Stocks in the US gave up their gains Friday on the back of some solid banking results as bond rates rose after Fed chair Janet Yellen suggested the path of monetary policy might be to run the economy hot.
Those moves helped push the US dollar higher against the euro, yen and pound but the Aussie dollar caught an updraft from the inherent reflationary message embedded in Yellen’s comments.
On commodity markets, WTI oil gave up its gains for a marginal fall ($50.35), gold is back at $1250, copper is sitting at $2.10 and iron ore bolted to a 5-week high.
But the wash-up is futures traders expecting a 9-point fall in local stocks when the market opens at 10am.
Here’s the scoreboard (8.23am):
- Dow: 18098 -45 (-0.25%)
- S&P 500: 2132 -7 (-0.3%)
- SPI 200 Futures (December): 5,426 +11 (+0.2%)
- AUDUSD: 0.7565 -0.0000 (+0.0%)
The top stories
1. Janet Yellen signaled the next big shift in central banking policy Friday – and it might be good for the Aussie dollar. I touched on this in my Oz Diary this week but Janet Yellen’s speech in Boston Friday signaled a potentially important change in central bank thinking.
Yellen said it might be worth “temporarily running a ‘high-pressure economy’, with robust aggregate demand and a tight labour market”. That implies less Fed hikes, but a steeper yield curve and it also implies Yellen agrees with the latest iteration of BoJ policy which is to be credibly irresponsible – at least with regard to what conventional wisdom says central banks should do.
That’s something the BoE suggested when governor Mark Carney effectively said Friday that the BoE will ignore the looming uptick in inflation in the UK and keep rates low and monetary policy loose to let the UK economy heal from whatever the troubles of Brexit may bring.
Bond rates are higher and the Australian and Canadian dollars have moved up as well. The reason is that central banks look like they are finding a way to be reflationary and that is usually good for the Aussie dollar.
2. Here are the RBA’s warnings on Australian apartments and China. The RBA released its financial stability review on Friday where it gave the Australian banking system a clean bill of health. But it did highlight two big risks for the economy.
The first, and biggest, was a warning on the impact from the wave of apartment completions looming in Brisbane, in particular, Melbourne, and to a lesser extent Sydney. Rents are dipping and prices are falling. The hope of course is that falls are quarantined to these markets. Maybe, maybe not – I’ve got more here.
The other warning was about China’s love affair with debt-fuelled growth. “Recent policy stimulus has helped stabilise parts of the economy, but has also helped to further fuel the rapid pace of credit growth,” the bank wrote. David Scutt has more here.
3. Soc Gen’s uber-bear Albert Edwards has a new worry – the Chinese yuan. Will Martin reports Albert Edwards has another warning for the financial markets — stop focusing on the pound, and look at China’s currency instead.
Edwards’ basic argument is that while everybody in the Western hemisphere clamours to talk about the pound’s crash and its impact on Britain’s economy, something more troubling is going on in the Far East. Investors, Edwards says, are substantially underestimating the importance of the continuing fall in the yuan (also known as the renminbi). More here.
4. Speaking of currencies, there’s an argument that the crashing pound is the best thing that could happen to Britain right now. Of course it is. We Australians don’t need any prompting to understand the beauty of a currency that floats up and down to shock absorb the economy from externalities or domestic moves.
But it’s something kind of newish to G7 nations like Britain. So Will Martin has Soc Gen’s Edwards again explaining how the pound’s fall can assist the economy and inflation. And assist it will need to, given comments from EU leaders over the weekend reinforcing that from their side of the Channel, a hard Brexit is the only deal to be done unless British prime minister May gives ground on free movement of people.
5.The next recession is coming in the US. Big Deal. I love this article from Barry Ritholtz, writing in Bloomberg, shining a light – again – on the faux-accuracy of economic forecasts. It’s not to be snarky at economists who are only reacting to client and market demand for a guide to the future. Rather it simply highlights how hard it is to get forecasting right.
As Neils Bohr is said to have opined: “Prediction is very difficult, especially if it’s about the future.” Traders and investors need to remember this. More here.
6. Here’s a look at all the key data and events for the week ahead. It is a huge week for the global economy – again – with a raft of important Chinese data on Wednesday the highlight of a week that includes an ECB meeting and British chancellor of the exchequer Phillip Hammond again addressing the thorny issue of Brexit.
Thanks to the NAB’s market economics team, I’ve got more here.
And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
Stockland (SGP: ASX)
Friday’s Reserve Bank Financial Stability Review has the financial press talking about the housing outlook this morning. When will forward-looking projections of an oversupply in new apartments impact the current reality of last weekend’s hot market and strong auction clearance rate? The chances are it will happen. The property market tends to have long lag times and, in particular, to lag the stock market which peaked 18 months ago.
Stockland is one ASX 200 stock with an exposure to apartments through its residential development business. It’s also exposed to rising interest rates. The stock is already down 10% from its peak in August. Currently valued at 14.9 times forward earnings, Stockland is actually trading below the 15.8 times it has averaged since the beginning of 2013.
How Stockland handles chart support between about $4.45 and $4.55 will be a test of market sentiment towards the property sector. A clear break below this creates the risk of a move back to around $4.20.
You can follow Ric on Twitter @ricspooner_CMC