The troubles in the financial sector, especially European banking, weighed on stocks overnight with US markets down a little less than 1% while stocks in Europe were sharply lower.
That helped push bond rates lower again as the post-BoJ and Fed rally continued.
Both those moves were despite a big surge in oil which rose 2.6% as the pre-OPEC volatility continued.
The wash-up is that SPI 200 traders have marked down the December contract by 42 points suggesting stocks will be sharply lower at the open.
On forex markets, the Aussie is a little higher as the US dollar came under mild selling pressure across the board but especially against the yen. The Kiwi is the best performer.
Here’s the scoreboard (7.59am):
- Dow: 18094 -167 (-0.91%)
- S&P 500: 2146 -19 (-0.86%)
- SPI 200 Futures (December): 5,373 44 (-0.8%)
- AUDUSD: 0.7634 +0.0020 (+0.3%)
The top stories
The ASX is likely to open under pressure this morning – gap with S&P 500 closed. In the US, the financials index fell 1.2%, while in the UK financials dropped 1.74% on the FTSE 100. So it’s likely the troubles in financial stocks across the globe overnight will find its way to Australia’s shores today. That’s important for prices because it was the financials which rescued the local markets yesterday and got it back to flat after early weakness saw it lower.
Many investors will likely think the banks have had a good run and who could argue? The CBA closed at $73.44. It made a low of $69.22 on September 14. So some sort of pullback is likely on the minds of traders anyway. That’s especially the case with the AFR story this morning that Labor thinks banks profits are too high. In a broader sense it’s also likely given last night’s fall in the S&P and the recent recovery in the ASX has closed the gap between the relative performances of the two indexes.
2. Rio Tinto is buying back its bonds to cut debt. With its share price back up near the highest levels in 5 months, Rio Tinto has announced a plan to call $1.6 billion of its 2017 and 2018 bonds and offer to buy back up to $1.5 billion of debt maturing between 2019 and 2022, Reuters reports.
This follows on from $4.5 billion of bond buybacks earlier this year and it is a strong signal that Rio’s cash flows from operations are sufficient for the company to buy back debt and improve its balance sheet. It also might get the company a ratings upgrade, Hunter Hillcoat, an analyst at Investec, told Reuters. “Reducing gross debt levels removes a criticism it faced from the ratings agencies,” he said.
3. Today’s presidential election is a huge event for markets – especially if Donald Trump wins. There is a cabal of traders and investors who believe a Donald Trump presidency will be bad for the markets. Mark Cuban, a Clinton supporter, says stocks will tank. That’s important to note as we await the presidential debate at 11am AEST.
I say that because with a new Bloomberg poll showing Trump is leading Clinton, and with 6 weeks until the election, traders and investors must now exercise their minds as to what a Trump presidency might look like. And because there are enough folks who think Trump is bad for the market, other traders will be thinking that maybe he is, or at least that enough traders think that he is, to push the market down. It’s Keynes’ beauty parade analogy all over again.
So it’s no wonder Goldman Sachs say this is the biggest fight since the Mayweather/Pacquiao bout. Of course, if Clinton prevails we could be in for an unexpectedly nice stock rally in Asia today.
4. Europe’s banking crisis is back and Angela Merkel is caught right in the middle this time. The last time we had a European banking crisis it was really about banks in peripheral European nations rather than the core. But Mario Draghi’s “whatever it takes” comment proved the salve the market needed. But, as I have highlighted in the recent past, Italy’s banking crisis is also Germany’s. Deutsche Bank’s share price, except for a small period in August/September, has been falling along with the price of troubled Italian bank Monte Paschi.
Last night, Deutsche Bank made a new record low, losing another 7.5% after talk that Merkel had ruled out a rescue for the bank. That’s unhelpful. If we learnt anything in 2008/2009, if shareholders get wind of an existential threat then governmental aid is the most effective circuit breaker. But if Merkel rescues Deutsche, or even hints at it, then Italy’s prime minister Renzi will have cover to inject funds into Italy’s banking system. It’s what should be done. But the big question is will it happen?
5. A weaker currency is no longer a miracle economic elixir. Currencies aren’t exactly doing what central banks want them to do recently – I offer the BoJ and the yen as Exhibit 1 and the Australian dollar as Exhibit 2. So I found a Bloomberg article interesting overnight which said currency depreciation hadn’t proved the economic boon, or given the usual economic kicker, around the world it used to.
Maybe it’s the shift to service based developed economies, maybe it’s the slowdown in global trade I’m not sure. But as the article says a weaker currency is no longer the miracle elixir it once was. That is particularly important for Australia going forward. But it also suggests that if the Aussie does break higher it won’t hurt as much as many expect.
6. TWITTER! Us finance types love Twitter. That’s because it’s become an essential piece of market communication infrastructure over the years. If you watch the right accounts, you can find things on Twitter before all the major outlets and at least as quick as your Bloomberg or Reuters terminal.
But infrastructure isn’t sexy and Twitter has been struggling to hit the “growth” numbers in users or profit folks expect from social media companies. So the sharks are circling. Salesforce is said to be interested and overnight we heard Disney is thinking about bidding for the company.
It’s going to be interesting to see where it ends up. I just hope its character doesn’t change.
Key data for the past 24 hours (with thanks to BNZ markets)
NZ: Trade balance ($m), Aug: -1265 vs. -735 exp.
GE: IFO business expectations, Sep: 104.5 vs. 100.1 exp.
US: Home sales (‘000), Aug: 609 vs. 600 exp.
And now from CMC Markets’ Michael McCarthy is today’s Stock of the Day
OZForex – off the charts
OFX Group (OFX, formerly OZ Forex) has one of the strangest charts of a top 200 company (below). The price action between mid-November 2015 and mid-February is entirely isolated from the preceding and following trading. Thankfully, a story goes with it.
OFX is a good example of B2C and B2B working hand in hand. The company provides international payment and other forex services directly to consumers, while offering a platform based turn-key solution for institutions, enabling them to offer the same forex services to their customers.
The spike in price last November was due to a “non-binding, indicative and conditional” bid for the company from payments giant Western Union. The fall three months later occurred after Western Union walked away. Cynical traders suggest this was always WU’s intention – they simply wished to look under the hood of this fast growing competitor.
After a share price recovery, further falls followed changes of the board. Now it’s just above its all-time low at $1.812. Some analysis calculates this share price is around 17x forward earnings, with a long term growth rate around 15%. A PE/G ratio just over one puts it on my radar.
Michael McCarthy, chief market strategist, CMC Markets
You can follow Michael on Twitter @MMcCarthy_CMC
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