Now the fun begins. After a fairly benign first few days trade – outside of crude oil’s fall – the week get busy real fast today with the pending release of second quarter CPI for Australia.
That will be followed tonight by UK GDP and at 4am tomorrow by the FOMC decision on US interest rates.
There is more events and data on Thursday and Friday so it’s no wonder markets were, for the most part, quiet overnight. The Dow lost 0.1%, the S&P 500 eked out a 0.03% gain and the SPI futures rose 0.2% and point to another good start when the physical ASX market opens at 10am.
On currency markets, the Aussie rallied to 0.7541 yesterday afternoon and for the most part it’s held those gains, sitting at 0.7505 this morning. Gold is a little better bid, copper remains firm, but the oil price fall is becoming self-perpetuating. Prices bounced off their lows but crude in WTI terms is now below $43 a barrel with expectations by many of a further demise in the weeks ahead.
Here’s the scoreboard (7.58am):
- Dow: 1847 -19 (-0.1%)
- S&P 500: 2169 -1 (+0.03%)
- SPI 200 Futures (September): 5,503, +12 (+0.2%)
- AUDUSD: 0.7505 +0.0037 (+0.49%)
The top stories
1. Is today’s release the most important CPI print ever? It’s CPI day here in Australia and economists believe we’ll see a low print and the RBA will then cut next week. After the shock 0.2% fall in headline CPI for the first quarter proved Australia can’t escape the global deflationary trend, most forecasts are for another fairly low number, with 0.4% the market’s best guess. That would leave the year on year rate at an incredibly anaemic 1.1% and many believe lead to an RBA rate cut next week. We’d probably need a headline print at or around the NAB’s 0.7% expectation to change the market’s view on the RBA.
David Scutt has his 10 second guide to the release here.
2. Stop whining – hedge funds aren’t to blame for the decline in Australian bank stocks. Yesterday I touched on why some investors think it might be time to sell Australia’s big banks again.
But there is a weird dynamic that emerges whenever anyone talks down Australian banks or indeed Australian housing. Somehow it’s seen as un-Australian, if the person is a local, and if the protagonist is from offshore, we Aussies get positively defensive – kind of like we did with that silly Margot Robbie interview with Vanity Fair.
As David Scutt points out, maybe we get defensive as a nation because the banks have been so profitable for so long and we’ve all had a nice fat ride with them. But Australian banks do have genuine headwinds and some traders – here and offshore – genuinely believe their prices will continue to head lower. Those same folks are putting their money where their mouth is and shorting the banks.
The short sellers, many of whom might be hedge funds, are on the right side of the trade over the past year or so. Now it’s up to bank managers, the CEOs of the big four and their reports, to prove them wrong and maintain profitability and dividends. Time will tell.
3. The market’s reaction to the Apple and Twitter results couldn’t be more divergent. I love Twitter, it’s easily my favourite social media platform. But the reality appears the company just can’t monetize, or grow, its user base in the manner it and the market hoped. Alexei Oreskovic has a full wrap here, but the disappointing result saw the stock fall 10% in after hours trade.
Apple on the other hand is ripping higher. Up around 8% in after hours trade on the back of lower than previous results but results that “beat the street”. Indeed, Apple said the result was better than its own expectations at the start of the quarter. Kif Leswing has all you need to know about the results here but in many ways the most remarkable outcome was the huge bounce in iPad sales. Just when you thought they were dying.
One thing worth noting for local traders – at least in the period before the CPI release at 11.30am – is that Apple is a big part of the US indexes and as such, its rally should keep futures bid which will in turn give a good, positive, tone to Asian stock markets.
4. The Fed meet announces its latest decision tonight – Mohamed El-Erian says traders underappreciate the chances of Fed moves this year and next. Allianz economic adviser Mohamed El-Erian told Bloomberg TV overnight that the Fed is facing diminishing returns from keeping rates low and “risks collateral damage” from this policy. He also said the market is underestimating the path of Fed interest rates this year and next.
Many would argue there could be collateral damage to markets if the Fed does actually move this year. But their job in the end is to manage the economy, not just markets.
El-Erian added “the more the structural headwinds, the less effective central banks’ stimulus is. It’s ironic, but this is a recognition that is now spreading within the Fed.” Which suggests that if the Fed can’t do anything about those issues it should seek to normalise policy and let the lawmakers do their job.
5. Deutsche Bank’s head of currency strategy believes the Fed will miss a golden opportunity to tighten tonight – here’s why. I’m in the camp that says the lack of market fallout from Brexit, and the relatively contained economic impact to Britain, plus the rebound in US jobs and US economic outcomes means the Fed is back where it was after last December’s meeting. That’s the one where they tightened policy for the first time since the GFC.
It’s a view advocated also by Alan Ruskin, Deutsche Bank’s head of G10 FX strategy. Akin Oyedele reports that Ruskin said in a note to clients that “by the standards set when the Fed first tightened the Fed should be tightening in July”.
That’s because the Fed “could not have wished for a more benign financial market, international event and data backdrop than they have right now,” he said. He worried the Italian banking crisis could kick to another level by the meeting in September so the Fed may miss an opportunity with tonight’s announcement. Some will argue Ruskin’s view is the very reason the Fed should hold fire. But the point is in this fractious market environment there will always be an excuse to do nothing. As Mohamed El-Erian suggests, that’s not a good idea.
6. Nomura reckons Asia could be barreling toward a financial crisis. Rob Subbaraman, chief economist at Nomura, is all beared up about Asia. Rachel Butt reports that he reckons Asia could be walking into a financial disaster as rising debt, bubbly real estate, and headwinds to growth all threaten the possibility of a credit crunch. That could then lead to a financial crisis throughout the region.
He’s really worried about China where the level of private debt exceeded 200% of GDP in the fourth quarter of 2015. As readers know, I’m less worried about China and tend to agree with Steen Jakobsen from Saxo Bank who said this week that he thinks markets are under pricing the ability of China to transform and still wring productivity improvements out of its transitioning economy.
It’s worth reiterating that China’s leadership is not standing idly by as its economy turns into a slow-motion train wreck. It has quietly but actively engineered a significant yuan devaluation over the past 12 months and Xinhua reported yesterday that China’s leaders pledged to use available policy tools to “strive to maintain stable economic development trends”.
Naturally we all need to watch China because it faces considerable headwinds and an apparent increase in tension between President Xi and Premier Li. But disaster still seems a low probability risk.
Key data for the past 24 hours (with thanks to BNZ markets)
NZ: Trade bal, 12m, ytd, NZDm, Jun: -3313 vs. -3300 exp.
US: Markit services PMI, Jul P: 50.9 vs. 52.0 exp.
US: Markit composite PMI, Jul P: 51.5 vs. 51.2 prev.
US: Consumer conf. index, Jul: 97.3 vs. 96.0 exp.
US: Richmond Fed man. index, Jul: 10 vs. -5 exp.
US: New home sales m/m, %, Jun: 3.5 vs.1.6 exp.
And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
Northern Star Resources (NST: ASX)
Northern Star is an ASX 200 gold miner with operations in the Northern Territory and Western Australia.
Last financial year Northern Star produced 561,153 ounces of gold at an average “all in” cost of $US 780. That produced a net profit after tax of $151.4m. The company has no debt and is steadily building cash reserves. These will be used to develop new mines in the Northern Territory and near Kalgoorlie. However, Northern Star still has the pleasant problem of needing to decide on how best to deploy cash in future. It was able to increase its full year dividend by 40% to 7c. All up, it looks pretty clean operation for investors looking for gold mining exposure.
The share price is down 18% from its peak about 3 weeks ago. This partly reflects the correction in the gold price. However, there was also a little disappointment in production volumes announced last week. These were within guidance but the stock was priced for perfection and some investors were obviously hoping for a bit better.
The $4.25/$4.40 zone looks to be potential chart support. This finds the 20 week moving average and 61.8% Fibonacci retracement level.
Ric Spooner, chief market analyst, CMC Markets. You can follow Ric on Twitter @ricspooner_CMC