6 things Australian traders will be talking about this morning

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An interesting day on stock and commodity markets in US trade overnight with early moves giving way to more muted returns by the close of trade.

It seems traders were already focused on the most important release of the month tonight in US non-farm payrolls.

At the close there was a small gain for the Dow, a small fall for the S&P and a reversal for crude after it approached the highs for the year. In the end though, it was only up 1% at $44.23 but iron ore was lower again in New York, copper fell another 1.5%, and gold reversed early gains.

The wash-up was an ugly night of trade on the SPI 200 where the index fell 47 points, 0.9%. That’s interesting given the physical market went nowhere yesterday. We asked John Craig from Bell Potter what was going on in the SPI. He told us that the weakness was a result of soft metals and some selling interest and as a result “the SPI was offered all night and didn’t catch the US bounce”.

On forex markets, the Aussie is back in the mid 0.74 cent region, euro is around 1.14, USDJPY at 107.20 and the pound is at 1.4480. Ish.

On the day, there is plenty to focus on with the the RBA’s explanation of why it eased and what it thinks the future looks like with the release of its quarterly Statement on Monetary Policy at 11.30am AEST. Then it’s the the big one – non-farm payrolls in the US at 10.30pm. Here’s Akin Oyedele’s great preview of the data.

Here’s the scoreboard (7.29am):

  • Dow: 17,660, +9.45 (+0.05%)
  • S&P 500: 2,051, -0 (-0.0%)
  • SPI200 Futures (June): 5,237, -47 (-0.9%)
  • AUDUSD: 0.7464, +0.0010 (+0.13%)

Now, the Top Stories

1. Here’s why the RBA is going to have an easing bias for a long time yet. The ECB released its latest inflation outlook last night and it’s clear they don’t see any real lift in inflation anytime soon.

“Most measures of underlying inflation do not show any clear upward trend,” the ECB says. “The annual rate of HICP inflation excluding food and energy continues to lie at or somewhat below 1.0%. This suggests that underlying inflation has not gathered upward momentum since last summer.”

From a market point of view the ECB said: “Market-based measures of long-term inflation expectations have stabilised at low levels and remain substantially below survey-based measures of expectations.” Their chart doesn’t show 2% before 2020.

Now, Europe is not Australia but as Warren Hogan wrote earlier this week, it “has become clear over the past decade, the inflation process is becoming globalised. Supply chains are global while multinationals are increasingly prominent in the retail space.” So while Europe and the rest of the world has an inflation problem, Australia does too.

That means the RBA will have its easing bias, and act on it, for some time yet.

Welcome to the top job Phil Lowe – you’ll be dealing with an outlook no modern day RBA governor has ever faced before.

2. Bank shares are rallying even though “external pressures are squeezing the Australian major banks’ performance”. Westpac is back above $30, the NAB is heading back toward $28, the CBA is nearing $75, and the ANZ is holding above $25. The big four are looking much better, in terms of their stock price, as we end the week than they were a few days ago.

The question on investors’ minds though is whether this renewed upward trajectory is just more noise within the choppy 2016 range or whether the ANZ’s deck clearing and the NAB’s better than expected results are the start of a turn.

Yet the big questions traders will be asking is about the outlook for the economy, for bad debts, earnings, competition, and demand for capital. You can see why the banks have been beaten down.

Chris Pash has a great piece discussing all these issues and the fact that profits at the big four banks has slipped. He’s looked at some analysis by accounting firm EY. It’s a must-read for bank shareholders but it’s also a must-read for all Australian investors as well, given the big four make up around 25-26% of the ASX 200’s market capitalisation.

3. Could the Fed really attempt one last ‘Hail Mary’ before announcing negative rates? Steven Englander is Citibank’s head of FX strategy globally. He’s a guy who’s paid to think about things from the helicopter and then work out what that means for day to day and month to month moves in forex markets. Jonathan Garber reports that, in a note to clients, Englander highlights the point I’ve been banging on about for a while now – outside of jobs, the US economy is looking wobbly.

“US economic data have been soggy, other than labour market data, which means that we get one positive data release a month followed by a series of disappointments,” Englander wrote.

That, Englander hypothesises (he’s hawkish so this is his Fed/forex Gedanken experiment) means the Fed may not raise rates and may actually embark on a QE4 programme before taking rates negative.

If you think about item 1 above, recognise the US economy outside of jobs is struggling for traction, and then think about the global backdrop, it’s a thought experiment worth considering.

Now, stock traders – would that be good or bad for share prices???

4. Adult beverage time – Uber bear Albert Edwards says the global economy is like the Titanic. No guessing which way uber-bear Albert Edwards reckons Fed policy will head. Will Martin reports on Edwards’ latest missive which says US companies are using the recent weakening of the dollar to paper over serious problems in their businesses and it’s akin to “a shuffling of deck chairs on the Titanic before the global economy sinks below the icy waves”.

Some of his thoughts aren’t that far removed from those of hedge fund legend Stan Druckenmiller I highlighted in yesterday’s report. And Edwards says: “Risk assets are once again refocusing on the increasingly dismal prospects for global growth rather than the short-term relief of dollar weakness.” He’s worried about US growth which feels like it is, outside of the jobs market, slowing.

And he’s right about the Fed having boxed itself into a corner. Yup.

5. It’s not just Edwards – some of the world’s biggest hedge fund managers are very gloomy about the outlook for markets and the economy. Bob Bryan has a great rap of all the news and views from the Ira Sohn Investment Conference which is a forum for big-time investors, mostly hedge fund managers, to pitch bold ideas.

As he notes, nearly all of the ideas sounded grim for the world economy. It’s worth a look if, for no other reason, than you need to know where everyone is looking so you can look somewhere else for opportunities.

6. The collapse of LTCM in the 1990s proves Donald Trump could win the US Presidency. I haven’t thought for a second that Donald Trump can’t win the US Presidential race. That’s because as a behavioural economics and finance guy, it was clear to me that he tapped a vein of feeling in the US, and in many ways around the world, that was palpable. And in a country where getting people out to vote is a big part of winning, that was a very strong hand to play. It still is – the Democrats should be worried.

But part of my inability to dismiss Trump is also that I am a finance guy. That’s important because as Myles Udland points out, Trump is teaching the political punditry one of the most painful lessons ever learned in finance is also applicable to them. That is, the financial world found out with the collapse of hedge fund LTCM in the late 1990s that models don’t always work.

Maxwell Tani is reporting this morning that House speaker Paul Ryan says for the moment he can’t support Trump. But as Myles points out, Trump has broken the model and is one vote away from the White House.

Now traders, the big question. What will that mean for markets?

Key data for the past 24 hours (with thanks to BNZ markets)
AU: Trade balance (m), Mar: -2163 vs. -2,900 exp.
AU: Retail sales (m/m, %), Mar: 0.4 vs. 0.3 exp.
CH: Caixin PMI services, Apr: 51.8 vs. 52.2 prev.
UK: Markit services PMI, Apr: 52.3 vs. 53.5 exp.

You can catch me on Twitter.

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

Crown Resorts (CWN: ASX)

James Packer’s Crown Resorts cashed a few chips this week, reducing its shareholding in the Macau based casino group, Melco Crown.

Crown sold down its shareholding from 34.3% to 27.4% and pocketed proceeds of $US 800m. This will allow it to shore up its balance sheet; better fund its project pipeline and potentially return some capital to shareholders. It also reduces Crown’s exposure to Macau, where high roller business has fallen away following China’s corruption crack down.

The market liked the move but not enough to push Crown out of the trading range that’s confined it since the New Year. Yesterday’s rally was yet again stopped in its tracks at the trading range resistance. If Crown does fall away again, it will be the stocks 5th failure to get passed this $12.50 zone so far this year. The direction of the break out of this range, when it does finally come, should indicate the new trend for Crown.

Ric Spooner, chief market analyst, CMC Markets

You can follow Ric on Twitter @ricspooner_CMC

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