Let’s get excited.
Billions, no trillions, of dollars are being “wiped” back onto stock market values. After all the terrible price action we saw in the first five weeks of 2016, markets are rallying and sentiment appears to have improved materially.
That’s likely to prove ephemeral on a longer term basis. But hey, stocks are stronger, oil and iron ore are on fire, the Aussie dollar is higher and it’s BHP Day.
With 20 minutes of trade left, Wall Street is higher with the Dow up 1.3% and the S&P 500 up 1.2%. Europe had a great night as well with the FTSE up 1.47% and the DAX in Germany 2% higher.
That’s lifted the overnight futures on the ASX higher with the March SPI 200 contract up 35 points to 4,995. That sets up a good day for local stock traders.
Also having a good day is the Aussie dollar which is up 85 points to 0.7234, but sterling is getting crushed by the debate about Brexit and the euro is under pressure from the stronger US dollar.
On commodity markets, risk appetite fuelled a rally in crude and iron ore and pushed gold lower.
Here’s the scoreboard (7.38am):
- Dow: 16,605, +213 (+1.3%)
- S&P 500: 1,942, +25 (+1.28%)
- SPI200 Futures (March): 4,995, +35 (+0.7%)
- AUDUSD: 0.7234, 0.0085 (1.15%)
And the top stories:
1. ASX200 – one resistance level broken, here’s the next level traders are watching.
I love trend lines. Traders love trend lines. That’s because – to borrow one of Keynes’ theories – traders know that other traders know the trend line exists and so traders watch what other traders do near the trend line. That is, they watch to see how the buyers and sellers interact around the trend line. If prices reverse, like they did on the ASX200 twice last week, the line is reinforced. If the trend line breaks, like it did on the ASX yesterday, then traders – buyers at the moment – pile in.
So, with the ASX200 physical having broken the recent trend line yesterday, and with the SPI200 futures rallying a further 33 points overnight after strong gains on Wall Street, the outlook has brightened for the ASX.
After closing at 5,001 yesterday, 5,072 is the next level to watch as a recent high on the ASX200. But next trend line resistance isn’t until we get near 5,200.
2. It’s BHP earnings day, here’s what you need to know. There were so many questions that the Big Australian had to answer at its earnings announcement today. With its share price back at $17.18, well off its $14.06 low, much was expected interms of guidance and dividend policy.
In the end BHP has posted a $US5.669 billion loss, and slashed its dividend, and abandoned its progressive policy of keeping payouts the same or higher. Chris Pash has a great wrap of what you need to know here.
3. As the Australian dollar rises, so do the chances of an RBA rate cut. The Aussie had a ripper of a night, up 1.1% on this time yesterday and firmly back above 72 cents this morning. David Scutt has what you need to know about the rally but essentially it’s up because oil is up, iron ore has rocketed, stocks are rallying, and risk appetite has increased.
That’s the perfect positive feedback loop for the Aussie. But as RBA board member John Edwards highlighted last Friday he, and no doubt his colleagues at Martin Place, would prefer the Aussie lower.
That’s important because as the risk of a further rally in the Aussie increases, monetary conditions in Australia are tightening. Goldman Sachs chief economist Tim Toohey says that is one of the pre-conditions for the next round of RBA rate cuts.
4. Peak pessimism or healthy skepticism? One of the pre-requisites for a sustainable market bottom is that traders and investors just give up on their longs, turn uber-bearish and worry incessantly. We saw a short term version of this two Thursdays back and the market is rallying as a result.
But it is worth noting that Bob Bryan from Business Insider US reports that almost everyone Citi forex strategist Steven Englander talked to in Asia thinks the global economy is a black hole.
You don’t have to be a contrarian to see where the fuel for the current rally is coming from. Certainly last night’s flash manufacturing PMI in the US was disappointing but the US economy is defying the doomsayers. Australians are familiar with that story. The question is whether the global economy might ultimately surprise as well. There is already so much bad news priced in, it’s a fair bet.
5. The oil glut won’t end till 2017, but crude ripped higher anyway. Oil does not have a demand problem. The issue with oil is supply. Too much of the black stuff in an almost perfectly competitive market means the marginal player sets the price. That’s what’s helped push crude lower in the past few months.
(On perfect competition, I recognise light sweet is better than heavy sulphur but once refined, oils is oils Sol.)
As a result the International Energy Agency, in its five-year outlook released last night said, it’s “dangerous” to declare a new era of lower oil prices, but…
That’s a big but. Yet Nymex and Brent crude ripped 5% higher. Why might be hard to fathom but reports from the oil markets is that traders like the fact the IEA said in its base case outlook it expects US shale production to fall back by 600 kb/d in 2016 and by another 200 kb/d in 2017. Forget the fact the IEA says production will then spike by 2021, that’s too far away.
6. Here’s what central banks are doing wrong in 2016 – they don’t get inflation. Anyone who reads my stuff knows I think that central bankers are an earnest bunch, trying their best to bolster the global economy. But you’ll also know I think they are using outdated thinking and that as a group, constantly cutting interest rates is just constantly borrowing from the future. It can’t go on forever.
One thing that central banks might have wrong is in their understanding of inflation and how and why it manifests in the economy. To this end, Jim Edwards from Business Insider in the UK sat down last week with one of the City’s top analysts and discussed what central banks fundamentally misunderstand about inflation.
Have a great day. You can catch me on Twitter.
And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
Brambles (BXB: ASX)
Like Dominos and Amcor, Brambles is an example of a major Australian company outside the mining sector that’s succeeding on a global basis. Yesterday, the pallet manufacturer pleased the market with an upgrade to guidance. It’s now expecting constant currency profit growth of 8-10% in F16 compared to previous guidance of 6-8%. Shareholders were rewarded with an 8% jump in the stock price.
Brambles has also been a bit of a chartists dream. The chart has featured strong trends and harmonic patterns. If the latest AB=CD pattern is repeated, the next peak might come in around $12.40. Given strong recent momentum a higher number wouldn’t surprise. The next possibility might be a 127% Fibonacci expansion of the last major correction around $12.65.
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC
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