THE SHERWOOD OVERNIGHT UPDATE REPORT 17th December 2014 US and European markets rally as Russia raises interest rates by 6.7 percentage points. Summary • Russia pushed official interest rates up by nearly 7 percentage points yesterday to stem the decline in its currency and inflation. Although the Rouble declined further, regional sharemarkets rallied led by gains in energy and materials stocks but outside Europe, gains had more of a cautious tone and seemed to lack deep conviction with continued demand for safe haven plays including government bonds and the Yen. Meanwhile, oil prices declined further as a disappointing Chinese manufacturing PMI pressured energy demand assumptions, but this was partially offset by the best batch of European data for nearly half a year which boosted sentiment. Elsewhere there was some downgrades to IT stocks in the US which capped gains, and within the last hour of the US session the MSCI World Index is higher (+0.3%) with advances in Europe (+2.1%) and the US (+0.1%) offset by a decline in Asia (-0.9%). • In other financial markets, 10-year government bond yields were all down a couple of basis points (US Treasuries down to 2.07% which is a fresh 19-month low, UK gilts declined to 1.77% which is a fresh 20-month low and Japanese bonds closed at 0.3626% which is a fresh all-time low), high beta currencies were higher against a steady Greenback (AUD +0.03% to 82.16 and the Euro +0.4% to 124.90) and commodities all declined: • Dr copper -1.7% at USC290.00 per pound. • gold -1.1% to USD1, per troy ounce. • oil -0.6% to USD55.57 per barrel. • iron ore -0.5% to USD69.02 per metric tonne in US futures markets. • base metals were all lower. • The SPI suggests that the Australian market will open points +16 higher (+0.3%) at 10am AEST. Market news • Asia - Asian markets closed lower yesterday with a sharp decline in the Japanese market having spill over effect to most of the region after a weak US market saw sentiment weaken at the opening. The Yen was sharply stronger after Moscow raised its interest rate overnight in response to safe-haven flows. and this sparked a price decline in exporters. Greater Chinese markets were the exception to the regional decline as they staged yet another afternoon rally in response to the usual suspect of additional stimulus somewhere in the economy, although no one seems capable of identifying where that will be - today it was a third airport for Beijing which seems less believable than the previous sessions new inter-land railway idea. By the regional closing bell in Mumbai, the MSCI Asia Index was lower (-0.9%) with losses in Singapore (-2.4%), India (-2.0%), Japan (-1.9%), Hong Kong (-1.6%) Korea (-0.9%), Australia (-0.6%) and Taiwan (-0.4%), with only China (+2.3%) closing in positive territory. In the local market the S&P/ASX 300 Index was -33 points lower (-0.6% to 5,092) with the index down to a 10-month trough with nine sectors declining led by energy (-2.1%), materials (-1.9%) and healthcare (-0.6%), with only utilities (+0.6%) recording an advance. •. Europe - European shares closed higher as the Russian central banks raised interest rates by 6.7% to 17% which seemed to give some comfort to investors that the decline of the Rouble will begin to ease. However, oil prices declined further and the Russian Rouble also depreciated, so time will be the judge of that policy solution. Meanwhile, economic data was generally above expectations with the regional PMI, ZEW survey of German investor confidence and the regional trade balance all coming in in positive territory. However, UK inflation was below expectations and a poll in Greece saw the anti-Europe Syriza party well ahead in the upcoming Presidential election which could be troublesome for markets if it is accurate. By the regional close, the EuroStoxx Index was higher (+2.1%) with gains led by energy (+3.0%), materials (+3.0%) and industrials (+2.7%). In the major markets, gains were led by Germany (+2.5%) with the UK (+2.2%) and France (+2.2%) also posting double century gains. In the periphery markets performance was less upbeat although most markets rallied with Ireland (+0.9%), Portugal (+1.0%), Spain (+1.8%) and Italy (+3.3%) all posting gains, whereas Greece (-0.3%) was one of the few regional decliners. • US - on Wall Street, with around 45 minutes left in the trading session, US equities are higher in a relatively lacklustre session. Economic data was not particularly constructive with housing finance and approvals both coming in below consensus. In the corporate space, broker downgrades to Google and Microsoft put the handbrake on any market advance and meant the NASDAQ has been in negative territory all day. Within the last hour of trading, the Dow Jones Industrial Average is up +38 points (+0.2% to 17,219), with the S&P 500 (+0.1% to 1,991) and the NASDAQ (-0.4% to 4,587) posting mixed results with six sectors currently trading up led by energy (+1.6%), telcos (+0.9%) and industrials (+0.8%), whereas IT (-0.5%) and consumer discretionary (-0.8%) are the only noteworthy decliners. Tuesdays economic news • Australia/Asia - In its December monthly board meeting minutes, the RBA acknowledged calls for a rate cut in Australia, with the remainder of the minutes broadly unchanged from the November meeting. Meanwhile, Chinese economic data was mixed yesterday with the December flash manufacturing PMI declining to 49.5 from Novembers final 50.0 level with new orders, employment and prices all coming under pressure, but this was partially offset by new export orders which increased at a faster rate. This reading provides authorities with more ammunition to provide policy stimulus roads and a third airport for Beijing. •. Europe - European economic data was constructive with the October trade balance (€19.4 billion) coming in well ahead of consensus (€18.2 billion) and the September reading (€17.7 billion). Meanwhile, the preliminary November regional manufacturing PMI rose solidly to 50.8 (relative to consensus of 50.5 and the October result of 50.1) and 51.9 for the services sector (51.5 and 51.1), with improvements in France in particular, although it still remains in contraction territory. Similarly, the German ZEW survey of investor sentiment rose for a second consecutive month in November with economic sentiment rising to 34.9 which was better than consensus of 20.8 and the October result of 11.5. Elsewhere, UK inflation came in slightly below consensus at +1.0% y/y relative to +1.2% y/y. Overall, it was a constructive set of economic data prints, although a lot of water has to under the bridge before we can say that things have turned the corner in the worlds largest trading block . US - US economic data was a bit weak with new housing starts (1.028 million versus street estimates of 1.040 million) and building permits (1.035 million relative to 1.060 million) both coming in on the wrong side of consensus. However, these data points are notoriously noisy and would not deter the US Fed from their policy path with activity now being supported by lower bond yields which will help offset the impact of the higher US dollar. Todays major data releases Australia/Asia • Economics - no major domestic releases, but there is the November Japan trade balance (Oct: -¥710.0 billion). • Equities - Ten Network Holdings has its annual general meeting while Boart Longyear has an extraordinary general meeting for shareholders to vote on a recapitalisation program. Meanwhile, LatAm Autos and oOh! Media list on share market. Europe/US • Europe - October UK labour market report (Sep: unemployment 6.0%). • US - December US Fed FOMC meeting minutes and November US CPI (Oct: 0.0%). What is the key investment message overnight? The Russian authorities have tried a lot of measures recently to slow the depreciation of the currency and nothing seems to have worked and the rate rise by the Russia central bank smells of desperation. The move was driven by the need to limit the risks of devaluation and inflation that have significantly increased of late, with the Rouble having declined by more than iron ore prices in 2014. The size of the rate rise is truly a shock-and-awe approach which has worked previously for several emerging markets central banks over the past 18 months including Turkey, Brazil and South Africa, who were also suffering from a fierce currency sell-off and tried to take short-term speculators out of the market. In essence, the Russian central bank is informing risk speculators that it will be on the other side of a short Russian Rouble position which provides a floor for the downward momentum to ease, at least for the time being. But the question then becomes what will happen to the Russia economy which is already suffering from near -50% decline in oil prices and from international sanctions which is hurting trade and making it very difficult for Russian corporations to refinance their debts. Russia may not yet be on the brink of a financial crisis but it is close to losing its investment-grade status and a crisis could well follow if things don’t rapidly improve and at this stage I dont think they will. Regards Matt Sherwood Head of Investment Research
Posted on: Wed, 17 Dec 2014 07:22:27 +0000