Crude oil dropped again last night, falling more than 3.5% which took the price down and through important technical support.
Now that a deal seems off the table at this month’s OPEC/non-OPEC meeting, traders are wary of catching a falling knife.
That weakness in crude was mirrored in other commodity markets, with gold down another $8, copper losing 1% and commodity currencies like the Kiwi, CAD and Aussie all lower. The Aussie is back below 76 cents and at real risk of a big fall if the RBA is dovish or aggressively jawbones the currency after today’s board meeting.
On stocks, after a poor day’s trade yesterday, the ASX looks set to take its lead from the weakness in US markets overnight which fell a little in the face of important overhead technical resistance. Last week’s low of 4,976 is the level traders will watch today.
Here’s the scoreboard (7.37am):
- Dow: 17,737, -56 (-0.31%)
- S&P 500: 2,066, -7 (0.32%)
- SPI200 Futures (June): 4,982, +2 (+0.0%)
- AUDUSD: 0.7597, -0.0067 (-0.87%)
Now, the Top Stories
1. ASX200 – the very definition of a weak market.
Around midday yesterday traders on the ASX were feeling pretty good. The 200 index was up near 5,050, the banks were in good shape, and things were looking good. Yet by the close of play the ASX200 had done a full round trip, put in a terrible performance and actually finished down on the day.
That weakness yesterday, the inability to hold onto its gains, sends traders a message. That is, the bears are in control and it raises the real risk that the ASX200 heads toward 4,800 once more.
2. The government is ruining the economy. This is not about politics, it is about the behavioural impacts on consumers and businesses because of Australia’s fractured politics and poor political leadership. Let me explain.
Yesterday’s big miss in retail sales worries me. It suggested that after spending up big in Q4 2015, consumers were more cautious. That’s important because it is generally accepted that the economy slows down a little during an election campaign which we are already in – given the prime minister has essentially said we’re having a July 2 double dissolution election. Like consumers, the latest Dun and Bradstreet business survey, released this morning, shows more caution from the business community as well.
This slowdown in spending and investment takes on an even bigger significance because the government is so scatty at the moment, releasing tax thought bubble after tax thought bubble into the air without any real thought of the implications on the electorate and business from the volatile nature of this torrent of ideas. To put it mildly, it’s startling the horses.
How else can you explain the latest Newspoll in The Australian released this morning? It shows Labor has pulled ahead of the Coalition 51-49 in two-party terms. It’s the first time Labor has taken the lead since PM Turnbull’s putsch of Tony Abbott and it’s no overstatement to say the honeymoon is well and truly over for the prime minister. The problem is the economy is paying the price for all his fun.
3. The chances of the RBA easing are growing. No one thinks the RBA will ease today. And very few think they will ease at all. Even the ANZ recently changed their easing bias back to one of consistent RBA rates at 2% for the next year or two.
But I’m with Tim Toohey, Goldman Sachs’ Australian chief economist, and believe the RBA will eventually need to cut rates in Australia. Not today, and not necessarily because of the high Australian dollar – I’m pretty sure they still think the Fed hike mid-year is coming and will fix that.
Rather, I think the political uncertainty in Australia, coupled with a volatile global market and economic backdrop, means that consumers won’t be so keen to run down savings in this and the next few quarters as they were toward the end of 2015 – see point above. That means the rest of the economy will need to do the heavy lifting and there is little sign that that is in train. The good news is, of course, the RBA can actually ease by 50 points pretty quickly without fear of reigniting the housing price boom now that APRA has the banks where it wants them.
4. Here’s BI founder Henry Blodget’s latest missive tipping a bucket of cold water on the stock market bulls. Blodget says that the good news in the first quarter was that for the first time in more than 80 years, stocks “(in the US) finished in the green at the end of the quarter after falling more than 10% to start the year”. But that good news comes with a sting, “the downside to the recent stock recovery, however, is that stocks are now again extremely expensive. And that, in turn, suggests that long-term stock returns from this level will be lousy.”
2% per year for the next 10 years with a real chance of a dip lower somewhere along the line, Blodget says. That would be appalling news for a local stock market heavily weighted toward banks and miners, struggling for relevance in the current murky global environment. More from Blodget here.
5. Mohamed El-Erian says it’s time for traders to get off their central bank co-dependency. If there is one major change in markets over the past few years, and one that has fundamentally changed the dynamics of markets and how they operate, it is that central banks have become volatility amplifiers, not volatility dampeners. That’s very different to the first 26 or 27 years of my career and it has had profound impacts on the way markets operate and in turn, impact traders’ reaction function to central bank speeches and announcements. Nowhere is that more obvious than in the US with the actions of the Fed.
It’s time to break that co-dependency with central banks, says El-Erian, chief economic adviser to Allianz. His prescription is to get off the central bank roller-coaster and for “a return to fundamental-based investing”. He’s not hopeful it will happen anytime soon but it’s a great article worth reading.
6. The IMF is worried about China and you should be too. China has had a better run of it lately. The data has stopped being terrible, the yuan is stable, and there is a real sense that Beijing has got its arms around the market turmoil and as a result has stabilised that side of things. But the IMF isn’t convinced and believes the links, and potential for market contagion, between China, emerging markets more broadly, and developed markets is growing. The Wall Street Journal reports that the IMF found that China appears to have a special ability “to trigger market moves in other countries based on the release of economic news and data”.
I know that’s not exactly an earth-shattering revelation for traders who have had to navigate markets and Chinese data over recent years. But the IMF says “the impact of shocks to China’s fundamentals on global financial markets is expected to grow stronger and wider over time.” So as China’s massive economy transitions toward consumption and services, and as it inevitably slows because of this, expect volatility to increase.
That is unless forecasters get better at guessing at Chinese data releases. If the market and the outcomes are the same then for the most part volatility disappears.
Key data for the past 24 hours (with thanks to BNZ markets)
AU: Retail sales (m/m%), Feb: 0.0 vs.0.4 exp.
AU: Building approvals (m/m%), Feb: 3.1 vs. 2.0 exp.
UK: Construction PMI, Mar: 54.2 vs. 54.1 exp.
EC: Unemployment rate (%), Feb: 10.3 vs. 10.3 exp.
US: Factory orders (m/m%), Feb: -1.7 vs. -1.7 exp.
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And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
ANZ is poised at an interesting chart level. The share price has lost 12% over the past 2 weeks and is trading at around 9.5 times forward earnings.
The share price has paused around the 78.6% Fibonacci retracement level for the past 2 days. This is the last of the commonly recognised retracement levels and often turns out to be the low point for a correction.
Rising bad debt levels are the focus of market concerns about ANZ. The immediate problem centres on resource related business customers. The fact that oil prices are falling again will inject an element of concern into the commodity complex and may not help nerves about ANZ.
However, the announcement of a likely $100m in additional provisions recently announced by ANZ is at the end of the day an incremental increase. Current forecasts for total provisions are about $1700m this year. If ANZ holds this retracement zone by staying above $22.50 and then begins to move higher, things could begin to look interesting for potential buyers.
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC