There was recovery in risk to end the week in most markets on Friday night.
Stocks in the UK and Europe rallied, crude oil surged more than 4%, the Aussie, pound and other forex pairs rallied while bonds sold off a touch.
But that reversal was lost on US stock markets which ended the week with another mild down day.
That’s left the ASX 200 with little lead from an unchanged September SPI futures contract. But the continued recovery in forex this morning, especially the rally in GBP/JPY and AUD/JPY, suggests we might have a risk on day in Asia. That and the rally in gold – and commodities more broadly – should support the local market.
Here’s the scoreboard (7.12am):
- Dow: 17675 -58 (-0.33%)
- S&P 500: 2071 -7 (-0.33%)
- SPI200 Futures (September): 5,117, 0 (0.0%)
- AUDUSD: 0.7433 +0.0073 (+0.99%)
Now, the Top Stories
1. The interest of China in Virgin Australia could put Qantas under pressure. I’ll get to markets broadly and Brexit in a tick but I thought this story neatly summarises the opportunities and threats Australian companies face from the emergence and growth of China as our primary customer in sectors of the economy outside mining.
The FT had a really interesting story about Virgin Australia CEO John Borghetti’s struggle with Air New Zealand at the board table and his moves which are seeing the Kiwi carrier sell down its stake in Virgin as Borghetti brings two Chinese firms onto the share registry and conducts a $1 billion capital raise.
We already know that there has been a breathtaking growth of Chinese visitor arrivals to Australia and Anthony Moulder, analyst at Citi told the FT that “there remains a significant growth opportunity for Chinese and Australian carriers…Chinese visitor numbers to Australia are forecast to quadruple to 4m a year by 2030.” Which is where the threat and opportunity comes in – a day after the deal to bring the Chinese onto the share registry, Virgin applied to operate daily flights to Beijing and Hong Kong. An opportunity for Virgin. A threat to Qantas?
2. Markets are recovering as traders bet that the Leave campaign is slipping. It looks like it is going to be a risk on day today in Asian markets. That’s if the lead from forex markets is any guide this morning. On Friday the Aussie and other currency pairs got a lift after forex traders started to worry about central bank intervention to support the pound, and other currencies like USDJPY, in the wake of a British vote to leave the EU.
That recovery – position squaring as Marc Chandler from Brown Brother Harriman called it – has continued in early Asian trade this morning. The pound is up 0.7% at 1.4455 (recall the low late last week was around 1.40) the Aussie is up at 0.7426, and the euro is up half a per cent at 1.1328.
Fear of intervention got things moving Friday but polls over the weekend suggest the Brexit vote is back to a coin toss with the Leave and Remain camps neck and neck. The latest poll of polls from whatukthinks.org has the vote at 50:50. As awful as it is, the murder of Jo Cox has turned sentiment for the moment. So if forex traders are right we should see the ASX rally, bonds sell off a touch, and commodities remain well bid in Asia today.
3. Whatever happens today and this week, the market will react to the outcome – here are four ways this week’s Brexit vote could hit markets. There is no guarantee on the outcome of this very close decision but given there is so much tension in markets there is little chance that nothing will happen once the vote is announced during our day here in Australia, Friday.
So in order to try and guide clients, the folks at Capital Economics in the UK have come up with 4 scenarios based on the level of vote to Leave or Remain in the referendum. They use above or below 55% for either side as their delineation and the potential outcomes all see big moves for markets and the economy. It’s what happens when the elastic is wound up too tight. You can find more here.
5. This explanation from BAML of what type of market we are in helps explain why the Brexit reaction could be huge. Folks like to characterise the market as being bullish or bearish. 2016 has had both extremes of that range. But Seth Archer reports the folks at BAML reckon the current market is a “buffalo”. That is the market “tends to roam over a long period of time, is herd-like and rather heavy, and can run the other way when worrisome obstacles get in the way”.
Of course it’s really just a neat way to explain a market dominated by short-termism with little fixed view on the long-term outcome for the economy or markets. Karin Kimbrough, head of macro and economic policy at Merrill Lynch, said the buffalo brings “low returns and higher volatility”. It also brings the perfect mindset for a massive reaction to this week’s Brexit vote. Strap on your tin hat.
5. This is the most important thing to happen in central banking in years. We had an earth-shattering change of monetary policy focus and methodology from the St Louis Fed president James Bullard in a paper he released Friday. It fundamentally reworks the way the St Louis Fed looks at the economy and the operation of monetary policy. In a nutshell, it says the idea of a long run rate of growth – and by extension the output gap – is rubbish. Bullard advocates that the economy goes through different growth, inflation and interest rate regimes and monetary policy should be calibrated for that.
It means Bullard DOES NOT THINK rates in the US need to be increased. He was the outlier in last week’s dot plot. And the implications of what this means for interest rates – if Bullard can convince his colleagues of the efficacy of his new regime model – is a potentially lower US dollar and higher Australian dollar than many are currently forecasting. Myles Udland has more here.
6. It’s going to be a huge week – here’s what you need to know. It’s a massive week for politics, money, and markets with the Brexit vote. But there is also some reasonably interesting events here in Australia with the RBA minutes tomorrow and a raft of RBA speeches. I’ve had a look at these and all the other big events for the week in my Australian Diary. You can find it here.
Key data for the past 24 hours (with thanks to BNZ markets)
NZ: BNZ Manufacturing PMI, May: 57.1 vs. 56.5 prev.
NZ: ANZ consumer confidence, Jun: 118.9 vs. 116.2 prev.
US: Housing starts (‘000), May: 1164 vs. 1150
US: Housing permits (‘000), May: 1138 vs. 1145 exp.
You can catch me on Twitter.
And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
Gold rallied $21 on Friday, after dropping $13 the previous day. This sets the tone for what looks like being a volatile week.
Gold is not just about Brexit. However, recent safe haven buying has clearly had a significant impact. The gold price is up 8% from its low in late May. This creates the potential for two way volatility; risk on selling if the vote is to remain and safe haven buying if it’s to leave. Fluctuating thoughts on what the Fed might do are also right in the mix for gold this week.
Against this background, recent price action in gold miner, Newcrest, is beginning to look “toppy”. Last week it made a minor peak above the upper Bollinger Band followed by one under it. This indicates declining momentum and a potentially stalling trend.
The red 50 day moving average has done a good job of defining the medium term up trend for this stock over recent months. It’s currently sitting around $19.70
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC