Dow 19,000 and S&P 500 2200. They are the new milestones these two benchmark US stock indexes traded at last night as the resonance from Donald Trump’s policy prescription for the US economy continues to buoy stocks.
Bonds are a little higher and the US dollar has some of its mojo back.
But in some ways the big focus was again on OPEC with oil having a wild night as expectations of a deal gave way to worries of disappointment as rumours circulated that the Iranians, Iraqis and the Russians weren’t on board. But in the end, WTI is down around half a per cent.
On forex markets the US dollar pushed back from early weakness. But the Aussie has been able to stay firm and is up near 74 cents. The yen is weaker again with USDJPY back above 111 while the pound lost half the previous night’s move.
Gold is still struggling, but the metals rally continued. So much so the Shanghai exchange has upped the margin requirement.
The wash-up is that after a very solid 62 point rally yesterday, the ASX looks set to open a little stronger today. Futures trades have the December SPI 200 contract marked 7 points higher overnight.
Here’s the scoreboard (7.49am AEDT):
- Dow: 19039 +83 (+0.4%)
- S&P 500: 2203 +4 (+0.2%)
- SPI 200 Futures (December): 5,428 +7 (+0.1%)
- AUDUSD: 0.7398 +0.0037 (+0.50%)
The top stories
1. RBA assistant governor Chris Kent gave a pretty solid outlook for the Australian economy overnight. For the fourth time this month the RBA has delivered a pretty upbeat take on the Australian economy. Overnight, assistant governor Chris Kent spoke at the Australian Business Economist dinner and said that the readjustment in the mining investment boom was around 80% through and that “growth of activity in the non-mining sector has risen gradually over recent years. That improvement has been fostered by low interest rates and the depreciation of the exchange rate since 2013.”
That’s consistent with what the RBA continues to say and means “growth of non-mining economic activity is expected to be around average over the next two years”, he said.
Kent also noted the happy improvement in national income flowing from the pick-up in the terms of trade. But he added “the improved outlook for commodity prices is not likely to lead to a noticeable pick-up in mining investment (in the near term at least). Even so, if our forecasts are right, the terms of trade will shift from the substantial headwind of recent years to a slight tail breeze providing some support to the growth of nominal demand”.
Most of his speech was actually on the outlook state-by-state, so it’s worth noting, he also said that the forces restraining the mining states are also “waning” and the lift in the terms of trade means “there are reasonable prospects for stronger growth of nominal demand in the mining states and, by extension, for the economy overall”.
2. But S&P is warning of a possible downgrade because of Australia’s deficit. Treasurer Scott Morrison is on notice from credit rating agency Standard and Poor’s to get his budgetary house in order or Australia faces a ratings downgrade. David Scutt reported yesterday that S&P said: “Whether we maintain our AAA rating or not partly rests on the Government’s willingness and ability to enact new budget savings or revenue measures to reduce fiscal deficits materially over the next few years.”
Personally I think the loss of the AAA might actually be a good thing because then we could get into a sensible debate about policy without this ridiculous notion that we can’t threaten the AAA rating. It might cost a few more points on foreign debt but it would be worth it for proper policy debate.
Anyway, Morrison has some time, the AFR reports this morning. The Fin says S&P Global Ratings director Craig Michaels told a conference: “If the government does meet its current target of a 2020-21 surplus that would still be consistent with the rating…But if there’s more slippage beyond that then that probably wouldn’t be.”
3. Bond, Bonds, BONDS! Bonds have been fairly calm and fairly tame so far this week. US 10s are sitting around 2.32% this morning. But after a 50-point sell-off from the lows on the day of the US presidential election count, that’s probably to be expected. But it seems there is still upward pressure on bonds from Trumponomics.
Ben Moshinsky reports data from Deutsche Bank showing that investors ditched bonds at the fastest weekly rate since 2013. EM markets are the big losers of these capital flows, Deutsche data shows. No wonder AsiaFX has been getting pummeled.
David Scutt took a look at the same note and focused on the assertion from Deutsche’s team that the rotation from US bonds to stocks is just getting started.
What’s important here – for EM markets in particular – is if Trumponomics provides a backdrop for growth in the US and higher rates bonds the world over are going to be sold off heavily. But I’m starting to change my view on the impact of that on stocks. It doesn’t necessarily mean stocks will go down.
4. Deutsche Bank says the S&P can run all the way to 2500 “before suffering its next bear market”. On the topic of bond selling not killing the stock market rally, a different team of Deutsche Bank analysts led by David Bianco, chief US equity strategist, is uber-bullish.
Bloomberg reports Bianco said investors are under-appreciating the “much higher chance now of a long lasting economic expansion that rivals the 10 year U.S. record”. As a result, he says the S&P 500 “will reach 2,500 in 2018 before suffering its next bear market”.
5. There’s a problem with the conventional wisdom you’re hearing about a Trump stimulus. In an interesting think piece, Josh Barro says: “I don’t think we should assume a Trump fiscal stimulus would be effective in stimulating the economy.”
I’ll leave you to read the whole article. But my takeaway is he actually does think it might work, just that it will take a lot longer than folks think. Here’s his conclusion:
Lower corporate income taxes could encourage corporate investments that make the company gradually more productive over years and decades, but they won’t do much to boost next quarter’s GDP growth number.
6. The US dollar is sweeping all before it and SocGen says we need to get the champagne chilled for a parity party. Now anyone who has a bottle or two in the cupboard waiting for the AUDNZD parity party knows there is something weird about these big round numbers that gets the level close but not quite there – often.
That said though, Kit Juckes, a currency strategist at SocGen, says the euro will hit 1.00 against the US dollar in the first quarter of 2017. Will Martin reports parity between the euro and the dollar will be driven by two big catalysts: European politics, and a strengthening dollar following the expected rate hike by the US Federal Reserve in December.
It will be interesting to see what the impact on the Aussie dollar is in that environment.
From Ric Spooner at CMC Markets, here’s today’s Stock to Watch
When you get close to an OPEC production decision, there are inevitably all sorts of statements and progress reports creating oil market volatility. Last night’s version was negative. A preliminary meeting failed to resolve whether Iran and Iraq will participate in any production cuts, although this might still be achieved at the formal meeting in Vienna next week.
Depending on what figures you use, OPEC’s production has increased from around 32.5m barrels a day in May to around 34m last month. If they can actually get production back down to around 32.3-33m, even for a while, we are likely to see an average oil price somewhere in the $50’s over coming months. If not, oil looks set to wallow in the $40’s for a while.
Against this background, local energy producers, Woodside and Santos are both at chart resistance. The OPEC outcome will probably determine if this is broken or rejected. The Woodside resistance consists of a potential “3 drives to a high” pattern. In this case the last drive is the pretty much the same size as the second one (AB=CD)
Ric Spooner is chief market analyst at CMC Markets. You can follow Ric on Twitter: @ricspooner_CMC
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