Stocks, crude and the Aussie dollar were lower again overnight. But they recovered from the lows as the argument over what the Fed will, or perhaps won’t do, at the June and July meetings continues.
At the close of play the Dow and S&P were down 0.5% and 0.3% respectively. That’s a much better close than Europe which saw the DAX collapse 1.48% and the FTSE fall 1.82%.
The washup is that the SPI 200 June contract is just 6 points lower this morning. That recovery from overnight lows reflects a similar move off the 2305 region yesterday on the ASX200 physical market which recovered into the close to finish at 5323.
On currency markets, traders thumped the Aussie trying to get it to stay below 72 cents but it’s popped back as commodities recovered and is sitting at 0.7223 this morning.
Here’s the scoreboard (7.34am):
- Dow: 17,435, -91 (-0.52%)
- S&P 500: 2,040, 8 (0.37%)
- SPI200 Futures (June): 5,359, -6 (-0.1%)
- AUDUSD: 0.7225, 0.0000 (0%)
Now, the Top Stories
1. Former RBA governor Ian Macfarlane poured cold water on the big calls for RBA rate cuts. This week Macquarie Securities has joined the growing ranks, and chorus, of those calling for a collapse of RBA rates in Australia to – some say below – 1%. But it seems former RBA governor Ian Macfarlane is questioning the need for such as drastic reduction in interest rates.
Macfarlane says that the RBA does not have a “mechanical” reaction function to lower inflation and “has always prided itself on having a more flexible” approach than other countries. But the killer is his comment that Australia already has easy monetary policy and the RBA shouldn’t cut rates “each time we receive an inflation statistic showing it is below target”.
2. MACQUARIE: A new valuation paradigm has emerged for Australian stocks. Speaking of Macquarie, the Australian equity team has used the new, and lower, cash and bond forecasts from their colleagues in the Economics team to make a strong case that a new valuation paradigm is occurring in Australian stocks.
Essentially they are saying that just like the rest of the world, when the discount rate for stocks falls, so the desperation for return by investors drives a PE expansion. That means stocks can rise even though the fundamental outlook has deteriorated.
It’s just a chase for yield. And while Macquarie says “it’s an uncomfortable equilibrium, because we know it cannot continue ad infinitum,” investors had better get on board. They did drop their end target from 5900 to 5700 however.
3. More, and stronger warnings from the Fed about rate hikes. Bill Dudley is the boss of the New York Fed and a voting FOMC member. In the hierarchy of the Fed, he’s one of the more senior voices. Last night he reiterated the message markets understood yesterday from the Fed minutes and that given by regional Fed presidents Williams and Lockhart earlier this week that June is live. He also added that there was a sense in the FOMC that markets were underestimating the Fed’s tightening probability. To reinforce the point he said if he’s convinced his own economic forecast is on track, then a June or July tightening is a reasonable expectation.
Richmond Fed President Jeffrey Lacker was also on the hustings telling Bloomberg Radio that he supported an interest rate hike at the Fed’s April meeting and thinks the case for raising interest rates in June would be “very strong”.
You can’t get much clearer than that folks. So you might be wondering why the Aussie dollar, euro, yen, crude oil, and stocks aren’t lower. The reason is that traders believe Fed vice-chair Stanley Fischer, one of the only FOMC members beside Janet Yellen to outrank Dudley, muddied the water a little in traders’ minds.
Fischer said: “What we need most, now that we are near full employment and approaching our target inflation rate, is faster potential growth.” If you know anything about economics you’ll know while he’s not talking about June or July, he’s supporting Dudley’s stance. Which means the market is still not grasping the Fed’s message of the imminence of a rate hike.
4. Remember the bond market ructions of 1994? I do, and we might be heading there again. This is really interesting. You know I’ve been banging on about the market under-pricing Fed risk recently and I’d argue after last night the cloth ears the market has are getting worse. Scarily though, Deutsche Bank’s Torsten Slok says bond markets are setting themselves up for a rerun of the 1994 bond market rout.
I was managing an interest rate fund at State Super back then and it was no fun to see rates, especially big tick items like US 30-year bonds, roar higher in such a short space of time.
Akin Oyedele has covered Slok’s note here. But the key takeaway is Slok’s comment that “I continue to believe that the biggest macro risk for investors is inflation because the market doesn’t expect it and it is the main reason why the Fed has started raising rates”. What he said folks, what he said – time to look out the front of the car not the rear view mirror.
5. Hedge funds are getting out of the stocks market. I’m still trying to figure out if this is bullish or not. Bob Bryan reports that data crunched by Andrew Birstingl of FactSet shows “the top 50 hedge funds sold off US equities for the second consecutive quarter. Funds unloaded nearly $55 billion worth of shares in U.S. equities during the first quarter, which was more than triple the value removed in Q4”. Unsurprisingly given the price action, Apple was the “most sold off”, Birstingl said.
On my question of whether this is bullish and if cash needs to get back to work, Bryan suggests that it’s probably not. “The underperformance of hedge funds’ stocks, along with other asset classes, led many investors to yank their money out of the funds,” he wrote.
6. Two cracking yarns about China – both must reads. The world’s second biggest economy is in the midst of a massive structural transformation. That necessitates a shift in economic output, a slowdown in same, and cause some large concerns about the strength and path of the Chinese economy.
When we talk about growth falling in China to 6.5%, or question whether it’s actually lower, we forget just how big the economy is and what that actually means. But David Scutt has put it all into perspective and reports on a HSBC note which says “China added the equivalent of Turkey to global GDP in 2015”. That’s big folks.
Also looking at this great HSBC note, Ben Moshinsky reports on a wild chart which shows exactly how important China is when it comes to consumption in so many markets. The chart is about stuff but as the economic transition continues, China’s demand for services will increase and the nation will change the very shape of exportable services globally.
Key data for the past 24 hours (with thanks to BNZ markets)
NZ: ANZ consumer conf. index, May: 116.2 vs. 120 exp.
AU: Employment change (k), Apr: 10.8 vs. 12.0 exp.
AU: Unemployment rate, Apr: 5.7 vs. 5.8 exp.
UK: Retail sales ex auto fuel (m/m,%), Apr: 1.5 vs. 0.6 exp.
US: Phil. Fed business outlook, May: -1.8 vs. 3.0 exp.
US: Fed’s Dudley speaks: June is a “live” meeting
You can catch me on Twitter.
And, if you are interested in improving your trading and learning how I approach markets and trades, my strategies and processes, I’m holding a course in Sydney soon.
Now from CMC Markets’ Michael McCarthy is today’s Stock of the Day
Blue Sky at James Hardie
No, it’s not a verse in a Midnight Oil song (ex-MP Peter who?). James Hardie (JHX) shares broke to an all-time high yesterday following its full year report and the announcement of a US $100 million buy back. From a technical point of view this puts JHX in blue sky territory.
Although headline profit fell, when one-offs and sold businesses are stripped from the comparison the underlying operating profit shows a healthy 10% gain in constant currency terms. JHX is not the Blue Sky Mining Company of the song, but lower than expected asbestos claims did contribute to a better bottom line. This more than somewhat offset the negative impact of a higher USD.
However, the combination of above average profit growth and a buyback could see further substantial share price gains. While JHX remains above the previous high at $20.04 it’s happy days for shareholders.
Michael McCarthy, Chief Market Strategist
You can follow Michael on Twitter @MMcCarthy_CMC