The strong Chinese close and the mixed US session sets markets up for an uncertain open. Currently, the ASX is looking to open down after its strong session yesterday. But the big question will be whether Chinese markets can hold onto their gains of the past two days.
The Chinese cash market opens at 12.30 pm AEDT and will again have enormous bearing on how Asian markets close today. The Shanghai Composite does look a bit precarious after its 3% gain, retaking the 3000 level yesterday.
Personally, I think a trip down to 2500 still seems likely, and is probably needed to purge some of the “irrational exuberance” of the market seen in 2015. But momentum does look to be back into Chinese equities and that should be good for markets globally – at least in the short term.
Divergence in WTI and Brent overnight: The Brent March contract gained 2.2%, while WTI for February delivery dropped more than 3%. A couple of factors seem to be weighing here. The WTI February contract expires today, and then changes over to the March contract. Although the March contract also lost 1% overnight, it was nonetheless trading at a US$0.77 premium to Brent. Tonight will also see the release of the weekly EIA data on US oil inventories and the market expects to see inventories increase by a further 2.75 million barrels. Concerns of another inventory blow-out look to be weighing on WTI.
Metals continue their rise, despite the fact further falls seem inevitable. Metals prices appear to be moving in lockstep with gains in Chinese equities at the moment. Copper gained 0.7% on the LME and Qingdao iron ore was up 0.3%. Improved Chinese sentiment spilled over to equities in the materials space as well, with the materials sector as a whole gaining 2.5% on the FTSE overnight.
BHP will be in focus today as it releases its Q2 output numbers. Current market expectations are for 59.3 million tons in the quarter. But given RIO missed estimates and downgraded its output forecasts into 2016 yesterday, it will be very interesting to see if BHP lowers its output forecast for 2016 as well.
Chinese data yesterday made it pretty clear that momentum in its economic activity would steadily decline into 2016. A lot of planned fiscal spending for Q1 2016 was brought forward into Q3/Q4 2015, which means investment spending could decline quite sharply in 1H 2016. This will undoubtedly affect Chinese demand for commodities. Chinese iron ore stockpiles have risen 19.2% since they bottomed in June. The rise in stockpiles and the iron price is priming the market for a sharp reversal in the fortune of the iron ore price in a months or two.