Wall Street Flayed on Familiar Concerns

With all the composure of a giraffe on ice-skates, global markets plunged last night amid a poor consumer confidence reading in the US and worries that Chinese leading indicators were signalling a slowdown even as anxiety levels rise about Beijing’s plan to tighten credit and hence growth.

To be honest, these triggers were not remarkable of themselves, but after waxing and waning above 10,000 for a fortnight or so, investors finally decided to de-risk on a massive scale, as many bourses slumped in excess of 3% and the Dow dived beneath 10 grand. The S&P500 was flogged to the tune of 3.1^ and sits right on that pivot point we have previously canvassed in TCD, at 1,040.

Like kicking a consolation goal in the last minute of a game during which you have been utterly thrashed, US stocks popped off their intraday lows in the last 15 minutes, but that was hardly something to celebrate.

Source: Bloomberg

Treasuries Up, Confidence Down

The MSCI Global Index suffered its worst sigle session in 14 months, which is up against a bit of competition, as Treasuries again spiked in price and yields fell sharply. 10-year US paper now returns jst 2.95% annually, with that yield under 3% for the first time since April 2009 when we were just starting to pull ourselves up from the market’s nadir.

Obviously, the significant fall in comnsumer confidence – logically attributable to job concerns and anaemic growth in the US – elevates concerns ahead of Friday’s nonfarm payrolls announcement. If that headline shows that more than 115,000 positions were shed in June, then look out below.

Roundup

Metals were comprehensively smashed, with copper shellacked 5.5%, nickel off 7.6% and lead about the same. Have a wild guess at the impact that had on the miners. Alcoa’s fall of 6.3% was pretty typical and Canadian shares tumbled.

The higher greenback also hurt oil, which slumped more than $2 a barrel, although gold rose in unison with the USD as defensives were all the rage and the fear trade ruled. BP CDS’s widened to a record as Washington demanded to be included in any asset sale plans as it seeks to ensure the capability remains to fund the Gulf cleanup.

After outperforming of late, Citi collapsed 7%, with most other major financiers hit circa 4%. Only Goldmans managed to hold itself with any dignity as it surrendered only 2.1%.

Steelmakers Arcelor, US Steel and Posco were spanked 6% on demand worries and the gaming sector was whacked as many familiar names (Wynns, MGM for example) erased 8% of shareholder value in the session. 9 stocks fell for every one that rose on the S&P500.

Chinese Indicators Show Market’s Fragility

Take a look at the below chart of Chinese leading indicators, and the rolling over of the index has not yet reached the stage at which it is in freefall, but the continued slide was enough to stoke the embers of fear.

All of a sudden, the EDC re-emerged as an issue as deficits are slashed via spending cuts and tax rises and the impact on growth is magnified by a pullback in Chinese activity.

Source:Bloomberg

I suppose it’s understandable that these early signs of slowdown are identified by investors with decent memories of the horrendous conditions that abounded in 2008-2009, but as yet there is insuffient evidence to suggest China is tanking. Yes, Shanghai dusted 4.5% Tuesday, but that’s been due for a while now.

Perhaps this market is finally identifying the tepid growth that will characterise most economies for the medium term, and returning prices to fair value accordingly.

House Prices Rose – A Long Time Ago

Give me a spell.

Data out last night indicated a 0.8% recovery in home prices. That might sound pleasing, but the data relates to sales made in April! That’s eons ago in this climate, and again is reflective of the final uptick occasioned by the expiry of the tax relief afforded buyers.

Airlines Hit by Chinese Fears

This sector is hardly a Robinson Crusoe, but the airline industry sustained a severe hit last night as fears that intercontinental traffic would slow if China starts to taper off from its admittedly stratospheric growth pattern.

Fair enough, as the sector has been on its knees (as it often is) throughout the GFC and with the exception of JAL most of the larger names have chosen to unite rather than succumb. Those synergies won’t last forever and with the State-funded Emirates looking to undercut wherever possible, the requests for Federal help are likely to start flowing more publicly should this persist.

Europe

The FTSE gapped down under 5,000 for the first time in a month with miners and banks leading the way south. Sterling and euros devalued against the perceived safety of the USD, even though the UK sold 8b quid in paper that received strong support – a clear indication that new issues are in vogue almost to the exclusion of all other asset classes.

Talk that Exxon was looking at bidding for BP was a bright light, even if BP’s share price hardly soared.

Bond markets were relatively active, with Tesco raising a couple of billion against the security of 41 of its supermarkets. Watch more and more majors look to the debt markets instead of gun-shy banks.

Australian Stocks Fall on Shanghai Plunge

My prediction looked a tad awry early, with the XJO shrugging off ostensibly poor offshore leads to poke higher in the first hour. Once Asia opened for business, though, the trakectory changed abruptly and we fell away into the close per the below.

With today the last day of our financial year, there were few reasons for buyers to be in charge and the news out of Beijing hastened the falls.

Source: Paritech

Roundup

Each of the major banks reversed initial gains to finish noticeably, if unremarkably, lower by 4pm. The miners oscillated throughout but finished on a down note despite word of a peace deal on the RSPT.

Downer disappointed with a couple of confusing announcements that indicated it was shelving cash and delaying creditor payments to bolster its 30 June balance sheet (gee, a company fiddling with its payments to enhance its position as at a particular balance date? Say it isn’t so…). DOW lost 5% accordingly.

Campbell Brothers did go against the grain, though, and jumped 5% after revealing an impressive second half outlook.

RSPT Deal to Be Announced?

As we have covered previously, expect Gillard to trumpet the terse concession by the mining industry to a swathe of adjustments to the RSPT and shortly thereafter catch a ride to Government House to request Parliament be dissolved. The CSG sector will likely come under the PRRT regime, and thus assuage Anna Bligh and the giants she courted to SE Queensland.

Allowing for the immediate write-off of capital expenditure will appeal, and altering the retrospectivity of the tax generally should please.

Hardly ideal for the miners, and Twiggy will continue to shout from the bleachers, but Gillard may well emerge as something of a peacemaker here and an election in the second week of August is on the cards.

Boring Stocks

Plenty around. Tatts didn’t pay me a $50m dividend overnight, but despite its overdue writedown of its UK assets (continuing the trend) it recovered late as it reiterated its dividend expectations. Expect > 10% yields including franking credits from this gaming asset that is not without its problems, but something that is a justifiable hold.

ConnectEast has also exhibited signs of being oversold of late and with traffic numbers on the rise it should find fairer weather ahead. It has largely fallen with TCL, but there was never a bid on the table for CEU so that retracement is overdone and it has now moved into appealing territory.

Elsewhere, QBE, OSH, DUE and OZL are front and centre when it comes to solid stocks to enter around here.

DJS Under Fire

The board of David Jones continues to attract flak for its approval of a $1.5m payout to disgraced CEO Mark McInnes.

I know there are sensitive issues involved here, but from a shareholder’s perspective I would have thought most would have wanted the bloke who knew how to create and sustain sharehodler value to remain and some deal to be worked out with the complainant. Take away his bonus, give it to her and keep the man in whom the market has trust at the helm.

Non-sharehodlers may understandably have a different view.

Today

Off anything less than 100 would be something of an achievement, but I expect us to recover in the afternoon and finish off around 85 in the red.

Cheers,

Simon Wallace
Group Relationship Executive