Traders in the US still don’t have the chutzpah to take the S&P 500 up and through the resistance zone at 2100/05. That reflects nervousness about the release of non-farm payrolls on Friday as much as it does about the fact that the market appears fully valued to many.
But, US stocks did come back from early weakness after Asian and European markets – not to mention the ugliness on the ASX which lost more than a per cent yesterday – were lower. That’s left the SPI 200 up just a few points and suggesting another nervous day’s trade.
Elsewhere, the US dollar was weaker but the Aussie still fell. Rates rose, crude oil dipped and then recovered on rumours of an OPEC deal, copper struggled again and iron ore remains under pressure.
Here’s the scoreboard (7.56am):
- Dow: 17789 +2 (+0.01%)
- S&P 500: 2099 +2 (+0.11%)
- SPI200 Futures (June): 5,332, +3 (+0.1%)
- AUDUSD: 0.7252 +0.0023 (+0.31%)
Now, the Top Stories
1. The Aussie dollar was lower last night because traders think Australia’s GDP is a mirage and the RBA will be cutting again. GDP was stronger than expected, Q1 data released yesterday showed. The 1.1% growth rate beat the socks off almost every forecast, some of which started the week at just 0.4%. And the 3.1% annual rate was the strongest since 2012. As David Scutt wrote yesterday, that meant “for what seems to be the umpteenth occasion, Australian economic growth stunned financial markets”.
But many traders and economists decided they’d deconstruct the numbers and, in taking out net exports, mount an argument that the economy is actually weak. Those who thought that a bit dodgy more correctly focused on the income side of the GDP equation to show we might be selling lots of stuff but we aren’t getting that much for it. It meant financial markets had a glass half-empty day and ignored CommSec chief economist Craig James’s view that the ‘gloomsters’ are just plain wrong on Australia’s economy.
That all meant that the Aussie, which rallied to a high just under 73 cents, is back at 0.7250 this morning even though the US dollar is weaker across the board. I’m not one to deconstruct GDP data in the way some have. But there was a really simple and powerful part of the GDP data that says the RBA must keep its easing bias. The GDP deflator – which is a broader measure of inflation across the economy – was negative. I made a heap of money back in the ’90s when we got a negative deflator and the RBA swiftly cut rates. It seems forex traders are making the same bet now.
2. The world’s biggest investor just downgraded their view on stocks for the short term. Richard Turnill, global chief investment strategist at BlackRock, the world’s biggest investor with $4 trillion in AUM, said in a note that the firm has downgraded its outlook for stocks. Myles Udland reports Turnill said the likelihood of further interest rate increases from the Federal Reserve as well as the potential for a Brexit — or the UK voting to leave the EU — a slowdown in global growth, and a worsening of the European migrant crisis this summer, all pose a risk to stocks in the short-term.
A big part of the downgrade is where US stocks sit in their historical valuation range (the top third). Turnhill sees stocks as particularly vulnerable to economic shocks related to any or all of these risks.
Perhaps a recognition of these risks is what weighed on the ASX200 yesterday.
3. And here’s what PIMCO says investors need to do over the next five years. From the world’s biggest investor to one of the world’s biggest bond managers. PIMCO has released a secular outlook on markets and it makes for troubling reading. Where Blackrock is worried about stocks in the short term, PIMCO says that longer term risks remain. It highlights that the global economy “has plodded along since 2009” supported by emergency monetary policy operations and a “debt-financed investment boom in China”. PIMCO’s baseline is more of the same but it gives a stark warning.
We should not take excessive comfort from this familiar refrain even if it does remain our baseline scenario because the system has only averted collapse via (1) zero or even negative policy rates, (2) gusher of liquidity via QE and the (3) debt-financed investment boom in China and other EM economies. Yet all three policy props are running into diminishing if not negative returns, and investors need to avoid being lulled into a false sense of security by extrapolating past trends.
PIMCO says in that environment investors should look for active management, but also look for capital preservation. The firm also says it’s a bottom-up stock-pickers market, and that investors should scan the world for opportunities. Interestingly, it says investors should look for “inflation protection for a world in which helicopter money will tempt and perhaps seduce policymakers”.
4. Data from the US last night affirms the Fed will be hiking rates soon. All eyes are on the release of May non-farm payrolls at 10.30pm Friday AEST. But the idea that the Fed is a one data point, or one factor, central bank is a bit ridiculous. Rather, they look at many things across the whole nation and to that end the Beige Book – which surveys all 12 Fed districts – is an important read on the economy.
So the release of the Fed’s Beige Book at 4am gave a clear message of labour market tightness, small wages rises and price pressures. “Employment grew modestly since the last report, but tight labour markets were widely noted; wages grew modestly, and price pressure grew slightly in most Districts,” the Beige Book said. The other thing it showed was that in many districts there was tightness at both the top – high skill – part of the jobs market and bottom – low skill – part.
Non-farms will be important for traders but unless it’s a terrible number the Fed is on track to tighten in June or July.
5. Ahem, the OPEC market might surprise everyone. I’ve been out there on my own on this one recently but OPEC members have revived the idea of a production deal. As you know, I’m a behavioural finance and economics guy. So my sense is that in having changed the oil leadership team, the Saudis are unlikely to leave the rhetoric and policies of former oil minister Al-Naimi unchanged – subtly or not.
So it isn’t exactly a surprise that multiple news organisations are now reporting that the Saudis might be considering backing a ceiling on production. From Reuters: “The Gulf Cooperation Council is looking for coordinated action at the meeting.” That was a senior OPEC source, referring to a group combining OPEC’s biggest producer Saudi Arabia and its Gulf allies Qatar, Kuwait and the United Arab Emirates. No guarantees of course, but oil bounced back smartly from its lows.
Don’t forget the Saudis also want to IPO Aramco.
6. China has a new problem with capital flows. China has done a very good job this year of stabilising its markets, its economy, and its currency and in doing so it has stemmed the accelerated pace of capital flight which was occurring a few months back. In no small part, the West should cheer because in doing that, Chinese authorities help stabilise our markets and push investors’ fears to the background.
But China does still have issues around the management of the economy and markets as it tries to make the biggest and fastest economic transition in the history of man.
One of those headwinds, according to Professor Christopher Balding, an economist at Peking University, is that while Beijing has clamped down on outflows “the problem now is that inflows into China are collapsing. Probably down almost 40% this year. That is placing maybe even more pressure on the RMB [yuan] than the outflows. To run a fixed exchange rate you have to balance those things.”
Linette Lopez reports Balding also said he thinks Beijing will do its darndest to keep the yuan as stable as possible, and won’t be overwhelmed by the hedge funds. But he also said “do not be surprised by periods of real volatility…Beijing is not the best speed boat driver”.
Key data for the past 24 hours (with thanks to BNZ markets)
NZ: Terms of trade, Q1: 4.4 vs. 1.0 prev.
NZ: QV house prices, May: 12.4 vs. 12.0 prev.
CH: Manufacturing PMI, May: 50.1 vs. 50 exp.
CH: Non-manufacturing PMI, May: 53.1 vs. 53.5 exp.
CH: Caixin manufacturing PMI, May: 49.2 vs. 49.2 exp.
AU: GDP (s.a. y/y, %), Q1: 3.1 vs. 2.8 exp.
UK: Market UK manufact. PMI, May: 50.1 vs. 49.6 exp.
US: ISM manufacturing, May: 51.3 vs.50.3 exp.
NZ: Dairy auction (GDT price index, %): 3.4 vs. 2.6 prev.
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And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
Tuesday’s strong building approvals data looked like good news for CSR. The company’s end of year outlook noted that the building pipeline was already good enough to support strong activity for its building products through until the end of its current financial year in March 2017. The last couple of approval figures suggest that this will continue into F18 creating potential for consensus earnings upgrades.
CSR traded ex dividend yesterday. This sees it an interesting level both from a chart and valuation point of view. It’s now trading at around 10.5 times forward earnings. Yesterday it came to rest right at chart support and a couple of key Fibonacci levels. If it starts to base around here, a rally would not surprise.
If this support does not hold, there is another key Fibonacci level around $3.25/$3.27. Valuations would be even more attractive down there.
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC