6 things Australian traders will be talking about this morning

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European and US stocks meandered in overnight trade, finishing the session mixed as investors continued to express caution after the rapid rebound seen in the wake of the UK Brexit vote.

In another session marked by weak trading volumes, the Dow Jones Industrial Average rose for an eighth straight day, the longest rally since March 2013. That was offset by small declines on the broader S&P 500 and Nasdaq indices. It was a similarly wishy-washy session for European markets.

On currency markets, the US dollar jumped to a four month high, heaping pressure on the likes of commodity-currencies such as the Australian, Canadian and New Zealand dollars, along with the British pound.

In commodity markets base metals were higher while crude and iron ore futures continued to weaken. Precious metals were mixed, with gold recording a small gain while silver slipped.

As a result, it’s set up a flat start for Australian stocks on Wednesday with SPI futures pointing to a gain of 1 point on the open.

Here’s the scoreboard (7.55am AEDT):

Dow 18,559 +26 (+0.14%)
S&P 500: 2,163 -3 (-0.14%)
SPI 200 Futures (September 2016 contract) 5,411, +1 (flat)
AUD/USD: .7502 (-1.2% from Monday’s close)

The top stories.

1. The US dollar index is flying, rising to a fresh 4-month high on the back of continued strength in US economic data and talk that the US Federal Reserve could raise interest rates as soon as September. The US dollar index (DXY) hit a high of 97.148 in overnight trade, a level last seen in mid-March. The catalyst for the increase was a rebound in US housing starts in June, jumping 4.8% from a downwardly-revised 1.7% drop in the prior month. Akin Oyedele has the details. The dollar was also helped by an article from Jon Hilsenrath from the Wall Street Journal, a noted Fed watcher, who wrote on Tuesday that “Federal Reserve officials are looking more confidently toward an interest-rate increase before year-end, possibly as early as September, now that financial markets have stabilised after Britain’s vote to leave the European Union and the economy shows signs of picking up”.

2. Goldman Sachs just put Wall Street on alert with two words, says Portia Crowe. Though the firm beat in fixed income, currencies, and commodities, or FICC, trading revenues, which were up 20% from the same quarter a year, it was still down significantly for the first half of the year. What’s more telling is what the bank had to say about it: “Although market-making conditions generally improved compared with the first quarter of 2016, Fixed Income, Currency and Commodities Client Execution continued to operate in a challenging environment characterised by low interest rates, political uncertainty and concerns about global growth,” Goldman said. It’s the words “challenging environment” that are key,’ says Crowe. If things were looking positive, the firm would likely have avoided that language. Perhaps another reason to be cautious, particularly when stocks sit at all time highs.

3. Could the Australian dollar rally back above 80 cents before the year is out? Ilan Dekell, head of macro for global fixed income at AMP Capital Investors, believes there’s a chance it could. In an interview with Bloomberg, Dekell stated that a failure from the Reserve Bank of Australia (RBA) to cut interest rates in the months ahead — something that markets currently expect — could see the Aussie hurtle back above 80 US cents. If it is “not delivered, the market will reassess and that will lead to the Aussie dollar to continue to rally,” Dekell told Bloomberg. “Particularly in a backdrop where equities, risk assets, are being supported in an environment where the US is not looking to hike rates.” Next Wednesday’s Australian Q2 CPI report, if it wasn’t already, just became all that more important. Markets are currently pricing in around a 60% chance that the RBA will cut the cash rate to a record-low level of 1.5% in August. Economists are near-unanimous that a rate cut will be delivered.

4. Bank of America’s big money clients hate stocks, which is a great sign for the future, says Myles Udland. A chart from the firm’s latest fund manager survey published on Tuesday, shows that institutional clients — big mutual funds, hedge funds, pension funds, etc. — have sold about $120 billion worth of stocks over the last eight years. According to Tom Lee at Fundstrat, this net selling provides a major contrarian signal for markets that has a very bullish analogue. Lee said on Twitter on Tuesday that these outflows look a lot like the behaviour we saw from institutions between 1982-1990, the first eight years of what became the biggest bull run for stocks in US history. Udland points out that Lee is “one of the most strident bulls on (Wall) street”.

5. The great hope for the US economy — American consumer spending — is looking good, according to Macquarie Capital’s consumer equities team. “Macro data continues shows that the global economy’s $13 trillion gorilla, the US consumer, is getting even stronger,” said the Macquarie team in a note Tuesday. “Aggregate spending is rising by ~$500 billion per year and data for 2Q has been robust.” According to Macquarie, there are three big reasons to think that this growth will continue. A strong labour market, consumers are ready to take on debt in order to spend and households can deal with rising interest rates and gas prices. Bob Bryan has more.

6. Iron ore spot prices continues to mirror a game of snakes and ladders. On Tuesday the spot price for benchmark 62% fines fell by a further 1.5% to $56.02 a tonne, according to Metal Bulletin, leaving the decline since July 13 at 5.7%. Despite the recent weakness, the price has held above the $50 level since early June, leaving the gain so far in 2016 at 28.6%. Dalian futures fell again in overnight trade, although not to the same scale seen in previous sessions.

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

Rio Tinto (RIO: ASX)
“Solid” seemed to be a frequently used word in commentary on Rio’s production report yesterday. Iron ore production was a touch below consensus forecasts but Rio maintained its guidance for global sales of 350m tonnes in 2016 including 330m tonnes from the Pilbara.

However, iron ore stocks generally were under a bit of pressure yesterday. Traders are wondering if this is about as good as it gets for a while. China’s steel production has actually increased in recent months but there are questions over how sustainable this is in an oversupplied global market. At the same time, the Roy Hill project will add to iron ore supplies over coming months and Vale’s big new project is scheduled to begin production around the end of the year.

The Rio chart completed a neat double top at the 78.6% Fibonacci retracement. Its next test might be the potential support of past resistance around $46.

Ric Spooner, chief market analyst, CMC Markets. You can follow Ric on Twitter @ricspooner_CMC.

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