The Dow had its biggest fall in a couple of months overnight, losing 210 points, 1.17%, as Apple shares weighed on tech and the US GDP data undershot expectations.
That left the S&P 500 closing in on important technical support.
Those moves, and the performance on European bourses, were still pretty solid in context with the big 3% fall in the Nikkei after the Bank of Japan decided to do nothing with interest rates and monetary policy yesterday.
It all combines to a mild negative bias for the ASX today with the SPI down 8 points. Mitigating the worries could be another enormous rally in iron ore overnight, strength in gold, and continued strength in energy.
On forex markets yesterday, traders went nuts after the BoJ non-announcement and bought the yen aggressively. That’s seen USDJPY move around 3%. That, and the weaker than expected Q1 GDP in the US, pushed the USD lower across the board which has lifted EURUSD to 1.1352 and the AUDUSD up to 0.7627 this morning.
Here’s the scoreboard (7.55am):
- Dow: 17,830, -210 (-1.17%%)
- S&P 500: 2,076, -19 (-0.92%)
- SPI200 Futures (June): 5,193, -8 (-0.2%)
- AUDUSD: 0.7625, -0.0039 (+0.5%)
Now, the Top Stories
1. “Doing nothing is like a tightening” – if the RBA doesn’t cut, the Australian dollar could rocket to 80 cents. Foreign exchange markets are the world’s biggest and hitherto deepest market. But as we progress through 2016, it is increasingly obvious that the foreign exchange market has become increasingly dysfunctional. Nowhere has that dysfunction become more obvious than in its reaction to central bank policy – announcements, action, and lack of action.
Jason Wong, a currency strategist at the BNZ in Wellington, summed things up nicely in his morning note to clients today. “In the current environment, ‘doing nothing’ is equivalent to a de-facto tightening of policy and so it was for the RBNZ and BoJ – both sat on their hands, resulting in 1.9% and 3.1% gains in their currencies against the USD respectively,” Wong wrote.
That’s an interesting pointer for the RBA board when it sits down next Tuesday to decide what to do. It suggests it should ease because to pass could see the Aussie up near 80 cents and a handbrake on growth. But the yen’s strength since the BoJ took rates into negative territory early this year is also a lesson that forex traders are slightly mad at the moment. USDJPY initially rallied (yen weaker) into the mid-121 region after the BoJ action yet this morning it’s around 108 – 11% stronger even though the BoJ eased policy. So what the RBA says, as much as what it does, is going to be important. And in the end, even if it is pitch perfect, there’s no guarantee forex traders will applaud.
But not everyone thinks rates are going lower next week. Westpac’s Bill Evans says the RBA will sit pat.
2. And the winner is – GOLD!!! Central banks losing their way, or at least markets believing they have, global economic growth still looking week, uncertainty about the outlook for stocks remains high, forex volatility, and negative interest rates are all combining to drive gold higher again. Indeed, for many traders and investors, gold is the only real place they can find as a receptacle for their cash at the moment.
That’s driven it back toward the highs for the year which are also the highest levels since early 2015. Traders, particularly many chartists, see a move toward the $1320/30 region possibly higher.
3. US GDP missed and whiffed in the first quarter – Fed tightening anyone? The US economy slowed to its lowest level of growth in a couple of years with the print of 0.5% first quarter GDP growth. That was weaker than the market’s expectation of a growth rate of 0.7%. Akin Oyedele reports that “personal consumption, which makes up over two-thirds of output, was stronger than forecast. Together with housing investment, consumers held up the economy in the first three months of this year as weak business spending slowed it down”.
Of course, this is just the first read of GDP and we’ll get two more updates in coming months which will build out the picture of where growth really is at. Or at least was in the three months to March. But 0.5% is weak growth and such weakness is a challenge for stocks in an aggregate or index level. Individually Facebook, Amazon, and LinkedIn’s results in the past 24 hours show however that at an individual level some stocks are still doing extremely well.
4. Carl Icahn is out of Apple – why that matters. This news is a conundrum for me and maybe is just another example of how tough and volatile markets are becoming, or have become. As you can tell by the intro, Icahn is out of Apple but it’s the why that’s fascinating. Linette Lopez reports that Icahn said he got out because he’s worried about Apple’s sales slowdown in China and what that means for the company’s performance going forward.
But – and this is the really interesting thing – Icahn isn’t getting out because he thinks Apple has issues. In fact, he says it’s undervalued. Rather, in what looks like a great real life modern day example of JM Keynes beauty parade analogy of money managers, Icahn implies he’s getting out because other investors can’t see Apple’s value.
Here’s Keynes from his General Theory of Employment, Interest, and Money:
It is not a case of choosing those [faces] that, to the best of one’s judgment, are really the prettiest, nor even those that average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees.
On CNBC, Icahn said “I think the stock is very cheap still on a multiple basis” and this is what he said when he wrote to Tim Cook back in 2014:
It is our belief that large institutional investors, Wall Street analysts and the news media alike continue to misunderstand Apple and generally fail to value Apple’s net cash separately from its business, fail to adjust earnings to reflect Apple’s real cash tax rate, fail to recognise the growth prospects of Apple entering new categories, and fail to recognise that Apple will maintain pricing and margins, despite significant evidence to the contrary. Collectively, these failures have caused Apple’s earnings multiple to stay irrationally discounted, in our view.
Icahn is out it seems because “average opinion” of how pretty Apple is has gone against him. That suggests we are really entering the higher degrees Keynes talked about. And of course other investors are watching him so Apple’s shares fell.
5. But it’s not all doom and gloom – individual stocks can still outperform. If you are bearish stocks then it’s hard to make an argument that any one stock can buck the trend. But if you are more sanguine and believe that even if markets seem to have discounted the future, they won’t crash, then this looks like a classic stock pickers’ market. Take Apple and Twitter for example. This week’s earnings both have disappointed and the value of both’s stock price has been hit as a result. But the opposite is true of Facebook, which reported yesterday, and Amazon and LinkedIn which reported this morning, all killed it and are seeing their stock price rise.
These are US examples but they aren’t remote to local investors. Just look at the performance of individual stocks on the ASX of late. It’s a stock pickers’ market folks – we’ve had years of making solid returns by just buying the indexes – the ASX200, S&P500, FTSE, DAX, and so on – but it feels like investors will be rewarded by digging a little deeper to find the gems and avoid the dogs. Of course Ben Graham, William O’Neill, and Warren Buffett would say it’s always been thus.
6. It’s time for Australia to issue a 100-year bond. Leaving aside the fact that there is, as Warren Hogan wrote yesterday, a real chance Australian rates fall to 1 per cent and drag the entire curve lower, it’s time for Australia to issue a 100-year bond. The reason I say that is because getting away a long bond with our AAA rating would take about three seconds. And Glenn Stevens said governments around the world should borrow to invest in infrastructure which will deliver rates of return above that cost, and the SMH reports this morning the PM is going to announce a Smart Cities plan today which will require plenty of debt to fund his plans.
Belgium and Ireland have both just issued 100-year bonds and investors have fallen over themselves to buy the debt of serial defaulter Argentina’s return to capital markets.
This infrastructure plan – properly targeted – is exactly what the globe needs and it is exactly what Australia needs to set itself up for the next 50 years. It also neatly helps plug the mining gap at a time when the economy may have hit a flat spot. So if you hear anyone Chicken Littling about debt and the AAA rating, just tell them that if we want to repay the former and maintain the latter, spending to improve the infrastructure and so the economy is exactly the way to achieve both.
Rant over – have a great weekend.
Key data for the past 24 hours (with thanks to BNZ markets)
NZ: RBNZ OCR review, Apr: 2.25 vs. 2.25 exp.
JP: Household spending (y/y%), Mar: -5.3 vs. -4.1 exp.
JP: CPI ex food, energy (y/y%), Mar: 0.7 vs. 0.8 exp.
JP: Retail sales (y/y%), Mar: -1.1 vs. -1.4 exp.
JP: Industrial production (y/y%), Mar P: 0.1 vs. -1.6 exp.
JP: BoJ: no change to policy
GE: Unemployment rate (%), Apr: 6.2 vs.6.2 exp.
EC: Economic confidence, Apr: 103.9 vs.103.4 exp.
GE: EU harmonised CPI (y/y%), Apr P: -0.1 vs.0.0 exp.
US: GDP (saar%), Q1 A: 0.5 vs. 0.7 exp.
US: Core PCE (y/y%), Q1 A: 2.1% vs 1.9% exp.
You can catch me on Twitter.
And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
Woodside Petroleum (WPL: ASX)
As the oil price continues to grind higher, the outlook for energy stocks is obviously a good deal brighter than seemed likely only a short time ago. Woodside’s share price has rallied 16% this month.
While the disaster scenario of $20 oil now seems a lot less likely, oil may struggle to get too far above $US50 for a while. Huge inventories are likely to keep a lid on the price rally. Above $50, US shale oil producers are also going to start getting interested in hedging to lock in positive cash flows.
All that suggests that Woodside’s share price might struggle with chart resistance around $29. Around this level or a bit below sees the 200 day moving average, trend line resistance and the 38.2% Fibonacci retracement of the last major decline.
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC