6 things Australian traders will be talking about this morning

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Janet Yellen confirmed what her colleagues have been saying recently on Friday night. The Fed chair said that it’s “appropriate” for the Fed to raise rates in “coming months”.

But stocks still rallied with the S&P closing at 2099 in sight of the all-time high of 2135 just 1.75% away. The Dow rose 0.25% and the Nasdaq was up 0.65%.

That, and the iron ore rally Friday, has helped lift the June SPI 200 futures 23 points suggesting that after a stellar close Friday of 2405, the ASX 200 might be able to take out the recent high at 5425.

On forex markets, the US dollar was buoyed by Yellen’s comments and euro is back at 1.11, USDJPY is just under important resistance sitting at 110.2, and sterling is still doing well as the notions of Brexit recede. The Aussie is a little weaker this morning at 0.7175.

On commodities, gold’s collapse continues under the weight of the US dollar and improved risk appetite in markets. Crude is still under $50 a barrel but off Friday’s lows while copper is sitting at $2.1140 a pound – 6 cents off last week’s lows.

Here’s the scoreboard (8.02am):

  • Dow: 17,873, 455 (+0.25%)
  • S&P 500: 2,099, +9 (+0.43%)
  • SPI200 Futures (June): 5,433, -23 (-0.4%)
  • AUDUSD: 0.7175, -0.0001 (-0.01%)

Now, the Top Stories

1. ASX above 5400 – that’s the best close since August. If the weekend close for the June SPI 200 is right and the 200 index takes out the recent high of 5425 then we could see increased interest back in Australian stocks.

That might sound strange given that interest would come into the market at the highest levels since last August’s collapse. But having spent 9 or 10 months at or below 5400 many traders, technical or otherwise, are potentially going to see this move as a break out of this range and start to focus on higher targets.

In truth the reality is that the moves on the ASX are in no small part reliant on those in the US. That means the ASX today may – I say may because my daily expectations have been awful lately – struggle to take out the high. But if US markets continue to rally, the ASX will too.

2. As stocks rally more cash is leaving the market in favour of bonds. Germain to this debate is the discussion on stocks’ ability to rally even though money is still exiting the equity market. You’ll recall Friday that I highlighted a bit of research which highlighted that at some point this rally in stocks will drag money back into the market, propelling stocks higher still.

As I think I also highlighted the fact that money is still rushing out of the market tells us something about the strength of the underlying stock market structure, which has been able to hold up even as money has continued to rush from stocks into bonds and cash.

Bull markets climb a wall of worry very often and while the S&P has yet to take out the all-time high and is thus just in a range at present, bond and cash hordes tell us there is still much pessimism which can easily give way to fear. But in this case the fear might just be of missing out on returns as stocks push higher.

3. Watch the yan this week – a stronger dollar is pressuring it and that could spook traders. The yuan closed at 6.5615 on Friday as it continues to lose ground against the stronger US dollar. That’s the highest level (higher USDCNY equates to a weaker yuan) since the move which took it to a high for the year of 6.5945.

That’s especially important this week with the release of the Chinese PMI data for manufacturing (Wednesday) and Services (Friday) which could remind traders that as the yuan is weakening, so too is the Chinese economy. Now you know I reckon the Chinese are doing a solid job of the biggest and fastest economic transition in history. But that doesn’t mean that traders and investors won’t start to worry if the yuan slides much further against the US dollar and the economy continues to slow.

But as the euro weakens against the yuan as well, 7.2877, and has broken its uptrend from last year, what choice have the Chinese got but to let the yuan slide a little further? Something to watch though.

4. Here’s more proof making money in the markets is tough – the end of hedge funds. Hedge funds are supposed to generate high returns for their investors in compensation for the high fees they charge. That means there is a clear contract between these investors and the so-called masters of the universe (at least the financial one) that they need to get these super-sized returns.

The trouble is that hedge funds haven’t been delivering lately. And that, Bob Bryan reports, means hedge fund assets under management could fall by 25%. Bryan says Tony James, president of private equity giant Blackstone, said, “there will be a shrinkage in the industry and it will be painful. That’s going to be pretty painful for an awful lot of places.”

Dan Loeb, manager of the hedge fund Third Point, said that it had been “one of the most catastrophic periods of hedge fund performance” and that many funds won’t survive.

Where will all the money go? It’s pretty cheap to buy and ETF or index fund these days to replicate the market’s performance. Money into stocks anyone?

Could the OPEC meeting this week surprise? OPEC has a meeting this week – June 2 – and pretty much no one expects any sort of production deal. That’s despite the reality that recently the Qatari oil minister said $65 is the level needed to stave off a fiscal meltdown. It’s also despite the reality that the Saudis too need a higher price to help assuage its budgetary issues.

Call me cynical but I reckon the convergence of the meeting, the recent oil price strength, the new Saudi oil minister – who also happens to be the chair of the Saudi giant Aramco oil company – and the fact the Saudis want to list Aramco means we could be in for a surprise and oil might continue to rally.

That’s important because as oil rallies, it washes away the deflation pulse of earlier this year. It gives strength to the Fed’s concerns about US inflation and it might even give the ECB a chance to upgrade its inflation forecasts in Thursday’s meeting.

A continued oil rally will also support the risk on rally around global markets at the moment. OPEC has taught us not to expect too much. But could this week’s meeting be different?

6. And of course it’s a huge week on local markets. It’s a data deluge this week both here in Australia and offshore. The release of GDP is the local highlight. Globally, traders will be focused on the plethora of PMIs, an ECB meeting and US non-farm payrolls Friday.

Here’s my diary of the week ahead from an Australian perspective.

Key data for the past 24 hours (with thanks to BNZ markets)
NZ: Net migration (s.a.), Apr: 5520 vs. 5330 prev.
US: Existing home sales (mn), Apr: 5.45 vs 5.40 exp.
G7 meeting: No new initiatives to stimulate global growth

You can catch me on Twitter.

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

Woodside Petroleum (WPL: ASX)

Markets are nudging around or through resistance at the moment, flirting with the possibility of a full on bullish extension.

The oil market is a case in point. It’s had a great run but is finding the going a bit tougher around these levels. The Brent price, in particular, while holding its ground has lost upward momentum over the last 2 weeks.

The Woodside Petroleum chart is one that should give a good insight into whether or not the markets are going to really get going with a new upside leg. It’s approaching the well-defined resistance of a major trend line and its 200 day moving average. There is also a harmonic AB=CD level just above the trend line that could stop any minor false break.

Ric Spooner, chief market analyst, CMC Markets

You can follow Ric on Twitter @ricspooner_CMC

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