The Overnight Report: Tapering Markets
By Greg Peel
The Dow closed down 48 points or 0.3% while the S&P fell 0.4% to 1690 and the Nasdaq lost 0.3%.
Yesterday's market action on Bridge Street exemplified the old adage of "up by the stairs and down by the elevator". With volumes on the ASX comparatively small, and little interest from offshore in the northern summer, a trickle became a flood yesterday as the sell-off fed on itself into the afternoon. Banks and the big miners were hardest hit, and while one can make the case of mortgage rate cuts worrying bank shareholders, the iron ore price was up overnight and the currency was pretty stable all day.
Thus the sell-off was more of an indiscriminate index sell-off, with no sector spared, cyclical, defensive or otherwise. Not aiding the mood was a jump in the yen against the US dollar as the Japanese continue to worry whether Abenomics is actually having its desired effect. A stronger currency is not good news for Japanese exporters, and in a summer-thin market the Nikkei plunged 4%.
The benchmark ASX 200 closed at 5011 after a 1.9% fall, and for technical analysts a pullback to the 5000 break-out level has always been on the cards, particularly given the recent stall. The question now is as to whether 5000 can hold in the face of growing expectation the Fed will indeed begin tapering QE next month, and the nervousness that surrounds such a reality. The SPI Overnight fell 9 points.
Wall Street was weaker again last night although was more reminiscent of July trading, falling early but closing off the lows. In Dow terms the market fell 97 before rallying to close down 48. Yet another Fedhead was feeling left out, and so the non-FOMC Cleveland president added to the collection of useless comments by suggesting it was probably time the Fed began tapering, while not offering any specific date.
A month or so ago the Fedheads were still split along their hawk-dove lines, but now it appears the hawks and doves are all lining up like ducks. September it will be then. Or maybe October. But then it could be December. Perhaps what September will bring us, given a press conference will follow the FOMC meeting, is confirmation of exactly when. And as we know, September is historically the worst month for stocks and October sends shivers down spines.
We have now seen 90% of S&P 500 stocks report quarterly earnings, and the score card is 4.6% growth in earnings. That would have been 6% were it not for big misses by large caps Google, Microsoft (Dow) and Exxon Mobil (Dow). The bad news is that revenues fell a net 0.5%, but September quarter forecasts have largely held fast at 4.3% earnings growth. Revenue growth remains elusive as US companies continue to cut costs, streamline and deleverage. But they are now sitting on the greatest pile of cash ever recorded, and that must eventually be deployed.
The British pound shot up last night ahead of the fourth test, given the Poms have decided to feel pretty smug anyway despite being done like a dinner in the third and saved only by Manchester's familiar weather. Or maybe it was because the new BoE guvna took a leaf out of the Bernanke playbook and decided to set a target on monetary policy.
The BoE announced last night that the record low cash rate of 0.5% will remain until UK unemployment falls below 7%. QE will also remain in place until 7% but could be upped if 7% is not approaching. It's 7.8% now, so they bought the pound last night on the assumption the target would be reached sooner rather than later. Of the world's major economies, the UK's is currently looking the most impressive on PMI and other bases. The FTSE tumbled 1.4%.
The US dollar index fell 0.4% to 81.28 on the sterling surge. The Aussie is thus now nibbling at US$0.90, while gold has recovered by US$3.60 to US$1286.30/oz.
Base metals were again all over the shop and directionless, while the oils continue to link in with Wall Street. Brent fell US69c to US$107.44/bbl and West Texas fell US$1.08 to US$104.22/bbl.
Spot iron ore rose US$1.70 to US$133.10/t.
As noted, the SPI Overnight fell 9 points.
China will release its July trade balance today and the Australian jobs numbers are due.
Today's round of profit results includes heavyweights Rio Tinto ((RIO)) and Telstra ((TLS)), along with Aquarius Platinum ((AQP)), Aurora Oil & Gas ((AUT)), Henderson Group ((HGG)) and others.
Rudi will appear on Sky Business today at noon.