6 things Australian traders will be talking about this morning

A cracking night on stocks in Europe and the US presages a great day for local trade on the ASX after yesterday’s weak close.

The SPI 200 June contract is up 75 points suggesting a gain of 1.4%. If that occurs it will take us back within sight of the tough 5400 zone again.

Back to the US and the market had a nice technical break in the S&P, banks rallied as traders bet they’ll win in a higher rate environment and Apple led the Nasdaq higher. Strong home sales is suggesting that the US economy is doing rather better than many feared.

Crude oil is up again, gold is down because risk is on, copper lifted is head off the mat and even iron ore stopped tanking.

On forex markets the US dollar is winning and is at a 10-week high against the euro just above 1.11. It’s back at 110 against the yen, but the pound was stronger as Brexit recedes and Bremain appears to rise in the polls. The Aussie fell to 0.7142 last night after Glenn Stevens’ comments and US dollar strength but it’s back at 0.7180 this morning.

Here’s the scoreboard (7.49am):

  • Dow: 17,706, +213 (+1.22%)
  • S&P 500: 2,076, +28 (+1.37%)
  • SPI200 Futures (June): 5,371, +75 (+1.4%)
  • AUDUSD: 0.7179, -0.0042 (-0.58%)

Now, the Top Stories

1. Stocks rallied as traders get hot for the US economy – today at least anyway. Markets have time or price consolidations. That means after a move, up or down, they either reverse course, a price consolidation, or they hold onto a range for a while, a time consolidation.

I raise this because even though last night’s moves in Europe and the US are really just another example of the wild intra-range volatility we are getting used to, it seems traders are focusing on the US economy’s strengths, not weaknesses.

Last night the US dollar and stocks both received a lift from the big beat in new home sales (biggest gain in 24 years) and I think this comment I saw on Reuters from Chris Rupkey, chief economist at MUFG Union Bank in New York, sums up the market’s feeling overnight – ephemeral as it could eventually prove to be. “Consumers are taking the leap and buying the biggest of big ticket items of their lives and this speaks to confidence. The Federal Reserve can raise rates at their June meeting without fear the economy is going to slow.”

In the end that helped the S&P break out of a nice little bullish setup. Here’s the chart.

2. Glenn Stevens delivered a perfect set of remarks yesterday – has to be good for markets. Yesterday, the RBA governor sat down for a fireside chat at the Trans-Tasman Business Circle boardroom briefing in Sydney. He delivered a strong message with perfect pitch which reiterated the RBA’s strong commitment to the 2-3% inflation band.

Certainly he noted the bank doesn’t have a mechanical reaction function of cutting rates just because the inflation number slips below the range. But in recommitting to the inflation target, he signaled the RBA will likely again cut rates in order to anchor consumer expectations, which are currently falling, in or above that range.

It’s pretty much exactly what I suggested he needed to do yesterday and it worked – as the Aussie dollar’s fall showed.

3. This could be a really bullish sign for stocks and markets broadly. It’s been a really interesting year of fear and greed and all manner of folks running to the safe haven of cash. Against this backdrop. I’ve been really impressed with the US, and global, stock markets’ ability to hang tough near the highs.

So, when I read a piece by Rachel Butt this morning that quoted Angelo Rufino, portfolio manager of Brookfield Asset Management saying ““It’s obviously an energy and commodities-focused distressed cycle … and it reminds me of the early 2000s tech and telecom bust…We’re in the early innings but its time to put money to work”, it caught my eye.

The reason is that he helps manage $240 billion, including distressed debt. These guys are, of course, the real bottom feeders of financial markets. But I don’t mean that as a pejorative. Rather I see them as the early adopters of the good times, or, more correctly, the potential of good times ahead.

There is a lot of money on the sidelines – maybe Tom Lee is right and stocks are going to rocket into year’s end.

4. Market liquidity is an illusion. Having been managing money or running a balance sheet during most of the crises of the last 25 years, I know all too well what can happen when you can’t exit a position. It’s one of the reasons I love currency markets so much – stay in the big pairs and the liquidity stays there.

But while wholesale market traders know that liquidity can evaporate at times of crisis, product makers have continued to build offerings to a retail client base that offers a level of liquidity that is going to be hard to guarantee. That’s the essential takeaway from an interesting research piece by Darren Langer, a senior portfolio manager at Nikko Asset management, that I wrote up yesterday.

It’s an honest look at markets and products because in the post-GFC world, people should know they’re not always going to be able to get out of investments quickly.

5. Crude oil is ripping higher again. Speaking of time and price consolidations. Crude oil, in West Texas terms anyway, just won’t go down recently. Any dip has found the buyers and the price is now sitting at $49.10 just below this week’s change of contract high at $49.20.

One of the big reasons for the strength is the American Petroleum Institute’s latest inventory data this morning showed a draw on inventories of 5.137 million barrels which is a big increase from last week’s 1.1 million draw. I’m reminded of a chart I saw recently from Westpac chief strategist Rob Rennie which highlighted that seasonally we are in draw season – to many traders, it seems, that is supportive of the oil price even if Iran is said to be ramping up production.

The good news in oil is that it will help fix the global inflation issue for a while. Central banks will welcome that and I reckon some kind of normality in CB operations will improve the mood of markets.

6. China, hostage to the zombies? Market gyrations, and the multiple bubble bursting operations of Chinese authorities has been a massive distraction for markets over the past 6 months. And it is easy to forget, as RBA governor Glenn Stevens noted yesterday that China’s “economic transition is on a scale that no one has ever done before”, which means the end result is still uncertain.

So there is naturally going to be some volatility in the economy and the data. That’s a given.

But the transition is being complicated because of excesses that have already built up in the economy. That, according to a new article by Linette Lopez citing Soc Gen research, means China’s economy is being held hostage by “zombie companies” the government is supposed to be reforming.

This in turn, Linette says, has stalled the move to free the yuan. Personally I reckon the forex market gyrations in the yuan and US hedge funds lining up to belt the heck out of the yuan is actually the highlight. But back to Linette and Soc Gen – they reckon the key point of why the zombies have Beijing in their thrall is that “recognising even a small share of SOEs’ non-performing debt would easily overwhelm the financial system”.

I’m going to editorialise again – would it be any different in the US or Australia? Would our pollies or theirs make the hard decisions? No way. So let’s cut the Chinese some slack – this is the biggest and fastest transition in history. They aren’t doing an awful job and if they screw it up, main street US and Australia will pay the price as much as China will.

Key data for the past 24 hours (with thanks to BNZ markets)
GE: ZEW survey expectations, May: 6.4 vs. 12.0 exp.
US: New home sales (‘000), Apr: 619 vs. 521 exp.

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