Crude oil shot higher with Nymex WTI hitting $44 a barrel at one stage.
That strength, and the overall risk-on feel which helped propel the whole commodity complex higher, underpinned the rally in stocks even though at the end of trade the S&P 500 was only marginally higher. But given it still clung above 2100, that’s been a positive lead for the ASX 200 today with the June SPI futures contract up 36 points overnight. We might have another solid day.
On forex markets, the Aussie is back below 78 cents after the US dollar ended the day a little stronger. A raft of individual “buy US dollar” recommendations from the investment banks floated out last night, suggesting a sense of changed circumstances is starting to grip forex markets.
Here’s the scoreboard (7.26am):
- Dow: 18,096, +43 (+0.24%)
- S&P 500: 2,102, +2 (0.1%)
- SPI200 Futures (June): 5,241, +36 (+0.7%)
- AUDUSD: 0.7790, -0.0023 (-0.3%)
Now, the Top Stories
1. Everyone hates this stock market rally – that’s the best sign yet it might continue to surprise. Myles Udland pointed out in his wrap of the US trading day that Josh Brown “captured the current mood in markets, which is one of disbelief, anger, discontentment, conspiracy, and laughter”.
The Dow just broke above 18,000 for the first time in nearly a year, and no one wants to even smile.
I think a lot of this stems from the seeming disconnect between a sluggish economy and record high stocks. Another component of it is the anxiousness that people feel so soon after it looked like a full-blown bear market could be upon us. There was recession talk in the air as recently as last month as well. People who did something to protect themselves – selling, shorting, hedging, etc – are absolutely furious. And it’s entirely understandable.
One of the things I am thankful for personally is that I stopped playing the guessing game professionally about where markets were headed roughly six years ago. The game was endlessly frustrating and I was never any good at it anyway. Running money based on evidence and rules, as we do today, has made a huge difference in my life. I can’t imagine ever going back to the way things were for me from 2000-2010.
Process folks, process. That’s the key to trading and investing – too many traders and professional investors still shoot from the hip.
2. The ASX 200 can break higher today – could we see 5300? The ASX closed at 5216 yesterday. That’s the best close since the market started to tank in early January. It’s been a solid rally over the past two weeks with the 200 index up 6.5% since the low on April 8 at 4893. Overnight, the SPI200 futures were up another 33 points suggesting that today the market can break up and through this old support line and kick on toward 5300. With crude ripping higher, iron ore having another great day and the US markets pushing a little higher, we should have a good day.
Here’s a great chart of the physical market and the trendline traders look like they might be keeping an eye on.
3. Argentina’s bond sale was a cracker – that’s bullish but troubling. Okay so I know there’s a new bloke running Argentina, I know he’s so-called “market friendly” and I know that he is trying to turn the country around. But I still find it amazing that investors fell over themselves to buy the nation’s first debt issue since it – well there’s now easy way to say this – defaulted a little more than a decade ago. Interest was so keen that the issue was upscaled to $16.5 billion and the yield tightened.
Like me, the FT asks today how did Argentina pull off a $16.5bn bond sale? The answer that we jointly come up with is the rate on the bonds. The 7.5% rate on the 10-year bond which has a high yield and junk style rating- 5% above AAA-rated Australian 10-years – appears to have done the trick. “It is hard to resist a country that returns to markets with an attractive yield, no matter what has happened in the past,” Gabriel Sterne at Oxford Economics told the FT.
Central banks, low and negative rates, and QE means rates of return for bond investors are pathetically low. So now they worry less about the return of their capital and wonder more about the return on their capital. That’s a dangerous game. But it also tells us why stocks are bid at the moment – money is being put to work. Investors are just chasing a return where they can.
4. Silver is gold as the price goes nuts. Silver has been a big mover in recent days as traders, playing a bit of catch-up to recent rallies in gold, reports Will Martin. There has been a correction in the trading ratio between gold and silver, Martin says, which has traditionally seen silver prices track gold carefully. But this year silver prices have lagged a little behind.
UBS analyst Joni Teves puts it, as quoted by the Financial Times: “It’s a combination of silver getting a bit of attention over the past week with the big move in the gold/silver ratio and quite a few market participants looking at silver in and its relative performance to gold and thinking it might be time for a bit of catch up.”
Over at IG, Angus Nicholson has a great explanation of the what and why of silver’s rise:
There are two major factors driving the rally in silver: Chinese stimulus and negative interest rates. Silver, unlike gold, has far more industrial uses, and the significant uptick in Chinese stimulus evident in its large increase in credit growth and investment spending in its 1Q data has been immensely beneficial to a whole range of industrial commodities. Silver and gold also arguably function a lot like zero-yielding bonds, making them less desirable as global interest rates increase and more desirable as global interest rates decrease. Currently, more than a third of government bonds globally have negative yields making zero yielding assets comparatively quite attractive. Of the four major global central banks (the Fed, BOJ, ECB and PBOC), three of them are still currently in easing cycles. In such a scenario, even if the Fed does manage to raise rates once or twice this year, it is unlikely to make a major dent on the uptrend in silver and gold.
5. Low oil prices are still not helping the global economy. I reckon central bankers are secretly hoping that the price of crude heads back above $50 a barrel. That’s because that in itself will help wash away some of the globe’s deflationary forces that are gripping the global economy. That will then make central bankers’ lives a little easier as they’ll fret less about persistent low inflation.
But while the crash in crude has been a big part in dragging down headline inflation, the overall inflation backdrop around the developed world also tells us that aggregate demand is fairly weak, or at least much weaker than central banks would hope for. Nowhere is that more obvious than in the lack of growth dividend for the global economy from low oil prices. There’s just no evidence that low oil prices are boosting the world economy, writes Liana Brinded. She’s got hold of some research from Hermes Investment Management which tries to explain why that boost hasn’t flowed through from lower oil prices.
In summary, Hermes reckons the collapse in prices has demolished CapEx in the sector with knock-on effects in other sectors, while at the same time low/negative rates and unconventional monetary policy means central banks can’t do much to assist cheap oil. Brinded has more here.
6. The whole world is turning Japanese but China might be doing it faster than we think. David Scutt reports growing fears the Chinese economy is heading towards the trainwreck Japan experienced in the late 80s. Roy Smith, an academic at New York University said “China has now arrived at an existential moment after nearly 40 years of extraordinary economic progress”.
The point is “China has followed Japan’s economic development model, and may now too be facing a financial crisis like Japan’s that it may not be able to control, and that could diminish its ability to become the next Asian superpower”. And Scutty has a great chart from the NAB which shows the size of the debt bomb hanging over the Chinese like the Sword of Damocles.
Key data for the past 24 hours (with thanks to BNZ markets)
UK: Unemployment rate (%), Feb: 5.1 vs. 5.1 exp.
US: Existing home sales, (mill), Mar: 5.33 vs. 5.28 exp.
And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
Yesterday, BHP completed a trifecta of solid quarterly production reports from Australia’s three big iron ore producers. Like Rio the day before, BHP tweaked its production guidance a little lower; in this case down 8m tonnes for F2016. Again like Rio this was not about any underlying problem or change of strategy. It was about weather and bringing forward planned rail maintenance.
If anything, the market’s reaction to this was positive. A marginal reduction to production by the major producers no doubt helped the ongoing rally in spot iron ore this week.
BHP will open higher again today. This will push it through its 200 day (40 week) moving average. However, there’s a possible chart turning point not far above, around $21.20/$21.60. This consists of the 61.8% Fibonacci retracement and a harmonic AB=CD level. The potential resistance of the last major low is also around this level.
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC