6 things Australian traders will be talking about this morning

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Even though US stocks had a good night with gains of more than 1.4% the SPI 200 March contract is giving no lead (+6 points) on the direction stocks on the ASX will take when they open today at 10am.

Perhaps part of that lack of direction flows from the disappointing performance of European stocks which, with the exception of the FTSE in London, were all lower.

Perhaps equally it could be because oil is down again and back near $29 a barrel after the Saudi/Russia deal underwhelmed traders. Gold is lower also at $1202 but that’s off yesterday’s lows, while the Australian dollar is down around half a per cent from yesterday morning at 71 cents.

Here’s the scoreboard (8.40am):

  • Dow: 16,196, +222 (+1.39%)
  • S&P 500: 1,895, +31 (+1.65%)
  • SPI200 Futures (March): 4,881, +6 (+0.1%)
  • AUDUSD: 0.7107, -0.0032 (-0.45%)

And the top stories:

1. Oil collapsed even thought the Saudis and Russia agreed a production freeze – here’s why. So we got the deal. The Saudis, Russians, Qataris, and Venezuelans have agreed to freeze production levels. Yes, you read that right – we got a freeze, not a cut, and we don’t have the Iranians or Iraqis as part of the deal. And we certainly don’t have US shale oil producers as part of the deal either.

So oil is back around $29 a barrel in Nymex WTI terms. That’s a long way from the $31.53 high overnight – almost 5% in fact. Elena Holdony explains why traders think the oil production freeze won’t be a game-changer.

But Akin Oyedele has a piece on the beginning of the end for US shale oil.

2. There is only one question for China to answer about its currency, the yuan. The global investment team at Nikko Asset Management has hit the nail on the head on what the real question facing Beijing is this year. It’s a question that goes to the heart of China’s system of government and its desire for control in all aspects of the economy and markets.

Yu Ming Wang and his team ask “Is pragmatism going to trump ideology in Beijing?” when it comes to the yuan. That’s a tough one given that the PBOC or Communist Party folding in the face of hedge fund and market pressure would run “against the ethos of the Communist Party regime in terms of retaining ultimate control”.

I’ve got more here.

3. Chinese lending is going through the roof – that’s a sign authorities are rolling the dice to keep growth elevated. China released its lending data yesterday and the numbers were incredible. David Scutt reported Chinese banks just lent more money than ever before. “As a result of the enormous borrowing spree, the total value of outstanding yuan loans increased by 15.3% from 12 months earlier,” Scutty said.

But handing out loans like lolly bags at a 10-year-old’s birthday party comes with a downside – bad loans at Chinese banks just hit a decade-high.

So you won’t be surprised that “some super bears are now expecting an imminent collapse of China’s banking system and currency”, says Tao Wang from UBS.

4. Negative gearing on Australian property. Not directly applicable to traders today or tomorrow perhaps but certainly something of a macro factor that could influence the RBA’s outlook on rates. Or the Aussie dollar’s value if the doomsayers are right and the market tanks. The big question of course is why would the market tank if current investors are grandfathered and are not forced to sell?

Equally, claims that any changes would disproportionately hurt average Australians – what’s “average” anyway? – were neatly dispelled in David Scutt’s excellent piece yesterday about who uses negative gearing. Top percentile income earners and older Australians for the most part.

But don’t let the truth get in the way of important rhetorical arguments. What was it former prime minister Paul Keating once said? Something along the lines of self-interest always running a place.

5. Goldman Sachs says sell gold – that could be a good thing for markets. Gold had a blow off last week, rallying more than $60 an ounce in less than 24 hours. Since then it’s reversed course and is back near $1,200 an ounce as the risk rally continues and US stocks rise more than 1%. But in a note, Goldman Sachs has told clients to sell gold and get set for prices to head back to $1,100 and then $1,000 an ounce.

That’s good news potentially because Jeffrey Currie said while gold’s rally last week was in keeping with the overall market fear and was “a continuation of a trend established since the beginning of the year that started with systemic concerns over oil and China, we believe that these new fears like the past fears are not justified”.

6. The Bank of England is worried about bond market liquidity – you should be too. I was reading a EuroMoney article this morning discussing the big banking outlier which will have its regulatory capital requirements increase by as much as 700% on its market risk positions. That bank is an outlier but EuroMoney says the banking boffins in Basel’s new rules “market risk-weighted assets of less than 10% of total risk-weighted assets, compared with around 6% historically”. That doesn’t sound much but a move from 6% to 10% is an increase of 66.6%.

That’s important because these extra charges are sapping market liquidity. As if on cue, and without apparent irony, Alex Brazier, executive director for financial stability at the Bank of England, highlighted that reduced market liquidity and the potential for hedge funds to shut the gate on investors could result in “complete market dysfunction”.

It’s not just bonds, other markets are suffering from lower liquidity as well. Ben Moshinsky has more here.

You can catch me on Twitter.

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

Invocare (IVC: ASX)

It’s not exactly a health care business but funeral company, Invocare, shares some of that sector’s characteristics. It’s a defensive business with exposure to a growing and ageing population. It may lack the growth profile of some health stocks but it has the advantage of less exposure to changes in government policy.

Yesterday, Invocare beat expectations with a 14.5% jump in operating earnings thanks to a larger than expected number of deaths last year. Over the medium term it has growth opportunities but these are not without challenges. The company noted that the ability to acquire new assets at the right price in its core markets is becoming more difficult. While its very early days, it also noted that implementing its business plan in the newly acquired US business was proving harder to implement than anticipated and is being re-calibrated

The stock was up 3.4% yesterday and is trading at around 23 times forward earnings. Patient, buyers might keep an eye on long term support on the weekly chart between about $9.80 and $10.20.

Ric Spooner, chief market analyst, CMC Markets

You can follow Ric on Twitter @ricspooner_CMC

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