End Of Austerity In Sight? - Markets This Morning

• Most global markets were down on the U.S. Labor Day
• Oil prices start today below U.S. replacement costs
• Will global stimulus beat the bear market?

 

 

Many U.S. traders take the end of August off, and some stay out until Labor Day, after which children in the northeast U.S. head back to school. That’s another way of saying it will be all hands on deck at trading stations around Wall Street today. Action stations could mean big trading action.

Yesterday’s action in global markets was negative, as China’s Shanghai stock index fell 2.52%, and Hong Kong’s Hang Seng lost 1.25%. Japan’s Nikkei, benefiting from a weak yen, was up .36%. The French CAC-40 was down 2.25%, the German DAX was up .7%, and England’s FTSE was up .52%.

Changes in the value of stocks is often reflected in changing values of currencies, and yesterday people around the world were buying dollars. The Chinese Yuan was down against the dollar, to 6.37, the Japanese Yen dropped against the dollar to 119.36, and the Euro fell to 1.17 to the dollar.

In the commodity pits West Texas Intermediate (WTI) oil, the primary U.S. grade, will start today at $44.26, and Brent oil at $47.63. These prices are considered below replacement costs, at least for U.S. producers. They will be looking for sustained higher prices before investing in new production.

Is This The End of Austerity?

The big news of the weekend is the possible end of austerity in Europe, caused not by domestic political pressure but external pressure from a flood of refugees from the Syrian civil war. Their fate dominated news headlines, with the German Chancellor, Angela Merkel, offering the quote of the weekend, "Without human rights we are lost."

Wherever the migrants land, they will need services, and services will cost money, money that has to be taken in taxes or released through central banks, weakening local currencies. The refugee crisis could make a continued commitment to policies of fiscal discipline impossible, and that might actually benefit markets, as many critics have charged that German austerity was hindering global growth.

Anticipating this, European shares were led upward yesterday by commodity stocks. Commodities trader Glencore (GLNCY), based in Switzerland but traded in England, said it would cut debt, raise cash with new shares, and cut production to bolster prices, sending its  shares up 7%. Glencore will cut coal and copper production at some old mines in Congo and the Zambia in order to deal with low prices, while increasing production at newer mines with lower costs.

A Running of the Bulls?

U.S. analysts are not yet ready to call time on a bear market that has seen most Dow stocks fall 20% into bear market territory, but some are starting to see some breaks in the clouds, arguing for instance that the U.S. economy is less dependent on China for growth as many think. The value of China’s dollar reserves actually fell last month, thanks to the Yuan’s devaluation and sales of dollars meant to prop up the Chinese market. China’s reserves have actually been falling for a year now.

With China stimulating their economy to get growth back, Japan stimulating its economy to get any growth, and Europe stimulating its economy to absorb the refugee flood, the fear of a Fed rate hike in September may well ease today.

Given the fact that U.S. unemployment did fall last month to 5.1%, and the dollar remains strong in world markets, the threat of a Fed rate hike mid-month may cause some traders to look for the silver lining and do some buying.