To the scoreboard:
Dow: 21,184 -21 (-0.10%)
S&P 500: 2,436 -3 (-0.12%)
AUD/USD: 0.7489 +0.0062 (+0.82%)
ASX200 SPI futures (July contracts): 5,744 (-10)
Iron ore benchmark 62% fines: $US55.90/t +$US1.89 (-3.27%)
1. Political tension rocks oil markets: Prices were volatile in the fallout from a diplomatic cutting of ties between Qatar and a Saudi-led coalition. Prices rose yesterday on supply concerns, but swung lower overnight on concerns that a split between OPEC member states will make it harder to enforce the next round of production cuts. Benchmark crude fell by 1% back below $US50 a barrel. Qatar is a bigger producer of LNG gas than oil, but Reuters reported there were no immediate threats to supply and spot LNG prices were little changed.
2. Here comes the Aussie: It was another down day for the ASX200 yesterday, but that didn’t stop the Aussie dollar finding buyers overnight. The AUD was the best performing G10 currency, despite further falls in spot iron ore prices. The gains followed a series of data points yesterday which showed that Australia’s Q1 GDP growth — which is out tomorrow — may not be as bad as first feared.
3. Data today: The Reserve Bank of Australia releases its June interest rate decision at 2.30pm AEST. As is becoming the norm, no economists surveyed by Bloomberg expect the benchmark rate to be changed from 1.5%. The Business Insider 10-second guide to the decision is here.
4. Global wrap: US and UK stocks were slightly lower, while more gains in Germany helped to prop up the European index. The ASX200 has been marked down again today by another 10 points. The pound is back above $US1.29 ahead of Thursday’s election, while most of the recent good markets news in Europe seems to have been priced in with the Euro trading in a narrow range above $US1.12. In emerging markets, Mexico’s peso shot up by 1.9% against the greenback after a narrow state election win by the incumbent party.
5. Still swimming in cash: “Buy the dip” has been a popular phrase among traders in the post-financial crisis era of central bank stimulus. A recent note by JP Morgan shows that there’s still a record amount of cash sitting on the sidelines, to the tune of $US5 trillion. Cash piles have almost halved since the US election as excess capital was deployed, and the S&P500 has since risen by 14% to a new record. However, the extra money can still act as a backstop for both stocks and bonds if volatility increases.
6. Deal or no deal: While we’re on US stocks, this chart from Citi shows a recent divergence between stock prices and the level of merger & acquisition activity. Citi highlighted that the two measures have a relatively strong correlation, but M&A activity has recently slowed. Reduced M&A may be one indicator that stocks are overvalued, although Citi noted that a recent narrowing of yield spreads and improved corporate optimism sets the scene for more deals to get done this year.