By Greg Peel
The Dow closed down 90 points or 0.5% while the S&P lost 0.6% to 2157 and the Nasdaq fell 0.9%.
Sell the Fact
There may be some confusion as to why an interest rate cut from the RBA would cause the first sell-off in some time on the ASX when one would assume the opposite. The explanation is merely that the market so aggressively priced in an expected cut over the past few sessions there was really nowhere else to go, as profits were locked in.
An August rate cut was being tipped by economists as far back as May, although there was a little wavering from the market in between. Though not referred to directly in the governor’s statement yesterday, the cruncher was likely the US GDP result. On justifying its decision, the board cited moderate local economic growth, low inflation, and that persistent “complication” of the strong currency.
The weak US GDP result largely killed off any expectations of a September rate hike from the Fed, or even this year. Hence the US dollar has been falling ever since, forcing the Aussie higher. Unfortunately for the RBA, it appears the rate cut will only serve to drag on the Aussie, not send it falling. Last night the US dollar index fell another 0.8% and the Aussie is back to where it was pre-cut this morning at US$0.7604.
With regard individual sectors, in yesterday’s report I observed “a weaker US dollar is supportive of commodity prices. As to whether such support was worth a 2.7% jump in the energy sector yesterday on only a slight tick up in the oil price is a different matter”. And yesterday energy fell 3.2%. This contributed significantly to the overall 0.8% index drop but if we average out the two sessions, energy has only fallen in line with other sectors.
Outside of oil, the big loser yesterday was again consumer discretionary, down 1.4%. This sector should be a beneficiary of lower rates, but it had also been heavily bought in the lead-up to the RBA’s decision. The banks should also benefit, and they fell 0.7%.
On that note we saw the banks move swiftly yesterday to hand over only around half of the RBA cut in variable rates. The peasants are already at the gates wielding pitchforks. The trade-off was an increase in deposit rates, which will be some comfort to those living off investments, but no doubt will be overlooked by blood-spitting politicians.
The ASX200 was very much due a correction from the post-Brexit run-up, which received extra fuel from RBA speculation. A re-basing ahead of earnings season proper is not such a bad thing, and to that end the futures are suggesting another decent drop today.
The RBA’s problem with the Aussie is nothing compared to the Bank of Japan’s problem with the yen. Not only has the yen refused to fall despite everything the BoJ and Abe government have thrown at it, now hopes have faded once more of the Fed coming to the rescue and pushing up the greenback.
It has been expected for a month that the BoJ and Japanese government would unleash a combined monetary and fiscal shock & awe package as a last ditch effort, but on Friday the BoJ disappointed. So it was over to Abe, who yesterday announced a new fiscal stimulus package worth US$73bn over several years.
The package will cover everything from infrastructure, such as port upgrades, to child care and maternity leave. And 22 million low-income Japanese will all receive a direct “Pennies from Shinzo” hand-out of US$147. They can each now buy a beer in Tokyo.
Alas, the yen is another 1% higher against the greenback this morning, having jumped substantially following Friday’ BoJ disappointment. There may be some disappointment in the fiscal package as well, but it’s more a case of a weaker dollar.
The US dollar was weaker again last night because the Fed’s preferred gauge of inflation, the core personal consumption & expenditure (PCE) measure, rose a mere 0.1% in June. An annual rate of 0.9% is well below the Fed’s 2% target.
It’s not that US consumers aren’t spending. Indeed, personal consumption rose 0.4% in June, and the increase in June quarter spending is the biggest since the GFC. But incomes rose only 0.2%, meaning the trend is consumers dipping into their savings continues. This does not bode well. The Fed would like to see rising consumption, but supported by rising wages.
And to add to concerns, last night’s US auto sales numbers for July were disappointing. For month after month recently, auto sales have surprised to the upside, sparking fear of a “subprime” bubble building in car loans given the near-zero interest rate environment. The “miss” was not substantial, but following on from a surprisingly weak earnings result from Ford last week, it appears the positive economic contribution of auto sales is finally fading.
This news weighed on Wall Street last night. The other issue was the oil price.
WTI is only down US36c this morning but the point is that at US$39.72/bbl, the 40 support level has been broken. With supply returning after outages everywhere from Nigeria to Libya and Canada, supply-side fears have returned. Wall Street has paid a lot of attention to an oil price which for some time had been fluctuating within a comfortable range, but a break-down is a different matter.
Wall Street has subsequently broken out of its own tight trading range as well. Although last night marked the seventh straight down-day for the Dow, it was the first substantial fall since the Brexit rebound began. The S&P500 has dropped out of its two-week 2165-75 range, and the Nasdaq turned south for the first time in six sessions.
As noted, West Texas crude is down US36c at US$39.72/bbl.
Base metals were mixed yet again, with no metal moving more than 1%.
Iron ore rose US20c to US$60.70/t.
The US dollar index is down 0.8% at 95.07, thus gold is up US$10.40 at US$1362.10/oz.
The SPI Overnight closed down 35 point or 0.6%.
It’s service sector PMI day across the globe today, including Caixin’s take on China’s number.
The US will see the private sector jobs report for July tonight.
On the local stock front, we’ll see earnings results from Rio Tinto ((RIO)) and Genworth Mortgage Insurance ((GMA)) and in the wake of yesterday’s shocker from Seven West Media ((SWM)), Seven Group Holdings ((SVW)) will also report.
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