6 things Australian traders will be talking about this morning

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US stocks fell for the first time in ten days on Thursday, ending a streak that took stocks to new highs for seven consecutive sessions. Disappointing corporate earnings, another steep fall in crude prices, and investor caution towards the prospect of more monetary stimulus being delivered by central banks were cited for the decline.

After a wild start to the session, European stocks closed mixed, boosted late in the session by supportive words from ECB president Mario Draghi that underpinned a rally in financial stocks.

In currencies, the USD/JPY tumbled by close to 2% from its session highs (more below). While the moves elsewhere were close to non-existent.

Commodities were also mixed, with crude oil slumping by 2% as US gasoline inventories pushed supplies to a record high. Elsewhere precious metals pushed fractionally higher while base metals were split down the centre with zinc and tin higher, while copper and aluminium fell.

Iron ore surged more than 2.5% on the back of strength in Chinese steel price.

Here’s the scoreboard (7.30am AEDT):

Dow: 18,517.23 -77.8 (-0.42%)
S&P 500: 2,165.17 -7.85 (-0.36%)
SPI 200 Futures (September 2016 contract): 5,451 -32 (-0.58%)
AUD/USD: .7493 -0.0006 (-0.08%)

The top stories.

1. It doesn’t look like the Bank of Japan will deploy so-called “helicopter money” when it announces its July monetary policy decision on Friday next week, and it’s seen the Japanese yen rally hard in overnight trade. In an interview for BBC Radio 4 conducted in June, with the Financial Times’ Martin Wolf, Kuroda said there was “no need and no possibility” to embark on a policy to inject direct stimulus into the veins of the economy or the pockets of consumers.

While Kuroda has seemingly poured cold water on the prospect for a radical monetary policy shift, he told the BBC that policymakers were still poised to carry out more conventional easing in the form of ramped up quantitative easing and cutting interest rates further into negative territory “if necessary”.

It wasn’t enough to appease investors who drove the USD/JPY as low as 105.41, down close to 2% from highs seen earlier in the session. The USD/JPY has since recovered, buying 106.12.

2. Have we got it all wrong when it comes to the Chinese economy? For years, economists have been saying that China needs to “rebalance” its economy, moving away from growth based on investment in industrial manufacturing to one based on domestic consumption driven by regular Chinese people working in the services sector.

While the latest GDP figures suggest this transition is progressing smoothly, what if we’ve got this all wrong, and the economic shift is occurring too early? Qu Hongbin and Jing Li, economists at HSBC, believe it is, suggesting that with China’s GDP per capita only 14% that of the US, it is way too early to shift towards services-led growth.

What really worries HSBC is that the service sector’s jobs, while in general more labour intensive, are less productive for the economy than jobs in the industrial and manufacturing sectors. BI’s Linette Lopez has more.

3. It is time to accept the fact that Brexit may never actually happen, writes BI’s Jim Edwards. Leaving the EU is so difficult, and the consequences are so economically damaging, that it may be easier for prime minister Theresa May’s government to endlessly delay the process rather than to actually leave.

Edwards’ sums up the problem in ten easy steps, which can be found here. He suggests the government is heavily incentivised to drag its feet over the Leave negotiations, noting that it would be much easier for the Tories to be seen to be negotiating an exit, while not actually exiting, than actually leaving Europe.

4. The way two groups of investors on Wall Street are trading options suggests that a rally in stocks may be about to take a breather. According to Randy Frederick, managing director of active trading and derivatives at Charles Schwab, the behaviour of institutional investors and retail traders in the options market may be foretelling a flattening of the recent trend.

“We see equity traders just now starting to take on bullish perspective,” Frederick told Business Insider, “meaning, they have become comfortable with the uptrend that we’re in now. Especially on the retail side, it can often be a little bit of a contrarian [indicator] if the equity traders get a little bit too complacent. That could be a sign that we may be topping out just a little bit.”

Frederick also suggests that the red flag goes even higher when the institutional investors start hedging against a downturn while retail traders keep chasing the market’s direction. “I don’t think we’re quite there yet, but it does seem like we’re starting to get to that point, and that’s one of the number of reasons why I feel like the markets are probably levelling off here.”

5. China’s steel price rally is going to ‘fizzle out’ soon, says BMI Research. In a note from the group released this week, it states that steel’s rally in the first half of this year is going to fade in the second half, driven mostly by excess capacity pushing prices lower.

BMI’s core view is that this trend will begin to fizzle out as housing affordability continues to worsen amid high levels of inventory, writes BI’s Chloe Pfeiffer.

Despite that view, iron ore prices surged by more than 2.5% on Thursday, reversing six days of straight losses.

6. US stocks sit near all-time highs while volatility has fallen to incredibly benign levels. However, that trend is unlikely to last, says Pravit Chintawongvanich, head derivatives strategist at Macro Risk Advisors, who suggests that traders should look at more than just the CBOE (Chicago Board of Exchange) volatility index (VIX) — known as Wall Street’s “fear gauge” — to get the full picture.

In an interview with Bloomberg, Chintawongvanich believes that looking at the VIX can be misleading, noting it only measures the cost of options expiring over the next month. “To gauge how much the market is pricing in risk ‘on the horizon’, we need to look at longer-dated volatility,” he told Bloomberg.

Chintawongvanich suggests investors should watch movements in the VIX futures curve, something that tracks traders expectations for volatility over the longer-term. It’s far steeper and higher than where the VIX currently sits, indicating that volatility is expected to rise from here. Enjoy the tranquillity while it lasts, in other words.

And now from CMC Markets’ Ric Spooner is today’s Stock of the Day.

Resmed (RMD: ASX)
Resmed is listed on both the Aussie and New York stock exchanges. It’s an international company that develops, manufactures and distributes equipment for sleep disorders. More than half its revenue is sourced in the Americas; about a third comes from Europe and the rest is from Asia Pacific. This makes it leveraged to a weaker Aussie Dollar, especially against $US.

The company will release its quarterly profit result after US markets close on next Thursday (early Friday morning AEST).

Resmed goes into this event with its chart interestingly placed. It’s flirting with a break through channel resistance. This probably creates a bias towards a buy the rumour; sell the fact outcome where a result in line with expectations could see a bit of profit taking. However, a break out of this pattern to the upside would be constructive. For those of us who are bearish Aussie Dollar, that looms as a real possibility.

Ric Spooner, chief market analyst, CMC Markets. You can follow Ric on Twitter @ricspooner_CMC

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