Nikkei, FTSE, DAX, CAC, Dow, S&P 500, USDJPY, AUDUSD and so the list goes on on a night where reality continued to bite and bite hard.
Japanese PM Shinzo Abe’s “Third Arrow” announcement yesterday left the market flat and circled round and hit him in the backside it seems as both the Nikkei and USDJPY fell heavily. This fed into a weak session in Europe where the only thing the data showed, besides a great number in the UK, was that Europe isn’t getting worse. But it ain’t anywhere near growth either. Then to top things off the ADP private employment report in the US was up just 135,000 which was 30,000 weaker than the 165,000 expected by the punditry and which puts in doubt expectations of a 165,000 rise in non-farm payrolls on Friday and in many ways the whole notion that the recovery in the US is taking sustainable root at all.
Not unrelated to the employment growth, or lack there of, is the remuneration that employees are receiving in the US. Last night unit labour costs for Q1 were released and were expected to show an increase of 0.5% after the previous quarter’s 4.4% rise. However the print of -4.3% almost completely unwinds the +4.4% which was so integral in a market rally back the day it was released earlier this year. It also speaks – to continue the line pushed the day the 4.4% was released – of the ability, or in this case NOT, of US consumers to consume. Lack of jobs and no wage rises equals a complete lack of consumption’s ability to grow.
So it seems like the US economy may be slowing at a time the Fed still seems to be upping the rhetoric on “tapering”. Indeed Bloomberg this morning re-quoted NY Fed boss Bill Dudley and what he said back on May 22nd and he is dead right:
I don’t really understand very well how the tug-of-war between the fiscal drag and the improving economy are going to sort of work their way out
Time will tell, but in the mean time the Fed goes on about tapering and the economy slows, not good for stocks, not at all.
Indeed I have been expecting stocks to fall for a few weeks now and indeed stock pundits need to be careful what they wish for with many lamenting the fact the S&P hadn’t had a 5% retracement for ages. Well after last night’s fall of 22 points or 1.37% to 1,609 the S&P 500 is just under 5% off from the high last month.
In many ways I think that this stock reversal is only really just getting going and as noted yesterday the targets are 1,591 and if that breaks 1545.
Elsewhere in the US the Dow was down 217 points or 1.43% and the Nasdaq fell 1.28%.
In Europe stocks also were slammed both because the US markets were under pressure but also because the data in Europe continues to be weak even if its not as bad as it has been. At the close the FTSE was 2.13% lower even though the Markit Services PMI for the UK was the one genuine bright spot in the data releases last night printing 54.9 up two full points from last month and much better than the 53.0 expected. GBP caught a solid bit on the back but the FTSE could not. On the continent the DAX was 1.20% lower, the CAC fell 1.88% and strangely the peripheral markets of Milan and Madrid fell 0.96% and 0.86% respectively.
I don’t have the space here this morning but check out your charts on European markets, further downside beckons.
The GDP data in Australia yesterday was as bad a set of numbers you can ever get for only just missing the estimate of the market. If you scrutinise the data what you will see is an economy that is seeing the retraction of the mining boom and a lack of domestic demand to fill the void. Indeed the fact that net exports were such a positive contributor to the overall GDP return of 0.6% for the quarter and without which the economy would have produced negative growth (I know this is a bit mischievous given any other partial could have moved as well) speaks volumes for the fact the Australian economy is in strife.
It remains my un-abiding belief and has been since I saw the HILDA survey from back in 2009 on debt and Australian households share by age and intention, that the debt burden carried by Australian households will inhibit the efficacy of interest rate cuts in the future and as a consequence inhibit the transmission mechanism from rate cut to economic growth. As a result my belief since 2011 that rates in Australia would head to 2.50% has been adjusted down to 2.00-2.25%.
So it is no surprise then that the Aussie dollar got absolutely smashed last night making a new 12 month low at 0.9509. Initially after the data the Aussie held up very well – surprisingly so given the weak data. I sold on the rally into the 40’s on 96 and in the 20’s on 96 again and rode it down as the yen strength kicked AUDJPY lower and increased the pressure on the Aussie across the board.
AUDJPY and AUDUSD both look like they have further to go – while on the hourly charts things look like they may rally a little the focus is now on 92.95 and 0.9400/20 respectively.
On other FX markets I was short USDJPY yesterday looking for a test down to the uptrend line for this big long term trend which we effectively saw overnight. The euro is becalmed and I am still watching the formation of 1.28-1.3260 box. A break either side would be decisive. GBP was a big mover overnight and I was asked on Twitter yesterday what I thought I said that it is having a big old counter-trend rally within an overall move back to 1.42 which regular readers know is my long term core view. But I also noted that I thought GBP had a couple of big figures topside a large part of which we saw last night. So where to from here? A break of 1.5420 gives another 150 points but I am inclined to fade this move from here.
Data
Australian trade data might get people going today after yesterday and then we have German factory orders before both the BoE and ECB decisions and jobless claims in the US.
Twitter: Greg McKenna