By Greg Peel
The Dow closed down 45 points or 0.3% while the S&P lost 0.3% to 2132 and the Nasdaq fell 0.5%.
Cracks In China
Just when it looked like the Chinese economy may have bottomed out, suggesting stimulus measures were finally beginning to gain traction, along came yesterday’s trade numbers. Slight improvement in the September PMIs was encouraging but now China-watchers have been left scratching their heads.
Chinese exports fell 10.0% year on year in September when a 3% drop had been forecast, while imports fell 1.9% when a 1% gain had been forecast. Within the numbers, imports of iron ore and copper were lower than expected. Given the oil price rallied over the month, in equivalent terms the import result would have been weaker still.
The ASX200 had been expected to open weaker yesterday morning on the lower overnight oil price, and indeed the index fell around 25 points from the open. From there it tracked sideways until midday when the Chinese data were released. At 2pm the index hit bottom, down 54 points.
Following a slight recovery to the close, the energy sector finished down 2.0% and materials 0.9%. Most influential was a 1.1% fall for the banks, reflecting the flow-through from the Chinese economy to the Australian economy. Adding to weakness in resources was the decision by Citi to downgrade both the Big Two miners to Sell because they had rebounded too far, in the analysts’ view.
Two of the sectors finishing in the green by the close were the safety plays of utilities and consumer staples.
The Aussie took a dive, dropping close to the US$75c mark.
We recall that the sell-off experienced in the beginning of 2016 had a lot to do with fears of a Chinese slowdown – or at least a more dramatic slowdown than might otherwise be expected. Those fears were one reason, among others, the Fed started to back down on its intention to raise rates several times in the year. But as fears slowly abated, attention became squarely focused on the next Fed rate rise. China somewhat slipped into the background as Brexit and European bank issues took centre stage.
Now China is back in focus. Chinese data are not seasonally adjusted and are notoriously volatile, and October numbers will likely be even more distorted given the week-long holiday. But concern has been building over a bubbling Chinese housing market. Were the bubble to burst, demand for steel, copper and other materials would likely crash too. Yesterday’s weak trade numbers do little to ease tensions.
Mind you, we went through this exact same scenario shortly after the GFC. Massive government stimulus flowed straight into asset price inflation, sparking fears of a property bubble and bust and prompting endless talk of a Chinese “hard landing”. Years on, we don’t hear that expression much anymore. Beijing muddled through, and most likely will muddle through again. But there are concerns over just how much China’s debt to GDP has grown in the meantime.
Will China once more provide the Fed with an excuse not to hike? One month’s data do not a summer make.
But what they have done is sparked a sharp risk reversal on Wall Street overnight.
As Fed rate rise expectations have grown over the past couple of months, US investors have been selling out of high-yield utilities, telcos, REITs and government bonds, and buying the banks and the US dollar. Last night investors bought utilities, telcos, REITs and bonds and sold banks and the dollar.
It was all about China. The Dow was down 184 points early in the session before rallying back to be almost square, and fading off again towards the close. The movement suggests traders first sold what they wanted to get out of, and then turned around and bought what they wanted to get back into. On one set of numbers, Wall Street reversed from “risk on” to “risk off”.
The sell-off in bonds – the US ten-year yield fell 4 basis points to 1.74% -- came just after it had looked like a breakout to 2% was on the cards. The sell-off in bank stocks comes before tonight when all of Citigroup, Wells Fargo and JP Morgan (Dow) report quarterly earnings. This is when the US earnings season really starts.
It seems like an overreaction to so swiftly change tack after months of rotating portfolios in the other direction. But given those months of rotation, it makes enough sense and is hardly too worrisome to think some profits might be taken the other way around on a heightened sense of caution. The Chinese data provided a prompt.
Copper posted the biggest loss on the LME last night, unsurprisingly, in falling 2%. Lead, nickel and zinc all fell 1% but aluminium managed a 0.5% gain.
Iron ore always confounds, and it rose US10c to US$56.60/t.
On the back of the China data, and the fact US weekly oil inventories showed a much bigger build than anticipated, we should have seen WTI drop through the US$50/bbl mark. But the weekly data also showed US refining has slowed considerably, albeit largely due to seasonal maintenance shutdowns, so actually West Texas crude is up US25c at US$50.46/bbl.
We might also have expected that as part of this risk reversal trade, and the fact the US dollar index is down 0.4% at 97.56, would mean gold would be back in favour once more. But gold traders must be feeling a bit once-bitten at the moment. Gold is up US$3.40 at US$1257.50/oz.
Having fallen in the local session on the Chinese data, the Aussie has since rebounded right back on the weaker US dollar to be little changed over 24 hours at US$0.7567.
The SPI Overnight closed up 11 points. Here we likely see a case of Australia having reacted first to the Chinese numbers, so to react to Wall Street’s reaction would be double counting.
If the US banks come out with solid earnings result tonight, last night’s action may just prove a bit of a blip. Then there’s a month-long US results season to get through which will no doubt draw the focus away from China once more.
Janet Yellen will speak tonight, which as always will be closely monitored.
And tonight’s US data include the all-important retails sales numbers along with inventories, consumer sentiment and the PPI.
China will release inflation numbers today. They’re typically not as powerful as trade numbers these days but everyone’s now on edge. China’s September quarter GDP result is due next week.
The RBA will publish its Financial Stability Report today.
Rudi will Skype-link with Sky Business today to discuss broker calls at 11.10am.
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