Good morning! More all-time highs for US stocks. Here’s the scoreboard:
- Dow: 18,531.89, +15.34, (0.08%)
- S&P 500: 2,166.81, +5.07, (0.23%)
- Nasdaq: 5,055.78, +26.20, (0.52%)
- SPI futures: 5,417.0, +40.5 (0.75%)
- AUD/USD 0.7583 (-0.11%)
The top stories
1. Stocks continue to edge higher and this Goldman Sachs analyst thinks the rally in stocks is “textbook” and could have some way to run. Sheba Jafari is a technical analyst at Goldman Sachs and has a short-term target of 2,263 for the S&P, and believes that over a month the index could get as high as 2,452, with some pull-backs along the way. Here’s the scenario:
Dizzying stuff. Remember, this rally is connected to the fall in bond yields; risk money has to find a home somewhere. There’s more here.
2. Fixed income earnings are back in a big way. All the major US banks are reporting huge increases in revenue this quarter from their fixed income businesses compared to last year. The Brexit chaos but also the continuing flows to government and corporate bonds around the world are underpinning the performance. Fixed income, currencies, and commodities — or FICC — revenues have been smashing expectations for the bulge bracket banks – thanks of course to the flight to bond safety, but also because of the huge volumes of currency trades that followed Brexit. Here’s a sample:
- JP Morgan: $US3.96 billion for the quarter, up 35%
- Citi: $US3.47 billion, up 10%
- Bank of America: $US2.62 billion, up 22%
JPMorgan CFO Marianne Lake explained: “With oil stabilizing, policy stabilizing in China, obviously with the global monetary policy discussions, Brexit, there’s just a lot of activity in the client base. And so we were strongly up in rates, up in emerging markets and currencies, and also spreads tightened and the risk appetite came back in the spreads products.”
The problem is of course that while fixed income is great for earnings over periods like we’ve just had, the downward pressure on bond yields hurts bank performance in the long run.
3. Forget fiscal stimulus. One policy option that many traders and analysts considered as a way to get some global growth going, with central banks running out of policy ideas was through government spending. The current political climate, with populism and hysteria about public debt rampant in many parts of the world, means that just isn’t going to happen for developed economies. Matthew Hornbach, a interest rate strategist at Morgan Stanley notes that “the constraints that politics place on the global fiscal policy outlook should allow uncertainty and weak private demand to retard the little progress major developed economies have made.” Morgan Stanley thinks the outlook for global growth Yet another example of how the impact of politics on markets and economies has suddenly become very real.
4. London’s property market is looking like it’s rolling over post-Brexit. Immediately after the UK referendum some commercial property funds had to gate themselves from further client withdrawals. Now it looks like the broader property market is feeling the pinch. “Asking prices for UK properties on the market have fallen on average by 0.9% (-£2,647) so far this month to £307,824,” writes Lianna Brinded from London. “Inner, or central, London was particularly badly hit, with asking prices there falling by 2.3%.”
5. A familiar inflation picture is emerging for New Zealand. Here’s the chart, via HSBC:
The problem is that housing and petrol prices were the only real upward movers over the last quarter, with petrol contributing 0.2ppts to the quarterly headline rate of 0.4%. When you exclude petrol, inflation has been below 1% for the past five quarters in a row. Despite an increase over the quarter the annual rate of tradable inflation tanked from -1.2% to -1.5%. Yuk.
The RBNZ has a special economic update on Thursday and traders will be watching this carefully. Here’s HSBC’s take:
The RBNZ faces a significant policy challenge. While inflation remains too low and the recent rise in the NZD is likely to mean downward revisions to the RBNZ’s inflation forecasts, the financial stability risks of low interest rates are rising due to the booming housing market. Although the booming housing market could make the RBNZ more reluctant to cut further, our view remains that the RBNZ will keep its cash rate setting focused on the inflation target and will use macro-prudential tools to deal with risks in the housing market. With this in mind, our central case sees the RBNZ cut its cash rate by 25bps to 2.00% in August.
6. Meanwhile, Africa’s largest economy has the opposite problem. Nigeria’s inflation was 16.5% in June, up from 15.6% the previous month. This was somewhat expected after Nigeria bit the bullet and de-pegged the naira from the US dollar. Barclays analysts now expect the inflation rate to hit around 20% year-over-year by year-end. The country’s economy shrank by 0.4%, year over year, in the first quarter, and there is some concern that this important oil-producing nation is heading for a full-blown economic crisis.
And now from Ric Spooner at CMC Markets is today’s stock to watch
Oil Search (OSH: ASX)
The big downturn in energy prices is yet to produce much in the way of bargain basement acquisition opportunities. Oil and gas projects require massive investment and typically involve substantial financial; engineering and political risk. The good ones tend to be prized and are not sold cheaply.
Oil Search looks as though it’s been outbid for Inter Oil and the prized Elk-Antelope gas reserves in Papua New Guinea. ExxonMobil lobbed a higher bid yesterday and Oil Search has only a couple of days to respond.
Despite this, Oil Search was up 4% yesterday. This is because it is already a partner with Exxon in the PNG’s first LNG project as well as having an existing interest in the Elk- Antelope fields. Exxon’s involvement in Elk- Antelope will allow it to be integrated with the existing PNG facility adding additional gas trains and creating substantial synergies. That will avoid the expensive duplication seen in Queensland’s coal seam gas developments where 3 individual projects operate out of Gladstone. There’s plenty of development risk to come but Oil Search looks to be well placed with investment in a high quality asset especially now that Exxon is involved.
You can catch Ric on Twitter: @RioSpooner_CMC