It was another day of stock market weakness in Europe and the US overnight with falls across the board. Hedge fund managers’ doom and gloom warnings, see items 3 and 5 below, seemed to sum up the feeling that all the good news is priced in and the outlook has darkened for risk assets.
At the end of trade, US stocks were down 0.6% while stocks in Europe lost around 1%.
But the ASX has resisted these falls if overnight futures trade is any guide. The June SPI 200 contract is only 13 points, 0.2% lower, after yesterday’s big fall. For context, the June futures are 55 points lower than yesterday morning’s level, which is a fall of around 1.03%.
On forex markets, the US dollar was mildly stronger again. That knocked the Aussie back from its push above 75 cents and it is sitting around 0.7450 this morning.
Crude rallied, iron ore collapsed again and gold has continued to drift after its aborted foray above $1300 earlier this week.
Here’s the scoreboard (7.55am):
- Dow: 17,651, -100 (-0.56%)
- S&P 500: 2,051, -12 (-0.59%)
- SPI200 Futures (June): 5,237, -13 (-0.2%)
- AUDUSD: 0.7454, -0.0030 (-0.4%)
Now, the Top Stories
It’s a gloomy one today, so strap in.
1. BHP collapsed yesterday after Brazil dropped a $58 billion lawsuit on the Samarco disaster. BHP collapsed a little more than 9% yesterday after news broke that Brazil had launched a civil lawsuit against the firm and its partner Vale over the mine collapse last year.
Traders were clearly caught by surprise after it looked like the partners had done a deal with the Brazilian government. Yet such has been the strength of BHP’s rally since early April that it is still almost $3 or 20% above those levels and a little more than 33% above the lows for the year.
Leaving the disaster and the lawsuit to one side, from a price action point of view the question for BHP shareholders, after they recover from yesterday’s lawsuit shock, shareholders will need to refocus on the machinations of the iron ore and other commodity price movements.
2. Data in Australia could be huge for the dollar and interest rates today. The RBA has eased this week and seems to have an easing bias. While no one expects another easing for a few months, Aussie dollar and interest rate traders are on high alert for data that will support, or undermine, the chances of another cut.
The NAB’s economics team says:
In terms of the trade data, NAB is looking for some reduction in the March trade deficit to $3.0bn from $3.4bn in February with higher levels of iron ore exports the main driver for the improvement in the number. As for retail sales, our economists expect a moderate growth of 0.2% for the month up from a flat outcome in February.
I’m going to be watching both data sets really closely. But in particular, it’s retail trade that holds the key for me. It’s been on the weaker side recently. That’s important because the government’s budget outlook rests in no small part on very strong expectations for household consumption growth.
Scutty and I will cover the data, and any market reaction, at 11.30am here at Business Insider.
3. Stocks’ bull market is exhausting itself, says one of the world’s best hedge fund managers. Stanley Druckenmiller, head of Duquesne Capital and one of the world’s best-known hedge fund managers, thinks that the macroeconomy is looking disastrous and there are two sources for the coming problems, reports Bob Bryan.
He says an obsession with short term gains is causing problems in both the corporate sector and central banking, while he’s also worried about the ever-expanding debt bomb in China.
And he says, “the bull market is exhausting itself”. Why? You’ve heard this from me countless times, but Druckenmiller says why would there be a premium on companies when they have borrowed all of their growth from the future?
That the problem with the economy and markets.
4. The trouble with a weak global economy is that earnings are hard to come by – here’s another reason the bull market is exhausted. Probably is there no better evidence that Druckenmiller is right than what we’ve seen in global earnings reports recently. If you are an innovative company with a product people want – like Facebook and Amazon – then things look good. But for the vast majority of firms, their earnings are constrained by the level of overall economic growth.
Writing in the FT, John Authers says that even though stocks have been able to beat beaten down expectations, the fact that has failed to lift stock markets broadly is a bad sign for stocks and the companies themselves.
Here’s his conclusion:
It is just about possible to read this earnings season as the end of a period in which the market has regained its balance. But it is highly unusual for equity markets to go as long as a year without making a new high, unless they are in a bear market. In the US, we need to go back to the aftermath of the October 1987 Black Monday crash for the last time it happened. So the poor earnings and their sanguine reception can most likely be explained as part of the early stages of a bear market in the US.
5. Here’s another interesting take on the stupidity of negative rates from Jeff Gundlach – the Bond King. In another explanation of why negative rates are counterproductive, Bob Bryan reports US bond king Jeff Gundlach said:
Negative interest rates are the definition of deflation. Trying to combat deflation with deflation is like trying to put out your burning house with gasoline.
When you think about that, he’s right isn’t he? It’s a neat explanation which adds to the St Louis Fed research chief’s explanation that negative rates won’t work because they act like a tax.
You have to think that the RBA will be watching the debate about negative rates and is probably very keen to ensure Australia doesn’t fall into this yawning developed economy problem.
Here’s Akin Oyedele with another piece showing the staggering amount of bonds investors own for almost nothing in return.
6. And to round out a rather gloomy 6 things today – here’s Citibank’s global economics team with 4 things that could rattle the global economy. Bob Bryan, again, reports that Citi’s global economics team has posted a warning for clients about the global economy.
“None of the structural headwinds that seem to have plagued the global economy in recent years (a mix of excessive indebtedness, deteriorating demographics, rising political uncertainty as well as the end of the China growth miracle and the commodity supercycle) have been resolved,” said Ebrahim Rahbari, Willem Buiter, and Cesar Rojas in a note.
They then list 4 factors that could derail things – China, US interest rate expectations, US slowdown, and Europe’s political risks. Bryan has more details.
Key data for the past 24 hours (with thanks to BNZ markets)
NZ: Unemployment rate (%), Q1: 5.7 vs. 5.5 exp.
NZ: Employment change (q/q, %), Q1: 1.2 vs. 0.6 exp.
AU: AIG perform. services index, Apr: 49.7 vs. 49.5 prev.
NZ: QV house prices (y/y, %), Apr: 12.0 vs. 11.4 prev.
EZ: Markit services PMI, Apr F: 53.1 vs. 53.2 exp.
UK: Markit construction PMI, Apr: 52.0 vs. 54.0 exp.
EZ: Retail sales (m/m, %), Mar: -0.5 vs. -0.1 exp.
US: ADP employment chg, Apr: 156 vs. 195 exp.
US: Markit services PMI, Apr F: 52.8 vs. 52.1 exp.
US: ISM non-manufacturing, Apr: 55.7 vs. 54.8 exp
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And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
The sell-off in Woolworths’ took a day to get going after Tuesday’s quarterly sales report. This included news that another $150m would be spent reducing prices while Big W is now forecast to report a loss this financial year. In the meantime, the current price war is yet to produce a turnaround in market share. Woolies continues to lose ground to Coles and Aldi. Yesterday’s credit rating cut did nothing to improve sentiment.
At around 16 times forecast earnings, Woolies does not look compellingly cheap given the risks involved.
Yesterday’s large red candle implies strong downward momentum; not an encouraging sight for shareholders. Although it’s a messy looking chart, the swings in this downtrend have regularly formed harmonic AB=CD patterns. I’ve noted the last couple on the chart below. If this behaviour keeps up, $19.85 could be a potential resting place for the current sell off.
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC