The Fed minutes released overnight seemed to cement investor expectations for the Fed to delay their first rate rise until 2016. As the probability of a December Fed rate hike fell to 38.8%, the USD weakened noticeably seeing renewed vigour breathed in currencies and commodities.
There seems to be a major repricing of market expectations occurring in the wake of the nonfarm payrolls miss. This week’s rally clearly shows how much pressure the rising US dollar was putting on global markets.
White ASX, yellow Nikkei 225, green Hang Seng Index
Some of the big moves this week:
· WTI oil has risen 9%
· Dalian Iron Ore futures have risen 3.3%
· Copper is up 1.5%
· The ASX materials sector is up 9.6% and the energy sector is up 13.2%
The big question now is, how far can this relief rally go for? The driving forces of this rally in the ASX have been the performances of the materials and energy sectors. Yet both these sectors are still suffering from over supply with little chance of a quick turnaround.
Oil has been primed to bounce on news that production was being cut dramatically in the US. There are indications that Russia is prepared to enter into discussions with the major OPEC producers with the aim cutting back production. This may also be seen as one way for it to soothe relations with Saudi Arabia after its stepped up Syrian adventurism to support their key ally Bashar al-Assad’s regime.
Yet in the wake of the Obama administration’s highly significant deal with Iran, the oil market is still set to be flooded with new Iranian supply in early 2016.
A similar dynamic exists for iron ore. Although Gina Rinehart and Iranian president Hassan Rouhani are not known for their similarities, they are set to have a similar influence on commodity markets. Rinehart’s Roy Hill mine is set to start exporting to start flooding the market with huge amounts of low-cost iron ore.
Short positions in the commodity sectors are coming off at a rapid rate and that has certainly spurred a lot of these gains. But the longer term outlook is likely to start weighing on these sectors again.
This rally is likely to stall, and one of the key factors I would point to is that by-and-large much of the recent economic data continues to be negative.
The data in Australia and Japan has been particularly negative. Japanese machine orders declined for their third straight month, and in conjunction with the most recent industrial production data Japan looks set to enter a technical recession in Q3.
While in Australia, a range of data is showing the housing market is continuing to slow. With housing investment slowing, non-mining and non-housing investment yet to pick up and mining capex declining even more steeply than previously expected.
Housing finance approvals fell short of market expectations of 5.0% today, coming in at 2.9%. But new construction still declined 7.1%, which has been its eighth consecutive negative month. The Corelogic auction clearance rates for last weekend also came in at 69.6%, its lowest level since February. Although in the wake of the Reserve Bank of Australia (RBA) decision this week, Australia does not look set for a rate cut this year, but one in Q1 2016 does look increasingly possible.
ASX
The ASX took the solid leads from overnight and ran with it, rising a further 1%. The prospect of further US dollar weakness was clearly a boon to the materials and energy sector again today. Shorts in these sectors also seem to be coming off at a rapid rate as well.
The market seems to be welcoming Macquarie’s (ASX:MQG) acquisition of Esanda from ANZ. The stock has rallied 3.5% after it returned from its trading halt yesterday. Esanda is expected to build further synergy with Macquarie’s purchase of AWAS earlier in the year. Macquarie is looking strong as it heads into FY16, although concerns about performance of its China business in the current environment and potential threats from a much stronger Aussie dollar could be a drag.
ANZ’s sale and improved CET1 ratio position also was seen as net positive by investors as its stock rose 1.8%. Nonetheless, MQG’s strong performance helped boost the banking sector as whole as it rose 0.8%.