From Black Monday to Turnaround Tuesday. At least in European markets. Asian markets have failed to recoup much of yesterday’s rout with the Chinese stock market closing down an additional 7.6% as it becomes clear that the PBOC will not be intervening in the near term. Here in Europe, we have rotated not quite full circle but Turnaround Tuesday seems to be a far more optimistic place that Black Monday. The shock declines yesterday were broad based, with the trading strategies based on a foundation of panic.
What does tend to set yesterday apart and essentially make it entirely different from the market movements witnessed in 2008 is that despite the severe pessimism in equity markets, gold and indeed even the bond market was reasonably static and we did not exactly see a great rotation from risk assets into safe havens.
Today, trading is a lot more circumspect. The FTSE 100 is presently up 2.7%, breaking back above the key 6000 level led by the basic resource sector. European oil companies are all in demand following the shock declines yesterday. German IFO business climate also surprised rising above expectations to 108.3. Companies are clearly less pessimistic about China’s economy that the current market volatility would suggest.
The UK banking sector is flying owing to a broker upgrade for Barclays (LONDON:BARC) and Lloyds (LONDON:LLOY), shares are trading up 4.78% and 4.43% respectively.
A number of companies also provided their first half results, mainly in the mining sector.
BHP Billiton (LONDON:BLT) (+1.97%)
A relief rally following yesterday’s rout is taking place in early trade today. The world’s biggest mining company saw profits plunge 52% on the back of tumbling commodity prices. Underlying profit fell from $13.3bn a year earlier to $6.4bn in the year ended June 30. The company's CEO, Andrew Mackenzie, also said he believed China would continue to grow at 7% this year which is very much an outlier opinion these days but we shall wait and see. An increase to its dividend and a promise to never cut it has inspired investors to buy in this morning. The company increased its full-year pay-out by 2% to $1.24 per share.
Randgold Resources (LONDON:RRS) (-1.52%)
One of the few fallers in the FTSE this morning. A cut in RBC Capitals gold price forecast for 2018 onwards from $1300/oz to $1200/oz is weighing on the stock this morning. Randgold has however been raised to outperform by the group. Gold prices are paring back recent gains too in early trade as risk attitude improves drawing capital away from the safe haven.
Antofagasta (LONDON:ANTO) (+3.66%)
Despite reducing its interim dividend and fairly poor H1 results, the stock is riding high today. Pre-tax profit at Antofagasta for the six months to March 30 dropped 64 per cent to $297.3m on revenue 31 per cent lower to $1.8bn as the company came up against sharp falls in copper prices as well as rising costs. Net cash costs during the first half were $1.53 per pound, a 4.8 per cent increase. The company seems fairly complacent about the storm in commodity markets posed by short term weakness in China.
Certainly the question remains whether today’s move is simply a short term relief rally with an element of bargain hunting and short covering likely aiding the bounce. Nevertheless, there does seem to a some greater stability in the oil price which has climbed 2% this morning from a multi-year low.
With many revising their forecasts on when the FOMC will hike, even the most stubborn ‘September camp’ members are starting to see that the disinflation that comes from falling commodity prices is not a supportive climate for monetary tightening.
Nobody is suggesting that the FOMC is going to base its decision on one day’s trading in equity markets – it’s the macro picture that matters, particularly the US domestic picture, and given that inflation, along with labour markets is a key tenet for tightening. See more the FX market and market expectations below.
Investors will likely take this as a boon in the near term which will help explain the expected higher opening in US indices. We can however expect to see choppy conditions prevail on light trading volumes in the near term. The Non-Farm Payroll is always considered to be the most important data point on a monthly calendar. Next week’s will carry more weight than ever.
We are calling the Dow higher by 340 points to 16212.
Expectation for a Fed rate hike in September fades to 25%.
Weakness in US dollar continues as the expectations for a September action from the Fed fades significantly. The market gives no more than 25% chance for a Fed normalisation in September, down from 30% at the beginning of this week. As China’s ‘Black Monday’ spilled over the entire US and European equities, the Fed cannot – and should not – ignore the gloomy global macroeconomics. The market is too brittle to stand a policy normalisation. Over the past years, the stock market rally lacked a solid fundamental ground. The decoupling between the stock prices and the economic growth is the major cause of the stock inflation. The S&P 500 surged from $666.80 to $2134.72 since March 2009. There is certainly a fundamental input in this rise, yet a significant percentage is also due to a stock inflation caused by excessive liquidity injection that got stuck in the financial markets without ever reaching the real economy.
Therefore, there is significant room for further downside correction in S&P stocks. At $1575, the S&P 500 would retrace 38.2% of these gains.
A September action from the Fed is seen as pre-mature and would only boost the panic in the financial markets. The Fed is given little chance to take such a risky bet. The rate hike will certainly not come before the end of the year, with increasing probability that the Fed will take the first step no sooner than the first quarter of 2016.
The U.S. 10-Year yields broke below 2% in New York yesterday, which has only helped accelerating the US dollar’s depreciation against EUR, JPY, GBP and CHF. The Antipodeans (AUD and NZD) and the CAD were left aside given further weakness in commodity and energy prices.
Euro leads the game
The US dollar sell-off has mostly profited to EUR and JPY, as we had a significant accumulation of short positions since the beginning of the year especially in the euro, due to the QE and the Greek saga. The market had the opportunity to unwind the existing pool of short positions. This is basically why the euro has outperformed its G10 peers and holding so well above 1.1500/20 against the USD and 0.7200 pivot against the pound. In the longer-run, the dovish ECB divergence against the Fed and the BoE will be a cap to the current euro rally. Nevertheless, the short-term positive momentum may push the euro market well beyond itself. The US jobs data is a perfect candidate to trigger a fresh bull market. Due next Friday, the consensus for the nonfarm payrolls, 205K in August, may be somewhat optimistic given the further slide in energy prices and the additional 25% drop in Shanghai stocks in August so far.
Cable has made it up to 1.5803 on USD sell-off yesterday, the inflows in the pound market has been solid although seemed less significant compared to EUR and JPY as the market aggressively unwound the short positions in the latter currencies, whereas the pound was already in demand.
As the Fed is expected to postpone the first rate hike, the speculations on the BoE normalisation have become pointless at this stage.
The bias remains positive with vanilla calls trailing above 1.57 mark this week. However the dynamic between the pound and the US dollar is expected to remain little changed.
The euro leads the game.