The US dollar continued its march higher Friday and stocks were fairly quiet as the focus turns to relative interest rate policy and the likelihood that the Fed will raise rates in December.
San Francisco Fed president John Williams joined his colleague from New York, Bill Dudley, in saying that rates are likely to rise in 2016 given the current strength in the US economy and jobs market.
That combination, and the flow of earnings, left US stocks largely unchanged which also left futures traders on the ASX unexcited about today’s trade. The December SPI 200 contract dipped just one point at the close on Saturday morning.
On forex markets, the Aussie dollar is sitting at 76 cents – back in the middle of the broader 0.7450/0.7750 range as traders wait for the next catalyst to show itself. Perhaps that might be the release of Q3 CPI on Wednesday.
Gold and oil are largely unchanged, although competing messages from Saudi and Iraqi oil ministers over the weekend suggest the specifics of the oil production deal are far from settled.
Here’s the scoreboard (7.493am):
- Dow: 18145 -17 (-0.09%)
- S&P 500: 2141 0 (-0.01%)
- SPI 200 Futures (December): 5,402 -1 (+0.0%)
- AUDUSD: 0.7605 -0.0020 (-0.26%)
The top stories
1. The end of the mining boom and the east coast construction boom are still driving the Australian economy. CommSec’s latest State of the States report was released this morning and shows again that the residual effects of the mining boom are dragging on WA while NSW and Victoria are doing well. Naturally WA could be an indication of the future for these two states when the construction boom inevitably ends. I’ve got more here .
2. The US dollar is at its highest level in months and Morgan Stanley say it’s going higher. Hans Redeker and his team said in a note that “…the foundation for a powerful USD rally is in place. In many aspects, the USD outlook is stronger than it was last year.”
BNP agrees with Redeker, it seems, and the RBA will no doubt be hoping they are both right and the Aussie dollar dips a little lower. Something outside the bottom of the 0.7450/0.7750 range would help economic growth.
3. After months of relative stability, gains in junk bond prices might herald a strong stock market rally is around the corner. 2016 is a weird year. On the one hand we have cash levels held by big institutional investors at decade highs and a real sense that things could go awry. But on the other hand, commodities have bounced back strongly from early year weakness suggesting things are on the mend. It’s a bit of a conundrum really.
But the folks at Bespoke Investment Group think they have found a silver lining among the dark clouds. MarketWatch reports that the firm believes the recent rally in junk bond prices and the fact that “it’s generally thought that between the two asset classes, junk bonds lead stocks” means “the equity market is due for some catch up on the upside”.
4. RAY DALIO: There will be ‘big, bad outcomes’ if the ECB doesn’t keep buying bonds. One of the reasons the US dollar is so strong right now is that the euro is weak after the ECB president Mario Draghi left the door open for a QE extension at last week’s meeting. That’s a good thing because Ray Dalio, founder of Bridgewater – the world’s biggest hedge fund – said “tapering by the ECB would be very bad for Europe’s economy, its assets, and its unity”.
Akin Oyedele and Rachael Levy have more here.
5. Here’s a great explainer of negative interest rates and why economists are rewriting their text books. This is a bit long and a bit wonkish but it’s a good explainer of the heresy of central bankers pursuing negative rates and the impact that’s had on economic thinking. Dan Bobkoff and Akin Oyedele have more here.
6. And here is a look at this week’s key data and events. The last week of the month is usually a bit quieter for markets. Except when that last week coincides with Australia’s uber-important Q3 CPI which will guide traders on RBA thinking on interest rates. Equally with the US dollar strong and the Fed signalling a December rate hike, the release Friday of the first read of US Q3 GDP is also vitally important.
You can read about it, and the lack of volatility that has the CBA a little worried here .
And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
Ramsey Health Care
Healthscope shocked the market on Friday by announcing that its private hospital admissions were well below expectations in the last quarter. If this was to continue, EBIT growth would be flat for F17. That’s not consistent with a valuation of more than 25 times forward earnings which is where Healthscope closed on Thursday. The stock closed down 19% after the news on Friday.
There are now two questions to be resolved for investors. The first is whether last quarter was more about statistical volatility than any underlying trend in private hospital use. The proportion of people with private health insurance did drop from 47.4 to 47%.
The second question is the extent to which this issue might have been specific to Healthscope. The market appeared to take a compromise view on these matters as far as fellow private hospital operator, Ramsey Healthcare is concerned. It closed down 6%, leaving it at a healthy 28.5 times forward earnings. Ramsey is more diversified than Healthscope. It operates in 6 countries with only about 50% of its revenue sourced in Australia last year. Even so, the market will now be very attuned to any updates from Ramsey. Its AGM is scheduled for 9 November.
The next major chart support for Ramsey looks to be around $68-70. There’s quite a bit going on here, including the 200 day moving average, the June low and a key Fibonacci retracement level.
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC
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