Another cracking day on global stock markets sets up a solid rally on the ASX today with the June SPI 200 futures up another 34 points after yesterday’s 77-point rally in the 200 index.
The fact that the US rally was centred on materials, energy and financials is doubly encouraging for the local market bulls.
At the close of play, the S&P and Nasdaq were up 0.7% while the Dow Jones Industrials celebrated it’s 120th birthday with a 0.82% rise. Stocks in the UK and Europe were also sharply higher.
In no small part the rally is a reflection of a lift in risk appetite – as ephemeral as that may prove. But it is also being supported by the strong rally in crude oil which saw West Texas Intermediate up more than 2%. Copper was up by a similar amount but iron ore and gold are slipping.
On forex markets it was quieter with the Aussie holding around 72 cents and only the pound and Canadian dollar making any decent headway against the US dollar. Sterling was stronger on the back of Bremain gaining the ascendancy in traders’ minds while crude dragged the CAD higher.
Here’s the scoreboard (8.02am):
- Dow: 17,851, +145 (+0.82%)
- S&P 500: 2,090, +14 (+0.7%)
- SPI200 Futures (June): 5,402, +34 (+0.6%)
- AUDUSD: 0.7189, +0.0010 (+0.1%)
Now, the Top Stories
1. Can the ASX break 5400 and take on recent highs? Ladies and gentlemen, today is the day. The day when the bulls should be able to muster the courage to break not just 5400 but the recent high at 5425. No guarantees that will happen of course, but if ever there was a solid setup for a strong surge on the ASX200, today is it.
So after a solid rally yesterday – one which had the summit at 5400 in sight but couldn’t quite get there – the overnight moves offshore and in SPI200 futures will help the big drivers of the 200 index. Our miners should do okay again today after their global peers had another good night and commodities had a broad rally – although iron ore dipped again. Likewise, the banks, which had an incredible day yesterday, should do well again.
On the banks specifically, why wouldn’t you buy them – seriously. Well managed, in an economy that might have deflation but still has reasonable growth, lowish unemployment means the credit cycle won’t be too ugly. Then of course you have the yield – even if the dividends end up being cut – which stands out relative to term deposit rates and other such investments. They’ve also been cheap relative to the rest of the local market because the hedgies hate them. And voila! You have a rally as we’ve seen recently and saw again yesterday.
Oh, and Wells Fargo is up 2.89% last night, Citi is up 2.15%, Lloyds was up 1.82%, EVEN Deutsche Bank rose – it’s up 3.44%.
2. Australia’s CapEx data today is hugely important. Like much of the developed world, the Australian economy is, for the most part, service based. But we’ve just had a mining investment boom, which added a big pulse to economic growth and a bust which continues to be a drag on growth.
That means that the release this morning of private new capital expenditure and more importantly, expected expenditure, is a big data point for markets and traders. There are lots of moving parts to this release and David Scutt has a great 10-second guide to the release.
There are two key elements to consider. First the actual volume change in CapEx in the quarter which the NAB says will probably be down 5%. The second element is the second estimate of expenditure expectations for 2016-17. The NAB says it “expects that the first estimate of $82.6 billion will be revised up somewhat to a current estimate of $92.3 billion”.
3. This fund manager reckons negative rates are coming to Australia. Arif Husain, head of international fixed income at T. Rowe Price, reckons negative yields are coming to Australia, the AFR reports this morning.
Personally, it’s a possibility the AFR report reads to me like the thinnest piece of research I’ve seen in a long while. Husain said “Australia is different right? I was in Germany five years ago, they said they were different, now look at that, they’re pretty much like Japan.” Perhaps he recognises my point, because he also said “this is not a prediction but it’s certainly a warning, I would not be surprised to see negative yields in Australia at some point.”
The preconditions for such a move in Australia are interesting. But there are conditional probabilities on such a move as well. Can you imagine where the Aussie dollar would be if Australia had negative rates? 60 cents would get blown through in a heartbeat and the RBA would be thinking it might need to defend the all-time low of 0.4775.
But, the flip side of that would be a massive loosening in monetary conditions from a crash in the currency and imagine the kind of pulse would that give the economy.
Anyway it’s a view and I always like to read the views Fof a person/s with a different view to the conventional wisdom. Even if I find it far fetched.
4. Ahem – the massive US service sector is slipping. The US economy is a real conundrum at the moment. Neither weak nor strong overall, some sectors appear to be doing well, some struggling and others doing really well. Overnight we got more of this mixed data with the FHFA home price data showing a rise of 0.7% in April which was better than expected and a nice increase after the 1.3% rise in the first quarter. That release built on the incredible strength of new home sales the day before.
So consumers appear to be both buying housing and benefiting from its appreciation. That reflects their positivity and should be good for economic growth.
But the US is predominately a service based economy and the release of the Markit flash services PMI for June of 51.2 was a bit disquieting. Akin Oyedele reported that this lower than expected outcome, the worst in years, means that the services sector is firing warning shots at the economy.
It’s hard to disagree and it highlights a Fed hike, although signalled, is not a lock. Markets are currently trading the paradigm that the US economy can weather a Fed hike. But we are only one weak non-farm payrolls away from a change in sentiment. Indeed, St Louis Fed president James Bullard said last night a hike is not set in stone.
5. Germain to the above, Deutsche Bank says the Fed is probably screwed. Myles Udland reports that the economics team at Deutsche Bank says the Fed is caught in a negative feedback loop that means by preparing markets for future interest rate hikes, the Fed potentially hampers its ability to actually carry out those hikes in the future.
Here’s how Deutsche Bank explains it:
It is believed that this shift in rhetoric toward a more hawkish message will ultimately be self-defeating. By signalling rate hikes, interest rates adjust higher, the dollar strengthens, and risk assets may come under pressure. This produces tighter financial conditions, which ultimately prevent, or at least limit, the eventual rate increase. This natural tightening of financial conditions in response to rate hikes is expected.
To a certain extent that’s true. But you’d have to argue from the current stock market rally, and muted pulse of strength from the US dollar that perhaps the Fed’s communication strategy is working. That suggests if they are right about the balance between growth and rates, then markets will be okay and the doom loop broken. In the end, it’s about the economy. If it weakens, the Fed gets a black eye and the doom loop is reinforced. If not, then the Fed’s credibility is enhanced. Economy, that’s what matters and that means we need to watch services. Like a hawk.
6. Microsoft getting out of phones tells you much about the global economy. I’m a bit of a Microsoft fan boy. I like the idea that anything I do on any of my machines – laptops, desktops, and phone – instantly syncs across the three platforms. So I’ve owned Lumia phones for a few years since the 1520 came out.
But there’s news overnight that Microsoft is sacking 1850 people at the old Nokia factory in Finland and taking another $950 million writedown. Why wouldn’t Microsoft do that given you can get all the functionality I prized between my Windows phone and bigger machines on Android and iPhone now? The move reflects the reality that the firm under Satya Nadella is going services first and foremost – even though my Surface Book is a phenomenal laptop.
Why services? Because making stuff has become commoditised with marketing as the differentiation point. And on that front, Microsoft has lost. But not in services because Windows is still relevant to so many users globally.
This is all a roundabout way of saying that next week when we get the next round of global PMI data, it’s services much more than the manufacturing reads you all need to start paying attention to. That’s where the developed market global economy is. It also highlights why that US PMI of 51.2 is troubling.
Key data for the past 24 hours (with thanks to BNZ markets)
NZ: Trade balance ($m), Apr: 292 vs. 25 exp.
AU: Construction work done (q/q%), Q1: -2.6 vs. -1.5 exp.
GE: Gfk consumer confidence, Jun: 9.8 vs. 9.7 exp.
GE: IFO business climate, May: 107.7 vs. 106.8 exp.
US: Advance trade balance ($bn), Apr: -57.5 vs -60.0 exp.
US: Markit services PMI, May: 51.2 vs. 53.0 exp.
CA: Bank of Canada rates decision: 0.5 vs. 0.5 exp.
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Now from CMC Markets’ Michael McCarthy is today’s Stock of the Day
Top End Beef – Australian Agricultural Company
The Australian Agricultural Company has shot the lights out with a stunning turnaround. AAC yesterday unveiled a $67.8 million profit for the full year, up 706 % from the previous. It confirmed the driver is the implementation of its vertical expansion strategy, and that it remains on track for further build. Naturally, this started a (ahem) stampede among investors.
The surge in AAC’s share price occurred on huge volumes. Average daily turnover in AAC is close to 1.5 million but yesterday almost 10 million shares changed hands. The share price rose more than 12%, and closed within a whisker of the session high. These factors normally have technical analysts salivating.
This impressive share price action occurred finished just below the post GFC high at $1.70, and leaves AAC sitting at the resistance level of $1.67 (give or take). If AAC falls away in the next few sessions, that impressive volume will look like confirmation of a turning. Definitely one to watch in trading today – a close above $1.70 could mean a break out and significantly higher levels. Failure could see a pull back to $1.40-$1.50 before AAC reaches higher ground.
Michael McCarthy, chief market strategist, CMC Markets