Crude oil defied the bears again overnight with Nymex crude closing at a new high for this run above $44.
That and the continued rise in US interest rates sets up the next big event for global markets tonight with the release of the FOMC’s latest interest rate decision.
No one expects the Fed to move but there is a strong chance it becomes a bit more balanced about the outlook and thus signal rate rises.
But that possibility didn’t faze stock traders with the S&P and Dow mildly higher in New York. London was also higher and that has helped the SPI 200 rally in overnight trade. The June contract gained 20 points which suggests a better day after yesterday’s slip of the ASX200. It was actually a solid day technically with the 200 index dropping to test support around 5213 before closing above that level.
On forex markets, the US dollar was mildly weaker with the Aussie trying to punch below 77 cents before the buyers came in and caught the shorts driving it higher, even though iron ore is weaker again.
Here’s the scoreboard (8.09am):
- Dow: 17,990, +13 (+0.07%)
- S&P 500: 2,091, +3 (+0.19%)
- SPI200 Futures (June): 5,215, +20 (+0.5%)
- AUDUSD: 0.7746, +0.0030 (+0.38%)
Now, the Top Stories
1. The market recovery almost guarantees the Fed sets up a June rate hike tonight. US Treasury yields have been rising over the past couple of weeks as bond traders reassessed the chances of a Fed hike this year. That growing expectation doesn’t appear to be reflected in Fed fund futures, stocks, nor in the US dollar, which is still languishing.
Despite the fact no one expects the Fed to move and there is no press conference, the FOMC announcement at 4am AEST tomorrow is vitally important for traders and global markets.
Yesterday, Mohamed El-Erian told Reuters he thinks the Fed will set up a June rate hike while Akin Oyedele – in his excellent primer of everything you need to know about tonight’s Fed announcement – reports that Wells Fargo’s Sam Bullard says “Given the relative improvement seen abroad (particularly China) and in U.S. financial conditions since the March meeting, we believe there is scope to reintroduce a more balanced assessment on risk to the outlook”. I agree with him but it is not a universally held view, which just reinforces what an important event this Fed announcement is and how carefully they must craft their statement.
2. Apple and Twitter have both just missed on their earnings reports and their stocks are getting hammered. Okay, so we are leading with the Apple news on the site this morning. But the fact that it has had its first decline in 13 years is something noteworthy for the readers of this note. That’s because it’s an example of how current stock prices and the level of stock indices around the globe reflect a heavy discounting of the future and where we are now. It’s why the indexes are struggling. The S&P 500 closed last night at 2091, just 2% below its all-time high. Of course Apple expects things to pick up again in a quarter’s time but in an uncertain global environment, investors are dealing with what they can see and feel now and have just wiped out $40 billion in value off Apple shares.
Twitter is a bit different, or maybe not, in that even though the company missed as well, it is also already looking like it has reached maturity as a business as user growth dwindles.
These two earnings reports aren’t dire for the companies by any stretch. But they do remind me of the internet bubble 16 or 17 years ago. It’s different – back then there was a sense the internet and tech were going to revolutionise our lives, it was just the business model to profit from that was largely absent. This time it feels to me like the revolution has happened, been priced in, and now investors are wondering what’s next, where will the growth come from. I’m not saying there is going to be a tech crash, but much is priced in.
3. Australia’s CPI today is the biggest data point and event risk for markets in ages. Consumer prices are the bane of central bankers existence at the moment. With price rises consistently undershooting expectations, the BoJ, ECB and others have been forced to take emergency measures into unchartered and negative rate territory. Luckily here in Australia we don’t have that problem. Inflation is still firmly in positive territory but it is slipping – at least in a headline sense.
That makes today’s release of consumer price data for the first quarter a big event for the RBA and for markets. David Scutt’s excellent CPI preview says that headline inflation is expected to increase by 0.2%, leaving the annual rate unchanged at 1.7% while core inflation is tipped to rise 0.5%. That would take the annual rate to 1.95%, below the RBA’s target band if realised.
A low number puts the RBA in play for a cut next week. Some economists believe and that puts the Aussie dollar in play today as well. We’ll have all the action at 11.30am.
4. Oil market back in balance? You better believe it, says the BP CEO. Oil won’t go down. Every time traders look like they want to cap this recent rally and sell it slower, crude defies the bears and pops to a new high. It did it again overnight. Perhaps part of that is the strong message that BP’s CEO Bob Dudley gave investors when announcing the company’s earnings overnight.
Oscar Williams-Grut reports Dudley said, “market fundamentals continue to suggest that the combination of robust demand and weak supply growth will move global oil markets closer into balance by the end of the year”. That’s without the production freeze, which might help explain why prices are sticky each time they fall back to, under, $40 at the moment.
If Dudley is right and the market heads toward balance, then prices will defy the bears and stay firmer than anticipated. That’s great news for central banks because it will help with their inflation targets. It’s also great news for the junk bond market if companies can avoid bankruptcy and restructure.
5. This has to be the best investing advice I’ve read in ages. As traders who keep trying to sell oil or the British pound are finding out at the moment, sometimes good ideas just don’t work. That, according to Daniel Davies, a former investment banker and a senior research adviser at Frontline Analysts – a provider of equity research, writing in the FT – is one of the big things to look out for when you are investing. Davies says good ideas that have stopped working are dangerous for investors and money managers. He says that’s what’s afflicted Bill Ackman’s Pershing Square hedge fund bet on Valeant Pharmaceuticals and Crispin Odey’s hedge funds recent bets. Both firms have been under pressure, as these bets have spectacularly unravelled lately.
Davies is actually saying in the piece that if only Ackman and Odey had have put their strong wills aside and had a stop loss on the trade, they would have been okay. Now clearly the type of investing traders like Ackman, Odey and other hedge fund types do is very different to what most folks do. But just remembering to check your ego at the door when you enter markets is a great piece of advice.
6. I’m still watching credit markets very closely as signs of a junk bond bubble grow. Super low rates are like a rising tide that covers and hides all ills. They have distorted asset markets all over the globe. But in some sense, nowhere has that been more obvious than in the junk bond market where the search for yield has opened up a world of cash for many companies who in previous cycles would never have been able to borrow and certainly not at the rates they have recently accessed debt.
That’s the message from Kathy Jones, chief fixed income strategist at Charles Schwab, who told Bob Bryan that “Back when I was in school, you wouldn’t even talk about those kinds of things because you couldn’t even issue CCC bonds.”
During the market funk earlier this year, high yield spreads, especially for oil firms, blew out. They’ve recovered some of that move but are still pretty wide. Keep an eye on this space though because if the Fed does move toward tightening a couple of times this year, conditions in emerging and junk markets could deteriorate and that is likely to reverberate around the whole of global finance.
Key data for the past 24 hours (with thanks to BNZ markets)
US: Durable goods orders (m/m%), Mar P: 0.8 vs.1.9 exp.
US: Markit Services PMI, Apr P: 52.1 vs. 52.0 exp.
US: Consumer confidence index, Apr: 94.2 vs. 95.8 exp.
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And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
Blackmore’s (BKL: ASX)
Blackmore’s share price has again dropped below its 40 week (200 day) moving average. The stock initially spiked through the average when China announced changes to the regulation and taxation of products imported through its cross border, e-commerce channel. This is an important sales channel and source of potential growth for the healthcare product and infant formula supplier.
The fact that Blackmore’s has been sold back below the average after an initial bounce, indicates that investors remain uncertain about what China’s regulatory changes mean for Blackmore’s growth potential. There may be no impact. However, it’s at least possible that there could be some temporary disruption while the new rules are being clarified and implemented or that longer term demand growth may be slowed by a loss of tax advantage.
Blackmore’s is now trading on around 26 times forward earnings. For chart traders, the potential support zone around $133-137 is starting to look a realistic possibility. This picks up the long term trend line; the 61.8% Fibonacci retracement and a harmonic AB=CD level.
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC