Stocks in the US were lower overnight as investors looked to slightly weaker earnings as a key driver and expectations of a Fed rate hike in December sit near 80%.
Oil was lower as backsliding and claims for exemptions from participation saw traders naturally question whether this was going to be another OPEC failure to launch. But elsewhere in the commodity complex, gold and base metals were higher with copper rising more than 2% overnight.
These moves on balance should support the local market today but SPI traders are betting on falls with the December contract losing 12 points overnight. If the price action of the last few days tells you anything about local stocks it is that the day traders have the tiger by the tail.
On forex markets, the US dollar was initially stronger but gave back most of those gains – except against the pound- while the Australian dollar was firm and remained bid in its own right.
Here’s the scoreboard (7.49am):
- Dow: 18169 -54 (10.3%)
- S&P 500: 2143 -8 (-0.4%)
- SPI 200 Futures (December): 5,411 -12 (-0.2%)
- AUDUSD: 0.7638 +0.0033 (+0.43%)
The top stories
1. Today’s CPI could change market expectations about RBA interest rates and the Aussie dollar – here’s a preview. David Scutt has your excellent 10-second guide to today’s data which he says is perhaps the most highly anticipated domestic data point we’ve seen since the last inflation report in late July. That’s because traders know that the RBA is worried by persistently low inflation and the last two times it’s been released, it’s been followed by a rate cut from the RBA, Scutty says.
Economists naturally like to focus on the measures which strip out volatile items. But RBA governor Lowe signaled the RBA is watching consumer inflation expectations and, because observed inflation is a big input into expectations, headline is the one I reckon the RBA will focus on. That’s because real people like you and me live in the real world and petrol prices and other movements matter.
2. Here’s the best explainer of why dampened volatility is a risk to markets. Jesse Felder runs a multi-billion dollar hedge fund and he’s adding his voice to those worrying that volatility has been artificially kept low not just by central banks but by traders who are selling vol. (Volatility has a price, so yes, you can sell it.)
But it’s important to note Felder is not calling for a stock market crash; “That would be asinine,” he says. But he is worried that the probability of such an event is rising, all other things equal, because the vol sellers are increasingly selling vol in what they think “is a no-brainer short”. An alternative analogy I’d use is that risks are rising because these sellers are picking up pennies in front of a steamroller.
He nicely explains how things can go awry towards the end of this post. Hint – risk parity funds are the portfolio insurance funds of 2016.
3. This is amazing – Jim Rogers is still tipping a Trump victory and that is a scary prospect for traders. Here’s one I didn’t expect. George Soros’ old business partner is saying that Donald Trump can still prevail in the US election. The AFR reports that Rogers made the comment at a private event in Sydney.
“I suspect [the winner] will be Mr Trump but whoever it will be, it’s not going to be good. I hope you are all prepared because there is going to be some very serious problems in the world. Trade wars always lead to bankruptcies,” Rogers said.
If you think about that in terms of the item above we’ll see a massive volatility expansion and asset prices around the globe will come under acute pressure as the vol shorts try to cover and the tail wags the dog.
4. Five bond funds hold 20% of US high yield bonds with the top 20 holding 46% of the market. That’s a scary prospect, according to UBS. It’s easy to always try to find something to be scared about. But humans seem to love scary stories of all genres and investing is no different. So Matt Turner has a look at an interesting piece on concentration risk in the US high-yield bond market.
Stephen Caprio and Matthew Mish at UBS say besides the metrics quoted above, mutual funds and separately managed accounts hold 70% of the high yield market. That means that when markets are benign, investors in these funds are happy but as soon as something goes awry, they all head for the exit together.
You can see the corollary with the vol sellers here. This is not to say that another big market funk is coming. But it is to say that the result of central bank policies in recent years is a number of crowded trades which either need a lot of time to unwind and rebalance or they could coalesce into a panic for the exits at some point in a cathartic clean out.
5. The OPEC deal is starting to unwind – even before it gets inked. It seems like nearly a third of OPEC is now claiming special status to be exempt from any deal to cap or cut production when the group sits down in November. But as the back-sliding continued, it was assumed that the Russians were on board. However Jonathan Garber noted overnight that oil’s dive came about following an Interfax report stating the Russian envoy is against production cuts.
If that’s true, the deal is as good as dead. But it would run counter to the comments recently from the Russian oil minister and president Putin. We know Rosneft’s head Igor Sechin is not keen on the deal. The next month could be fraught for oil traders and that could impact energy stocks and the market overall.
6. This one is for the CEOs, CFOs, boards and other managers of banks who feel assailed by regulations and the Salem witch hunt nature of the debate about banking. Goldman Sachs CEO Lloyd Blankfein doesn’t need any help from me to defend himself but Portia Crowe’s piece where he says “the world wants me to be scared to death” is instructive.
“I live in fear that one of my tens of thousands of employees … will do something wrong, and their bad behaviour will be ascribed to me — not simply because I failed to supervise, but in this current milieu, it will be ascribed to me as if I intended that bad act,” the chief executive said in a recent interview with CNN’s Fareed Zakaria. “I’m scared to death of mistakes that are made in my organisation — and guess what, the world wants me to be scared to death of that,” he added.
I brought this up because most of us have worked with and for people who didn’t always share the overall organisation’s goals and who somehow evaded scrutiny. CEOs get the big bucks and the blame but the key for me – and the key to APRA’s prudential rules on bank risk management – is that culture is not just important, it’s critical. If a CEO can show the organisation’s culture is pointed in the right direction, then they will get an easier time.
And that cultural change, as we’ve seen across the globe recently, is something bank managements have yet to achieve. So Blankfein is going to stay scared a little longer.
And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
Mirvac property defaults – nothing to see here.
If there are going to be credit problems in the property market, the consensus view is that the main danger period is likely to be next year when apartment completions peak.
Mirvac provided a quarterly update yesterday and it was very much a case of so far so good. The company did note that residential settlement defaults were slightly above their historical average of 1%. However, all defaulted lots had been resold. Mirvac settled 667 lots last quarter so you get the feeling we are only talking about 7 or 8 defaults.
It’s true that Mirvac is unlikely to be in the main firing line of any property problems. Its residential development business has a strong skew to NSW which is expected to represent over 40% of revenue. The main centres of concern are Melbourne and Brisbane. Mirvac also has a strong balance sheet.
Overall it was a solid trading update, with guidance maintained for 8-11% growth in operating earnings and a distribution of .102- .104c per share in F17.
Mirvac is trading at 14.6 times forward earnings and a dividend yield of 5%. This is slightly below the average PE of 14.8 that has applied since 2013.
Yesterday saw a nice bounce off the top end of chart support. The bottom of that support is around $1.95/$2.00. At that level, Mirvac would be valued around 13.75 times forward earnings. This is a level that’s provided valuation support for much of the last 4 years.
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC