Stocks in the US eked out further gains as the market continues to climb this wall of worry.
The S&P’s close at 2112 was the highest for the year but the sense from the floors of the NYSE seems to be it might struggle from here. We’ll see.
Unfortunately for the local market the mildly positive lead from offshore (the DAX was up 1.65% and FTSE up 0.18%) isn’t expected to help with the June SPI 200 down 18 points, -0.3%, after yesterday’s disappointing close at 5371.
On currency markets, the Aussie dollar is the standout, gaining more than 1.2% after the RBA left rates on hold and omitted an easing bias from the governor’s statement yesterday. At 0.7453 it looks strong but 0.7490/0.75 could be formidable resistance. Elsewhere, the US dollar was mixed.
Crude oil rounded out the triumvirate of most hated markets (S&P 500 and AUDUSD the other two), defying the gloomsters with a strong push above $50. Iron ore was lower in Asia but a little better in US futures and copper collapsed all the way back to recent lows at $2.05 a pound. Gold is unchanged from Friday’s close at $1244.
Here’s the scoreboard (8.00am):
- Dow: 17938 +18 (+0.1%)
- S&P 500: 2112 +3 (+0.13%)
- SPI200 Futures (June): 5,360, -18 (-0.3%)
- AUDUSD: 0.7452 +0.0090 (+1.2%)
Now, the Top Stories
1. The RBA proved again yesterday why it is the best central bank in the world. I believe the RBA is the best central bank in the world. That’s because the RBA has managed a small open economy, with freedom of capital flows, and an almost perfectly free float of the exchange rate, and in a fractious, uncertain, and unstable global economy away from the icebergs. Sure the RBA bears and Australia bears will point to big chunks of ice ahead. True. But so far it’s about 20-nil to the RBA.
So you won’t be surprised when I say that yesterday’s statement by governor Glenn Stevens was another masterfully crafted document which highlighted the strengths and the risks to the economy. Sure he disappointed some by omitting an easing bias from his statement. But with growth on track with RBA expectations, the currency still low by long run standards and at “fair value” on current drivers, it is, as Stevens said, “still helping the traded sector”.
So why would he be looking to ease again soon? Oh, inflation. Certainly he wants to anchor consumer inflation expectations as high as possible. But he also doesn’t want another destabilising run in housing investment when “dwelling prices have begun to rise again recently”. That’s even if the RBA believes the “considerable supply of apartments” is likely to constrain prices.
It’s tough to manage this economy. The RBA will ease again if it has to, that’s what it does. But for the moment, it has signaled things are going okay. I’m also guessing, as Warren Hogan said on Sky Business yesterday afternoon, the RBA wants to stay out of the super low interest rate club for as long as it can. See the next item for why.
2. Here’s why low rates aren’t working. For those of us with a behavioural finance and economics bent, it’s hardly earth-shattering news that super low and negative interest rates aren’t working. But not everyone has spent the last 20 years devouring everything they can find on the connection between human psychology, biases, nudges and so on with the economy and markets. So this story may be very instructive for a lot of folks.
To that end, Rachel Butt has a great wrap of a new theory from Jason Thomas, managing director and director of research at private equity giant Carlyle Group, on why super low rates aren’t working at reigniting investment in the global economy.
In short, lower interest rates fail to boost business investment because companies are incentivised to pay dividends or buy back stocks instead. Ta da, incentives matter. And Thomas says: “It may be that low rates do not spur business investment because of their impact on investor preferences.”
That preference might be for cash from the business at a higher rate than the risk free rate and voila! Thomas says you get “financial incentives for businesses to distribute incremental cash flow rather than reinvest it in their business”. The full article is definitely worth the read.
3. One of the most important charts for traders of our big miners. The most remarkable aspect of the commodity price crash in recent years has been the flexibility that producers have been able to unlock in their cost structures. Whether it’s shale oil in the US or our own mining giants in iron ore that flexibility has enabled companies to lower their cost base and stay in the game.
It’s important for Australia naturally because even though as a nation we’d like higher prices and thus higher taxes, we also want our miners to be healthy and profitable as well. David Scutt has a great chart via Citibank’s multi asset research team that looks at the bank’s estimated all-in breakeven rates for major seaborne iron ore producers in 2016.
You can see the advantage the big miners have over their competition.
4. It’s happening. There is a growing recognition that stocks might just keep rising. As Dennis Gartman often says, if a market doesn’t go down on bad news then it’s not a bear market. So one of themes you would have picked up on over the past few week’s here in my note is that against the all-pervading bearishness out there in stock land, US stocks just wouldn’t go down.
Overnight another cautious voice was added to the many who are now saying US stocks may not collapse the way many have predicted. In its daily note, Capital Economics gave “another reason why the US stock market is not hugely overvalued”.
“Several factors have probably reduced the equilibrium level of the equity risk premium (ERP) in the US to a level that is well below its long-run average. Partly as a result, the stock market is unlikely to be anywhere near as overvalued as the bears assert. Their wait for an ‘inevitable’ crash is likely to go on,” the firm said.
The rest of what they say is a bit of a pointy-hatted finance discussion. But distilling it down into layman’s terms, Capital Economic’s view – which I agree with – says that if the extra return stock holders need to earn over the risk free rate – US Treasuries – has fallen, then the current level of valuation using the widely regarded Shiller CAPE measurement is not as extreme as many think.
It’s not exactly a glowing endorsement or bullish case. But as the Aussie dollar is showing at 0.7450, valuation metrics matter and can confound the bears.
5. Germany’s 10-year bond just closed at an all-time low – EURAUD is lower. Germany’s DAX was 1.65% higher last night after industrial production for April rose 0.8%. But that didn’t stop its 10-year Bund heading to a record low of 0.048%. Yes folks, that’s just shy of zero for German 10-year bonds.
As a safe-haven Germany seems to be benefiting from growing fears about the impact of the British EU referendum on June 23. So it may not be long before rates of 10-year Bunds fall below zero.
From an Australian perspective, that just highlights again why the Aussie dollar is finding buyers. As German 10s rally, the Aussie 10s sit around 2.2%. Still low by our standards but high by global standards. The net result of this is that it supports the AUDUSD price and it puts downward pressure on the EURAUD rate which, at 1.5235, could collapse toward 1.47 in the months ahead.
6. Brexit Watch – it’s getting messy. It’s two weeks and one day until the UK’s EU referendum. Will they stay or will they go? That’s the big question and the pound is trading with some wild price action as the polls flit from Leave winning to Remain winning and back.
It’s a big deal as Janet Yellen, amongst others, has mentioned. So while I won’t bore you with a Brexit watch every day for the next couple of weeks, I will throw in articles I reckon are important.
Today there are two I saw on BI:
Key data for the past 24 hours (with thanks to BNZ markets)
AU: RBA cash rate target, Jun: 1.75% vs. 1.75% exp.
CH: Foreign reserves ($bn), May: 3192 vs. 3200 exp.
GE: Industrial production (m/m%), Apr: 0.8 vs. 0.7% exp
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And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
Seven West Media (SWM: ASX)
Seven West owns a string of businesses that are well down the track of being disrupted. Its flagships include Channel Seven, The West Australian and Pacific Magazines.
Yesterday it made an incremental step towards investment on the other side of the fence, taking a 15% stake in the unlisted Airtasker. This is an online job outsourcing market place where people who want things done can access contractors and service providers. SWM participated in a $22m capital raising by Airtasker, which is a direct competitor to the listed Freelancer.com. Seven’s investment in Airtasker adds to its online stable including Yahoo7.
SWM has been a recovery stock, rallying from a low of 66c late last year to $1.10. In the big picture though, its main business are battling falling advertising revenue and it’s hard to see where this disruptive change process is going to end up.
The recent price kick off the low at $1.04 looks very much as though it may only be a corrective rally. If it rises to and then falls away from key Fibonacci retracement levels around $1.13 or $1.15, a move back below $1 could easily follow.
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC