August 25, 2015

Markets Today: “Oh What A Night”

Feeding off Monday’s 8.5%plunge in the Shanghai index and not much else, US stock markets have just closed with the S&P500 down 3.92%, the NASDAQ -3.81% and the Dow 3.56%. This masks much more extreme intraday volatility and which saw indices down more than 5% earlier in the US session.

Frankie Valli and the Four Seasons’ 1975 Classic was originally penned as a celebration of the end of Prohibition in 1933. That may not therefore seem like an appropriate title for today’s missive, though there will be more than a few traders and investors staggering out of their Manhattan offices grateful that the law still allows them to drown their sorrows in their local watering hole.

Feeding off Monday’s 8.5%plunge in the Shanghai index and not much else, US stock markets have just closed with the S&P500 down 3.92%, the NASDAQ -3.81% and the Dow 3.56%.  This masks much more extreme intraday volatility and which saw indices down more than 5% earlier in the US session.  The ‘fear gauge’ soubriquet commonly applied to the VIX (a measure of the volatility of the S&P 500 option market but which only goes up when stocks go down) hit a high of 53% today.  Earlier this month it was trading below 11, so a rally of 487% from intra month low to high (so far).

This is relevant in our part of the world since it feeds directly into our assessment of short term fair value for the AUD/USD rate (not that we recommend using this as a short term trading tool).  Last week, this was indicating short term fair value close to 80 cents; today, it is more like 68 cents.  It comes as little surprise therefore to come in to find that the AUD (and NZD – also a highly risk sensitive currency) are the worst performer in the G10 currency arena by a very considerable margin. AUD is down 3% on Friday’s close and the NZD -2.15%. There’s still a stewards enquiry going on as to the act low in the NZD/USD, but our New York desk suggest it looks like being 0.62, and which if right means that at one point last night the flightless bird was off 7.3%!  The low of the AUD meanwhile looks to have been somewhere near 0.7050, so over 4% down.

Pure volatility aside, we also need to remain highly cognizant of the strong correlation between the AUD and Asian EM currencies. More pressure on the latter today almost certainly means more downward pressure on the AUD at some point.  In this regard, the fixing of the USD/CNY rate by the PBoC this morning will be a very key focal point, after the central bank failed last night to do its now customary job of intervening to push USD/CNY down into the onshore (18:30 AEST) close.  Instead, USD/CNY blew out to above 6.40 from below 6.39 on Friday.  USD/CNH is closing in New York around 6.50, about 0.75% up on the day.  Though other Asia currencies has arguably already weakened in anticipation of further depreciation in the RMB, a higher fix today may well elicit a familiar feedback loop back to currencies in the rest of the region.

If there is a surprise looking at the overnight currency scoreboard, it is perhaps that currencies that have become quite pure oil price plays – CAD and NOK, have fared worse (oil is off 5.8-6.5%). The Canadian dollar is off little more than 0.5% and the NOK less than 0.2% lower. Less surprising is that the JPY – the traditional bastion of safe haven support in a crisis – has fared best with a near 3% gain (at one point USD/JPY traded as low as Y116.18).  Japan may no longer be running large current account surpluses but it enormous stock of external assets makes the currency ripe for large scale repatriation flows in a crisis. Also unsurprising is Euro strength (+2%) and where we continue to see purging of short positioning (more so we suspect in spot and options than currency futures).

Perhaps the other surprise to some is that US bond yields aren’t lower, especially at the front end of the curve (2yr Treasuries 4.5bps lower at 0.568%).  That the dollar is not stronger might be part of the story here, while incoming Fed speak is holding to the view that the US central bank will still make a first move on rates this year (really?).  Dennis Lockhart, considered a centrist and a current FOMC voter, has just said that the Yuan, dollar and oil prices all complicate the US outlook (no mention of stocks of course), but that he expects the Fed to begin raising rates this year.  Meanwhile ex-Dallas Fed President Richard Fisher has just told CNBC markets today were quite orderly.  He sounds more like an investment banker who just might be short of equities than a policy maker. Oh wait – he is.

Coming Up

There’s nothing much on the developed world calendar to detract from or amplify the ongoing travails of global stocks and currency markets.  The only thing on the domestic calendar this morning is the weekly ANZ Roy Morgan consumer confidence reading – safely ignored. Offshore tonight in Europe, as well as detail of German Q2 GDP we’ll get the August German IFO survey. The interest here should be in the extent – or otherwise – to which German business sentiment has been negatively impacted by China’s recent currency moves and sharply elevated concerns regarding China’s growth slowdown and how that is impacting demand for exports from Europe’s primary growth locomotive.

In the US tonight, its housing data courtesy of New Home sales (expected to rebound 5.8% after June’s 6.8% fall) and Case-Shiller house price indices, plus the Conference Board’s version of consumer confidence (see at 93.4 up from 90.9 in July).


On global stock markets, the S&P 500 was -3.90%. Bond markets saw US 10-years -3.13bp to 2.01%. On commodity markets, Brent crude oil -6.82% to $42.36, gold-0.5% to $1,153, iron ore -5.0% to $53.28. AUD is at 0.7159 and the range was 0.705 to 0.7318.

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