A quick recap: We are away. The S&P 500 closed above 2,000 for the first time since August 20 this morning as the markets healing process continues and the S&P’s rally of the September lows stretches to around 7.5%. The Dow and Nasdaq were also higher as was all of Europe. The rallies in Europe were however very cautious as they closed before the Fed minutes were released (see below in other news) and the fact that Germany released data showing that it had its worst month of exports since the financial crisis.
It was continuation of the good run in stocks, though, which should buoy the ASX today after yesterday’s disappointing reversal from the highs. Overnight trade on the SFE shows that the SPI 200 December futures are up 62 points at 5,256 suggesting a rally of around 1%.
But, the fact that the US looks good, that oil (+4%) and energy ripped higher, that the CRB commodity index is higher and that there are enough mixed messages in the Fed minutes to forestall the first rate hike, along with the solid rally of BHP and Rio in London last night suggests the rally could exceed futures trader expectations.
Asia didn’t have the best day yesterday which contributed to some of the bulls reticence on the ASX. The point of concern for many was that the Shanghai market only rose 3% after its week off, even though other indexes around the region were up something like 6% while the market was closed. The Nikkei was down on Japan specific economic factors with the economy watchers survey weaker than expected.
The impact on bond markets was that rates have drifted a little higher in the US and elsewhere as risk appetite has increased and some of the fear trade that took US rates under 2% dissipates. US 10’s finished at 2.10% — still very low.
On forex markets the Aussie had a cracker rallying with the US dollar weakness pre-FOMC minutes. It has tested the top of the recent range again – I’ve had a look at the outlook and thrown in a chart below. Euro is higher as well and the Pound managed to rally even though the BoE was read as somewhat dovish by forex traders initially given concerns about China and emerging markets.
On the data front today the key things to watch are Australia’s housing finance approvals report for August. NAB’s David de Garis says the focus will “be on the investor lending figures and whether it reveals further signs of flatness. Headline owner occupied lending volumes are expected to have risen 6%, counter to the general trend of softer demand with this expected rise to be analysed to see whether it reflects simply greater refinancing activity or signs of a genuine pickup demand for housing finance from owner occupiers.”
Tonight UK trade is out and then in the US there is plenty of Fedspeak, with Fed presidents Lockhart and Evans speaking. US September import prices are “likely to remind the market of the continuing deflationary impact prices from the strong dollar,” de GAris says.
There could be some interest in the Canadian dollar tonight with the release of their September labour force report.
Also worth noting is that earnings season is underway. this morning Alco reported its results to kick things off – with a miss.
The overnight scoreboard (7.47am AEST):
- Dow Jones Industrials +0.82% to 17,075
- Nasdaq Composite +0.41% to 4,810
- S&P 500 +0.88% to 2,013
- London (FTSE 100) +0.61% to 6,374
- Frankfurt (DAX) +0.23% to 9,993
- Tokyo (Nikkei) -0.99% to 18,141
- Shanghai (composite) +3% to 3,144
- Hong Kong (Hang Seng) -0.71% to 22,354
- ASX Futures overnight (SPI December) +62 to 5,256
- AUDUSD: 0.7252
- EURUSD: 1.1273
- USDJPY: 119.91
- GBPUSD: 1.5349
- USDCAD: 1.3012
- Nymex Crude (front contract): $49.68
- Copper (US front contract): $2.3575
- Gold: $1,139
- Dalian Iron Ore (January): 376.5(denominated in CNY)
- US 10 year bond rate: 2.10%
- Australian 10 year bond rate: 2.67%
– The Fed gave us plenty to think about with the release of its minutes. NAB senior economist David deGaris summed up the message nicely saying in a note this morning that:
The Sep FOMC minutes came and went and when all is said and done, it has not clarified whether the Fed is likely to be hiking before year end or later. As is quite often the case – and with some increased divergence of views – you could read into the Minutes whatever you wanted. Initial wire headlines were a combination of the various mixed threads: “many members see lift-off conditions met this year”, “several members concerned about downside risks to the outlook” and “members viewed risks to outlook as nearly balanced”.
All in all, the majority view is to expect that lift-off will happen in coming months – as we know from Yellen – but with plenty of caveats to hold off and wait.
So amidst the mixed messages here’s a wrap of the best pieces on BI:
- The Fed spent a lot of time talking about ‘China’ in September
- The Fed thinks stocks are expensive
- The Fed still expects to raise rates this year – with full Fed minutes
- And, related to the Fed but saying they have lost control – Soc Gen uber-bear Albert Edwards says these two charts show the global economy is ‘turning Japanese’
– On Forex markets the Australian dollar ran into solid resistance last night up near the recent high in the 0.7270/80 zone with a high of 0.7271. It’s only off a little but the market is setting up for a potentially huge break higher. That’s because with the US dollar weaker again two big feet are being lifted off the Aussie. naturally a weaker US dollar helps lift the Aussie higher but the big rally that a weaker US dollar can, has, allowed in commodity markets is a double whammy for the Australian dollar.
The short term speculative market is still very short as well and the Aussie is also winning on many crosses which increases the buying.
Here’s the Aussie chart – my target is 0.7400/30:
And now to CMC Markets’ Michael McCarthy for today’s Stock of the Day
South to Head North
Here’s a tip for corporate boards – don’t put “South” in the title of any intended spin-offs. “Share price heading south” headlined research reports are inevitable. This may in part explain the brutal rounds of earnings revisions that South32 has suffered since listing. Analysts have sliced original listing earnings estimates of around 15 cents per share to a consensus closer to 7 cents, causing around $370 million to evaporate next year alone.
Ok, you got me. Falling commodity prices may have played a part. Whatever the causes, the share price tumble puts them in an interesting position.
A mix of nickel, alumina and aluminium, coal, manganese silver lead and zinc is hardly compelling from a long term, investment point of view. However, for traders, there is a stronger technical signal that could see significant gains.
On the chart, the two lows (blue arrows) are the low points of a “W reversal” formation. The first is outside the Bollinger Bands, and the second within – a necessary condition for the signal. Alert traders may have bought on Tuesday, after Monday closed above the high of the previous day. Extremely conservative traders may wait for trading above of the middle of the W at 1.713, although that trade would follow the rules of double bottoms rather than W reversals.
Michael McCarthy, chief market strategist, CMC Markets
You can follow Michael on Twitter @MMcCarthy_CMC
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