Stocks ended the week in the red on Friday after the US data flow printed on the negative side of the ledger.
PCE inflation was a little lower than the Fed would like at 1.6%, the Chicago PMI was disappointing at 50.4, and the University of Michigan consumer confidence read of 89 was lower than expected.
The US economy just won’t play ball regardless of the jobs market strength and that weighed on stocks and the US dollar which was pummeled by the yen and the euro. USDJPY at 106.24 is the lowest it’s been since October 2014 and the euro is closing in on 1.15. That didn’t help the Australian dollar though, which is languishing below 76 cents this morning and lower on the crosses.
Out over the weekend was the official Chinese PMI data which missed to the downside.
The wash-up suggests some mild downward pressure on the ASX200 today over and above the 6 point loss the SPI200 suffered at the close on Saturday morning.
Here’s the scoreboard (7.55am):
- Dow: 17,773, -57 (-0.32%)
- S&P 500: 2,065, -11 (-0.51%)
- SPI200 Futures (June): 5,225, -6 (-0.1%)
- AUDUSD: 0.7597, -0.0029 (-0.38%)
Now, the Top Stories
1. Buffettology – Warren Buffett had so much to say at Berkshire Hathaway’s annual conference over the weekend. You don’t have to be a devotee of the Warren Buffett and Charlie Munger school of “value” investing to learn something from the globe’s most exalted money manager.
Over the weekend, and during a six-hour Q&A session, Myles Udland reports that the Berkshire CEO and his vice chairman fielded questions about the company’s businesses, the world of negative interest rates, what the hardest part about being Berkshire Hathaway is, and how they got their sense of humour.
They ripped hedge fund favourite Valeant Pharmaceuticals to shreds calling it a “Wall Street scheme”, reiterated again that derivatives might be a “potential time bomb if you were to get a discontinuity”, and talked about the problems Berkshire Hathaway has as a result of its success.
He also said he’s going to keep drinking Coke and explained why the value part of investing is getting harder.
It was, as usual, great stuff.
2. RBA and Federal Budget. What a day Tuesday is going to be with the release of an RBA decision and the Federal budget.
The guesses are in and the “no change” crew have it by a small margin over those economists who believe the RBA will leave rates on hold at tomorrow’s meeting. Essentially the dividing line appears to be that the “no cut” camp says the economy is doing okay at the moment, so there is little need to cut just yet. Cutters mostly seem to say the CPI means the RBA has nothing to lose in stoking the coals of the economy’s fires a little further while at the same time achieving its goal of knocking the Aussie dollar lower. That last part is less certain given the temper forex traders are in at the moment. But no RBA move almost guarantees the Aussie will roar.
The focus will swiftly shift from Martin Place to Parliament House in Canberra. It’s increasingly looking like this might be the type of pre-election budget we’ve become used to over the years. Tax cuts for middlish Australia – I’m not convinced $80,000 is really middle given it’s above average, a bit of extra tax for high-income earners’ super, a big infrastructure spend and no doubt rhetoric about jobs and spending.
But for traders, economists, foreign investors, and the credit rating agencies, that’s all noise, smoke and mirrors really. We’ll be looking at the forecasts, commodity prices, growth, inflation, revenues, expenses and judging the credibility of them. I’ve got more in my weekly diary – see item 6 below.
3. Stock market end game? The stock market rally in the US and Europe has stalled lately after a solid rally from the first quarter’s lows. That’s because the stock rally is entering the end-game and faces multiple challenges which mean volatility is about to kick off again in the coming weeks, according to the global macro strategy team at UBS. While this is a US-centric note, the leadership position of the S&P 500 means it has ramifications for the local market here directly and then also secondary effects through stocks’ impacts on other markets.
One of the big reasons volatility will be back is because investors think central banks have lost their power. This is a theme I have been banging on about for ages. It’s why forex markets are in a bit of a funk – at least USDJPY is – and it is a real risk for asset returns in the year/s ahead.
4. Central banks have lost their way and are blowing bubbles all over the market. There’s an associated problem with these experimental policies central bankers are using. They are buying up all the high quality stuff, driving the price higher – yields lower on bonds – and crowding out investors into the riskier spectrum of assets.
Bob Bryan has a great article explaining how this is blowing dangerous bubbles in markets. “People are hiding out in stocks that they think are safe, growing assets and that is looking like it’s under pressure,” said John Bailer, the portfolio manager of The Boston Company’s Income Stock Fund. Yep, that they are.
5. The market might be turning on Apple – that’s uber important. No flame burns forever, some don’t even last a night, sang Mumford and Sons in their cracking tune Tomkins Square Park. It has ever been thus in love, life and markets. In a markets sense, it is because as traders and investors become more enamoured with a company, its earnings, its performance, its management and so on, more and more expectation builds.
At some point those expectations get ahead of the company’s (or country, in the case of Chinese data over the weekend) ability to deliver on those expectations. Inevitably there is disappointment. Management tries to keep investors happy. But that inevitably leads to more disappointment and at some point the darling is no more.
So while it’s too early to say the market is giving up on Apple, last week’s results have changed the conversation. Jim Edwards has an interesting article highlighting that some influential investment analysts who cover the company are starting to raise doubts about the way the company talks about its sales data. It’s the thin end of what might be a very big wedge. It’s an important behavioural shift for Apple and as I highlighted recently, perhaps the market.
6. And of course it’s a huge week on local markets. RBA, Federal Budget, NAB business survey, retails asles and building approvals make this a huge week for local traders and markets. Add in a dozen Fed speakers, the release of global PMI data to test the pulse of manufacturing and services industries and throw in the release of US non-farm payrolls on Friday and you get a sense of just waht a big week it is.
Here’s my diary of the week ahead from an Australian perspective. And for those who want to be a little bit more intimate with what’s going on in the US, here’s Jonathan Garber’s excellent take on the week ahead from a US perspective.
Key data for the past 24 hours (with thanks to BNZ markets)
NZ: Building consents, m/m%, Mar: -9.8 vs.10.8 prev.
NZ: ANZ activity outlook, Apr: 32.1 vs. 29.4 prev.
GE: Retail sales, y/y%, Mar: 0.7 vs. 2.7 exp.
EZ: Unemployment rate, Mar: 10.2 vs. 10.3 exp.
EZ: Core CPI, Apr A: 0.7 vs. 0.9 exp.
EZ: GDP, s.a., q/q%, Q1A: 0.6 vs. 0.4 exp.
US: Employment cost index, Q1: 0.6vs. 0.6 exp.
US: Core PCE deflator, y/y%, Mar: 1.6 vs. 1.6 exp.
US: Chicago PMI, Apr: 50.4 vs. 52.6 exp.
CH: Manufacturing PMI, Apr: 50.1 vs. 50.3 exp.
CH: Non-manufacturing PMI, Apr: 53.5 vs. 53.8 prev.
You can catch me on Twitter.
And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
Tassal Group (TGR: ASX)
Here’s a chart that looks as though it has the energy to keep swimming up river.
The Tasmanian salmon farmer’s share price started to rally off a neat re-test of trend channel resistance last week. The 200 day moving average and 38.2% Fibonacci retracement around $4.10 looks like where it’s heading. This is about 5% above the current price.
Tassal recently did a brave thing for an Australian producer, deciding to drop out of a tender to supply Coles. This will allow it to reduce selling costs and increase sales to the wholesale market which has been impacted by reduced supply due to warmer water.
Tassal is currently trading on a 14.3 times forward earnings; a multiple that should not be a barrier to higher prices for a while yet.
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC