– The Chinese market volatility and failed efforts by authorities to stem the flow of selling in Shanghai finally got trader’s attention yesterday. Having played a back seat to the Greek crisis and with the real chance that Sunday is the day that Greece’s fate is sealed, the complete lack of traction and emergency measures in China has shone a light on the communist party and the leadership of the president and premier. What seems to have happened this week, perhaps even just yesterday, is that traders and investors finally woke up and realised there is potentially more to the Shanghai bubble bursting. Paul Colgan summed it up brilliantly with his “the day the popping of the China stock bubble echoed around the world” piece. I think it’s a must read. I also think Mike Dolan’s piece on how Greece and China are showing the limits of the “whatever it takes” central banker approach is also important.
– Turning now to the US and overnight the New York Stock Exchange blacked out for three hours, United airlines grounded its entire fleet for two hours and the WSJ website crashed — all supposedly due to unrelated computer glitches. That didn’t help sentiment on US stocks which came under heavy selling pressure from the beginning of trade. That left stocks down a fairly sharp 1.47% for the Dow, 1.75% for the Nasdaq and 1.66% for the S&P. With a close at 2,046 the S&P 500 has finished trade below the 200 day moving average for the first time since October last year. Back then the index hit and bounced sharply off the trendline, stretching back to the start of this rally in 2011. Now, traders will be asking themselves these two questions: How far will the S&P 500 fall? Will the trendline be supported again? The answers to these questions will, as much as Greece and China, determine the fate of global markets in the run up to Christmas.
Alcoa’s quarterly earning report after the close won’t have helped sentiment.
– The Fed minutes were out this morning and besides providing the basis for a rate rise this year the Fed, unlike the RBA, said it was worried about Greece. The context here is that they were worried before this latest round of messyness. That suggests, as US bond traders have recognised, that the Fed may delay the first tightening. That helped US 10’s rally another 7 points to 2.19% even though San Fran Fed president John Williams said that rates need to rise twice this year… German Bunds rose two points to 0.67% and Australian 10’s finished at 2.34% down three overnight.
– In Europe, Greece is obviously still important but last night the market seemed to have a bit of a ceasefire with stocks rising across the continent with an accompanying small rise in German bonds after Greece asked for a 3 year deal under the ESM framework. However, there were still plenty of comments suggesting that Europe is going to play hardball with Greece. Madame Lagarde of the IMF this morning said Greece cannot get special treatment but also said debt restructuring was needed. Mike Bird from BI Europe looked at the 7 chaotic steps Greece would take if it exited the euro and issued a new currency.
The debt restructure is something John Hussman picked up on with this tweet.
Here’s the overnight scoreboard (7.21am AEST):
- Dow Jones down 1.47% to 17,515
- Nasdaq down 1.75% to 4,909
- S&P 500 down 1.67% to 2,046
- London (FTSE 100) down 1.58% to 6,432
- Frankfurt (DAX) up 0.91% to 6,490 /li>
- Tokyo (Nikkei) down 2.13% to 19,737
- Shanghai (composite) down 5.91% to 3,506
- Hong Kong (Hang Seng) down 5.84% to 23,516
- ASX Futures overnight (SPI September) -31 points to 5,370
- US 10 Year Bonds -9 points to 2.19%
- German 10 Year Bonds +2 to 0.67%
- Australian 10 Year Bonds -3 2.74%%
- AUDUSD: 0.7425
- EURUSD: 1.1072
- USDJPY: 120.68
- GBPUSD: 1.5358
- USDCAD: 1.2738
- Crude: $51.80
- Gold: $1,158
- Dalian Iron Ore (September): 364
– After a poor days trade yesterday SPI futures are suggesting another down day for the ASX. Iron ore bounced in China, which may help sentiment some. But as we saw yesterday it seems Australian traders are taking their cues from Shanghai stocks as well these days. We’ll be watching China closely to see if it can rally off this 3,500 zone which forms natural support. Yesterday I wrote up a research note from Morgan Stanley saying this is a deleveraging event in Shanghai that has further to go. So it might be a little early yet.
– In Asia yesterday it was a sea of red as the woes in Shanghai reverberated across the entire region. Even the usually unflappable Straits Times Index in Singapore fell 1.67%, while the Nikkei was off more than 2% and the Hang Seng tanked. Mumbai ended deeply in the red too. So it’s all eyes on Shanghai again today.
– On currency markets you can gauge the depths of emerging concern by forex traders, amongst others, in the price action of the Yen which has had a material rally against a wide range of other currencies, including the Aussie and US dollars. With a rally of almost 2 cents from the mid 122 region yesterday morning to the current level in the mid 120’s USDJPY is a clear indicator that risk aversion is rising. In other currencies the Aussie dollar came back from fresh six year lows made in late Asian trade yesterday while the Euro, like European bourses, actually rallied. Sterling’s technically induced fall continues and the Kiwi has bounced off its lows as well.
– On commodities Dalian iron ore is up sharply this morning but US futures went the other way with the curve out past January 2016 in the $40/$41 per tonne region. Crude is down again and gold still can’t take a trick, stuck below $1,160 as it is. Copper rallied to $2.50 a pound. Maybe there are some signs that yesterday’s carnage was a bridge too far.
– On the data front today we get Australian jobs numbers and the unemployment rate at 11.30am (AEST). Japanese machinery orders and Chinese CPI are also out in our timezone while German trade is released later tonight. Greek unemployment is also out if you need a further reminder of how bad the Greek economy is. The Bank of England has an interest rate decision and we get jobless claims in the US.
And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
Webjet provided a rare bright spot in a glum day’s trading yesterday. The online travel agency rallied 11% after releasing a positive trading update. What really pleased the market, were strong gains in both domestic and international bookings in its Australian business. Against the background of a relatively flat overall market, this implies good gains in market share as Webjet has upgraded its website and implemented what appears to be an effective marketing program.
From a chart point of view, the possible resistance of the 38.2% Fibonacci retracement looms. However, given the strength of yesterday’s move a rally to the 50% or 61.8% retracement levels in the $3.58- $3.72 zone looks possible over time.
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC