Quick Recap: Wall Street and European stock markets shrugged off the Chinese market volatility overnight with gains across the board. That ended five straight days of declines in the US where energy stocks were solid and all sectors in the S&P 500 advancing into the close. Earnings results from companies including UPS, Pfizer, and Ford topped forecasts. In Europe, it was the Pharma sector again leading the charge. That’s helped local futures which are indicating at 26-point rally on the ASX.
On other markets, bonds were a little pressured by the stock rally and the Kiwi was the standout mover in currency land, up more than 1%. The Aussie and Canadian dollars were also higher and the CRB rallied 0.8% in what looks like an interesting commodity and commodity bloc move amid weak sentiment toward the sector. Iron ore, on the Dalian exchange, was up 2.3%!
The overnight scoreboard (6.46am AEST):
- Dow Jones +1.09% to 17,630
- Nasdaqup +0.98% to 5,089
- S&P 500 +1.24% to 2,093
- London (FTSE 100) +0.77% to 6,555
- Frankfurt (DAX) +1.06% to 11,173
- Tokyo (Nikkei) -0.1% to 20,328
- Shanghai (composite) -1.68% to 3,662
- Hong Kong (Hang Seng) +0.62% to 24,503
- ASX Futures overnight (SPI September) +29 to 5,569
- AUDUSD: 0.7321
- EURUSD: 1.1057
- USDJPY: 123.56
- GBPUSD: 1.5610
- USDCAD: 1.2925
- Crude: $47.71
- Gold: $1,095
- Dalian Iron Ore (September): 400
– Now the news. On the data front in the US, there was a bit of disappointment with consumer confidence falling to a 10-month low of 90.9. Case Shiller house prices actually FELL 0.2% in May. And, even though the Markit flash Services PMI rose to 55.2, BI US’s Akin Oyedele reports this morning that “Confidence in the business outlook fell to the lowest level since June 2012.” In the UK, GDP printed exactly on expectations at 2.6% for the year.
– China was the big story in our time zone yesterday. David Scutt wrote:
“Having opened down more than 5%, the index staged a remarkable mid-session rally, briefly breaking into positive territory before meandering lower over the course of afternoon trade. Eventually the index closed down 1.68%.”
That’s a victory of sorts for authorities who are just trying to stem the bleeding and stabilise the market in what seems like a battle that will drive stocks lower in time. That’s the view of Deutsche Bank which believes Shanghai looks like the Nasdaq bubble. But yesterday, as the Shanghai rally celebrated on its first birthday, the 200-day moving average proved support once again. Here’s the chart:
– Locally, the market has had a remarkable couple of days. Marching, largely, to the beat of its own drum, the market has bucked the bearish sentiment that pervaded to end last week and the first few session of trade with unexpected strength. Certainly yesterday’s early weakness reversed once the Chinese markets climbed off their lows but overall the tone this week on the ASX, and even in the Aussie dollar, has been much stronger than many expected. Futures are pointing to another good day again with some solid rises in London trade for the miners and the banks likely to catch a lift from the US.
– One thing traders will be wondering though today, and which might keep things a little subdued is what the FOMC is going to say tomorrow at 4am when it announces it decision, most likely, to hold rates steady. Interestingly, the NAB’s local currency strategist Emma Lawson reckons that Janet Yellen’s oft-made point – that it’s not the start but the magnitude of rate rises that is important – has cut through with investors. Here’s what she wrote this morning:
It’s been a long time between cycles. That prolonged period of policy easing has made markets nervous about the coming cycle and how various asset classes, including or especially those outside of the US, will cope.
Generally, in a recent investor trip, many clients did not want to focus on the September or December start in the Fed cycle, but rather the end point. How much and how fast is the Fed likely to raise interest rates; and how will the more integrated global financial market cope with that? Therein lies the uncertainty…So a September versus December kick-off will generate short-term moves in the USD and yields, but it is the path ahead that should be the most important factor. In that, the Fed is likely to reassure on a steady, and very slow, hiking cycle in the statement.
The eventual terminal rate (peak if you will) will be determined by the likely, lower, potential growth rate in the US but we shall see how that develops over time. And, how those assets used to a low risk premium come to manage a higher price for the risk premium.
Note Lawson mentions “lower, potential growth rate”. That’s what RBA governor Glenn Stevens was talking about for Australia as well last week.
– Elsewhere, Commsec’s Craig James said that “major currencies were mixed against the greenback in European and US trade. The euro fell from highs near US$1.1080 to lows near US$1.1020 and ended US trade at US$1.1055. The Aussie dollar rose from lows near US72.95c to highs around US73.40c and ended US trade near US73.25c. And the Japanese yen lifted from near 123.80 yen per US dollar to JPY123.50, ending US trade around JPY123.55.” So marking time – except for the Commodity block which looks like it has turned. Here’s the Kiwi chart showing a breakout of the downtrend.
– On commodities, oil prices were higher as traders expect a drop in inventories and base metals managed to recover recent weakness. Copper was up 2.2% to $2.40 a pound while nickel and zinc were 2.7% higher. Aluminium lagged a little, up just 1.1%. Gold was fairly quiet and sits in the mid $1190s still. Iron ore is stronger as David Scutt highlights this morning.
– On the data front, there is nothing in Australia but forex traders will be watching RBNZ governor Wheeler’s speech closely today. Retail trade in Japan is out as is the Gfk consumer sentiment survey in Germany tonight. Home sales and crude inventories are out in the US and then at 4am it’s the FOMC decision
And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
While the ASX 200 index closed 7% below its high for the year yesterday, CSL equalled not only its high for the year but its all-time high at $96.60.
The catalyst for yesterday’s rally was news that the US Food and Drug Administration will review CSL’s application to approve use of a haemophilia treatment it has developed. While approval is not a certainty, this is an important step in a process that could see CSL selling this new product within 1-2 years. CSL yesterday said it has the only late stage development treatment in this space.
Amongst other things, the outlook for CSL has also been improved by recent weakness in the Aussie dollar. The majority of its profit is earned offshore and profits are quoted in $US meaning they are worth more to Aussie shareholders if our currency weakens.
Last night’s Aussie dollar strength may give traders a little cause for pause this morning and at around 21.5 times next year’s earnings, some may prefer to wait on the upcoming profit report before buying CSL too aggressively at this stage.
If this cautious scenario plays out then Fibonacci projections of the latest 5 wave advance marked on the chart below might prove to be a short term resting place for the stock. There are a number of these projections. One that I’ve shown on the chart projects that the swing up from “4” to “5” will be the same size as the first swing in this formation. The projections cut in at around $97.50/$97.80
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC
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