6 things Australian traders will be talking about this morning

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The Fed signaled the preconditions for a rate hike are in the ascendancy overnight but traders on stock and forex markets don’t see any risk in that given the next meeting is not for another six weeks.

As a result, the US dollar was marginally weaker and the S&P 500 dipped just 3 points.

That helped stabilise the Aussie dollar back near 75 cents and left SPI 200 traders free to push prices a little higher. The September contract is up 11 points and the big miners had a good night overnight. That suggests a solid open but yesterday’s reversal off 5565 will keep the local stock bulls wary.

Elsewhere crude fell as inventory data showed the big drawdown in inventories many were expecting in the US during driving season has not materialised. Copper was also down but Gold and Iron ore are up.

Here’s the scoreboard (7.27am):

  • Dow: 18472 -2 (-0.01%)
  • S&P 500: 2169 -3 (10.12%)
  • SPI 200 Futures (September): 5,511, +11 (+0.2%)
  • AUDUSD: 0.7490 -0.0015 (-0.2%)

The top stories

1. This is the Business Insider must read of the day for traders – Leon Cooperman published an epic 48-page note to investors explaining why everything is fine. The stock market rally in the US, and global markets, that we’ve seen post-Brexit strikes me as both one of the most hated moves I’ve seen and years and also one that many traders and investors have missed out on. (That might explain why so many folks hate it.)

But Leon Cooperman, from billionaire investor Omega Advisors, has released a 48-page outlook which identifies multiple potential problems, ranging from inflation to exogenous shocks triggered by Brexit and China Rachel Levy reports. But in every case, the letter said the market would be just fine. Slightly contrarian and certainly worth the time to read.

2. Here’s another poke in the eye for the bears – if you only bought stocks at the last the market tops you’d still be up 26%. This is a long game view on stocks but important because not everyone is a trader like me who jumps in and out all the time. Indeed most investors, whether directly or via their superannuation, are from the buy and hold school of investing.

Myles Udland reports Andrew Adams, an analyst at Raymond James, published a note saying that that $100,000 spent on the S&P 500 at each of these last three tops still nets investors an $80,000 gain (or 26.6%) over this period. And this doesn’t include the roughly 2% dividend the index pays. It takes a lot of patience, and some mighty big draw downs to get that 26% return. But that is the nature of long-term buy and hold investing.

Here’s Adams’ chart:

3. The Fed signaled that rate hikes in the US are back on the table – but markets didn’t care. The Fed released its interest rate decision overnight and left rates on hold. But the statement said that “near-term risks to the economic outlook have diminished” and that “on balance, payrolls and other labour market indicators point to some increase in labour utilization in recent months”. That suggests that rate hikes are back on the table. Indeed, Esther George wanted a hike at this meeting.

It’s a more upbeat assessment than last month when the Fed held fire, and the statement did say “the Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labour market indicators will strengthen”, which suggests that rate rises are certainly back on the table and September is live. The market recognises this but is unfazed by it and based on the overnight price action, might have expected a more hawkish statement.

More here.

4. The chance of an RBA rate cut is slightly reduced but Tuesday’s meeting is live. Rather than delivering a decisive verdict on whether the RBA will cut rates next week, the release of second quarter CPI had something for everyone. Citibank and TD securities have changed their calls from cut to hold but Michael Blythe, CBA chief economist, says the RBA will cut through gritted teeth.

David Scutt has a great roundup of what economists are saying about Australia’s inflation report.

Me – I think they can wait because the inflation print was in line with their expectations and the NAB business survey shows an economy transitioning well.

5. Facebook crushed it overnight with its earnings report, but this short seller says it could lose a third of its value. Facebook just blew expectations away with a 59% increase in earnings and that has sent the stock up 8% in after-hours trade.

But Bloomberg reports that Andrew Left, Citron Research founder – the guy who shot to prominence when he made the bear case for Valeant Pharmaceuticals – says Facebook could lose nearly a third of its market value and he’s betting against the stock and selling Facebook shares.

In a nutshell “if you think Facebook has a monopoly on social media, just walk outside and go speak to anyone between the ages of 16 and 30 and you’ll see Snapchat”, Left said.

6. There will be plenty of chat about this in the nation’s dealing rooms today – BBSW traders feared jail terms. An interesting one from the AFR’s Jonathan Shapiro this morning. He says that “documents filed to the courts by the Australian Securities and Investments Commission as part its case against National Australia Bank, traders debated whether jail time could befall those seen to be involved in manipulating the BBSW”.

Here’s one of the conversations reported in the AFR:

“I”d sty [sic] away from that rate set if I wre you” wrote Westpac’s Richard Conway via Bloomberg chat to NAB’s interest rate swaps trader Robert Collins on January 2013.

“mate i always do…i figure i pay the rateset fee to avoid goin gto [sic] jail” he replied, in one of the many chats littered with spelling and grammar errors.

Key data for the past 24 hours (with thanks to BNZ markets)
AU: CPI y/y, %, Q2: 1.0 vs. 1.1 exp.
AU: CPI trimmed mean, y/y, %, Q2: 1.7 vs. 1.5 exp.
CH: Westpac-MNI cons. sent., Jul: 114.0 vs. 115.9 prev.
UK: GDP, q/q, %, Q2 A: 0.6 vs. 0.5 exp.
UK: Index of services, m/m, %, May: -0.1 vs. 0.1 exp.
UK: CBI retailing reported sales, Jul: -14 vs. 1.0 exp.
US: Dur. goods orders, m/m, %, Jun P: -4.0 vs. -1.4 exp.
US: Pending home sales, m/m, %, Jun P: 0.2 vs. 1.2 exp.
US: FOMC rate decision, Jul-27: 0.5 vs. 0.5 exp.

You can catch me on Twitter or at AxiTrader where I am the Chief Market Strategist.

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

Fortescue Metals (FMG: ASX)

Two years ago, Fortescue was the wounded Wildebeest of the iron ore herd. There was a dangerously large distance between it and the main group of large miners in terms of costs and debt. It looked the obvious victim in the event that iron ore prices kept falling.

Since then, Fortescue’s management has done a fantastic job increasing productivity and reducing costs. Fortescue is now back into the herd in terms of its mining cash operating costs. It’s gearing has dropped to 40% and it looks a realistic chance of achieving management’s target of 30%.

Fortescue’s generates less cash per tonne of iron ore sold than the other majors. It’s all in costs are higher due to higher debt while the grade of iron ore it sells is lower and gets a lower price. However, FMG will now generate cash at much lower iron ore prices than it would have 2 years ago.

Risk taking, contrarian shareholders have been well rewarded for putting faith in this management team. The stock has rallied by more than 200% from its January low. It was up 7% yesterday after its production report provided guidance for yet lower costs next year.
Having regained its status as the fourth of the iron ore majors, the chances are its stock price will soon begin to move much more in line with that of the general iron ore herd.

Ric Spooner, chief market analyst, CMC Markets. You can follow Ric on Twitter @ricspooner_CMC

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