Quick Recap: The rollercoaster ride continued overnight with US stock markets recovering from deep losses to finish around square for the day. That’s a remarkable achievement given the weakness, in some cases acute, in European markets overnight and Asian markets yesterday.
At the heart of the volatility is the Yuan devaluation, depreciation and then sell off in afternoon trade yesterday which took the USDCNY spot price up to 6.4486, around 2% higher (Yuan lower) than yesterday’s reference rate. The PBOC lent on prices, and traders, and is back at 6.3845 this morning.
All this volatility and worries about a looming deflationary pulse through Asia and the rest of the world has caused traders to alter their bets about when the Fed will liftoff. This has seen bonds rally and the US dollar undermined. It’s also seen the Euro rise toward 1.12 and the Aussie dollar rally almost two cents from yesterday’s fresh 6 year lows.
Gold is up, oil and copper rallied, and the SPI 200 futures are pointing to a positive day’s trade in Australia today.
The overnight scoreboard (7.10am AEST):
- Dow Jones flat at 17,402
- Nasdaq +0.15% to 5,044
- S&P 500 +0.1% to 2,086
- London (FTSE 100) -1.4% to 6,571
- Frankfurt (DAX) -3.27% to 10,924
- Tokyo (Nikkei) -1.58% to 20,392
- Shanghai (composite) -1.03% to 3,887
- Hong Kong (Hang Seng) -2.38% to 23,916
- ASX Futures overnight (SPI September) +22 to 5321
- AUDUSD: 0.7381
- EURUSD: 1.1158
- USDJPY: 124.22
- GBPUSD: 1.5610
- USDCAD: 1.2975
- Crude: $43.33
- Gold: $1,124
- Dalian Iron Ore (September): 439 (it’s denominated in CNY folks)
– Now the news. China’s decision to first devalue it’s currency and then let the market set the rate had its first real test yesterday afternoon with the USDCNY rate rising (Yuan weaker) toward the top of the 2% band Chinese authorities have established for the daily range. That looks like it might have spooked the central bank a little with reports from forex dealers that the state-owned banks were selling in order to keep the USDCNY around 6.43. Unsurprisingly they won the battle and USDCNY is back in the 6.38 region this morning. That’s still another 0.9% weaker than yesterday’s reference rate. The setting of the reference rate today at 11.15am AEST is important for traders across the entire spectrum.
– China’s move comes at a vulnerable time for markets. With the Fed readying to increase rates for the first time since 2006, the Bank of England not far behind, and acute pressure on emerging markets for many months now, the reactions we have seen so far have been large but nothing compared to what we could see if markets go completely “risk off”. That’s a very real danger, according to Soc Gen’s market maven Albert Edwards. Yesterday he wrote that the Chinese devaluation is leading to a “financial market rout every bit as large as 2008”. You might need an adult beverage when you read that.
– In terms of explaining why markets have reacted the way they have, the NAB’s Sydney-based currency strategist Emma Lawson reckons, “Markets are concerned because it implies weakness in the Chinese economy, and depreciation of a normally stable currency could lead to corporate losses, foreign investor losses on local asset holdings and general volatility in asset prices leads to uncertainty.” That about sums it up.
– Why the US recovered is difficult to fathom on the face of it. Have we seen the selling crescendo? Or was it just an absence of catalysts to sell more given that its Asia, not the US and Europe, are driving the bus at the moment? In many ways this means the tail is wagging the dog. In his morning note CommSec’s chief economist Craig James said, “US share markets recovered from early losses to end mostly flat on Wednesday. Energy stocks rebounded in mid-trade with the S&P Energy index gained 2%, as traders covered short positions. Apple, which was at one stage down 3.4% closed almost 1% higher. The S&P financial sector was one of the largest drags on the market, down 1.1%”. Europe went home before the US rally really kicked off so you’d probably expect a fair bit of catch up tonight given the magnitude of the selling on continental exchanges yesterday.
– It all leaves us with an uncommonly positive lead from futures markets this morning for local trade on the ASX. Yesterday Michael McCarthy from CMC went on the record regarding his inclination to buy the market.
Good trading and investing takes nerve. Today, the Australia 200 index reached a level where, in my view, it is a clear “BUY”. I fully expect to wear a lot of flack for this call, just as I did when I called the market a “SELL” at 5922. Nonetheless, here are the reasons why investors and traders should have a long hard look at buying at current levels.
It’s worth a read.
– On forex markets, as noted above, the US dollar took a beating on the back of the markets reappraisal of when the Fed might increase rates for the first time. Westpac’s Wellington based strategist Imre Speizer this morning said, “Fed funds futures are now pricing a 40% chance of a hike in September, compared to around 70% after the strong US jobs report last week. Fed dove Dudley said the China developments are being watched but they expect to hike rates soon.” Forex traders are betting December is now the front runner.
– A weaker US dollar has lifted the weight off commodity prices with Nymex crude, copper and other base metals higher. Interestingly gold has managed a strong rally in the past week. Every time it traded down to or under $1,180 it found some support and it’s clear, in some circles at least, the Chinese-induced instability we are seeing, which could get worse, has bought out the buyers.
– On the data front today we get the ASX300 version of the NAB Business survey at 11.30am AEST but otherwise it’s quiet, except for the NZ Business PMI and food price index. Tonight in Germany, France and Spain we get CPI while the big one — potentially massive — is retail sales in the US. Jobless claims are also out tonight. Of course we’ll all be watching the Yuan fix at 11.15am today too.
And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
Bollinger Bands are a charting tool designed to say something about both trend and momentum. The middle band is a 20 day moving average or trend indicator. When it’s heading down with prices beneath it, a downtrend is indicated. The upper and lower bands are measures of standard deviation. Prices below the lower band indicate particularly strong variance or trend momentum.
Newcrest recently made a couple of trend lows below a falling lower band indicating a downtrend in full flight. However, these were followed by a couple of trend lows above the lower band suggesting declining momentum and growing indecision. From here a break above the moving average could signal that this indecision was transforming into a change in trend from down to up.
The next few days will be interesting for Newcrest. Last night saw a good rally in gold as the $US continues to defy consensus expectations of ongoing strength. Newcrest will also announce its results on Monday. This serial underperformer continues to show signs of turning around under new management. If they can produce a good performance on costs after a solid 4th quarter production report it’s likely to be well received.
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC