6 things Australian traders will be talking about this morning

Edward Munoz Alvarez-GettyImages

Stocks in the US came back from the bring as the stock/oil price nexus continued.

Both assets were lower early but Commsec chief economist Craig James said oil “rose on Wednesday as strong US gasoline demand offset worries over record high crude stockpiles and OPEC refusal to cut production”.

That dragged stocks back into the black and help the SPI 200 March contract recover to finish up 31 points, 0.7%. That suggests the local market might have a better day today. That is especially the case given crude is back above $32 a barrel and stocks had such a bad day yesterday.

But while the focus is on crude and stocks, it’s forex and the strong rally in the yen which is really interesting to macro traders. At 112, USDJPY looks like a clear sign that there is a strong level of fear still gripping markets. Likewise, gold at $1239 sends a similar signal.

The Aussie dollar this morning is largely unchanged at 72 cents while copper and iron ore have lifted a little in the past 24 hours.

Here’s the scoreboard (8.21am):

  • Dow: 16,484, +53 (0.32%)
  • S&P 500: 1,929, +8 (+44%)
  • SPI200 Futures (March): 4,886, +31 (+0.6%)
  • AUDUSD: 0.7200, 0.0000 (0.0%)

And the overnight data round-up (courtesy BNZ)
AU: Wage price index (q/q%), Q4: 0.5 vs. 0.6 exp.
AU: Construction work done, (q/q%), Q4: -3.6 vs. -2.0 exp.
US: Markit services PMI, Feb P: 49.8 vs 53.5 exp.
US: New home sales (‘000), Jan: 494 vs. 521 exp.

Now the top stories:

1. This could be the scariest threat to Australian banking I’ve heard of. Australia is a net importer of foreign capital. That capital is used to fund investments like Pilbara iron ore mines, the north-west shelf gas fields and also more mundane investments. But the capital we import is also an important part of the Australian financial system’s funding. That’s because as a nation we don’t have enough deposits to support the system as a whole and wholesale investors, both local and from abroad, bolster banks funding.

That is all context to a story written by Ben Moshinsky from BI UK overnight that globalisation is collapsing. Moshinsky picks up on a UBS research note highlighting that regulators and central banks “prioritised keeping pools of capital in within national borders after banks and investors got burned in risky international deals they didn’t understand in the 2008 financial crisis”.

It would be ludicrous to suggest that funds for the Australian banking system will dry up. But as the increase in Australian bank CDS prices, and the debate about Australia’s housing bubble shows, the cost of attracting that capital are rising and could rise further.

2. The discussion about a Sydney housing bubble is directly relevant to Australian funding. I was treasurer of Newcastle Permanent Building Society when Lehman Brothers collapsed. We’d borrowed some money from the US private placement market (USPP) in 2007 and 2008 and as a home loan lender the funders, US life companies largely, wanted continual briefings about the state of the housing market in Australia because they were worried Australia’s housing market, like the one in the US, would collapse. They couldn’t sell the debt we’d issued – that’s often the nature of the USPP market – but they would have if they could have. Many of their offshore colleagues sold Australian mortgage debt, in the form of RMBS, at whatever price they could because they feared a collapse in Australian housing and with it, the economy.

Fast forward eight years and the same fears remain. Offshore investors and observers still can’t understand why Australia’s housing market didn’t collapse. But they are doubly worried because our residential debt has continued to climb. That means the renewed debate ignited by a hedge fund manager and an economist who posed as a gay couple earning $125,000 per annum to tour housing developments in Sydney’s west and discuss finance with mortgage brokers is so important.

It goes to the very heart of offshore investors’ fears about Australia. And that means it goes to the very heart of Australia’s ability to fund our banking system.

For the record, Mortgage Choice’s CEO refutes some of the couple’s claims here.

3. Hang onto your hats – there is a growing risk the US economy contracts in the first quarter. The Fed, US interest rate policy and the US dollar, is at the heart of 2016’s market maelstrom. So what it does, and how the US economy is looking in terms of growth, is a key driver of volatility this year.

Last night’s surprise collapse in the Markit flash services PMI to 49.8 versus the 53.5 expected means “a significant risk of the US economy falling into contraction in the first quarter”, according to Chris Williamson, chief economist at Markit. If that happens, the Fed won’t be hiking rates in March or June. And if that’s the case, traders and investors will have to once again recalibrate their thinking on markets and asset prices.

4. Hedge funds as a reverse indicator? Matt Turner says the team at Soc Gen released a note saying the positions hedge funds are currently holding means they are pricing for Armageddon. That could be the best sign yet for the recovery because if their positions are already set for the dark ages, then that’s already priced into markets and baked into the cake.

Of course, they just might be right. Here’s a link to Turner’s great chart.

5. USDJPY at 111.87 might be telling us something important about stocks – and not in a good way. Yesterday morning I sat down with Roger Bridges, the global rates and currencies strategist for Nikko Asset Management in Sydney. We had a wide-ranging chat about markets but what struck me was what Bridges said about the message he was taking from USDJPY – in particular the yen’s strength (USDJPY lower).

You can read more here but essentially he reckons markets might be giving up on central banks and their ability to influence the economy and markets.

6. The most depressing chart in the world. Economists just keep getting it wrong. It seems like the IMF and others can’t help but overestimate the level of growth the global economy will generate. Myles Udland has more here. For me the key is global growth looks like it has taken a structural step lower. No wonder stocks are struggling

Have a great day. You can catch me on Twitter.

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

Bega Cheese (BGA: ASX)

Bega unveiled a 10% increase in normalised profit yesterday. The share price has been slashed after losing the contract to provide home brand cheese to Coles. However, the market still sees Bega as a growth stock given its contracts to supply infant formula to Blackmores and Bellamy’s for the Chinese market. This is reflected in a valuation of 30 times F16 earnings.

The share price is now showing signs of stabilising at chart support. This consists of the old peak back in March 2014 and the 61.8% Fibonacci retracement of the whole rally from$3.94

Ric Spooner, chief market analyst, CMC Markets

You can follow Ric on Twitter @ricspooner_CMC

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