Sun setting on northern summer trading

The current value trading through US and European markets is mild at best, and this is leading to fairly large ‘mood signs’.

With the FTSE shut for a summer bank holiday, volumes in Europe last night were lighter still and both sides of the Atlantic finished in the red. With investors away from their desks, trade action like what was seen last night in the US looks stronger than it actually is. The fear in the market today is the escalation of the Syrian crisis, with Secretary of State John Kerry stating that the President will hold Syria’s government to account for the use of chemical weapons.

The comments saw the markets free-falling into the close, having traded in the green for over three quarters of the day. The Washington Post is now reporting that it’s not a question of if the US goes to war with Syria, it’s a question of when, with the al-Assad regime now ‘crossing the red line’.

This caused gold to shoot up and cross the $1400 an ounce mark, and it will see the gold plays continuing their recent surge. Yesterday we saw Silver Lake (SLR) entering a trading halt to raise $47.5 million in a capital rising. The surge in the gold price may actually trigger several more of these gold plays to take advantage of their recent share price surge and rise capital themselves.  

Energy is also being watched very closely as a declaration of war by the US will see a spike in world oil prices. This is the worst possible outcome at the current point in time – and from a humanitarian point of view.

If war does eventuate, higher fuel prices are going to add a third impact point to emerging markets as their currencies were again smashed overnight.  The Indian rupee fell to 65.53 to be back within 0.8 rupee of its all-time low, the Brazilian real and South African rand also shift lower on the news.

However oil actually declined for the first time in three days last night as the US census bureau released very disappointing durable goods data. Core durable goods (excluding transport items) fell -0.6% versus an expected gain of +0.6%, while durable goods orders (including transport) fell 7.3% versus -3.0%. The major drop in transport orders saw demand of crude falling and that coupled with a Libyan port reopening overrode the Syrian crisis news to see oil lower. 

Also on the wires, the two and ten year treasury yield gap continued to widen, at 2.55 percentage points; this is twice the monthly median gap 1.23 points. The all-time record is 2.93 points which was reached in February 2010 and the current steepening of the yield curve is the fastest pace since 2009.

This shows bond bears are sharpening their claws and are positioning themselves for tapering. We have stated several times that bond yields will signal the next stage of volatility and on current pace, we expect this to filter through to the equity market in the coming weeks as terms such as ‘credit risk’ and ‘borrowing cost’ start to hit the newswires.

What might cause this to quicken is news out of CNBC quoting sources from the White House that are predicting Lawrence Summers will be named Fed chairman in the coming week and is currently being ‘vetted’. If this is the case, his slight more hawkish than the current ‘group of five’ may see QE ending faster than currently planned. From a market point of view this would increase volatility as it would prefer vice president Janet Yellen as she is one of the more dovish on the board and is backing the current time line plans.   

Moving to the local market and earnings season will see releases from Beach Energy, Flight Centre, AWE, McMillian Shakespeare and Billabong. It will be interesting to see how big of a black hole BBG is in considering how many takeover bids fell through FY 13 due to ‘the due diligence process raising concerns about BBG’s books’. The local market looks set to have a pull back today following the moves out of the US markets.

The opening calls are suggesting the ASX will shed 22 points to 5114 (-0.42%) with BHP’s ADR suggesting the stock will follow the global drop, losing eight cents on the open, to $35.50 (-0.22%). 

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