6 things Australian traders will be talking about this morning

EAST DUBLIN, GA – JULY 9: A contestant dives during the mudpit belly flop contest at the 10th annual Redneck Games July 9, 2005 in East Dublin, Georgia. The games, which began 10 years ago in response to the 1996 Olympic Games in Atlanta, draw thousands of rednecks from around the world. (Photo by Barry Williams/Getty Images)

The US dollar was stronger overnight as Fed speakers worked hard to unwind the message that Janet Yellen delivered last week.

Oil was lower as well and this combination weighed on stocks, the Aussie dollar, and commodities more broadly.

At the close, the Dow lost 0.45% while the S&P 500 dipped 0.64% to 2036. In Germany, the DAX finally closed above 10,000. But the wash up for the local market is likely to be more weakness on the ASX200 today after the June SPI200 fell 34 points overnight.

With crude oil down 4% to $39.81 a barrel, copper down 2% to $2.24 a pound, and commodities more broadly off around 2% – as measured by the CRB index – the Australian dollar, Canadian dollar, and Kiwi are all much weaker today.

The Aussie has fallen 1.23% to 0.7523.

Here’s the scoreboard (7.34am):

  • Dow: 17,502, -80 (-0.45%)
  • S&P 500: 2,036, -13 (-0.64%)
  • SPI200 Futures (June): 5,098, -34 (-0.7%)
  • AUDUSD: 0.7523, -0.0098 (-1.26%)

Now, the Top Stories

1. The risk rally is in retreat – how far can markets drop? A firmer dollar and weaker oil have knocked the risk rally a little overnight. It should be no surprise to traders given that the rally lost upside momentum so obviously in recent sessions.

The Morgan Stanley and UBS messages to sell we talked about yesterday are just manifestations of a recognition that after a terrible crash in the early part of the year we’ve now had an extraordinary recovery. That leaves the market in a position, and at levels – forex, stocks, commodities, emerging market bonds – where the data needs to be strong to kick to the next level.

We haven’t seen that yet so the risk rally is drifting, looking for support.

Locally, both the Aussie dollar and ASX200 look biased lower in the short term. Technically the Aussie could fall into the low 74 cent region and the ASX 200 to 5080/90.

2. The commodity rebound has outrun fundamentals. This is exactly why the risk rally has faltered a little. Colin Hamilton, the head of commodities research at Macquarie, wrote in the FT overnight that:

Commodities have always been cyclical, but already this year we have seen two distinct mini-cycles — down in January, recovering in February and March.

Of course, fundamentals do not change that quickly, but sentiment certainly can. In particular, Chinese sentiment has turned around sharply — from the lowest point in the history of Macquarie’s China steel and copper surveys in January into positive territory.

Crucially, in what is a very good piece he added, “However, outlook for 2016 is not great and we would be cautious on hopes of further upside in prices as demand is not aggressive enough.”

3. It looks like there could be a civil war at the Fed as speakers undermine Janet Yellen’s message. If you’ve just come back from Mars and heard the Fed speakers this week you’d be forgiven for thinking Yellen and her colleagues set the market up for imminent rate hikes.

Of course, that’s not what happened – indeed, the opposite. But you’d never know that listening to Fed speakers this week. Jason Wong, a currency strategist from BNZ in Wellington, summed it up nicely this morning (our emphasis).

We’ve had Lockhart, Williams, Harker, Evans and Bullard all on the speaking circuit and the message has been consistent – a more hawkish tone than market pricing, the FOMC statement and Yellen’s press conference. Bullard gave an interview this morning and said that a rate hike should be considered next month following another strong jobs report. This was the same guy who didn’t vote for a rate hike only last week.

Markets aren’t exactly ignoring them either. The US dollar is stronger, stocks are down and the risk rally is mildly unwinding because the Fed is contradicting itself. A good chair controls its board – this internal revolt could be a test of Yellen’s stewardship of the Fed.

Elsewhere, Myles Udland says everything the Federal Reserve has been trying to do could turn out to be wrong.

4. Warren Buffett neatly explained how bubbles are formed – lesson for Australian housing. Elena Holodny has been mining the recent document dump from the US National Archives, which released transcripts, meeting agendas, and confidentiality agreements from the Financial Crisis Inquiry Commission (FCIC).

She’s found Buffett explaining that “You can get in a whole lot more trouble in investing with a sound premise than with a false premise”. He also explains house market bubble dynamics. There are some interesting parallels in that for some parts of the local housing market. You can read more here.

5. Brexit is real – the UK could leave the EU and that could cause traders some real issues. The pound slipped last night after a a poll showed that the people of Britain now favour the vote to leave the European Union, Will Martin reports.

On Tuesday evening, a poll from ICM suggested that 43% of people now favour leaving the EU, compared to just 41% wanting to remain within the European bloc and sterling is down 0.66% to 1.4112 as a result.

Now that the vote to leave the EU is in the ascendancy, expect the stay vote to find its voice. Overnight, Lloyds of London said “The UK’s membership of the EU has been part of this success story.”

Bond, currency and stock markets may move to increasingly factor in the exit now. But if the vote to leave actually wins, all heck could break loose in global markets.

6. One hedge fund manager is so scarred from this year’s action he said this is “no longer an investment market but a battlefiel”‘. You don’t get to run an $11 billion hedge fund unless you know a thing or two about markets. So when hedge fund manager Crispin Odey likens the increased volatility in markets to a battlefield you know something is amiss.

Julia La Roche has Odey’s comments in a very interesting article.

But, if I may, this is another reason why traders and investors are booking profits so quickly. They are scared of volatility.

And the overnight round-up of key data(courtesy BNZ Markets)
US: New home sales, Feb: 512k (510k exp)

Happy Easter, I’m back Tuesday. You can catch me on Twitter.

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

Caltex (CTX: ASX)
The restructure of Caltex has been a major success for shareholders. Management’s future plans include leveraging its convenience locations with products other than just petrol. Pick up sites for online sales might, for example, be a possibility.

The big re- rating of Caltex peaked a year ago. Since then the chart has formed a large double top style pattern.

Caltex came in for some heavy selling 3 weeks ago, possibly in anticipation of news that its refinery margins had declined. This was confirmed by a subsequent monthly report. Margins were down for the month but still above the levels of February last year.

The share price has been in recover mode recently but is approaching key resistance around $33.30/$33.50. This consists of the 200 day moving average, the 38.2% Fibonacci retracement and a harmonic AB=CD level. Dropping away from that level would be a sign of weakness.

Ric Spooner, chief market analyst, CMC Markets

You can follow Ric on Twitter @ricspooner_CMC

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.