The volatility continues.
After the Dow closed 1% lower on Friday, it rallied 175 points for a 1% rally overnight. The S&P 500 went along for the ride with a rise of 0.98%.
In no small part, news that Warren Buffett’s Berkshire Hathaway’s 13F filings revealed a position in Apple was the big news for the company and the market. It reminded traders that there might still be value in some of the market’s beaten down stocks.
That, and a sharp rally in crude oil overnight helped lift the SPI 200 44 points higher, suggesting a gain of 0.9%. After yesterday’s remarkable rally, traders will be wondering about exactly what’s up on the ASX at present as it rocks higher.
On currency markets, the Aussie dollar rose above 73 cents at one point last night but is back in the 0.7280s as traders await the potentially market moving release of the RBA minutes at 11.30am.
Here’s the scoreboard (7.40am):
- Dow: 17,710, +175 (1.00%)
- S&P 500: 2,066, +20 (+0.98%)
- SPI200 Futures (June): 5,393, +44 (+0.9%)
- AUDUSD: 0.7288, +0.0034 (0.46%)
Now, the Top Stories
1. The RBA minutes today are a huge event for the Aussie dollar, bonds, and stocks. The Aussie’s sell off and the bond market rally face their first big test this morning since the release of the RBA’s quarterly statement on monetary policy a couple of Fridays ago. That’s because while the RBA has only cut once and downgraded its inflation expectations – while keeping growth expectations pretty solid – the market has extrapolated this change to infinity. That means some forecasters have pencilled in RBA rate cuts to 1% while others have gone even further.
So traders will be looking for colour around the actual conversation that the board had about the outlook for inflation, growth and rates. Did the board have a conversation which supports the markets repricing and Aussie 10-years bonds at all-time lows? That’s a repricing which hammered the Aussie and turned the stock market around.
There is no guarantee we’ll be more informed once the minutes are released than we are now. But traders will be watching closely and economists and strategists will be poring over every word with a fine-tooth comb.
2. Here’s why Goldman Sachs did a big U-turn on oil. Oil has been rallying for some time now, finding support in the $43/44 region for many weeks. But yesterday’s news that Goldman Sachs had changed its outlook for the black gold helped kick Brent up 2.5% and WTI up 3.5%.
The key here is that Goldman, like many in the market now, seem to be agreeing with Saudi statements last month that the oil market will be back in balance late this year or early next year. Goldman said:
The physical rebalancing of the oil market has finally started. While supply and demand surprised to the upside commensurately in 1Q16, leaving the market oversupplied by 1.4 mb/d, we believe the market has likely shifted into deficit in May. The 2Q16 deficit that we now forecast is occurring one quarter earlier than we expected mid-March, driven by both sustained strong demand as well as sharply declining production. The shift in OECD stocks will be further exacerbated by the ongoing strong Chinese inventory builds.
3. Oil’s rally is a game changer for inflation and central banks – especially the Fed. Do you remember how much of the first quarter CPI deflation we printed in Australia was driven by the fall in transportation costs? All of it and more is the answer. Without a collapse in transport, the CPI would have been a small positive most likely. That’s important here in Australia but it is vitally important for the Federal Reserve’s plans for the path of its rate hike cycle in the US.
What’s important to know is that oil doesn’t have to rally to change the inflation rate. It only has to stop falling. And it hasn’t just stopped falling – it’s actually up more that $20 a barrel, off its lows. That undoes much of the global deflationary pulse that washed over markets and spooked central banks. Even if oil settles around current levels and defies the new calls for rallies into the $50s – and even one of $65 by year’s end I heard on Sky Business when I was co-hosting with Carson Scott last night – the deflationary pulse washes away.
AS if on cue, the Fed’s Jeffrey Lacker said overnight that June is live and it’s time to catch up.
4. Demographics are markets, they drive supply and demand – prepare to have your mind blown. Elena Holodny reports that the world is about to see a mind-blowing demographic situation that will be a first in human history: There are about to be more elderly people than young children. She says that just before 2020, adults over 65 will begin to outnumber kids under 5 across the globe.
That, according to BAML, means we’ll hit “peak youth”.
That’s problematic for the countries of the globe with strong social contracts between the government and populations around retirement incomes and standards of living into old age. It’s important also because as we run out of workers to support the aged and retirees, we also run out of income to pay for all the things global populations have expected their governments to provide.
In Australia, we might like to think about that as well. Is it reasonable that wealth built up under the tax shelter of superannuation still remains largely untaxed in retirement when the working child or grandchild of the superannuant pays tax on the same, or lower level of income. These are big issues and big questions and they will shape markets in the years ahead.
Not to mention the savings glut and what that does to bond rates, economic activity and so on. Time for a conversation and a hard look at ourselves, folks. In the interests not just of the shrinking number of kids, but ourselves as well.
5. Hedge funds – charge too much, deliver too little. That’s the message from hedge fund legend Jim Chanos. Linnette Lopez reports Chanos said on a Business Insider podcast:
“Really, it’s befuddled me and I’m in the industry… how the industry’s gotten away with the high fees for so long for what in effect is beta, market exposure.”
Chanos is an alpha creater in his own right and he wonders where it’s coming from in the move to indexing. No doubt his peers do too – see below.
6. Hedge fund managers – the non-billionaires – are miserable. I can’t think of many things I’d rather do less, but Linette Lopez just spent some time at the SALT hedge fund conference in Las Vegas. She’s written an interesting piece on just how miserable the non-billionaire folks in the room were faced with an inability to beat the market and a potential Donald Trump presidency.
This is an interesting story on so many levels. Most I see it in behavioural terms. Get a bunch of super wealthy dudes and dudettes in a room and everyone except the top few, likely older and more established – so less fearful of losing their wealth – are looking around judging their own wealth relative to everyone else.
Keynes’ beauty parade on a personal level. It helps explain why some of these guys’ performances have been so awful lately.
Key data for the past 24 hours (with thanks to BNZ markets)
NZ: Perform. of services index, Apr: 57.7 vs. 54.8 prev.
UK: House prices (m/m, %), May: 7.8 vs. 7.3 prev.
JP: Machine-tool order (y/y, %), Apr: -26.4 vs. -21.2 prev.
US: Empire manufacturing index, May: -9.02 vs. 6.50 exp.
CA: Existing home sales (m/m, %), Apr: 3.1 vs. 1.5 prev.
US: NAHB housing market index, May: 58 vs. 59 exp.
You can catch me on Twitter.
strong>And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
This is a busy chart but it’s well placed to provide some insight into short term market dynamics.
Rio looks like rejecting short term support with potential for some strong upward momentum, at least initially. This coincides with the Shanghai Steel Rebar contract also faltering at support yesterday.
In Rio’s case, it looks like forming a minor double bottom at the 78.6% Fibonacci retracement level. The Bollinger Bands are pointing to the possibility of a minor reversal. The first low of the double bottom is under the lower band while the second leg is above it. This indicates that the downtrend is losing impetus.
However, to be more than a minor blip this rally will need to clear the resistance of the last minor peak and 200 day moving average around $46.65.
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC