Stocks were mildly lower in the US overnight after Europe closed lower following the Asia market lead yesterday.
It’s too early in the week to be focused on Janet Yellen’s speech Friday but that seems to be the excuse many are using for the light volumes of trade and the mild negative bias.
Locally the impact on SPI 200 futures was a fall, a rally and a flat close during the overnight session with the June contract off just 1 point. But we had a fairly benign lead yesterday as well before the wild gyration in the ASX200 during the day’s trade.
Today could be similar. Certainly we’ll be watching Chinese commodity markets again. But eyes will also be Glenn Stevens at 1.05pm today.
On forex markets the yen is stronger again after the G7 rebuttal of any notion it could intervene to stem the yen’s strength. Elsewhere it has been fairly quiet and the Aussie dollar is sitting just above 72 cents waiting on Stevens as well.
On commodities, iron ore collapsed (see item 4), crude fell, copper remains weak, and gold is becalmed.
Here’s the scoreboard (7.53am):
- Dow: 17,492, -8 (-0.05%)
- S&P 500: 2,048, -4 (-0.21%)
- SPI200 Futures (June): 5,335, -1 (0.0%)
- AUDUSD: 0.7221, 0.006 (-0.1%)
Now, the Top Stories
1. Here’s what Glenn Stevens should say today – and why. We published two separate articles on Business Insider yesterday which highlight exactly what Stevens has to say today in his remarks if he is genuinely worried about inflation being stuck below the RBA’s 2-3% target band. David Scutt covered some research from the NAB which showed why your view on inflation, and that of consumers more broadly, could determine whether the RBA cuts rates again.
It’s all about anchoring inflation expectations.
In a similar vein, I wrote a piece based on some ideas I picked up in former Bank of England governor Mervyn King’s brilliant new book. King agreed it is about expectations and suggests Stevens should give “a clear and convincing explanation of why it may be desirable to allow inflation to run above or below target for a period in order to restore a sustainable path for the economy”.
Markets feel like they expect Stevens to reinforce the more hawkish messages we’ve heard from Bernie Fraser, Ian Macfarlane, and John Edwards recently. But the NAB’s analysis and King’s advice would suggest the opposite. Stevens remarks today are super important in both a short and long-term context for the economy and markets.
2. Deutsche Bank says the Australian dollar is the most overvalued currency in the world (almost). The hits for the Aussie dollar keep coming – thankfully for the economic outlook. Overnight the currency strategy team is out with a call that the Aussie dollar is almost the most expensive currency on the planet right now (the HKD is the most expensive). They say traders and investors should sell it against the G3 – USD, euro and yen.
Their key reasons are that “Bond inflows to Australia are likely to fall off a cliff even before the RBA cuts rates toward 1%. A possible Labor win in July could dampen house price inflation. Externally, commodity prices and global risk should deteriorate as China slows.” They also note that while the speculative community is not as long as it was, positioning is still net long creating further supply of Aussie dollar sellers.
3. Australian house prices won’t crash, but they will fall. Capital Economics is out with an interesting piece of research. Paul Dales, Capital’s local chief economist, cites all the usual rhetoric we hear from the doom and gloomers and rebuts most of it, concluding that the Australian housing market won’t have a big US-style price collapse but that after a period of relative stagnation, house prices will fall around 10% starting in 2018/19 once the RBA starts raising rates.
What’s most interesting about the research is that Dales says it is Australia’s high lending standards which are the key difference, and the associated low levels of what we might call dodgy loan types which is the key difference and keep the housing market in relatively fine fettle and the banks in solid form – more here.
4. Incredible – iron ore is imploding, and just took one of its biggest overnight falls in years. David Scutt reports iron ore’s incredible collapse is continuing. He says that according to Metal Bulletin, the spot price for benchmark 62% fines fell by 6.69%, or $3.67, to $51.22 a tonne, leaving it down 27.3% from the multi-year peak of $70.46 a tonne struck on April 21. Price are now back to the levels seen in March.
On a related note, federal treasurer Scott Morrison might be getting a little titchy. That’s because one of the most interesting things in Australian government finances so far this year has been the big difference in price expectations for iron ore in the federal ($55 a tonne) and West Australian ($43.79 a tonne) budgets. If this collapse continues, the feds might have a much bigger hole in their finances than they are currently suggesting.
5. Deutsche Bank is also telling clients stocks could crash 20% by year’s end. Will Martin reports that analysts at Deutsche Bank led by Sebastian Raedler have released a note saying there will be “no further upside” for European equities in 2016, and it is far more likely that stocks will fall or flatline for the rest of the year. “The combination of weak global growth, Fed risk, a likely fade in China’s growth rebound and fragilities in the US high-yield credit market significantly undermines the upside case for European equities from current levels,” the report says.
This is Euro-specific note but it is hard to make the case that European stocks can fall 20% without an associated collapse elsewhere across the globe. Including Australia.
And of course there is a caveat – the analysts base case is that markets “muddle through” to the end of the year. I reckon in the context of where the Fed is heading that would be a good result and could set up a very solid 2017 rally.
6. Goldman Sachs says the oil industry is trapped. Technology is changing the face of the oil industry according to Goldman Sachs. Bob Bryan reports the bank says the global industry is trapped in a vicious circle of production at lower and lower costs that will continue to feed the oversupply of oil and keep prices in the current range.
The biggest change in recent years is the emergence of US shale, which, according to the Goldman research team, has created a brand new paradigm for oil production.
“The increasing productivity and huge scale of the US shale plays has flattened the industry cost curve and provides substantial new volumes, with a relatively short lead time, at US$50-60/bl oil prices,” Goldman says.
You get the gist of what that means for the Saudis, OPEC, oil prices and inflation particularly because Goldman says as the fight to stay competitive intensifies, the efficiency increases will flatten the curve further, forcing producers to push production higher in order to keep their foothold. This increased supply then keeps prices low.
I won’t nick anymore of Bob’s article – it’s worth a read.
Key data for the past 24 hours (with thanks to BNZ markets)
JP: Trade balance (Yen Bn), Apr: 823.5 vs. 540.0 exp.
GE: Markit Manufacturing PMI, May P: 52.4 vs. 52.0 exp.
GE: Markit Services PMI, May P: 55.2 vs. 54.6 exp.
EC: Markit EZ Manufact. PMI, May P: 51.5 vs. 51.9 exp.
EC: Markit EZ Services PMI, May P: 53.1 vs. 53.2 exp.
US: Markit US Manufact. PMI, May P: 50.5 vs. 51.0 exp.
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Now from CMC Markets’ Ric Spooner is today’s Stock of the Day
Treasury Wine Estates (TWE: ASX)
Not much to worry investors here, except perhaps the price.
Treasury Wine Estates has been one of the great recovery stories of the Australian stock market. The share price has increased by 107% in a little over a year.
Treasury Wine is seen as a growth stock for the next few years. A weaker $A is a big help. However, sales growth in Asia and improving margins on the back of a product mix more skewed towards higher end brands are key drivers.
This outlook has seen investors push the valuation up to around 34 times forward earnings The chart is also showing signs of flagging momentum at these lofty levels. It looks as though it might be forming a triple top. If this stock does make a third peak around $10.40 a correction is possible.
The other defining feature of this chart is the trend line that’s done a good job of stopping the major corrections on the way up. It’s now been joined by the 100 day moving average which is tracking along with it, adding to its potential significance. Conservative investors concerned by the triple top might be prepared to wait for any pull back to this support.
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC