The risk reversal rally continued overnight with the pound printing above 1.47 at one point.
That was almost 7 big figures above last week’s low near 1.40. The reversal also drove stocks in the UK sharply higher with the FTSE up 3% while the German DAX and French CAC were up 3.4% and 3.5% respectively.
Crude also ripped higher with WTI up 2.9% to $49.37 while Brent is back above $50 a barrel with a gain of 2.4%. That put pressure on gold initially and it dipped to $1275 before finding solid support and rallying back to $1289 this morning.
But even against this risk-on backdrop, US stocks slid into the close giving back the best of their gains but still closing well in the black.
That combination sets up a solid day for the ASX200 after yesterday’s 1.8% rally which added close to $30 billion in value to Australian stocks. The September SPI futures contract is at 5221, up 24 points. That implies the physical should open around 5280 – resistance is around 5293.
Here’s the scoreboard (7.59am):
- Dow: 17804 +130 (+0.73%)
- S&P 500: 2083 +12 (+0.58%)
- SPI200 Futures (September): 5,221, +24 (0.5%)
- AUDUSD: 0.7455 +0.0022 (+0.29%)
Now, the Top Stories
1. Brexit watch – a wrap of the best stories on BI. The pound was above 1.47 at one point last night. That’s almost 7 big figures off last week’s low. The FTSE was up 3% as well as this risk rally takes hold. It’s all because markets are betting the Remain camp is going to get up. Here’s a wrap of the key article I picked up from BI this morning.
- BREXIT BETTING: The odds have now made a ‘huge shift’ towards a Remain vote
- John Oliver shreds the ‘Leave’ camp in an impassioned rant on the UK’s Brexit referendum
- Here’s the simplest way to understand how a Brexit would affect the world’s biggest economy.
- Poland could get slammed if Britain decides to leave the EU.
- And probably my favourite is the take from BI alumnus Mike Bird and a colleague over at Mike’s new home the Wall Street Journal. As his headline shows, markets are fractured and fragile, illiquid and moving hard and fast. Tiny Tilt in ‘Brexit’ Polls Roils Global Markets, Mike and Riva Gold write.
- Hot off the press at 7.15am, Reuters reports social researcher NatCen sees UK leaning towards EU ‘In’ vote. 53% Remain – 47% Leave.
- And YouGov says Remain is catching up in a poll conducted between the 17th and 19th of June which showed Remain 42%, Leave 44%, Don’t know 9%.
- And finally George Soros has warned a vote for Brexit would trigger a crash worse than Black Wednesday. He’s not short, is he? Is he?
2. When the Brexit vote is over we’ll lose the distraction from the globe’s real problems. Humans are programmed to deal with what’s in front of them. It worked really well during our evolution and as a species we still tend to focus on the most accessible information at hand. It’s one of the reasons why Brexit watching has become the financial press’ latest sport – our readers are interested.
But Bob Bryan reports Andrew Lapthorne, head of quantitative strategy at Societe Generale, says there are bigger problems out there in the global economy we will need to focus on when the vote is done.
“Whatever the outcome of the Brexit vote this week investors will still be facing the prospect of negative rates and negative yields on a huge range of bonds, massive corporate leverage with worryingly rising delinquencies and of course expensive equity markets and falling profits,” wrote Lapthorne. “To that extent these political events are a distraction from the main event, weak global economic growth and perverse asset markets” he added.
Now, quants are naturally predisposed to stay focused on their topic of interest in a way neurotypical humans are not. But that doesn’t mean that Lapthorne is not 100% right.
3. On that theme – negative interest rates are a “seeping poison” for the world’s most important financial institutions. I presented at a charity conference yesterday on the state of the nation and the investment returns that might flow from that. One question that came up repeatedly was about how low rates could go in Australia and also how did negative interest rates work at banks and other financial institutions.
It’s a theme Citibank’s Willem Buiter and Ebrahim Rahbari have picked up in a new research note. Will Martin reports the pair warn that the negative rates may stop institutions being able to make money, which in turn would hit their ability to pay out on things like pensions and insurance policies. Banks also suffer because they can’t make a margin between what they lend and what they borrow at.
In the end, Buiter and Rahbari say that it’s “retirees and others unable to return to the labour market” who live off their savings who are the real victims. Yes indeed. Glenn Stevens has noted this himself in the past and it’s why I reckon the RBA will only cut rates materially from where they are now if the economy falls in a hole. The minutes are out at 11.30am.
4. Diversification is for the weak-minded, says one of Wall Street’s investing gurus. Bryon Wein is one of Wall Street’s legendary investors. These days he’s Blackstone’s vice-chair and in his latest podcast he’s talked about the lessons he learned from his mentor Edgar de Picciotto, the founder and chairman of Union Bancaire Privée, who died in March.
Rachel Butt reports Wein said he’s not a big believer in diversification – the strategy they teach in undergraduate and masters finance courses – because Picciotto taught him “diversification is for the weak-minded”.
“I’m a big believer in taking risk by concentrating (that’s the lesson I learned from Edgar), and by cutting my losses quickly and letting my winners run,” Wein said. That is an almost flawless trading approach.
5. More on China/Australia business and economic ties. Yesterday I wrote about the tie up between Virgin and its new Chinese partners and the opportunities that offers the company in the years ahead as Chinese tourism grows. Today I want to highlight a great article by Tony Boyd has written this morning over at the AFR.
Boyd says Citi’s chief economist for China, Li-Gang Liu, will front a seminar in Sydney today and remind participants of the continued rise of the Chinese middle class. Boyd says:
This is a phenomenal tidal wave that should not be ignored by investors. China’s consumers are a powerful force being factored into the strategic asset allocation of international fund managers.
Li-Gang says China’s economic rebalancing has started, albeit at a slow pace.
Last year consumption in China contributed more than 60 per cent of GDP growth and Li-Gang says it will continue to rise steadily between now and 2020.
He says over the next five years, China’s private consumption could rise to about $US13.7 trillion in purchasing power parity terms, making it one of the largest consumer markets in the world.
It’s a huge opportunity for Australian business and increasingly service exporters will be able to capitalise on that growth.
6. Debt bomb – Goldman Sachs says China’s debt boom is the biggest and fastest in history. Speaking of China, I always try to focus on the positives of its emergence as a global economic superpower and what that means for the Australian economy and Australian business. But that is not to say that there are still not risk of missteps by policy makers or dangers ahead.
One of the most obvious dangers is the debt-fuelled approach to growth that China has been undertaking. It’s an approach which has accelerated in 2016 as authorities have tried to stabilise the economy which was faltering. That’s all by way of background for some interesting research from Goldman Sachs which says China’s debt-to-GDP level nearly doubled from 154% to 249%.
Ben Moshinshky reports Goldman says this “ranks in the 98th percentile of debt buildups in modern history”. That’s the basis for many questions about the inevitability of a debt crisis but Goldman says it’s not “inevitable”.
Key data for the past 24 hours (with thanks to BNZ markets)
NZ: Westpac Consumer Confid., Q2: 106.0 vs.109.6 prev.
NZ: BNZ Perform. of Services, May: 56.9 vs. 57.7 prev.
JP: Adj. trade balance (Yen Bn), May: 270 vs. 113 exp.
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And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
Metcash (MTS: ASX)
I made supermarket operator, Metcash a stock to watch last week, highlighting the potential for volatility after a big rally leading into its profit report. As it happens, that’s how things played out with the share price down 12.5% after release of the report yesterday.
In many respects, the report represented a pretty solid delivery on managements’ turnaround strategy. It seems that the market had got a bit too optimistic about anecdotal evidence of good performance by the Diamond and Price match store initiatives. Bottom line is that supermarkets are a tough industry at the moment. Metcash’s IGA supermarkets are facing tough competition from Aldi, Coles and a newly price conscious Woolworths.
The share price bottomed at a key chart level yesterday. There’s a lot going on around this $1.78 including a couple of trend lines, the 100 day moving average and the 38.2% Fibonacci retracement. Downward momentum is strong though and even if there’s a bounce from current levels, the stock looks vulnerable to a break of this support for a while. It’s currently trading around 10 times forward earnings.
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC