6 things Australian traders will be talking about this morning

Photo: Brendon Thorne/Getty Images.

Stocks in the US made fresh all-time highs for the Dow and S&P 500. The new peak on the Dow was 2168.99 before it eased a little into the close to finish the day at 2163.75 up 0.5%. The Dow was 0.73% and the Nasdaq was 0.57% higher. In Europe, the CAC and DAX rallied hard with gains of more than 1% but FTSE traders were a little disappointed not to get a BoE rate cut sugar hit with the 100 index closing down 0.24%.

The wash up is that the September ASX SPI 200 futures are up 0.6 points after another strong day yesterday which saw the index close above 5400 for the first time since May 30. Can it break the top of the recent range? That’s the questions traders need to ask themselves. Chinese data today could be important in that determination.

On currency markets the Aussie is looking strong above 76 cents again but the Kiwi has been pole-axed by an announcement yesterday afternoon that the RBNZ will be providing an out of cycle market update next week. That’s weird, and traders appear to fear it will mean they’ll signal some more easing. In other trades the British pound is stronger after the BoE move and is sitting at 1.3330 while the Yen is getting hammered with USDJPY at 105.36 this morning.

On commodity markets gold is back at $1334, and oil recovered some of the previous days losses up 2%.

Here’s the scoreboard (7.23am):

  • Dow: 18506 +134 (+0.73%)
  • S&P 500: 2163 ++28 (+0.53%)
  • SPI 200 Futures (September): 5,389, +6 (+0.1%)
  • AUDUSD: 0.7631 +0.0026 (+0.34%)

One last time before a week off – David Scutt will be your host next week.

The top stories

1. Is today the day the ASX breaks the shackles and burst higher? The ASX 200 closed at 5411 yesterday. That means the market has had all, and then some, of the catch up rally to the US market’s moves which we talked about earlier this week. It also means that graders have a question to ask themselves today. That is, can the market take out the recent high and kick on to a new and higher range?

It’s happening in the US and there is no real reason it can’t happen here if the US market stays firm. Technically a break of 5430 would open up the chance of a run of between 180 and 200 points in the months ahead.

Here’s the chart from my Reuters Eikon terminal.

ASX200 Daily (Reuters Eikon)

2. Ideas the world is drowning in debt are just plain wrong this analyst says. That means the RBA is right about Australia’s debt. Global debt levels are at an all-time high. It worries many folks that the world is drowning in debt. But that analogy is a furphy according to Michael Pearce, global economist at Capital Economics. Bob Bryan reports that Pearce said while debt is rising the more important thing is that the groups that owe the debt have an improving ability to pay down that debt due to incredibly low interest rates.

“The decline in real interest rates since the financial crisis means the global economy can sustain higher debt burdens than in the past,” said Pearce. “It is increasingly clear that the fall in interest rates is a structural change, due to factors such as population ageing and a slowdown in global productivity growth.”

It’s worth taking the jump over to read the whole article. But the reason I’m leading with this today is that this is a key point the RBA has been making for years.

Ask Luci Eliis, the RBA’s head of financial stability, or any of her other other senior colleagues at the RBA, about how important the decline in interest rates is for both the rise in Australian house prices and the debt levels and you’ll likely get a response that it is a primary driver (of course falling inflation has made this all possible).

Add in Pearce’s point about the groups that owe the debt and we have a triumvirate of points the RBA is consistently making about debt levels in Australia. But it would be remiss of me to use Pearce’s argument to make the RBA’s point without also highlighting that he does call out Australia and rising household debt as a “concern”.

3. Just because the Bank of England did something a few economist didn’t predict, doesn’t mean they were wrong or it was a shock. OK I feel like I need to make this point again. Just because a central bank, or a data release, doesn’t do something that the pundits expect it to do does not mean it’s wrong. A couple of days back I saw an article criticising the NAB’s business survey – which I firmly believe is the single best economic release in the economy – for being wrong. Yet if you followed the leads of the NAB survey over many years you’d consistently get your take on what’s happening in the economy right.

Similarly overnight the Bank of England was said to have stunned markets by deciding to leave its rate at 0.5%, not the 0.25% many expected. I’ve read reports by economists saying things like, “this has added to market uncertainty”. Mmmm. Maybe the economists just got it wrong. The idea goes that Mark Carney misled traders. But here is the actual quote in question from his June 30 speech.

In my view, and I am not pre-judging the views of the other independent MPC members, the economic outlook has deteriorated and some monetary policy easing will likely be required over the summe.

And here is what the BoE governors statement said last night:

Most members of the Committee expect monetary policy to be loosened in August. The precise size and nature of any stimulatory measures will be determined during the August forecast and Inflation Report round.

August is summer right? It’s a lesson again that markets, economists and traders can’t just say a bank is wrong because they don’t like the outcome.

Now you can have a look at Jim Edwards explainer as to why Mark Carney held fire last night. You guessed it. It’s about the zero lower bound.

4. And as if to prove what sooks market-types can be when they get it wrong, here’s a conspiracy theory the shorts are spreading about what’s driving stocks higher. Stocks in the US have broken higher. That’s dragging global stock markets and other risk assets with it. It’s knocked gold lower and has turned much of the prevailing wisdom that stocks are due for a crash and we’ll all be rooned on its head. So this stock rally means many traders – shorts in particular – are getting creamed and many investors, who might have a little too much cash on the sidelines, are losing ground on the index.

So what’s the explanation? Not that traders could be wrong for the moment, that the break out might have legs. Rather the explanation for some of the disgruntled bears is a conspiracy theory. No, I’m not kidding.

Bob Bryan reports the new prevailing wisdom from some corners of the NYSE is that the move has been “constructed” as the market runs up to the next expiry. Keene Little at Options Investor says because the gains are coming in overnight futures trade, not during the New York trading day, that something must be amiss. “It’s much easier (cheaper) to manipulate the market higher with overnight futures than it is during RTH (regular trading hours)”, Little wrote.

Ugh, ugh, ugh. Seriously. If the market is mispriced the flip side of Little’s comments are that traders in New York could spend the day selling the market and drive prices back down. As he points out it would be much harder to hold it up during the NYSE trading day.

Anyway the rally is real because as Dennis Gartman always says “if a market doesn’t go down on bearish news then its not a bar market”. If stocks can hold above 2135, S&P 500 terms, for the end of this week and this month we might be at the start of a big move. But if I’m wrong I promise not to complain the market is rigged by the shorts.

5. You don’t know as much as you think about trading or investing. I’m lucky, I wanted to be in markets when I was a kid and I was at the dealing desk in Westpac back in 1988 when I was still 18. So I’ve spent thousands and thousands of days, some of them very long, at the direct market and economic coals face – not to mention my Undergrad and Master degrees.

But most folks haven’t had that opportunity. Yet scarily research from State Street Global Advisers (SSGA) showed that when investors where “asked about their level of financial knowledge, nearly two-thirds of investors rated themselves as advanced”. But only 15% of folks knew the difference between the different costs associated with an index fund or an actively managed fund.

That’s important because SSGA says your actual level of financial literacy impacts your asset allocation and also your emotional reactions to market moves. I’ve covered the research here.

I raised it this morning because coincidentally in Chris Cuffe’s latest newsletter he has a link to a piece from Jack Gray and Steve Hall at investment manager Brookvine which highlights SSGA’s point. Gray and Hall conducted a white board workshop with some HNW investors and says “it is difficult for advisors to convince clients of the need for some diversification given the concentrated approach founders relied on to accumulate wealth and their strong emotional attachment to their businesses”.

But they conclude while sometimes difficult for private investors “diversification is an effective way of reducing risk of capital loss and of lowering volatility. It is almost a free lunch”.

6. The Fed really is in play. There has been a lot of Fed speak already this week. And while the message continues to be one of caution and patience the undertone I’m getting is that rates are too low, relative to where the economy is and is headed. Jobs are strong, wages are starting to rise – even if older workers leaving the workforce is holding absolute growth down – and the fact oil has stopped falling means the deflationary impact will wash through consumer and producer prices in the months ahead and bias inflation higher.

Last night we saw evidence of this with the release of producer prices in the US for June. The data showed prices rose a much stronger than expect 0.5% for the month, where economists had been expecting a still solid 0.3%. Core PPI was a big beat as well with an increase of 0.4% against 0.1% expected.

This puts the Fed back in play and perhaps we’ll hear a little more on their intentions at the next FOMC meeting in a couple of weeks time. Let’s face it, the things that were holding them back, Brexit, China, and market instability, are washing away. So September is probably live now.

Key data for the past 24 hours (with thanks to BNZ markets)
NZ: BNZ manufacturing PMI, Jun: 57.7 vs. 57.1 prev.
NZ: ANZ consumer confidence, Jul: 118.2 vs. 118.9 prev.
AU: Employment change (‘000), Jun: 7.9 vs. 10.0 exp.
AU: Unemployment rate, Jun: 5.8 vs. 5.8 exp.
UK: BoE bank rate (%): 0.5 vs. 0.25 exp.

You can catch me on Twitter or at AxiTrader where I am the Chief Market Strategist.

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

Flight Centre (FLT: ASX)

The ASX 200 index is shaping up to test chart resistance and so, not surprisingly, are a number of individual stocks.

Flight Centre is one chart amongst the beaten up brigade that looks interesting. The share price was crunched in late May when it announced reduced profit guidance for the current year. Flight Centre attributed this to a number of factors including consumer uncertainty; airfare price wars and poor results in its US leisure business.

After the quick loss of altitude in late May, the stock has levelled out and formed what could be a basing pattern on the chart. This looks like an inverse head and shoulder type pattern and the share price is currently sitting at the resistance of the “neck line”. If it breaks clearly through this, a rally to the first major Fibonacci retracement level around $33.80 would not surprise.

Ric Spooner, chief market analyst, CMC Markets. You can follow Ric on Twitter @ricspooner_CMC

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