After the last few days, sharp rallies, oil prices and commodity currencies ran into a wall last night and have reversed course.
Nymex crude is down 1.7%, Brent fell 2.27%, the Aussie lost 0.64%, and the Canadian dollar was down around 1%. Other oil-based currencies like the Norwegian krone and Russian rouble were also lower against the US dollar.
On stocks, the SPI 200 is indicating a weaker day’s trade today on the ASX when it opens. The June futures contract fell 29 points, 0.6%, after the S&P 500 dipped back by around half a per cent last night and Google and Microsoft both missed on their earnings reports.
Elsewhere on forex, even though ECB president Mario Draghi reiterated that he’d do whatever it takes to get the Eurozone economy moving, and increased expectations of BoJ easing next, the euro and yen remain fairly firm.
Here’s the scoreboard (7.29am):
- Dow: 17,982, -114 (-0.63%)
- S&P 500: 2,091, -11 (0.52%)
- SPI200 Futures (June): 5,228, -29 (-0.6%)
- AUDUSD: 0.7739, -0.0050 (-0.64%)
Now, the Top Stories
1. A stock market rally and strong data is starting to turn the US dollar around – watch out for next week’s Fed meeting. I’m leading with this because I think traders are forgetting this is a self-curing rally in stocks, commodities, and risk appetite. That is in shooting from despondency to euphoria, markets are giving the Fed some clear air to start to focus once again on the US economy and the Fed’s own goals. That, according to the its last dot plot, means at least two rate hikes this year. Two hikes the market, US interest rate and US dollar, don’t have priced in.
That’s important because the data overnight reinforced what Boston Fed president Eric Rosengren said earlier this week about the strength of the labour market. Overnight, the latest read on initial jobless claims fell to 247,000. That’s the lowest level in any one week since November 1973.
Of course, other areas of the economy are not going gangbusters – as the Philly Fed showed last night. So this is not going to be a protracted or large move this year. But the point is if markets give the Fed room to focus on the US economy – the likely move is to higher rates – then that will underpin the US dollar and likely go some way to undermining the rally in stocks. Next week’s FOMC statement is going to be crucial in setting up a June tightening – or not.
2. George Soros says China reminds him of pre-GFC USA. It’s pretty clear that credit-based growth where borrowing increases, debt builds up, and house prices surge is a discredited prescription for growth after the near death experience that global finance had when the debt bomb of US housing exploded and lead to the GFC. But don’t tell that to the Chinese – or maybe us here in Australia (that’s for another time) – who are driving credit and housing fast in order to pump up the tyres of economic growth.
So it’s not really a surprise that legendary investor George Soros said that China’s financial system right now “eerily resembles what happened during the financial crisis in the US in 2007-08”. It’s very ponzi-like, Soros implies, saying “most of [the] money that banks are supplying [in China] is needed to keep bad debts and loss-making enterprises alive”.
As if to highlight just how tenuous the Chinese recovery just might be, and how narrowly based it is on credit and housing, David Scutt writes that China has 4 years worth of unsold housing stock, yet it’s still building more.
I try not to be a China doom and gloomer but I also strongly believe the quarterly data which shows GDP in the low 6% region, not the high 6% region the annual data released last Friday, is closer to the mark. China is slowing – the question is how panicky the government will become in forestalling the day of reckoning. And then of course what that day, or days, might look like.
3. Mario Draghi said helicopter money isn’t coming to Europe but more easing could be. Mario Draghi wasn’t exactly a picture of joy last night, noting that the risks for the eurozone economy are still titled to the downside with a risk that inflation could soon turn negative in the EU. That sounds very much like the ECB’s policy prescription isn’t working. But Draghi said “our measures in place since June 2014 have clearly improved borrowing conditions for firms and households”. Imagine how dire things would have been otherwise.
To those who think that the next step is helicopter money – dumb idea – Draghi said the ECB hasn’t even discussed it. But he did say more easing is possible. At his press conference, Draghi did his best impression of Grumpy Cat, taking dead aim at the critics of the ECB who question its policies and their effectiveness.
“Any time the credibility of a central bank is perceived as being put into question, the result is a delay in the achievement of its objectives – and therefore the need for more expansion,” Draghi said, apparently getting loud. He added “our policies work, they are effective. Just give them time.” Someone might want to refer him to the speech in New York by Glenn Stevens this week.
4. After a strong rally, oil ran into a wall and the US dollar last night. The price action in crude over the past week shows how fractured markets have become in 2016. That is, the downside volatility Monday, the gap, the price crash into the mid $37s and then the subsequent rally back above $44 (I’m talking WTI here) show traders don’t really have an anchor and suggest there is less biodiversity in the oil trading universe with many traders’ sidelines.
Yesterday in Asia, prices for crude rallied after comments from International Energy Agency (IEA) chief Fatih Birol who said the oil market will be back in balance by next year. But prices in WTI and Brent terms appeared to hit a wall last night.
“The biggest negative factor was the ECB, with Draghi talking about doing whatever it takes” Frank D. Cholly, a senior market strategist at brokerage R.J. O’Brien in Chicago told Dow Jones. “That added euro weakness, dollar strength and ultimately all commodities took a hit,” he said.
US dollar folks – that’s why I lead with it at item one today. If it gets a wriggle on then the current broad market rally will be under pressure.
5. Junk downgrades already outpace 2015. Debt markets – they always find a way to blow things up. While on the one hand, Argentina’s leap back onto the global issuance stage with a monster $16.5 billion issue shows risk appetite is strong again, there is a counterpoint in the number of junk bonds being downgraded.
The FT reports this morning that “the debt doghouse is filling up fast”.
“More companies were downgraded to junk status by Moody’s in the first three months of the year than in the whole of 2015. In total, 51 companies were pushed into junk territory, up from eight in the fourth quarter and 45 in 2015,” the FT reports.
The question the FT asks, the one worth thinking about, is whether or not the credit cycle globally is or has turned. Like a rising tide low and negative rates hide any number of sins. So the fact that the cycle might be turning with rates so low and or negative in so many nations tells you much about the state of the global economy. Maybe the Fed won’t raise rates after all.
6. Against that backdrop, it’s worth noting earnings forecasts always get cut, but 2016 has been particularly terrible. Microsoft and Google both missed market expectations of earnings this morning and their stock prices are down in the after market as a result. Those misses will weigh on the market in Asia today and likely the US when trade opens tonight.
But Myles Udland has an interesting piece highlighting that earnings forecasts are getting cut across the board and aggressively so. Myles says “expectations for 2016’s earnings are already down about 16% from when estimates were first made and we still have over half the year left. If the downward trend holds, earnings this year could be truly terrible”. Of course, as Mlyes notes “on the other hand, earnings expectations could be near a trough”.
6a. Prince is dead. Not normal here in this piece but as a kid Prince and his music was part of the soundtrack to my youth. So here’s a link to what Paul Schrodt reckons is Prince’s most powerful performance ever – 12 minutes at the 2007 Super Bowl.
And of course there is that epic guitar solo Prince played at the George Harrison memorial concert – wait for the 3 minute 28 seconds mark!
Key data for the past 24 hours (with thanks to BNZ markets)
NZ: Net migration, (s.a.), Mar: 5330 vs. 6070 prev.
NZ: ANZ consumer confidence, Apr: 120.0 vs. 118.0 prev.
AU: NAB business confidence, Q1: 4 vs. 4 prev.
UK: Retail sales ex auto (y/y%), Mar: 1.8 vs. 3.8 exp.
EC: Deposit facility rate (%), Apr: -0.4 vs. -0.4 exp.
US: Initial jobless claims, Apr 16: 247k vs. 265k exp.
US: Philly Fed business outlook, Apr: -1.6 vs. 9.0 exp.
EC: Consumer confidence, Apr: -9.3 vs. -9.3 exp.
You can catch me on Twitter.
And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
Wesfarmers released its March quarter sales results yesterday. They were strong and don’t look like good news for Woolies. Both Coles Food and Liquor and Kmart beat expectations. Their sales growth also looked better than the broad market. That suggests that market share continues to improve, giving Woolworths’ shareholders reason to be nervous.
The result was that the share price fell away from the $22.60 zone again. This has now been established as a pretty solid chart resistance zone for Woolworths.
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC