What a night of bullishness we’ve seen on global stock markets. The buying started in Asia yesterday before European traders joined the fray, buying banks and miners. That drove the FTSE up 1.8% and the DAX up 1.96%. US traders were more circumspect initially but as the day rolled on, the bullishness built and Wall Street is closing at its highs – record ones – on all the major indexes.
That combination opens up the tantalising prospect of a big day for the local stock market where we might even see a significant technical level breached (see item 1). At present, futures traders on the ASX have marked the SPI 200 up 0.9% anticipating a 48-point gain when the physical market opens at 10am.
On other markets, oil is lower by around 2% as traders lose a little faith in whether OPEC will stick. Copper and some other base metals reversed yesterday’s gains and are a little weaker while gold is a smidge higher. Iron ore, however, bucked the trend, rallying to a two-year high.
On forex markets, the Aussie dollar’s low of just 07418 yesterday is remarkable given the weak Q3 GDP. It just shows traders believe the economists when they say the weakness is transitory and growth is already looking better. Elsewhere on forex, the US dollar is weaker which also helped the Aussie rally back to 0.7470 this morning.
Here’s the scoreboard (7.55am AEDT):
- Dow: 19518 +269 (+1.4%)
- S&P 500: 2240 +29 (+1.29%)
- SPI 200 Futures (December): 5,526 +45 (+0.8%)
- AUDUSD: 0.7470 +0.0015 (+0.19%)
The top stories
1. The ASX 200 might finally break a significant resistance level today if futures traders are right. The ASX has failed around the 5500 region for a few months now. It’s just never quite been able to hold onto the level and has pulled back consistently from rallies. But today might be different.
After a stonking rally on Wall Street and Europe, which included strong gains for banks and the miners, futures traders on the ASX have marked the December futures contract 45 points higher this morning. Add those 45 points to last night’s close of 5478 and, if futures are right, we’ll see the physical market above 5520. That would take out both the current trend line that stretches back to last year’s highs around 6000 and also the recent peak for the ASX 200.
Can the market finally do it?
2. Okay, yesterday’s GDP was a shocker. But it really does look like business, and the economy, has moved on. The verdict from Australia’s financial economics fraternity appears to be that Q3’s weak print was a one-off and the economy will bounce back in Q4 and into 2017.
That’s something that new survey of SMEs undertaken by Westpac and the Melbourne Institute seems to support. The index shows a big improvement in SME business confidence with a print in the current quarter of 100.7 from Q3 2016’s 95.6. Add that to the release earlier this week of the interim Dun and Bradstreet Business Expectations survey for Q1 2017, which showed business is confident and investing as we head into the new year.
I’ve got more on Westpac’s SME survey here. But the behavioural economist in me says that these surveys tell us something about activity as much as confidence. And that suggests the economy has picked up from Q3’s weak spot.
3. A Reuters poll of global strategists says stocks are forecast to rise next year, but face risks a-plenty. Danger Will Robinson. That was my first thought when I saw the story this morning that a poll undertaken by Reuters showed that “hundred of upbeat strategists” say markets will rise further in 2017. Not because I don’t think they will – I’m all in on stocks right now – but just because of the universality of the call.
It’s the Trump effect.
Reuters says “the most striking shift since the last Reuters global survey – in October – is how quickly many strategists, brokers and fund managers have changed their tune on the shock election of Donald Trump as the next U.S. president”. More here.
4. China’s FX reserves tumbled to their lowest level since 2011 in November. If China is doing any currency manipulation it’s not the sort Donald Trump is worried about. Rather China looks like it is actively spending reserves to slow the yuan’s fall. That seems to be the evidence we saw in the release overnight of China’s foreign exchange reserves which fell far more than expected during the month. The print of $3.052 trillion is still a huge level of reserves for China but it was much lower than forecast and the lowest level in nearly six years.
Traders won’t have been surprised at the undershoot however, because we know authorities are struggling to stem capital outflows because of the actions of SAFE in lowering its oversight of outflows all the way down to just $5 million a week or so ago. Reuters, via the BI US site, has more here.
5. Trump is complex. He said “we have to look” at trade “almost as a war” but has appointed a man as ambassador to China who Beijing lauded as an “old friend”. One of the reasons Asian and other emerging markets were hammered in the immediate aftermath of the Trump electoral victory was because many investors feared the potential for a trade war to weigh on the growth and currencies of EM. So they moved their cash and withdrew their capital.
Those thoughts appeared to crystallise this week with Trump’s Twitter attack on China and its exchange rate policy. Those thoughts would have hardened further when he told a crowd in Fayetteville, on his “thankyou” tour, that he wants to defeat the enemy on jobs. “We have to look at it almost as a war, because that’s what’s happened to us,” the president-elect said. “That’s what’s happened to our workers.”
Sounds ominous. But then last night he announced Iowa governor Terry Branstad for the role as Chinese ambassador. I don’t know much about him but a Chinese Foreign Ministry spokesman – Lu Kang – said Branstad is an “old friend” of China and that “we welcome him to play a greater role in advancing the development of China-U.S. relations”. Reuters reports that Branstad has a relationship with Chinese president Xi going back decades.
Donald Trump – the iron hand, kit glove president? I wouldn’t have guessed that. But time will tell.
6. AAA rating’s are back for risky securitisations without income verification. While Australia’s political class argues over the AAA rating as though it’s oxygen for the economy, Bloomberg reports this morning that the ratings agencies in the US have just given the prized AAA rating to securitisations – bonds backed by mortgages – “in which a lender verified a borrower’s income with bank statements rather than tax returns”.
They go further to say that the securitisations, rated by Fitch and DBRS, contain a large proportion of loans which are “not qualified mortgages, meaning they do not adhere to U.S. government guidelines designed to give borrowers extra protections against their lenders. Those guidelines include how much debt a borrower can have.”
Yet they have a AAA rating. This time it’s different right?
From Ric Spooner at CMC Markets, here’s today’s Stock to Watch
Origin moved to simplify its business on Tuesday by announcing that it will spin off parts of its upstream gas production and exploration businesses. It will conduct an IPO for a new company that will contain gas production businesses in a number of places including the Otway and Cooper Basins as well as New Zealand.
Market reaction has been underwhelming. This possibly reflects the fact that Origin will keep its big Queensland coal seam gas interests. There was too much debt to spin this off as well.
There was a brief spike following the announcement on Tuesday but the stock closed down yesterday in line with weaker oil prices. This isolated Tuesday’s candle leaving a bearish “island reversal” chart pattern.
There’s chart support around $6.10 including the 38.2% retracement level. That looks interesting bearing in mind that the IPO will improve Origin’s balance sheet plus the potential for the OPEC agreement to support energy prices next year
Ric Spooner is chief market analyst at CMC Markets. You can follow Ric on Twitter: @ricspooner_CMC