Stocks in the UK and Europe were down a little in overnight trade as the US enjoyed its Fourth of July holiday. That weakness left the SPI 200 September futures pointing down 13 points for the open after what turned out to be a pretty good day on the ASX 200 yesterday, with a 35 point rally.
While stocks languished, commodity currencies soared and the Aussie dollar finds itself this morning around 0.7530 – 100 points off yesterday’s lows – while other commonwealth currencies like the pound, South African Rand, and Canadian dollar are all higher. The Kiwi rose as well and was the strongest of the big currency pairs in the past 24 hours and is now sitting above 72 cents at 0.7222.
On other markets gold is up near $1350, Brent crude dipped a little but has held above $50 a barrel and copper hit overhead resistance before dipping back to $2.21 a pound today. Iron ore is also higher.
Here’s the scoreboard (7.57am):
- Dow: 17949 +19 (+0.11%) – As at Friday July 1
- S&P 500: 2103 +4 (+0.19%) – As at Friday July 1
- SPI200 Futures (September): 5,237, -13 (-0.2%)
- AUDUSD: 0.7530 +0.0075 (+0.9%)
Now, the Top Stories
1. There is little chance the RBA will ease rates today – but that doesn’t mean nothing will happen at 2.30pm. The RBA meeting this morning, and the governor’s statement at 2.30pm this afternoon is universally expected to leave rates at 1.75%. But the governor’s statement is still a key event for forex, interest rate and stock traders who will pore over every word and sentence for any indication of what the RBA is thinking about the long term effects of Brexit, the weekend election, the labour market, Aussie dollar and the release yesterday of the Melbourne Insititute’s monthly inflation gauge which showed a huge jump of 0.6% in June.
Traders will be evaluating the governor’s words for any hint, or not as was the case in June, of an easing bias.
David Scutt has a great snapshot of everything you need to know about today’s meeting in his 10-second guide to today’s RBA rate decision.
2. Australia’s big banks have just passed a very important threshold. Australia’s prudential regulator, APRA, released a report yesterday which showed that the capital position of the big banks has now satisfied a key hurdle David Murray’s Financial System Inquiry had set for them. That hurdle was the requirement for the big banks to have capital positions, common equity tier one, in the top 25% of global banks. Murray set that hurdle as the level at which the banks could then be considered “unquestionably strong”.
They’ve attained that position by raising capital over from the market and APRA’s release shows that the pressure is now released from the banks to tap the market again. At least for the moment as APRA awaits more rules from the banking boffins in Basel. I have more here.
3. Gold is testing a huge level and may rally hard if it gives way. Gold has pushed back towards the post-Brexit high overnight and is sitting at $1350 an ounce this morning. One of the biggest questions traders are asking is how stocks could have rallied in the past week but gold also be up near the post-Brexit highs. That’s an apparent contradiction.
But Commerzbank analyst Carsten Fritsch told the Reuters Global Gold Forum on Monday: “The Brexit vote caused uncertainty and most people don’t like that. Uncertainty leads to volatility in financial markets and to a rush into safe havens such as bonds and gold”.
That’s as straight forward an answer as you’ll get. Although I’d add that low rates, negative ones in particular, increase the attractiveness of gold as well. Given the gold miners on the ASX it’s worth noting that with gold sitting just $10/15 below important resistance from the high earlier this decade there is a chance that a break drives these stocks substantially higher. It has to break first of course – gold mining companies will be watching closely.
4. UK politics is fractured and Britain may not leave the EU. As Malcolm Turnbull is again finding out a week is a long time in politics. But the machinations of Australian politics are nothing compared to the fractured state of UK politics in the wake of the vote to leave the EU just 10 or so days ago.
So far David Cameron has resigned, Boris Johnson was knocked out cold by his lieutenant Michael Gove who chose to run for the Conservative leadership himself, and while that battle rages Nigel Farage, the leader of the UKIP Party and prominent leaver, has declared “job done” and quit politics. Yes, that’s before Britain has a new prime minister, and well before the UK has triggered Article 50 of the Lisbon Treaty to formally start the withdrawal process from the EU. It is, as Carrington Clarke said to me on Sky Business a little after 7am this morning, no one actually wants to face up and do the hard work associated with leaving.
It definitely feels like there is some backsliding going on which might explain why Austrian finance minister Schelling told Handelsblatt that “in five years, there will still be 28 member states … Britain will remain a member of the EU in the future”.
In the meantime UK politics almost guarantees continued uncertainty which will weigh on business and consumer sentiment, spending, and investment.
5. There is another European banking crisis brewing and because of Brexit it could cause a huge political stoush. Last night the shares of the oldest bank in the world, Monte dei Paschi de Sienna which was founded in the 1400’s, fell to a record low after the ECB pushed the bank to cut hard into its non-performing loans. The ECB wants Monte Paschi to cut loans 8 billion Euros in 207 and then another 6.3 billion Euros in 2018.
That’s a big cut and speaks to the malaise on the bank’s balance sheet and in its customer set. BUt Monte Paschi, and Italian banking more broadly has now become another faultline in the battle between Northern and Southern Europe.
Over the weekend Italian prime minister Matteo Renzi, no doubt with the recent Rome Mayoral elections in mind, intimated that he would go against Brussels wishes and bail out the bank, and the system, with tax payer money if needed.
Separately last night Bundesbank president Jens Weidmann was carrying on about budget deficits and the need for countries in Europe to rein them in. Adam Button over at ForexLive summed it up nicely.
Weidmann says an ‘independent’ institution overseeing the rules would help with implementation.
There is a major element of tone deafness here. UK voters just rejected centralized, undemocratic institutions and Weidmann is talking about fresh ones that can dictate government spending.
Meanwhile, unemployment is rampant on the Eurozone periphery is rampant and the only solution Germany offers is: “Be more German”.
UK Chancellor of the Exchequer George Osborne has a cunning plan to stop a business exodus from Britain. The UK economy has just had a massive kicker from the big fall in the value of the pound against the US dollar and across the board. That is likely to go some way to mitigating the impacts of uncertainty on the economy more broadly as the devalution of the Pound has made British industry and services cheaper to but from and consume.
But the UK is still at some risk of a flight of big business to Paris, Frankfurt, Berlin or Brussels.
Osborne has a cunning plan to stem this flight of businesses across the Channel or across the Irish Sea. He’s floated a plan to cut UK corporation tax to 15pc. He said the UK is “still open for business” and he wants to create a “super-competitive economy”. Whether its an actual plan or just a chip on the table when it comes to Brexit negotiations in the months and years ahead it is a masterstroke. Already the French economics minister Emmanuel Macron is up in arms with Reuters reporting that it’s not his impression corporate taxes are the first issue which the UK government needs to move on post-Brexit.
It’s a smart strategy which ever way the cookie crumbles as it moves Europe, and European leaders who would never promise such a cut and who may now be at risk of losing businesses onto the back foot.
There is so much water to flow under the Brexit bridge in the months ahead. Traders need to be on their toes for second round impacts even though markets are ignoring Brexit itself in many ways.
Key data for the past 24 hours (with thanks to BNZ markets)
AU: ANZ job advertisements, Jun: 0.5 vs. 2.4 exp.
AU: Building approvals (m/m, %), May: -5.2 vs. -3.5 exp.
UK: Construction PMI, Jun: 46.0 vs. 50.7 exp.
EZ: Sentix investor confidence, Jul: 1.7 vs. 5.0 exp.
CA: Manufacturing PMI, Jun: 51.8 vs. 52.1 prev.
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And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
Goodman Group (GMG: ASX)
Industrial property fund manager and developer, Goodman Group, has been in the news for a couple of reasons in recent weeks. Firstly, because about 6% of its $33bn portfolio is in the UK giving it some “Brexit” risk. Secondly, there were unconfirmed press reports yesterday that it’s close to a major deal to sell $640m of assets to Blackstone. If confirmed, this will be consistent with Goodman’s strategy of divesting and recycling around $2bn of property each year.
Consensus expectations are for Goodman to achieve Earnings per share growth of around 5-6% over the next couple of years. Based on expected dividends for the next 12 months, it’s currently trading on a yield of about 3.5%. Goodman’s stable earnings outlook means the share price is likely to benefit from any further cuts in interest rates as investors chase yield.
For chart traders, this looks an interesting stock. Over recent weeks it’s formed a classic symmetrical triangle. After 3 rejections of the triangle support and 2 of the resistance, the next move according to the charting texts will be a break through the resistance. That should set up for a rally beyond the previous high at $7.40. The “measuring rule” often applied to triangle formations implies potential for a rally to around $7.65.
Ric Spooner, chief market analyst, CMC Markets. You can follow Ric on Twitter @ricspooner_CMC