyst for the early gains in stocks, diminished “uncertainty” apparently considered more of a positive than the prospect of higher interest rates. The bullish momentum stalled on renewed political uncertainty however with news of House Speaker John Boehner’s resignation. Heavy selling of biotech names, a clear catalyst hard to find, sent that sector down more than 5% and weighed on the broader market into the close too.
In Australia, December SPI futures were down 4 points to 5,028 after Friday’s fall on the physical market. But Spiezer’s comments and the fact that BHP was up 0.7% and Rio Tinto up 1.4% in London means that Europe and the Dow might actually be a better lead for trade on the ASX in Australia today. So we might get a nice little rally.
On bond and forex markets, the combination of Janet Yellen’s comments Friday morning that 2015 rate hikes are still on the table and the upgrade of Q2 US GDP to a 3.9% annualised pace (from 3.7%) helped push rates and the US dollar higher. Fed speakers George and Bullard added to the drum-beat in favour of liftoff, Bullard noting the case for hikes is “quite strong”, while George noted that waiting for the perfect conditions before raising rates was “unrealistic”, Speizer said.
That said, the big dollar couldn’t hold onto its gains and even the victory for the separatist party in the Catalan election over the weekend hasn’t really hurt the euro in early Asian trade. Not yet anyway.
On commodity markets, oil prices rose, gold hung in but base metals came under pressure again.
Data wise, it’s a quiet start to what is going to be a huge week of economic releases in Australia, China, the US and around the globe. You can read my preview here.
The overnight scoreboard (7.31am AEST):
- Dow Jones Industrials +0.7% to 16,314
- Nasdaq Composite -1.01% to 4,686
- S&P 500 -0.05% to 1,931
- London (FTSE 100) +2.47% 6,109
- Frankfurt (DAX) +2.77% to 9,688
- Tokyo (Nikkei) +1.76% to 18,880
- Shanghai (composite) -1.62% to 3,091
- Hong Kong (Hang Seng) +0.43% to 21,186
- ASX Futures overnight (SPI December) -4 5,028
- AUDUSD: 0.7020
- EURUSD: 1.1190
- USDJPY: 120.46
- GBPUSD: 1.5196
- USDCAD: 1.3329
- Nymex Crude (front contract): $45.70
- Copper (US front contract): $2.29
- Gold: $1,145
- Dalian Iron Ore (January): 381 (denominated in CNY)
- US 10 year bond rate: 2.16%
- Australian 10 year bond rate: 2..69%
Now the news. Janet Yellen, strong US GDP growth in Q2 and the strength in the Uni of Michigan consumer confidence index (87.2 in September against 86.5 expected and 85.7 last) along with the Fed speak from George and Bullard highlights that Fed really could have raised rates this month without too much argument from anyone other than those who want the cash rate to stay at the effective zero rate for “market support”. Of course the Fed said it was worried about conditions abroad but it could have easily just been a metaphor for “market turmoil” more broadly. Whatever the outlook, it is increasingly looking like a lose-lose scenario for stock traders over the long run. Here’s BI US colleague Akin Oyedele’s summary of the outlook from Lisa Shalett, head of investment/portfolio strategies for Morgan Stanley Wealth Management’s:
A Fed on hold brings uncertainty, and signals to investors that the world economy is tanking. But if the rate hike that Shalett and others have forecast comes to fruition, it will formally signal the end of monetary stimulus and takes away the boost that stocks have enjoyed for the past six years.
– In that vein of uncertainty, it’s worth highlighting the chart I used in this week’s Diary about the impact of volatility. Boiling it down, we know volatility clusters and volatility begets volatility. That’s what we are seeing in the big ranges on stock and other markets at the moment. And, with a huge week of data and Fed speakers, we are likely to have more volatility this week.
But that volatility also cures itself eventually because it chases traders who don’t like volatility away. In time, that dampens market ranges because the skittish traders are out of the market. We aren’t there yet, as the chart shows. Volatility, as exemplified by the daily ranges, remains near 5-year peaks. But by the end of this week we’ll have a much better feel for where global markets are going to be headed toward Christmas.
– One thing to watch this week is the potential for a US government shutdown to impact markets. On Friday, speaker of the US House of Representatives John Boehner announced his resignation, both as speaker and from Congress at the end of October. Boehner has been at odds with many in his party recently and some say that his resignation means the risk of a shutdown is lower than it was. But the CBA’s Sydney-based currency strategist Joseph Capurso highlighted this in a note this morning saying:
A left field influence on the USD this week is the 30 September deadline to increase the debt ceiling on the US Federal government. We expect a last minute agreement to increase the debt ceiling but failure to increase it (very unlikely) would increase volatility and sap global equity markets.
Just another thing in the mix this week.
– On commodity markets iron ore jumped on Friday, oil was a little higher and the gold bulls are getting a little excited about the prospects for some real gains in the months ahead with the price up near $1,150. But base metals suffered as Commsec’s Craig James highlighted in his note earlier this morning. “Base metal prices fell by up to 2.7% on the London Metal Exchange with zinc leading the way. But nickel rose by 0.4%. Over the week metals fell by up to 4.4% (copper). But tin was largely flat and nickel rose by 2.8%,” he said.
– On the data front today, it’s very quiet. In Japan we get the leading and coincident indexes of economic growth and tonight we see the releases of the personal income and consumption data.
And now from CMC Markets’ Michael McCarthy is today’s Stock of the Day
Newcrest’s management team are working hard to overcome legacy issues. Two investor concerns are intertwined – unforeseen operational difficulties leading to sub-guidance performance. However, for the last eight quarters, NCM have met or beat guidance. This represents a better operational performance, and an understanding that companies should “under promise and over deliver”.
This may be why NCM is up more than 20% against a gold price rise of around 7%. NCM failed on Friday at $13. More importantly, the price action is all over the shop – disconnected from previous trading (green circle on the chart), with significant gaps between trading days. This is a sign of instability in the price, and often accompanies a false or corrective move.
Naturally, NCM’s share price is tied to gold. On any given day it may track or invert the gold performance, but over time must follow. Those who see overhead resistance for gold, possibly on the back of a stronger USD, may consider shorting NCM as a leveraged play.
Michael McCarthy, chief market strategist, CMC Markets
You can follow Michael on Twitter @MMcCarthy_CMC
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