US stocks recovered from their lows to finish only mildly lower after the much weaker than expected non-farm payrolls on Friday night.
The print of just 38,000 was well below anyone’s forecasts. But the fact the data undermined expectations of an imminent Fed rate rise helped support stocks into the close.
That recovery in US stocks helped the SPI 200 close well off its lows and just in the black with a 1 point rise. After the 40 point rise Friday, that leaves the local market free to contemplate a speech by Janet Yellen tonight, tomorrow’s RBA meeting and the impact of movements in the Aussie dollar and commodities on stock valuations.
Speaking of the Aussie, it rallied close to 2% and is up near 74 cents as the US dollar collapsed after the data Friday. Euro is approaching 1.14 again and the yen has pushed USDJPY down below 107.
On commodities, crude lagged as traders worry about US growth and the Baker Hughes rig count in the US rose. Copper rallied as the US dollar weakened, iron ore rallied also and gold ripped higher on the back of increased uncertainty and a weak US dollar.
Here’s the scoreboard (7.37am):
- Dow: 17807 -31 (-0.18%)
- S&P 500: 2099 -66 (-0.29%)
- SPI200 Futures (June): 5,324, +1 (+0.0%)
- AUDUSD: 0.7362 +0.0136 (+1.88%)
Now, the Top Stories
1. The Australian dollar is not overvalued. Recently the boffins at Deutsche Bank said the Aussie dollar was about the most overvalued currency in forex land. It was an interesting take and, prompted by a question from Business Insider in the US, I asked the NAB’s currency team what they thought of the Aussie’s fair value at the moment.
Rodrigo Catril, one of the NAB’s Sydney-based currency strategists, told me that it’s fair value model estimated the Aussie’s value against the US dollar at around 0.7330 last Friday against a spot of 0.7230 at the time. That fair value is likely to be higher this morning with gold up and US interest rates sharply lower Friday.
Value, like beauty, can be in the eye of the beholder. But the NAB’s model uses statistical analysis and long held, and strong relationships, to estimate value. It’s an updated version of a model I built many years ago when I was doing the currency strategy thing and it is a good guide. So while the RBA won’t like the Aussie back up near 74 cents, any notions that it is overvalued at present ring hollow.
2. Here’s Citibank’s great take on what’s up with markets right now. Tobias Levkovich, Citibank’s chief US equity strategist, has a great take on the trouble afflicting markets and traders at the moment. In his Monday Morning Musing, Levkovich said:
The investment community’s mindset remains “willing and able” to accept any potential misfortune but seems stoically unable to discern more positive realities. The current zeitgeist reflects dissatisfaction of things ranging from subpar economic growth and income inequality to global monetary policy and politics, not to mention proxy wars, profit margins and commodity prices. After having lost 50%+ twice in stocks during the 2000s, investors appear wary of any recurrence and thus have taken on an almost persistent negative mood that just cannot be shaken.
Strategists and economists don’t want to get caught being too positive either, lest they end up with egg on their face. So we end up with the pernicious negativity.
However, Levkovich says the seeds are being sown for stronger stocks:
Bearishness prevails, but equities could get an earnings kicker that might embarrass the naysayers. The most positive fundamental argument out there beyond sentiment and even some valuation metrics is the earnings turn thesis as the energy and dollar drags on EPS of the past 18 months reverse in the next six to-12 months. But higher industrial activity is also likely due to rising ISM new orders and that helps the bottom line as overhead fixed cost is better absorbed if decades of history are any guide.
3. A huge dovish shift in Fed expectations after jobs were weak and services slipped in the US. Nothing like a big miss to the downside for the world’s most important single data point to change traders outlook about the chances of an imminent Fed rate hike. At the close Friday, Fed Funds futures showed pricing for a June hike was giving it just a 4% chance while July, which had been favoured by traders pre-jobs, collapsed from around 60% to just 21%. 2- and 10-year treasury yields collapsed more than 10 points as well as traders price out the chance of a hike.
Jobs whiffed with just 38,000 new positions created last month. But the unemployment rate fell to 4.7% and wages still grew at 2.5% over the year so far and 3.2% over the past 12 months. So it’s not all bad news even though jobs growth has been slowing.
More interesting to me, and maybe the Fed, is the slowdown in America’s massive services sector. Akin Oyedele reports that ISM’s non-manufacturing Purchasing Manager’s Index (PMI) came in at 52.9 in May, missing the forecast for 55.3, and showing that the sector continued growing but at a slower pace. The Markit Services PMI fell to 51.3 and Markit chief economist Chris Williamson said: “With optimism about the business outlook dropping to a new post-crisis low, companies are expecting conditions to remain challenging in coming months, citing uncertainty about the presidential election as well as broader worries about weak demand at home and abroad.”
One thing to note though, is that the Atlanta Fed GDP now estimate of US Q2 GDP growth is currently sitting at 2.5%. Hardly weak. Traders might want to start watching this a little more closely to better gauge what the Fed might be thinking about the path ahead for growth.
4. One bad number and now folks are talking about US recession. Here’s the question you have to ask yourself whenever the market gets a number wrong. Is the fact the market got the number wrong reflective of poor forecasting ability or does it actually convey some important information about the company or economy being forecast? There is then also an associated question of materiality of that new information.
I make that point to put some context around the renewed fears that Friday’s weak jobs report in the US now has some folks worried about recession. Bob Bryan reports the economists at Barclays raised the possibility, saying in a note post-jobs that “since 1960, when payroll growth has dipped persistently below its recovery-period average, the US economy has more often than not found itself in an NBER-defined recession 9 to 18 months in the future”. Similarly, JP Morgan’s home-made recession model hit its highest mark since the financial crisis on Friday, according to Bob.
Jobs, wages growth, low unemployment, house prices rises, home sales, retail sales all suggest the economy is not doing terribly badly. That’s important because the JP Morgan model has the recession risk at about one third. That means there’s a two third risk that no recession occurs over the next 12 months. I’ll leave you to decide if you want to be glass half full or half empty.
5. Here’s another warning that debt markets could be about to explode. Let’s say that Barclays or JP Morgan are correct about the looming trouble for the US economy we’ll see it in rising company debt defaults and that will likely start in the high yield sector.
Bob Bryan went back to UBS credit strategist Matthew Mish’s note of the market to highlight a key concern among investors over the composition of the bond market. Mish says “holdings of corporate debt are increasingly concentrated in ‘less stable’ hands. In a rising default environment, mutual funds, ETFs and foreign investors are more likely to liquidate holdings than pension, life insurance, private equity and hedge funds, and forced selling could cause significant price volatility, and this in turn could lead to major redemption issues.”
Put simply, these “tourist investors” are in the market for yield and not because they believe in it. So at the first signs of trouble, they’ll bail out. That’s how and where the next global panic can start. Bob has more here.
6. And of course it’s a huge week on local markets. Uncommonly, and unusually, it feels like every week of 2016 I’ve written “it’s going to be another huge week”. That’s the way things have panned out so far and this week kicks off with a bang as well. We have Janet Yellen speaking, the RBA’s board meeting and governor’s statement, stocks at the top of their range, and so much more.
You can catch me on Twitter.
And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
I featured Harvey Norman a few weeks ago when it looked a chance of making a bullish break through the top of a pennant chart pattern. That didn’t happen. Instead it broke through the bottom of the pattern and on Friday, fell to initial chart support around $4.36.
Harvey Norman should benefit from the small business depreciation concessions as tradies stock up on new mobiles and computers at the end of the financial year. This week’s news of ongoing strength in building approvals should also support its white goods business for longer than expected.
The stock is currently trading around 15.3 times current earnings compared to an average of 16 since the beginning of last year. This looks like a solid footing for a bounce if the stock does start to show signs of consolidating around current support levels. These consist of a well-established trend line and the 78.6% Fibonacci retracement of the latest rally.
If the support doesn’t hold and the stock continues to slide, then the next major support around $4.15 could be an even more attractive opportunity. This is the 61.8% Fibonacci retracement of the major uptrend and a harmonic AB=CD level.
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC