Quick Recap: The fallout from China’s surprise RMB devaluation continued overnight with investors suffering from an acute case of risk aversion. Stocks were sold heavily with the S&P 500 the only major global index not to fall more than 1% overnight.
Commodities were also under pressure with copper down close to 3% and another oil crash with Nymex losing more than 3% and now under $44 a barrel. Bond’s rallied and gold managed to find a little bid tone.
On forex markets, the Aussie dollar is the worst performing major currency as the pressure continues in the wake of fears of what China is really up to. What’s impressive, or startling, about that is the Aussie lost more ground than the CAD or NOK which are getting hammered by crashing crude oil.
It all sets up an important day’s trade in Asia today. It also brings to a fine point the potential impact of an expected announcement by the CBA of a $5 billion rights issue this morning and the impact it might have on the ASX where futures are already pointing lower.
The overnight scoreboard (6.20am AEST):
- Dow Jones -1.21% to 17,402
- Nasdaq -1.27% to 5,036
- S&P 500 -0.96% to 2,084
- London (FTSE 100) -1.06% to 1,687
- Frankfurt (DAX) -2.68% to 11,293
- Tokyo (Nikkei) -0.42% to 20,720
- Shanghai (composite) Flat (not a typo) at 3,928
- Hong Kong (Hang Seng) -0.09% to 24,498
- ASX Futures overnight (SPI September) -30 to 5375
- AUDUSD: 0.7298
- EURUSD: 1.1043
- USDJPY: 125.17
- GBPUSD: 1.5574
- USDCAD: 1.3106
- Crude: $43.33
- Gold: $1,108
- Dalian Iron Ore (September): 423
– Now the news. Risk aversion – two words that sum up the price action across markets overnight in the wake of the Chinese RMB devaluation. 1.85% is no big deal in the real world; let’s face it, the Aussie is down around 22% against the US dollar in the past 12 months. Remember? This time last year the AUDUSD rate was comfortably in the 92-95 cent range. So we can hardly complain and traders should not be shocked. But, as I wrote in my Go Markets afternoon report yesterday, “It is likely also a tacit admission that the official data is off the mark and the 7% GDP rate is somewhat ‘fantastic’. Worryingly, for those us who were around for the Asian crisis in the late nineties, the move is what we saw back then. China outsourced its difficulties to the region via devaluation.” Which begs the question the BNZ’s currency strategist Kymberly Martin asked in her note this morning, “is there more to come” and what will the fallout be?
– Investment banks around the globe are trying to answer that question. Bank of America analysts reckon that “a 1% move in CNY is associated with a 0.5-0.6% decline in USD commodity prices”. That will hurt Australia, Canada, New Zealand, Brazil and Chile. BI US’s Linette Lopez reckons that Brazil is going to get absolutely hammered by the move. Morgan Stanley reckons the globe just got another deflationary pulse. Which brings me back to BNZ’s Martin, who nicely summarised the markets’ thinking in her morning report:
The move by the PBOC appears to have unsettled markets as they wonder; is the move part of a desperate attempt to revive China exports, as downside risks to the economy’s growth build; is there more to come; is there potential for the move to delay the US Fed from hiking rates?
– All of this meant that stocks were sold off heavily in Europe and the US. Germany was the worst performer, it seems, after the ZEW economic sentiment survey came in below expectations. The question of whether or not the overnight stock moves are a reasonable response to what China did from a fundamental point of view will be answered in time. But the price action highlights that markets are a little more fragile than they seem by many measures, as we’ve highlighted here for a while. The key impact of this sell-off in stocks is that bonds rallied. Westpac’s New Zealand based strategist Imre Speizer wrote this morning that:
US 2yr treasury yields fell from 0.70% to 0.66%, while the 10yr fell from 2.20% to 2.11%. Fed funds futures are now pricing just below a 50% chance of a hike in September, with a hike not fully priced until January 2016. Falling commodity prices are seen as a counterargument for Fed tightening. Australian 3yr government bond (futures) yields fell from 1.98% to 1.90%, while the 10yr yield fell from 2.83% to 2.73%.
Solid rallies were seen in European bond markets as well.
– Partly that is a risk aversion/questioning the Fed trade and part, I think, is a reflection of a recognition that if the world is about to get a fresh deflationary pulse, then central banks are about to have serious issues with policy. In the US, it could slow the start and temper the size of the tightening cycle. In Europe, it means the ECB’s open-ended QE operation will continue and it could slow the BoE’s first tightening. All of that is likely positive for stock indexes as a whole even if some sectors – miners – will suffer. But that is for another day.
– In terms of that deflationary pulse, Nymex crude made another post GFC low last night with a fall of 3.75% to $43.13. Copper is back below $2.35 a pound and base metals generally came under pressure.
– Looking then at the impact of all of this on the ASX today and it’s likely, following futures and the poor lead from the US, the market is under acute pressure in trade after yesterday’s 0.65% fall. Chris Pash wrote yesterday afternoon that “all the major banks fell, except for the Commonwealth, which is due to release its annual results (today). The NAB was down 2.58% to $32.46, the ANZ 1.73% to $30.07 and Westpac 1.93% to $32.05. The Commonwealth closed steady, down just 0.02% to $82.12.” That’s important because of the weight these stocks hold in the index and also because “the CBA is likely to ask shareholders for $5 billion today.” We’ll have full coverage of the CBA results and any market moves live today.
– On the data front today, it’s going to be huge. We get wages data and Westpac Consumer Sentiment in Australia. But all eyes are going to be on China’s release of retail sales for July, along with industrial production and urban development. We also get Japanese IP data and tonight at 8.10pm AEST we get a speech from Philip Lowe, the RBA deputy governor on “National Wealth, Land Values and Monetary Policy”. Employment is out in the UK tonight and the job opening (JOLTS) survey in the US.
And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
Pub discussions about which Australian shares are going to be worth more than $100 are going to be very different from today. Cochlear dropped out of the race for the foreseeable future after its results yesterday and this morning’s report of a capital raising by CBA will put it out of contention as well.
There wasn’t too much wrong with Cochlear’s results yesterday other than the fact that sales growth for last year and guidance for next year were a bit below market expectations. However, as my colleague Michael McCarthy pointed out in this piece on Monday, when a stock is priced at more than 30 times forecast earnings, market reactions to small misses is likely to be severe. Cochlear closed down 7% yesterday after being down 15% at one stage.
For those looking at chart levels as potential entry points on this stock just in case it gets sold down further, the zone of support around $73 looks interesting. This would be a 50% retracement of the major uptrend and also picks up the potential support of the August 2014 trend peak. At $73 Cochlear would be trading at around 23 times forecast earnings for next year.
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC