6 things Australian traders will be talking about this morning

ABU DHABI, UNITED ARAB EMIRATES – MARCH 8: (EDITORIAL USE ONLY) In this handout photo provided by Red Bull, Matt Hall of Australia leads Kirby Chambliss of the United States and Nicolas Ivanoff of France over the Emirates Palace prior to the first stage of the Red Bull Air Race World Championship on March 8, 2016 in Abu Dhabi, United Arab Emirates. (Photo by Joerg Mitter /Red Bull via Getty Images)

The Aussie is roaring and back above 78 cents for the first time since mid 2015, the S&P 500 closed above 2100, and iron ore and crude are both rising sharply again.

Welcome to the increasingly volatile world of markets in 2016 where traders emotions are worn on their sleeves and markets are prone to deep despair and wild euphoria – in equal measure.

With the S&P 500 at 2100 it is closing in on its all-time high once again and that should help the ASX 200 shake off its fear of pushing too far, too fast in trade today. SPI200 futures are up 31 points, 0.6%, overnight so it should be a good day again.

That’s particularly so with crude oil up more than 3%, iron ore rocketing 5%, and the CRB commodity index up more than 2%.

On forex markets, besides the rally in the Aussie, the Norwegian krone was the best performer last night, rising around 1.3% on the back of the oil bid. Likewise, the CAD is back below 1.27.

Here’s the scoreboard (8.07am):

  • Dow: 18,054, +49 (+0.27%)
  • S&P 500: 2,100, +6 (0.3%)
  • SPI200 Futures (June): 5,212, +31 (+0.6%)
  • AUDUSD: 0.7813, +0.0064 (+0.82%)

Now, the Top Stories

1. Central bank governors are coming out against helicopter money – Glenn Stevens likened it to drug dealing. Seriously, this is the dumbest idea on the planet right now. But as RBA governor Glenn Stevens said last night, the very fact that people – serious types, he said – are even talking about so-called helicopter money tells us how dire things are getting in the global economy. Helicopter money, Stevens said, is when “unrequited transfers (gifts) to individuals’ bank accounts by the central bank”. Free money, no questions asked, from the central bank with unlimited resources.

Anyway, Stevens said it’s a dumb idea, likened it to drug dealing and said governments need to get off their backsides, get out of the austerity mindset and start building useful infrastructure to get global growth going. I’ve got more here.

The Bank of England’s Mark Carney didn’t miss either last night, saying that he is “not a believer in the concept of helicopter money”, and arguing that it can lead to what he called a “compounded ponzi scheme”. Will Martin has more here.

2. Despite yesterday’s RBA minutes saying policy in Australia is “very accommodative”, Macquarie Bank says rates will be cut at least two times this year. Get two economists in a room and you’re likely to get four views on the outlook, the old joke says. So it’s interesting at the moment that there seems to be a wide void between some economists who think the economy is tanking and will need rate cuts, while others think we are muddling through without need of any more easing from the RBA.

My own take on the RBA minutes yesterday was that the Aussie might be complicating things, but with employment strong and its liaison report solid on retail sales, the RBA is alert but not alarmed. Others, like Annette Beacher at TD Securities, and Kymberly Martin at the BNZ, picked up on the inclusion of the phrase “very accommodative” when talking about monetary policy when previously the bank had just said settings were accommodative. That suggested even with a high Aussie, the bank sees monetary policy as providing significant stimulus to the economy.

But the economics team at Macquarie Securities sees some dark days ahead for the Australian economy and is predicting at least two cuts from the RBA. David Scutt reports James McIntyre thinks Australian economic growth will struggle this year, suggesting that it “is likely to weaken as the economy digests the last half of the decline in mining investment spending and the hit to income from lower commodity prices”.

3. The ASX has to take out the March highs today. Traders briefly took the ASX 200 up and through the range top we saw back in March with a high of 5219 yesterday. But given the ASX had outperformed the moves in Europe and USA on Monday, traders found the air a bit thin and stocks reversed to finish at 5188 – still a positive day but not a breakout one.

But overnight futures are up another 31 points, banks around the globe rallied, crude oil rose another 3%, iron ore rocketed again, and there is a real sense that markets want to push this rally further. So the set up for a breakout on the ASX is there – if traders dare.

The only handbrake – if there is one – is that the ASX has caught up all its under performance to the S&P 500 with the last week’s uber-rally. Maybe that’s why traders are wary. Who’s afraid of 5220?

4. The Aussie dollar is 10 cents higher than it was in January – yes, it is! This is an amazing stat. Most forecasters entered the year thinking the Aussie would trade down toward the mid 60 cent region with some even saying 60 cents itself. Yet even when commodities crashed, and stocks went offered, the Aussie retained a bid tone just below 70 cents in the 68 high region.

It was the first sign of offshore demand that has, along with the recovery in commodity prices and changed expectations about the Fed, driven the Aussie back above 68 cents. David Scutt has more AND a great chart here.

5. Speaking of the Fed though – Boston’s Rosengren reckons rates are going higher faster and the stock and commodity rally might make him right. Boston regional Fed governor Eric Rosengren made a compelling case yesterday that the market is underestimating the chances of Fed moves to hike interest rates and in doing so highlighted that this risk rally might be self-curing and that forex traders may need to be on alert for a US dollar reversal at some point.

This is something I wrote about over at AxiTrader yesterday. Rosengren’s speech caught my eye because even though Fed chair Yellen has signalled the Fed is going to let the economy and employment growth run a little hotter than we all expected, Rosengren not only worries that inflation will eventually accelerate but makes a good case that markets are underpricing the risks of Fed tightenings.

Rosengren said “pricing in the federal funds futures market implies roughly three-quarters of a percentage point in increases by the end of 2018. That seems inconsistent with the assessment of continued moderate growth in the U.S. economy.” With a risk rally on, with the S&P closing in on all-time highs and an overall air of positivity, the risks are the Fed signals its intent to tighten again at this month’s meeting. The question of course is what will traders do then?

6. A US view of what’s holding markets together right now. Besides the changed rhetoric of the Fed the other big driver of improved market sentiment has been the successful deployment of tools by the PBOC and Chinese authorities to rescue the economy from its dive, which stabilised the currency and in doing so, also global financial markets.

Is it sustainable? Linnette Lopez reports a bunch of banks think it is not. Societe Generale’s Wei Yao says “this looks like an old-styled credit-backed investment-driven recovery, which bears an uncanny resemblance to the beginning of the four trillion stimulus package in 2009”. But Wei says it won’t last and will eventually end in tears. Alternatively, as Lopez says, traders are going to enjoy it while it lasts.

Key data for the past 24 hours (with thanks to BNZ markets)
NZ: Perform. of Services Index, Mar: 54.8 vs. 56.9 prev.
AU: RBA Minutes, Apr: policy is “very accommodative”
EZ: Current account (s.a, €, b), Feb: 19.0 vs. 25.4 exp.
GE: ZEW survey, curr conds, April: 47.7 vs. 50.8 exp.
GE: ZEW survey, expectations, Apr: 11.2 vs. 8.0 exp.
EZ: ZEW survey, expectations, Apr: 21.5 vs. 10.6 prev.
US: Housing starts (m/m, %), Mar: -8.8 vs. -1.1 exp.
NZ: GDT dairy price index, (% chg): 3.8 vs. 2.1 prev.

Key data for the past 24 hours (with thanks to BNZ markets)

And now from CMC Markets’ Ric Spooner is today’s Stock of the Day

Rio Tinto (RIO: ASX)

Solid would be a reasonable description of yesterday’s quarterly production report. Iron ore production was a little below consensus but this was about seasonal factors not any underlying problems. Aluminium, coal and copper production was all broadly in line.

Rio tweaked its iron ore production guidance for 2017 down by 10m tonnes to a range of 330-340. This is due to delays in getting its driverless train project up and running. Given expectations of an over supplied market; investors don’t seem particularly concerned about this.

What’s been a bit more than solid is the unforseen increase in commodity prices this year, especially iron ore which was up again yesterday. If nothing else, profit results for the current half year are going to be a lot better than most forecast.

Last week, Rio’s share price surged through its 200 day moving average and an established trend line. The $53.50/$55.50 zone now looks a point of interest on the Rio Chart. This is a resistance zone formed by a previous support line. It was re-tested a couple of times after the initial break, adding to its potential significance and there is a harmonic AB=CD level there as well.

Ric Spooner, chief market analyst, CMC Markets

You can follow Ric on Twitter @ricspooner_CMC

You can catch me on Twitter.

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