Quick Recap: Boom, what a night.
Markets had a solid bounce across all major equity markets Monday. China took the lead in our time zone, the ASX was higher and the rest of Asia was also mostly stronger, setting a solid platform for Europe and the US to build on. That’s what we saw in Europe and then the US with some very strong gains.
Whether it was selling fatigue, Fed vice-chair Stanley Fischer’s comments that inflation might be a little low to raise rates too soon (leaving aside Atlanta Fed president Dennis Lockhart once again saying September is in play), or Warren Buffett’s massive $37 billion play for aerospace engineering firm Precision Castparts which drove stocks higher matters less than the fact that buyers were back last night. That sets up another good day for the ASX today.
On forex markets, traders definitely listened to Fischer. The Aussie tested support around 0.7352 before it bounced back above 74 cents last night. But it lagged the euro which is now back above 1.10 and the CAD and NOK, which rallied with the big move higher in crude. Copper and other base metals were also higher.
In other big news – gold is back above $1100 and ounce
The overnight scoreboard (7.20am AEST):
- Dow Jones +1.39% to 17,615
- Nasdaq +1.16% to 5,101
- S&P 500 +1.28% to 2,104
- London (FTSE 100) +0.26% to 6,736
- Frankfurt (DAX) +0.99% to 11,604
- Tokyo (Nikkei) +0.41% to 20,808
- Shanghai (composite) +4.93% to 3,928
- Hong Kong (Hang Seng) -0.13% to 24,521
- ASX Futures overnight (SPI September) +36 to 5,477
- AUDUSD: 0.7412
- EURUSD: 1.1016
- USDJPY: 124.58
- GBPUSD: 1.5589
- USDCAD: 1.2998
- Crude: $44.83
- Gold: $1,104
- Dalian Iron Ore (September): 425
– Now the news. First Warren Buffett. While it’s never easy to tell exactly what any one day’s move was about, one thing is certain. That is, if the “Sage of Omaha” is spending $37 billion to buy Precision then that is very likely to have given traders in stock and other markets an element of confidence in the outlook in the months and years ahead. Akin Oyedele from BI US wrote that the deal is the biggest one for Berkshire Hathaway ever.
“I’ve admired PCC’s operation for a long time,” Berkshire Hathaway chairman Warren Buffett said in the statement. “For good reasons, it is the supplier of choice for the world’s aerospace industry, one of the largest sources of American exports.”
In an interview on CNBC Monday morning, Buffett said: “All deals seem expensive to me, but this one doesn’t. We’re certainly paying a very good price.”
In that same CNBC interview, Buffett also said that “stocks are going to be higher”. He didn’t mean today or tomorrow, rather the long term, but investors appear to have been listening.
– So it is hardly any wonder that stocks in the US were sharply higher. As noted above, it could just as easily have been selling fatigue which drove prices up. The Dow had been down for 7 days in a row and from a short-term technical point of view looked a little oversold. There is more hope of Chinese stimulus as well after the big miss on exports in Chinese trade data over the weekend. According to Craig James at CommSec, that sentiment had been what drove European stocks higher initially.
– In terms of Fedspeak, we had competing comments from Fischer and Lockhart. Lockhart said “I think the point of ‘liftoff’ is close…The economy has made great gains and is approaching an acceptable normal … conditions are no longer extraordinary.” Reuters also reports that he told journalists that he is “very disposed” to a rate hike at the September meeting. Balancing that sentiment were comments from Fischer, who told Bloomberg that in the US there is currently an “interesting situation in which we are is that employment has been rising pretty fast relative to previous performance and yet inflation is very low”. That’s an innocuous observation but he followed up with a comment that has many thinking the Fed may delay its first hike until December. “The concern about the situation is not to move before we see inflation as well as employment returning to more normal levels,” Fischer said.
– Hence a weaker US dollar which to a certain extent lifted the weight of commodity markets as well. Gold is back above $1,100. Nymex crude is up 2.5% on prices this time yesterday and that is after prices made a new post-2009 low in trade as well. The NAB’s senior market strategist at their BNZ operation for New Zealand Kymberly Martin said this morning that part of the rally in crude was on the back of “data showing that Chinese imports of crude made a record monthly gain in July”. Copper rallied 4 cents a pound for a gain of 2.82% while Commsec’s Craig James says base metal prices on the LME were up between 1.1% and 3.3%. Iron ore on the Dalian exchange after coming under pressure yesterday afternoon, which pushed it down to 418. It’s back higher at 415 this morning.
– For the local market, we had some solid moves in the banks yesterday. Chris Pash highlighted the moves yesterday afternoon writing that “The ANZ, which closed the week down more than 7%, picked up 1.53% to close at $30.60. The NAB was up 1.52% to $33.32, Westpac 1.02% to $32.68 and the Commonwealth 1.03% to $82.14.” Those moves were helped by the strong performance of the NAB, whose local Australian business performs as it lifts cash profits 9%. With futures up 36 points today, with traders having respected the bottom of the trendline which stretches back to 2012 once again, and with the solid rally in base metals, it could be another good day on the market.
– Speaking of good, any day you get a 4.93% rally in stocks is a good day. That’s what we saw in Shanghai again yesterday. David Scutt reported yesterday afternoon that hopes of stimulus had contributed to the rally but also that “it appears reports of additional reforms to Chinese state-owned enterprises may have been the catalyst to spark the acceleration in buying momentum”. Either way, one thing that authorities achieved was to remind traders that even if you think the market is going lower, you do not want to be caught in a bear market rally. That’s particularly the case when China’s government is the largest player in the nation’s stock market.
– On interest rate markets, Westpac’s New Zealand based strategist Imre Speizer wrote this morning that “US 2yr treasury yields ranged between 0.72% and 0.74%, while the 10yr rose from 2.18% to 2.24%. Fed centrist and FOMC voter Lockhart repeated his views from last week (although now including Friday’s payroll data observation), namely that he’s disposed towards a September liftoff. Vice-Chair Fischer said in a Bloomber interview that a lower neutral rate is now a possibility, that employment is rising fast, but inflation remains low. Australian 3yr government bond (futures) yields rose from 1.97% to 2.02%, while the 10yr yield rose from 2.81% to 2.87%.”
– On the data front today, the NAB’s business survey is out. Wholesale prices in Germany are out tonight along with the ZEW survey. CPI in Italy will be released and then in the US we get the NFIB small business confidence index and unit labor costs.
And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
Dick Smith Holdings
JB Hi Fi closed up 10.6% yesterday after beating expectations with its profit result. Computer equipment and household appliances sales have performed solidly in recent times, helped along by the business tax incentives and strong housing construction.
This makes Dick Smith a stock to watch. It’s down nearly 14% since the peak in May and has fallen to a chart support level.
It goes into next week’s earning’s report trading on a fairly undemanding multiple of around 9.3 times forecast earnings for next year.
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC