Stocks in the US and on the continent defied the weakness in Japanese and Asian stocks by rallying strongly overnight and reversing Friday’s losses. The Dow climbed more than 100 points and the S&P 500 is back at 2080. In Germany the DAX was up 0.84%.
That’s left the SPI 200 up 12 points, 0.2%, after what was a very interesting day’s trade yesterday where the banks’ hammering was offset by strength in materials and almost every other sector.
But the ANZ’s results, out this morning, which showed a big miss on cash profits, crash in its RoE, and a dividend cut is likely to keep pressure on the banking sector again today.
The weakness in crude oil, Brent, fell 2.98% and WTI was 2.24% lower, along with a small dip in copper, might be a little bit of a handbrake on local stocks. Gold broke $1300 at one point overnight but it’s back at $1290 this morning.
On forex markets, the US dollar remains pressured which helped the Aussie rally and it is at 0.7665 this morning. The Kiwi is above 70 cents! Elsewhere, USDJPY remains well entrenched near 1.06 and EURUSD is above 1.15. US dollar weakness complicates things for Glenn Stevens and the RBA if they are worried about the Aussie dollar.
Here’s the scoreboard (7.21am):
- Dow: 17,891, +117 (+0.66%)
- S&P 500: 2,081, +16 (+0.78%)
- SPI200 Futures (June): 5,235, +12 (+0.2%)
- AUDUSD: 0.7663, +0.0066 (+0.86%%)
Now, the Top Stories
1. It’s RBA day and it’s easy to make the case the RBA should and shouldn’t cut rates. Westpac’s chief economist Bill Evans says the RBA won’t cut. That’s despite the Westpac Consumer sentiment survey having dipped a bit recently. NAB chief economist Alan Oster, on the other hand, says the RBA will ease. That’s despite his monthly NAB business survey showing that business conditions, confidence, trading, profitability, and employment look strong.
This divide between two of Australia’s most respected, and well informed, economists neatly summarises the difficulty the RBA governor and his board will have when they sit down today to decide the appropriate response to the surprise Q1 CPI.
Is it a rogue number driven by the collapse of transport costs (fuel)? If so, the RBA may discount it given the bounce in oil from its lows and the $1.24 a litre I paid on the way down to Sydney yesterday. But core inflation is now also well below 2% so it’s not just petrol the other side counters.
It’s a tough decision for the RBA made tougher when you throw in the variable of the Australian dollar and forex traders’ reaction to today’s announcement. If the RBA doesn’t cut, the Aussie could be back at 78 or 80 cents. If the RBA cuts once but signals that’s it, the Aussie could fall and then bounce back toward 80 cents. That means the RBA almost needs to decide not one cut but also the next – or leave the door a long way open to the next cut – if it wants the Aussie lower.
But forex traders are in a funk, so ignore the Aussie as a reason to cut. Which brings it back to the domestic economy. On that basis, it’s a much harder question, as Evans and Oster would tell you.
Here’s David Scutt’s 10-second guide to today’s RBA rate decision.
2. The Federal Budget is turning into a real election budget. Does anyone else feel like the narrative around the budget has changed recently? From doom and gloom and a sense it was going to be an “Old Mother Hubbard” budget the treasurer and prime minister have been positively ebullient over the past few days as they pre-release many of the measures that we’ll here about at 7.30 tonight.
Chris Pash has a great primer on what we know will be in Scott Morrison’s 2016 budget tonight.
But I get a sense the recovery in commodity prices might have changed the outlook for the government’s finance. Yesterday I covered a budget preview note from CBA chief economist Michael Blythe highlighting why it’s so important Scott Morrison gets his commodity price forecasts right. The kicker however was that Blythe said: “Our own stress testing shows that the terms-of-trade just has to stop falling to change the income dynamics.”
The big question is – are we there yet?
3. This is fascinating – The ECB thinks that someone could be leaking US economic data. This is serious, seriously disturbing, if the ECB analysis of price moves in the S&P pre US data releases is true. Bob Bryan reports that a white paper released by the European Central Bank on Monday, says there is statistical evidence that a large swath of US economic data is getting leaked early, leading to price shifts in markets before the releases come out.
“About 30 minutes before the release time, prices begin to drift in the direction of the market’s subsequent reaction to the news,” the ECB paper says. Worse yet the moves seem to predict the data which has the biggest “surprise”.
Nothing is more important than data integrity. But with millions of profits available to someone if they can anticipate data releases the risk is leaks happen somewhere. The ECB says the alternative is superior forecasting ability. Either way US authorities will no doubt respond in time.
4. Passive investing makes stock markets more efficient. Really? I’m still cogitating over this one – it’s an interesting point I hadn’t really considered previously. Myles Udland reports that pseudonymous finance blogger Jesse Livermore is making about passive investing in index funds actually driving more efficiency in equity markets. He says passive investing is an active decision by those who know they lack the skill to manage their own money and that the growth in this sector – and the volume of money that achieves the market return via index ETFs and the like then pressures bad active managers out of the market.
That, Livermore says, leaves only the really good active managers in the market which in the end should improve the quality of active managers and in doing so, make the market more efficient.
It’s a really interesting piece and worth the time when you have it.
5. ECB president Mario Draghi blames the savers and highlights everything that’s wrong with modern-day monetary policy. I’m going to try to keep this together but I can feel my blood boiling after comments from ECB boss Mario Draghi overnight blaming Germans, and their high savings rate, for the ECB’s need to have low rates.
For too long now monetary policy has been aimed at penalising the frugal to the benefit of the profligate. The modern day monetary policy premise of course is that savers should spend, borrowers should borrow more, and both should consume, consume, consume. It is simply borrowing from the future and – as Draghi and his counterparts around the world are finding out – there is a point where the garages are full of cars, the wardrobes full of clothes, and ultra low and negative rates mean – as Glenn Stevens pointed out recently – savers have to save more, not less, if they want to guarantee a standard of living in later life.
Draghi’s comments, reported in the FT, seriously make me sick. Not because of any personal antipathy toward him but because there is a real sense we are doing the same here in Australia – right here and now as we wonder about an RBA rate cut today.
Let’s hope John Fraser at Treasury got Glenn Stevens’ memo on infrastructure spending. IF Australia can do something different, if the government’s plan for 30-minute commutes could somehow even come close to fruition, then we can really be different.
6. Oil might have maxed out for this run as defaults on junk energy bonds has shattered a record. There have been plenty of rumours over the past week of producer hedging after oil’s solid rally and break higher in the past couple of weeks. That gave technical traders a signal Friday that a top might have been in place for this run. That notion, that a short term peak might be in place, was reinforced overnight by OPEC data which showed that “April production from the producer group was up 170,000 barrels a day month-on-month at 32.64 million b/d”, the Wall Street Journal reported this morning.
“Germany’s Commerzbank said in a note that OPEC’s April output could have been much higher without outages in Kuwait, the United Arab Emirates, Venezuela and Nigeria that meant the figure fell just short of January’s record of 32.65 million b/d,” the WSJ said.
That, and the fact the default of two companies has just pushed the default rate on risky bonds in the energy sector to an all-time high suggests the oil price, energy sector, and the banks who lend to them are not out of the woods yet.
Key data for the past 24 hours (with thanks to BNZ markets)
AU: NAB business conditions, Apr: 9 vs. 12 prev.
AU: NAB business confidence, Apr: 5 vs. 6 prev.
JP: Nikkei PMI manufacturing, Apr F: 48.2 vs. 48.0 prev.
EZ: Markit manufacturing PMI, Apr F: 51.7 vs. 51.5 exp.
CA: RBC manufacturing PMI, Apr: 52.2 vs. 51.5 prev.
US: Markit manufacturing PMI, Apr F: 50.8 vs. 50.8 exp.
US: ISM manufacturing, Apr: 50.8 vs. 51.4 exp.
You can catch me on Twitter.
And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
The bottom line yesterday was a solid but underwhelming result ahead of what might be a difficult period for banks. Although, Westpac’s bad debt provisions were a little higher than consensus they were consistent with the outlook announced at its recent business update.
Costs were also a bit higher than expected. This left cash earnings a touch below consensus and meant that Westpac’s dividend now accounts for 80% of its cash earnings.
It will probably be able to maintain a steady dividend in future but there is not much margin for error.
The share price closed down 3.5% yesterday. However, the big picture is that this stock has oscillated around an average of $31 for the last year. Given the downside momentum implied by yesterday’s gap and the fact that it will soon trade ex its 94c dividend, another test of chart support between about $27.50 – $28.50 looks possible.
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC
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