A less ebullient night for stocks after the strong recent rally.
Some of that is on the back of the big collapse in oil (WTI -4.38%) after the inventory draw was less than forecast. And some of it is a little apprehension before bank earnings start to be released in the US tonight.
At the close the S&P 500 was up just 0.01% at 2152.43, the Dow rose 24 points and the Nasdaq clung to the 5000 mark with a close at 5005. In the UK there was no celebration as Theresa May became prime minister with the FTSE down 0.15%, while in Frankfurt, the DAX dipped 0.33%.
But SPI traders are still pointing to a positive start for the ASX when it opens, with the September futures up 8 points.
On currency markets the Aussie is just clinging to 76 cents, the Kiwi has dipped to 0.7271 and the Pound is well down on yesterday’s levels above 1.33 sitting at 1.3137 as traders await the expected Bank of England rate cut tonight. USD/JPY is at 104 and the Euro is at 1.1090.
Gold rallied $11 an ounce and copper is up at $2.24.
Here’s the scoreboard (7.59am):
- Dow: 18372 +24 (+0.13%)
- S&P 500: 2152 +0 (+0.01%)
- SPI 200 Futures (September): 5,357, +8 (+0.1%)
- AUDUSD: 0.7605 +0.0010 (-0.15%)
The top stories
1. It’s jobs day in Australia The Aussie dollar, ASX, and interest rate traders will be watching closely. But it could be a mess. The monthly release of Australia’s employment number is one of the most watched economic indicators and also a catalyst for big moves on markets. But it’s close to 25 years since I stopped “punting” the release of the ABS’ jobs numbers because the standard deviation of the jobs number is massive. For example, the ABS says that while they estimated an increase in jobs of 17,900 in May, there’s a caveat that they are 95% confident that the range for the actual number of jobs created in May was somewhere between -40,700 and 76,500.
See what I mean.
It gets worse, lately we’ve had an additional complication – sample rotation. That’s when the ABS changes the people it surveys in order to generate its jobs number and the NAB says is going to distort the figure today. David Scutt covered their reasoning here. But the key point for traders is that the market is looking for a rise of 10,000, but the NAB says the rotation will see the jobs number print -17,000. That could set the cat amongst the pigeons, especially with the AUD/USD above 76 cents.
2. Here be dragons lurking – this analyst says central bank policy will eventually crash the stock market. Central bank negative interest rate policy is strange. Many folks believe it’s daft and actually counterproductive as it sends the wrong signals. That’s a theme Tad Rivelle, chief investment officer of fixed income for the TCW Group, has picked up on Bob Bryan reports.
Rivelle, in a note titled “Here be Dragons” says “to say [negative interest rate policy] makes no sense is almost tautological. Nobody pays to have their Amazon delivery delayed or their Uber pickup deferred. Consumption now is always prioritised over consumption later, which is why interest rates have been positive for centuries. Is there some set of future expectations that could possibly justify negative yielding debt?”
He says central banks are pursuing policy aimed at ensuring markets never have a “tantrum” or actually experience the type of pullback that perhaps is justified by economic circumstance.
Rivelle said that means “Low growth — the consequence of inefficient resource use — then becomes the recurring justification for still more central bank rate suppression. The paradigm is not one of self-correction but of doubling down. Keep doubling down and rather than having a series of corrections, you might just end up with a crash”.
Or alternatively, maybe we get a world in which asset prices are disconnected from the real economy which can never heal because central banks are sending the wrong signals.
3. Myles Udland kind of agrees – here’s his great look at why high cross market correlations tell us this is still a crisis market 9 years after the GFC began. I don’t have room to do justice to Udland’s piece so you might want to take the jump and read it here. In short, Myles tied together research threads from Neil Dutta at Renaissance Macro, Mohammed El Erian, and Howard Marks to make a strong point that even though stocks are back at all-time highs markets are still trading like we’re in a crisis.
That is the high correlations across many markets and the central-bank “sponsored” strategy of buying any and all dips — be it a backup in bond yields or a drop in the stock market — which has been a profitable trade since the financial crisis, show old habits are hard to break. That approach, which is central bank crisis response conditioned, is also responsible for the persistence of high cross market correlations.
Myles also looks at the volatility we’ve seen markets recently, especially in the wake of Brexit, the lack of liquidity, the swing from active to index investing strategy and concludes:
Stocks are at all-time highs. This will be the headline. This is a true statement. It is not something to dismiss. But what is happening under the surface and the linkages we’re seeing revealed between and across markets is where the action is. And where it will be from now on.
Watch this space.
4. The Fed’s Beige Book helped explain why Fed officials are most sanguine on the interest rate outlook. The 12 regional Feds get together before each FOMC meeting and create a summary of economic activity in the US economy. It’s called the Beige Book and it was out at 4am today.
Akin Oyedele’s summary of the Beige book is that the Fed is generally positive about the US economy and says it continues to trudge along. Trudge is a neat way of characterising it and the book is an interesting read this month showing why even with strong jobs gains and an apparent increase in wages Fed presidents like Neil Kashkari said yesterday that caution is still warranted before raising rates in the US.
That’s something Myles picked up in the book and covered in his piece the US economy’s biggest puzzle explained in two paragraphs. In summary he says the pace of retirements is keeping labour costs down because older, more expensive workers are retiring and being replaced by younger workers who command less salary. Equally when it comes to replacements firms are being selective which is why days to fill openings is at a 15-year high.
So the labour market is hot. But the generational transition is masking some of the pressures. How the Fed judges these two dynamics will be vital in understanding the path of US interest rates.
5. Germany issued 10-year bonds with a negative yield and the US 30 year auction was well bid. Germany has joined Japan and Switzerland as countries which have issued 10 year bonds with a negative yield. The overnight auction saw investors take the bonds at -0.05%. Jason Wong, a strategist at BNZ in Wellington, said in a note this morning “If this sounds like a poor investment, then it is, but any buyer could have sold it at the close and yielded a profit, with Germany’s 10-year rate down 6bps on the day at minus 0.09%”.
That helps explain a large part of the buying dynamic at play in bond markets lately. Kind of a greater fool theory. If I buy I can sell to someone lower and make a profit.
Across the Atlantic investors bought $12bn of 30-year Treasuries auction. The yield was above Friday’s low of 2.1% but the demand at auction helped the 30 year rally 5 points on the day to 2.17%. The FT reports that asset managers and foreign central banks increased their demand in the auction to 76.9 per cent of the issue compared with a 72 per cent average.
So even as stocks rally bonds remain bid. That kind of makes Myles and Tad Rivelle’s point.
Oh and as if to underline the point well regarded bond “god” Jeff Gundlach has such a jaundiced view on bonds at the moment he’s telling people to go and punt wheat.
6. Adult beverage time – Credit Suisse says the UK economy will collapse into recession and 500,000 jobs will evaporate. I didn’t think the BoE would rush to ease this month because the wash up from Brexit is still uncertain. But Bloomberg made a compelling argument over night that Mark Carney’s experience as BoC governor in the GFC suggests he will go early. That means the BoE MPC will announce an easing at 12 noon London time this evening they say.
More scarily though is Credit Suisse take on the impact of Brexit on the UK economy. Will Martin reports the bank says there is going to be a recession and a collapse in employment. “On the back of our forecast for GDP growth falling to 1.0% in 2016 and -1.0% in 2017, we can expect the unemployment rate to jump up to 6.5% by the end of 2017” Anais Boussie and her team wrote in a note.
I wasn’t convinced about Carney and I’m not convinced the British economy will collapse. But Credit Suisse is not alone in its dire outlook for the UK. Traders will be watching closely, especially if they are trading the Pound, GBPAUD, the FTSE or Gilts. But perhaps the narrative of today’s 6 things is really that if Credit Suisse is right all markets will feel it.
Key data for the past 24 hours (with thanks to BNZ markets)
NZ: Food price index (m/m%), Jun: 0.4 vs. -0.5 prev.
AU: Westpac consumer confid., Jul: 99.1 vs. 102.2 prev.
CH: Trade balance (USDbn), Jun: 48.1 vs. 45.7 exp.
EC: Industrial production (m/m%), May: -1.2 vs. -0.8 exp.
CA: Bank of Canada rate decision (%): 0.5 vs. 0.5 exp.
And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
Computershare (CPU: ASX)
If you own any Australian shares, the chances are you’ll be familiar with this name. Computershare provides administrative services to the financial services industry including share registries, corporate trusts, employee share plans and mortgage administration. It’s an Australian company but these days it’s very much a global operator.
Computershare’s revenue is leveraged to stock market activity; corporate actions and interest rates. In recent years, low or negligible interest rates have become a real problem. They have significantly reduced the company’s earnings on client balances. Recently the company has also been a victim of Brexit. Computershare has significant UK businesses and so a negative exposure to the weaker Pound. Hence the dramatic drop in the share price after Brexit.
The stock’s post Brexit trashing now sees the chart at an interesting place. A bounce off the current support would confirm a large triangle formation, creating potential for a return to the triangle resistance which was essentially where it was before Brexit. A clear drop through this support would be a negative.
A chart technique for potential buyers in a situation like this is to use the “divergence” between the RSI momentum indicator and price. The RSI in the box below the chart is starting to make higher lows while price is still making lower lows. If this continues to the extent that the RSI breaks up above the resistance of its last peak, you can be a bit more confident that price is going to reject this support line.
Ric Spooner, chief market analyst, CMC Markets. You can follow Ric on Twitter @ricspooner_CMC