Angus Nicholson for Chris Weston, Chief Market Strategist at IG Markets
The selloff in equities this week has really been driven by the compounding of a range of ongoing macro factors, with the energy market front and centre in this dynamic. Many analysts have been ringing the alarm of recession-like yields seen in the junk bond market, which have historically portended major market selloffs. But the energy sector accounts for a significant portion of high yield debt and a lot of the reason behind rising junk bond yield spreads is attributable to the ongoing collapse in oil prices.
Now that OPEC has failed to agree on supply cuts, the oil price is completely rudderless. In an environment where both Brent and WTI oil are trading below US$40 a barrel, the debt-laden and marginal energy players are increasingly likely to be pushed to the verge of bankruptcy. This has driven up junk bond yields and in turn weighed on the equity markets.
The other macro factor concerning markets, and particularly hurting commodity prices, is the further weakening of the CNY. After the USDCNY rallied sharply in late-August, the CNY has steadily strengthened over the past two-and-a-half months. However, yesterday saw the USDCNY break through its late-August high. It comes as no coincidence that the currency has weakened considerably after the CNY was formally announced as a member of the IMF’s Standard Drawing Rights basket and also that it has occurred in the lead up to the Fed’s 16 December meeting where they are widely expected to raise interest rates.
A weakening of the CNY sounds alarm bells for the many exporters that worry that Chinese demand will be dampened by a weaker currency. This has added to further pain for the commodity sector with the Bloomberg Commodities Index losing a further 9.7% since the CNY re-began its steady weakening path on 30 October. Looking at China’s November FX reserves data, the US$87 billion monthly decline clearly indicates there is a lot of weakening pressure on the CNY and the government is having to spend a lot of its foreign reserves to curb a steeper decline in the currency.
Japan
The October machinery orders released today were very strong, expanding at 10.7% MoM – their highest monthly increase since March 2014. The machinery orders add further weight to the strong October industrial production numbers. Together they point to another strong capex number in Q4, indicating that the marked capex uptick seen in the previous quarter will not be a fleeting result and we are increasingly looking at a turnaround in Japanese business spending.
While there was little reaction in the Yen or the Nikkei, these data points are increasingly pointing to a strong 2016 performance for Japanese equities. While there was a wide-ranging sell off in Japanese stocks today, consumer discretionary and industrial sectors did perform comparatively better in the wake of the data. Japanese cyclicals and consumer discretionary stocks look well positioned to benefit from a steady pickup in Japanese investment. The Bank of Japan will be hoping that this spills over into a boost in wages over the coming months.
China
Chinese November inflation data came in better than the market had been expecting. CPI increased 1.5% YoY from a previous 1.3%, and PPI held steady at 5.9%. The gain in the CPI was certainly a positive, particularly in the wake of the pickup in imports growth seen in yesterday’s trade data. Non-food CPI also picked up from October, although core CPI (ex-food and energy) remained unchanged at 1.5%.
Most positively for the CPI is there did look to be a steady widespread increase in inflationary pressures across a range of different components. Food inflation saw the biggest increase, but there were also noticeable increases in services, medicines and consumer goods. The CPI data does look to be painting a positive picture of the Chinese consumer ahead of the important retail sales figures. And, taken in conjunction with yesterday’s strong increase in import growth, it does look like we will see relatively decent activity data out of China in November and December, enough to reach the 7% target at least in the official growth figures.
This helped push the Shanghai Composite into positive territory after an initial negative open. With consumer discretionary and financials leading the index in the wake of the data.
ASX
Australian housing finance approvals weakened 0.5% MoM in October, providing further evidence that the steam is coming out of the Australian housing market. There was also a particularly concerning report out by Prosper Australia that estimated around 20% of investor property held in Melbourne was left vacant, a phenomenon familiar to many of China’s high-end property developments. The auction clearance rate also dropped to 59.2%, very close to its lowest level since the beginning of 2013.
The ASX followed the poor lead from the US and fell sharply at the open, dropping to 5070. However, there has consistently been strong buying seen in the ASX around the 5050 level over the past couple of months. Investors did seem keen to rush into the significantly weakened materials and energy sectors today despite ongoing concerns about the commodities outlook. Although after paring back the losses a bit the index slumped towards the close to finish down 0.55% at 5080.
Energy stocks were up 0.7% and indicated that perhaps yesterday’s selloff may have been a bit overdone. Santos, one of the worst performers yesterday, saw a strong bout of buying off its multi-year lows as the stock rose 5.6%.
BHP was also offered some respite today. After initially dropping into the A$16 handle the stock bounced back to gain 1.8% on the day. The materials sector as a whole also saw strong performance, rising 0.9%. There looked to be a strong performance by many of the gold miners as the spot price gained overnight and global volatility picked up with the selloff in equities.
The banks had a fairly rough day in line with the broad based selloff as financials lost 0.3%. However, despite all the other three banks selling off, CBA managed to gain on the day; being the largest stock, this helped pare back losses on the index as a whole.