Stocks in the US made fresh all-time highs after another massive print for non-farm payrolls suggested the American economy is in better health than many thought possible. Bond rates and the US dollar were both up as well after the data.
That positive tone in the US along with solid rises for the miners on Friday night and a generally much stronger global financial sector bodes well for the physical market to beat the 31 points the September SPI futures contract is pointing towards today.
On forex markets the data and US dollar strength knocked the Aussie dollar back to 76 cents, meaning it had a false break Friday, while gold was also lower. Crude oil hung tough and iron ore did well.
Here’s the scoreboard (7.33am):
- Dow: 18543 +191 (+1.04%)
- S&P 500: 2183 +19 (+0.86%)
- SPI 200 Futures (September): 5,489, +31 (+0.6%)
- AUDUSD: 0.7626 +41 (+0.5%)
The top stories
1. It’s a huge week for company reporting in Australia, including the Commonwealth Bank and Telstra.Bendigo Bank kicks things off today and Matt Felsman from APP securities says there are 23 major companies reporting this week. In light of the recent decision to hold back such a large chunk of the RBA’s rate cut the Commonwealth Bank’s result, and ANZ’s trading update are probably the highlight.
Equally though Felsman says that given the “confession season” in May, the following two months saw “the smallest amount of pre-reporting profit warnings in 4 years” and there is some risk of big moves when companies report. Those who disappoint will be punished, Felsman says, but with “consensus expectations for 2015-16 earnings for an 8% decline in profits” companies that even just deliver on expectations, let alone show “they have gone above and beyond…they will be rewarded”.
2. US jobs were super strong – is the Fed back in play? The US economy created 255,000 jobs in July and wages growth hit a post GFC high of 2.6% year on year. That data should put to bed any questions about the strength of the jobs market after May’s big miss.
But that data also puts the chance of Fed hike in 2016 back on the table. Bond traders aren’t too fazed yet and I like the way Bllomberg framed it, saying that bond traders are slow to sell on jobs surge in face of patient Fed. Equally though I like the discussion in The Economist which says a Fed hike would be a policy mistake. They give 3 pretty good reasons.
The Fed will know these risks so bonds might be right to not worry too much about aggressive rate hikes.
3. Goldman says this most hated stock market rally in years won’t last. As I highlighted last week a Reuters survey showed institutional investors are as short stocks and long bonds as they have been at any time in the last 5 years. That means they were expecting both stocks and bonds to head lower. It also means there are plenty of folks missing out as US markets hit all-time highs.
That could mean that these recalcitrant stock buyers eventually get dragged into the market, propelling it higher, as the imperative of matching index performance forces their hand. But Bob Bryan reports chief US equity strategist for Goldman said in a note to clients on Sunday that stock markets around the world are not going to offer any serious gains for the foreseeable future.
“In the next three-months we expect negative price returns in Asia (-3%), Japan (-6%), US (-10%) and Europe (-11%),” said Kostin. “This week our global strategists lowered equities to underweight in a 3-month asset allocation model given that stocks trade near the upper end of their ‘fat and flat’ range.”
4. This black swan fund says there is going to be chaos. I’ve included this one because the point that London-based hedge fund 36 South Capital Advisors made in discussion on Raoul Pal’s Real Vision TV is an important one.
Jerry Haworth, the firm’s CEO, says that eventually negative and zero interest rates will fuel the inflation that central bankers so greatly crave right now. That’s the key to everything. Most traders and investors are stuck on central bank policy not working, inflation remaining low, and interest rates remaining low.
But if central bank policies do gain traction, if central bank policies do work, there could be carnage as rates normalise. It’s not today or tomorrow. But Haworth would no doubt suggest we all keep this in the back of our minds.
5. Even though stocks are at all-time highs – One of the biggest warning signs of the financial crisis is flashing again. Libor, that’s the rate at which banks effectively lend to each other, is flashing a warning sign that everything is no rosy in global finance at the moment. Over the past month Libor has spiked to levels not seen since 2009.
There are some technical issues around why Libor might be spiking which flow from new regulations that come into play in the US during October. But not all of the move is likely to be as a result of this change. So, as David Scutt noted in our Devils and Details podcast last week, we need to keep an eye on this lift in Libor.
(You can subscribe to Devils and Details on iTunes here, or listen in below.)
6. Mark Carney’s bold plan for UK interest rates is brilliant, but it is polarising analysts. Over the weekend Will Martin wrote two articles about Mark Carney and the Bank of England’s actions last Thursday. The first, the Bank of England is acting like a “cornered lion” cited Deutsche Bank’s Jim Reid saying just like every other central bank the BoE’s actions won’t work. But that article was soon followed by this one saying one of the world’s biggest hedge funds (Bridwater) is backing the Bank of England.
I’m well and truly with Bridgewater who said the BoE “acted swiftly, before there was a chance for a downturn to become more entrenched, puts them in a better position as well”.
Key data for the past 24 hours (with thanks to BNZ markets)
AU: RBA Statement on Monetary Policy, Aug:
GE: Factory orders, m/m%, Jun: -0.4 vs. 0.5 exp.
US: Trade balance, $b, Jun: -44.5 vs. -43.0 exp.
US: Chg. in non-farm payrolls, ‘000, Jul: 255 vs. 180 exp.
US: Unemployment rate, %, Jul: 4.9 vs. 4.8 exp.
US: Average hourly earnings, m/m%, Jul: 0.3 vs. 0.2 exp.
CA: Net change in employment, ‘000, Jul: -31 vs 10 exp.
CA: In’t merchandise trade, $b, June: -3.63 vs. -2.84 exp.
CH: Foreign reserves, $b, Jul: 3201 vs. 3200 exp.
And now from CMC Markets’ Michael McCarthy is today’s Stock of the Day
The airline industry can be viewed as the most un-economic of sectors. Put simply, far too many major shareholders don’t care enough about return on capital. Where sovereign funds have major shareholdings, they’re often prepared to accept losses because of the wider benefits a national airline can bring to an economy. Add in US airlines that revolve in and out of Chapter 11 protection, and the competitive landscape is a horror story.
On Friday Virgin Airline Holdings (VAH) reported. While the headline numbers dripped blood, underlying operating profit swung from loss to profit. One of the surest predictors of share price appreciation is positive earning s revision, and VAH is displaying that at the operating level.
Now look at the chart. However the downtrend line is drawn, it’s clearly broken. Even a modest retracement could see 31 cents, up 20% from here. Time to break the rules?
Michael McCarthy, chief market analyst, CMC Markets.
You can follow Michael on Twitter @MMccarthy_CMC