6 things Australian traders will be talking about this morning

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It’s champagne and fireworks again this morning as US stocks markets traded to new record highs overnight.

But the party may have been cut a little short as the Dow 20,000 T-shirts and hats had to be put back in the cupboard after the index pulled up around 50 points short of the mark.

The strength in US stocks followed a similarly ebullient mood across Europe, although it’s worth noting that the basic materials sector was the only sector in the red on both the FTSE and the S&P 500.

That could be a handbrake on what otherwise looks like a fairly positive day for local stock traders. The December SPI contract on the ASX is up 32 points this morning.

Elsewhere, oil stabilised after the previous day’s rally and selloff, metals were mixed but copper and iron ore fell. Gold remains under pressure as it struggles for relevance in the current environment.

On forex markets, the Aussie dollar is mildly higher at 75 cents this morning in what was an otherwise quiet night as traders await the FOMC decision tomorrow morning.

Here’s the scoreboard (7.48am AEDT):

  • Dow: 19919 +123 (+0.62%)
  • S&P 500: 2274 +17 (+0.76%%)
  • SPI 200 Futures (December): 5,582 +32 (+0.6%)
  • AUDUSD: 0.7499 0.0011 (+0.14%)

The top stories

1. Here’s why stocks are rising. The latest BAML survey of massive global investors shows they are running from cash back into stocks. There is nothing like money flow to move markets. It’s why forex and commodity traders are fascinated with the weekly machinations of the futures positions of speculators. And it’s also why the big investment banks survey money managers to see where their asset allocations are and what their cash levels might be.

So it’s worth noting that back in October, BAML reported that investors were holding cash levels at a 15-year high. But Bloomberg reports overnight all that has changed and investors are putting money back to work. “Cash balances fell to 4.8 percent in December from 5.0 percent in November. That marks a notable shift from the 5.8 percent level posted in October.”

It’s not hard to see why they are doing this given Bloomberg also reports the BAML survey shows “expectations for global growth and inflation are at five-year highs, optimism about the outlook for corporate profits is at six-year highs, and only 6 percent of investors forecast lower bond yields next year”.

2. Here’s the latest update of the ASX and S&P 500 chart. It suggests a strong day ahead. Correlations come and go in strength. That’s something we’ve seen more than once over the past year in the relationship between the ASX200 and the S&P 500. The ASX has over and undershot the S&P’s performance a number of times.

But with the 200 index up near the highs of 2016, it felt like a necessary component of any turnaround from yesterday’s fall, and to take the market up to the highs was a move higher in US stocks. That’s what we got overnight and the futures traders reckon the ASX will rocket another 30 points higher when trade opens at 10am.

We’ll see how things go but my favourite chart suggests it’s at least a 60:40 chance. Unless we get worried about the Fed, that is.

ASX 200 v S&P 500 Daily (Source: Reuters Eikon)

3. But Bill Gates reckons stocks are expensive which is an interesting reminder about bonds. Bill Gates was channeling his inner Fed researcher today when he told CNBC’s Squawk Box “stocks are expensive”. You’ll recall earlier this year the Fed released a paper saying stocks were way overvalued on a PE basis and could only really be justified because of super low rates. That’s something Gates was picking up on when he said “I find it, you know, kind of amazing that interest rates have stayed so low for so long”.

Yes, Bill is right. He’s also right when he says tomorrow’s rate hike and two in 2017 are priced in. But he added that if they go up by more “six”, then you’ll probably see a reaction. Indeed you would because six rate hikes would blindside almost everyone and would also likely drive bonds substantially higher, increasing the discount rate for stocks and in doing so, undermining valuations.

Six hikes looks a stretch. I think four. But even that – if the dot plot signals that, tomorrow could be a headwind for the market.

4. It all means the controversial dot-plot will be front and centre driving market moves this time tomorrow. Akin Oyedele has an interesting article highlighting that the market and the Fed may finally be getting aligned on expectations of interest rates.

Mike Ryan, the chief investment strategist at UBS Wealth Management Americas, said: “This could be the year actually that the Fed dots actually serve as channel markers, so that they give us a better idea of what the Fed would do in terms of policy.”

Interestingly, the markets is still really only looking for two hikes next year.

5. Here comes even higher oil prices and with it, inflation. Oil was higher again last night, consolidating the previous night’s gains. In no small part that was as a result of the latest monthly report from the IEA overnight. The IEA highlighted just what an important and massive impact the OPEC and non-OPEC deal is going to have on oil markets.

Bloomberg reports the IEA said oil stockpiles will decline by about 600,000 barrels a day in the next six months and that the oil market will turn from over to under supply.

Naturally, US shale oil producers might have something to say about that. And economics 101 says as long as marginal revenue is greater than marginal costs you can produce profitably. It’s just a question of what that price is for shale and how many wells, how much supply, comes on board between here and $60.

6. This hedge fund is trying to take away my edge. I’m a behavioural economics and finance guy. I spend my time trying to figure out what’s driving people and as a result what that means about how they’ll interact in the economy and what they’ll do in terms of investment and trading decisions.

Now this $1 billion hedge fund is systemising that process, as Manoj Narang, who is setting up MANA Partners next month, explained to Business Insider. Narang said the aim of his fund is “to make money by doing the same thing as the rest of the market, only doing it first before the rest of people commit their capital”. Damn, that’s me.

He went on:

That’s the only way to make money when you’re automated or discretionary. The same thing goes for machines. To me, the most fertile ground for building quant trading strategies that are profitable is by anticipating, is by orienting those strategies to have a very strong structural component that understands how human beings make decisions.

Damn again. But maybe I can automate my process.

I’m Greg McKenna and you can catch me on Twitter or at AxiTrader where I am the Chief Market Strategist.

From Ric Spooner at CMC Markets, here’s today’s Stock to Watch

Newcrest Mining

We’ve seen some big directional moves since the US election. Stocks and the US Dollar have run hard to the upside. Bonds and gold have been sold off.

Current momentum could easily take these moves further but we do seem to be entering territory where markets are becoming vulnerable to a bit of contrarian news. The experience of early this year where the end of year rally was followed by a risk off correction is probably worth keeping in mind.

With all that in mind, one possibility might be to build a bit of a contrarian position into gold while running the trend in other markets like equities. Gold miner, Newcrest has just entered the top end of a support zone.

This extends right down to the 61.8% correction and March lows around $16.50/$17 but might be used to progressively build a defensive position if it does keep falling.

Source: Supplied

Ric Spooner is chief market analyst at CMC Markets. You can follow Ric on Twitter: @ricspooner_CMC

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