Miners back in demand. For now.
The FTSE is showing all sectors in the green this morning with low trade volumes the order of the day owing to US Labour Day. Glencore (LONDON:GLEN) is the highest riser and basic resource stocks are in demand despite the volatility in China overnight and the Shanghai Composite closing lower by 2.55%. Perhaps the fact that the losses remain in single digits is considered good news these days?
Indices closer to home have added an average of 1% this morning. The DAX, still in death cross mode, has bounced higher but it is notable that it is the utilities sector that is leading the gainers followed closely by the materials sector.
News from the National Bureau of Statistics says China's economy actually grew 7.3% last year, down from 7.4%. Naturally, these figures can be taken with a large pinch of salt but the market seems to be liking it.
With Chinese FX reserves falling to two year lows, it’s hardly a disaster. The war chest still has some $3.56 trillion left albeit lower than forecast. We can likely expect to see further reductions in reserve requirements in the near term, which may in turn help prop up the stock market there.
The recent sell off in European markets has created some pockets of value in certain stocks and this has been recognised with a host of broker upgrades aiding risk sentiment this morning. Glencore has temporarily reversed its mantel from the FTSE dog to the FTSE darling this morning, rising as much as 12% in early trade.
A stock that falls 60% year to date has to find a floor some time, and clearly the time was ripe for management to actually address the problems. Some issues, such as the decline in copper prices, are to some extent outside the control of the company, but any measures that might shore up some confidence in what was beginning to look like a penny stock are clearly welcome. Dividend cuts, asset selling and a new debt reduction plan appear to be doing the trick and have inspired some broker upgrades. Cutting production at some of its copper mines is also underpinning other mining stocks this morning as a tighter copper market might well bring about a floor.
Supply is one issue, but Glencore and indeed other basic resource companies can do little about faltering demand.
Nevertheless, other mining stocks are enjoying the tail wind from the surge in Glencore’s share price: Antofagasta (LONDON:ANTO) (+6.8%) Fresnillo (LONDON:FRES) (+2.43%) BHP Billiton (LONDON:BLT) (-2.03%).
Pearson (LONDON:PSON) is also on the rise and benefitting from several broker upgrades. Solid performance in the US in school textbook and services market despite loss of some contracts. Shares in the company have declined 8% year to date but the average price target now implies 22% upside.
The strength of the pound will likely be a recurring theme in next quarter earnings releases. Associated British Foods (LONDON:ABF) have given us a taster in its trading update this morning. The company expects a modest decline in full year operating profit as cooler weather and the stronger pound impacts sales and margins. The stock fell 2.3% in early trade.
Thick fog before the September Fed meeting
The market continues seeing a glass half full even though the US jobs data missed estimates on Friday’s release. The US economy created a meagre 173’000 jobs in August, way below 217’000 expected. Nevertheless the improvement in wages and the lower unemployment rate have been supportive of the US dollar. In the aftermath of the US jobs data, we can at least state that the perception has been positive. Interestingly, the probability of a September rate hike has rebounded from 26% to 32%; chances given for a December hike is 60%.
August jobs data failed to provide more clarity regarding the Fed policy outlook. The volatility is on agenda walking toward September 16/17th FOMC meeting.
In G20 meeting, IMF President Lagarde urged the Fed not to rush to a rate hike as the rout in commodity and stock markets do not provide a solid base for a tightening in monetary policy.
The S&P 500 stocks have potential for further weakness
The S&P 500 stocks spent the major part of the current calendar year above $2000 mark.
The Beige Book, that covers the six week period to August 25, does not include the burst in equity bubble worldwide. Though the thunderstorm in the equity markets has certainly not been a massive surprise for the FOMC Chair Janet Yellen as she had openly warned investors about the possibility of an asset price inflation, the recent unwind in the equity complex only confirmed her doubts.
This being said, the S&P 500 stocks trade some 25% higher compared to top levels before both 2000 technology bubble burst and 2007 subprime crisis hit the US stocks. Though the US companies certainly grew in value over time, the economic recovery is still on a shaky ground. Is 25% to 200% premium over the past ten years trading range (top to bottom) representative of the current underlying macro reality? This is yet to be proven.
The recent outrageous sell-off in the market has been the proof that the liquidity that central banks have been injecting since last eight years have been grandly stuck in the financial markets. In the dearth of intervention from authorities, the entire market could easily tumble down to the starting point. The economic recovery would then be nothing but an illusion.
CHF 8.6bn : the cost of keeping the euro-franc in 1.05/1.10 band
It has costed an additional 8.6 billion francs to the SNB to keep the euro-franc rate within 1.05/1.10 range in August, as euro gave back gains in the second part of the month. SNB’s foreign exchange reserves increased from 531.8 billion franc to 540.4 billion in August, while sight deposits remained unchanged. As the selling pressures on the euro are building following the European Central Bank measures to curb the appetite in the single currency, the SNB will certainly need to step up efforts to prevent the euro from cheapening back to the lower end of the 1.05/1.10 implicit band.
The SNB has, however, the financial flexibility to lead the game up to 800 billion to 1 trillion franc worth of accumulation in foreign currency reserves