Daily Market Reports | Sep 03 2015
By Greg Peel
The Dow rose 293 points or 1.8% while the S&P gained 1.8% to 1948 and the Nasdaq added 2.5%.
Weak
There are no two ways about it, yesterday’s Australian June quarter GDP report was a disappointment. The economy grew 0.2% in real terms from the March quarter for an annual growth rate of 2.0%, missing expectations of 0.4% and 2.2% respectively. The trend rate is considered in a post-GFC world to be 2.75%, and was previously 3.25%.
It gets worse in nominal, ex-inflation terms, which provides the true picture of national income growth. The nominal economy grew 1.8% in 2014-15, the lowest rate since 1961-62. Lower, that means, than the Keating recession of 1991-92.
We don’t have to look too far to nail down the culprit. A combination of falling mining investment and falling commodity prices is proving too significant a force for the non-mining economy to overcome at this stage. Growth came from household spending and government spending (mostly on lumpy defence) while weakness was felt in business investment and the rundown of business inventories.
And while household spending is a positive driver, the hangover from the GFC continues to be evident in the household savings rate, which ran at 8.8% annual growth in the June quarter. That’s good for future financial risk, but not good for immediate economic growth.
There are two factors that have the power to save the Australian economy – the Aussie dollar and fiscal reform. The currency is doing its bit, and as I noted yesterday the Aussie began and ended the June quarter at 76 with a trip to 81 in between, and today we’re at 70. The other factor relies on the commitment, foresight and courage of our politicians.
We’re all doomed.
W-Bounce?
I asked the question yesterday morning, with the Dow down over 400 points and the SPI futures suggesting a 62 point fall for the ASX200, whether this would actually be double-counting of the previous session in which the Chinese PMIs were released. Well at 11.30am we were down 75 points.
That’s when the GDP result was released, and while the Aussie enjoyed a 69 (handle) the stock index actually bounced, briefly, before the index dropped to 81 points down just before 1pm. At that point we were getting closer to the 5000 support level, at 5015, and it seems someone with some money said “While they’re all at lunch, start buying”.
Sandwiches were hastily thrust aside and others joined the rally in the afternoon, taking us back to be 5 points up on the day. Yes – to be down again would have been double-counting.
The good news is China is closed today and tomorrow, to honour a parade of missiles. Taking China off the screen does not solve any problems, but it does mean one less distraction as Bridge Street tests the waters to see whether the second wave of selling is now over, or whether there are some even slower sellers still waiting to pounce at higher levels. If the former is true we can book in a standard W-bounce, at least for now, until mid-month when the Fed meets.
Normal
It would be foolish to suggest Wall Street is taking its lead from Australia at the moment but it has seemed that way this week, basically because we see the Chinese data while they’re all asleep.
Last night Wall Street traders also decided to test the waters to see whether the second wave of selling might now be over. They did so from the open, sending the Dow up about 200 points into a void. There were a few wobbles, but the US indices largely held their ground throughout the day as everyone waited to see how the market-on-close orders would stack up this time around.
The imbalance was benign, and so it was safe to buy to the close. The Dow kicked up another 100 points in the last half hour.
For the first time in ten days, traders suggested the market felt “normal”. Volumes were on average, heartbeats had settled down and anxiety had subsided. Wall Street is no doubt now looking forward to the Labor Day long weekend. For many this means back-to-work next week, other than for those who cut short their summer holidays when all hell broke loose over a week ago. It also means back-to-school, which for many US retailers is almost as significant a consumer spending period as Christmas.
“Normal” also meant traders could concentrate on US economic data releases, which had garnered little attention during the turmoil.
The ADP reported 190,000 private sector jobs were added in August. This is a bit better than July, and around about expectation. Economists are forecasting Friday’s non-farm payrolls report to show 213,000 jobs added.
The US measure of June quarter productivity had originally been estimated at 1.3% growth, but last night was revised up to 3.3% growth. Read it and weep Mr Hockey (aka Dead Man Walking).
But the big talking point was the Fed Beige Book, which provides an anecdotal economic assessment of each of the twelve Fed regions. While it gave a nod to the impact of the stronger greenback and lower oil prices, most importantly it reported “increasing wage pressure due to labour market tightening” across several regions. Wage growth is the one thing that had been noticeably lacking in the US as 2015 played out, but now it seems inflationary pressure is building.
The Beige Book also suggested there were few signs of spill-over into the US economy from the Chinese turmoil. Such an observation only serves to reinforce the fact the China-triggered Wall Street sell-off was all about US stock market overvaluation and not about sudden China fears.
On this collection of positive US data, the Dow opened up 200 points. Yet on last night’s data alone, the Fed would raise. This confirms to me what I have suggested for a while now – when the Fed raises, Wall Street will rally. Maybe not in the first five minutes, but once the initial dust has settled.
Commodities
LME traders were encouraged by last night’s US data, while remaining wary that the number that matters is Friday night’s jobs report. Copper, nickel and zinc rose 1%. Short-covering in tin continued, for a second 3% gain.
Iron ore rose US10c to US$55.80/t.
Volatility continued in the oil markets. After Tuesday night’s 8% plunge, which followed two successive 6% gains, WTI initially attempted to rally but was sold off again when the weekly US crude inventory report showed an unexpected increase. But the sell-off proved short-lived, and in came the technical buyers. West Texas is up US$1.83 or 4% to US$46.05/bbl.
Brent is up US$1.92 or 4% to US$50.44/bbl.
The US dollar index fell on Tuesday night but rallied back on the strong US data last night, to be up 0.7% at 95.90. Gold is thus down US$6.10 at US$1133.80/oz.
The Aussie is up 0.3% to US$70.40 over 24 hours, having dipped below 70 briefly yesterday following the weak GDP report. We may assume the forex markets are mostly short Aussie.
Today
The SPI Overnight closed up 31 points or 0.6%.
The focus in Australia will be back on more immediate data today, with the release of the July retail sales and trade balance numbers. The August service sector PMI will also be released, as it will in Japan, and in the eurozone, UK and US tonight.
As noted, China is closed today and tomorrow.
The ECB will hold a policy meeting tonight.
The US will also see its July trade numbers tonight, along with August chain store sales.
Rudi will appear on Sky Business' Lunch Money, noon-12.45pm today.
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