A quick recap:
The S&P 500 managed to just cling to a positive close but the other big indexes in the US and all the major European bourses were lower overnight. There are many reasons being proffered for why markets rallied on the news the Fed has a December rate hike on the table yesterday, but pulled back today, but the best answer might come from other markets.
The rise in US interest rates suggest the markets are taking the threat seriously which might have given stock traders a little room for pause. Since the announcement yesterday morning, US 10s have risen around 15 basis points (7.4%), US 2-year rates have risen 10 points (16%). They are massive percentage moves for bond holders and provide another valuation challenge for stocks up at these levels. Australian bonds have escaped the selling because of the CPI and Aussie 10s are at 2.59%, down 10 points from the high earlier this week.
The wash up for the ASX is that after yesterday’s no doubt disappointing fall of 1.3%, futures are pointing lower again this morning. The December SPI200 contract is 15 points lower at 5,224. The weakness yesterday means the ASX200 market has had a failed break which technical traders (and everyone else) will hate. See chart below.
On forex markets, the Aussie’s halo has certainly slipped around its neck as it slowly drifts lower. The market sees a genuine risk that the RBA will cut rates on Tuesday and there is some positioning being undertaken in the lead-up. 0.7040 is the key support level traders will be watching now. Below that and 0.6950 comes into play.
Elsewhere on forex markets there was a little bit of action just after the lower than expected print for GDP last night of 1.5% for the third quarter. But that was only 0.1% weaker and extract the inventory drag and you see a relatively strong internal US economy.
Akin Oyedele from BI US reports that The Department of Commerce said in its release, “The increase in real GDP in the third quarter primarily reflected positive contributions from personal consumption expenditures (PCE), state and local government spending, nonresidential fixed investment, exports, and residential fixed investment that were partly offset by negative contributions from private inventory investment.”
That is not a weak economy. No wonder interest rates lifted a little and stocks wondered about the effect of a December hike. But technical factors helped the euro and sterling a little higher while USDJPY went nowhere.
On commodity markets, copper dipped 3 cents a pound and crude gave back the tiniest part of yesterday’s massive 5% rally but iron ore futures on the Dalian exchange lifted from this time yesterday.
On the data front today, it’s all about Japan. Not only is vitally important CPI, unemployment, vehicle, construction and housing data out but the BoJ also announces its decision on monetary policy. Is it too soon to see more accommodation in Japan? Maybe, but it feels like more QE is coming.
Retail sales in Germany tonight will be watched closely as will the PPI in Fance, GDP in Spain, CPI and PPI in Italy and EU wide employment and CPI data. All of these will help inform expectations about what Mario Draghi is wont to do at the next ECB meeting.
In the US personal consumption and spending data along with the employment cost index are vital for thinking about the chances of a December Fed hike.
The overnight scoreboard (7.37am AEDT):
- Dow Jones Industrials -0.13% to 17,755
- Nasdaq Composite -0.42% to 5,074
- S&P 500 -0.04% 2,089
- London (FTSE 100) -0.65% to 6,395
- Frankfurt (DAX) -0.29% to 10,800
- Tokyo (Nikkei) +0.17% to 18,935
- Shanghai (composite) +0.38% to 3,388
- Hong Kong (Hang Seng) -0.6% to 22,819
- ASX Futures overnight (SPI December) -15 to 5,224
- AUDUSD: 0.7073
- EURUSD: 1.0970
- USDJPY: 121.12
- GBPUSD: 1.5307
- USDCAD: 1.3164
- Nymex Crude (front contract): $45.74
- Copper (US front contract): $2.321
- Gold: $1,145
- Dalian Iron Ore (January): 363.5 (denominated in CNY)
- US 10 year bond rate: 2.17%
- Australian 10 year bond rate: 2.58%
– The ASX broke out, rested on support and then yesterday crashed back down and through and back into the previous trading range. That’s already a bad sign and an ominous one for a deeper fall if the market drops another 15-20 points today. Here’s the chart:
– Albert Edwards, Soc Gen’s notable Uber bear, has teed off on Mario Draghi in a report overnight. He’s thrown the ECB president in with the Bank of England and the Fed as someone who hasn’t learnt anything from his QE efforts. The point he is making is that the efforts at QE, which are supposed to drop interest rates across the curve low enough to encourage banks to lend, are not working.
More detail at Akin Oyedele’s post here.
– There is a storm brewing in global credit markets. Certainly the money that has flowed into them in this low rate/QE world has induced some over borrowing and increased leverage in emerging markets. That’s got many traders worried about the impact this will have when what they see as the bubble bursts. But the FT reports this morning that there is a stoush between the two big ratings agencies, Standard and Poors (S&P) and Moodys, over the classification of hybrid debt. This week S&P has reclassified the hybrids as 100% debt. That’s important because hybrids, issues that combine the structure of debt with some of the characteristics of equity, are an increasingly popular source of funding for some companies. The FT reports $45 billion were issued last year and $26 billion has been issued this year. As arcane as the change may seem, what it does is increase the leverage of the companies whose debt has been reclassified potentially impact investors views of those companies and potentially triggering some selling. We’ll keep an eye on things.
And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
What a great story this is on so many levels. Congratulations to those investors who bought around $30 a couple of years ago. Isn’t it refreshing to be presented with an example of an industry other than mining where Australia can develop a competitive edge to take advantage of China’s increasing prosperity?
Yesterday’s announcement that Blackmores will combine its reputation and proven expertise in health products with our agriculture industry to produce baby formula in partnership with Bega Cheese certainly captured the market’s imagination. Of course a stellar set of sales figures didn’t hurt either.
However, a forward PE of 41 times earnings is not for the faint hearted. The fact that the market closed at $175 after peaking yesterday at $200 suggests a bit of re thinking may have followed the initial burst of exuberance.
The long wick on this week’s candle also suggests that the $200 high might be as good as it gets for a while. Looking for useful features in this near vertical chart, the July peak around $157 stands out. This is close to the 38.2% Fibonacci correction of the rally off the long term trend line that began at $79 in August. So this $153/$157 zone might provide support. A break below this would be a sign of weakness, suggesting potential of a deeper correction of the $79- $200 rally.
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC
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