Daily Market Reports | Jul 07 2015
By Greg Peel
The Dow closed down 46 points or 0.3% while the S&P lost 0.4% to 2068 and the Nasdaq fell 0.3%.
Rock’n’Roll
The ASX200 fell 100 points from the opening bell yesterday, which we can blame on Greek “no” vote fear. But it quickly found sufficient support to rebound to be around 70 points down by mid-morning. We might suggest (a), the Australian market has already taken a good hit on Greek fear, and Greece is not really a major influence on the Australian economy and (b), measures undertaken over the weekend suggested the more important market to Australia – China’s – just might find a bottom.
Sure enough, when the Shanghai Exchange opened late morning Sydney time, the Chinese index rallied close to 8%. Yet while one might expect this to provoke some more buying on Bridge Street, instead the ASX200 simply hung in space. It continued to hang in space as the Chinese rally quickly retreated, all the way to unchanged by the time the Australian market closed. Yet a little kick at the death saw the ASX200 finish 63 points down.
A kick at the death saw the Shanghai index finally close up 2.4%. Interestingly, despite the 30% drop the index has suffered, its prior exponential rally means the 30% odd correction has only taken the index back to its 200-day moving average.
Yesterday’s local sector moves featured a 2.5% drop for energy, compounded by a lower oil price, and 1.7% for materials, ditto iron ore. Otherwise, cyclicals copped it more than yielders, with the telco falling the least (-0.3%) and the banks holding up (-0.8%) as all other sectors fell over 1%.
While yesterday’s overall session was clearly “volatile”, the fact the index barely moved for the greater part of day, once having adjusted, suggests that at levels under 5500, investors are prepared to weigh up the balances and remain poised for whatever happens next.
From the “for what it’s worth” department, yesterday’s data releases included a 1.3% pop in job ads in June, according to ANZ, after a flat May, to an annual growth rate of 10.8%. This looks very positive, and the recent trend goes a long way to explaining why Australia’s unemployment rate has behaved itself when many expected it not too, but ANZ’s own economists warn against complacency.
What we’re seeing, notes ANZ, is a promising shift to growth in service sector employment, but this will prove fleeting on a net basis as the reduction in mining employment gives way to a big reduction in energy sector employment as the big LNG projects reach completion.
TD Securities’ inflation gauge showed a 0.1% increase in June to a headline annual rate of 1.5%. The core rate of 1.4%, which is the RBA’s benchmark, is in no way preventative of another rate cut.
Greece
The bad news for the Greeks is that the banks will not reopen tonight, as the finance minister had promised. His resignation came out of the blue but is no great surprise given he’d already been benched by Tsipras in negotiations with the creditors for being too much of a hot head, and clearly there’s little value in him hanging around now those negotiations have reached a critical point.
The good news is the ECB will continue to extend emergency funds to Greek banks, albeit with two caveats. The first is no increase on daily funding from last week’s level, meaning the banks are still at risk of running out of physical cash given long lines at ATMs. The second is a haircut on collateral, such that the assets the ECB requires to be put up against emergency loans, for example mortgages, will be valued less highly than they were last week, implying less bang for the collateral buck.
There is good news in that the German and French leaders, following a hasty phone hook-up, have told Greece “the door is still open”, but while Hollande is seemingly a little more sympathetic, Merkel remains insistent there will be no debt relief provided.
If the creditors wrote down the money owed by Greece, they’d have to do it for all eurozone members who would quickly put up their hands.
Eurozone officials are meeting tonight, so yet again it’s a case of waiting and watching.
Commodity Crash
The West Texas crude price and the iron ore spot price have been tracing out very similar price paths, down to the dollar, despite having little connection other than being vital global commodities. Following both falling into the forties, and then rebounding into the sixties, both had started to look wobbly even before Grexit fears intensified and China’ stock market tanked in earnest.
Thus it wasn’t going to take much to tip those prices over, and last night West Texas crude fell US$2.81 or 5.1% to US$52.69/bbl and iron ore fell US$2.10 or 3.9% to US$52.00/t. Brent crude was even harder hit, falling US$3.52, or 5.8%, to US$56.81/bbl.
Brent is the global benchmark oil price, and its fall reflects a switch in focus from supply-side issues – OPEC stubbornly pumping furiously and the US rig count now growing again – to demand-side issues – weaker demand from Europe and China. Falling Chinese steel production has been the red flag for the iron ore price, and China’s stock market correction, with a bit of Greece thrown in, has also directed focus towards demand.
Copper is the base metal benchmark, and last night it fell 3.2% on the LME on a similar basis. But other than a 2.5% fall for typically more volatile nickel, moves for other markets were not too severe.
Wall Street
European stock markets have already pulled back a long way thanks to Greece, so while the German DAX fell 1.5% last night and the French CAC 2.0%, it could have been a lot worse. That mood flowed over to New York from the open, and the Dow promptly fell 166 points.
But an hour and a half later, the Dow was back to square on the session. It only started to tip over again when someone pointed out what was happening on the Nymex. The big drop in oil prices impacted on the US energy sector, and Wall Street closed marginally weaker as a result. But all things being equal, Wall Street largely took Greece, and China, in its stride.
This was not so much the case in the US bond market, where a flight to safety saw the ten-year yield drop 12 basis points to 2.28%. The other supposed safe haven, gold, put on a typical rabbit in the headlights impression and is little changed at US$1169.80/oz.
The US dollar index is stronger, as might also be expected on a safe haven basis, although given similar attraction to the pound, yen and Swissy, the index is up only 0.3% to 96.27, with the euro the main victim.
The Aussie is down 0.3% to US$0.7496.
Today
The RBA board might otherwise be pleased the Aussie is now lower, when it meets today, except for the drivers responsible. China is the big worry, and falling commodity prices only enhance the problem. Australia’s March quarter GDP result may have surprised to the upside, but the first two months of the June quarter have seen a worrying trade deficit blow-out and if oil and iron ore tumble back down again, it won’t get any better.
Still, no one is calling a rate cut today.
The futures market is calling some relief on Bridge Street today, given global stock market falls were not as severe as feared. The SPI Overnight closed up 19 points or 0.4%.
Tonight sees the Greek saga continue.
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