The NAB’s head of interest rate strategy Skye Masters summed up trade in the US Friday beautifully:
“With US Q4 GDP revised up and core PCE higher the focus on Friday turned back to inflation and the path for the Fed funds rate. This saw equities retrace earlier gains, USD strengthen while bond yields rose.”
That meant it was a disappointing end to a pretty solid week for stocks and oil. It also meant the US dollar surged, knocking the euro, yen and pound for six. The Aussie dollar was under pressure as well, losing a cent, but it is still holding above 71 cents this morning.
Crude is just under $33 a barrel, gold hung tough at $1,222, copper is at $2.12.
In the end, the ASX SPI 200 futures for March were up just 7 points after a lacklustre day on Friday. But, on a positive note, banks globally did a little better on Friday night which could help the dominant sector of the ASX in trade today.
Here’s the scoreboard (7.28am):
- Dow: 16,639, -57 (-0.34%)
- S&P 500: 1,948, -3 (-0.19%)
- SPI200 Futures (March): 4,860, +7 (+0.1%%)
- AUDUSD: 0.7135, -0.0100 (-1.38%)
The top stories:
1. The guy that runs this $1.5 billion fund nails why markets are in a bit of a funk. Jeff Rottinghaus, portfolio manager of T. Rowe Price’s US Large-Cap Core Fund and Price Growth & Income Fund, told Business Insider’s Bob Bryan that it feels almost impossible to find a good stock pick. He’s been cautious since 2014 – a bit early perhaps he says – but it’s because “things just feel very sluggish”.
He gives two reasons and he’s dead on. One one hand the industrial and commodity based sectors are going through a cyclical downturn. On the other, consumer-focused sectors that should be stronger due to low oil prices are largely going through a secular decline.
2. The world’s best central banker (arguably anyway) has a great explanation for why stocks have been under pressure. Mark Carney is governor of the Bank of England and former governor of the bank of Canada. He’s widely credited with coming up with the idea of forward guidance in the dark days of the GFC so central bankers could give the market confidence they would not be reversing course anytime soon. He’s widely viewed as a safe pair of hands.
On Friday he delivered a speech in Shanghai as part of the G20 meeting and it was a cracker. But two paragraphs summed up nicely why stocks have started to pull back from their over-valued levels over the past six months.
The effect of QE on the wealth channel cannot last forever. Monetary neutrality means real asset prices are not boosted indefinitely by such policies; their economic effects must ultimately unwind.
Said differently, unless an improvement in fundamentals boosts the underlying cash flows of these assets, real valuations will fall back. That structural policies have not boosted real growth sufficiently is a better justification for the re-pricing in risk markets than any loss of confidence in the power of central banks.
The key point Carney and the G20 made is that monetary policy can’t do it all.
3. G20 finance ministers and central bankers highlighted the fear but were short on a prescription. John Howard used to say if you want to kill a difficult political topic you shouldn’t give it oxygen. Who doesn’t remember some of those stonewalling “7.30 Report” interviews? Often his silence infuriated the interviewer but it meant the line of questioning went nowhere.
That’s a lesson the G20 might want to think about as they constantly add to market concerns by naming their fears and voicing their concerns about the state of global growth. Over the weekend, the G20 communique said (our emphasis):
The global recovery continues, but it remains uneven and falls short of our ambition for strong, sustainable and balanced growth. Downside risks and vulnerabilities have risen, against the backdrop of volatile capital flows, a large drop of commodity prices, escalated geopolitical tensions, the shock of a potential UK exit from the European Union and a large and increasing number of refugees in some regions. Additionally, there are growing concerns about the risk of further downward revision in global economic prospects. While recognizing these challenges, we nevertheless judge that the magnitude of recent market volatility has not reflected the underlying fundamentals of the global economy.
Hands up if you believe them? My guess is that in not mentioning the lack of faith markets now have in policy makers, they might have missed the whole point. Time to get John Howard on the line.
4. We can all learn so much from Warren Buffett – here’s his takedown of growth doomsayers. Growth is much lower in the post-GFC environment than it was in the previous decades. That’s something Carney highlighted in his speech. But rather than focus on the negative of this step down in growth, Buffett wants everyone to think about the positives of what growth of around 2% can still mean for the US economy. All you need is a bit of maths, the power of compound interest — the most powerful force in the galaxy — and a long-term view.
You can read Myles Udland’s take on what Buffett said here.
And here is a wrap of the other Business Insider stories from his annual meeting held over the weekend.
- BUFFETT: ‘The babies being born in America today are the luckiest crop in history.’
- Berkshire Hathaway earnings beat by $804 a share and rise to a record
- Warren Buffett wants to do more deals — Seriously, he wants to buy more.
- Warren Buffett says it’s ‘highly likely’ climate change poses a major problem for the planet
- Oh, and Mr Buffett ‘is not ready for Tinder’
5. Voter disquiet, Irish coalition not returned, hard liners lose in Iran, Brexit chances growing. I’m a behavioural economics and finance guy. That means I put stock in humans as humans in the economy, not humans as automatons. So I watch what people do in response to stimuli, political and the economy in particular, to gauge what might be driving these behaviours and what might happen down the track. It’s a small part of the overall very large behavioural economics field. But it is one that gives me a decent feel for what’s going on.
Anyway, I say that because over the weekend two elections, in Ireland and in Iran, show the level of disquiet with the “establishment” that voters feel at the moment. In Ireland, Edna Kenny’s coalition won’t be returned, while in Iran the hardliners took a knock as the moderates won key seats. Add in Boris Johnson’s push toward Brexit and Donald Trump’s ascendancy in the Republican presidential race and you can see it’s not just markets that are volatile in 2016.
Something to keep an eye on folks – 2016 could be the year politics impacts markets in a way it hasn’t for years. It’s one thing the G20 did get right – a Brexit would “shock” the markets.
6. And of course, my AUSTRALIAN DIARY: Everything you need to know about the week ahead for markets. It’s a big week ahead for markets in what CommSec economist Savanth Sebastian called the “Autumn avalanche” of data. He, and others, have highlighted that the focus, for stocks at least, turns from earnings to data.
You can find my diary for the week ahead here.
And the overnight data round-up (courtesy BNZ)
NZ: Trade balance ($m), Jan: 8 vs. -271 exp
JP: CPI ex food, energy (y/y%), Jan: 0.7 vs. 0.7 exp.
UK: Gfk consumer confidence, Feb: 0 vs 3 exp.
EC: Economic confidence, Feb: 103.8 vs 104.3 exp.
GE: CPI EU harmonised (m/m%), Feb P: 0.4 vs 0.6 exp.
US: GDP (s.a., annualised), Q4 S: 1.0 vs 0.4 exp.
US: Personal income (m/m%), Jan: 0.5 vs. 0.4 exp.
US: Personal spending (m/m%), Jan: 0.5 vs.0.3 exp.
US: Core PCE deflator (y/y%), Jan: 1.7 vs. 1.5 exp.
US: Univ of Mich. cons. sent., Feb F: 91.7 vs. 91.0 exp.
Have a great day. You can catch me on Twitter.
And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
Friday was a pretty extraordinary session for a leading stock like Woolworths. It had a trading range of 11% and finished 9% off its low after initially cratering following release of its profit result.
The turnaround potentially reflects volatility associated with short covering. It looked like a classic case of sell the rumour, buy the fact with profit takers scrambling to take advantage of Friday’s lower prices.
There might also have been some reassessment of the unexpected news that Brad Banducci had landed the job as CEO. Markets had expected an external candidate in an obvious move to instil cultural change. However, Banducci is far from a Woolworths “lifer”. He has an entrepreneurial background and was a major part of the Dan Murphy success story.
All that said, the underlying story of Friday’s results continues to be one of a big job ahead. Profit margins remain under pressure while sales and market share are yet to be stabilised.
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC
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