Markets Today: Netflix vs NBC

While being glued to the long running soap opera of the Greek debt situation, there is another, more mini-series like, show going on in the East. And like Netflix versus NBC (who shows Days of our Lives) it has crept up and has captured everyone’s attention.

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While being glued to the long running soap opera of the Greek debt situation, there is another, more mini-series like, show going on in the East. And like Netflix versus NBC (who shows Days of our Lives) it has crept up and has captured everyone’s attention.

Overnight, the NYSE was closed for three hours due to a ‘technical’ hitch, but managed to fall; European equities were higher. Commodity prices fell, yields were a little lower and the USD was lower against the G3 but stronger elsewhere. Measures of market volatility were mostly higher.

China’s equity markets continue to fall yesterday, the real extent to which we can’t say: given many stocks are suspended and others are limited in the amount they decline. While the comparisons to 2007/08 are being made, this is not the financial crisis mark II, but a different situation. But negative nonetheless. It is early days, there are possible traditional monetary policies to be put in place for example, but the level of concern it is creating, and volatility, and impact on commodity prices have the potential to leech into broader markets. Australia included. So for today, we are in Netflix mode, rather than the soap opera.

To follow the linkages, monitor this trail: The decline in Chinese equities has slowed demand for cars (they were negative for the first time in two years in June), which lowers the demand for steel, which lowers the price of Australian iron ore, which weighs (further) on housing prices in the Pilbara (as well as the AUD). Iron ore dropped 10% yesterday and is now below $50, the lower it goes the more it drops below break-even for many of the new mining entrants. That is why mining companies are seeing lower prices outside of China.

There was little new information from Greece overnight, it does appear that they must have a credible proposal to take to the Institutions by midnight Thursday, otherwise they are out. That is the hardline stance, but we have seen that soften before. A positive was the holding steady of the ECB’s ELA, which while keeping the capital controls, does allow the banks to remain solvent. EUR was supported on this.

In the US, the FOMC minutes take a backseat given we know that events have overtaken them. Members were balanced but saw some risks from Greece and China. There was a note of rising wages, but mostly the news was modestly dovish. The Fed’s Williams spoke and noted that they could still hike in 2015 and that Chinese stocks were not an important concern for the US.

Coming Up

It is a busier day today, on the data front, but they will provide only a small diversion from the twin distractions of China and Greece. Because, no matter what happens in the data, if these two risk events worsen (or dramatically improve in short order) then that is likely to trump a really good Australian payrolls or hawkish Fed tone. Weak data would just add to the mood.

In fact, NAB expects a softer than market headline employment outcome (-17K) after the super strong outcome last month. The market expectation is for a flat outcome. The markets are likely to react in the short term, but take their overall directional guide from the global events.

The Bank of England meet today. No change is expected and in this case there is no statement: we have to wait for the minutes to provide details of the hawkish dissenters. And, in the current circumstances, most central banks are likely in wait and see mode.

There are a raft of Fed speakers: Kocherlakota (non voter, dove), Governor Brainard (voter, dove) and Fed member George (non voter, hawk) are all speaking on the economy and policy. A diverse spectrum of starting points here, so we aren’t expecting a whole lot of clarity. Governor Brainard’s guide is likely the one the market will take to heart.

China is set to release CPI data today, usually a big market move but perhaps not so much today. A modest increase in the annual rate is expected; an unexpected drop would cause the most reaction as bets for more easing would rise.

Overnight

On global stock markets, the S&P 500 was -1.50%. Bond markets saw US 10-years -5.35bp to 2.20%. On commodity markets, Brent crude oil +0.79% to $57.3, gold+0.5% to $1,158, iron ore -10.1% to $44.59. AUD is at 0.7423 and the range was 0.7372 to 0.7459.

  • FOMC minutes slightly dovish
  • Fed’s Williams still see a hike in 2015

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