It’s a quieter week on the economic calendar but the world will be wrapping its head around the events of Friday night, Asian time, when there was a violent coup attempt in Turkey.
First, here’s the scoreboard (7.30am AEST):
- Dow: 18,517.27 (+0.06%)
- S&P 500: 2,161.47 (-0.10%)
- SPI futures: 5,376.5 -13.0 (-0.24%)
- AUD/USD: 0.7595
The top stories
1. Turkey staved off a military coup at the weekend but with President Tayyip Erdogan now rounding up the plotters and talk of reintroduction of the death penalty, this story has some way to run. There’ll be some ongoing uncertainty on what the future looks like for the nation, which has a critically important geopolitical dimension given its proximity to the Middle East and status as a NATO member. Experts saythe events present “a great opportunity for ISIS”, with Turkey’s military vastly weakened and the country very vulnerable to spill-over from the conflict in neighbouring Syria. The Australian dollar tumbled in late trade on Friday, closing down 1.3% for the session, and global bond yields fell as it emerged the attempted coup was underway. But the chaos subsiding over the weekend, the Aussie has picked itself off the mat in early Asian trade.
2. This is part of a wider theme, though, of political events and the political outlook suddenly taking on a much greater role in global financial markets. David Kotok, chief investment officer of Cumberland Advisors, told BI’s Bob Bryan that politics is “driving investors’ decision-making more than any other year I know of” and that this new dynamic would lead to “extraordinary volatility in both directions”.
“The problem is markets don’t have a way to discount politics the same way they can discount earnings, or economic data, and the like,” Kotok said. “Discounting political events is almost impossible and when you can’t discount things in the market, that leads to more volatility.”
Here’s a list from Morgan Stanley of all the potentially disruptive political events coming up:
And these are just the ones we know of. Coup attempts aren’t in the diary. More here.
3. Citi beat the Street with its results on Friday, posting EPS of $US1.24 on revenue of $US17.55 billion, a tidy beat on the $US1.10 on $US17.56 billion expected. Interestingly it was the trading businesses that drove the result: fixed-income revenue was $US3.47 billion vs $US3.14 billion expected, up 14%, while equity trading accounted for $US788 million against $US707.5 million expected, up 21%. It’s a big turnaround from the previous quarter and perhaps a reflection of the short-term opportunities there have been for trading operations in the volatile environment over the past quarter, especially with the result of the Brexit referendum.
4. China’s GDP printed a slight beat on Friday, , but there are some worrying signs beneath the surface. Soc Gen’s China team noted, in what they referred to as the “most worrying aspect” of the underlying data, that private sector investment actually went negative (-0.7%) for the first time since 2004. Meanwhile, investment by state-owned enterprises was 24%, up from 22.4%! It suggests that China’s attempts to encourage a more modern economy are struggling to find traction, and that the current growth is still being funded the old way: with government spending on major projects.
5. New Zealand inflation is a topic of unusual importance this week. New Zealand interest rate futures place the probability of a 25bps RBNZ August rate cut at about 60%, and Q2 CPI figures in NZ are some of the most anticipated in recent memory. David Scutt looks at this and the other events on the calendar here.
6. Nintendo’s share price has almost doubled on Pokemon Go. Is it over-bought? Deutsche Bank thinks yeah, maybe:
Assume the game lasts ten years and profits fall one-tenth annually. Using a five per cent cost of capital, Nintendo must generate $US3.3bn of earnings this year. That requires $US14bn of in-app revenue if Nintendo receives one-third of the revenue through its stakes in the Pokemon Company and the game’s developer, Niantic, at a 70 per cent profit margin. With Apple and Android taking their 30 per cent cut, players must therefore spend $US21bn. If five per cent of players actually pay (the same as Candy Crush) and they spend $100 each, Nintendo’s share price jump only makes sense if the app is downloaded by every second person on planet Earth.
Now from CMC Markets’ Ric Spooner, here’s today’s stock to watch:
Dulux (DLX: ASX)
Here’s another example of the kind of chart that suggests that there are limits on how much higher the Australian stock market can get in the short term. It might grind a bit higher from here but it seems unlikely to roar away to the upside.
Paint and building products group, Dulux peaked neatly at the bottom end of chart resistance on Friday. It’s trading at around 20 times earnings which seems plenty for a moderate growth stock exposed to risk of any significant downturn in the residential building cycle.
For Dulux to punch through the top of this resistance one of 2 things is likely to be required. Either it will need to beat earnings expectations by a good margin or the market will have to take overall equity valuations to even higher levels based on a lower for longer interest rate outlook.
Looked at things the other way, there’s a fair bit of downside risk if either the market or the company gives investors anything to be a bit concerned about.
Ric is Chief Market Analyst at CMC Markets ANZ. He’s on Twitter here.