A quick recap: The big question for traders in Australia today is: do they pony up and start buying on this last day of the quarter after the carnage we saw in Asia pacific markets yesterday failed to gain traction in Europe and the US markets overnight?
That’s not to say that markets in Europe and the US were universally bullish. Europe finished in the red. But that was after being crunched in early trade and recovering about half the early losses. Glencore was a big mover again, rallying 16%, which takes back about a third of the losses from the previous day. That was after the company came out in defence of its business and the analyst from Investec, whose report was the butterfly that caused the previous night’s tornado in the share price, sounded much more equivocal in TV interviews.
In the US it wasn’t exactly a great day’s trade. The Nasdaq, fresh from its “death cross” this week finished in the red. The Dow was volatile but finished in the black, while the S&P 500 was under pressure all day but managed to get back in the black to end the day.
The wash up is that the December ASX 200 futures are up 43 points to 4925. BHP and Rio Tinto both rallied in London trade and given it is the last day of the quarter I’m betting (not that I bet, just trade) that prices will end the day a percent or so higher.
That expectation is reinforced by the rally in crude oil of a little more than 1%, copper’s stabilisation, base metals rally and the move higher in the grand daddy of commodity indices, the CRB, last night. Iron ore had a mild rally last night in Chinese futures, while gold is back in the mid $1,125.
On currency markets, if you look at the prices this morning compared with those yesterday around this time you’d be forgiven for thinking nothing happened. But the Aussie nudged below last week’s low in afternoon trade yesterday hitting 0.6934. At the same time the Kiwi was testing 63 cents and USDJPY was in the low 119’s. But the fact that stocks didn’t follow Asia-Pacific’s lead reversed these moves, so in the end only the Canadian dollar was materially away from where it was 24 hours ago.
Today’s data calendar is dominated by Japanese retail sales, housing starts and industrial production. In Australia we get the release of private sector credit and building approvals. Retail sales and unemployment are out in Germany tonight along with the latest read in UK GDP. EU employment is out while in the US tonight we get the Chicago PMI, ADP payrolls, a speech by Bill Dudley and another by Janet Yellen.
The overnight scoreboard (7.26am AEST):
- Dow Jones Industrials +0.3% to 16,049
- Nasdaq Composite -0.59% to 4,517
- S&P 500 +0.12% to 1,884
- London (FTSE 100) -0.83% to 5,909
- Frankfurt (DAX) -0.35% to 9,450
- Tokyo (Nikkei) -4.06% to 16,980
- Shanghai (composite) -2.06% to 3,036
- Hong Kong (Hang Seng)-2.97% to 20,556
- ASX Futures overnight (SPI December) +43 to 4,925
- AUDUSD: 0.6983
- EURUSD: 1.1249
- USDJPY: 119.74
- GBPUSD: 1.5151
- USDCAD: 1.3421
- Nymex Crude (front contract): $44.89
- Copper (US front contract): $2.26
- Gold: $1,127
- Dalian Iron Ore (January): 367(denominated in CNY)
- US 10 year bond rate: 2.06%
- Australian 10 year bond rate: 2..61%
Now the news. It is such a fractious time in markets at the moment. A week or so ago the big beat in US consumer confidence, which printed 103 in September — up from 101.5 last month and well above moribund analyst expectations of 96 — could have raised fears that the fed will tighten. But what it did was suggest a certain level of US economic resilience to traders last night looking for something positive to grab onto. Equally encouraging was the Dallas Federal reserve services index which rose from 9.3 to 12.8. Tomorrow all the focus will be on manufacturing PMI’s in China, Japan and elsewhere. But it’s services that matter in developed economies and they are in a much better state of health.
– The Fed mentioned conditions abroad in its September statement as a key driver of why it held rates steady. That was taken as code for China and emerging markets (EM) more broadly. So it’s important that we continue to monitor what is going on in the EM world. Unfortunately, it’s still tough going for these economies. Yesterday, the Reserve Bank of India cut rates by 50 basis points and billionaire activist investor Carl Icahn warned of junk bonds, rather than EM bonds, but it’s a similar story. Here’s Emma Lawson, NAB’s excellent Sydney-based currency strategist, with a great update on what is going on the moment.
EM currencies are weaker and funding currencies such as JPY, and EUR (in this cycle) are stronger. The typical behaviour for the high yield, commodity currencies (AUD and NZD) are in place. They are under pressure. Measures of market volatility are higher, with credit spreads much wider, VIX (equities) has risen again and MOVE (bonds) has shot higher.
EM central banks are implementing their contingency plans by increasing liquidity in the local market (HK), providing USD swaps to local corporates (Brazil) and intervening in the local currency (multiple).
Overnight, the IMF warned of the $18 trillion emerging market corporate bond market. To give you an idea of the strains confronting some EM countries, the 10-year bond yield in some are presently at the highest level in 12 months. Compare this to the “norm” in many G10 and the more solid EM countries, where the yield is at its lows for the last 12 months. Historically, the stretched EM yields are still below peaks, but this rise in risk premium is another expression of market concern regarding underlying fundamentals. This is classic risk repricing, where countries with current account deficits, foreign denominated debt, and particularly commodity exporters, are responding to changing global conditions. This risk repricing is beyond any debate about the Fed raising interest rates 25bp or not.
The nervousness in EM is translating, in this global interconnected world, to corporates who deal with EM, to economies reliant on global demand, and commodity exporters, like Australia, And that is why Australian equities were down over 3% yesterday, the ASX 500 cracking the 5000 level. (Japan and others also broke key levels).
– That’s why concerns about Glencore’s debt load, and that held by other mining companies around the globe — not to mention Carl Icahn’s junk more generally — are suddenly front and centre. In 2007/2008 it was sub-prime debt and where it was spread and who owned. 2015/2016 could easily turn into the mining/EM debt crisis if we don’t see commodity prices recover.
And now from CMC Markets’ Michael McCarthy is today’s Stock of the Day
Shoot me – I bought BHP
Like most people, my Self-Managed Super Account is for the long term. One of my primary goals is to buy top quality companies at lower prices. One tactic is to place “resting orders” to buy stocks at what look like ridiculous prices, well below market. And yesterday, I was hit on a BHP order, buying at $22.
Resting orders must be managed carefully. One risk is having too many, getting hit on all of them in a meltdown, and not being able to pay. Investors tend to use them selectively, on the most desirable long term holdings. BHP is the world’s largest mining company, with an excellent track record and leadership that have successfully managed through the commodity cycle. Diversification demands exposure to this key Australian industry, and in my view there’s none better than BHP.
Given the universal gloom around China, commodities and global growth, why would anyone buy BHP? Take a look at the chart below. It’s a monthly chart, showing BHP’s performance this century. The range is $7.87 to $50. The green line is $22. It’s possible BHP could plunge to $18, but looking at the chart I’m happy with yesterday’s trade.
Michael McCarthy, chief market strategist, CMC Markets
You can follow MIchael on Twitter @MMcCarthy_CMC
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