An interesting night where Brexit fears seemed to settle a little and the Fed decision was intially taken positively by stocks before the Dow, S&P and Nasdaq all slid into the close to end in the red for the day.
Strength in the miners overnight and financials has helped lift the SPI 200 into the black by a couple of points. But the ASX had a weak close yesterday and today is the close out for the June SPI contract which could make trade interesting.
On forex markets, the Fed decision weakened the US dollar a little which has lifted the Aussie back to 74 cents. The Kiwi is back above 70 cents against the USD and the yen is around 106. The pound and euro are a little higher at 1.42 and 1.1260 respectively.
On commodity markets, gold traded up to $1296.70 but it’s back at $1291 now. Copper bounced 5 cents a pound to $2.09.
Here’s the scoreboard (7.31am):
- Dow: 17640 -35 (-0.2%)
- S&P 500: 2071 -4 (-0.18%)
- SPI200 Futures (September): 5,109, +2 (0.0%)
- AUDUSD: 0.7403 +0.0060 (+0.82%)
Now, the Top Stories
1. The Fed – no move, lower growth, lower rate expectations, and no rate rise soon. There were no real surprises in what the Fed said or did last night. They left rates on hold in the 0.25%-0.50% range, they lowered the dot plot (but still projected 2 hikes this year), and Janet Yellen said during the press conference that July could be live if the jobs data for May does prove to have been a misdirection on the economy.
But overall, whether in the Fed’s statement or in her press conference, Yellen sounded pretty downbeat overall. She characterised it as “cautious” and noted that the Fed needs to verify the economy’s progress. That’s because the policy tools to support the economy in a downturn are fewer than those to cool it.
That is consistent with a message we got from the Fed earlier this year about the ability to run the economy a little hotter than many might think reasonable given the labour market strength. So now that this strength is in question, Yellen said “we need to assure ourselves that the underlying momentum in the economy has not diminished”. She added that the Fed’s forecasts suggest “healthy growth” for the rest of the year – even though it downgraded growth for this year to around 1.9 to 2.0% in 2016, down from its previous outlook of 2.1% to 2.3%.
2. Yesterday’s close on the ASX broke some important technical levels. The ASX200 had an interesting day yesterday. Early weakness gave way to a recovery and then fell into the close. Henry Jennings from Marcus Today said: “The index tried valiantly to turn positive at one stage with a rally to 5195 before falling over and slipping heavily in the last hour closing at 5147 down 56 points. Once again the banks were the big drag on the index with falls of around 1.8%-2.3%%.”
Jennings noted that the close saw some big “technical levels broken”. That’s the 5150/60 region I spoke about yesterday. Overnight the miners did well, and financials in the US, UK and Europe did okay also. That suggests that we should see some early strength today. But the chances are rising that lower levels might still beckon before real and sustainable buying re-enters the market.
Here’s the ASX 200 chart from my Reuters Eikon.
3. Macquarie – the commodity cycle has turned. I’m in the camp that says the commodity cycle bottomed earlier this year. So this might simply be a bit of confirmation bias from me. But, David Scutt reports that Macquarie said they “no longer think commodity fundamentals are getting worse”.
Could that have been why the miners have had a cracker in overnight trade? In London, Rio was 3.9% higher, BHP bounced 4.09%, Glencore rose 6.5%, Anglo American was 5.25% higher, and Vale rose 3.81%.
Maybe, but back to Macquarie, which believes that the fundamental factors that drove prices lower over the past five years are no longer getting worse. They see supply growth negative for most of the commodities they cover and demand expectations shifting higher. That means prices should rise through time.
4. Brexit Watch – chaos on the menu. It’s a week till the British EU vote and it’s interesting to see the difficulty with which Britons are struggling to decide which way they should vote. Our own Lianna Brinded, BI’s finance editor in London, wrote a great piece overnight saying that “for the first time ever, in my view, the arguments for us breaking ties with Brussels are looking more appealing”.
It’s a really interesting article and worth the read. But I highlight it because the momentum that the Leave campaign has garnered in recent weeks does continue to be building. And that is a clear and present danger to markets – currencies, bonds, commodities, credit, stocks and any others you care to name.
Paul Colgan reports on a Credit Suisse note which shows the swing in momentum between the two camps and the collapse in the Remain vote (at least in the polls). Credit Suisse warns ominously “the vote to leave the EU would entail an immediate and simultaneous economic and financial shock for the UK. We are likely to see an immediate contraction in GDP, which can be seen as a front-loading of the fall in UK national income that leaving the EU would imply for the UK.”
Ben Moshinsky also has an interesting read from Citi saying that traders are extrapolating the potential for a British exit from the EU into a wider possibility of the EU unravelling.
5. Speaking of Brexit, the CBA says the AUDUSD will fall heavily if Britain votes to leave the EU. The Australian dollar is the world’s favourite punt. Traders like to trade it because it’s deep, liquid, and – they believe – a good proxy for global growth. Alan Greenspan once gave a nod to this when he said when he wants to know how global growth is looking, he just looks at the level of the Australian dollar (I’m paraphrasing).
What that means is that the Aussie can rise and fall on market sentiment on growth. What it also means, according to Richard Grace, the Commonwealth Banks’s chief currency strategist and head of international economics, is that he doesn’t “believe markets are appropriately pricing the downside risk to AUD/USD, given we anticipate global equity and commodity markets declines will lead to a reassessment of the global economic growth outlook, and the fact the referendum results will be released in the less-liquid Asian time zone”.
In other words, if Britain votes to leave the EU, the Aussie will get hammered.
6.Hedge funds continue to lose their lustre and money is flowing out. When you take fat fees, you have to deliver fat returns as a multiple of those fees. That’s been tough recently for hedge funds as they struggled with a difficult market. Prominent funds like Bill Ackman’s Pershing Square Capital and David Einhorn’s Greenlight Capital tumbled about 20% last year. 20%! And that was before the ugliness of the first quarter’s destructive crash and then bounce in markets.
So it’s no surprise then that Rachel Butt reports that big investors are taking their money out of hedge funds. Leaving aside where they are putting it – private equity – we should all be a little worried about hedge funds losing capital and an eventual reduction in their numbers.
Why? Liquidity. Regulations already hog-tie banks when it comes to providing market liquidity – it has reduced across the spectrum of all markets as a result. Hedge funds are both a user and additional source of market liquidity. So if hedge funds lose capital and become less active overall, market liquidity decreases.
You know what that means. More volatility. We better get used to it.
Key data for the past 24 hours (with thanks to BNZ markets)
NZ: BoP current account bal. NZD, b, Q1: 1.3 vs. 0.96 exp.
AU: Westpac cons. conf. index, Jun: 102.2 vs. 103.2 prev.
NZ: Non-res. bond holdings, %, May: 68.5 vs. 66.5 prev.
CH: New yuan loans, CNY b, May: 986 vs. 750 exp.
UK: ILO unemployment rate, 3m, Apr: 5.0 vs. 5.1 exp.
EZ: Trade balance, s.a., €b, Apr: 28.0 vs. 21.5 exp.
US: Empire manufacturing index, Jun: 6.01 vs. -4.9 exp.
US: Industrial production, m/m, %, May: -0.4 vs. -0.2 exp.
NZ: GDT dairy av. prices change, %: 0.0 vs. 3.4 prev.
US: FOMC rate decision, 15-Jun: 0.5 vs. 0.5 exp.
You can catch me on Twitter.
And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
Futures markets are indicating a relatively steady open for the stock market this morning. However, heavy selling of the banks has been a feature of the sharp drop in the ASX 200 over the past 3 days. A quick look at the banks’ price charts shows strong downward momentum making it hard to be confident we’ve yet reached the bottom of this sell-off.
The Westpac chart reveals a vertical descent and rising volume over the past 3 days. The stock also closed on its low after breaking minor trend line support yesterday. This looks much like the sort of thing that was going on in late March. This time, the volume of selling is not as high but it is rising.
These circumstances tend to produce larger declines or, at best a period of nervous hanging about current levels. Westpac is not aggressively priced at 12 times forward earnings so we may not be in for a really big move lower. However a decline back towards the March lows around $27.70 looks a distinct possibility.
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC
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