Stocks in the US were on balance positive but flat after the FOMC minutes confirmed Fed vice-chair Stanley Fischer’s weekend warning that the decision to hold rates steady had been a close call.
The US dollar was, however, a little stronger although not against the Australian dollar which is sitting at 0.7560.
Oil was lower again as markets wonder if OPEC will do a deal given September production numbers were up again and US 10-year bonds are at their highest level in months.
That poses a risk to markets, one that SPI traders seem to put more weight on than their US counterparts. That’s left the December SPI 200 contract down 15 points after yesterday’s much better than expected performance on the ASX.
Today’s key focus is on Chinese trade data.
Here’s the scoreboard (8.26am):
- Dow: 18144 +15.54 (+0.09%)
- S&P 500: 2139 +2 (+0.1%)
- SPI 200 Futures (December): 5,440 -15 (+0.3%)
- AUDUSD: 0.7565 -0.0040 (+0.6%)
The top stories
1. Australia issued a massive 30-year bond yesterday. One of the weird things about doing this note each day is that I strongly believe the bond market moves we’ve seen recently, if they continue, will be the source of real risk for global markets. But because they move in increments, bonds don’t make the cut for 6 things all that often.
But today is different after the Australian government issued a bumper 7.6 billion 30-year commonwealth government bond maturing in March 2047. The rate on the bond was 3.27 which is around 100 points above the 10-year bond and compares favourably with the US 30-year yield of 2.5%, the UK rate of 1.74%, Japan’s 0.05%, Germany’s 0.7%, and Switzerland’s 0.07%.
It’s even higher than China’s rate which is sitting at 3.19%.
Because the yield was higher than the 3% coupon buyers even get to purchase the bond at a discount to face value. Now I’m guessing here but it might help explain why the Aussie dollar is bid even though the US dollar is stronger and commodities are down a little – who wouldn’t want to buy this bond?
2. The Fed minutes suggest that a rate hike this year is locked and loaded – now to pull the trigger. That the Fed minutes weren’t disruptive, even though they were fairly hawkish and showed the FOMC is fairly close to raising rates in the US, is down to vice-chair Stanley Fischer’s warning over the weekend. On the sidelines of the IMF World Bank meeting, he warned that the September decision had been a “close call” so markets and traders had a chance to react on Monday, Tuesday, and most of Wednesday before the release.
So the US dollar had already risen, bonds had sold off a little and stocks knew the Fed minutes were likely to read hawkish, which they certainly did. Akin Oyedele has a wrap of the minutes here but the key takeaway for me is the battle between those who think the labour market slack is a worry and those who still want to wait for inflation to rise. In the end though, it’s the Fed’s own fear of getting behind the curve and having to jack rates up aggressively – episodes the minutes said in the past “had been followed by recession and a large increase in the unemployment rate” – means rates will rise in December on current settings.
3. Here’s another dire warning on the chance of a stock market collapse. HSBC’s technical analysts have joined Citibank’s technical team in suggesting a big fall is imminent. Bob Bryan reports that Murray Gunn, the head of technical analysis for HSBC, said that he is now on “RED ALERT” given the price action over the past few weeks.
The levels to watch according to Gunn are 17,992 on the Dow and 2116 on the S&P 500.
4. While we are on stocks, BAML says they are nearly as expensive as they were during the tech bubble. Akin Oyedele has had a look at some new research from Savita Subramanian, an equity strategist at the bank, who says: “The S&P 500 median P/E is currently at its highest levels since 2001 and suggests that the average stock trades a full multiple point higher than the oft-quoted aggregate P/E.”
Why does that matter? “This puts it in the 91st percentile of its own history and just 14% from its Tech Bubble peak,” he said.
5. This guy thinks gold could hit $2000 an ounce by 2018. Could the globe’s huge post GFC monetary experiment with quantitative easing, negative rates and super easy policy ultimate stoke the fires of inflation? Even though that’s not apparent at the moment, it is certainly a possibility. And it is one that Ronald Stoeferle, managing partner at Liechtenstein-based Incrementum AG, told Bloomberg could ignite a rally in gold in the next couple of years.
Stoeferle said: “Inflation may surprise to the upside and this will be the moment when you want to have some gold in your portfolio.” He’s not saying the absolute level of inflation will go through the roof, just that the change in direction and the increased momentum toward inflation which will get gold moving. He reckons we could see a move back to $1365 this year and $2000 in 2018.
6. The pound’s wild ride continued overnight. After rallying sharply in Asia yesterday on the back of rumours British prime minister Teresa May would let parliament vote on her Brexit plans, the pound fell heavily again overnight.
The point of the move from 1.2102 up to 1.2375 and back to 1.2205 this morning is the fear of, and discussion around, hard Brexit. The moves by parliament to take back some control and soften the process are seen as positive for sterling and the economy by forex traders. But these moves are being resisted by the prime minister. But, as Henry Jennings from Marcus Today said on SkyBusiness when I was on with him and Ingrid WIllinge at lunchtime yesterday, there are two sides to this debate and there is every chance that the hard stance we heard from French president Francois Hollande that precipitated the pound’s collapse last week, is where the real pressure comes from.
And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
Goodman Group (GMG: ASX)
Yesterday, the Australian 10 year bond yields moved above its 200 day moving average around 2.27%. Yield driven REIT, Goodman hit its 200 day average the day before and actually sustained a minor bounce off it yesterday.
When the Fed hiked rates in December last year, our 10 year bond peaked at around 3%. At the time, Goodman Group was trading at 15.3 times forward earnings compared to 16.5 times now. A move back to that valuation would imply a share price of around $6.50. That would bring the dashed trend line on the chart below into play.
There are differences between now and last December so our bond yields may not get all the way back to last year’s levels too soon. Those differences include 2 RBA rate cuts; a higher Aussie Dollar and a lower inflation rate.
Even so markets are forward looking and are factoring in higher US rates and improved inflation based on higher commodity prices. In that scenario, it wouldn’t surprise to see bond yields rise further, even if not all the way back to last year’s levels. Overall downward momentum in the bond market and Goodman’s share price looks pretty strong. There’s reason to be cautious about buying this sector for a while yet, even if there is a bit of a short term bounce from around current levels.
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC