6 things Australian traders will be talking about this morning

Atsushi Tomura/Getty Images for MORINAGA

Stocks in the US stalled below important overhead resistance as traders lacked the conviction to push the rally further.

Earnings season continues and it was BofA and Wells Fargo’s turn last night to turn in solid, but not spectacular results. US data was mixed with strong jobless claims numbers but slightly weaker than expected consumer prices.

But the wash-up of a US stall and European strength has been a 14-point rally in the SPI 200 June futures overnight. That’s despite lower iron ore and gold, and flat energy markets. It’s been a cracking week for the ASX so far. Can it keep rallying today?

On forex markets, the Aussie made a marginal new high for this run at 0.7736 but it’s back at 0.7684 this morning. Elsewhere, the euro and yen were largely unchanged.

On commodity markets, oil is becalmed as traders wait for Sunday’s big OPEC/non-OPEC meeting in Doha. It’s a huge event.

So too is Chinese GDP due out this morning. And the RBA will release its financial stability review which, while not necessarily market moving, might just make fascinating reading for bank shareholders.

Here’s the scoreboard (7.46am):

  • Dow: 17,926, +18 (+0.1%)
  • S&P 500: 2,083, +1 (0.0%)
  • SPI200 Futures (June): 5,105, +14 (0.3%)
  • AUDUSD: 0.7690, +0.0040 (+0.52%)

Now, the Top Stories

1. Here’s a great example of the challenge for Australian stock market investors. Dividend imputation and dividends are at the very heart of many Australian investors’ thought processes when it comes to putting their money to work in local stocks. But as the global economy has slowed and as earnings have been harder to come by here at home as well, the pool of dividend cash has been slashed. That threatens valuations for the stocks, as the banks have found out recently, and reduces income flowing to SMSFs and other investors.

James Frost over at the AFR says that even though an incredible $19 billion in dividends is being rained on investors this season, it’s down 23% on last year’s massive dividend cheque of $24.7 billion paid out by corporate Australia. He says SMSFs will get $1 billion less than last year.

“Pumped up by incredibly high payout ratios, generous franking credits and progressive dividend policies, companies that could least afford it were forced to distribute more and more capital to income‑hungry shareholders. In hindsight, it was only a matter of time before overstretched companies turned off the taps of cash,” Frost writes.

Are you still wondering why the ASX is struggling? These changes have challenged investor thinking and valuation at a time of local and global uncertainty.

2. Ratings agencies versus Australia – Scott Morrison takes the ball up, and drops it. Stick with me, this isn’t about politics. It’s about the cost of borrowing within the Australian economy. This week we’ve heard from the NAB saying they think Australia’s AAA credit rating might be at risk because of the deterioration of the federal government’s debt position. Yesterday we heard from credit rating agency Moody’s Investor Services that the NAB might be right because “despite a consensus on fiscal consolidation through successive administrations, the government has been unable to reduce expenditures”. Moody’s says the government needs new revenue raising measures.

But the politics as we approach the election seems to suggest that any measures the treasurer implements will be offset elsewhere which makes Moody’s point about no overall improvement in the debt position. “Of course there will be revenue measures in the budget but what we’re saying is where we will apply those revenue measures is to reducing the tax burden in other parts of the economy,” Morrison said.

Why am I worrying about this in 6 things? Because unless Australia wakes up to the reality we now have lower income relative to what the Howard and Costello cuts envisioned, and as a result are living beyond our means, the situation will only get worse. That means we’ll eventually lose the AAA rating and that means the cost of borrowing in the economy – especially for the banks who borrow offshore to fund our lifestyles and debt binge – will rise. On a positive note, at least if Australia gets downgraded, the Aussie dollar might fall.

3. OPEC’s big meeting with non-OPEC members is this weekend – it could be huge. Or not. There is much anticipation surrounding the meeting in Doha this Sunday between the OPEC and non-OPEC nations on whether or not there will be a production freeze. It’s a big event for traders and markets even outside of the energy complex because the price of crude, and the impact that the risk of potential defaults in the sector has had on credit spreads, banks, and the stock market has been integral to this year’s volatility.

Will the Saudis agree to a deal if the Iranians are on the outside? Will OPEC agree a deal if it looks like US producers are finally seeing production slip? There’s been little capex in US shale oil which means production should decay reasonably quickly in the next 12 months. Then of course it depends who actually turns up. It all suggests getting a deal will be hard to get done. Elena Holodny has more here.

4. Goodness – here’s another warning of a debt bomb ready to burst. Bond markets are great at blowing everything up. So it’s interesting that for the third day this week I’ve got another warning that there is another part of the bond market ready to burst. Bob Bryan reports this morning that UBS’ Matthew Mish wrote in a note to clients that “we believe there is a corporate credit bubble in speculative grade credit. And the structural downside risks for high yield bonds and loans are material, with non-negligible downside risks to growth”.

Non-negligible sounds a bit like Mish is trying to soften the blow because he also says: “We believe roughly 40% of all issuers are of the lowest quality, and roughly $1tn which will end up ‘distressed debt’ in this cycle.” That’s trillion with a T folks and it’s a really interesting article – worth a look.

5. The slowdown in Singapore’s economy and change in FX policy is more important than you think. Yesterday Singapore released the first estimate of Q1 2016 GDP which showed the disturbing outcome of no change on the previous quarter against the still very low expectations of 0.2% growth. Nothing about the release was good and the Monetary Authority of Singapore – their central bank – changed tack on its approach to the Singapore dollar by dropping its explicit appreciation path to a neutral one.

That may not sound like much of a move but Westpac’s currency strategist Sean Callow said the MAS “is now more downbeat on the outlook for both growth and inflation, prompting a surprise switch from ‘modest and gradual’ SGD NEER appreciation to neutral, a stance last seen in 2010”. Singapore’s move helped weaken its dollar 1% yesterday and a change for the first time since 2010 is a big move for the MAS. It just highlights that with overall global growth relatively weak, countries are still fighting for their share.

6. It’s China GDP day, so hold onto your hats. China has done such a good job of managing the market volatility, stocks and currency this year and a large part of that has been an improvement in the data recently. But the big test for the market might be about to hit the screens today with the release of Q1 2016 GDP.

David Scutt reports that a survey of 64 economists polled by Thomson Reuters, economic growth is expected to slow to 6.7% year-on-year in the March quarter. Forecasts range from 5.8% to 7.2%. If we get another good set of numbers, like the trade date induced rally two days ago, then markets are likely to rock higher once again. That will helps stocks and the Aussie dollar.

As Scutty says, the GDP figure has a curious knack of coming in around market expectations. So if there is a miss to the downside, watch out.

Key data for the past 24 hours (with thanks to BNZ markets)
NZ: BNZ manufacturing PMI, Mar: 54.7 vs. 56.0 prev.
NZ: Non-res. bond holdings (%), Mar: 67.4 vs. 68.3 prev.
AU: Employment change (k), Mar: 26.1 vs.17.0 exp.
AU: Unemployment rate, Mar: 5.7 vs. 5.9 exp.
UK: Bank of England rate, 14 Apr: 0.5 vs. 0.5 exp.
US: CPI (m/m, %), Mar: 0.1 vs. 0.2 exp.
US: CPI ex food and energy (y/y, %), Mar: 2.2 vs. 2.3 exp.

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And now from CMC Markets’ Ric Spooner is today’s Stock of the Day

Santos (STO: ASX)

Major oil producers are due to meet in Doha this weekend to discuss a potential agreement on freezing production. The oil market heads into this event parked at a significant chart resistance level following a major rally.

Local oil and gas stock, Santos, is in a similar position. It’s making a third attempt at resistance around the 50% retracement level. A clear break through this would look constructive. The next resistance level is around the 200 day moving average and 61.8% Fibonacci retracement.

However, the Doha meeting has a definite “buy the rumour; sell the fact” look about it. For Santos, failure at this resistance would set up a triple top and a chance for potential buyers to get set on a downward correction.


Ric Spooner, chief market analyst, CMC Markets

You can follow Ric on Twitter @ricspooner_CMC