6 things Australian traders will be talking about this morning

Chris Ratcliffe/Getty Images

Stocks in the US and Europe were higher overnight after the Fed passed on the opportunity to signal a strong intention to raise rates at the June meeting.

Instead, its equivocation on the pros and cons of the economic outlook left traders with the feeling that the die is not yet cast and data dependency will make it hard for the Fed to find the justification to hike.

So the Dow and S&P are higher which has helped the SPI 200 roar up 51 points, 1%, after yesterday’s fall of 0.6%. If the banks can join in the recovery then the ASX200 should have a good day.

Elsewhere the Aussie finally found some support but it’s still down more than 2% this morning. Euro is up a little after the Fed news but the yen is a little weaker as traders await the Bank of Japan’s decision today.

On commodity markets, crude is roaring again up another 3% to $45.37 in WTI terms and $47.28 in Brent crude terms. Copper lost 1%, iron ore was mildly higher in US futures trade and gold is at $1245 an ounce.

Here’s the scoreboard (6.55am):

  • Dow: 18,041, +51 (+0.28%)
  • S&P 500: 2,095, +3 (+0.16%)
  • SPI200 Futures (June): 5,205, +50 (+1.0%)
  • AUDUSD: 0.7586, -0.0160 (-2.2%)

Now, the Top Stories

1. Deflation and the RBA – is the situation so dire the RBA must ease? After the big shock of the negative inflation print yesterday, -0.2%, the chances of an RBA rate cut increased substantially with many economists changing their forecasts to a cut next Tuesday. David Scutt has an excellent round up of Australia’s key economists thoughts and forecasts here.

The question the RBA needs to answer for itself is whether one negative print for headline CPI is enough to ease rates given the strong employment market, solid business conditions, and the economic transition that seems to be spreading. But, as I wrote over at AxiTrader in the wake of the CPI yesterday, “whether or not the economy needs it given the strength of business conditions and confidence is open to debate. But the reality is that if the post-GFC environment has proved anything to the RBA it is that their decisiveness – as opposed to other central bank dithering – has been one of the reasons that Australia has weathered the storm so well.”

So as HSBC’s local chief economist Paul Bloxham said: “There is no denying that inflation is too low, which means that the cash rate almost certainly needs to be cut. The usual rule of thumb is the sooner the better.”

For balance, here’s the 3 main reasons the RBA would hold off cutting interest rates next Tuesday from Capital Economics’ Paul Dales. He’s someone who has been calling rates to 1.5% longer than anyone else in the market.

2. The Aussie dollar finally found some support, but it had to fall below 76 cents first. 2.1 per cent. That’s how far the Australian dollar has fallen in the past 24 hours. After making a high of 0.7765 in pre-CPI trade yesterday it made a low after the Fed announcement of 0.7750. The good news for the bulls – bad news for the economy – is that it found some support at a trendline that traders have been watching recently.

Part of that support was also that the Fed delivered a pretty bland statement which kept the US dollar under broad pressure. Equally Elena Holodny reports not everyone in Forex land believes the RBA is going to cut. The “overnight decline of AUDUSD is unlikely to enter into a broad AUD downtrend at this stage,” argued a Morgan Stanley team led by Hans W. Redeker. “Instead, investors and even the RBA may downplay the inflation disappointment and hope rising commodity prices and the linked terms of trade improvement would push inflation higher in the next quarter.”

Either way, it’s been a big fall. Here’s the chart:

AUDUSD Daily (MT4, AxiTrader)

3. Australian banks were slammed yesterday. It was a really bad afternoon for the banks yesterday in the wake of the negative CPI and expectations that the RBA will cut rates once again. The ANZ fell 1.53%, the Commonwealth dropped 2.46%, the NAB was 2.18% lower and Westpac fell 2.03%. Usually banks might profit from the notion that rates are going down as the central bank tries to stoke economic activity.

But with APRA clamping down on investment lending, it seems bank shareholders were focused on the impact lower rates will have on the banks’ net interest margin (NIM). That’s the income the banks receive as a spread between their borrowing costs and the rates at which they can lend for mortgages and other debt they advance to customers. As rates fall, NIM comes under pressure because earnings on mortgages – still mostly on variable rates here in Australia – falls faster than deposit rates. That’s because a large swathe of customer deposits will already be attracting a zero or near zero interest rate and also because new APRA liquidity requirements have caused another lurch for term deposits in Australia’s banking system.

The falls yesterday wiped off a substantial chunk of the rally from the April lows. Last night’s rally on Wall Street may support the banks in trade today. But in the end, if the RBA cuts in coming months, it just puts further pressure on bank earnings at a time when they are already assailed by multiple headwinds.

4. The US Federal Reserve wasn’t hawkish at all. The doves have it. That seems to be the clear takeaway from the ex-Fed members and other commentators I watched on Bloomberg Television in the aftermath of the release of the statement at 4am AEST. While some say that the Fed has opened the door to a June hike, the counterpoint is that in stressing that it is data dependent, the Fed has highlighted the big difficulty it is going to have in getting the data to support a move higher in interest rates.

In particular, by noting that “labour market conditions have improved further even as growth in economic activity appears to have slowed” and also stressing that “growth in household spending has moderated, although households’ real income has risen at a solid rate”, the Fed appears to really stressing the difficulties the US economy is still facing. The Fed also noted that inflation is still undershooting.

SocGen’s Michaela Marcussen and Klaus Baader wrote this morning that “the FOMC’s statement did little to change our view that only one hike will be delivered this year. As expected, the risk assessment was upgraded slightly, but it remains a long way from being ‘balanced’. This makes a June hike unlikely in our view.” Given the US dollar was weaker and stocks rose – traders seem to hold a similar view.

Now for the Bank of Japan and its possible easing today.

5. Hedge fund Killing fields – another example why traders need to check their egos at the door. It’s been a rough several months for hedge fund investors and Myles Udland reports that Third Point’s Dan Loeb thinks this period has been the toughest since Third Point opened up shop in December 1996. He says that hedge funds herded into the same trades and then – like our man Daniel Davies talking about Bill Ackman and Crispin Odey in the FT yesterday – they didn’t get out when markets turned.

The key trades that went against hedge funds were that the Chinese yuan didn’t collapse, major momentum stocks like Amazon and Netflix declined, Valeant continued to crater, and the year’s biggest pharmaceutical deal was called off. “When markets bottom, they don’t ring a bell but they sometimes blow a dog whistle,” Loeb Wrote.

You can read his full letter to investors here.

6. Something positive for a change – One of the ‘most powerful economic forces’ is creating a massive opportunity for investors. It’s easy to get stuck in the narrative that slow and low growth here at home and around the world means there are no opportunities out there to invest or build businesses. Facebook’s results this morning kill that theory and show that this is a world where the tide of the global economy won’t raise your boat unless you have a good idea, good business plan and execute it well.

But Bob Bryan reports there is a big global tide that is offering up huge opportunities for business and investors. That tide, or trend, according to Joe Quinlan, chief market strategist at Bank of America Merrill Lynch’s US Trust division, is the rising middle class in emerging markets.

“You and I are used to having everything — toaster, television, credit card — but many of these people in these developing countries are getting these goods for the first time. It’s a huge opportunity for growth and the demographics really give you a long-term look at what the economy can do,” Quinlan told Business Insider in an interview.

Given Australia’s proximity to Asia and FTA with China in particular, we can certainly set our economy on a course to benefit from this surge in wealth and income on our doorstep.

You can catch me on Twitter.

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

Wesfarmers

With more people forecasting another rate cut, the outlook is looking potentially grimmer for term deposits and cash. Investor attention will again focus on good quality “yield stocks”.

Wesfarmers looks a good candidate. It’s trading on a dividend yield of 4.8% (6.8% after franking) .Following another strong quarterly sales report from Coles, Bunnings and Kmart, there’s no reason to believe it won’t have a solid cash flow and earnings base to support valuations over the next year or so.

As is often the case, this chart features, harmonic AB=CD swing patterns. The current one points to a possible turning point around $43.15. Rejection of that level could produce the next correction for buyers to take advantage of.

Ric Spooner, chief market analyst, CMC Markets

You can follow Ric on Twitter @ricspooner_CMC

NOW WATCH: Money & Markets videos

Want to read a more in-depth view on the trends influencing Australian business and the global economy? BI / Research is designed to help executives and industry leaders understand the major challenges and opportunities for industry, technology, strategy and the economy in the future. Sign up for free at research.businessinsider.com.au.