The week ended with another new all-time high close for the S&P 500. But after an almost 500-point rally to last week’s high of 5531, the ASX SPI Futures could only muster a 4-point rally in Sycom trade.
That suggests the importance of sentiment in Asia today and then the flow from a huge week of data will guide trade this week.
On currency markets, the Aussie slipped its two-month uptrend last Thursday and is at 0.7462 this morning, under a little pressure, while the US dollar is stronger across the board.
On commodity markets, iron ore has slipped, oil is lower, gold is still under pressure but copper is hanging tough.
Here’s the scoreboard (8.23am):
- Dow: 185701 +54 (+0.29%)
- S&P 500: 2175 +10 (+0.46%)
- SPI 200 Futures (September): 5,471, +4 (+0.1%)
- AUDUSD: 0.7460 +0.0001 (+0.00%)
The top stories
1. This hedge fund manager’s favourite short will scare the heck out of you. The Italian banking crisis continues. And there are a few folks now getting worried about troubles in Portugal and its banking system. But Edward Misrahi, the founder and chief investment officer of RONIT Capital, has a favourite short that could bring European banking to its knees and cause one heck of a political ruction in the EU.
Matt Turner reports that Misrahi, in an exchange with Raoul Pal, told Real Vision TV he thinks Deutsche Bank is a great short. You’ll recall I recently shared the chart showing the movements in Deutsche’s share price have closely mapped those of struggling Italian bank Monte Paschi. So Italy’s banking problem is also Germany’s. Here’s the exchange between Misrahi and Pal.
Edward Misrahi: This could get me in trouble. There is one trade I think you would like. I think that the best tail-risk insurance there is right now is puts on Deutsche Bank.
Pal: I think they are going bust.
Misrahi: By the way, I think that they are going to get nationalised. I think for me, that is the best hedge of any portfolio. Incredibly, you can still buy out-of-the money puts, not that expensively, which I find crazy.
If they are right, we are sailing into a maelstrom.
2. Northern hemisphere summer volatility? Speaking of Deutsche Bank, while stocks may be making new highs the bank says volatility over the northern hemisphere’s summer is a chance to continue. In the db140weekender, the bank says that “this week the VIX index plummeted to 11.5 – in the bottom one percentile of daily closes since 2008. And one-month skew for the S&P 500, indicating demand for downside protection versus upside optionality, dropped to a post-crisis low.”
That’s a good sign we can relax and watch the Olympics right?
Maybe not, because the bank also says “with volatility of volatility, mostly a measure of confusion, at elevated levels since 2012, markets will remain prone” to “see-sawing”. Perhaps they will. But the bank also says “investors may wish to use the holidays to clear their heads”. They may also clear the decks after a nice post-Brexit rally which could mean the S&P 500, the Dow, and the ASX 200 may find the topside a lot harder from here.
3. Britain’s economy might be copping it from Brexit but Europe looks resilient. Sterling got hit on Friday night after the release of the one-off post-Brexit Markit PMI. The data showed a big collapse in the services (47.4) and manufacturing (49.1) purchasing managers indexes from where they printed on the last read. But what the heck do you expect purchasing managers to say when everyone is telling them things are going to be bad? This is a confidence read and I reckon you can dismiss it for now. That’s particularly the case given EU PMIs (services 52.7 and Mfg 52.8), also released Friday, showed Europe is shrugging off Brexit.
Personally I think Mark Carney, George Osborne and David Cameron over-egged it. Two are gone now, the third?
4. The G20 are hopeless and useless – but they had a meeting over the weekend and promised to continue to work together. The G20 finance ministers and central bankers got together over the weekend in Chengdu, China for a confab on global growth, monetary policy, and the global economy’s challenges. They were particularly focused on Brexit and its implications, which to me seems to be a neat way of blaming externalities for their individual woes. As usual, they released a communique which said said global growth is “weaker than desirable” and the G20 said it will use all tools “monetary, fiscal and structural” to generate “strong, sustainable, balanced and inclusive growth”.
But this is just another meeting where the policy makers have focused on what is wrong, not what they can actually do. That’s something IMF managing director Christine Lagarde picked up on in her own post-meeting statement.
I noted that the G20 members are taking actions to foster confidence and support growth. I welcome their determination to use all policy tools —monetary, fiscal and structural— individually and collectively to achieve strong, sustainable, balanced and inclusive growth. Structural reforms are particularly critical, as recent IMF work shows that well-designed structural reforms can lift both short- and long-term growth and make it more inclusive. Further trade liberalization is also crucial to bolster productivity and global growth, while taking steps to ensure the gains from trade are shared widely.
That sounds like finance diplomacy speak for “You guys are failing and need to do better” to me.
5. The oil market has “reached the bottom of the cycle”. There will be central bankers dancing a jig all over the globe if this call by Schlumberger, the world’s largest oilfield services company, is right. Akin Oyedele reports the company’s CEO Paal Kibsgaard said “in the second quarter market conditions worsened further in most parts of our global operations, but in spite of the continuing headwinds we now appear to have reached the bottom of the cycle”.
Now of course, an oil services company saying the cycle has bottomed (Halliburton said the same last week) could mean that higher prices are encouraging more production and perhaps lower prices. But improved structure in the market means that any renewed falls in prices shouldn’t be too far. OPEC, particularly the Saudis, have been telling us the market is moving back into balance. Schlumberger and Halliburton’s outlooks suggest this is the case. Higher oil should help inflation across the globe. At least that’s what the central bankers will be hoping.
6. And it’s a huge week for markets. Unusually we end the month not with a with a whimper on the data and events front but with a bang. Whether it’s the CPI here in Australia, UK GDP, the FOMC meeting, Japanese CPI and the BoJ, or EU and US GDP, it’s a big week for traders.
And then of course we have August, the Olympics, and the potential that traders in the US go on holidays. Lots to think about. Here’s my quick look at all the events that matter, with great thanks to the NAB’s economics team.
Key data for the past 24 hours (with thanks to BNZ markets)
JP: Nikkei manufacturing PMI, Jul P: 49.0 vs. 48.1 prev.
GE: Markit manufacturing PMI, Jul P: 53.7 vs. 53.4 exp.
GE: Markit services PMI, Jul P: 54.6 vs. 53.2 exp.
EZ: Markit composite PMI, Jul P: 52.9 vs. 52.5 exp.
UK: Markit manufacturing PMI, Jul P: 49.1 vs. 48.7 exp.
UK: Markit services PMI, Jul P: 47.4 vs. 48.8 exp.
CA: Retail sales, m/m, %, Jun: 0.2 vs. 0.0 exp.
CA: CPI core y/y, %, Jun: 2.1 vs. 2.0 exp.
US: Markit manufacturing PMI, Jul P: 52.9 vs. 51.5 exp.
And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
Woodside Petroleum (WPL: ASX)
Woodside’s released its production report for the June quarter last week. It held no real surprise for the market.
Production was down 6.3% due to planned maintenance on its North West Shelf plant. Sales volumes and revenue were also down with revenue dropping 16% on the March quarter. LNG prices were down because much of Woodside’s revenue comes from long term contracts that have a lagged relationship to the spot oil price. This will work in Woodside’s favour over coming months as it begins to reflect the recovery in the oil price over recent months.
Last week, saw the Woodside chart hit its 40 week or 200 day moving average yet again. The oil price has retreated recently under the weight of large inventories and an increase in the number of producing US shale oil rigs. The 200 day moving average may prove a tough nut for Woodside’s share price for a while yet.
However, there is growing visibility on a return to a sustainable balance in the oil market. That means prices are unlikely to fall a long way from current levels. If this hold true, Woodside could find support back in the $25.50/$26.50 zone and this could be a spring board for a successful assault on the 200 day moving average.
Ric Spooner, chief market analyst, CMC Markets. You can follow Ric on Twitter @ricspooner_CMC