Overnight: Tina’s Day Off

By Greg Peel

Carnage I

US$7.00 to the renminbi is considered the line in the sand which the PBoC currency peg will not cross on fear of a flight of capital out of China. Bearing in mind this exchange rate is USD-RMB — upside down, if you like, from AUD-USD – any value above US$7 means the renminbi has been allowed to devalue. That’s what happened yesterday, and that’s why global markets have panicked.

Beijing has dismissed accusations of currency manipulation, suggesting the currency was pegged in line with market pressure. But on the same day, the Chinese government ordered state-owned enterprises to stop buying US agricultural products.

In other words, this is retaliation. If China’s currency devalues, its exports become cheaper in the US, thus offsetting the impact of tariffs. However, it also means Chinese purchasing power is diminished. That’s not good for those countries which do not have tariffs on China but rather have an economy based on exports to China.

…One reason why materials (-2.8%) was the biggest loser yesterday, outside of IT, which plunged -5.2%. While IT tends to follow the Nasdaq, it is also the sector of high-growth, high-multiple smaller caps which are always the first to be jettisoned when the balloon starts losing altitude.

But all sectors were sold off yesterday, with consumer discretionary faring the best on only -1.1%. That sector had already been hit after Trump’s latest tariffs were announced. All sectors outside of IT posted losses between -1.1% and -2.5%. There was no rotation to defensives, it was a Sell Everything session.

We could call it the day the market woke up to the fact that at the old high, reached on July 30, the emperor had no clothes.

The top four individual losers in the ASX200 were all “tech” names, albeit Hub24 ((HUB)) is actually a financial. Appen ((APX)), WiseTech Global ((WTC)) and Afterpay Touch ((APT)) all fell between -8 and -11%. Rounding out the top five was Fortescue Metals ((FMG)), down -7.2% after having been carted on Friday as well.

Gold miners were inevitably among the winners on the day, as well as Oil Search ((OSH)), which rose 2.9% on news the PNG government does not plan to meddle with the PNG LNG contract.

In other news, data showed Australian auto sales fell -2.8% year on year in July, down -4.7% in NSW in particular. Australia’s biggest selling vehicle, the Toyota Hilux, saw sales fall -10.4%.

Australia’s services sector PMI fell to 43.9 from 53.2. I long ago stopped highlighting Australian PMIs given inexplicably wild month on month volatility, completely at odds with incremental monthly movements in the rest of the developed world.

Carnage II

In case you’re looking for some good news, the Dow rallied around 200 points at the death. But that took it from down around -950 to down around -750.

Aside from China retaliation, Wall Street was also spooked by the US services PMI falling to 53.7 from 55.1. See what I mean?

Falls on Wall Street last night echoed those in Australia yesterday. Every S&P500 sector closed in the red, and the hardest hit was tech. A -5% fall in Apple, which is right in the trade war firing line, was responsible for a big lump of the losses in all three major indices.

Yet other mega-caps such as Amazon and Facebook, which have no connection with China, were also thumped. So again, it was Sell Everything.

…And move into bonds and gold, despite very low yields in the former and no yield from the latter. The US ten-year bond yield fell -12 basis points to 1.74%. Gold jumped another twenty-plus dollars.

The VIX volatility index jumped 40% to 23, out of “complacency” territory.

If there is any consolation it could be that spikes like these in the VIX often signal an overwrought response, given such a move represents a flight into put option protection, and the sellers of those put options have to sell the market to hedge, which pushes the market down, which prompts more put option buying…

But on the subject of complacency, the S&P500 hit 3000 for the first time last month on just that – complacency that the Fed would just cut rates to prop up the economy (or market), and complacency that a trade deal would eventually be reached one way or the other, supported by a need for Trump to get a “win” ahead of an election, and the fact he hates seeing Wall Street fall.

We’ve since had a Fed sounding cagey about another rate cut and an escalation in a trade war that has no end in sight. We may yet get a September rate cut from the Fed, given one feeds the other.

In the meantime, PE multiples have been sharply pulled back to more average levels and the US earnings season as a whole has been rendered somewhat moot, other than to suggest softness in earnings was not as bad as feared earlier in the year.

But uncertainty has now overcomes complacency, and beyond the trade war and the Fed, we have Hong Kong and Brexit to worry about.

Commodities

If you’re holding positions in mining stocks today you’d want to hope they’re nickel miners. Fears of a supply risk in Indonesia are responsible for nickel bucking the trend. Otherwise, base metal price falls were somewhat offset by the fall in the US dollar, and the fact they all got carted on Friday night.

No such luck for iron ore, where Steve Smith would have come in handy.

The oils are always first to go on trade war escalation.

If the Chinese can’t move their currency out what are they going to buy to preserve capital? Gold (and bitcoins).

The US dollar index is down -0.6% and the Aussie is down -0.5% at US$0.6756. The renminbi is also down, leaving the yen as the typical safe haven.

Today

Strap in. The SPI Overnight closed down -110 points or -1.7%.

The RBA meets today. Suddenly things are looking more urgent.

We’ll also see numbers for trade and job ads.

Earnings reporters today are all REITs, most notably Westfield landlord and top twenty stock Shopping Centres Australasia ((SCP)).

The Australian share market over the past thirty days…