A better day beckons for the local market after a recovery in stocks, forex and commodity markets across Europe, the UK and the US overnight.
Stocks in the UK were 2.6% higher while in the US, energy and financials lead the S&P 500 1.78% higher and back into the 2020/2120 range. Commentary seems to be that while the volatility isn’t over, the worst effects of Brexit are likely to be quarantined to the UK and Europe.
So the SPI 200 is up 83 points for a 1.6% gain. Whether or not the local market can replicate that level of rally today is an open question but it is worth noting that in the last two days buyers have come into the market and into the banks.
On forex, the pound is a little less than 1% higher at 1.3324, the yen is at 102.67, and the euro is sitting at 1.1077. Not strong but at least not still falling. The Aussie is back near 74 cents but off yesterday’s highs.
On commodities, oil was up around 3%, copper is at $2.17 a pound – its highest level since May while gold is under pressure from the risk rally at $1311.
Here’s the scoreboard (8.01am):
- Dow: 17409 +269 (+1.57%)
- S&P 500: 2036 +36 (+1.78%)
- SPI200 Futures (September): 5,127, +83 (+1.6%)
- AUDUSD: 0.7327 +0.0058 (+0.79%)
Now, the Top Stories
1. Warren Buffett’s investment manager shares the recipe for financial success. Warren Buffett and Charlie Munger are getting on a bit these days. Buffett himself is 85 and Munger is in his 90s. So for the sake of Berkshire Hathaway and its shareholders, they have brought in some outside help to manage the company. Christin Martens from BI Germany sat down with Ted Weschler, who alongside Todd Combs, is one of the two investment managers that Buffett hired to help oversee Berkshire’s portfolio.
It’s an interesting story, especially how Weschler got the job, but the success bit is what’s important for readers of this column. Unsurprisingly, you’ll guess I agree with him 100% when he Teschler says “Investing is kind of a game of connecting the dots. The nice thing about it is the longer you are in the business, as long as you are intellectually curious, your collection of data points of dots gets bigger and bigger”.
Malcolm Gladwell would call it 10,000 hours, others might just call it hard work. But like a cricketer building an innings, it takes some time to get your eye in and then you can build from there. But like cricket these days, investors and traders don’t seem to want to build. They want to swing for the fences all the time. No wonder markets feel more volatile these days.
2. A face-ripping rally for stocks? This analyst thinks so. A big fall in any asset is usually followed by some sort of recovery. That’s what we saw last night across stocks, forex, and commodity markets. But Bob Bryan reports Nautilus Investment Research reckons that last night’s rally in stocks is just the start of the recovery.
Tom Leveroni at Nautilus says that “there have been 29 times that the S&P 500 has dropped more than 5% over a two day period since 1996. 19 of those times stocks ended the following day higher and 21 of those times stocks ended the month higher after such a drop. So yes, it may look bad now, but history suggests that it could get a lot better soon as long as you hold on tight.”
Of course the flipside is that volatility clusters as we saw in last night’s rally. It’s just upside volatility and that’s still messy for traders. That’s something Leveroni notes himself. “Historical aftermaths, we generalize, are mixed to Bullish for the near-term but with the only sure bet continued volatility,” he wrote. Tin hats still at the ready it seems, but today should be a cracking day for the ASX200.
3. Stocks might have rallied but politics is still a big risk for markets. So last night was interesting politically. Nigel Farage, UKIP leader and Brexiteer, turned up at the European Parliament (where he is a member) and rubbed their noses in last week’s result. That got him into a proverbial punch up with European Commission president Jean Claude Juncker and Farage was jeered and booed by his EU parliamentary colleagues.
Elsewhere, Scottish First Minister Nicola Sturgeon told the BBC that an independence vote is not her “starting point” but reiterated that “everything must be on the table”. And then there are stories about MPs not voting to leave, the Lords blocking a vote if it gets through the Commons and Matthew Nitch Smith reports that UK constitutional expert Dr Peter Catterall says we may need to wait all the way to the end of the year before Article 50 is triggered. Catterall thinks another general election is more likely – I think he’s mad.
So you can see that political risk is still rife in the UK and Europe and Myles Udland has a great piece explaining why political risks won’t be leaving markets anytime soon. Myles has grabbed a quote from some Morgan Stanley research which may not be earth-shattering but which he reckons captures the broad consensus on what is dragging down the political mood in many Western economies: wages are down, debt is up, and the merits of free trade are being questioned.
Tick, tick, and tick.
And if you missed it yesterday morning – I did – here’s Myles’ really good piece saying ‘Leave’ voters are not as stupid as David Cameron wanted them to be. I reckon it’s a must read.
4. Speaking of the drag political wrangling can have on the economy, Australian politicians please take note. As we head into the last days of the election campaign and as the chances of a close run election appear high – especially in the Senate, Paul Colgan has a cracking piece highlighting that Brexit is horrifying proof political chaos hurts the economy – and Australian MPs should take note.
He’s taking umbrage at the fact the two major parties are in reality so close on policy that both sides resorted to making stuff up in order to attack each other. Privatise Medicare and the return of people smugglers are just the latest scare campaigns Labor and the Liberals are using to try to garner the extra handful of votes that might be the key in the marginal seats.
Here’s the key to Colgo’s argument:
Australian politicians as a group will likely never face up to the poisonous economic impact of creating wilful instability. But they have contributed to it. The era of seemingly never-ending leadership speculation and the inability of successive prime ministers to deliver on their promises is acting almost like a de facto tax, putting a drag on investment as businesses and consumers have been trained to be wary about believing anyone in particular will either be in charge, or able to get anything done.
You don’t need to take my word for it. Treasury secretary John Fraser and RBA governor Glenn Stevens explained it to the Abbott cabinet at the start of last year, explaining to ministers that the absence of confidence among consumers and business had been holding the economy back.
As the ANZ-Roy Morgan survey showed again yesterday Australian consumer confidence is strong at the moment. Our political class might want to remember the linkage if they start any shenanigans if the vote is close or we do indeed end up with another hung parliament.
5. Brexit is just a reflection of key battle lines in the global economy and humanity. I really like this piece written by Adam Button over at ForexLive. A bit like Myles Udland and Morgan Stanley above, Adam says “the dominant theme of the past three decades is globalization. It’s meant open borders and open trade. The backlash is here.”
He highlights the divide on the left of politics between what you might call the chardonnay socialist set – he calls them the latte left – and what you might call the “real” left. A family uncertain about its future, as Adam has framed it.
But for me the key – and why David Cameron messed this up and why we need more diversity in the ranks of our parliamentarians if we want a fair future for all kids – is what Adam says about political insiders versus outsiders.
“Political experience is no longer an asset, it’s a liability. Distrust of politicians is high and rising. The idea that change can come from within the ranks of the political elite is dead or dying. This is probably the most dangerous battle of all because slick-talking wildcards are about to seize power,” he wrote.
Whoever could he mean?
6. Bonds are rallying on fear and central banks policy expectations but could we see a Fed complication? The US economy is still stronger than many think. Last night the Department of Commerce released the third estimate of gross domestic product for the US, which showed 1.1% growth, revised up from the second estimate of 0.8% and the advance print of 0.5%. Likewise, consumer confidence rose more than expected in June with a print of 98. And the Atlanta Fed’s latest GDP forecast for the second quarter, which ends this week, is 2.6%.
That’s not exactly strong growth but it’s not weak enough to prompt any type of easing from the Federal Reserve either. That might complicate overnight calls from ECB president Draghi about global coordination of monetary policy and it could complicate the rally we are seeing in global bonds.
That rally was clearly driven by a general rise in fear across markets. But it is also driven by a recalibration of expectations about central bank policy rates in the UK, Europe, the US, and here at home in Australia.
The big question for the Fed and bond buyers is if markets now bet the fallout from Brexit is going to be contained to the UK and Europe, then are bond rates too low? Perhaps that’s why the Australian government 10-year is back above 2%.
Key data for the past 24 hours (with thanks to BNZ markets)
US: GDP (SAAR, third estimate), 1Q: 1.1 vs. 1.0 exp.
US: Core PCE deflator (y/y% third est.), 1Q: 2.0 vs 2.1 exp.
US: Consumer confidence, Jul: 98.0 vs. 93.5 exp.
You can catch me on Twitter.
And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
Mayne Pharma (MYX:ASX)
In what is being hailed as a positive and transformational deal, Mayne Pharma has been selected to purchase a portfolio of 42 generic drugs from Teva Industries and Allergan Plc. Teva was required to sell down its portfolio following acquisition of Allergan’s generic drug business.
Mayne expects its acquisition to contribute sales of $US237m in F17 at a gross margin in excess of 50% and for the deal to be highly earnings accretive. Some manufacture will be done in Adelaide.
The acquisition price is $US 652m and will be funded in part by an $888m equity raising. The press is reporting that this has been heavily oversubscribed. The stock has been in a trading halt since announcement of the deal yesterday.
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC
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