Was that the sound of dead cat bouncing? Whatever, traders had something to smile about on Friday. (Reuters: Brendan McDermid)
For investors, it was a week where there was nowhere to hide — except under the doona clutching a pile of cash and some gold ingots.
Even Friday’s recovery on Wall Street seemed to lack much conviction.
For the optimists it represented a buying opportunity in an overdone sell-off. For the pessimists, it was probably the proverbial “dead cat bounce”.
By the close of business on Friday the week’s toll had mounted up with the selling hitting all points on the globe:
- Wall Street’s S&P500, Dow Jones Index and Nasdaq all -4pc
- Australia’s ASX200 -5pc
- Germany’s Dax -5pc
- Japan’s Nikkei -5pc
- China’s Shanghai Composite -8pc
- Crude Oil -4pc
Gold edged up 1pc, but the big winner was volatility. The VIX volatility index, or Wall Street’s so-called “fear gauge”, jumped 44 per cent.
It is still difficult to pinpoint why things came unstuck so quickly, but rising interest rates — and their impact on corporate earnings and economic growth, as well as their risk free attraction as an investment alternative to equities — is where most fingers were pointing.
Throw in the unresolved and potentially very damaging trade dispute between the US and China, central banks dialling down their money printing and heroically-priced tech stocks underpinning stock market gains and the culpability spreads.
Unusually broad sell-off
JP Morgan’s head of cross asset strategy John Normand says there’s nothing particularly unusual about the broad-based rout prompted by a bond market sell-off — remembering that as bonds are sold, their price falls and the yield, or interest rate, rises.
“While bond market sell-offs almost always damage some other market — emerging market assets and gold are casualties in about half of major bond sell-offs, and global equities in only one-fifth of such rate moves — this month’s contagion is one of the worst for equities in 15 years based on breadth of declines across size, sector and style,” Mr Normand told clients over the weekend.
So what was different this time?
Mr Normand argued the current cycle is aging and vulnerabilities abound in terms of fundamentals and valuations.
Mr Normand’s thesis is markets have not yet fully taken into account the Federal Reserve’s determination to raise rates well into next year and beyond.
“Credit and equity markets do not seem to price an earnings outlook that will be challenged next year by restrictive Fed policy, a tighter labour market and higher tariffs,” he said.
It might be an unpalatable thought, but investors better get used to pretty skinny returns, and more frights like last week, as this current bull cycle trudges into senescence.
Stress, what stress?
Despite all this, on most metrics big investors are not pricing in much risk despite last week’s swoon.
- The VIX spiked, but is still a long way short of the fear generated in February.
- Cash holdings have risen over the year, but are also well below levels held by investors in early 2016
- Credit Default Swaps — or the cost of debt insurance — have risen on worries about Italy and Turkey, but again are well below the worries of two years ago
- The gap between US 2-year and 10-year Treasury bond yields has widened again, decreasing the betting on a recession anytime soon
- The St Louis Fed’s Financial Stress Index — a measure of financial market stress — remains well below its long-term average
- Various spreads between interbank lending rates indicate there’s little perceived stress in the banking and corporate world
Wall Street’s rebound was led largely by the banks, but there was also interest in some of the tech stocks jettisoned in the mad rush to exits over the previous two days.
The banks kicked off the latest earnings season with some robust profits.
Wells Fargo reported a 32 per cent increase in earnings, JP Morgan was up 25 per cent and Citigroup brought up the rear with a still very respectable 12 per cent rise.
They were all buoyed by continuing strong growth in lending, brisk stock market activity and rising interests rates boosting their margins.
However, the bank bosses weren’t discounting the risks that could smack down their profits once more.
JP Morgan chief Jamie Dimon said the market may not be ready for short-term interest rates heading for 4 per cent as the Fed tried to keep inflation corralled.
“The market may not take it that well if rates go up,” Mr Dimon said.
The wave of buying in the US looks likely to peter out somewhere in the mid-Pacific this weekend with ASX futures trading pointing to an ugly start to the week, down almost 1 per cent.
Markets on Friday’s close:
- ASX SPI 200 futures -0.9pc at 5,803 ASX 200 (Friday’s close) +0.2pc at 5,896
- AUD: 71.8 US cents, 61.6 euro cents, 54.1 British pence, 79.8 Japanese yen, $NZ1.09
- US: Dow Jones +1.2pc at 25,340 S&P500 1.4pc at 2,767 NASDAQ 2.3pc at 7,497
- Europe: FTSE -0.2pc at 6.996 DAX -0.1pc at 11,524 EuroStoxx50 -0.5pc at 3,194
- Commodities: Brent oil +0.2pc at $US80.43/barrel, Gold -0.5pc at $US1218/ounce, Iron ore $US70.70/tonne
Unemployment back in focus
Could unemployment take another step down? That’s the big question for the week with September’s labour force figures due to be released on Thursday.
NAB’s view is it will, with it forecast for another 30,000 new jobs created over the month and a steady participation rate combining to knock unemployment down to 5.2 per cent.
That would put a spring in the step of Reserve Bank officials looking for something to spur along wages growth.
Just what the RBA thinks about current labour market conditions and the prospect for wages is likely to spelt out in a speech on the subject by deputy governor Guy Debelle on Tuesday.
In the corporate world, AGM season cranks up this week.
For those who prefer anger and conflict than tea and sandwiches at their AGMs, Telstra on Tuesday is the go.
Chair John Mullen has written to shareholders apologising for a performance that has seen Telstra’s share price tumble around 40 per cent.
While executive bonuses have been cut, it may not be enough to head off a shareholder revolt on the telco’s remuneration report.
A 25 per cent vote against it would see a “first strike” recorded against Telstra, an uncommon and embarrassing occurrence for a big company.
China’s economy to slow, but not much
China’s official bean-counters will produce their usual miracle of tabulating the all the inputs into the world’s second-biggest economy and cranking out a GDP number just a couple of weeks after the quarter has been ruled off.
Capital Economics Julian Evans-Pritchard, says the official GDP data have been implausibly stable over the past few years and are of limited use as a gauge of China’s economic performance.
“That said, we do expect the recent downward pressure on the economy to be reflected in a slight weakening in the official GDP growth rate last quarter,” Mr Evans-Pritchard said.
The consensus view is the National Bureau of Statistics will knock third-quarter GDP down a peg to 6.6 per cent over the year when the figures are released on Thursday.
The monthly data deluge, to be released at the same time as GDP, is expected to confirm a general softening in the Chinese economy.
Manufacturing data has been week lately and weaker commodity imports don’t support the view infrastructure investment will rebound. Retail sales should ease back a bit too if car sales are any guide.
Chinese inflation (both producer and consumer) should tick up when the data is released on Tuesday.
US corporate earnings
A better than expected performance by US banks helped turn things around on Friday.
The next batch of results are likely to set the tone for the market this week.
Bank of America, Goldman Sachs, Morgan Stanley, Netflix, IBM, Johnson & Johnson are among the bigger companies to release earnings updates.
Earnings guidance and commentary on the impact of rising interest rates and ongoing trade tensions will largely drive investor emotions.
|RBA minutes||More of the same and a bit dated after last week’s wobbles|
|Telstra AGM||Angry investors likely to deliver a big protest vote against executive pay|
|RBA speech||Deputy governor Guy Debelle speaks on the state of the labour market|
|Leading index||Westpac series looking at economic conditions 6-to-9 months down the track|
|Origin, CSL & Tabcorp AGMs||Tabcorp will focus on Tatts merger, Origin still struggling to gain traction despite LNG boom & CSL just gets on with business|
|Jobs/unemployment||Sep: Another solid number expected after a big August result. Unemployment may tick down to 5.2pc|
|Business survey||Q3: NAB series|
|US: Retail sales||Sep: Forecast to step up from a fairly flat August|
|CH: Inflation||Sep: Consumer and producer inflation likely to edge up|
|EU: Trade balance||Aug: Still a solid surplus, but focus on composition & impact of tariffs|
|US: Industrial production||Sep: Tipped to ease back|
|EU: Inflation||Sep: Core inflation still likely to be chugging along below 1pc YOY|
|US: Fed Minutes||Minutes from last meeting where rates rose. Could have important insights into future moves|
|US: Housing starts||Sep: Housing data in sharper focus with the sector starting to soften|
|JP: Trade balance||Sep: Big deficit tipped to narrow a bit|
|CH: GDP||Q3: Forecast to slow a tad to 6.6pc YOY|
|CH: Monthly stats||Sep: Retail sales, industrial production and infrastructure spending all forecast to be steady ahead of another round of stimulus|