The Fed minutes, which were more hawkish than expected, dominate market chatter and moves this morning particularly in forex markets where the US dollar advanced strongly across the board.
That’s left the Aussie dollar down in the low 72 cent range, Euro back at 1.12, and USDJPY above 110 as forex traders reevaluate the chances, likelihood, that the Fed tightens again soon.
Stocks were far more muted at the close. But the fact that the Dow and S&P ended largely unchanged masked the fact that they moved through a 1 per cent range on the day.
The washup is that the ASX looks set to open largely unchanged with the SPI 200 June futures down 4 points. That said, overnight moves might complicate the outlook with global miners under pressure while banks in the US were sharply higher.
Add in a fall in crude oil, a dip in copper, and a 1.7% fall in gold and it’s a stock pickers’ day ahead.
Here’s the scoreboard (7.39am):
- Dow: 17,526, -3 (-0.02%)
- S&P 500: 2,047, 0 (0.0%)
- SPI200 Futures (June): 5,355, 4 (0.1%)
- AUDUSD: 0.7219, 0.0100 (-1.36%)
Now, the Top Stories
1. The Fed – June really is live. Fed presidents have been warning traders but the release last night of the minutes from the Federal Reserve’s April meeting put a rate hike in just four weeks’ time on the table.
As is the case with these things, everyone has their favourite paragraph and most of the focus is on the fact that the Fed said “most participants judged that if incoming data were consistent with economic growth picking up in the second quarter, labour market conditions continuing to strengthen, and inflation making progress toward the Committee’s 2 per cent objective, then it likely would be appropriate for the Committee to increase the target range for the federal funds rate in June.”
But I also like the paragraph which highlights US data takes primacy over everything else. I think that is more important in understanding the Fed’s current thinking:
Most participants judged that the benefits of using monetary policy to address threats to financial stability would typically be outweighed by the costs associated with deviations from the Committee’s employment and price-stability objectives induced by such actions.
It is important to note that these minutes don’t make June a lock. What they do for me is restore my view of where the Fed was at before the release of the April statement. That document was far more dovish than Fed speakers had suggested in the lead up and these minutes reflect what looks more like the message they have been sharing. Now we all know the Fed really might tighten the 2 or 3 times Dennis Lockhart suggested yesterday.
2. The Aussie dollar is under pressure because the Fed and RBA are going in opposite directions. The RBA minutes weren’t as dovish as many hoped but low inflation is taking hold in Australia. That was the message we got firmly from the release yesterday of the ABS wage price survey. I wrote a piece which said the cold, dead hand of low inflation is starting to grip Australia’s economy. This article seems to reflect forex traders’ thoughts about the outlook for inflation, and thus RBA interest rates in the months ahead.
But that’s just one weight on the Aussie at the moment. As RBA governor Stevens has said for some time now, when the Fed starts tightening, the AUDUSD will fall.
That’s the impact the minutes had overnight with the Aussie collapsing from the high 72 cent range to a low of 0.7216. Traders are now waiting for the labour force data at 11.30am before they decide what to do next.
3.Now Goldman Sachs has issued an ‘anything but stocks’ note. Yesterday I highlighted a piece from David Scutt noting that Goldman was saying the next 5-10% in stocks is to the downside. Yesterday the firm took their concerns to the next level, issuing a note which could be characterised as a “virtually anything but stocks” note.
Today Scutty reports Goldman Sachs’ portfolio strategy research team wrote: “Until we see sustained earnings growth, equities do not look attractive, especially on a risk-adjusted basis.” As a result of the outlook, Goldman says “given we do not see much value across asset classes and we see a variety of cross-asset risks, we remain overweight cash near term”.
And they note something which is germane to this morning’s discussion about the Fed minutes: “We believe the market’s dovish pricing of the Fed increases rate shock risk, in which case both equity and bonds could sell off.”
4. Here’s more evidence that investors are losing faith in companies’ management focus. Themes in markets are important, so I wanted to highlight the latest in what appears to be an emerging meme about the focus of company management and their goals.
Yesterday I highlighted that hedge funder Carson Block said “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”. So it’s really interesting that this morning Bob Bryan followed up his chat with Block with an interesting article saying big time investors are fed up with companies’ shenanigans.
In his piece, Bryan quotes Michael Hartnett, BAML’s chief investment strategist, saying “investors continue to express fatigue with financial engineering, as a net 17% of investors think corporate payout ratios (dividends & buybacks) are too high”.
It’s time to get active investors – get companies investing again and fix the US and global economies.
5. Consumers and the global economy are on the brink because of rising political risks. The developed world economies are dominated by services. That means that consumers, and consumption, are really important to the overall growth rate. It also helps explain why wages are falling and inflation is low – but that’s another story.
Anyway, Will Martin reports that analysts at Morgan Stanley say a growing cocktail of “political and geopolitical risks” has the ability to weaken consumer spending, put a drag on demand, and stunt economic growth, which in turn potentially pushes the global economy closer to a recession.
The good news however is that the bank’s base case “remains a moderate improvement in global growth over the coming quarters”. But they are right, consumer spending and sentiment are fragile things.
6. Macquarie – a bunch of countries could be about to go bust. A market memory is very important. It puts context around moves and it can stop a trader, strategist, or economist from becoming hysterical over something that, in the grand scheme of things, is not really material.
The other thing about a market memory – or at least study market history so you know what went on in the past – is that you are informed about what could happen as history rhymes.
With that background, it’s worth having a look at Elena Holodny’s wrap of a Macquarie research note looking at what happened last time oil collapsed. “The last great collapse in oil and commodity prices from the end of the 1970s led to a decade-long wave of sovereign defaults. We believe another wave is coming, involving multiple debt restructurings over many years.”
It’s an interesting note and worth a look. Sovereign defaults are not something that usually goes unnoticed in markets – whichever one you trade.
Key data for the past 24 hours (with thanks to BNZ markets)
JP: GDP (s.a. q/q, %), Q1 P: 0.4 vs. 0.1 exp.
AU: Wage price index (y/y, %), Q1: 2.1 vs. 2.2 exp.
UK: ILO unemployment rate (3mth), Mar: 5.1 vs. 5.1 exp.
EZ: Core CPI (y/y, %), Apr F: 0.7 vs. 0.7 exp.
US: FOMC Minutes, 26-27 April: “most” judged a June hike might be warranted.
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Now from CMC Markets’ Ric Spooner is today’s Stock of the Day
The re-think on Woolworths as a takeover target ran out of steam at $23.05; at least so far anyway. In doing so it, has set up trend line resistance on the chart.
If the stock price does fall away from here, it will have defined a potential trading range. The trend line would be the upper boundary and the previous lows around $20.50 are support. A quick move below $21.90 would fill last Wednesday’s gap, making this scenario more likely.
If the buyers are just taking a breather and the trend line resistance is taken out, the 200-day moving average comes into play. This has terminated all bouts of confidence since January 2014. It currently sits at around $24.
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC