6 things Australian traders will be talking about this morning

NYSE Floor (Getty/Spencer-Platt)

After a choppy night’s trade US markets are closing mildly in the black. European stocks were mixed as well. The miners helped the FTSE 100 in Londone put on a 1% gain but the DAX in Frankfurt was down 0.4%. The wash up is an indication from futures traders that the local market might give back some of yesterday’s solid gains. The March SPI 200 contract is down 14 points, 0.3%.

On forex markets the Aussie was above 72 cents at one point this morning in what has been generalised US dollar weakness as traders walk back from thoughts of aggressive Fed tightenings. But the Aussie has slipped back about half a cent from the earlier peak of 0.7243.

On commodity markets gold continues to rally, crude dipped back around 1.5% but iron ore and copper were both higher.

Here’s the scoreboard (8.15am):

  • Dow: 16,416, +80 (+0.49%)
  • S&P 500: 1,915, +3 (+0.15%)
  • SPI200 Futures (March): 4,919, -14 (-0.3%)
  • AUDUSD: 0.7194, +0.0032 (-0.43%)

And the top stories:

Stick around for number 6 it explains why markets are going to continue to be so volatile in 2016.

1. Here’s why the Aussie dollar is so strong – everyone’s changing their Fed outlook. It’s all about the Fed really in 2016. Sure lots of other markets have got all funky this year but it’s really about the fed, policy divergence and the US dollar rally. So it’s important that the traders have now recalibrated their expectations of Fed tightening. That’s knocked the US dollar for six and driven the Aussie dollar above 72 cents, Euro above 1.12 and pushed USDJPY perilously close to a destabilising break below 116.

But if you are wondering why the recalibration of Fed views Jan Hatzius, Goldman’s head of global economics, neatly showcased why yesterday at a conference in Sydney. Hatzius showed the audience a chart of the tightening in financial conditions in the US which he said had tightened to the worst level since 2009. I’ve covered what he said in more depth here.

As a result the market doesn’t think the Fed will raise rates until 2017 Myles Udland reports.

2. Deutsche Bank reckons there is a real chance the US enters recession in the second half of 2016. Part of the rethinking on the Fed is also heightened worries about the outlook for the US economy. Goldman’s Hatzius said yesterday that he thinks 2016 will print around 2.1% – the post GFC average. But Joe LaVorgna over at Deutsche reckons that the move in corporate profits he is seeing is a signal that a recession could be on the horizon.

Bob Bryan has more here.

3. The miners are on a tear and today could be another good day on the ASX. BHP, Rio Tinto, and Fortescue soared in trade yesterday rising 8.2%, 8.9% and 11.3% respectively. It’s a reversal of fortune as iron ore hits levels not seen for months and crude rallied strongly.

Last night in London trade the two big miners put another 2.5% and 1.5% respectively on the Australian gains to finish up 10.8% and 10.3% respectively. That sets up another good day for them and the materials index on the ASX today. But Will Martin reports even these stellar gains pale compared to what Anglo American and other saw in London trade last night.

4. Albert Edwards says China is running out of money. There is a misconception about China that traders have only recently woken up to. It’s not the big capital outflows, although that’s part of it, it’s the reality that CHina’s $3 trillion reserves war chest isn’t actually that much cash. That is China’s reserves to GDP ratio is toward the bottom end of IMF recommendations.

That’s something Soc Gen’s uber-bear Edwards has grabbed onto in his latest note. Akin Oyedele says Edwards’ latest update highlights “China is about to run out of spare capacity in its foreign exchange reserves, and will be forced into floating the renminbi as a free currency, saying that the scenario is “entirely plausible and indeed likely.” Maybe those hedge funders are right.

5. Gold is rallying and that tells us a lot about China. One of the great conundrums of global markets over the past couple of years is why, with all the volatility, has gold kept falling? It seemed that what ever happened the yellow metal just kept sinking. But that has changed in the past couple of weeks as gold has reversed off the bottom of the long term downtrend and then this week broken above the 200 day moving average. That’s the point at which many traders change their outlook from bearish to bullish.

My personal hypothesis is that gold is a nice hedge against a weaker Chinese currency. It’s probably the most accessible, and best, hedge for Chinese themselves. Here’s the chart:

Gold – XAUUSD – Daily (MT4, AxiTrader)

6. The global financial elite have screwed up markets. I can feel a rant coming on. I just can’t believe that global policy makers think they can fix markets by taking away the market clearing mechanism. Yesterday I wrote a piece about State Street Global Advisor’s view that 2016 is the year that the volatility of volatility rises. Kevin Anderson, State Streets head of investments for the Asia-Pacific region, has five well-known drivers of volatility and one under-appreciated one. It’s the lack of liquidity in markets, as a result of regulatory changes foisted on banks by the global elite closing the stable door to the last crisis which sows the seeds of this new volatility and the next crisis.

And as if on cue the FT reports this morning that IMF chief Christine Lagarde said the “global economy’s system for coping with financial shocks needs to be overhauled to prepare for looming crises in emerging economies.”

We used to have banks who were prepared to do this but they are not allowed anymore. Regulators are taking away that mechanism. Instead the global elite continue to embrace the Europeanisation of markets in the mistaken belief that they and they alone have the brain power to intervene and control markets. To wit Madame Lagarde is asking for policy makers to bolster the global safety net by increasing swap lines between central banks to access credit lines from multi-national lenders.

The reason: she sees a looming crisis in commodity-exporting emerging economies. If only central banks didn’t think they needed to stop markets from clearing and if banking regulators didn’t want to tell shareholders and boards how they should take risk with their own capital.

I could go on for hours – we are in a world where excess has been built because of central bank actions and no one can fix it except central banks. The world has gone Japanese and any criticism of China’s policy actions misses the point the developed world is no better.

Catch me on Twitter.

And now from CMC Markets’ Ric Spooner is today’s Stock of the Day

Rio Tinto

The big moves in mining stocks yesterday looked consistent with the sort of “trading” based volatility that’s a feature of markets at the moment.

Rio’s profit report is due next week. However, moves the size of those we saw yesterday, usually see at least some follow through. The next 3 potential targets or resistance zones for this rally I see are:

    • The trend line and 50 day moving average around $41.70/$42.40
    • The 38.2% Fibonacci retracement at $43.70
    • The 50% retracement and September low at $45.90

A push past the September low would be a sign of significant strength but that’s a long way away at the moment.

Ric Spooner, chief market analyst, CMC Markets.

You can follow Ric on Twitter @ricspooner_CMC

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