Janet Yellen’s dovish comments continued to reverberate around global markets overnight. That helped European and US stocks rally again and saw the US dollar under selling pressure once more.
At the close of play, stocks in London and Frankfurt were 1.6% higher while in the US, the S&P 500 rose 0.44% to 2063 and looks on track for a test of resistance at 2088.
That positive tone offshore has kicked the ASX SPI 200 futures 42 points higher and it looks like the ASX should have a positive open. The question is whether stocks can hold those gains or whether they’ll turn tail and run again like the buyers did yesterday.
On forex markets the Aussie traded above 77 cents on more US dollar weakness. The Kiwi remains a standout, also up more than 1% to 0.6924 this morning.
Turning to commodities and oil traded around a bit but finished largely unchanged at $38.27 while copper lost more than 1% to $2.19 a pound. Iron ore dropped again.
Here’s the scoreboard (7.44am):
- Dow: 17,716, +83 (+0.47%)
- S&P 500: 2,064, +9 (+0.44%)
- SPI200 Futures (June): 5,035, +42 (+0.8%)
- AUDUSD: 0.7670, +0.0045 (+0.58%)
Now, the Top Stories
1. BHP and Rio roared higher in London trade – ASX has to rally today. Surely? Like the little engine that couldn’t, the ASX opened sharply higher yesterday, ran into overhead technical resistance and then collapsed to finish just a little above the 5000 mark. It must have been a disappointing day for the bulls with plenty of head scratching about why the market struggled, the banks couldn’t hold onto gains and certainly why the market slipped back below 5000 in the hour before the close.
But overnight the SPI futures are up more than 50 points, while BHP and Rio both gained close to 6% in London trade. But traders are still not convinced about the banks, with the NAB’s ADR (American Depository Receipt) in New York the only one of the big 4 with a material gain of 1.3% overnight. Westpac and ANZ ADRs were up 0.61% and 0.17% while the CBA’s price fell 0.12% according to my Reuters terminal.
Stocks are likely to open at resistance again today – can they push through? Will some, or all, of the massive $8.6 billion dividend flow this Friday find its way back into the market to support prices?
2. The Aussie dollar traded above 77 cents overnight – what’s next? David Scutt reported yesterday that Richard Grace and the currency strategy team at the CBA are now forecasting the Aussie will rally to 80 cents next year. He’s bullish the local economy, reckons commodities are bottoming and the Fed won’t be too scary on the rate rise front which means the US dollar won’t roar, as many – including the RBA – had expected.
It’s a bullish stance that is finding support in market prices. Last night’s high of 0.7709 is getting closer to the 78 cent retracement level many traders are looking for. The Aussie ran into some option-related selling and it’s back at 0.7675 this morning but still relatively strong.
3. Bill Gross reckons bond fund managers can’t count and are investing using the greater fool theory. The greater fool theory of investing says that traders and investors buy a stock, currency, commodity, bond, or other tradeable asset, which they know is worth the price but which they are betting someone else will buy off them at a higher price. It’s part of the process of how bubbles form and it’s part of the “ponzi” phase of economist Hyman Minsky’s Financial Instability Hypothesis.
So it is interesting that bond investing heavyweight Bill Gross has called buyers of bonds with negative rates out on the strategies they are using at the moment. Essentially he says that bond traders are being tricky in thinking they can beat the ECB by never planning on holding bonds to maturity. Bob Bryan has more on that here.
But for me, the big message in Gross’ latest newsletter is that central banks have distorted markets and goosed asset returns, which is in the end not sustainable and with negative rates increasingly gaining traction around the globe, it means that “a stock investor will earn much, much less than historically assumed or perhaps might even lose money herself”.
“Yields have been at 0% or negative for years now across most developed markets and to assume that high yield bond and equity risk premiums as well as P/E ratios have not adjusted to this Star Trek interest rate world is to believe in – well to believe in Zeno’s paradox.”
4. Gold has given back it’s post-Yellen gains. Gold is having a good year. Nothing like fear and uncertainty to kick the world’s favourite safe haven higher. But prices got ahead of themselves and when that happens the market needs to consolidate. Which is exactly what gold has done since punching through $1260 earlier this year. Last night that consolidation continued as traders realised that while the world Janet Yellen is setting US interest rates for will weaken the dollar – good for gold – it is also likely to take the edge off traders’ fears.
So the shiny stuff has reversed all of yesterday’s gains and is back at $1225 this morning. The trader in me says this consolidation needs to trade back to $1195/1200 – or spend a very long time bouncing around – to test the bulls’ resolve. Time will tell.
5. Chicago Fed president Charles Evans just reiterated Yellen’s message that the risks to growth are down and rates won’t rise too fast. After being assaulted by the hawks in the run up to Easter, it’s the turn of the Fed’s doves this week to put their side of the story. Janet Yellen went uber-dove yesterday while overnight her message was reiterated by Evans.
He said “a very shallow path is the most appropriate path for policy normalization over the next three years”. He also said the risks to the economy are skewed to the downside.
“I see the distribution of future shocks as skewed in the direction of output running somewhat softer and inflation somewhat lower than what I have written down in my baseline projection,” he said, adding “this tilting of the odds strengthens the rationale for shading policy in the direction of accommodation and provides additional support for a gradual path in normalizing policy”.
6. This is part of what’s worrying Bill Gross as unsustainable – EM credit binge will exact painful price. Zero rates, negative rates have distorted the vlaues of other assets since the GFC as Gross outlined above. Investors are paying prices for speculative assets that they would never contemplate if rates were in the “normal” range. Possibly nowhere is that more obvious than in emerging market corporate debt markets.
The FT says that markets are underestimating the danger in corporate credit and I couldn’t agree more. Here’s how the paper reckons it might play out “weak public sector corporations risk infecting sovereign balance sheets precisely at a time when, owing to sustained weakness in growth, many are already under fiscal pressure”.
“As EM governments suppress corporate trouble, their own credit risk will probably rise, nudging their yields higher. The cost of equity then rises for every company, even those which are fundamentally sound, in sectors unrelated to the one in trouble.”
That means “the pain in EM corporate credit will begin with a lag, but it will very likely demand more than its pound of flesh. The collateral damage from it will be broader, and may last longer than in developed markets.”
Oh, and Ireland issued a 100-year bond last night at 2.35%. That’s a lower rate than the Australian government’s 10-year bond. Just saying!
Key data for the past 24 hours (with thanks to BNZ markets)
JP: Ind. production (m/m, %), Feb P: -6.2 vs. -5.9 exp.
GE: CPI (m/m, %, EU harmonised), Mar P: 0.8 vs. 0.7 exp.
US: ADP employment change (k), Mar: 200 vs. 195 exp.
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And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
There are 3 reasons to be nervous about this chart. It looks as though it’s finished an Elliot 5 wave advance; the slow stochastic is rolling over from the overbought zone above 80% and the price is flirting with a break of trend line support.
This fits with CSR’s negative exposure to a stronger Aussie Dollar together with mounting concerns that Australian dwelling construction is close to a peak. CSR’s 2 main businesses are aluminium and building products (Gyprock; Bradford; Monier tiles and others).
There is a positive though. CSR has an ongoing buyback programme for 10% of its stock. This will no doubt help support the share price.
Even so a clear break of the trend line could see a pull back to the 38.2% Fibonacci retracement around $3.00 so it might pay to be prudent at this stage. It would take a rally past the recent high at $3.37 to change this nervous short term outlook on the chart.
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC