6 things Australian traders will be talking about this morning

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US stocks finished higher on Friday after the weaker than expected non-farm payrolls print of 160,000 saw traders wind back expectations of a Fed hike.

That rally built on what was a spectacular turnaround on the ASX Friday, after the RBA signalled more rate cuts, and the SPI 200 June futures contract is up another 22 points for a gain of 0.4%.

On forex markets, the Aussie has consolidated in the mid-73 cent region post-RBA for a fall of more than 3% since this time Friday. But the remarkable thing on forex markets was actually that the miss from non-farms didn’t knock the US dollar for six. Euro is around 1.14, the yen around 1.07 and the US dollar index is largely unchanged. No move in forex – that’s interesting.

On commodity markets oil was higher, as was gold and copper.

Over the weekend, China released its latest trade data which showed a bigger than expected surplus on the back of exports. But overall the data still speaks of a soft global economy. So it will be interesting to see what traders around the world make of this data today.

Here’s the scoreboard (7.35am):

  • Dow: 17,740, +80 (+0.45%)
  • S&P 500: 2,057, +7 (+0.32%)
  • SPI200 Futures (June): 5,270, +22 (+0.4%)
  • AUDUSD: 0.7354, -0.0243 (-3.19%)

Now, the Top Stories

1. It’s on. But does the election really matter for markets? The marathon election campaign has begun with the election date of July 2 the best part of two months away. Already the latest polls in competing news outlets have opposite results. The message we can take is the campaign at the moment has the protagonists neck and neck. Much could happen over the next 8 weeks.

Elections, and Australian politics, are not usually market moving events. In a macro sense, that is likely to be the case again with this election. But equally given the stark policy differences of Labor and the Coalition over their approach to banks (Royal Commission) and negative gearing (grandfather what we have and restrict new investments to new housing stock), there is a risk that traders react to the polls if and as they shift.

That’s not to say one policy is better or worse than another – I’ll leave that to your own personal preference – it’s simply a reflection that the banks have already been under pressure lately and given the global backdrop they are more fragile than usual. The overall market is subject to global forces and commodity markets.

For the Australian dollar whoever wins, wins. Traders won’t care – either pair of hands will be perceived as safe by international investors. Likewise, interest rate traders know the RBA’s mind now after Friday’s revelations of downgraded inflation forecasts and potentially numerous rate cuts.

So it’s really just the banks, and perhaps associated real estate stocks, which might be effected by the election. Otherwise it’s business as usual for the market.

2. US data has been weak and prompted a revision of Fed rate hike expectations. The US economics team at Bank of America Merrill Lynch has revised their call for Fed rate hikes from June and December to September only.

Partly it’s because there has been a clear loss of momentum in the pace of US economic growth but it is also because of the Brexit vote and what the BAML team says is a Fed policy pursuing “opportunistic reflation”. That is, the Fed wants the US economy to run a little hotter than what many might think is acceptable in order to try to entrench inflation, not deflationary forces, back in the US economy. Then when it’s confident inflation is at or above 2% sustainably, they can worry about hiking further and faster.

I’m with BAML – Japan and Europe have both shown the folly of doing things to stick to a mindless rote interpretation of how the economy, rates, inflation, and consumption fit together. So the Fed will run a little hotter and the RBA will cut a little deeper – both with the same aim.

On a related note, Elena Holodny reports that Capital Economics says the oil price rally could be “sowing seeds of its own destruction”.

3. Everything you thought you knew about Saudi Oil Policy is probably wrong. Saudi Arabia sacked their veteran oil minister over the weekend and replaced him with Khalid al-Falih, chairman of the state-owned oil company Saudi Aramco. Liana Brinded reports that this cements the position of control by 30-year-old deputy crown prince Mohammed bin Salman. He’s the man driving forward Vision 2030 — Saudi Arabia’s plan to curtail the kingdom’s “addiction” to oil. You’ll recall he’s the guy who scuttled any chance of the oil production freeze the Russians were pushing hard for recently.

But the problem is many think the crown prince is out of his depth. How exactly can the chair of a company that is about to be partly privatised also act as the oil minister of the most powerful producer on the planet is an obvious question. But as Lianna points out, the big swing factor here is that he is changing the Saudi’s traditional decision-making process. That means oil traders, and the rest of us, probably need a new playbook.

Oil, along with the US dollar, is a key benchmark for global central banking and inflation, so I’d urge you to read Lianna’s full piece here.

4. Here’s the problem for investors in, and managers of, listed companies. The current local and global business and economic environment is not one many managers would have expected as they climbed the rungs to the top of the corporate ladder. Not only is running businesses more challenging but stakeholder management has become an art in itself.

Bob Bryan reports Mike Thompson, chairman of S&P Investment Advisory services, told Business Insider that “running a publicly traded company is a serious balancing act. You have to appease both long-term and short-term investors in order to keep yourself around and that’s incredibly hard.” Thompson says at the moment most companies are leaning toward the short term – buying back shares and appeasing shareholders with debt financing in a low interest rate environment. The question is knowing when to start to play the long game, Thompson says.

But let’s face it, focusing on the short term is nothing short of financial engineering to keep the stock price as high as possible. That’s something Thompson acknowledges. So he wants a changed focus from EPS and PE ratios to return on invested capital (ROIC).

He’s got a point. But at present the problem for investors is gauging the true value of stocks in the increasingly fractious and uncertain environment. It’s one of the reasons the big stock indexes around the world have stalled again.

5. Itchy trigger fingers – this hedge funder says that’s the problem right now. This is not entirely unrelated to Thompson’s point about companies favouring the short term. Hedge funder Dan Loeb from Third Point says that funds have itchy trigger fingers and are either selling or not taking part in deals he thinks are worth looking at. That creates opportunities for him to buy undervalued assets, he says.

Whether or not he is right we’ll only know in the future – at present it’s just one man’s view. But the issue that Loeb speaks to is that hedge funds, investors and traders more broadly, have been hammered by the volatility of the last 9 months and are second guessing themselves and not trusting their process. That’s poison for them individually; it’s then a tragedy of the commons, and it feeds more instability and volatility into the system, making things more uncertain.

2016 is a tough year and traders, just like company managers, are getting caught between timeframes. Until that changes we are stuck with uncertainty.

6. And of course it’s a huge week on local markets. It’s going to be an interesting week for traders with many unanswered questions after the weaker than expected US non-farms Friday. The fact that the US dollar and stocks didn’t really move speaks volumes for the confusion and many moving themes in markets at the moment.

It sets up another interesting week. So here’s my diary of the week ahead from an Australian perspective. And for those who want to be a little bit more intimate with what’s going on in the US, here’s Myles Udland’s excellent take on the week ahead from a US perspective.

Key data for the past 24 hours (with thanks to BNZ markets)
AU:RBA statement on mon. pol.: CPI forecasts lowered
US: Chg in non-farm payrolls (k), Apr: 160 vs. 200 exp.
US: Unemployment rate (%), Apr: 5.0 vs.4.9 exp.
US: Average hourly earnings (y/y, %), Apr: 2.5 vs. 2.4 exp.
CH: Foreign reserves (USDbn), Apr: 3219 vs. 3202 exp.
CH: Trade balance (USDbn), Apr: 45.6 vs. 40.0 exp.

You can catch me on Twitter.

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

Westfield Corp (WFD: ASX)

The RBA’s new, weak inflation outlook brings stocks with offshore earnings right into focus.

International shopping centre operator and developer, Westfield, will be well placed if the Aussie dollar ends up in the 60s. Last week it broke through the top of a triangle formation but backed off a conclusive move past the previous high at $10.66. If you are in the “60 something” camp for Aussie dollar then any downward corrections in the near future could be an opportunity.

Ric Spooner, chief market analyst, CMC Markets

You can follow Ric on Twitter @ricspooner_CMC

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