6 things Australian traders will be talking about this morning

CAIRNS, AUSTRALIA – NOVEMBER 13: A tandem hang glider take to the air from Rex Lookout on November 13, 2012 in Wangetti, Australia. Located in Far North Queensland, the Cairns region is one of Australia’s most popular travel destinations with a tropical climate and close proximity to both the Great Barrier Reef and Daintree Rainforest. (Photo by Mark Kolbe/Getty Images)

Predictably trade was quiet and stocks dipped a little in the US as traders ready for both the long weekend and a speech by Janet Yellen tonight. That left the Dow and S&P with small losses even though Europe had a good day.

It’s also left the SPI 200 June futures up just 5 points. That’s not much of a lead for our cowardly lion ASX 200 index in trade today. The setup was there for a break of 5400 yesterday but again the market stalled and closed at 5388.

Today’s action is unlikely to be too positive given oil backed off $50 a barrel in both Brent and WTI terms. Iron ore and gold were also lower.

But the Aussie dollar is strong even though yesterday’s Capex was on the weak side of the ledger. The Aussie dipped to 0.7160 but is sitting at 0.7221 this morning. Elsewhere the US dollar was mildly weaker against the euro, yen and pound.

Here’s the scoreboard (7.48am):

  • Dow: 17,821, -23 (-0.13%)
  • S&P 500: 2,090, -0.5 (-0.1%)
  • SPI200 Futures (June): 5,398, +5 (+0.1%)
  • AUDUSD: 0.7122, +0.0033 (+0.45%)

Now, the Top Stories

1. The match has been lit for an ‘explosion higher’ for stocks. There has been a pervading bearish feeling around markets this year. Even though oil, stocks and credit markets have all recovered from their lows, money has still flowed toward cash and a certain amount of pessimism and skepticism about the gains has been in evidence.

But against that backdrop, stocks in the US have been hanging tough and even though the ASX has struggled to break and hold 5400 the bounce from the lows has been significant.

That sets up a perfect mix of conditions that could send stocks on a ride up, up, and up according to Andrew Adams, market strategist at Raymond James. Bob Bryan reports that Adams published a note highlighting that the move to cash won’t last indefinitely.

“What happens when the market keeps going up and much of that money starts to flow back into stocks as investors scramble to get back in once fear of missing out takes over?” asked Adams. “This ‘dry powder’ on the sidelines could possibly force an explosion higher, assuming we don’t get anything major that comes out of nowhere, and it looks like the match may have already been lit given yesterday’s continuation move of Tuesday’s strong rally.”

Kaboom for the bears if Adams is right. Have a look at the story – he has 15 current reasons why the market could be at a bottom.

2.Here’s the pictorial view of what Adams is saying. Adams is talking about investment fundamentals. But he is also talking about investor behaviour. Chartists say that investor thinking and behaviour is fully represented in the price action.

Fund flow data shows Adams is right about money running to the safety of cash. That dash to cash continued even as stocks – here represented by global bellwether S&P 500 – recovered. Adams has a really good point – it’s worth considering.

Here’s the chart:

S&P 500 Weekly (MT4, AxiTrader)

If Adams is correct – of course it is an if – the ASX 200 will be dragged higher by the positive price action offshore.

3. Japan’s prime minister is warning world leaders about a ‘Lehman-scale crisis’. Just to balance out this morning’s positivity, I caught this article from Reuters, via BI USA, which said that at the G& meeting happening in Japan right now, prime minister Abe has given a dire warning about emerging markets.

Of course emerging markets, like credit, has been on the back burner again recently as markets have rallied but the story says Abe presented data showing that commodities prices had fallen 55% since 2014, the same margin they fell during the global financial crisis, Nikkei reported, interpreting this as “warning of the re-emergence of a Lehman-scale crisis”.

Deputy chief cabinet secretary Hiroshige Seko told reporters “G-7 leaders voiced the view that emerging economies are in a severe situation, although there were views that the current economic situation is not a crisis.”

Now, this is politics folks, so Abe has something in mind with his warning. Maybe there is a big package coming in Japan and certainly the Japanese sales tax increase is most likely to be postponed. Forex traders take note.

4. Got a view on the milk wars and dairy industry? If so, you need to read this. This most recent battle over milk and the move by the milk companies to claw back cash from farmers who they say they have effectively overpaid has caught the nation’s attention. It’s led to a consumer reaction of eschewing cheap milk in favour of the “local” stuff. And it has driven the government to throw a fist full of dollars at farmers in a way they never would to workers at Holden, Ford or the Whyalla steel mill.

Leaving that aside, almost everyone I talk to has a view on Murray Goulburn and Fonterra’s conduct, the plight of the farmers and whether or not they should get “special treatment” as some have called it.

But if you want the lowdown on milk, the industry, this battle and your own conduct then you need to read this definitive piece by Simon Thomsen. It’s brilliant and one of the best pieces I’ve read in ages.

5. Markets are getting used to this idea that the Fed will hike. Federal Reserve governor Jerome Powell was out and about overnight reiterating the Fed is on track to hike “fairly soon” as long as the data holds firm. He said “there are good reasons to think that underlying growth is stronger than these recent readings suggest…Labor market data generally provide a better real-time signal of the underlying pace of economic activity.”

I agree with him. Durable goods was weak last night but the US is a service and consumption based economy. So while manufacturing is important, it’s swamped by jobs, consumers, spending, housing, and wages. But more importantly, bond and stock investors seem to be agreeing with him and accepting the notion that the Fed is going to hike rates sometime soon.

Just look at the demand for the US debt at the auctions this week. I like the way Min Zeng, over at the Wall Street Journal, framed it this morning. Zeng said: “It’s three for three. A $28 billion sale of seven-year Treasury notes this afternoon wrapped up a strong week of U.S. government debt sales. Sales of two-year and five-year notes in the previous two days also drew solid demand from investors at home and abroad. The results suggest the bond market may have adjusted to the possibility of a rate increase by the Federal Reserve this summer”.

And if that is the case, then Andrew Adams may have a very good point.

6. I want to talk about market liquidity again. I am first and foremost and FX trader. Besides the fact that I’m a macro, not micro kind of guy, there are two primary reasons for that. The first is that currencies go up, AND down, all the time. That creates lots of opportunities to trade in the same way that a stock trader might screen the whole ASX 200 index looking for trades. The second reason I trade currencies mostly is liquidity. Even during the dark days of the GFC currency market, currency markets were open and liquid.

But all markets, actually most, aren’t as liquid as FX markets and that is becoming a real issue for traders and investors. It’s really important for retail investors as much as wholesale investors.

Recently I wrote a piece highlighting that in the post-GFC world, people should know they’re not always going to be able to get out of investments quickly. And overnight, Matt Turner has a really interesting piece on bond market liquidity which explains the concept with the help of fried chicken. He says Chris White, the founder of ViableMkts and the creator of Goldman Sachs’ electronic bond trading platform GSessions, has a pretty compelling description of liquidity and an explanation for why it is lacking at the moment.

Here’s the rub. White’s argument is that the provision of liquidity is the provision of convenience to the accessor of that liquidity and that it is no longer profitable for the sellers of convenience, so they’re not selling that service.

And voila! We have illiquid markets. Now where’s the Aussie dollar at the moment?

Key data for the past 24 hours (with thanks to BNZ markets)
NZ: Fonterra’s milk forecast for 2016/17: $4.25, below exp.
AU: Private capex (q/q%), Q1: -5.2 vs. -3.5 exp.
NZ: Budget: a stronger set of fiscal accounts
US: Durable goods orders (m/m%), Apr P: 3.4 vs. 0.5 exp.
US: Non-defence durable goods orders: -0.8 vs. 0.3 exp.
US: Pending home sales (m/m%), Apr: 5.1 vs. 0.7 exp.

You can catch me on Twitter.

Now from CMC Markets’ Ric Spooner is today’s Stock of the Day

CYBG PLC

Here’s another example of something that happens a lot. The spin off has outperformed the parent. NAB shareholders would have been well advised to cash in, putting the proceeds into their much maligned UK subsidiary, Clydesdale Bank. Since the spin off in February, CYBG is up 40%. After allowing for the loss of its dividend, NAB is up 5.5%.

Clydesdale’s share price was turbo charged this week by its profit result and investor presentation. Investors loved the fact that its interest margin has improved and that it plans to make even larger than expected cost savings. The strength of the Pound against the Aussie has helped Clydesdale’s $A price recently but hasn’t made a great deal of overall difference since the spin off. GBPAUD is only marginally higher than it was at listing.

Ric Spooner, chief market analyst, CMC Markets

You can follow Ric on Twitter @ricspooner_CMC

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