The zig zag run continues.
For the third day in a row, US stock markets have moved around 1%. Last night the Dow lost 1.02% while the S&P dipped 0.94% to 2047. Key to the price action was a solid rise in headline CPI of 0.4% and warnings from Fed governors about rate hikes.
That weakness, and the fact the ASX200 failed again at 5400 yesterday, will put pressure on the market when it opens this morning based on the overnight move on futures markets. The SPI 200 June contract is down 29 points, 0.5%.
But it won’t be all bad news on stocks with energy companies likely to benefit from crude oil’s continued rally. The miners did well in London and iron ore is higher again while copper is holding around $2.09 a pound.
On forex markets the Aussie dollar rallied hard after the release of the minutes yesterday which suggested a more muted rate cutting cycle than many traders had begun to price. But with investment banks like Morgan Stanley reiterating that traders should sell the rally, the Aussie is sitting just above 73 cents this morning.
Here’s the scoreboard (7.49am):
- Dow: 17,529, -180 (-1.02%)
- S&P 500: 2,047, -19 (-0.94%)
- SPI200 Futures (June): 5,369, -29 (-0.5%)
- AUDUSD: 0.7319, +0.0035 (+0.48%)
Now, the Top Stories
1. The release of Australia’s wage price index today has never been more important. The Bureau of Statistics’ first quarter wage cost index is out in Australia today. It measures the average change in wage and salary levels in Australia’s labour market and, as David Scutt points out in his excellent primer this morning, the WPI has been falling for a while now. In fact. the rate of growth in Australian wages is at series lows.
This data is important for two very good reasons. The RBA referenced wages in the board minutes yesterday as a risk to the inflation outlook. Low wage growth will tend to anchor households’ expectations about the overall level of price rises in the economy. That’s kind of chicken and egg. But, perhaps more importantly, the level of wages growth also influences what folks can pay for the stuff they buy.
That then influences inflation but it’s also important for household consumption in the economy. It’s hard to argue that consumption can grow much faster than wages unless consumers drop their savings rate. That’s important because the federal budget is looking for consumers to save less and spend more. But wages, and wages growth, will provide the base line from which consumption can grow.
2. Goldman Sachs thinks the risks to stocks in the US are down – that will make it hard for the ASX. David Scutt reports this morning that analysts at Goldman see the current headwinds faced by US stocks are likely to lead to a 5-10% retracement in stocks. They say the “long list of potential risks skews the distribution of risks to the downside, and after a hefty rally, it seems easier to see the index 5% or perhaps 10% lower rather than higher”.
Certainly a casual look at a chart of the S&P 500 shows that momentum topside has stalled and technical traders will have noticed the 1% down, 1% up, 1% down candles of the last 3 days looks ominous. With another failed attempt by the ASX 200 yesterday at 5400, local traders will be looking cautiously at our market and the lead the S&P is giving them.
3. Ahem folks – US CPI just had its biggest one-month gain in over 3 years. The debate over inflation, and its outlook, is the single most important debate in global markets right now. That’s because the path of inflation is directly related to the path of central bank policy.
That’s important for RBA policy, the Bank of Japan, ECB and so on. But nowhere is that more important than in the US where the jobs market is very tight and only needs around 55,000 new jobs a month to match population growth, yet the current run rate is close to 200,000 a month. That’s driving wages higher and, once oil stops falling, likely to help lift inflation to and through the Fed’s 2% target.
Last night’s April CPI release showed a 0.4% increase in headline CPI for the month, the highest in years with the gas index up 8.1%. That makes the chart I shared yesterday on the rate of change in the price of crude the most important chart in the world right now.
Inflation rising, or at least looking like it isn’t falling anymore, will give the Fed room to raise rates and suggests market expectations might be underpricing that chance.
4. And on cue, Fed presidents are warning that June is live. Fed governors, especially influential ones like John Williams from the San Francisco Fed (Janet Yellen protégé) saying that rates could increase as soon as June will be troubling the stock market bulls. It should trouble everyone because the market is only pricing a 50% chance of a rate hike in September, and less than 20% for a June hike at the moment.
Overnight, Williams said: “I think the incoming data have actually been quite good and reassuring in terms of policy decisions, so, in my view, June is a live meeting.”
Also on the hustings was Atlanta Fed governor Lockhart, who said he’s assuming 2-3 hikes this year and June “certainly could be a meeting at which action could be taken”. He added he’s not as pessimistic as the market.
The Fed may not be able to hike in June unless they get out there and prep the market. That means June is live but unlikely at the moment. Perhaps this is what Williams, Lockhart and others are trying to do.
5. Gold – get on board. Gold is having a good year this year. After making a low around $1050 in January, gold is up around 20% at $1279 an ounce this morning. That rally has also renewed interest in the miners with news via the FT overnight that George Soros spent $263.7 million to buy a 1.7% stake in Barrick gold. Barrick is up more than 150% in 2016 so Soros must think there is still plenty of upside for the company. The FT also highlights that other hedge funders like David Einhorn have also been buying gold miners.
And it seems after years of irrelevance to most traders and banks, gold is also finding interest elsewhere. Elena Holodny reports this morning that the world’s biggest bank just bought a “secret” gold vault in London. The secret is not the vault but its location. No doubt that’s because it can hold 2,000 tonnes worth. I think that’s around 65 million ounces or $83 billion dollars worth of gold.
Elena says that this move supports China’s desire to more heavily influence the price of gold.
6. Financial Engineering – this notable short-seller says the way companies are acting is eerily similar to the financial crisis. Financial engineering is back and it’s worrying Carson Block. He says that he’s seeing “fewer and fewer abject frauds from places like China” but told Business Insider’s Bob Bryan that “there has been a shift in accounting, though — more and more companies are using financial engineering to make things on their balance sheets look very different than they are”.
That sounds ominous with the gap between adjusted and unadjusted earnings widening and Block says “it’s kind of like the financial crisis in the sense that these companies aren’t doing anything technically illegal but they’re coming right up to the line”.
That means the structure of market earnings is worse than it appears. Just another headwind to add to Goldman Sachs list – although this one is more company specific.
Key data for the past 24 hours (with thanks to BNZ markets)
AU: RBA Minutes, May: “persuaded” to cut rates.
NZ: 2-year inflation expectations, Q2: 1.64 vs. 1.63 prev.
JP: Industrial prod. (m/m, %), Mar F: 3.8 vs. 3.6 prev.
UK: Core CPI (y/y, %), Apr: 1.2 vs. 1.4 exp.
EZ: Trade balance (s.a. €b), Mar F: 22.3 vs. 22.0 exp.
US: CPI ex food and energy (y/y, %), Apr: 2.1 vs. 2.1 exp.
US: Industrial production (m/m, %), Apr: 0.7 vs.0.3 exp.
NZ: GDT dairy auction, average price change (%): 2.6.
US: Fed’s Lockhart: “two or three hikes possible this year”
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And, if you are interested in improving your trading and learning how I approach markets and trades, my strategies and processes, I’m holding a course in Sydney soon.
Now from CMC Markets’ Ric Spooner is today’s Stock of the Day
Paint and building products group, Dulux, released its half year result yesterday. Profit was in line or slightly better than analyst expectations but not, it seems, the market’s. The stock closed down 3% after announcing profit growth of 3.7% and maintaining its full year guidance.
Dulux is trading at around 18.6 times forward earnings which, although not over the top, is not especially cheap for a moderate growth stock.
The chart has set up a clear trading range. The next test may be whether the support just above $6.00 can hold once the stock goes ex dividend. If this level does happen to break, there is potential for move lower buyer and a better value opportunity for patient buyers.
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC
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