Stocks recover, US dollar loses early gains but markets are looking wobbly

I’ve consistently warned that volatility transitions from periods where it is low to those where it breaks out. Last night I met with a fellow trader/strategist with multi-decade experience like myself and even though he said to me that central banks have thrown a blanket over the market – implying it won’t fall – I can’t help the felling that what is going on in Portugal is a sympton of a greater malaise papered over by central banks but still there.

So even though US stocks recovered a reasonable amount of early losses, bonds lost early gains and the US dollar reversed its early strength last night’s trade looks like a night when we saw that the canary in the coal mine of global markets is looking a bit sick.

The catalysing force last night was the continuing problems at Banco Espirito which saw its parent struggling with payments and reignited fears about European banking. Craig James from CommSec notes that banks in Norway and Spain also came under pressure.

Having said all of the above though there is no point getting too bearish because one bank in a small European country is not the market but this along with recent rallies in core bonds and sell offs in peripheral bonds, gold’s rally, and my sense of an asset allocation shift suggest risk money is being taken off the table at the moment.

To the markets specifically and the Dow recovered from a low of 16,805 to finish at 16,915 off 71 points or 0.42%. The Nasdaq was 0.52% and the S&P recovered to be down just 8 points for a loss of 0.4% at 1,965.

A slip below 1,945 signals a deeper move.

As the epicentre of last nights move European stocks were hit harder than their US counterparts the FTSE fell 0.69% to 6,672. the DAX lost 1.52% to 9,659 as 10,000 is becoming a bit of a memory. In Paris stocks fell 1.35% while in Milan and Madrid the indices were 1.90% and 1.98% lower.

As noted above the impact of the shenanigans in stocks was that core bonds had a bid tone while the European periphery continues to look very wobbly. US 10′s had a brief foray under 2.50 but sold off again to finish down just a point to 2.54%. UK 10′s rallied 3 points to 2.63% while German 10 year bunds also rallied 3 points finishing at 1.20%. Italian and Spanish bonds however sold off 6 points to 2.83% and 2.81%.

Obviously any real perspective says that the Italian and Spanish rates are still very low rates but it is the blow out in the spread to German bunds which is the signal that markets are getting a little worried about things. This worry was confirmed to a certain extent with the very weak result in Italian industrial production which was released last night and printed -1.8% against expectations of a rise of 1.1%.

Looking locally futures traders on the ASX took the September SPI 200 contract 18 points lower to 5401 bid. It could be a poor end to the week’s trade today.

It’s reasonable to expect a test of 5315.

In Asia the Nikkei fell 0.57%, the Hang Seng was 0.27% higher while stocks in Shanghai hardly moved down just one point at the close. That’s actually a pretty solid result after the Chinese trade data disapointed the market. There is nothing exciting to be released in Asia today so expect a little weakness on the back of US moves.

On currency markets the Bank of Englands decision to leave rates at 0.5% was no surprise nor its decision to keep its QE intact. Sterling however finished the day lower and is at 1.7130 this morning. Euro is at 1.3608 and the Aussie recovered from a low of 0.9358 and is at 0.9394 this morning.

If AUDUSD trades below 0.9358 it should run hard.

On commodity markets iron ore is trying to build momentum to crack $97 tonne and was up 55 cents to $96.32 tonne for the September 62% Fe contract. Newcastle coal for September delivery lost another 20 cents to $69.75 tonne. Copper rallied 2 cents to $3.26 while Gold climbed in the uncertainty in markets to $1337 and silver rose to $21.41 oz. On the Ags concerns about solid crop yields saw corn lose 0.87%, wheat was 0.51% lower and soybeans dropped 0.36%.

On the data front this morning we get home loans in Australia before German CPI tonight.

Greg McKenna

NB: Please note all references to rates above are approximate

To learn more about Greg McKenna, read on here.