It was another good night for global stocks as the promise of more QE buoyed traders on both sides of the Atlantic. The FTSE was up 2.3%, while the Dow and S&P were up 1.3% each.
That sent the local SPI200 futures up another 49 points, 0.9% higher and suggests another good day after yesterday’s superb performance to end the financial year. The question for local traders today is whether with the US on holidays on Monday and non-farm payrolls next Friday, will traders want to buy with gusto again?
Elsewhere, Crude got thumped in one 30-minute period overnight and is down around 3% in WTI terms. Gold is hanging tough at $1320, copper is strong at $2.19 and the Aussie dollar is back up at 0.7440/50 after it also had a swift collapse overnight to a low around 0.7369 before reversing swiftly.
Also the global bond market rally continues with UK 10’s now at 0.87%.
Here’s the scoreboard (8.00am):
- Dow: 17929 +235 (+1.33%)
- S&P 500: 2099 +28 (+1.36%)
- SPI200 Futures (September): 5,225, +49 (+0.9%)
- AUDUSD: 0.7447 +0.0000 (+0.0%)
Now, the Top Stories
1. Last night we got confirmation more central bank easing is coming and that propped up stocks. Bank of England Governor Mark Carney knocked the Sterling for six last night but underpinned the global bond market rally and helped stocks surge again. He said: “In my view, and I am not prejudging the views of the other independent MPC members, the economic outlook has deteriorated and some monetary policy easing will likely be required over the summer”.
But, as Will Martin reports, he also highlighted that there are limits to what the banks can do to support economic growth in the UK given the political and economic uncertainty as a result of the vote to leave the EU.
He’s going to do all he can. But he is the man who invented forward guidance and he said part of the BoE’s plan is “ruthless truth telling”. The trouble is though “one uncomfortable truth is that there are limits to what the Bank of England can do. In particular, monetary policy cannot immediately or fully offset the economic implications of a large, negative shock. The future potential of this economy and its implications for jobs, real wages and wealth are not the gifts of monetary policymakers”.
That’s why, as I noted yesterday, stocks and gold can both be up.
2. But can QE and low rates really work? As a behavioural finance and economics guy I think negative rates just send all the wrong signals to the broader community and they impact on the banking sector’s ability to make money and function properly. They make it hard for investors to get returns (see adults only item below) and they cast a pall over the markets and economy which is counter to their goal.
Mark Carney admitted there are limits to monetary policy and we heard via Bloomberg that the ECB is thinking of relaxing its rules because it can’t buy enough bonds. It’s denied it as you can see in the tweet below. But even the discussion makes the point that policy hasn’t worked and isn’t working. Helicopter money is a silly idea but it’s not too far a trip from corporate bonds to money into people’s accounts.
— Michael Steen (@michaelsteen) June 30, 2016
Why am I banging on about this? Because it just shows how broken some parts of the global economy are and how weak future growth is likely to be in the years ahead. The next question of course is, can equity valuations be supported in the long run after this Brexit reversal and QE sugar hit has run its course?
3. All of which suggests to me the RBA will be a reluctant cutter. It’s the first of the month so traders are naturally thinking about the RBA and what it might do next Tuesday at its Board meeting. Given the big bounce in stocks and recovery in risk appetite across global markets its unlikely that the RBA will move in July. But most forecasters believe that August is going to see a cut after what is expected to be a low second quarter CPI release on July 27.
The story goes that with low inflation the RBA has to cut rates to a new low of 1.5% and because inflation is expected to stay low many expect further rate cuts.
But, if the RBA is anything it is not stupid. So here’s the question I’m asking myself. If growth is relatively healthy, if the dollar is no longer helping – but not hurting the economy, if the negative behavioural impacts of super low rates are counter productive, and if there is nothing the RBA can do about falling inflation anyway, isn’t the best course of action to leave rates where they are?
I know this might be a radical idea and completely non-consensus but RBA governor Stevens was one of the first to cry foul on the ability of monetary policy to solve all the economic ills that ail an economy. It’s what Mark Carney said last night. So why would the RBA travel the path other central banks have proven doesn’t work. There’s nothing to suggest Australia is special and the outcome will be different. So why not leave rates where they are?
4. This is not a market for beginners – it’s an adult only market. I do a TV interview on Sky Business every morning around 7am and co-host every second Monday for a couple of hours and every second Wednesday for an hour. What’s interesting about that is by necessity I have to pay attention to what people are saying and what questions they, and the presenters are posing. And one of the most intriguing things about those questions is the level of uncertainty they convey. Not just uncertainty about the outlook but also uncertainty about what investors should do.
My answer constantly this year is that this is a stock pickers (or currency, or bond, of currency pair) market and traders need to do a lot of homework. It’s a tough market.
But I hadn’t considered it in a way that Henry McVey, head of global macro and asset allocation at private-equity firm KKR has. Rachel Butt reports that McVey, citing high PE’s for stocks and low rates on bonds, says investors shouldn’t expect getting outsized returns given today’s macro backdrop. He’s called it an “adult swim only” saying that today’s market conditions are like “swimming at the beach when there is a strong undertow that could pull a less experienced athlete out to sea.”
He’s right. This really is an adults only market. I’m having great fun with all the volatility this year and all the competing drivers. But I’m about to complete my third decade in banking and finance. It’s tough market for beginners. Rachel’s article is really good – have a read.
5. This economist says China is headed for a 1929 style depression. Andy Xie used to work at Morgan Stanley and the World Bank. These days he’s a Shanghai based independent economist and he has an apocalyptic outlook for the Chinese economy according to MarketWatch. In a recent interview Xie told MarketWatch that China’s path resembles one that led to the Great Depression with rapid credit expansion, loose monetary policy and the pervasive belief that asset prices will just keep rising contributing to the type of speculation that will ultimately end in a market crash.
“The government is allowing speculation by providing cheap financing…China is riding a tiger and is terrified of a crash. So it keeps pumping cash into the economy. It is difficult to see how China can avoid a crisis,” Xie said.
He added “China grew too fast. The government is using its power to stop the unraveling but not address the issue. It is just buying more time”.
6. And to end Friday on a cheery note – George Soros says Brexit has unleashed a crisis as bad as 2008. Could the post Brexit QE induced relief rally and the bounce in stocks be the last great selling opportunity before markets collapse again? George Soros appears to think so. He says Brexit has “aggravated looming dangers”.
Bob Bryan reports Soros said, “it unleashed a crisis in the financial markets, comparable in severity only to 2007/8. This has been unfolding in slow motion, but Brexit will accelerate it. It is likely to reinforce the deflationary trends that were already prevalent.”
I’m not sure I agree unless you see the break up of the EU which Soros specifically says won’t happen. “The referendum has highlighted for people in Britain just what they stand to lose by leaving the EU…If this sentiment spreads to the rest of Europe, what seemed like the inevitable disintegration of the EU could be instead creating positive momentum for a stronger and better Europe,” he said.
Soros is a man who has made billions trading markets but I’m struggling to see the linkages with 2008. But that’s just me.
AND – Here’s a Friday Podcast Bonus. Paul Colgan and David Scutt sat down with CMC’s Mike McCarthy to take a deep dive into the economy as Australia decides who is going to govern us at tomorrow’s election.
Key data for the past 24 hours (with thanks to BNZ markets)
NZ: Building permits (m/m%), May: -0.9 vs. 6.6 prev.
JP: Industrial production (y/y%), May P: -0.1 vs. 1.9 exp.
NZ: ANZ activity outlook, Jun: 35.1 vs. 30.4 prev.
GE: Retail sales (y/y%), May: 2.6 vs. 2.5 exp.
GE: Unemployment rate (%), Jun: 6.1 vs. 6.1 exp.
UK: GDP (q/q%), Q1 F: 0.4 vs. 0.4 exp.
EC: Core CPI (y/y%), Jun A: 0.9 vs. 0.8 exp.
US: Chicago PMI, Jun: 56.8 vs. 51.0 exp.
You can catch me on Twitter.
And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
Woolworths (WOW: ASX)
25 August looms as a key date for beleaguered Woolworths’ shareholders. That will see the next profit report and will provide insight into how Woolworths’ new strategy is faring against fierce competition from Aldi and Coles.
It was also hoped that Directors would be able to announce the sale of the Masters and Home and Timber Hardware businesses on 25 August. However, this is now in doubt after the Competition Commission delayed its decision on Metcash buying Home and Timber. The ACCC wants to consult on undertakings Metcash has provided to lessen the anti-competitive impact of its bid. Metcash is not the only bidder. A number of parties are reported to be interested in both Masters and Home Timber.
The Woolworths chart is also interestingly placed. If it can rally past last week’s high of $21.38, there is hope for a return to triangle resistance and the 40 week moving average around $22.50/$23. A move under last week’s low of $20.34 would represent a familiar but depressing slide into new lows for shareholders as the major downtrend continues.
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC