6 things Australian traders will be talking about this morning

NEW YORK, NY – FEBRUARY 05: Traders work on the floor of the New York Stock Exchange (NYSE) on February 5, 2016 in New York City. Despite the U.S. unemployment rate dropping to 4.9 percent after a positive jobs report, the Dow Jones industrial average was down over 200 points at the close. (Photo by Spencer Platt/Getty Images)

A tough day at the office beckons for the local market today after the ASX futures fell heavily on Friday night.

The SPI 200 March contract is down 56 points, 1.1%, suggesting a down day today. That fall came in the wake of weaker than expected jobs gains in the US and the risk off tone that enveloped markets as a result.

That risk-off tone hurt the Australian dollar which collapsed under 71 cents. That’s a long way from Thursday night’s weekly high of 0.7243. That weakness was almost uniquely Australian dollar related as the euro is still relatively strong at 1.1150 and USDJPY is still below 117.

Crude collapsed again and is back below $31 a barrel while gold remains the primary beneficiary of all the market ructions at the moment.

Here’s the scoreboard (7am):

  • Dow: 16,204, -211 (-1.29%)
  • S&P 500: 1,880, -35 (-1.85%%)
  • SPI200 Futures (March): 4,867, -56 (-1.1%)
  • AUDUSD: 0.7077, -0.0120 (-1.66%)

And the top stories:

1. It’s time for BHP and Rio to drop their progressive dividend policy. Our miners had a phenomenal bounce last week. BHP finished Friday at $16.20, up more than 14% from its low for the week. Rio, at $41.62 a share, was up just a little under 14%. Last week’s bounce was in no small part a result of the pre-Chinese New Year recovery in iron ore and oil’s big bounce intra-week. But oil still finished down around 8% on the week and iron ore’s rally stalled Friday on the Dalian exchange. This volatility is just a very short-term microcosm of the business the miners are in and the fact that mining is a cyclical business.

Are cyclical businesses consistent with progressive payout ratios? That’s a question the ratings agencies seem to think has been asked and answered in the negative now the peak in the cycle has passed. And it’s a question BHP and Rio competitors Anglo American and Glencore answered last year by changing their dividend policies. So, will Rio change its policy at this week’s company announcement or will it wait and see what BHP will do later this month?

Time will tell but Tim Schroeders, a fund manager at Pengana Capital, told the AFR that the progressive policy should go because Rio can “still pay out a healthy dividend, but there is no need to lock yourself into the progressive policy and make a rod for your own back”.

“Why differentiate yourself and be less flexible?”

2. ASX stocks are pointing lower and the Aussie was mauled Friday night. The US non-farm payrolls had something for everyone. The lowest unemployment rate in years at 4.9% but a print of just 151,000 jobs created. Wages were higher too. So on the one hand, it reinforces the Fed’s notion it needs to increase rates, but on the other it was also a miss. Barclays economists got mixed signals from the report and now only expect two rate hikes from the Fed this year.

Yet stocks tanked in the US and the ASX was hammered lower and looks set to open down more than 1% today. The Aussie dollar likewise was hammered as stocks and commodities fell. That’s because traders seemed to fret about the Fed staying the course of four hikes this year. Here’s the big question for traders today. With many markets in Asia out, will we be spared the weakness in the region that might have been expected after the weekend’s events, or will Australian markets be used as proxies for the region and come under heavy selling pressure?

3. Asia remains the focus even though it’s a holiday. The Lunar New Year absence of Chinese, Korean and Singaporean markets could save markets a big headache early this week given the twin headwinds of the continued collapse of China’s Reserve position and the latest rocket test by North Korea (DPRK).

Yesterday, PBOC data showed China’s reserves dropped another $99.5 billion in January. That’s the second-biggest monthly drop on record as outflows accelerate at an unsustainable pace of more than $1 trillion per annum. Also over the weekend, the DPRK launched a long-range satellite, contravening UN resolutions and raising concerns about Pyongyang’s erratic behaviour.

Stocks will be down anyway today. But things might yet get much worse.

4. Investors are scared of stocks and buying bonds big time. Watch what they do not what they say. That’s one of the messages I’ve taken away from the past quarter century of markets. Luckily these days the data on fund flows in global markets is both comprehensive and timely.

Bank of America Merrill Lynch covers these flows better than almost anyone on the globe. Their latest summary highlights the fear still gripping investors.

Risk-off weekly flows: large ($9.9bn) Equity redemptions; more ($2.4bn) inflows to US Treasury funds; and strong ($0.7bn) inflows to Precious Metal funds.

Fixed income says “Deflation”: 5th consecutive week of robust inflows to govt/tsy bond funds; 20th straight week of muni bond inflows; 14th straight weeks of bank loan fund outflows; EM debt outflows in 25 of past 28 weeks.
Equity sector rotation is defensive: utilities see largest inflows in 13 months ($0.9bn); healthcare/biotech record largest outflows in 5 months ($1.2bn) (Chart 1); note however that financial sector funds saw first inflows in 8 weeks.
Gold inflows indicate USD consensus reversing: 4th straight week of inflows ($2.3bn in total) to gold funds, as investors’ US$ unwind (encouraged greatly in past week by
ECB/BoJ/Fed) shifts from discounting slowdown to discounting policy response.

On bond markets, the FT reckons that government bond yields around the globe are sending a recession signal.

5. Here’s the truth about what stock markets can really do. All Australians, because of our compulsory superannuation system, have been sold a bill of goods that says stocks are good and invest for the long run. But what almost never happens is that Australians receive the type of education that will inform them and they understand the level of volatility the stock market, all markets, can have from time to time.

So I offer you Sam Ro’s excellent piece – Here’s the truth about the stock market in 16 charts. I recommend in particular slides 1 and 13. Not as contradictory as you might think.

6. The week ahead is a another important one – here’s a diary of the key events. No employment data this Thursday; I read somewhere on Friday the ABS has asked for extra time to get the stats right. But there is still plenty of interesting things happening locally. That’s because it’s the week we get the release of the single best economic release each month – the NAB business survey. Westpac’s consumer confidence data is out as well and governor Glenn Stevens front Parliament for his semi-annual testimony.

Globally the release of the IEA’s oil market report is more interesting than usual given recent oil market volatility. Fed chair Janet Yellen also talks midweek. You can read the full calendar here.

Catch me on Twitter.

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

Amazon. Com (AMZN)

Amazon is the kind of stock that has been, and could still be, particularly vulnerable to the current stock market sell-off. On Friday, the online retailer closed down 28% from its December peak.

Amazon is a high growth stock but its profit margins are low and its share valuation is high. Its December quarter earnings missed expectations. They rose to $1 per share from 45c a year ago. Revenue growth was good although below expectations at 22%. The market’s main concern is with costs and the low profit margin. Amazon makes only 75c on every $100 of sales revenue. Despite the recent sell-off, Amazon is still trading at 107 times 2016 earnings and 57 times 2017.

The Amazon chart has been playing straight out of the pattern trader’s song book recently. The late January corrective peak was made right at an ab=cd and Fibonacci retracement level. This is the classic Gartley pattern.

It is now approaching a couple of potential Gartley levels that might represent the end of the larger downward correction. The first is around $488. The worry is that downward momentum is strong at the moment so as a minimum you’d want to see signs of the stock rejecting this level before assuming the worst might be over for Amazon. Given strong downward momentum, the next level around $440/$450 could come into play. That’s about 13% below current levels and a drop of that magnitude is likely to be accompanied by further weakness in the overall market.

Ric Spooner, chief market analyst, CMC Markets.

You can follow Ric on Twitter @ricspooner_CMC

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