It was a night where the ghosts of 2007 came to haunt traders after UK property funds halted redemptions, the Italian banking crisis was front and centre and the Bank of England said in the financial stability report that their pre-Brexit fears were beginning to crystallise.
That drove a real risk off feel to trade with stocks, bonds, commodities, commodity currencies, and the British pound all lower. Naturally in that environment gold remained strong and the buyers game for the Yen again driving the USDJPY rate lower again.
The washup was new all time lows for US, German and UK 10 year bonds which suggests a new all time low in Australia today as well. Stocks ended in the red with big falls in the DAX which lost 1.82%, the CAC which fell 1.68% while int the US stocks were lower but only by around 0.6% to 0.8%.
That’s left the SPI 200 pointing to a 21 point fall on the ASX today to follow up on the 1% fall yesterday. The Aussie dollar is also sharply lower at 0.7460.
Here’s the scoreboard (7.34am):
- Dow: 17840 -108 (-0.61%)
- S&P 500: 2089 -15 (-0.68%)
- SPI200 Futures (September): 5,167, -19 (-0.4%)
- AUDUSD: 0.7461 -0.0069 (-0.9%)
Now, the Top Stories
1. Markets are starting to feel like 2007. This is uncomfortable. Back in 2007 the shuttering of two special investment vehicles by SocGen was for me the start of the credit crisis that then enveloped Bear Stearns funds and ultimately Bear Stearns itself and then, of course, Lehman.
So news in the past 24 hours that problems in the UK property trust market has seen the suspension of redemptions by Aviva, Standard Life and The Pru are giving this a very 2007 feel. Oscar Williams-Grut has more on his take on the Standard Life fund and why this is looking like 2007 all over again here.
But given I’ve written that Brexit was not Lehman, I need to talk about this. Brexit was not Lehamn. But this is a signal that it could be because if shuttered funds cause tension elsewhere and people trying to withdraw cash in other sectors of the financial system what starts out as natural self-interest to protect capital can morph into a tragedy of the commons and cause capital destruction across the entire financial system. Mark Carney and others are on watch but tension clearly increased in the past two days.
2. Speaking of tension – lets talk about the Italian banking system. Yesterday I noted the Italian banking crisis was brewing and could cause a huge political stoush for Europe. But Will Martin has gone a step further and says that we should all forget Brexit — Italy is poised to tear Europe apart.
The key here is not just that Monte Paschi hit another new all time low last night but rather that this is happening just a few months before the Italian referendum aimed to stabilise its political system. With that event on the horizon Italian prime minister Matteo Renzi has become a little less focussed on Brussels and a Little more focussed on what he needs to do to shore Monte Paschi and the banking system overall.
That in itself is problematic for Germany and the centre of Europe. But as Will says a political mess can quickly turn into a cornucopia of financial and economic disarray. Euro to 1.05 easy in the run up.
3. Sometimes central bankers are just too honest – Mark Carney and the Bank of England might have scored an own goal. I will never forget reading Alan Greenspan’s book many years ago where he talked about his approach to 9/11. Greenspan essentially said he had to pretend he had certainty on the economic and markets outlook even though he in fact had no idea what was going on. That “carry on regardless” attitude was important in helping markets heal.
Things have changed since then and Mark Carney’s invention of forward guidance – letting people know what you are really thinking – seemed inspired in the intial phase of the GFC when markets need to know central banks weren’t going to reverse course and jack up rates in a hurry. But since then, and know that markets know central bankers are no-longer omnipotent things haven’t gone so well.
But transparency is still key in many central banks and last night the Bank of England’s Financial Stability Report was a masterclass in informing markets. The trouble is that in speaking plainly and frankly the BoE has unwittingly added to the troubles in the UK property fund sector and Italian banking when it said many of the potential risks it had identified in the run-up to the referendum had “begun to crystallise.”
Oscar Williams-Grut has more here. No wonder markets went into a funk last night.
4. Gold was right and this guy thinks it’s going to break sharply higher – $4,200! Yesterday I highlighted the big downtrend in in gold that the current price of $$1355 is banging up against at the moment. A break would be a huge signal for a sharp rally higher and a long term change in the outlook.
But as bullish as I have become lately (still waiting for the break though) I’m not even close to the call Christopher Wood from CLSA has made for gold. Bob Bryan reports Wood wrote in a note that “A long-term bullish view is maintained on gold bullion, with the ultimate price target now set at US$4,200 an ounce”.
His point as to why is a good one. Wood says central banks are trapped by the economy and their policies “will ultimately discredit central banks pursuing unconventional monetary policy, threatening the stability and indeed integrity of the current fiat-paper-money system”.
At least in some people’s minds. And it won’t take too many to drive gold higher if Woods is right. Let’s hope his wrong though because a world where gold is $4200 is not a pleasant one.
5. Ladies and gentlemen, we have a stock market bubble. Perhaps. Bob Bryan has an interesting piece that focusing not on the conventional piece to earnings ratio but price to sales (P/S). Michael Lebowitz at 720 Global says “At its current record level, the P/S ratio leads us to one of two conclusions: 1) Investors are extremely optimistic about future economic and earnings growth or 2) Investors are once again caught up in the frenzy of an equity bubble and willing to invest at valuations well above the norm”.
We know the Fed sounded a warning a week or so back about the PE ratio being high by historic standards. But it’s worth noting the bond market rally will have kept it anchored on this metric against bond rates by which the Fed said it was not elevated.
Scarily though Lebowitz says the S&P 500’s P/S ratio is “now 2.50 standard deviations from the median” and roughly equal to the level just before the bear markets of 2000 to 2002 and 2007 to 2008.
6. Bringing it home – what’s it all mean for Australia. Looking at all of the above it’s not really any surprise that the Aussie dollar is back at 0.7461 this morning. You could argue that this is again a fairly good performance. We saw a collapse in the CRB commodity index of more than 2.5%, iron ore is suffering again, the Chinese leadership said 6.7% is going to be tough, crude collapsed, bonds rallied (Aussie 10’s at an all time low), and risk went off. Traders need to watch 0.7449 – there’s a trend line there and if it breaks selling could intensify.
On stocks the SPI 200’s fall of just 19 points overnight looks a little light in the context of everything that happened. BHP and Rio were lower in London and their peers like Vale, Anglo, and Glencore were hammered. The banks are under pressure and even though my read on the APRA capital news was pretty optimistic I’m out there on my own on that. That speaks volumes about sentiment. So after a 1% fall yesterday it could be another tough day for local stocks.
On the RBA just quickly that last sentence yesterday was a close to a promise of a cut as you’ll get. They also pretty much said they won’t cut just for the Aussie dollar but if inflation on June 27 is low a rate cut is a lock. Even though I reckon they should leave rates where they are.
Key data for the past 24 hours (with thanks to BNZ markets)
AU: AiG perf. of services index, Jun: 51.3 vs. 51.5 prev.
AU: Trade bal. (AUD, m), May: -2218 vs. -1700 exp.
AU: Retail sales (m/m, %), May: 0.2 vs. 0.3 exp.
NZ: QSBO: Business confidence, 1Q: +19 vs. +2 prev.
NZ: QV house prices (y/y, %), Jun: 13.5 vs. 12.4 prev.
NZ: ANZ commodity prices, Jun: 3.7 vs. 1.0 prev.
AU: RBA target rate: 1.75 vs. 1.75 exp.
CH: Caixin services PMI, Jun: 52.7 vs. 51.2 prev.
UK: Markit services PMI, Jun: 52.3 vs. 52.8 exp.
EZ: Retail sales (m/m, %), May: 0.4 vs. 0.4 exp.
US: Factory orders, May: -1.0 vs. -0.8 exp.
NZ: GDT dairy auction: -0.4% decline in av. prices
And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
Fortescue Metals (FMG: ASX)
Here’s a chart to warm the heart of contrarian investors. This year, Fortescue’s share price is up 105%. Rio Tinto’s is up 7%.
This story is also a short sellers’ nightmare. Fortescue was being priced as the weakest of the major iron ore producers Conventional wisdom was that its relatively high costs and leverage would force it into a dilutive capital raising or asset sales as the iron ore price continued to plunge.
Instead, the iron ore price has held up; Fortescue has done a great job in bringing its production costs much closer to the majors and it has taken advantage of these circumstances to de risk by buying back debt. All this has seen Fortescue shareholders enjoy a major re rating.
The true contrarian will now be looking for opportunities based on this re rating being taken too far
Ric Spooner, chief market analyst, CMC Markets. You can follow Ric on Twitter @ricspooner_CMC