– Shanghai had one of its most remarkable days of trade yesterday in what has been an impressive few months of price action. Down sharply at one point it managed to close higher on the day. But US and European traders weren’t convinced and they took stocks in the US and Europe lower overnight.
– What seems to be happening is multiple warnings from respected analysts, journalists and fund managers are beginning to break through investors a.k.a “Stockholm Syndrome”. It might sound hyperbolic but BI US and UK ran a piece last night which seemed to capture the mood perfectly — These two terrifying charts show that the US could be heading for a big stock market crash. Just as Akin Odeyele pointed out earlier, Brean Capital’s Peter Tchir wrote: “It is time to reduce US equity holdings for the near term and look for a 3% to 5% move lower. The Treasury weakness is NOT a ‘risk on’ trade it is a ‘risk off’ trade, where low yields are viewed as a risk asset and not a safe haven.” Either way you can feel the summer bear awakening.
– Was that the high? That’s the question bond traders will be asking themselves this morning after the sharp sell-off in bond markets continued last night. It then reversed sharply which saw US and German 10 year rates close lower on the day. The key driver of the reversal is being attributed to more dovish Fed-speak overnight. But to me the bond sell-off is incompatible with the equity sell-off. That doesn’t necessarily mean I disagree with Peter Tchir, at least not in the first instance anyway. Bond rates are probably headed higher. But in the short term if markets go risk off and stocks start to swoon then the bond sell-off is likely to slow and reverse a little.
– Another thing that may have helped bonds, according to Westpac’s New Zealand based strategist Imre Speizer, was “The IMF rather unconventionally urged the Fed not to tighten monetary policy before 2016, after cutting its US GDP growth forecast for 2015 from 3.1% to 2.5% (which has been our forecast since last year).” IMF boss Christine Lagarde said “the inflation rate is not progressing at a rate that would warrant, without risk, a rate hike in the next few months”. Speizer added “the Fed’s lift off decision is not just about the state of the labour market.” Perhaps, but zero rates are incompatible with the state of the labour market.
– Speaking of the IMF. News that Greece has requested that it skip the payments due in the early part of the month fora bulk payment at the end. We are in the end game of this part of the mess but we are no closer to greece getting on a sustainable fiscal or economic footing.
Here’s the overnight scoreboard (7.20am AEST):
- Dow Jones down 0.94% to 17,905
- Nasdaq down 0.79% to 5,059
- S&P 500 down 0.86% to 2,095
- London (FTSE 100) down 1.31% to 6,859
- Frankfurt (DAX) down 0.69% to 11,340
- Paris (CAC) down 0.93% to 4,987
- Tokyo (Nikkei) up 15 points to 20,488
- Shanghai (composite) up 0.76% to 4,947
- Hong Kong (Hang Seng) down 0.38% to 27,551
- ASX Futures Overnight (SPI June) -17 to 5,490
- US 10 Year Bonds -6 to 2.31%
- German 10 Year Bonds -5 to 0.82%
- Australian 10 year bonds -9 to 2.97%%
- AUDUSD: 0.7682
- EURUSD: 1.1234
- USDJPY: 124.35
- GBPUSD: 1.5364
- USDCAD: 1.2497
- Crude: $57.99
- Gold: $1,176
- Dalian Iron Ore (September): 436
– The ASX had a shocker yesterday breaking down and through support to finish the day off 1.4%. It lost more ground overnight in futures terms with indications it will remain under pressure again today. At times like these traders often step aside, waiting to see the bottom before re-entering. We’ll see how it plays out over the next few days.
– In Asia yesterday it was a wild and crazy time on the Shanghai stock market. Weakness in the early part of the day seemed to be linked to some change in margin at brokerages. But you can’t keep a good Shanghai bull down it seems, and the market rocketed after the post-lunch low. Rhyme or reason is hard to fathom in the mania that is the Shanghai exchange.
– On forex markets the US dollar was generally a little stronger across the board last night. But the Aussie was the worst performer of the majors after yesterday’s big miss on retail sales and the all-time record trade deficit — at least in dollar terms. Technically, it looks like the US dollar might have a little way to run. That’s particularly the case if we get a big non-farm payrolls result tonight as both Capital economics and Deutsche Bank are forecasting.
– On commodities you really have to wonder about gold. Personally, with all the cross and counter currents I’m putting some gold in my back pocket as an insurance policy. But it seems not many are doing the same, given it fell again last night to $1,176. Crude was crushed too, falling 2.78% to $57.98. Copper lost a couple of cents to $2.71 a pound and Dalian iron ore was 438.5.
– On the data front this morning we get the AiGroup performance of construction index in Australia. But all the news is offshore with German factory orders, UK inflation expectations, EU GDP and of course US non-farm payrolls at 10.30pm AEST tonight. Canadian employment is also out.
And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
Crown Resorts (CWN)
As one who tries to apply the old traders rule of not attempting to catch falling knives, I found it difficult to find a stock to watch after yesterday’s sell-off.
However, Crown Resorts came to the rescue. This stock has been beaten up over recent months, falling around 20% from its February high. Compared to a lot of other stocks though, it’s weathered the storm of the last couple of days pretty well. These signs of flagging downward momentum and the early possibility of a bullish head and shoulder pattern make it a stock to watch in my book.
The 20% decline over recent months reflects ongoing concerns about the impact of China’s anti- corruption drive on the revenues of Crown’s part owned Macau casino and the impact on its balance sheet of the Barangaroo development in Sydney. However, at 16 times projected F16 earnings and with most analysts now having made conservative assumptions about Macau, the bad news looks well and truly priced in.
The textbook approach to an inverse or bullish head and shoulder is to buy on a break above the neck line. The potential significance of this neck line is enhanced by the fact that the 50 day moving average cuts in around the same level. However, before any of that comes into play, Crown will have to weather the storm of the current down trend and confirm the right shoulder of this pattern by holding Wednesday’s low or thereabouts.
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC