Stocks were lower across the board in Europe and North America overnight putting further pressure on the ASX 200 which fell 47 points yesterday.
The September SPI 200 futures contract is down another 35 points suggesting it’s going to be another tough day on the local market.
It’s a different story for gold bugs and Aussie dollar bulls after the US dollar came under heavy selling pressure last night. The fulcrum was again the yen after the Japanese stimulus announcement disappointed the market.
Elsewhere oil is down again and the iron ore rally is taking a breather.
Here’s the scoreboard (7.55am):
- Dow: 18313 -91 (-0.49%)
- S&P 500: 2157 -14 (-0.64%)
- SPI 200 Futures (September): 5,465, -35 (-0.6%)
- AUDUSD: 0.7605 +0.0099 (+0.99%)
The top stories
1. The market is betting the RBA is not done yet – more cuts to come. The RBA cut rates to a new all-time low of 1.5% yesterday. It left the door ever so slightly ajar to further cuts but the reality was that just like May there was no clear bias to ease rates anytime soon. But David Scutt reports overnight index swaps are now fully priced for another rate cut — taking the cash rate to 1.25% — by May next year.
The interest rate strategy team at the CBA doesn’t think it will take that long with Jarrod Kerr, senior interest rate strategist, saying “a rise in bank funding costs, weak international inflation outlook, and the RBA’s growing comfort in lending practices all point to another rate cut in November. We forecast a move to 1.25% by year end.”
2. Here’s why the Aussie dollar is back above 76 cents even though the RBA cut rates yesterday. When I first started out as a currency strategist back in 1998 it surprised me when I talked about the impact of the US dollar, and put a USD indicator in my AUDUSD fair value model, why so many folks thought I was mad. They seemed to think the Aussie side of the cross was the key to everything. Fast forward 18 years and not a lot has changed with discussion about the RBA’s “disappointment” that the AUDUSD rallied after the cut.
But the RBA knows better than anyone that the US dollar is a big driver of the Aussie; it’s something they know they can’t do anything about. Last night the US dollar fell 0.7% which is a fair chunk of the Aussie dollar’s 0.99% rise. Anyway, here’s a medium term AUDUSD versus the US dollar index chart from my Reuters Eikon terminal which shows what a big influence the big dollar is on the Aussie.
3. Australian bonds traded to all-time low rates yesterday but Fitch says traders could lose $3.8 trillion if rates normalise. Given the demographic and economic backdrop, it’s a remote possibility that rates across the globe rise sharply anytime soon. But rating agencies are paid to worry about risks and Robert Grossman at Fitch has issued a report which says “a hypothetical rapid reversion of rates to 2011 levels for $37.7 trillion worth of investment-grade sovereign bonds could drive market losses of as much as $3.8 trillion”.
It probably won’t happen soon but the point to remember is that the policies being pursued by central banks, even though they appear to be failing, are all about increasing inflation and driving interest rates higher.
4. Japan released a massive stimulus package yesterday – but the yen strengthened. Here’s why Japan released details of prime minister Abe’s 28 trillion yen stimulus package. That is around $360 billion Aussie dollars, so even in an economy the size of Japan, it’s no small bikkies. But traders and the market were disappointed and the yen strengthened another 1.5% against the US dollar.
That seems strange but Jason Wong, a strategist at NAB subsidiary BNZ in Wellington, explained it nicely in his morning note. Wong said:
Much was made of the size of the ¥28 Trillion fiscal stimulus package heading into yesterday’s release but new spending for current fiscal year will be just ¥4.6 Trillion, which doesn’t look out of the ordinary compared stimulus packages over the past 20+ years that have done little to drive Japan out of its deflationary spiral.
5. Now we know what the Fed is targeting for jobs growth in order to raise rates. Reuters reports Dallas Federal Reserve Bank President Robert Kaplan said overnight that the FOMC is looking for a “healthy margin above” 80,000 to 125,000 new jobs each month to give confidence of removing slack in the US economy.
The market is looking for another 180.000 this Friday when July non-farm payrolls is released. It’s always an important number but continued strong employment appears to be edging the Fed toward another hike in 2016 – even if the market doesn’t want to believe it.
6. But complicating things is that if not for consumers, the US economy might actually be in recession. Last night saw the release of stronger than expected personal spending data in the US makes Kaplan’s point about employments impact on the economy. We also know that wages are starting to rise further reinforcing this.
But Myles Udland reports Joe LaVorgna, Deutsche Bank’s US chief economist, says that excluding consumers, economic growth is down 0.2% over the last four quarters. This means that outside of the consumer — the driving force of the economy — the US economy isn’t really growing at all. No wonder the Fed keeps delaying its rate hike.
Key data for the past 24 hours (with thanks to BNZ markets)
NZ: QV house prices, y/y%: Jul: 14.1 vs. 13.5 prev.
AU: Trade balance ($m), Jun: -3195 vs. -2000 exp.
AU: Building approvals (m/m%): -2.9 vs. 0.8 exp.
NZ: RBNZ 2-yr inflation exps. (%), Q3: 1.65 vs. 1.64 prev.
AU: RBA cash rate target: 1.5 vs. 1.5 exp.
JP: Fiscal stimulus package: ¥4.6 Tn new spending FY17
UK: Markit construction PMI, Jul: 45.9 vs. 44.0 exp.
US: Personal income (m/m%), Jun: 0.2 vs. 0.3 exp.
US: Personal spending (m/m%), Jun: 0.4 vs. 0.3 exp.
US: Core PCE deflator (y/y%), Jun: 1.6 vs. 1.6 exp.
NZ: GDT dairy auction, avg winning price: +6.6%
And now from CMC Markets’ Michael McCarthy is today’s Stock of the Day
Seven West woes – structural and cyclical
Q. If a share price has halved in just over two years, how much further can it fall?
Seven West Media (SWM) reported a further slip in profit, and a horrible revenue and earnings outlook. Investors responded with an 18% trouncing of its shares. While this may be a case of lowering market expectations in a bid to outperform the lower bar, SWM may have miscalculated concerns about its overall strategy.
SWM’s main business is its free to air TV, radio stations, Perth newspapers, magazines and community newspapers. Old, old media. This is surprising, because not only does Seven have a long standing association with Yahoo, and a recent foray into subscription video with Foxtel, it has developed online support for much of its existing media.
Yet the bottom line says the transition to new media is not delivering, and is looking increasingly like lip service to investor concerns. A kinder, alternative explanation is that SWM is poised to capitalise on an upswing in the advertising cycle to juice up its structural transformation. Either way, the numbers say it isn’t working. It’s hard to see where SWM’s salvation will come from if the long awaited turn of the advertising cycle is further delayed.
Down, but not cheap yet.
Michael McCarthy, chief market strategist, CMC Markets
You can follow Michael on Twitter @MMcCarthy_CMC
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