6 things Australian traders will be talking about this morning

Spencer Platt

Another better night on Wall Street helped US stocks end the week in the black for the first time in 2016.

That sets up a better day for the ASX 200 with the March SPI 200 futures contract indicating the market should open 1.1%, 55 points higher.

The strong surge in oil, 20%+ off last week’s low, should help the energy sector while copper’s push back to $2 a pound is symptomatic of a general lift in sentiment throughout the commodity sector at the moment.

Likewise the Australian dollar back at 70 cents is also a sign that for now, investors are a little less pessimistic. And US 10-year bonds back at 2.05%, 11 points off last week’s lows, suggests this might be a better week for markets.

Here’s the scoreboard (7.20am):

  • Dow: 16,093, +210 (+1.33%)
  • S&P 500: 1,906, +37.91 (+2.03%)
  • SPI200 Futures (March): 4,934, +55 (+1.1%)
  • AUDUSD: 0.7002, -0.0008 (+0.0%)

And the top stories:

1. Stocks had their first up week for the year. But is the carnage over?

We’ve hardly even had a chance to enjoy the fact that US markets closed up for the week and we’re being reminded that the outlook is still clouded. Pundits are still at loggerheads about what this all means, reports Matt Turner from BI US. He says the number one question for investors right now is “Have markets got it right?”

Larry Fink, CEO of BlackRock, seems to think the worst is yet to come. He told CNBC in Davos that “I do believe there is a need for blood in the street.” What he means is that markets, and some industries like oil, need a cleanout, including bankruptcies, before the market can heal. That’s because a “market correction weeds out the weak”. After that traders and investors can move on. The good news, he thinks, is that stocks will be higher by year’s end.

2. Here’s the good news now though – stocks usually go up after really crappy months. Professor Philip Tetlock, writing in Superforecasting: The Art and Science of Prediction, said that when we are faced with irreducible uncertainty we should rely on reversion to the mean.

So in this context, after what has so far been a terrible January, Sam Ro from BI US says it’s a note worth highlighting. Ro covered some research by Brian Belski which found that performance in the S&P 500 after its worst 20 months since WWII “tends to snap back rather sharply following such poor months…average gain for the S&P 500 during the 3/6/12-months following the 20 worst months is roughly 3%, 7%, and 15%, respectively.”

3. On the flip side? Volatility is here to stay and traders should get ready for more extreme days in the market. To many traders and investors, it might feel like the current volatility is out of control. Not so according to Todd Hawthorne, the lead portfolio manager at Boston Partners who told Bob Bryan from BI US that, “This is a resumption of normalized volatility behaviour, and I expect it is what we’re going to see going forward.”

Buckle up folks.

4. There is a worrying change in investors’ views about China. In a sea of news from Davos last week, this is the one that really struck me as both important and an excellent explainer of why the heck markets are in a funk.

Linette Lopez from BI US reports that after years of being polarised as either China bears or China bulls, investors’ conversations have “shifted to something more specific”.

Scarily that means, “they point to specific, crucial issues that need to be handled as soon as possible”.

“Some don’t see them being handled at all. And there are some who think it’s too late.”

5. It’s not me, it’s you – hedge funds blamed for commodity rout. The AFR reports this morning that “Arrium director and former Rio Tinto strategy chief Doug Ritchie said the dramatic fall in commodities has been exacerbated by speculative bets placed by hedge funds”.

Ritchie, channelling his inner Mahathir Mohamad, said:

With derivatives, when sentiment is upwards its going to have the impact of pushing commodity prices higher. And when sentiment is negative it is going to have a big impact pulling prices lower. Given volumes have held up pretty well, there are other reasons why copper is at $US4500, thermal coal is under $50, iron ore is at $US40. It’s just not the cyclical nature of the mining industry sending prices lower, put it that way.

In the article he actually make some good points about how to, and how not to, run a mining firm. But we can’t really blame hedge funds can we? Why weren’t the miners complaining when spec bets drove prices higher a couple of years back?

And as if to prove his point, Australian fund manager Ben Cleary from Tribeca Investment partners said: “We don’t think it’s (the bottom of the resources markets) any time soon and there’s still a couple of years of reset at least.” You can read more about that in The Australian this morning.

6. There is plenty of data and events this week to keep traders focussed. NAB business survey today, Australian CPI on Wednesday and important announcements from the Fed and BoJ are just some of the big stories traders will be watching this week.

We’ve changed up the format in the Oz Diary to make it more accessible. You can find this week’s version here.

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