It’s been an incredible 24 hours with the market funk of early yesterday morning giving way to a recovery in the price of crude oil, a surge in the Aussie dollar and a break of overhead resistance by US stocks.
The Dow closed above 18,000 for the first time since July last year and the S&P 500 broke up and through the trendline which has been capping its gains recently, and before that for months.
That sets the ASX up for a solid day today with the June SPI200 futures up 53 points, 1%. Whether the market can kick on further than that, given the SPI has outperformed the overnight moves in Europe and the US, is open to debate. But with iron ore higher, oil back around $40 a barrel, copper at $2.17 a pound and an overall risk-on mood, it just might be a better day.
On forex markets, it’s been a spectacular day for the Aussie dollar. Not so much for the punter who sold Aussie at 0.7588 early doors yesterday. But the high of 0.7758 overnight shows demand for Aussie hasn’t been diminished. Elsewhere, the yen’s strength and the Canadian dollar’s weakness reversed as oil recovered overnight.
Today it’s RBA minutes at 11.30am and a speech from RBA governor Glenn Stevens in New York at 11.30pm.
Here’s the scoreboard (7.39am):
- Dow: 18,004, +106 (+0.6%)
- S&P 500: 2,094, +14 (0.65%)
- SPI200 Futures (June): 5,182, +53 (+1.0%)
- AUDUSD: 0.7749, +0.0080 (+1.04%)
Now, the Top Stories
1. This is the real reason markets have been in a funk this year and it’s not going to change. This is so important I’ve bumped oil to the bottom of the six things list today. And I buy this argument 100%. Cullen Roche over at Pragmatic Capitalism wrote a post called “Thinking About the Great Normalization” where he talked about the state of global growth and addresses the concerns some hold about global growth – what’s being called in some quarters a “secular stagnation”.
Roche says he’d rather call it the “great normalization”. Growth is moderating, he says, but that moderation is back to a more stable and steady rate. “In other words, we’d been in a secular boom for 50+ years and what we’re seeing now is a lower, but more stable form of growth.”
Roche has a chart of growth for the past 2000 years which is why I am with him 100%. Even a casual read of the economic history of the world will show that the last 100 years was aberrant. It’s a point former OECD chief economist Olivier Blanchard made recently on CNBC when asked about growth. He said (I’m paraphrasing) that growth for the past 1000 years had been around current levels.
This has important implications for monetary policy, government finances, electorate entitlement expectations, as well as stock, bond and commodity valuations in the years ahead.
2. Here’s the best sign the Aussie dollar might go roaring to 81 cents. The Aussie dollar made a high of 0.7758 last night – 170 points above the Monday morning low. That’s a phenomenal performance and just another example why I warned yesterday that Monday morning Asia is a notoriously dangerous and fickle time of trade.
But even as traders await the RBA minutes at 11.30am today for signs of just how broad the discussion was about the Aussie rise and what options to restrain its rally might have been canvassed, there are signs that the global market bull is back and the Aussie could roar.
I don’t mean the rally in stocks and the break through resistance of the S&P 500 overnight. Rather I mean that the Argentinian bond sale has received so many bids, $70 billion for a $10-15 billion sale, that the banks have been able to tighten the terms the FT reports this morning. Remember this is the country that hasn’t issued for 10 years, and is a serial defaulter.
If Argentina is being overrun with bids for its bonds, then the bid is back in financial markets. That will underpin the Aussie dollar – no matter what the RBA wants.
3. Deutsche Bank and BAML reckon stocks could burst higher – and then crash. The S&P 500 closed above the resistance zone it had stalled behind recently this morning. That’s a sign stocks could continue to rally now resistance has been bested. But in separate notes overnight, both Deutsche Bank and Bank of America Merril Lynch say that stocks could not only rally but could roar.
Myles Udland reports that David Bianco and his team at Deutsche say stocks could rally to 2,500 by 2018 and then crash 20% back to 2000 – a little below where we are this morning.
Michael Hartnett of Bank of America Merrill Lynch is bullish as well and says: “It could simply be 1998/99 all over again. After all, a ‘speculative blow-off’ in asset prices is one logical conclusion to a world dominated by central bank liquidity, technological disruption & wealth inequality”. But Bob Bryan says Hartnett, like Bianco, reckons after the boom comes the bust – or in this case “pop”, says Hartnett.
4. Here’s what the Qantas stock price fall tells us about the Australian economy. Qantas’stock price had a shocker yesterday, falling more than 10% at one point after the airline warned it was seeing signs of softer domestic demand. Paul Colgan reckons that the slowdown, and the impact on Qantas load factors, isn’t the only evidence that consumers are getting a bit wary.
He’s had a look at my favourite barometer of consumer behaviour – spending in cafes, restaurants and takeaway outlets – added in an election campaign, a bit of household balance sheet rebuilding and reckons there’s an increasing chance that the economy is heading for a flat spot.
5. Credit is quietly blowing up and hardly anyone is noticing – that’s a worry. Here’s the counterpoint to the big bid in Argentinean debt – corporate credit is quietly blowing up in the US, reports Jim Edwards. US companies failing to pay their debts – defaulting – are heading back up to territory last seen in 2009, when the financial crisis hit bottom.
Edwards also notes that while defaults in the US are rising, so too are defaults in China. So it’s important that “Chinese companies have doubled their debt load since 2010. Clearly, some of them aren’t capable of carrying it,” Edwards says.
It’s a risk for global markets but for the moment – no one cares. Bring on the bull.
6. Oil rallied back to $40 overnight. I can’t remember whether it was Dennis Gartman or Jesse Livermore who said it, but when a market doesn’t go down on bearish news then maybe it’s not a bear market after all. That has to be the distinct impression traders may take away from oil’s collapse and then bounce after the weekend’s failed talks in Doha.
When markets opened yesterday morning, the price of West Texas Intermediate and Brent in futures trade collapsed more than 6% with WTI making a low around $37.50. But this morning it’s back up more than $2 a barrel after “filling the gap” that yesterday’s big falls caused. Some say that traders focused on the Kuwaiti oil strike, which will drop supply from 3 million BPD to just 1 million BPD, and ongoing troubles in Venezuela. That seems fair in the short run. I prefer to say that traders just did what traders do and filled that gap.
But the big question is what’s next? Supply is still greater than demand and prices should fall. But doomsayers may just be way too bearish if last night’s price action is any guide.
Speaking of doomsaying – Gary Shilling says the failed Doha meeting is proof that oil is still headed for $10.
Key data for the past 24 hours (with thanks to BNZ markets)
NZ: CPI (y/y, %), Q1: 0.4 vs. 0.4 exp.
UK: Rightmove house price (m/m, %) Apr: 1.3 vs. 1.3 exp.
US: NAHB housing market index, Apr: 58 vs. 59 exp.
US: Fed’s Dudley speaks: “gradual and cautious” but a little more hawkish on inflation.
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And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
Yesterday, Qantas provided more evidence of the patchy, fickle nature of demand in the economy. Its latest traffic and capacity report noted soft demand for both domestic and international air travel.
Bookings over Easter and the school holiday period were soft and this has continued in forward bookings for April and May. Qantas cited a drop in consumer confidence and the upcoming federal election as reasons for this.
Would a lot of people really go as far as putting travel plans on hold due to concerns about the ever moving chatter about tax changes?
Market reaction was savage, causing Qantas to break below trend line support and the 200 day moving average. However, the stock did rally off the initial support level of the November low around $3.46.
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC