The US dollar was hammered, the Aussie dollar rose to 0.7650, and stocks were bid in the wake of a very dovish speech from Fed chair Janet Yellen overnight. Yellen reiterated her cautious approach to raising rates and rebuffed her more hawkish colleagues who were on the hustings last week talking about raising rates as soon as April.
The washup is that the ASX200 SPI futures contract is up 33 points, 0.7%. That suggests a better day locally if traders have the gumption to buy the banks and other stocks today.
Elsewhere crude is crashing again, down another 2.5% to $38.39. Iron ore has fallen again but a weaker US dollar has helped gold lift back to $1241.
Here’s the scoreboard (7.44am):
- Dow: 17,633, +98 (+0.56%)
- S&P 500: 2,055, +18 (+0.88%)
- SPI200 Futures (June): 5,026, +33 (+0.7%)
- AUDUSD: 0.7627, +0.0089 (+1.18%)
Now, the Top Stories
1. The Aussie dollar is bid, above 76 cents and there is nothing the RBA can do about it. I remember when I first became a currency strategist and used to talk about the US dollar as a key driver of the Aussie. Traders and investors used to look at me as if I had two heads, even though every currency is a pair – AUDUSD, NZDUSD, GBPUSD, EURUSD and so on. It’s still an amazingly under-appreciated driver of the Aussie because people seem to want to focus on commodities and interest rate differentials.
But the overnight move in the US dollar and, as a result the Aussie, highlights just how important the other side of the Aussie dollar can be. See item 4 for my take on Janet Yellen’s speech but the key for forex traders is that her dovishness has kicked the AUDUSD up and through 76 cents. Key here is that because it’s the US dollar side of the AUDUSD exchange rate that is driving the sharp move higher, there is precious little the RBA can or is likely to do about the Aussie’s strength. That’s because while the Aussie is the second strongest of the G10 currencies with a gain of 1.3% (the NZDUSD is up 2.02%) it is overall US dollar weakness which has been the key feature of the night. Euro is up 0.94% at 1.1299, GBP is 0.93% higher to an incredible 1.4386 and USDJPY is 0.7% lower (yen stronger) at 112.63.
Of course, Tim Toohey at Goldman Sachs was the first to highlight the likelihood that a stronger AUDUSD would lead to an RBA cut as soon as May – that’s a growing possibility. But as the Kiwi’s recent performance shows – remember the RBNZ shocked the market with a cut recently – that is no guarantee that the currency will fall sustainably.
2. A good day for US stocks should resonate on the ASX today. Yesterday was another shocker for the ASX. The market lost around 1.6% as the banks were hammered again and the mining giants were slammed in London as well.
But since Yellen’s speech at 3.30am, US stocks have rallied and that’s pushed the SPI200 futures up 30 points. After the hammering the local market took either side of Easter, that’s not the greatest performance ever and speaks to some enduring concerns that local traders have. Part of that reticence might be the break of support yesterday on the ASX200 – traders will be watching to see if the 200 index can rise back above 5040/55 before they get too excited.
3. Let’s talk about Australia’s banks. It was notable yesterday that even though the Big 4 were under pressure all day, the selling pressure intensified once the story about the collapse in prices in some parts of the Melbourne apartment market hit the wires. The markdowns from purchase price for some resales are of such a magnitude as to indicate some real stress in the market and troubling times ahead. Of course, that should be no surprise to anyone who understands markets as well as both the level of supply coming onto the market and the impact on settlements that APRA’s crackdown on investment lending could have.
But what this news has done is open up another front in the war, which is the banks against the turning, or perhaps, changing credit cycle here in Australia. It is more likely than not – as Luci Ellis, head of the RBA’s Financial Stability Department, highlighted in a recent speech – that the losses that are likely to occur in the apartment market are quarantined to that sector of the housing market. But for investors, it’s just another item to add to their list of headwinds for Australia’s big 4.
The question for traders today though is with a better performance on Wall Street, are they game enough to buy the banks again? Surely they are!
4. Janet Yellen smacked down all the Fed speakers who said April was ‘live’. If there is a civil war at the US Fed and its FOMC then it’s out in the open after Yellen rebuffed her more hawkish colleagues – who last week said the April meeting was in play – with a very dovish speech that has some commentators suggesting even June is now off the table.
Myles Udland reports that Neil Dutta at Renaissance Macro said the upshot of this commentary is clear: The Fed will not be raising interest rates in June.
I’ve read the speech twice this morning – it’s long but worth it – and there is no alternative but to agree with Blackrock’s Rick Reider who said after the March FOMC meeting that “There’s a takeaway [from the Fed meeting] that I think is extremely important. The Fed has made the determination that the risks of letting employment and inflation run hotter is the risk they’re willing to take.”
Yellen reiterated that message this morning saying (our emphasis):
Given the risks to the outlook, I consider it appropriate for the Committee to proceed cautiously in adjusting policy. This caution is especially warranted because, with the federal funds rate so low, the FOMC’s ability to use conventional monetary policy to respond to economic disturbances is asymmetric. If economic conditions were to strengthen considerably more than currently expected, the FOMC could readily raise its target range for the federal funds rate to stabilise the economy. By contrast, if the expansion was to falter or if inflation was to remain stubbornly low, the FOMC would be able to provide only a modest degree of additional stimulus by cutting the federal funds rate back to near zero.
That’s why the US dollar is weaker today, it’s why stocks went bid. Yellen is in no hurry to raise rates and anyone who opposes her looks likely to be steamrolled.
5. Oil is crashing again. After another failure at its 200 day moving average last week, the price of oil has continued to slide. Last night WTI lost 2.51% to $38.40 while Brent dipped a similar amount to $39.27. Clearly technical factors are at play, as the reversal of the 200 day moving average shows, but equal clear is the fact that while traders may be hopeful that the mid-month OPEC/non-OPEC meeting may reduce excess production, fears of continued oversupply remain.
Technically, the price of WTI looks like it could fall to at least $36 a barrel and the FT reports this morning that hedge funds “have established a record bet on rising oil prices, just as many market participants think a two-month rally could be running out of steam”. That will add weight to the fall if $36 breaks.
6. Brazil might be about to lose its president. Emerging markets are in strife as they struggle with slowed global growth and budget positions set for the good times. Nowhere is this more obvious than the struggles in Brazil where President Dilma Rousseff is accused by her opponents of dodgying up data to hide the depths of the weakness the economy is facing. As Linnette Lopez reports, Brazil’s largest political party, the Brazilian Democratic Movement Party (PMDB), has said that it will leave its coalition with the ruling Workers Party (PT). That puts a Rousseff impeachment in play.
It’s worth remembering Brazil is the world’s seventh largest economy and its troubles could infect other emerging markets. Lopez has more here.
Key data for the past 24 hours (with thanks to BNZ markets)
JP: Retail sales (m/m, %) Feb: -2.3 vs. -0.9 exp.
CA: Raw mat. price index (m/m, %), Feb: -2.6 vs. -0.9 exp.
US: Consumer confidence index, Mar: 96.2 vs. 94.0 exp.
US: Yellen’s: appropriate to “proceed cautiously”.
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And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
One of the keys to today’s trading will be whether the strong US markets can stop the rot for bank shareholders. It seems likely but more evidence of basing behaviour will be needed from a chart point of view. Recent downward momentum has been powerful. A steady to somewhat higher day for banks would leave them inside and towards the bottom of yesterday’s trading range – indecisive behaviour at best.
Eyeballing the chart below suggests a bit of mean reversion between provisions for bad debts and cash earnings looks possible for the banks in general and Westpac in particular. This would be a negative for earnings growth. However, bank loan books suggest we are far from a serious problem at this stage. Moody’s calculates the bank’s direct exposure to the resources sector is only around 3% of loans.
As far as housing is concerned, there is plenty of buffer. One of the positives in Westpac’s report on Friday is that 74% of mortgage customers are ahead on their loan repayments.
If Westpac does hold today it will be pausing at the 61.8% Fibonacci retracement level. Given the strength of recent downward momentum, however, it might ultimately end up testing the 78.6% retracement around $28.90
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC