A mixed night’s trade for stocks leaves the Australian market to its own devices today.
That’s after a strong rise in the miners took the FTSE 100 sharply higher but oil’s pullback from its highs, and some pre-Fed nervousness saw US stocks close largely unchanged.
The December SPI futures suggest a small 5 point fall when the ASX200 opens today – but sectoral moves and catch up from yesterday’s aborted trade are likely to overwhelm that move.
On forex markets, the Aussie dollar hit overhead resistance around 0.7570 and is back at 0.7536 this morning. That’s still up sharply from yesterday’s open in what was a weaker 24 hours for the US dollar overall. That, and a little trendline support, helped gold rally.
Here’s the scoreboard (7.34am):
- Dow: 18120 -4 (-0.02%)
- S&P 500: 2139 0 (0%)
- SPI 200 Futures (December): 5,264 5 (-0.1%)
- AUDUSD: 0.7535 +0.0061 (+0.82%)
The top stories
1. Yesterday’s mess on the ASX was embarrassing, raises questions about infrastructure, but shouldn’t hurt long term. Stuff happens in markets. Traders hit the wrong button, algos go a bit wild, and IT infrastructure breaks down. So while the ASX had a technical meltdown yesterday which saw the market open late, and close early, as long as it doesn’t become a habit, traders will move on – just like they did yesterday afternoon – to Ryan’s Bar.
Today should be a better day however, even though the lead from a flat Wall Street has left the December SPI futures down 4 points. That’s after BHP, Rio and other miners helped propel the FTSE 1.54% higher overnight. Financials in the UK and US did okay as well. So as long as the market opens, and functions, as normal it’s back to business as usual.
2. The treasurer and RBA governor may have just changed the outlook for interest rates. I could be drawing a long bow here but I think the subtle changes in the agreement that Scott Morrison and Phil Lowe signed yesterday on the conduct of monetary policy in Australia give a lower hurdle to RBA interest rate moves in the current environment.
Of particular interest to me is the addition of the reference to inflation expectations. The management of those, both on the top and bottom side of the range, is the RBA’s primary job because of how expectations impact consumption and investment.
3. Goldman Sachs say stocks could tank 25%. There are so many views out there at the moment. Yesterday I covered Fundstrat’s Tom Lee and UBS analysts saying stocks are a buy and today it’s the turn of David Kostin, Goldman’s chief US equity strategist.
Bob Bryan reports Kostin’s bearishness come from the fact that in this QE world, even though companies in the S&P 500 are becoming less and less profitable, they are not being penalised by investors. He’s had a look at ROE, and price to book ratios. He concludes the price side of price-to-book should likely fall to bring it more into line with historical trends.
That puts a downside bias on stocks and Kostin says there’s a chance of a crash. But he has a year end target of 2,100 for the S&P 500.
4. Folks on Wall Street are freaking out about a re-run of the taper tantrum. I think the Fed should hike rates this week. I think the probabilities of a hike are much closer to 50% than the current market pricing of 12%. That move would reverberate in bond markets. Likewise the Bank of Japan’s meeting tomorrow is important for JGB rates and by extension the long end of the global yield curve.
Andrew Tilton, chief Asia Pacific economist at Goldman Sachs, says folks are freaking out about the prospect of higher bond rates and “investors are contemplating the risk of a renewed ‘taper tantrum’ in EM as core bond yields have moved modestly higher in September, with regional rates moving in sympathy and EM equities and FX weakening”.
Not everyone agrees with him, as Akin Oyedele points out. But it’s clear that bonds, and their reaction to the BoJ and Fed, are the markets to watch this week.
5. It’s easy to spread doom and gloom about China and its economy – but the middle class is booming. In trying to transition its economy toward a more consumption orientated approach, China is trying to build a bridge between its economic past and its future. That it is doing this as the second biggest economy on the planet, in the full glare of market scrutiny, and at a time when money moves at the fastest – some may say erratic – pace in history makes the job more difficult for Beijing.
But Kim Iskyan from Truewealth Publishing writing at Business Insider US says China’s middle class is booming. Quoting research from McKinsey, Iskyan says “76 percent of China’s urban population will be considered middle class by 2022”. That’s a huge amount of people consuming and offers lots of opportunities for investors. Iskyan has more here.
To give the other side of the argument airtime, some say home prices in China have ballooned to “unsustainable levels“, and there’s an early warning sign that the country is financially overheating.
6. Oil collapsed off its highs last night in a sign that even a deal may not help raise prices. Over the weekend the head of OPEC said this month’s meeting is not a decision-making meeting but if consensus is reached another meeting would be held. The Iranian president said his country is supportive of a deal on production, and then early in our time zone yesterday, news hit that the Venezuelan president said a deal was close.
That saw oil rally sharply in Asia and that seemed to ignite the risk on, sell US dollar move we saw across the region. But last night the Venezuelan oil minister undid all the work of the day before when he noted that production would have to fall 10% to get rid of the supply overhang in the market. So WTI is up 0.6% at $43.30 but well off the $44.15 overnight high.
Key data for the past 24 hours (with thanks to BNZ markets)
NZ: Westpac consumer conf. index, Q3: 108 vs. 106 prev.
NZ: Perf. of services index, Aug: 57.9 vs. 54.2 prev.
UK: Rightmove house prices, y/y, %, Sep: 4.0 vs. 4.1 prev.
EZ: ECB curr. account, s.a, EURb, Jul: 21.0 vs. 28.2 prev.
US: NAHB housing market index, Sep: 65.0 vs. 60.0 prev.
And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
Deutsche Bank – Please sir, I want some more
For many, Deutsche Bank symbolises the indecisive, timid approach to recapitalising the European banks. Having so far made 3 capital raisings totalling €37.1bn since the GFC, markets are concerned that it will soon be forced into the next round. The catalyst for this could be the announcement of a much larger than expected $14bn demand by US authorities to settle claims over the bank’s sale of mortgage backed securities during the GFC. While the $14bn is an ambit claim, it’s far larger than the banks provisions.
Deutsche Bank’s share price is now down 57% from the interim peak last October. The stock is also below where it was trading at the height of the GFC crisis. It’s dropped sharply in the last couple of days and is heading for a test of support around €11.15.
The stochastic in the box below the chart indicates ongoing downward momentum suggesting a break of this support is a definite possibility.
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC