Overnight: Under Pressure

The Dow closed down 53 points or 0.3% while the S&P lost 0.2% to 2170 and the Nasdaq fell 0.2%.

Fed Fear

Welcome to September, historically the worst month of the year for stocks. Indeed, over the hundred year history of the Dow, only one month of the year has averaged a loss, and that is September.

But it’s just an average.

The last day of the local earnings season ended with a bit of a whimper. There were not that many companies left to report but it’s the first time in the last three weeks there have not been some significant up/down moves in reporting stocks to highlight.

There were still some moves – Harvey Norman (HVN) rose 2.7%, Independence Group ((IGO)) fell 3.7%, Adelaide Brighton ((ABC)) fell 4.2% — but nothing in the teens or worse as we have seen often this season.

It was otherwise a weak session, on a beta rather than alpha basis. Late morning the ASX200 was down 66 points and it was looking like the market was set to book a real shocker, with technical selling backing up fundamental nerves. Chartists have been calling the market lower if the index failed to hold above 5500, which it hasn’t.

Some buying came in to stabilise things through the afternoon but across the sectors, ultimate weakness can very much be put down to Fed fears. As we entered the August result season, the assumption was the Fed was no chance of raising in September and possibly not in December either. As we exited the result season, there now is a very real chance the Fed could hike this month and maybe even in December as well.

Even if the Fed funds futures are still only pricing in around a 33% chance of a September hike, it pays to be safe. And for many an Australian company impacted by US interest rates, there’s a lot of premium to give back.

A Fed rate hike means a stronger US dollar and that means weaker commodity prices, particularly gold. Gold has drifted down since Jackson Hole but not yet tanked. It is nevertheless hard to find any Australian gold stock with a Buy rating from a stock analyst. Result season featured many a solid operational result from the goldminers, but a consistent call of overvaluation from analysts, even on a bullish gold price forecast.

Result season featured many a strong result from defensive yield-payers in the market, but again, Buy ratings were very hard to find. REITs in particular have drawn a lot of overvaluation calls. If the US rate rises the value of Australian yield stocks to offshore investors slips slightly, and many are carrying premiums.

Then we have the double-whammy stocks. They include resource sector names paying solid dividends, such as the Big Two miners and a couple of Big Gas names, and they include yield stocks with direct US exposure, which would lose out on both the currency translation and the interest rate differential.

Yesterday saw materials lead the market down with a 2.4% drop, backed up by energy with 1.1%. Utilities lost 1.0% and defensive consumer staples 1.3%. The banks and telcos were also sold, but hung in there with only 0.4% drops.

We may only have to wait until tomorrow night to decide whether there will indeed be a Fed rate hike this month. If the US jobs report comes in as anything other than very bad, Wall Street is going to start to lock a rate rise in. Unfortunately the FOMC decision will not be announced until September 22, so we’ll have to suffer three weeks of tedious Fed speculation.

On a brighter note, yesterday’s release of local July sector credit numbers showed steady, if not surging, credit demand.

In annual growth rate terms, overall credit is up 6.0%, down from 6.2% in June. Total housing credit growth has slipped to 6.6% from 6.7% (and 7.5% a year ago) because investor loan growth has fallen to 4.8% from 5.0% in June and double-digits in the first three quarters of 2015. Owner-occupier loan growth has slipped to 7.6% from 7.7% but June marked the highest rate in six years. At 6.2%, business loan growth is up from 4.9% a year ago.

Not shooting the lights out, but enough to be comfortable with.

Weak Close

After five consecutive months of rallies, August saw the Dow close lower, having featured fresh all-time highs mid-month.

All talk on Wall Street is, of course, about the Fed, and specifically about tomorrow night’s jobs report and just what it might imply. The current forecast is for 185,000 new jobs and that is considered enough to keep the Fed talking rate rise.

Last night the ADP private sector report showed 175,000 new jobs created in August, in line with non-farm payroll predictions.

As we have witnessed this year, US jobs reports can be extremely volatile and often their veracity is questioned, particularly given large revisions are common in subsequent months. But again, Wall Street is looking at being safe rather than sorry.

With pressure on commodity prices it didn’t help that the weekly US oil inventory numbers showed a greater than expected build in crude and a lesser than expected drawdown of gasoline. The US dollar index was flat last night at 96.02 but risk is to the upside and thus commodity price risk is to the downside. Oil prices fell 3%.

Fedheads were also out and about again pursuing their favourite pastime of trying to confuse Wall Street into submission. The bottom line is two spoke with dovish tones and one with hawkish tones but of the three, only the hawk is an FOMC voting member.

US stock markets thus continued their modest correction. There is no great expectation a September rate rise would unleash a major plunge – most agree 25 basis points is neither here nor there and everyone would just like to settle the matter one way or the other – but September is the month of volatility so the jitters, at least, may run through the markets.

Tonight will probably be a quiet one on Wall Street ahead of the jobs report, but that is never certain.


West Texas crude is down US$1.43 at US$44.83/bbl.

The build-up of commodity price fear is being reflected in mining stocks but metal prices have not exactly buckled. Last night saw aluminium fall 1% but lead rise 1.5% and the other base metal were little moved.

Iron ore is unchanged at US$59.00/t.

Gold is down US$2.00 at US$1308.50/oz.

The Aussie is up 0.1% at US$0.7520.


The SPI Overnight closed down 19 points or 0.4%. Aside from current momentum to the downside, and technical weakness, the energy sector will be under pressure today.

It’s the first of the month so across the globe, including in Australia and the US, manufacturing PMIs will be released. China will release both its manufacturing PMI and service sector PMI.

In Australia we’ll also see August house prices and June quarter private sector capex, the latter being one of the RBA’s most closely watched data sets.

No more earnings reports. Woohoo! But do be reminded we are now very much into that which comes after – the ex-dividend season. Among those stocks going ex today is BHP Billiton ((BHP)).

Greg Peel

About Greg Peel

Greg Peel joined Macquarie Bank in 1986 and acquired trading experience in equities, currency, fixed income and commodities derivatives, ultimately being appointed director of equity derivatives trading. He later published In With The Smart Money (a plain English guide to the mysterious world of financial markets and derivatives) and acted as a consultant to boutique investment funds. In 2004 Greg joined FNArena as a contributing writer. He is now a director and principal of the company. Greg compliments the journalistic background of the FNArena team with lengthy experience as a financial markets proprietary trader.

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