Crude oil reversed the strength in Asia during overnight trade, falling heavily along with iron ore, copper, other base metals and gold.
Some of that weakness was a stronger US dollar, which weighed on the Australian dollar and other commodity currencies, as well as the yen. But some of that commodity weakness was also traders’ reactions to the Chinese trade data over the weekend and what it said about global growth and Chinese demand.
On the bourses of Europe and the US, stocks were mixed. The DAX rallied strongly on solid German factory orders. London was down marginally, a good result given the miners took a bath and in the US, the Dow fell a little and the S&P 500 rose a little.
The wash up is the SPI 200 June contract is down 16 points suggesting a mildly weaker day on the ASX 200. That is if the market can find a counter balance to what could be an ugly day for the miners.
The big data points today are the ANZ consumer confidence release in Australia and the release of Chinese CPI and PPI both of which have global implications.
Here’s the scoreboard (7.35am):
- Dow: 17,705, -34 (-0.2%)
- S&P 500: 2,059, +2 (+0.008%)
- SPI200 Futures (June): 5,297, -16 (-0.3%)
- AUDUSD: 0.7311, -0.0043 (-0.58%)
Now, the Top Stories
1. A stronger US dollar, commodity price crunch, and lower forecasts have the Aussie dollar under pressure this morning. The Aussie dollar is just sitting above 73 cents this morning. That’s only a few pips off the overnight low after a surge in the US dollar combined with commodity weakness and a renewed sense in the forex forecasting community that the Aussie dollar is going back under 70 cents pushed it lower.
No doubt in no small part the still excessive long AUDUSD positions being held by speculative traders is also weighing on the Aussie as these accounts liquidate losing bets.
But not everyone is a bear. Westpac’s chief strategist Robert Rennie posted a note yesterday morning on the bank’s client website saying he’d be a buyer at 73 cents.
“I think Chinese activity data this week should be reasonably solid; I think Japanese demand should start to creep in and, let’s face it, a number of forecasters have pushed back expectations for Fed rate hikes. BAML last week joined Barclays, Goldmans (and Westpac) in removing the June rate hike. That should be enough to help stabilise carry trades,” he said.
2. The miners were hammered in London and New York trade last night. The SPI 200 is only off 16 points overnight after what was a pretty solid day yesterday with the rise of 29 points leaving the ASX 200 marginally in the black for the year. But overnight we saw some big falls in global miners as heavy selling entered the markets after the Chinese trade data and weakness in commodity markets.
In London trade, Rio Tinto fell 7.92%, BHP dropped 6.085%. Glencore – which took a slice of Atlas Iron yesterday – slid 8.96%, Anglo American was down a stunning 13.84% and Vale lost 8.65%.
That weakness, falls in crude, iron ore, copper and gold, along with a lack of momentum in stocks globally could put a downside bias on trade on the ASX today when it kicks off.
Separately the Wall Street Journal has an interesting article arguing that the mining stock boom has dramatically outstripped rising metal prices. This and falling commodities sound like a perfect storm for the miners.
3. Former RBA governor Bernie Fraser has forgotten his own past and said rate cuts won’t work. Bernie Fraser was the first of the modern day governors of the Reserve Bank. He’s the guy who thought that a 2-3% inflation band was the way the bank should target monetary policy and he’s the guy who took a punt and cut rates by 50 points in July 1996 even though inflation was above the top end of the RBA’s band.
So it’s a bit curious that he seems to slam the RBA’s latest move to cut rates saying that it won’t “get things moving”. I’ve got more here and still find it slightly incongruous given his background and actions as governor. I’ve got more here but Fraser is certainly onto something when he says governments need to do more.
3a. Traders, I’m holding a trader training course at the end of June in Sydney. I’m limiting it to small class size of about 20 participants and I’ll be teaching the tools and processes I use every day and have built over almost 30 years in markets – details here.
4. Chinese officials are getting worried about their debt bomb. “A tree cannot grow up to the sky — high leverage will definitely lead to high risks.” That’s the message from an unnamed, but “authoritative”, official from the ruling Communist party, Will Martin reports.
It’s apparent evidence that even the CCP is worried about the high debt culvert the economy has headed back into to achieve recent economic growth outcomes. The unnamed official also says “any mishandling will lead to systemic financial risks, negative economic growth, or even have households’ savings evaporate. That’s deadly.”
What was it Mr Holmes used to say to Watson?
Martin reports Nomura’s take is that the official says stimulus should be avoided which is going to make hitting the growth numbers difficult it seems. It’s a really interesting story and worth a look.
5. Trump watch – he tried to fix his comments on US debt but made things worse. To recap. Donald Trump mentioned late last week that he would take the same approach to borrowing on behalf of Uncle Sam as he did when he was developing. That is in the knowledge he can renegotiate terms if things go south.
No you can’t, Donald! This is the US government the critics – me included – screamed. So he tried to explain, which is where things got even more interesting.
Andy Kiersz reports Trump said: “People said I wanted to go and buy debt and default on debt, these people are crazy. This is the United States government. First of all, you never have to default because you print the money, I hate to tell you.”
6. This might help explain why stock price rises have stalled recently. The profit recession for companies continues despite the earnings season beats, Bob Bryan reports. Citing a new report from Jan Loeys, a global strategist at JP Morgan, Bryan says we are now three quarters deep into this corporate-specific recession. Profits dropped by 7.1% for S&P 500 companies year-over-year for the first quarter.
The only upside, according to Loeys’ note, is that while “global corporate earnings are in recession now…they are not yet falling as fast as they do during US economic recessions”.
The problem for the companies, the economy and of course stock holders is that Loeys says reversals of profit recession in the past have seen “either strong fiscal or monetary stimulus or strong growth in productivity”.
And the crunch of course is central banks “having much less to give today, fiscal policy neutral, and productivity falling, it much harder to expect higher company earnings over the next year”.
Key data for the past 24 hours (with thanks to BNZ markets)
GE: Factory orders (m/m%), Mar: 1.9 vs. 0.6 exp.
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And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
Fortescue Metals (FMG: ASX)
Mining stocks are on the way down again. Resource stocks are yielding to the likelihood that spot commodity prices got too far out in front of underlying demand realities.
However, this may not mean a return to January’s “Armageddon” settings. China’s return to greater emphasis on infrastructure stimulus is a change that can hold the line above those levels at least for the medium term.
Potential chart levels for Fortescue in this “pullback” scenario are around $2.40 or $1.90. The first sees past resistance levels and the 20 week moving average. The second is the 78.6% Fibonacci retracement. This often represents the end point for deep corrective moves.
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC