6 things Australian traders will be talking about this morning

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Stocks in the US continued to climb their wall of worry as Fed chair Janet Yellen signaled that a June hike is off the table, but said she still sees more positives than negatives for the US economy right now.

That positive tone saw the SPI 200 continue yesterday’s stellar rally on the ASX with prices expected to open around 0.3% higher in trade this morning. BHP and Rio Tinto had huge rallies of more than 6% and financial stocks in the US were a big part of the S&P’s rally last night.

On currency markets, the Aussie dollar rallied again after yesterday’s swoon in the wake of the weak inflation print and it’s back above 0.7350 this morning. The euro was quiet, the yen lost about one per cent and the Canadian dollar was stronger along with the price of crude which is up more than 2% in WTI terms.

Elsewhere in the commodity space, iron ore ripped higher yesterday and then in US futures. Gold is calm but held its strong gains and copper is holding tight above $2.10 a pound.

Here’s the scoreboard (7.53am):

  • Dow: 17920 +113 (+0.64%)
  • S&P 500: 2109 +10 (+0.49%)
  • SPI200 Futures (June): 5,378, +15 (+0.3%)
  • AUDUSD: 0.7362 +0.0 (+0.0%)

Now, the Top Stories

1. NO SURPRISE: Janet Yellen was cautious but she is still on track to raise rates. If you have a look at item 5 you’ll see some good reasons why Yellen was cautious but still fairly confident that the US economy, especially the consumer and labour markets, are still on a path that means rates need to increase.

Last night she said that the positives outweigh the negatives in the US economy right now. And she highlighted something traders, even economic forecasters, sometimes forget but central bankers can never afford to. That is, monetary policy takes time to impact economic outcomes.

That, as Myles Udland points out, means the Fed is going to raise rates again soon — and this will drive some people crazy.

Here’s the key bit from Yellen’s speech (emphasis added):

I continue to believe that it will be appropriate to gradually reduce the degree of monetary policy accommodation, provided that labour market conditions strengthen further and inflation continues to make progress toward our 2 per cent objective. Because monetary policy affects the economy with a lag, steps to withdraw this monetary accommodation ought to be initiated before the FOMC’s goals are fully reached.

With weak jobs and a Brexit vote this month the FOMC, as Atlanta Fed president Lockhart said on Bloomberg last night, can wait and see. “I don’t personally see a lot of cost to being patient to the July meeting at least,” Lockhart said.

2. The RBA is going to have a very interesting conversation around the board table today. Strong GDP, but some questions around it, low inflation, and a stronger Aussie dollar than the RBA would like are going to make for interesting conversation at the RBA’s board meeting today. The release yesterday of the Melbourne Institute’s latest inflation gauge, showing consumer prices in the economy fell 0.2% last month, suggests the RBA has little choice but to ease interest rates again in the next few months.

But, most forecasters expect the RBA to wait for confirmation from the 2nd quarter CPI – to be released July 27 – before easing again at the August meeting. That sounds reasonable but key to the RBA’s deliberations is whether consumer inflation expectations are falling. If they continue to expect the RBA to act swiftly and decisively.

Here’s David Scutt’s excellent 10-second guide to today’s RBA decision.

3. US stocks have broken the year’s high, now for the ASX. It might be a low energy rally but US stocks have been able to hang tough for weeks now. Last night the S&P 500 (which I use as the global bellwether index) traded up through the year’s high before dipping back a little to end the day at 2109.41. That’s the strongest close since November 3, 2015 and it continues to defy the bearish rhetoric from many quarters on the prospects of stocks.

Part of that could be a new acronym I heard when I did my Sky Business cross just after 7am this morning. TINA – there is no alternative – is a term being used by some commentators in the US now to explain why stocks are rallying. Naturally it reflects low interest rates globally, and this in turn impacts the discount rate on which future earnings rests, making – at least theoretically – stocks worth more than if rates were higher.

Bringing it back home, that helps explain why the rally on the ASX yesterday started from 11am when the inflation data was released. Of course, while most eyes were on the spectacular rally in gold miners, the banks, except ANZ which was weighed down by concerns about Asia, rallied hard, as did the rest of the market. The reason of course is that expectations of another RBA cut grew after the negative inflation print.

So levels to watch today on the ASX are 5380, roughly where the SPI closed this morning, 5400, and then the 5425 recent high. The chances of a sustainable rally on the local market are growing while US stocks climb higher.

4. HSBC added its voice to the bullish calls for stocks. US stocks have been hanging tough in the face of many headwinds. That, as Citibank’s head of US equity strategy Tobias Levkovich pointed out yesterday, means there is a “near 97% chance” stocks will be higher by around 7% in mid-2017.

Now the technical analysts at HSBC have added their voice to the bullish chorus. Bob Bryan reports the group, headed up by Murray Gunn, observed a number of key indicators that point to a higher move for the S&P 500 over the next few weeks.

The thinking of Murray Gunn and his team is that both manufacturing stocks and consumer-related stocks such as the FANGs (Facebook, Amazon, Netflix, and Google by HSBC’s definition) are looking strong and stocks are going higher for the near-term, so get on board while you can (not advice, just HSBC’s view).

5. After taking a deep breath, some analysts say Friday’s jobs data wasn’t that bad after all. The question you should always ask yourself after a “shock” data release is whether the shock is actually the data point or simply the markets’, and economists’, inability to forecast the data point correctly. I say that because the economy is the economy, data is data, it is not sentient. But economists, forecasters, and traders are supposed to be sentient. They are supposed to be able to judge what’s going on.

Now, no one expected a print of just 38,000 jobs to be created in the US last month. But there were those forecasters, JP Morgan for example, who said that as we near full employment in the US jobs market, the ability of the economy to create new jobs comes up against natural limits. So the proper reaction to the 38,000 print should have been surprise, not shock.

Now it seems a positive narrative around the jobs data is starting to emerge. Bob Bryan reports Ethan Harris, global economist at Bank of America Merrill Lynch, noted a number of measures that would indicate the full employment narrative. These included increasing wage growth, workers voluntary quitting their jobs, and fewer workers per available job opening. Deutsche Bank’s Torsten Slok joined the chorus, highlighting wage growth as the biggest argument for full employment.

That’s why Janet Yellen is alert, but not alarmed.

6. Looking for good long term stocks – find ones that can access the $56 trillion market that could be the biggest in the ‘history of commerce’. I’m a macro guy. Forex, commodities, interest rates, and stock market indexes (not usually individual stocks) are where I spend most of my time and have spent most of my career. But, as a macro guy you sometimes see big trends coming that offer opportunities at an individual stock level – if you can find the right company or companies.

To this end, I thought Bob Bryan’s report on a new piece of Bank of America Merrill Lynch research highlighting that “in a world starved for growth, we believe that the answer lies in uplifting the 4.5 billion people at the base of the economic pyramid”.

I couldn’t agree more. I’ve sensed an unwinding of the benefits of the industrial revolution in the past 10/15 years in developed markets. But BAML says: “The Bottom Billions will drive the growth of the global middle class, which will expand at rates seen only during the 19th century Industrial Revolution and post-WW2 booms. Every minute, 30 EM households join the global middle class.”

Now to just find the company that I can invest in to benefit from that growth.

Key data for the past 24 hours (with thanks to BNZ markets)
NZ: Building work put in place q/q%), Q1: 5.3 vs. 1.0
CH: Caixin China PMI Services: 51.2 vs. 51.8 prev.
UK: Markit Services PMI, May: 53.5 vs. 52.5 exp.
EZ: Retail sales (m/m%), Apr: 0.0 vs. 0.4 exp.
US: Change in non-farm payrolls (k), May: 38 vs.160 exp.
US: Average hourly earnings (y/y%), May: 2.5 vs. 2.5 exp.
US: Unemployment rate (%), May: 4.7 vs. 4.9 exp.
US: ISM non-manf., May: 52.9 vs. 55.3 exp.
GE: Factory orders (m/m%), May: -2.0 vs. -0.5 exp.
US: Fed Chair Yellen:”…still expects gradual interest rate increases”

You can catch me on Twitter.

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

Nufarm Ltd (NUF: ASX)

There used to be a saying in the futures market that the most bullish event for the local cattle futures market was rain in O’Connell Street. Like most of these sayings, this one was not without some foundation.

So I don’t want to be guilty of imputing too much benefit for Nufarm from torrential rain on the east coast of Australia. The agricultural chemical and seed company serves customers throughout the world. However, improving weather patterns in Australia are a significant positive. The market has also been pleased by management’s progress on efficiency savings which added $15m to the bottom line last financial year with more to come.

For those looking for pull backs to create buying opportunities, there are a couple of chart levels of potential interest. The first potential support could be around the 200 day moving average at $7.50. Below at this stage, the next support level looks to be around $7.07.

Ric Spooner, chief market analyst, CMC Markets

You can follow Ric on Twitter @ricspooner_CMC

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