6 things Australian traders will be talking about this morning

Stocks in the US continued to climb this wall of worry, pushing a little higher overnight.

That saw the S&P 500 close above the psychologically important 5100 level and the close of 5105 leaves the index just 30 points below the all-time high.

That rise, and associated rises in the Dow and Nasdaq, helped rescue the SPI 200 from its lows and the June contract is up 40 points, 0.8%, this morning. That suggests a better day ahead.

On currency markets the Aussie dipped briefly below 72 cents overnight, even though the US dollar is under pressure and is currently be assailed by the yen. The Aussie dollar’s fall is roughly twice that of its commodity cousins the Kiwi and CAD.

On commodity markets, crude dipped and recovered after the OPEC meeting in Vienna. Gold is at $1210, copper dipped a little further to $2.0695 a pound.

Non-farm payrolls in the US tonight is the highlight of trade.

Here’s the scoreboard (8.05am):

  • Dow: 17838 +49 (+0.27%)
  • S&P 500: 2105 +6 (+0.28%)
  • SPI200 Futures (June): 5,319, +40 (+0.8%)
  • AUDUSD: 0.7226 -0.0023 (-0.31%)

Now, the Top Stories

1. The ASX 200 should, I said should, have a better day today. Three days of unrelenting selling on the ASX saw the market fall 130 points, 2.4%, from Monday’s close with the ASX200 finishing at 5278 yesterday. Technically it looks awful and suggests it’s on track toward the first, and natural, Fibonacci retracement level at 5222.

But, the good news is that with US stocks pushing a little higher overnight and the S&P 500 just closing above the top of the recent range, the SPI 200 futures have rallied 40 points overnight.

The trouble is that the selling came from almost nowhere, was across the board, and didn’t stop. So with the non-farm payrolls tonight hanging over the market like the Sword of Damocles, there is every chance the local market disappoints us again. Not a forecast, but a good chance today.

2. The OECD reckons Australian housing is on the brink. You’d have to be from Mars, or about to settle on your eighth investment property not to know that there are risks in the Australian housing market. And as prices rise the fears of the bears (perhaps that they are increasingly wrong as much that prices will collapse) grow and the cries become more shrill.

But, that does not mean that the bears on Australian housing are necessarily wrong. It’s just they’ve been wrong so far. This week the OECD again added its voice to the bear camp, saying that Australian housing is on the brink of “dramatic and destabilising developments”.

It is a real risk, especially with a lot of product coming to market soon and needing to be settled. But low rates and inflation are a very much underappreciated driver of Australian house prices.

3. Here’s why the Australian dollar is tumbling – investors think Australia’s Q1 GDP might have been driven by a spike in iron ore. The Aussie dollar spiked to just below 73 cents after the GDP release on Wednesday yet last night it traded below 72 cents before recovering to 0.7222 currently. Now, in the grand scheme of things, 1 cent of movement is not very much. But also in the grand scheme of the global economy and markets, 3.1% growth is huge and should have supported the Aussie and driven it higher.

So what gives?

Paul Colgan might have the answer. He reports that the FX team at Credit Suisse reckon that the big spike in net exports, which was a big contributor to growth in Q1, was itself driven by the spike in iron ore in the first three months of the year. Credit Suisse said “the better-than-consensus-Q1 GDP print was driven by a temporary boost in prices and volumes of iron ore exports, which should not be expected to repeat”. So traders have sold some Aussie and reckon the RBA will still be cutting.

4. Bill Gross is so right – the last 40 years of investing history are a ‘black swan’ that won’t be repeated. One of the problems with investing is that markets tend to extrapolate everything to infinity. By that I mean that at a macro level, all manner of folks tend to expect what happened in the past and is happening now will continue into the future.

But as we are seeing with the global economy right now, the post WWII paradigm of growth, inflation and consumption is being challenged as central banks struggle to reignite growth. But, as Olivier Blanchard said recently, perhaps the global economy is heading back toward the lower and slower growth rate that it averaged over the past 1000 years, not the past 50 or 70.

If that is so, then Gross is spot on the money. In his latest investment outlook, Gross said he thinks the stellar returns experienced by both bond and stock investors over the last 40 years are an anomaly that will not be repeated. Forget the reference to a black swan and just focus on the idea that the returns are an anomaly or aberrant and you get Gross’ point.

Myles Udland has a great wrap of his thoughts here.

5. Oops, here comes the dividend from too much debt and too little growth – DEFAULTS. Bob Bryan is fast becoming my favourite writer from BI US and he has another cracking read this morning. Bob reports that Matthew Mish, credit strategist at UBS, says a tidal wave may be coming to the bond market, and it’s not going to be pretty.

Mish’s research asks whether the recent uptick in default rates is simply a “rogue wave” that will dissipate or the “start of a tidal wave” that will bring the rate of defaults much higher over the long-term. Mish is in the latter camp and says defaults are going to increase from 2.6% currently to 4.6% over the next year. It doesn’t sound like much but it’s a huge amount of bonds that won’t be repaid.

Folks, bonds and debt are often the catalysts for market ructions. So we all need to watch this space carefully whatever market we play in.

6. OPEC didn’t do a deal but two things the Saudis did in the past 24 hours suggest oil market glasnost. There was some disappointment that OPEC didn’t do a deal in the oil market overnight. Nymex crude dipped below $48 a barrel before clambering back to close at $49.17 by the end of trade. For me, this is the right response.

The new Saudi oil minister Khalid al-Falih, promised the kingdom would not flood the market with extra oil. Not exactly the change in rhetoric I thought we might see but it is subtle enough for me. In the grand scheme of things, he has also effectively signalled he’s not going to war with his colleagues, or Iran, over market share and also signalled that the Kingdom is not going to thump the price lower.

The other interesting thing was the Saudi’s $3.5 billion investment in Uber. That’s the largest private company raise ever I believe. Not related to oil but it tells you “2030” is a real plan and the Saudis are keen to revamp their investment portfolio as much as the economy. Very interesting behaviourally.

Key data for the past 24 hours (with thanks to BNZ markets)
AU: Trade balance (AUD, m), Apr: -1579 vs. -2100 exp.
AU: Retail sales (m/m, %), Apr: 02. vs. 0.3 exp.
JP: Consumer confidence index, May: 40.9 vs. 40.1 exp.
UK: Markit construction PMI, May: 51.2 vs. 52 exp.
EZ: ECB main refinancing rate: 0.00 vs. 0.00 exp.
US: ADP employment report, May: 173 vs. 173 exp.

You can catch me on Twitter.

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

Wesfarmers

The Wesfarmers chart was starting to look a bit ugly yesterday. Recent news of write downs and losses for Target and its Curragh coal mine plus the improving competitive position of Aldi are souring sentiment. The stock is down about 7% from the latest peak 3 weeks ago.

Yesterday it began to break below a well-defined chart support line. A stronger overall market could see it hold the line today. However, it would need to close above Wednesday’s high at $40.64 to look like another convincing rejection of this support line that might provide some comfort to shareholders.

If the share price just trades inside yesterday’s range it looks at risk of eventually breaking this support. That could see it test the 78.6% retracement and harmonic AB=CD level around $38.30. For my money, Wesfarmers would look decent value around there with an attractive dividend yield and the benefit of some great businesses like Bunnings, Office Works and Kmart.

Ric Spooner, chief market analyst, CMC Markets

You can follow Ric on Twitter @ricspooner_CMC

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