6 things Australian traders will be talking about this morning

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Good morning! Here’s what traders will be talking about to start the week.

To the scoreboard:

Dow: 20,597 -60 (-0.29%)
S&P 500: 2,344 -2 (-0.08%)
ASX SPI200 Futures – June (20 minute delay): 5,748 +1
AUD/USD: 0.7626 -0.0004 (-0.05%)
Iron ore benchmark 62% fines: $US85.06 -$US1.30 (-1.22%)

1. What to expect as markets open: After US and European stocks both finished slightly down on Friday, ASX futures point to a quiet opening, although sentiment may shift to the downside after further losses in iron ore. Investors watched the spectacle in Washington last week as the Trump administration was unable to get the healthcare repeal bill through Congress. Despite some jitters about what Trump’s failure to enact market-friendly tax reforms would mean, stocks in the US actually rebounded once the health care bill was pulled. The Trump administration is now expected to shift its focus to tax reform. A July/August timeline has been outlined, although the healthcare failure has raised doubts Trump will be able to enact complex changes to tax law without Democrat support. A decline last week of 1.4% for US stocks and low crude oil prices continued to weigh on bond yields, with US 10-year notes trading at 2.42%.

2. Key data this week: Australia has the Global Iron Ore & Steel Forecast conference in Perth on Wed/Thurs. The 2-day event is seen as a definitive guide for the current and future state of the market. HIA home sales data is on Thursday, with quarterly job vacancy data from the ABS on Friday. The US reports its balance of international trade data Tuesday, the EIA petroleum status report Wednesday, with final Q4 GDP numbers as well as jobless claims on Thursday. The UK’s move to formally trigger Article 50 will draw some attention on Wednesday. Europe has business confidence for February (coming off a six-year high) on Thursday and preliminary March inflation data is out on Friday. China reports manufacturing data on Friday.

3. Currency wrap: With the US facing political gridlock and a frothy stock market, the US dollar is expected to face more pressure this week as investors adopt more of a risk-off appetite. Further losses are expected against the yen from its current level at 111, with some analysts predicting a break towards 108. The Euro is also expected to start the week strongly, as traders unwind bearish Euro bets. Net short positions in the Euro fell to the lowest level since 2014 on expectations that the European Central Bank may increase interest rates faster than expected. The Euro is also expected to benefit from strong economic data in Germany on Friday and more political stability, after Angela Merkel’s Christian Democrats party won a key regional victory on the weekend. The Aussie dollar continues to hang around the US76c level in early trade this morning on Asian markets.

4. Lack of credit growth in US could be bad news: Data released by the Federal Reserve shows that lending growth in the US has slowed considerably. The decrease in loans could act as a warning sign to investors as loan growth (or lack thereof) often acts as a leading indicator for the real economy. Commercial lending in particular has dropped on an annualised basis, slowing by 5.4% over the last three months which is the sharpest level since December 2008. The broader market for loans and leases has also retracted and corporate bond issuance has stalled. Analysts don’t expect the warning signs in credit to drive the economy back into recession, but investors should be aware of key indicators to avoid being caught off guard.

5. Oil outlook remains shaky in wake of OPEC meeting: At a meeting of OPEC member states in Kuwait on the weekend, producers agreed that a six-month extension to supply cuts was likely. However, a joint OPEC committee stopped short of committing to the cuts, saying only that it would provide guidance as to further voluntary supply cuts in April. Russia (a non-OPEC producer) said that it was too early to tell whether further supply cuts would be necessary. Analysts expect the oil market to face more downward pressure this week as the market reacts to a lack of clarity from OPEC after the recent build-up of supply in the US shale oil industry.

Looking further out, a research note from Goldman Sachs highlights the risk of a supply glut in 2018, as a number of high-investment, large scale oilfield construction projects are completed and start their production phase.

6. A key fund manager has forecast headwinds for US growth: Add Fundstrat’s Tom Lee to the list of investment managers exercising caution, with a note advising clients to expect a pullback on the S&P 500 in the first half of 2017. Among the negative factors that investors should watch out for, Lee cited a median price/earnings ratio of 19 times which is historically on the high side. Lee said that earnings per share for US companies is unlikely to be revised higher in the upcoming corporate earnings season. Lee also said that he sees a drop in bond yields and a flatter yield curve as indicators that economic growth is slowing.

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