Stocks in Europe and the US eased into the close of the month overnight.
That, and weakness across commodity markets and global banks saw the SPI 200 lose 24 points, 0.4%, suggesting a weak open for the ASX 200 index today.
That suggests the index should slide toward 5350 at the open. But where it ends the day will be driven by the release of Australia’s Q1 GDP data and Chinese PMI surveys.
Likewise these will be the big drivers for the Aussie dollar which is off its highs of overnight but still up strongly after the release of the net exports data yesterday which suggested a strong GDP release today.
Looking at commodities, crude fell after the UAE oil minister said he was happy with the oil market (whatever that means), copper dipped, iron ore fell but gold rallied after testing below $1200 the previous night.
Here’s the scoreboard (8.02am):
- Dow: 17787 + 86 (+0.48%)
- S&P 500: 2096 -2 (-0.1%)
- SPI200 Futures (June): 5,358, -24 (-0.4%)
- AUDUSD: 0.7229 +0.0050 (+0.80%)
Now, the Top Stories
1. Australian GDP today could be a huge number. The NAB’s economics team is just one of the many forecasters who have upgraded their expectation for today’s release. Driven by strong government spending, especially on defence, and a massive 1.1% contribution to growth from net exports, the NAB has upgraded its forecast for Q1 GDP to 1.1%. That’s a potentially massive print and one which would keep the year on year growth rate around 3%.
Juxtapose that with low inflation, calls for 1% interest rates and a 60 or 65 cent Aussie dollar and you can see how difficult a job the RBA has at the moment. We’ll know more about their thinking next Tuesday. In the meantime, all eyes are on GDP today at 11.30am. Here’s David Scutt’s excellent guide to the data.
2. Sell in May and go away? There’s an old adage in markets where traders say “sell in May and go away”. Early on in the month it looked like that might be a solid trade. But having dipped down toward support around 2020/25 the S&P recovered and took the local market back up with it. So the question for traders is whether, after a positive, almost strong, performance in May, the old adage is tired and not likely to work this year.
There are signs that this could be the case with the S&P closing just below resistance in the 2100/2105 range this morning.
We interviewed George Boubouras, chief investment officer at Melbourne based Contango Asset Management, when I was co-hosting “The Close” on Sky Business with Carson Scott and Scott Phillips earlier this week. Boubouras summed up the challenge facing investors right now as they grapple with a strong recovery from the earlier year lows. He said many investors had missed the rally but because current levels on the ASX suggest the market is fully priced, they don’t want to buy. That creates tension in the market but also helps explain why the ASX was again unable to hold above 5400 into the month’s close yesterday.
Boubouras is bullish into year end and has a target for the 200 index of 5600. That’s around 4% higher than last night’s close. But, there is a sting in Boubouras’s bullish outlook. He thinks prices will go down before they recover. The question of when and how far is the difficult one for investors who have missed the recovery from this year’s lows.
3. We’ve launched a new weekly wrap of the stocks the Australian market is shorting. Short sellers are the guys and gals who borrow stock to sell with the expectation that the price will fall and they’ll be able to buy back at a profit. Because they seem to rub against the grain of most investors who buy a stock and look for it to rally, sometimes they aren’t very popular.
But there is nothing wrong with two-way flow in markets. More importantly, short sellers provide a service in highlighting issues that may have arisen at companies or signal risks that other investors, the longs, may not have considered.
So we asked IG if they wanted to work with Business Insider to put together a weekly look at what the short sellers are up to. We’ve called it SHORT STACK: What the Australian market is betting against this week and you can find this first edition here.
If you got any news, views or tips on what the shorts might be up to, you can ping me through the site. I’d love to hear from you.
4. Data in the US last night means that as long as non-farm payrolls isn’t abysmal, a Fed hike is a lock. Consumer confidence dipped last month but that didn’t stop consumers from spending with gusto. Elena Holodny reports that spending rose 1.0% in the last month, above expectations of a 0.7% increase. Meanwhile, personal income rose 0.4%, in line with economists’ expectations.
“The overall tone of this report was very constructive, and the solid rebound in spending will likely be interpreted at the Fed as a key indication that the economic recovery has regained its footing after the missteps over the past three quarters,” wrote TD Securities’ deputy chief US macro strategist Millan L. B. Mulraine in a note to clients.
The only question is will it be June, before the British referendum vote, or July when the Fed doesn’t have a scheduled press conference.
5. Traders might be getting nervous as the Chinese yuan is sliding again. When you trade in our time zone you can’t help but be influenced by and watch closely what is going on in China. Take today’s release of PMI data for example – in many ways it could overshadow Australia’s own GDP release. So local traders know the yuan has been sliding again – we talked about it here on Monday.
But Linette Lopez reports that fresh back from their long weekend, US traders are watching the slide and getting a bit titchy about just where USDCNY might slide to and the impact that could have on capital flows out of the country. Linette says the yuan’s move:
Is also a throwback to a scary recent time — the turmoil at the beginning of this year after the Fed’s first rate hike since going to zero in December 2008.
In January and February the yuan’s erosion against a strong dollar prompted Chinese people to move money out of the country, which spooked the country’s stock market, which in turn spooked markets around the world.
And now, that recent history is repeating itself.
Worse yet, Linette says Goldman Sachs/Gao Hua economist Song Yu is calling the calm that the yuan experienced over the past few months a “temporary sweet spot”.
6. Speaking of China – its stock market is set to join the MSCI index. Stocks in Shanghai ripped more than 3% higher yesterday after news broke that global stock market index benchmarking firm MSCI may finally be about to include Chinese stocks in its indexes. That means that the many billions of funds in MSCI indexes would need to allocate a portion of their cash into Chinese stocks even if they don’t want to, in order to cover the risk of underperforming the index.
David Scutt reports that the chances were boosted Friday when the Shanghai and Shenzhen stock exchanges published rules restricting trading halts in listed securities, an action that that many firms implemented during China’s stock market crash in 2015 in order to prevent the value of shares falling any further.
MSCI’s stamp of approval – if it is granted – will open the way to increased participation in Chinese stocks and aid the long term internationalisation of the index. It might feel like a rollercoaster ride for investors, however.
Key data for the past 24 hours (with thanks to BNZ markets)
NZ: Building permits (m/m, %), Apr: 6.6 vs. -9.8 prev.
NZ: ANZ activity outlook, May: 30.4 vs. 32.1prev.
AU: curr. acct balance (AUD, b), Q1: -20.8 vs. -21.1 prev.
NZ: Priv sector credit (y/y, %), Apr: 6.7 vs. 6.5 prev.
EZ: Unemployment rate (%), Apr: 10.2 vs.10.2 exp.
EZ: CPI core (y/y, %), May A: 0.8 vs. 0.8 exp.
US: Core PCE deflator (y/y, %), Apr: 1.6 vs.1.6 exp.
CA: GDP (q/q, %, ann.), Q1:2.4 vs. 2.8 exp.
US: Chicago PMI, May: 49.3 vs. 50.5 exp.
US: Consumer confidence, May: 92.6 vs. 96.1 exp.
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And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
Airlines were in the news yesterday after Virgin’s announcement that it has sold a 13% equity stake to China’s HNA Group. If approved, this will involve a strategic alliance including code-sharing, frequent flyer programmes and lounge access. On the face of it, this looks a good strategic move and may see increased competitive pressure for Qantas.
The Qantas share price meanwhile has been under pressure. Consumer caution and higher oil prices have been taking their toll. It’s now at a pretty undemanding 5.6 times forward earnings.
From a chart point of view, Qantas has arrived at a significant level. It’s baulking at the 38.2% Fibonacci retracement level. This has a habit of stopping corrective declines (at least for a while). Downward momentum is strong however. It may pay to wait for confirmation that Qantas can hold this altitude. If not, the next support looks to be the 50% retracement plus past resistance around $2.63-73.
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC