The rally in US stocks stalled last night. Perhaps some of the caution is related to the terrorist attacks in Brussels. But the unfortunate reality is that these types of incidents are becoming common enough for markets to cope with them.
Either way, at the close the run of wins for the Dow and S&P 500 ended with minor falls of 0.23% and 0.09% respectively. That’s left the ASX SPI 200 futures down 7 points indicating the physical market may be under a little pressure when the market opens today given topside momentum is waning.
It’s a very different story for the Aussie dollar, however, which benefited from a fairly soft approach to the recent surge from RBA governor Stevens yesterday. It’s up above 76 cents again today in what is an otherwise slightly stronger US dollar environment. USDJPY is back above 112, euro is back near 1.12 and sterling is getting hammered again on Brexit fears.
On commodity markets, oil remains relatively strong above $40 a barrel, copper is $2.29 and gold is trading $1247.
strong>Here’s the scoreboard (7.31am):
- Dow: 17,582, -41 (-0.23%)
- S&P 500: 2,049, -2 (-.1%)
- SPI200 Futures (June): 5,156, -7 (-0.1%)
- AUDUSD: 0.7515, +0.0039 (+0.51%)
1. RBA governor Glenn Stevens hardly jawboned the Aussie dollar at all – so is he cool with 76 cents? Jawboning is the process where a central bank talks their currency lower, and it was pretty clear now that forex traders were expecting Stevens to doing it yesterday.
Stevens actually reinforced the fact the RBA rarely intervenes as well, saying “we haven’t done a dollar intervention in this whole episode, and occasionally we have an opinion about the market price, which is not that unknown in central banking circles”.
Unless you think that the commodity price trend now is different and we are headed back to a world of considerably higher prices for an extended period and we think that the Fed is never going to lift rates, it’s not clear that the situation will warrant a much higher exchange rate than this and there is a risk actually that the currency may be getting a bit ahead of itself
That’s about as aggressive as the governor gets but it’s clear he thinks the current rally won’t last. It’s just that for the moment traders disagree. The Aussie is at 0.7620 this morning.
Also yesterday, Australia’s Treasury secretary John Fraser was candid in saying that he’s not sure experimental monetary policies being conducted around the globe are working. His candor is remarkable in a world of policy speak.
2. Both Morgan Stanley and UBS say the risk recovery is over – sell stocks. Two of the globe’s big investment banks have come out in the past 24 hours and said the risk recovery, and coincident rally, has run its course. Andrew Sheets and the cross-asset team at Morgan Stanley said they had “lowered overall portfolio risk” and it was time to play “good defense”.
But the technical analysis team of Michael Riesner and Marc Müller at UBS was more aggressive. “With the rally of the last few weeks and looking at our daily trend work, the SPX has reached its most overbought position since 2009!!,” they said. They are targeting a drop into the 1970/2000 zone for the S&P 500. Bob Bryan has more here.
3. Here’s a troubling reality for stocks – companies are not getting a “profit tailwind” from lower oil prices. It’s no wonder Morgan Stanley and UBS are bailing out on risk. That’s the clear takeaway from a separate report from JP Morgan economist Jesse Edgerton who shows that even though at first blush the stability of non-oil earnings recently looks encouraging, it’s actually a cause for concern.
Bob Bryan covers Edgerton’s note, but one of his three reasons he’s worried is “The fact that firms outside the energy sector have seen only flat earnings despite a tailwind from low energy prices suggests that other factors are holding back their performance.” Or as Stevens said yesterday – there just isn’t enough aggregate demand in the world.
Which is why a stock picking strategy for “future quality” might be the way to go in a low growth world. I’ve got more on how the equity team at Nikko Asset Management do it here.
4. Oil prices are up above $41 a barrel – now everyone’s watching Iran. March Nymex crude is sitting at $41.44 a barrel this morning, June is at $42.44. That’s a long way from the $26 low we saw earlier this year. Yesterday, OPEC general secretary Abdallah Salem el-Badri said he hoped oil prices had finally bottomed out and it’s likely central bankers desperate to kick inflation higher hope so too.
But Matthew Nitch Smith reports that analysts from Accendo Markets says the market is waiting to see what Iran will do. Will it keep pumping regardless now that sanctions have been lifted? Or, might it join the production freeze and trade off volume for price? Given where prices sit right now, Iran’s decision is crucial to whether oil prices continue higher or roll over.
5. The pound is getting slammed again as traders worry about Brexit. The British pound is down 160 points, 1.11% this morning at 1.42. Euro, on the other hand, is only down 0.2% at 1.1207. From what I am hearing, it looks like traders are betting that the terrorist attacks in Brussels overnight have increased the chances of Britain voting to leave the EU in June.
Richard Cochinos, at Citigroup, told the FT that it is “very difficult for investors to view the attacks as separate from the Brexit probabilities and the UK”. The pound has some way to fall as this view gains traction. What implications that has for other markets around the world, only time will tell.
Will Martin reported yesterday that Goldman Sachs said Brexit will smash British companies. Lianna Brinded covered the The Confederation of British Industry’s Director-General’s doomsday scenario earlier this week.
6. The epic Valeant implosion is heading towards a climax. A lot of folks are looking at the Valeant implosion and shaking their head, muttering “Enron”. But as dramatic as that collapse was, Linette Lopez reckons folks have it wrong. Valeant isn’t Enron, it’s WorldCom.
The reason is that Enron was a massive fraud while Worldcom was just poorly constructed and poorly run. Lopez has a nice recount of the similarities of the two firms. It’s worth a read as a study for stock investors who want to be able to spot the next – because there will be another one out there somewhere in the future.
Lopez also has an interesting piece saying Valeant is now The Bill Ackman Show. What will the billionaire do? And Lopez covers Piper Jaffray’s piece effectively giving up on the company.
And the overnight round-up of key data(courtesy BNZ Markets)
AU: House price index (q/q%), Q4: 0.2 (0.0 exp)
GE: Markit PMI manufact, Mar P: 50.4 (50.8 exp)
GE: Markit Services manufact, Mar P: 55.5 (55.0 exp)
GE: IFO business climate, Mar: 106.7 (106.0 exp)
EZ: Markit EZ PMI manufact, Mar P: 51.4 (51.4 exp)
EZ: Markit EZ PMI services, Mar P: 54.0 (53.3 exp)
UK: CPI (y/y%), Feb: 0.3 (0.4 exp)
GE: ZEW survey expectations, Mar: 4.3 (5.4 exp)
US: Markit PMI Manufact, Mar P: 51.4 (51.9 exp)
US: Richmond Fed manuf., Mar: 22 (0 exp)
Have a great day. You can catch me on Twitter.
And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
Resmed (RMD: ASX)
Resmed’s share price has dropped while the broader market has rallied over recent weeks. It now finds itself testing trend line support.
Resmed manufactures and distributes medical equipment for sleep disorders. It’s a growth stock which should benefit from ongoing take up of product by sleep apnia sufferers and developing wealth in emerging markets. However, it’s had some negatives recently. Competition is creating some pressure on margins and Aussie Dollar strength is hitting local valuations. The company reports in $US and derives more than half its revenue from the Americas with another third from Europe. It also bought a medical software company recently. This is a potential source of growth but is also a new industry for Resmed with all the risks associated with managing that.
This chart support looks potentially significant. A bounce off it would have shareholders sleeping more soundly. However a clear break would be a negative. The next major support below this is the low associated with the beginning of this channel support around $6.69.
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC