6 things Australian traders will be talking about this morning

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The Australian dollar was hammered back from 77 cents overnight in what was otherwise a fairly benign night for forex markets where the US dollar recovered from earlier losses.

Oil was lower again even though there was a crude draw as traders still try to work out whether the deal promised at the November 30 OPEC meeting is possible.

On stocks, after a really poor day yesterday, local traders have a slightly positive lead from SPI traders with the December contract up 8 points after a mixed night’s trade for US stocks as individual company earnings weighed.

Here’s the scoreboard (7.19am):

  • Dow: 18199 +30 (0.17%)
  • S&P 500: 2139 -4 (-0.17%)
  • SPI 200 Futures (December): 5,340 +8 (0.2%)
  • AUDUSD: 0.7644 +0.0006 (+0.1%)

The top stories

1. This study shows the banks might be right about their funding costs and the RBA and ASIC are wrong. Simon Cottrell, a former banker and now senior lecturer at the Australian Institute of Business in Adelaide has released the results of a 5-year study into the source of bank funding costs and says the RBA and ASIC are wrong about the relationship between the cash rate and bank funding costs.

The AFR reports Cottrell’s paper says:

“The RBA’s cash rate displayed no statistical significance as a driver of wholesale funding spreads and it is these findings that are particularly intriguing given the contrasting views of the Reserve Bank of Australia.”

I haven’t read his paper yet, just the story. But this seems to me like an apples and oranges argument. The RBA is talking about total funding and Cottrell wholesale funding – so I’m not convinced yet. But you can make up your own mind here.

2. I’ve been calling the Australian dollar the battler for years – yesterday’s price action shows why. The chart says it all really. Even though the headline CPI was stronger than expected and even though the Aussie pushed above 77 cents straight after the release of the data and then again in early Europe, the bears have chased it back from above 77 cents for the 9th time in recent months.

Any chartist will tell you that yesterday’s price action was just ugly.

AUDUSD Daily (AxiTrader, MT4)

3. This is the best article I have read on the oil market, on the Saudis, Russia and the outlook. Oil is back below $50 as the backsliding and request for exemptions from OPEC members and the confusion over Russia’s stance.

But if you want the lowdown on what’s going on in oil then I suggest you take the few minutes to read this interview Elena Holodny did with Helima Croft, head of commodity strategy at RBC Capital Markets. It’s a deep dive into what’s going on.

4. Here is another indication that the Fed hike in December is a lock. If the US services sector was an economy on its own it would be the third biggest on the planet. And the good news is that the Markit flash services PMI for October printed 54.8 from 52.3 last month and 52.5 expected.

Akin Oyedele reports Tim Moore, a senior economist at IHS Markit, said: “The latest survey data reveal a decisive shift in growth momentum across the US service sector, which mirrors the more robust manufacturing performance seen during October.”

Reuters reports this data along with trade and homes has seen Barclays economists upgrade their forecasts for Friday’s advance Q3 GDP report to 3%.

And here is another – strange but great – indicator that the US economy is growing strongly. Garbage is increasing.

5. But Mohamed El-Erian explains that this cycle of Fed hikes will be very different and less scary for markets. You might have noticed that the recent rally in the US dollar has stalled even though the odds of a Fed hike in December are up near 80%. Mohamed El-Erian says that’s because traders recognise this cycle from the Fed will be very different to those in the past.

Writing at Bloomberg he says “this Fed hiking cycle will depart drastically from historical norms. Instead of following a relatively linear path of increases at regular intervals, it will have pronounced ‘stop-go’ characteristics. Also, and perhaps more importantly, the endpoint — or what economists call the “neutral rate” — will be considerably lower than recent historical averages.”

That means the Fed won’t roil markets this time around he says.

6. Although of course Soc Gen’s uber-bear Albert Edwards says The market’s “catastrophic distortions” will cause a collapse. Bob Bryan reports Edwards is again highlighting the “catastrophic distortions” caused by central bank quantitative easing.

This week Edwards is worried about the debt levels that US companies have racked up under QE and super-low rates and says that even Japan is doing better than the US. You know his ultimate conclusion.

I’m Greg McKenna and you can catch me on Twitter or at AxiTrader where I am the Chief Market Strategist.

And now from CMC Markets’ Ric Spooner is today’s Stock of the Day

Wesfarmers – Down; Down

Wesfarmers released its quarterly sales results yesterday and disappointed the market. The rate of comparable store growth in its core food and liquor business has now trended lower for 3 quarters. Bunnings also failed to achieve its usual stellar growth, knocked by the impact of Masters stock liquidation.

Today’s supermarket results indicate that the performance of Coles and Woolworths may be starting to converge earlier than markets had anticipated. In both cases, the medium term growth outlook is likely to be subdued in an environment of increased competition from Aldi and, potentially, Lidl.

In the short term, however, it’s meant that Woolworths share price has outperformed Wesfarmers as the market adjusts for Woolworths’ competitive recovery. The market is anticipating improved results from Woolworths, meaning the release of its sales results on Friday carries plenty of potential for volatility.

Wesfarmers share price fell 5.7% yesterday, gapping through trend line support. Given today’s strong downward momentum, the current downtrend extend for a while yet, bringing into play potential supports just above $40 or around $38.50/$39.

Ric Spooner, chief market analyst, CMC Markets

You can follow Ric on Twitter @ricspooner_CMC

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